TEST BANK for Microeconomics 3rd Edition by Daron Acemoglu; David Laibson; John List by welldoneassistant

TEST BANK Microeconomics 3rd Edition by Daron Acemoglu; David Laibson; John List

TABLE OF CONTENTS Chapter 1: The Principles and Practice of Economics Chapter 2: Economic Science: Using Data and Models to Understand the World Chapter 3: Optimization: Trying to Do the Best You Can Chapter 4: Demand, Supply, and Equilibrium Chapter 5: Consumers and Incentives Chapter 6: Sellers and Incentives Chapter 7: Perfect Competition and the Invisible Hand Chapter 8: Trade Chapter 9: Externalities and Public Goods Chapter 10: The Government in the Economy: Taxation and Regulation Chapter 11: Markets for Factors of Production Chapter 12: Monopoly Chapter 13: Game Theory and Strategic Play Chapter 14: Oligopoly and Monopolistic Competition Chapter 15: Trade-offs Involving Time and Risk Chapter 16: The Economics of Information Chapter 17: Auctions and Bargaining Chapter 18: Social Economics

Chapter 1 The Principles and Practice of Economics 1.1 The Scope of Economics 1) Which of the following statements is TRUE? A) All economic agents are necessarily individuals. B) A worker who shirks work is not an economic agent. C) A government is an example of an economic agent. D) A street gang is not an economic agent. Answer: C Difficulty: Easy AACSB: Analytical Thinking Topic Entry: Economic Agents and Economic Resources 2) Which of the following best describes scarce resources? A) Resources that most people cannot afford to buy B) Resources that can only be distributed efficiently by the government C) Resources for which the quantity demanded is the same for all economic agents D) Resources for which the quantity that people want exceeds the quantity that is freely available Answer: D Difficulty: Easy AACSB: Analytical Thinking Topic Entry: Economic Agents and Economic Resources 3) Which of the following is NOT a scarce resource? A) Gold B) Pollution C) Petroleum D) iPhones Answer: B Difficulty: Easy AACSB: Application of Knowledge Topic Entry: Economic Agents and Economic Resources 4) In economics, scarcity refers to the situation of . A) making the best use of limited information B) having more wants than the amount of available resources C) the government rationing available goods and services D) sellers setting the prices of their products too high for people to be able to afford them Answer: B Difficulty: Medium AACSB: Analytical Thinking Topic Entry: Economic Agents and Economic Resources

5) Which of the following statements is TRUE? A) Gold is not a scarce resource. B) Both life-saving drugs and ice cream are examples of scarce goods. C) If a scarce resource is given away for free, everyone will be able to consume it. D) Scarcity means that there is an imbalance between unlimited resources and limited wants. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Economic Agents and Economic Resources 6) What are scarce resources? Why are economic agents concerned with the allocation of these resources? Answer: Scarce resources are resources for which the quantity that agents want exceeds the quantity that is freely available. Economic agents need to satisfy their unlimited wants in a world of limited resources. This makes it important for them to understand how these scarce resources are to be used and distributed in order to optimize allocation. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Economic Agents and Economic Resources 7) Define economics. Who are economic agents? Answer: Economics is the study of how agents choose to allocate scarce resources and how these choices affect society. An economic agent is an individual or a group that makes choices. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Economic Agents and Economic Resources 8) Economics is primarily the study of ________. A) the mental functions and behavior of individuals and groups B) the state, nation, government, and politics and policies of governments C) the problems related to the existence and evolution of society D) how agents choose to allocate scarce resources and how these choices affect society Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Definition of Economics 9) Economics is primarily the study of ________. A) the relationship between matter and its motion B) agents' choices and their impact on society C) events of the past and how these events affect present human behavior D) the different types of governments and the impact of their policies on a nation Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Definition of Economics 2 Copyright © 2022 Pearson Education Ltd.

10) ________ is analysis that generates objective descriptions or predictions about the world that can be verified with data. A) Positive economics B) Negative economics C) Microeconomics D) Normative economics Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Positive Economics and Normative Economics 11) Which of the following is an example of a positive economic statement? A) The pricing policies followed in single-producer markets should be strictly supervised. B) Unemployment is more harmful than inflation. C) Higher interest rates will encourage more savings. D) Pollution is one of the most serious economic problems. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Positive Economics and Normative Economics 12) Which of the following is an example of a positive economic statement? A) The government should ideally work as a welfare state. B) An increase in income causes an increase in savings. C) Economics is the most useful social science. D) Eliminating poverty is more important than reducing inflation. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Positive Economics and Normative Economics 13) ________ economics prescribes what an individual or society ought to do. A) Positive B) Negative C) Behavioral D) Normative Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Positive Economics and Normative Economics

14) Which of the following is an example of a normative economic statement? A) A cut in the tax rate will lead to an increase in consumption. B) Relaxation of import duties will encourage imports. C) An increase in subsidies to farmers will boost agricultural production. D) An increase in social security benefits will increase the welfare of all economic agents. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Positive Economics and Normative Economics 15) Which of the following is an example of a normative economic statement? A) An increase in government expenditure will lead to an increase in well-being. B) An increase in the money supply will lead to an increase in the inflation rate. C) An increase in income is accompanied by an increase in savings. D) An increase in income is accompanied by an increase in consumption. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Positive Economics and Normative Economics 16) Which of the following statements is TRUE? A) Positive economics deals with issues that are subjective. B) Normative statements depend on personal preferences. C) Positive economics recommends what people ought to do. D) Normative economic statements can be confirmed or disproven. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Positive Economics and Normative Economics 17) Which of the following statements correctly differentiates between positive and normative economics? A) Positive economics is descriptive, whereas normative economics is advisory. B) Positive economics describes what people ought to do, whereas normative economics describes what people actually do. C) Positive economics is based on judgments, whereas normative economics is not. D) Positive economics can only be applied to microeconomics, whereas normative economics can be applied to both microeconomics and macroeconomics. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Positive Economics and Normative Economics

18) Positive economics is descriptive because ________. A) it is based on ethical judgments B) its predictions cannot be verified with data C) it prescribes what an individual or society ought to do D) it explains what has happened or predicts what will happen Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Positive Economics and Normative Economics 19) Which of the following statements is TRUE? A) Positive economics describes what people ought to do. B) Normative economics describes what people actually do. C) Positive economics generates objective descriptions that can be verified with data. D) Normative economics is free from the value judgments, tastes, and preferences of economic agents. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Positive Economics and Normative Economics 20) Differentiate between positive and normative economics using examples. Answer: Positive economics is analysis that generates objective descriptions or predictions about the world that can be verified with data. It is analysis that describes what people actually do. "A 5 percent fall in the unemployment rate will lead to a 2 percent increase in the inflation rate" is an example of a positive economic statement. In contrast, normative economics is analysis that prescribes what an individual or society ought to do. It is subjective and depends on personal preferences, tastes, attitudes, feelings, or ethical judgments. "Pollution in developing countries is one of the biggest global environmental problems" is an example of a normative economic statement. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Positive Economics and Normative Economics

21) Robert and Janet are discussing the unemployment and inflation in their country. Robert, on the basis of a recent newspaper report, claims that a 5 percent reduction in unemployment will lead to a 2 percent rise in inflation. In contrast, Janet insists that inflation is a far bigger problem than unemployment and should be considered as of prime importance. Classify Robert's and Janet's statements as descriptive or advisory. Explain your answer. Answer: Robert claims that a 5 percent reduction in unemployment will lead to a 2 percent increase in inflation. This statement represents predictions that can be verified with data. Therefore, Robert's approach is positive, which means it is an analysis of things as they are. Positive economics describes what has happened or predicts what will happen. The conclusion of his statement can be verified with data and is not subject to tastes and preferences. Janet claims that inflation is a far bigger problem than unemployment and should be addressed as an issue of prime importance. Janet's statement is normative. Normative economics is analysis that recommends what people ought to do. Unlike Robert's statement, Janet's belief that inflation is a bigger problem than unemployment is based on her values or ethical judgments. Therefore, while Robert's statement is descriptive in nature, Janet's statement is advisory. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Positive Economics and Normative Economics 22) Classify the following as positive economics statements or normative economics statements. a) An increase in an individual's income increases consumption, but by an amount less than the increase in income. b) The government should undertake the responsibility of providing healthcare to all its citizens. c) The government should fund infrastructure projects to foster economic development. d) An increase in net exports has a positive effect on a country's national income. e) The gross domestic product of India is increasing at 5 percent annually. Answer: a) Positive economic statement b) Normative economic statement c) Normative economic statement d) Positive economic statement e) Positive economic statement Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Positive Economics and Normative Economics 23) ________ is the study of how individuals, households, governments, and firms make choices and how those choices affect prices, the allocation of resources, and the well-being of other agents. A) Cost-benefit analysis B) Microeconomics C) Macroeconomics D) Empiricism Answer: B Difficulty: Easy AACSB: Analytical Thinking 6 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Microeconomics and Macroeconomics 24) Which of the following is a topic studied by microeconomists? A) National income calculations B) Price determination by a firm C) Measures to combat inflation D) Interest rate determination Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics 25) Which of the following is a topic studied by microeconomists? A) Energy consumption by a firm B) Nationwide inflation rate C) Economic growth as a means to alleviate poverty D) Aggregate demand and aggregate supply in an economy Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics 26) ________ is the study of an economy as a whole. A) Microeconomics B) Cost-benefit analysis C) Behavioral economics D) Macroeconomics Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Microeconomics and Macroeconomics 27) Which of the following is a topic studied by macroeconomists? A) Aggregate demand in an economy B) Price determination by a firm C) The consumption choice of a single household D) The production decision of a firm Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics

28) Which of the following is a topic studied by macroeconomists? A) The savings of a single household B) The productivity of an agricultural farm C) The total output of an economy D) Price determination in a market Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics 29) Which of the following statements is TRUE? A) Microeconomics is the study of an economy as a whole. B) Macroeconomics studies how individuals make choices. C) The study of the inflation rate is covered under microeconomics. D) The study of the unemployment rate is covered under macroeconomics. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics 30) Which of the following statements correctly highlights the difference between microeconomics and macroeconomics? A) Microeconomics is descriptive, whereas macroeconomics is advisory. B) Microeconomics primarily deals with positive analysis, whereas macroeconomics primarily deals with normative analysis. C) Microeconomics deals with a small part of the economy, whereas macroeconomics deals with aggregate economic performance. D) Microeconomics describes what economic agents actually do, whereas macroeconomics describes what economic agents ought to do. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Microeconomics and Macroeconomics 31) Why an economy contracts during slowdowns and the analysis of appropriate policies is studied under ________. A) macroeconomics B) microeconomics C) agricultural economics D) international economics Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics

32) The impact of carbon taxes on the energy usage of individual households and firms is studied under ________. A) microeconomics B) macroeconomics C) normative economics D) positive economics Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics 33) The relationship between the unemployment rate and inflation is studied under ________. A) microeconomics B) macroeconomics C) behavioral economics D) international economics Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics 34) The relationship between a firm's advertising expenditure and its profit is studied under ________. A) microeconomics B) macroeconomics C) behavioral economics D) international economics Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics 35) Which word best describes the main focus of economics? A) Choice B) Money C) Equilibrium D) Causation Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Definition of Economics

36) Which of the following is a normative statement? A) Income inequality has been increasing in the US since the 1980s. B) Income inequality is the biggest issue facing the next generation of leaders. C) Increasing the minimum wage should decrease income inequality. D) The earnings of top executives a many times higher than most of their employees. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Positive Economics and Normative Economics 37) Which of the following is NOT a question that would be asked by a microeconomist? A) Why has the level of income inequality been increasing over time? B) How large should a carbon tax be to lower pollution to an efficient level? C) How does class size influence student learning outcomes? D) How does the availability of men affect a woman's likelihood of marriage? Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics 38) How does microeconomics differ from macroeconomics? Answer: Microeconomics is the study of how individuals, households, firms, and governments make choices, and how those choices affect prices, the allocation of resources, and the wellbeing of other agents. In contrast, macroeconomics is the study of the economy as a whole. The scope of macroeconomics extends to the study of economy-wide phenomena, like the growth rate of an economy, the national unemployment rate, or the inflation rate. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Microeconomics and Macroeconomics 39) A recent news report stated that the unemployment rate in the country of Lithasia had increased from 10.2 percent to 18.2 percent between 2003 and 2013 and that the government has adopted strict fiscal measures to expand employment. Would this report be considered microeconomic or macroeconomic analysis? Answer: This report pertains to macroeconomics. Macroeconomics refers to the study of an economy as a whole. Macroeconomics covers economy-wide phenomena, like the growth rate of a country's total economic output, the inflation rate, or the unemployment rate. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics

40) Students in a class are discussing how a firm that does not face any competition in a market should decide how many units of output to supply in the market. Would this discussion be considered microeconomic or macroeconomic analysis? Answer: Microeconomics is the study of how individuals, households, firms, and governments make choices. The students are discussing how a firm should make its output decision. This is a discussion about an individual entity and so is considered microeconomic analysis. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Microeconomics and Macroeconomics 1.2 Three Principles of Economics 1) Which of the following correctly defines the term "equilibrium"? A) It refers to a situation in which data are used to arrive at conclusions. B) It refers to a situation in which all economic agents are simultaneously optimizing. C) It refers to a situation in which an optimizing decision is made by an individual economic agent. D) It refers to a situation in which government intervention efficiently allocates scarce resources. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Principles of Economics 2) Which of the following best describes equilibrium? A) A situation where the government intervenes to allocate resources B) A situation where only one individual or firm makes an optimal decision C) A situation where no economic agent would benefit by changing his or her behavior D) A situation where economic agents do not optimize as they do not have perfect information Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Principles of Economics 3) Empiricism is analysis that uses ________ to test theories. A) data B) illustrations C) philosophy D) value judgments Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Principles of Economics

4) Which of the following is NOT a key principle of economics? A) Optimization B) Equilibrium C) Empiricism D) Substitution Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Principles of Economics 5) Which of the following does NOT illustrate one of the three principles of economics? A) Jessica is looking for a new job, but there are no jobs available. B) When driving on the highway, if one lane is moving faster than the other, people will change lanes until both lanes are moving at the same speed. C) Congress proposes an increase in income taxes, but they are worried that the tax hike might discourage work. Economists at the Congressional Budget Office are asked to examine data to see how labor supply responds to changes in the tax rate. D) Mallory owns a physical therapy clinic and has to decide if hiring an additional physical therapist would allow her to expand her business enough to offset the cost of the additional therapist and thus increase her profits. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Three Principles of Economics 6) Define the three key principles of economics. Answer: i) Optimization: optimization refers to the process of choosing the best option from a set of alternatives, given the available information. ii) Equilibrium: equilibrium is a special situation all agents are simultaneously optimizing, so that nobody would benefit personally by changing his or her behavior. iii) Empiricism: empiricism is analysis that is evidence-based–it uses data to test theories and to determine what is causing things to happen in the world. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Principles of Economics

1.3 The First Principle of Economics: Optimization 1) Which of the following statements is TRUE of optimization? A) Optimization analysis only relates to the financial budget of an economic agent. B) Individuals who optimize do not consider costs when choosing the most feasible alternative. C) Economic agents can optimize only when they are able to perfectly estimate all future costs and benefits. D) Economic agents who optimize attempt to choose the best feasible option, given the information that they have. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The First Principle of Economics: Optimization 2) Feasible options are options that are ________. A) available and affordable B) available but not affordable C) affordable but not available D) optimal for an economic agent Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The First Principle of Economics: Optimization 3) A consumer has $40 that he wants to spend. He faces four choices: a camera that costs $60, a cell phone that costs $150, a book that costs $10, and a Bluetooth speaker that costs $45. Which of the following is a feasible option for the consumer? A) The book B) The camera C) The cell phone D) The Bluetooth speaker Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The First Principle of Economics: Optimization 4) A decision or choice that is made after optimization analysis ________. A) has zero opportunity cost B) is not necessarily risk free C) is the same for all individuals D) cannot be justified using normative analysis Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The First Principle of Economics: Optimization 13 Copyright © 2022 Pearson Education Ltd.

5) Which of the following statements is TRUE? A) Optimization requires individuals to foresee the future perfectly. B) An optimizing individual need not consider the risks involved in various choices. C) An optimizing individual is also likely to exhibit rationality. D) The less information that is available, the easier it is to make optimal decisions. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The First Principle of Economics: Optimization 6) Which of the following statements is TRUE? A) Rational economic agents maximize more than just monetary income. B) An individual does not require information to make optimal decisions. C) The principle of optimization is only accurate when it comes to making monetary decisions. D) It is not necessary to consider the risks of alternatives while making an optimal decision. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The First Principle of Economics: Optimization 7) Which of the following correctly identifies the trade-off that a budget constraint represents? A) The amount of income that must be given up to obtain an additional unit of a good B) The maximum amount of two goods that a consumer can purchase given his income C) The optimum combination of goods that a consumer with a given income should purchase D) The amount of one good that has to be given up to purchase an additional unit of the other good Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade-offs and Budget Constraints 8) A budget constraint represents the ________. A) total money income that an agent earns in different time periods B) goods and services an economic agent can choose given her limited income C) inequality in the incomes earned by various economic agents D) aggregate income earned by all firms in an economy Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade-offs and Budget Constraints

9) Which of the following statements is TRUE? A) A budget constraint remains the same for a consumer at all levels of income. B) A budget constraint quantifies the trade-offs that economic agents face while making decisions. C) A budget constraint is a function of the income of the consumer and not of the prices of the goods and services available for consumption. D) A budget constraint is based on the minimum amount of money that an economic agent can spend on goods and services. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade-offs and Budget Constraints 10) A consumer has $20 that he wants to spend on two goods: pens priced at $2 each and pencils priced at $1 each. Which of the following correctly represents his budget constraint? A) $20 = ($2/Quantity of pens) + ($1/Quantity of pencils) B) $20 = ($2 × Quantity of pens) + ($1 × Quantity of pencils) C) $20 = ($3/Quantity of pens + Quantity of pencils) D) $20 = $3 × (Quantity of pens - Quantity of pencils) Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Trade-offs and Budget Constraints 11) An individual has 8 hours to spare. She has to divide her time between two activities: reading and writing. Which of the following allocations will completely exhaust the individual's budget? A) 3 hours of reading and 4 hours of writing B) 4 hours of reading and 6 hours of writing C) 2 hours of reading and 2 hours of writing D) 5 hours of reading and 3 hours of writing Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Trade-offs and Budget Constraints 12) A consumer has $50 to spend. He has to decide between buying two goods: magazines priced at $5 each and DVDs priced at $10 each. Which of the following combinations of the two goods will entirely exhaust his budget constraint? A) 3 magazines and 4 DVDs B) 2 magazines and 4 DVDs C) 6 magazines and 1 DVD D) 2 magazines and 2 DVDs Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Trade-offs and Budget Constraints 15 Copyright © 2022 Pearson Education Ltd.

13) Which of the following statements is TRUE? A) All rational economic agents attempt to maximize their income. B) A rational consumer makes his decisions depending on what the majority chooses. C) A budget constraint is an economic tool that quantifies the trade-off between the consumption of two goods. D) A trade-off refers to the exchange of goods between economic agents through the barter system or mutual exchange. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade-offs and Budget Constraints 14) Why do trade-offs occur? How are budget constraints related to trade-offs? Answer: Trade-offs occur because of scarcity–economic agents need to satisfy their wants with limited resources. Therefore, in most cases, some benefits have to be given up to gain other benefits. Budget constraints quantify the relevant trade-offs that an economic agent faces. Once trade-offs are quantified, rational decision making becomes easier, allowing the individual to make an optimal decision. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade-offs and Budget Constraints 15) The best alternative use of a resource is referred to as its ________. A) optimization cost B) market price C) social cost D) opportunity cost Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Opportunity Cost 16) A student has two options: she can either surf the web or work part-time. Working part-time pays her $20 per hour. What is the student's opportunity cost of surfing the web for 5 hours? A) $4 B) $20 C) $50 D) $100 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Opportunity Cost

17) John has to choose between two jobs: one that offers him $50 per hour and one that offers him $35 per hour. The opportunity cost of choosing the job that offers him $50 per hour is ________. A) $1.5 per hour B) $15 per hour C) $35 per hour D) $85 per hour Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Opportunity Cost 18) Define opportunity cost. A student who has just graduated from college has three job offers: the first job pays $35,000 a year, the second job pays $23,000 a year, and the third one pays $15,000 a year. What is the student's opportunity cost of taking the first job? Answer: Opportunity cost is the best alternative use of a resource. It is what an economic agent is giving up when he chooses a particular option. If the individual decides to take the first job, he will earn $35,000 a year. The opportunity cost of taking this job is the next-best offer that he could have taken. Therefore, the opportunity cost of the first job is $23,000 a year. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Opportunity Cost

19) A consumer has a monthly income of $100 that he wants to spend on two goods: rugs priced at $10 and chairs priced at $5. What is the consumer's opportunity cost of buying a rug? What is his opportunity cost of buying a chair? Use a table to represent the consumer's budget constraint. Answer: Opportunity cost is the best alternative use of a resource. Buying one rug costs $10, and each chair costs $5. One rug can be purchased with the same amount of money used to buy two chairs. Therefore, the opportunity cost of buying a rug is 2 chairs. Similarly, the opportunity cost of buying a chair is half a rug. The consumer's budget constraint is given by: $100 = 10 × (Quantity of rugs) + 5 × (Quantity of chairs). The following table shows the various combinations of rugs and chairs that the consumer can buy with $100: Budget 100 100 100 100 100 100 100 100 100 100 100

Quantity of Rugs 10 9 8 7 6 5 4 3 2 1 0

Quantity of Chairs 0 2 4 6 8 10 12 14 16 18 20

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Opportunity Cost 20) Sam pays $600 for 30 days of guitar classes. He attends an hour-long class every day. If, instead of attending class, he works at a part-time job, he would be paid $5 an hour. Alternatively, he could work at a fast-food outlet and earn $9 per hour. Once he has already paid a nonrefundable fee of $600 to enroll in the class, what is his opportunity cost of attending each hour of class? Answer: Sam's opportunity cost will measure the next best use of an hour of his time plus the hourly cost of guitar classes. Once he pays the nonrefundable $600, there is no further cost other than the value of his time. For an hour of time, he has two options: work for $5 per hour or work for $9 per hour. Therefore, the next best use of an hour that Sam spends on guitar classes is equal to the $9 he could have earned per hour by working at the fast-food outlet. Sam's opportunity cost of attending his guitar classes is $9 per hour. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Opportunity Cost

21) Suppose workers decide to work more and consume less leisure when their hourly wage rate increases. What could explain this behavior? Answer: With an increase in their hourly wage rates, workers work more and consume less leisure because of a change in their opportunity cost. Assuming that the initial wage of an employee is $10 per hour, the opportunity cost of one hour of rest or leisure is $10 per hour. If the wage rate increases from $10 to $20 per hour, the opportunity cost of one hour of rest or leisure also increases to $20 per hour. Therefore, taking an hour of rest becomes more expensive for employees, and so the workers tend to work more than they used to. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Opportunity Cost 22) ________ is a calculation that adds up the costs and benefits using a common unit of measurement, like dollar values. A) Cost-benefit analysis B) Revenue-income analysis C) Budget constraint analysis D) Expenditure-income analysis Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Cost-Benefit Analysis 23) Cost-benefit analysis requires ________. A) choosing the alternative with the least net benefit B) that all costs and benefits be measured in the same unit C) evaluating the budget constraint before making a choice D) that the risks associated with different alternatives be ignored Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Cost-Benefit Analysis 24) Suppose that Jinelle, an engineer, has to choose between two jobs. Which of the following statements is TRUE? A) When deciding between jobs, she should consider both the wage and the non-wage attributes of each job. B) When deciding between jobs, she should focus only on the costs of each job and ignore the benefits. C) When deciding between jobs, she should only focus on the benefits of each job and ignore the costs. D) When deciding between jobs, she should consider the wage attributes and ignore the nonwage attributes of each job. Answer: A Difficulty: Easy AACSB: Analytical Thinking 19 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Cost-Benefit Analysis 25) The net benefit of a particular alternative equals ________. A) the benefits received from the alternative plus the costs incurred when choosing the alternative B) the benefits received from the alternative divided by the costs incurred when choosing the alternative C) the costs incurred when choosing the alternative divided by the benefits received from the alternative D) the benefits received from the alternative minus the costs incurred when choosing the alternative Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Cost-Benefit Analysis 26) Out of a set of feasible alternatives, an optimizer should choose the alternative with the ________. A) highest net benefit B) highest opportunity cost C) lowest total cost, regardless of benefit D) highest total benefit, regardless of cost Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Cost-Benefit Analysis 27) If a particular choice that an individual faces gives him a benefit of $20 but costs $30, the net benefit from making this choice equals ________. A) $20 B) $10 C) −$10 D) −$30 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis 28) If a job pays a wage of $50 per hour, but has a non-wage cost valued at $20 per hour, the net benefit of taking the job equals ________. A) $2.5 per hour B) $20 per hour C) $30 per hour D) $70 per hour Answer: C Difficulty: Medium 20 Copyright © 2022 Pearson Education Ltd.

AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis Maria has to choose between driving and taking a train to destination A. Traveling by train will cost her $400 and will take 4 hours. Driving to destination A takes 6 hours, and the required amount of gasoline costs $250. Her opportunity cost of time is $15 per hour. 29) Refer to the scenario above. What is the total cost involved if Maria chooses to travel by train? A) $60 B) $400 C) $420 D) $460 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis 30) Refer to the scenario above. If Maria borrows her parents' car and pays for only the gasoline, what is her total cost of driving to destination A? A) $90 B) $250 C) $300 D) $340 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis 31) Refer to the scenario above. Maria should choose to ________. A) drive, as it will save her $120 B) travel by train, because it is quicker C) drive, as it will give her a real saving of $150 D) travel by train, as it will save her $30 in travel time Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis 32) Refer to the scenario above. If Maria's opportunity cost of time increases to $80 per hour, the cost of taking the train is ________. A) $320 B) $720 C) $800 D) $970 Answer: B 21 Copyright © 2022 Pearson Education Ltd.

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis 33) Refer to the scenario above. If Maria's opportunity cost of time increases to $80 per hour, the cost of driving to destination A is ________. A) $480 B) $730 C) $800 D) $970 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis 34) Refer to the scenario above. If the opportunity cost of time increases to $80 per hour, which of the following statements is TRUE? A) Maria should choose to drive, as it saves her $10. B) Maria should choose to drive, as it saves her $150. C) Maria should choose to travel by train, as it saves her $10. D) Maria should choose to travel by train, as it saves her $150. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis 35) Which of the following statements is TRUE? A) A rational economic agent is not likely to optimize. B) Cost-benefit analysis can also be used for normative economic analysis. C) Cost-benefit analysis does not yield the same result as optimization analysis. D) The net benefit of an option that costs $50 and provides a benefit of $100 is equal to $150. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Cost-Benefit Analysis

36) Wendy has to decide between taking a flight and driving to California. Air tickets cost $800 and will get her to California in 2 hours. If she decides to drive, she would need $300 worth of gasoline and 10 hours to reach her destination. Suppose Wendy's opportunity cost of time is $20 per hour. a) Assuming that there are no other costs involved, use cost-benefit analysis to decide whether she should fly or drive to California. b) If Wendy has an important business meeting to attend and this increases her opportunity cost of time to $200 per hour, will her optimum decision change? Explain. Answer: a) Cost-benefit analysis is a calculation that adds up costs and benefits using a common unit of measurement. It is used to identify the alternative that has the greatest net benefit, which is equivalent to benefits minus costs. If Wendy decides to drive down instead of flying, she saves ($800 − $300) = $500. But driving down to California takes an additional 8 hours of travel time. Therefore, the net benefit of driving relative to flying is: ($500 Cost saving) − (8 hours Additional travel time) × ($20/hour) = $500 − $160 = $340. Because the net benefit of driving is positive, driving to California is the optimum choice for Wendy when the opportunity cost of time is $20 per hour. b) If the opportunity cost of time changes, the net benefit of driving relative to flying will also change: Net benefit of driving relative to flying when the opportunity cost of time is $200 per hour = ($500 Cost saving) − (8 hours Additional travel time) × ($200/hour) = $500 − $1,600 = −$1,100. Because the net benefit of driving relative to flying is negative, flying to California is the optimum choice for Wendy when the opportunity cost of time is $200 per hour. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis 37) What is cost-benefit analysis? What are the steps involved in using cost-benefit analysis to make the optimal choice? Answer: Cost-benefit analysis is a calculation that adds up the costs and benefits of a particular choice using a common unit of measurement. It involves the conversion of all costs and benefits to a common unit of measurement so that they can be compared. The difference between the benefits and costs of choosing an alternative is referred to as the net benefit of the alternative. The alternative with the highest net benefit is the optimal choice. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Cost-Benefit Analysis

38) Kevin has a lot of free time, and he decides to pick up a new hobby. He has two options—he can take art classes or sign up for cooking classes. He estimates that the art classes would cost him $70 and would provide him with a benefit of $100. In contrast, the cooking classes would cost him $120 but provide him benefits worth $160. Use cost-benefit analysis to arrive at the optimum choice for Kevin. Answer: Kevin's optimal choice depends on the net benefits of both options: Net benefit of taking art classes = $100 − $70 = $30; Net benefit of taking cooking classes = $160 − $120 = $40. Therefore, given the costs and benefits involved, Kevin should sign up for the cooking classes rather than the art classes. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Cost-Benefit Analysis 39) Which of the following statements is TRUE of economic reasoning? A) Economic reasoning hampers optimal decision making. B) Economic reasoning can only be used with normative choices. C) Economic reasoning implies that leisure time is free and costless. D) Economic reasoning helps people make the best use of scarce resources. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Is Facebook Free? Roberta is moving to be closer to her children. Roberta is a nurse and makes $45 per hour. She has to decide whether to hire movers to pack up her belongings or pack it all up herself. The movers will charge $1,000 to supply packing materials and pack up all of Roberta's belongings. It would take 20 hours for her to pack up herself, and she would need to spend $300 on packing materials. 40) Refer to the scenario above. What is the total cost to Roberta of packing up herself? A) $1200 B) $900 C) $300 D) $1000 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Opportunity Cost

41) Based on the scenario above, which of the following statements is TRUE? A) Roberta should not hire the movers as she will save $1900. B) Roberta should not hire the movers as she will save $1000. C) Roberta should hire the movers as she will save $300. D) Roberta should hire the movers as she will save $200. Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Cost-Benefit Analysis 42) Refer to the scenario above, what is Roberta's opportunity cost of packing up herself? A) $300 B) $900 C) $1000 D) $1200 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Opportunity Cost 43) Refer to the scenario above, what is Roberta's net benefit of hiring the movers? A) -$300 B) -$200 C) $0 D) $1200 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Cost-Benefit Analysis 44) Refer to the scenario above. If Roberta found a 50% off coupon for the packing materials, how would that change her optimal choice? A) She would now save $50 by hiring the movers. B) She would now save $700 by hiring the movers. C) She would now save $50 by packing herself. D) She would now save $700 by packing herself. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Cost-Benefit Analysis

45) If Tom spends 4 hours a day on Facebook, and the minimum wage in his country is $7 per hour. a) What is his opportunity cost of spending time on Facebook? b) Given that spending time on Facebook has an opportunity cost, does this analysis suggest that Tom should work rather than spend his time on social networking? Answer: a) Opportunity cost refers to the best alternative use of a resource. In this case, the resource is time. So, if Tom decided to work instead of spending time on Facebook, he would earn $7 every hour. Therefore, Tom's opportunity cost of spending time on Facebook is equal to $7 × 4 = $28. b) No, economic analysis does not dictate choices. Economics would not tell Tom what to do; it would only help him identify the trade-offs that he is making in his decisions. Whether Tom chooses to work or spend time on Facebook is a normative choice that Tom should make based on costs and benefits. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Is Facebook Free? 1.4 The Second Principle of Economics: Equilibrium 1) Which of the following statements is TRUE of equilibrium? A) Economic agents have an incentive to divert from equilibrium. B) Each economic agent can reach equilibrium irrespective of the actions of others. C) In equilibrium, the opportunity cost of the choices made by each economic agent is zero. D) In equilibrium, all economic agents are choosing the best feasible option simultaneously. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Second Principle of Economics: Equilibrium 2) Which of the following will hold TRUE if the market for cameras is in equilibrium at a price of $40? A) Sellers of cameras will have an incentive to charge a price higher than $40. B) The quantity of cameras produced will equal the quantity of cameras bought in the market. C) Buyers of cameras will want to buy fewer cameras than they are purchasing at equilibrium. D) If the cost of producing cameras falls below $40 per camera, all sellers will stop supplying cameras. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Second Principle of Economics: Equilibrium

3) When the market for a commodity is in equilibrium, ________. A) no economic agent will want to change his or her behavior B) there will still be some unsold stock of the commodity C) all buyers of the commodity will want to change their behavior D) all sellers of the commodity will want to change their behavior Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Second Principle of Economics: Equilibrium 4) Which of the following is TRUE of equilibrium? A) Equilibrium refers to a situation where the government allocates resources among economic agents. B) Equilibrium refers to a situation where all economic agents simultaneously optimize after considering one another's actions. C) Equilibrium refers to a situation where all economic agents are making suboptimal choices and have an incentive to change their behavior. D) Equilibrium refers to a situation where an economic agent can be made better off without making anyone else worse off. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Second Principle of Economics: Equilibrium 5) Suppose the market for pizza slices is in equilibrium at a price of $1 per slice. What conditions are likely to be satisfied in the pizza slice market? Answer: The conditions that will be satisfied when the market for pizza slices is in equilibrium are the following: i) The number of pizza slices made by sellers will be equal to the number of pizza slices purchased by buyers. ii) Pizza sellers will produce pizzas at the point where the cost of production is less than or equal to the market price of $1. iii) Buyers will consume pizza as long as the benefit that they derive from consumption is at least equal to the market price of $1. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Second Principle of Economics: Equilibrium

6) When a market is in equilibrium, both buyers and sellers do NOT perceive a benefit from changing their behavior. Why? Answer: In most economic situations, an economic agent is not optimizing individually. His decision is influenced by the decisions taken by other economic agents. In equilibrium, each and every economic agent is doing the best that they can do, given the information they have and given the actions of other economic agents. Therefore, nobody perceives a benefit from changing his or her behavior. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Second Principle of Economics: Equilibrium 7) The term "free riders" refers to people who ________. A) don't contribute but still benefit from others' actions B) make economic decisions randomly and are not rational C) selflessly pay for others' consumption of goods and services D) haggle over the prices of the goods and services that they buy Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Free-Rider Problem 8) Who among the following is an example of a free rider? A) An individual who sneaks into a music concert B) A consumer who buys her groceries from a nearby store C) A taxpayer who exercises in the public park near his house D) A club member who makes voluntary contributions to the club Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Free-Rider Problem 9) Who among the following is an example of a free rider? A) A housekeeper cleaning a house B) A tax evader enjoying national security C) A consumer paying for pollution control D) An individual who buys a ticket for a baseball game Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Free-Rider Problem

10) Each member in a group might do what's best for himself or herself instead of behaving in a way that optimizes the well-being of the entire group. This gives rise to the problem of ________. A) Pareto inefficiency B) free riding C) irrational behavior D) disequilibrium Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Free-Rider Problem 11) Which of the following statements is TRUE of free riding? A) Free riding is easy to detect and punish. B) Free riding is reduced with social pressure. C) Free riding is not affected by incentives. D) Free riding does not impose a cost on society. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Free-Rider Problem 12) Assume that a house is rented by four students. When it comes to keeping the house clean, each of the four roommates has an incentive to leave the cleaning to the others. As a result, the house is never clean. Which of the following is the best solution to this problem of free riding? A) Asking every roommate to clean the house if they dirty it B) Requiring every roommate to contribute to a cleaning service C) Requiring each roommate to pay more toward the house rent and groceries D) Assigning one roommate the responsibility of watching over the other students Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Free-Rider Problem 13) Explain the term "free riders." Answer: Free riders are people who do not contribute but still benefit from the actions that others undertake. When people pursue their own private interests and do not contribute voluntarily to the public interest, the problem of free riding arises. For example, a free rider may avoid paying taxes but enjoy the same benefits enjoyed by tax payers. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Free-Rider Problem

1.5 The Third Principle of Economics: Empiricism 1) Empiricism refers to the process of ________. A) measuring variables B) testing ideas using data C) collecting and organizing data D) making choices using values and beliefs Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Third Principle of Economics: Empiricism 2) Which of the following statements is TRUE? A) Data help establish whether theories match reality. B) Data are not an integral part of optimization analysis. C) Empiricism is not an integral part of optimization analysis. D) Empiricism refers to the testing of ideas without using data. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Third Principle of Economics: Empiricism 3) Which of the following statements is TRUE of data? A) Data help verify causal relationships. B) Data are not important for evaluating theories. C) Anecdotes are good substitutes for data. D) The fewer data that are available, the better the empirical analysis will be. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Third Principle of Economics: Empiricism 4) Which of the following statements is TRUE? A) Testing with data is essential to developing a good theory. B) The knowledge of economics complicates decision making. C) Cost-benefit analysis can be applied only to limited economic decisions. D) Economics is more of a theoretical subject with limited applications in the real world. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Third Principle of Economics: Empiricism

5) Which of the following is a feature of a good theory? A) A good theory does not rely on data. B) A good theory cannot be tested with data. C) A good theory is free from approximations. D) A good theory closely predicts actual behavior. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Third Principle of Economics: Empiricism 6) What is the rationale behind empiricism in economic analysis? Answer: Empiricism refers to the use of data to test theoretical ideas or concepts. Empiricism is important, because it enables economists to determine whether economic theories are consistent with actual human behavior. This allows economists to refute faulty theories or modify them so that they are a better fit to the real world. Empiricism also enables researchers to identify causal relationships between different sets of variables. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Third Principle of Economics: Empiricism 1.6 Is Economics Good for You? 1) Which of the following statements is TRUE? A) Economics is concerned with money, not choices. B) Economics can be used to predict people's actions. C) Economics does not provide insights into human behavior. D) Economic reasoning tends to reduce the quality of decision making. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Is Economics Good for You? 2) Economic reasoning allows economic agents to make decisions ________. A) by random selection B) by comparing the costs and benefits of various options C) by replicating the choices made by other economic agents D) solely on the basis of tastes and preferences for various options Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Is Economics Good for You?

3) Which of the following statements is FALSE? A) One of the benefits of studying economics is that you will finally understand how to make money in the stock market. B) Studying economics can help you think about the tradeoffs involved with shutting down the economy to prevent the spread of a deadly virus, such as COVID-19. C) One of the benefits to studying economics is the ability to make better decisions. D) The opportunity cost of filling a scarce slot on your course schedule with an economics course is the knowledge you could be acquiring by taking another course. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Is Economics Good for You?

MicroEconomics, 3e (Acemoglu/Laibson/List) Chapter 2 Economic Methods and Economic Questions 2.1 The Scientific Method 1) Empiricism refers to using ________ to analyze the world. A) data B) beliefs C) traditions D) value judgments Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Scientific Method 2) The scientific method refers to the process by which economists and other scientists ________. A) collect data for further use in research B) develop models of the world and test those models with data C) develop models to explain the past but not to predict the future D) plot graphs to illustrate relationships between different economic variables Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Scientific Method 3) Which of the following statements is TRUE? A) Models that economists use are perfect replicas of reality. B) The scientific method used by economists is based on idealism and not empiricism. C) Models help economists explain the past but do not help predict the future. D) Testing with data enables economists to distinguish between good models and bad models. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 4) Which of the following is a feature of the scientific method? A) The scientific method is not based on data, statistics, or measurements. B) The scientific method allows improvisation and correction of inconsistent models. C) The scientific method enables the creation of perfectly accurate models of the real world. D) The scientific method is used only for studying topics related to economics. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 1 Copyright © 2022 Pearson Education Ltd.

5) Which of the following statements is TRUE of the scientific method? A) The scientific method may not reveal a "true" model of the world. B) The scientific method does not require the models to be tested with data. C) The scientific method used by economists and scientists is independent of empiricism. D) The scientific method can help develop accurate models even when data are unavailable. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 6) A model refers to ________. A) a perfect replica of reality B) a simplified description, or representation, of reality C) facts, measurements, or statistics that describe the world D) a set of facts established by observation and measurement Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 7) Which of the following is a feature of models? A) Models are the same as hypotheses. B) Models help in making predictions for the future. C) Models are more complicated than real life phenomena. D) Models are as complex as the phenomenon being studied. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 8) Which of the following statements is TRUE of models? A) The predictions of a model are referred to as data. B) A model is formulated after developing a hypothesis. C) Models are always based on assumptions that are known to be true. D) It is more important for a model to be simple and useful than to be precisely accurate. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data

9) A model ________. A) is often based on simplifying assumptions that are not necessarily true B) can be tested without data or statistics C) is a more complex representation of reality than a theory D) can never be used to predict the future, but it helps explain the past Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 10) Facts, measurements, or statistics that describe the world are referred to as ________. A) data B) models C) hypothesis D) empiricism Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 11) Which of the following statements is TRUE about data? A) Empiricism does not necessarily involve data. B) Consistency of models can be checked using data. C) Facts that describe the world are not considered data. D) Convincing data analysis in economics relies on using a small sample. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 12) Empirical evidence refers to ________. A) a simplified representation of reality B) a proposed explanation for a phenomenon C) the process of developing and testing models D) a set of facts established by observation and measurement Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data

13) Which of the following statements is TRUE? A) Theories are statistics that describe the real world. B) Hypotheses are predictions that can be tested with data. C) Data are facts established by observation and measurement. D) Empirical evidence consists of facts, measurements, or statistics that describe the world. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 14) A model's predictions are referred to as ________. A) statistics B) theories C) hypotheses D) empirical evidence Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 15) Which of the following statements correctly differentiates between a model and a hypothesis? A) Testing a hypothesis does not require data, whereas testing a model requires data. B) Testing a model requires data, whereas testing a hypothesis does not require data. C) A hypothesis can be used to make predictions for the future, whereas a model can only explain the past. D) A model is a simplified representation of reality, whereas hypotheses are a model's predictions. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 16) What is meant by the term "scientific method?" What are the key components of the scientific method? Answer: The scientific method is the name for the ongoing process that economists, social scientists, and natural scientists use to develop models of the world and to test those models with data. The key components of the scientific method are: i) Models, which are simplified descriptions, or representations, of reality ii) Data, which are facts, measurements, or statistics that describe the world iii) Empirical evidence, which consists of facts established by observation and measurement iv) Hypotheses, which are predictions that can be tested with data Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 4 Copyright © 2022 Pearson Education Ltd.

17) Why do almost all models begin with assumptions? Answer: Researchers develop a model, which is a simplified description of reality, to study a problem at hand. Real-world phenomena are often very complex, thus making them difficult to analyze in their true form. Therefore, assumptions are required to simplify complex phenomena and help researchers make good predictions about the future. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 18) Why are data essential components of the scientific method? Answer: Data are important for testing a model. Testing with data enables economists to separate the good models from the bad ones. When a model is overwhelmingly inconsistent with data, economists try to fix the model or replace it altogether. Thus, data enable empirical testing of models to determine whether a model is suitable for analyzing the problem at hand. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Models and Data 19) Economic models are often based on assumptions because they ________. A) help explain the past B) help simplify complex real-world phenomena C) help predict the future with greater accuracy D) help test models even when relevant data are unavailable Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: An Economic Model A model is based on an assumption that an additional year of education increases a student's future wage by 20 percent. 20) Refer to the scenario above. The hypothesis of the model is that ________. A) college graduates will earn about 80 percent more than high school graduates B) college graduates will earn about 107 percent more than high school graduates C) college graduates will earn about 200 percent more than high school graduates D) college graduates will earn about 275 percent more than high school graduates Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: An Economic Model

21) Refer to the scenario above. Which of the following statements is TRUE of the model? A) The predictions of this model cannot be tested with data. B) The predictions of this model are accurate and will hold for all individuals. C) The predictions of this model can be applied to unlimited years of additional education. D) The model predicts that two additional years of education is likely to increase future earnings by 60 percent. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: An Economic Model 22) Refer to the scenario above. Which of the followings statements is TRUE of the model? A) The predictions of this model can be verified empirically. B) The predictions of this model can only be applied for a limited number of years of additional education. C) According to the model, 2 additional years of education will increase an individual's future wages 1.20 times. D) According to the model, 2 additional years of education will increase an individual's future wages 2.98 times. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: An Economic Model 23) Refer to the scenario above. Which of the following statements is TRUE about the model's prediction? A) The prediction cannot be verified empirically. B) The prediction is precise, exact, and accurate for the entire population. C) The prediction is an approximate relationship and may not hold for everyone. D) The prediction can be applied to estimate the returns only for a limited number of years of additional education. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: An Economic Model 24) Refer to the scenario above. Which of the following statements is TRUE about the model? A) The model is not based on any assumption. B) The predictions of the model will hold for every individual. C) The model describes the economic payoff of more education. D) The model can be applied for a maximum of 10 years of additional education. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: An Economic Model 6 Copyright © 2022 Pearson Education Ltd.

25) Which of the following implies that a model is an approximation? A) The model is not based on any assumption. B) The predictions of the model are mostly wrong. C) The predictions of the model will hold in most cases but not all. D) The predictions of the model cannot be tested with data. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: An Economic Model 26) Which of the following is a key property of models? A) All economic models begin with assumptions. B) Empiricism is not essential for testing models. C) All models can be used for a limited time only. D) All models are consistent and do not make incorrect predictions. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: An Economic Model 27) What are the two important properties of all models? Answer: i) All models are approximations. A model cannot predict how a certain change in a particular variable will affect all individuals in the population. Instead, it predicts what will happen to most people in most circumstances. Thus, any model is just a simplified approximation of the features of a more complex real-life phenomenon. ii) Predictions of all models can be tested with data. Data can be used to verify and evaluate the predictions of all models. Testing with data enables economists and other scientists to refute inconsistent models and accept good models. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: An Economic Model 28) An economic model suggests that for every additional year of education, an individual's future wages increase by 5 percent. If Richard, with 12 years of education, earns $20 per hour, how much will he earn per hour if he decides to undertake 4 additional years of education? Answer: The model suggests that if Richard earns $20 per hour, an additional year of education will increase his hourly wages to 1.05 × $20. Therefore, 4 additional years of education will increase his hourly wage to 1.05 × 1.05 × 1.05 × 1.05 × $20 or $24.31 per hour. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: An Economic Model

29) An economic model suggests that an additional year of education increases a student's future wages by 15 percent. Using this model, answer the following questions. a) Gary completes 8 years of education, and John completes 9 years of education. If Gary earns $20 per hour, how much is John expected to earn? b) John completes 9 years of education, and Kevin completes 12 years of education. Given John's earnings (as calculated in part a), how much is Kevin expected to earn? c) Is there any limitation to such a model? Explain your answer. Answer: a) The economic model suggests that an additional year of education increases a student's future wages by 15 percent. Hence an additional year of education will increase the student's per-hour income by 1.15 times. If Gary earns $20 per hour with 8 years of education, John is expected to earn 1.15 × $20 or $23 per hour. b) If John earns $23 per hour with 9 years of education, and Kevin completes 3 additional years of education, Kevin is expected to earn 1.15 × 1.15 × 1.15 × $23 or $34.98 per hour. c) One of the major limitations of models like these is that they are approximations of real-life phenomena. It is unlikely that an additional year of education will create the same wage increment for all individuals. It is also unlikely that the wage increment from an additional year of high school education will be similar to the wage increment from an additional year of college education. Hence, the relationship between education and earnings as established by this model is not exact and is only an approximation of the real-world relationship. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: An Economic Model 30) Public-use data refer to ________. A) data that have to be purchased from an external agent B) data that are available to anyone who wants to use it C) data published by the government only during political campaigns D) data collected by a researcher only through field investigation Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Much More Do Workers with a College Education Earn?

31) In country X, the average yearly salary of 50-year-olds with 16 years of education is $50,275, while the average yearly salary of 50-year-olds with 12 years of education is $36,265. According to these data, 4 additional years of education are likely to be correlated with higher future wages of about ________. A) 24 percent B) 38 percent C) 50 percent D) 88 percent Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Much More Do Workers with a College Education Earn? 32) In a hypothetical country, the average wage of five 40-year-old citizens with a college education is $36,896, and the average wage of five 40-year-old citizens with a high school education is $25,864. What is the returns-to-college education in the country? Is there any limitation of this analysis? Explain your answer. Answer: Dividing the average salary of 40-year-old college graduates by the average salary of 40-year-old high school graduates results in the ratio ($36,896/$25,864) = 1.426. Hence, a college education is likely to raise a citizen's income by 42.6 percent. Yes, this analysis has a major limitation. It does not make sense to generalize overall returns to education on the basis of a sample representing a single age group. Thus, this model will provide information for only 40-year-old citizens. Returns to education could be high immediately after graduation but taper off with age, or they could increase with age. Either way, this measure does not capture the true returns to education. Moreover, to arrive at the conclusion, in each category, the average income of only five citizens is taken into account. The number of observations in this case is very small, and this may weaken the empirical argument presented here. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Much More Do Workers with a College Education Earn? 33) The mean of a data set is the ________. A) product of all values divided by the number of values B) sum of all different values divided by the number of values C) sum of all different values multiplied by the number of values D) difference between the highest value and the lowest value Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Means and Medians

34) Which of the following statements is TRUE about the mean of a series? A) The mean is equal to zero when all the values are identical. B) The mean is a commonly used technique for summarizing data. C) The mean is less than all the individual observations in the data set. D) The mean is calculated as the sum of all values multiplied by the number of values. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Means and Medians The following table shows the monthly wages of five different individuals. Individual 1 2 3 4 5

Monthly Wage $200 $450 $640 $700 $800

35) Refer to the table above. What is the average monthly wage? A) $450 B) $558 C) $612 D) $650 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Means and Medians 36) Annie, Darwin, Dorothy, Christian, and Isabella are five college students who work as parttime bartenders. If their average weekly earnings is $100, then their total weekly earnings is ________. A) $500 B) $400 C) $250 D) $700 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Means and Medians

37) A local swimming club enrolled thirty-five new members during the current year and charged each member a onetime membership fee of $200. What is the total membership fee collected by the club from the new members this year? A) $1,750 B) $2,000 C) $7,000 D) $3,500 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Means and Medians 38) The weights of six students in the seventh grade are 120 lbs, 110 lbs, 105 lbs, 100 lbs, 96 lbs, and 90 lbs. The average weight of the six students is ________. A) 105 lbs B) 103.5 lbs C) 100 lbs D) 95 lbs Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Means and Medians The following table shows the monthly wages of five different individuals. Individual 1 2 3 4 5

Monthly Wage $200 $450 $450 $500 $600

39) Refer to the table above. The average monthly wage of the five workers is ________. A) $600 B) $450 C) $440 D) $0 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Means and Medians

40) The average income of 25 employees working in a firm is $1,754 per month. What is the total income of all the employees? A) $40,000 B) $43,850 C) $56,225 D) $63,950 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Means and Medians 41) Which of the following statements is TRUE? A) Empirical arguments can be supported without the use of data. B) Using a large data set will strengthen the force of an empirical argument. C) Using fewer observations will strengthen the force of an empirical argument. D) The number of observations used does not affect the strength of an empirical argument. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Means and Medians 42) To judge a statistical relationship, should a researcher rely on a small sample or a large sample? Explain your answer. Answer: A key feature of economic and statistical analyses is the amount of data used. Small samples are not representative of the entire population. Therefore, the predictions of a model based on smaller samples may be only a very weak approximation of some real-world phenomena and lead to inaccurate predictions. Using a larger sample (in other words, a lot of data) strengthens the force of an empirical argument, because the researchers can make more precise statements. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Means and Medians

43) The following table displays the marks obtained by three students on an economics test. Student Mary Charles Tony

Mark Obtained (out of 100) 78 83 65

a) Calculate the mean marks obtained by the three students. b) Suppose one of the scores was reported incorrectly. Charles scored 38 instead of 83. How will the mean change if the correction is incorporated? c) How does the amount of data used affect the accuracy of a model? Answer: a) The mean, or average, is the sum of the observations in a data set divided by the number of observations. In this case, the sum of the marks of the three students is 78 + 83 + 65, or 226. Therefore, the average score of the three students is 226/3, or 75.33. b) Because one of the scores was wrongly reported, there would be a change in the sum of the scores. If the correct score is considered, the new sum of marks is 226 - 83 + 38, or 181. Hence the corrected average score is 181/3, or 60.33. c) The amount of data used plays an important role in determining the accuracy of a model. A key feature in economic analysis is the amount of data used. Using lots of data, or observations, strengthens the force of an empirical argument and allows the researcher to make more precise statements. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Means and Medians 44) Which of the following arguments based on anecdotes is most likely to be incorrect? A) Increased government spending lowers the unemployment rate in an economy but can lead to inflation. B) Based on a local survey of a small town, it was argued that greater opportunities to work from home are the prime cause of obesity among the elderly workforce in the country. C) The average annual earnings of high school dropouts in the United States was much less than that of graduates in 2015. D) A health survey of preschoolers in Mexico showed that the average height of preschoolers is between 3.5 feet and 4 feet. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Argument by Anecdote

45) Which of the following statements is TRUE? A) Arguments based on anecdotes are always true. B) In the scientific method, anecdotes are more important than data. C) Arguments by example are appropriate when contradicting a blanket statement. D) It is easier for a researcher to jump to a wrong conclusion when she uses a large data set. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Argument by Anecdote 46) 5 friends are comparing GPAs and find that they have a mean GPA of 3.0. If they make another friend with a GPA of 2.5, which of the following statements is TRUE? A) The mean GPA of the friend group will rise. B) The mean GPA of the friend group will fall. C) The mean GPA of the friend group will not change. D) There is not enough information to answer this question. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Means and Medians Cam'ryn, Lejla, Shaun, Tyson, and Elvira work 40 hours, 25 hours, 35 hours, 38 hours and 45 hours, respectively, each week. 47) Refer to the scenario above. On average, how much do they work each week? A) 30 hours B) 34.2 hours C) 36.6 hours D) 38.4 hours Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Means and Medians 48) Refer to the scenario above. What is the median of their hours worked each week? A) 35 hours B) 36 hours C) 38 hours D) 40 hours Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Means and Medians

49) Refer to the scenario above. If Kayla joins the group and works 42 hours a week, what would happen to the average hours worked for this group? A) The average would increase. B) The average would decrease. C) The average would not change. D) There is not enough information to tell. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Means and Medians 50) Philip Oreopolous found a 10% return to a year of schooling in the UK. If Rashmi could earn 25,000 pounds after completing 15 years of schooling. This result implies that she could earn ________ pounds if she completes 16 years of schooling. A) 22,500 B) 27,500 C) 30,000 D) 250,000 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Much More Do Workers with a College Education Earn? 51) Which of the following is NOT a reason that schooling and earnings might be positively correlated? A) Workers with higher wages become smarter and more productive. B) Additional schooling makes workers more productive and thus firms are willing to pay them more. C) A person's level of schooling and their innate ability (or innate productivity) are positively correlated, so more productive workers end up earning more. D) People who obtain more years of schooling might enjoy learning and complete more training once they are hired. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Much More Do Workers with a College Education Earn?

2.2 Causation and Correlation 1) Causation occurs when ________. A) two variables tend to move in the same direction B) two variables tend to move in opposite directions C) a change in one variable is the reason for a change in another variable D) a change in one variable does not cause any change in another variable Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 2) Which of the following is most likely to be an example of causation? A) The crime rate is high in a country. The literacy rate is high as well. B) A firm producing compact fluorescent light bulbs installs new machinery. Their per-day production of light bulbs increases. C) A soccer player scores four goals when he wears red socks. He concludes that the red socks helped him score the goals. D) A student wins money by scratching a ticket with a particular coin. He decides to scratch all tickets with the same coin in the future. Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 3) A variable is a factor that ________. A) cannot be measured B) is not affected by changes in other factors C) is independent and cannot be determined D) takes different values at different points of time Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 4) A correlation between two variables implies that ________. A) there is a cause-effect relationship between the two variables B) it is impossible to measure one variable without measuring the other C) there is a mutual relationship between both the variables D) when one variable changes, the other variable always changes by exactly the same amount Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation

5) Which of the following statements identifies a difference between correlation and causation? A) Correlation occurs when one thing directly affects another, whereas causation implies a mutual relationship between two things. B) Correlation implies a mutual relationship between two things, whereas causation occurs when one thing directly affects another. C) A causal relationship exists between two variables when they are correlated, but correlation does not necessarily exist if there's a causal relationship between two variables. D) Causation cannot arise when correlation is present, and correlation cannot arise when causation is present. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 6) Which of the following statements is TRUE? A) Correlation can only arise when causation is not present. B) Causation can only arise when correlation is not present. C) Correlation arises when there is causation and can also arise when there is no causation. D) Causation arises when there is correlation between two variables and can also arise when there is no correlation. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 7) When two variables move in the same direction, they are said to be ________. A) uncorrelated B) equivalent C) positively correlated D) negatively correlated Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 8) Which of the following pairs of variables is likely to be positively correlated? A) Income and consumption B) Price and consumption C) Education and unemployment D) Availability of health care and death rate Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Causation versus Correlation

9) When two variables move in opposite directions, they are said to be ________. A) uncorrelated B) positively correlated C) negatively correlated D) equivalent Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 10) Which of the following relationships is likely to exhibit a negative correlation? A) The relationship between the amount saved with a bank and the interest earned B) The relationship between the level of professional training and unemployment C) The relationship between inflation in the United States and traffic congestion in China D) The relationship between the amount of precipitation in a year and the number of umbrellas sold Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 11) Zero correlation between two variables implies that ________. A) both variables move in the same direction B) the variables are not related to each other C) both variables move in the opposite direction D) change in one variable causes the other to change Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 12) Which of the following relationships is most likely to exhibit zero correlation? A) The relationship between income and savings B) The relationship between education and income C) The relationship between wind velocity and the rotational speed of wind turbines D) The relationship between the amount received as unemployment benefits in China and the unemployment rate in Canada Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Causation versus Correlation

13) Data show that in 2012, the college enrollment in Lithasia increased. In the same year, the sale of hot dogs in Lithasia also increased. The relationship between college enrollment and the sale of hot dogs exhibits ________. A) a zero correlation B) a causal relationship C) a positive correlation D) a negative correlation Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Causation versus Correlation 14) An omitted variable is a variable that ________. A) is purposely left out as it does not aid an economic analysis B) does not cause other variables in a study to change when it changes C) is removed from a study as it can lead to the problem of reverse causality D) has been left out, and if included, would explain why the variables considered in a study are correlated Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 15) ________ occurs when the direction of cause and effect is mixed up in a study. A) Adverse causality B) Reverse causality C) Omitted variable bias D) Limited information bias Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 16) Which of the following claims is most likely to suffer from reverse causality? A) Higher income increases consumption. B) Relatively wealthy people tend to be relatively healthy. C) More hours of study are likely to lead to better results. D) Crime rate is seen to be lower in countries having a higher level of poverty. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Causation versus Correlation

17) What are the three categories of correlation? Illustrate with real-life examples. Answer: Correlation can be divided into three categories. These are: i) Positive correlation, which implies that two variables tend to move in the same direction. For example, when income increases, consumption increases. ii) Negative correlation, which implies that two variables tend to move in the opposite direction. For example, when people have more professional training, they are less likely to be unemployed. iii) Zero correlation, which implies that there is no relationship between two variables. For example, the amount of air pollution in India is likely to have no relationship with the pollution control measures adopted in the United States. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Causation versus Correlation 18) A survey recently indicated that being happy at work tends to make workers more productive. What can be a possible error of this conclusion? Answer: The conclusion derived from the survey is likely to be a correlation rather than causation. In other words, saying that happiness causes workers to be productive can be a misleading conclusion. It is also likely that workers who are productive are happier, because they are performing better than their colleagues. There can be other explanations to being happy at work. For example, if the job provides workers a good match for their skills, they will be happy to use their skills, which will make them more productive. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Causation versus Correlation 19) What is meant by the term "omitted variable" in correlation analysis? Explain with an example. Answer: An omitted variable is something that has been left out of a study that, if included, would explain why two variables are correlated. For example, it is seen that the rate of employees quitting is lower in firms that pay higher wages. Thus, a conclusion can be drawn that higher wages result in lower quit rates. But many other variables might influence the quit rates apart from wages, such as employee benefits provided by the firm, age of employees, and worklife balance. These variables that have been left out are omitted variables and if included in the study would better explain the quit rates of firms. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation

20) Reverse causality can create confusion between correlation and causation. What does reverse causality imply? Answer: Reverse causality is said to happen when the direction of cause and effect is mixed up in a study. This can lead to wrong conclusions. For example, researchers may claim that jogging causes people to be healthy. There's a possibility of reverse causality in this claim, because it might be the case that healthy people tend to jog more. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Causation versus Correlation 21) It has been observed in country X that with an increase in college enrollment over a period of 6 years, the demand for televisions has also increased. Would it be right to conclude that the increase in college enrollment has caused the increase in demand for televisions? Why or why not? Answer: The error in drawing such a conclusion is that the increase in both the variables may represent a correlation and not necessarily a causal relationship. Although both variables move together, it would be wrong to conclude that an increase in college enrollment is causing an increase in the demand for televisions. There may be other omitted variables, such as changes in the per capita income in country X or changes in the price of satellite television connections over the 6 years. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Causation versus Correlation 22) State the type of correlation between the following sets of variables. a) Consumption and income b) Education and unemployment c) Availability of health care and death rate d) Pollution control measures adopted in Canada and the number of cases of respiratory diseases in Australia Answer: a) Consumption and income are likely to be positively correlated. b) Education and unemployment are likely to be negatively correlated. c) Health care and death rate are likely to be negatively correlated. d) The relationship between pollution control in Canada and the number of cases of respiratory diseases in Australia is likely to have zero correlation. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Causation versus Correlation

23) Does correlation always imply causation? Why or why not? Explain with the help of real-life examples. Answer: No, correlation does not always imply causation. Both causation and correlation study the relationship between two or more variables and are therefore often mistaken for each other. Correlation means that there is a mutual relationship between two variables; as one variable changes, the other changes as well. Correlation between two variables does not necessarily imply that one causes the other. Correlation just looks at the strength of association between two variables, whereas causation occurs when one variable directly affects the other variable through a causal relationship. For example, if the use of some new packaging material improves the shelf life of bread, it represents a causal relationship. In contrast, if someone claims watching violent movies increases crime rates in a country, it is not necessarily a causal relationship. However, some degree of correlation may exist between both. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Causation versus Correlation 24) An experiment refers to ________. A) a simplified representation of some real-life phenomenon B) the process of collecting, measuring, and organizing data C) validating the claims of a model using statistics and facts D) a controlled method of investigating causal relationships among variables Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments 25) Which of the following is a feature of experiments? A) Experiments are restricted to laboratories. B) Experiments are carried out only in the study of economics. C) Experiments help determine cause and effect between variables. D) Experiments require the division of participants into a treatment group and a test group. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments 26) To conduct a randomized experiment, researchers usually classify the participants into a ________. A) study group and a control group B) treatment group and a test group C) study group and a treatment group D) treatment group and a control group Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments 22 Copyright © 2022 Pearson Education Ltd.

27) Randomization is the assignment of subjects by ________ to a ________. A) chance, rather than by choice; treatment group or to a test group B) choice, rather than by chance; treatment group or to a test group C) choice, rather than by chance; treatment group or to a control group D) chance, rather than by choice; treatment group or to a control group Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments 28) Which of the following statements is TRUE? A) Randomization is not used in medical experiments. B) Randomization allows for the classification of participants according to their choice. C) The subjects in the treatment group and the control group of an experiment are identical in all respects and they are treated identically. D) The subjects in the treatment group and the control group of an experiment are treated identically, except along a single dimension. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments 29) A researcher wants to test the effects of daily meditation on the stress levels of individuals. She divides the participants randomly into a treatment group and a control group and conducts an experiment. She pays for meditation classes for half of the subjects, and the other half does not join the class. Which of the following statements is TRUE of the two groups in this experiment? A) The participants in the treatment group are assigned by chance, whereas the ones in the control group are assigned by choice. B) The participants in the control group are assigned by chance, whereas the participants in the treatment group are assigned by choice. C) The treatment group is the group of subjects that receives payment from the researcher for meditation classes; the control group is the group that does not. D) The control group is the group of subjects that receives payment from the researcher to join the meditation class; the treatment group is the group that does not. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments

30) Which of the following is NOT a problem associated with randomized experiments? A) Experiments can sometimes get expensive for the researcher. B) The participants in the treatment group and the control group are not identical in all respects. C) Getting immediate answers to some important questions may not be possible. D) Sometimes experiments are conducted poorly, which may lead to inaccurate results. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments 31) A natural experiment is an empirical study ________. A) in which the predictions of the model are not required to be tested with data B) that can only be used to understand natural phenomena and is widely used in subjects such as physics and biology C) in which the researcher assigns subjects to the control and treatment groups to verify a causeeffect relationship D) in which some process, outside the control of the experimenter, has assigned subjects to the control and treatment groups in a random or nearly random way Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments 32) Which of the following is an example of a natural experiment? A) A laboratory research on the effectiveness of solar power as an alternative source of fuel B) A research on the effectiveness of a new medicine among some voluntary participants C) A research on the effect of air pollution on lung disorders by observing the health conditions of people who stay close to industrial areas and those who stay away from industries D) A study on the benefits of regular exercise by paying for the membership fees at fitness clubs for one-half of the participants Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Experimental Economics and Natural Experiments

33) Which of the following is NOT an example of a natural experiment? A) A study looks at the income distribution across countries to compare the level of income inequality in high income countries and low income countries B) A study examining the effect of blind auditions on the gender composition of orchestras by observing the fractions of females in orchestras that switch to blind auditions versus those who do not C) A study examining the effects of in utero stress on a child's birth weight by comparing birth weights of babies in utero during a devastating tsunami and those who were not D) A study examining the effects of a minimum wage on employment by observing employment in a state that raised their minimum wage and a nearby state that did not change their minimum wage Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Experimental Economics and Natural Experiments 34) Which of the following are the most likely to exhibit a negative correlation? A) Number of cigarettes smoked per day and life expectancy B) Number of times a person works out each week and life expectancy C) Income and life expectancy D) Beard length and life expectancy Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Correlation Does Not Imply Causality 35) In research, what is the importance of experiments? What is meant by randomization in experiments? Answer: An experiment is a controlled method of investigating causal relationships among variables. Randomization in experiments refers to the assignment of participants by chance, rather than by choice, to a treatment group or a control group. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments

36) To test the effectiveness of a newly developed medicine, 300 patients suffering from a heart ailment were divided into two groups of 150 people each. One group was treated with the new medicine, while the other was treated with an already existing, widely used medicine. In this scenario, identify the treatment group and the control group. What is the rationale behind dividing patients into two groups? Answer: The treatment group refers to the group of patients who received the new medicine. The control group refers to the group of people who were not given the new medicine but were instead given the medicine that was already in widespread use. The rationale behind this division is to compare the health changes of the two groups over time. This experiment tests whether the new drug is better than the old drug. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Experimental Economics and Natural Experiments 37) What are the problems with experimentation? Answer: There are three main problems associated with experimentation: i) Experiments can be very costly to conduct. ii) Experiments do not provide immediate answers to a number of important questions. iii) Experiments are sometimes conducted poorly, which can lead to inefficient results. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Experimental Economics and Natural Experiments 38) Suppose a pharmaceutical company wants to test the effectiveness of a new drug in curing cancer. Which approach should it use to test whether the new drug is more effective than existing medicines that are widely used? Answer: The best way to test the effectiveness of the new drug is to conduct a randomized experiment. An experiment is a controlled method of investigating causal relationships among variables. To check the effectiveness of the drug, the researcher creates a treatment group and a control group chosen from all the patients with cancer. The participants are randomly divided into a treatment group or a control group. The patients in the treatment group receive the new medicine, while the patients in the control group receive the standard existing medication. The researcher then has to investigate the participants over a period of time, keeping a track of how their health changes. If the participants of the treatment group recover faster than the control group, it can be concluded that the new drug is more effective than the existing medicines prescribed currently. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Experimental Economics and Natural Experiments

2.3 Economic Questions and Answers 1) Which of the following statements correctly indicates a property of good economic questions? A) A good economic question should always be easy to answer. B) A good economic question should always be positive and not normative. C) A good economic question must always include arithmetic calculations and graphical solutions. D) A good economic question addresses topics that are important to economic agents and/or to society. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Economic Questions and Answers 2) Which of the following is a property of a good economic question? A) A good economic question can be answered. B) A good economic question should always have a single solution. C) A good economic question always addresses topics that are important to the whole society and not to an individual economic agent. D) A good economic question should never incorporate elements from disciplines other than economics. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Economic Questions and Answers Appendix: Constructing and Interpreting Charts and Graphs 1) A circular chart split into segments to show the percentages of parts relative to the whole is called ________. A) a histogram B) a time-series graph C) a pie chart D) a bar chart Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Pie Charts

2) Which of the following graphical representations can be used most appropriately to show the distribution of a household's income, in terms of percentages, among the various categories of expenses? A) A bar chart B) A pie chart C) A histogram chart D) A time-series graph Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Pie Charts 3) Which of the following statements is TRUE? A) A bar chart has many limitations in comparison to pie charts. B) A bar chart does not allow for the comparison of a single variable across many segments. C) A bar chart can only be used to represent independent variables. D) A bar chart indicates the frequency of a variable by using rectangles of different heights or lengths. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Bar Charts 4) Which of the following graphical representations is ideal for comparing a single variable across different groups? A) A histogram B) A bar chart C) A scatter plot D) A time series graph Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Bar Charts 5) An independent variable ________. A) cannot be measured B) cannot be represented on a bar chart C) is manipulated by the experimenter in an experiment D) is determined by the other variables in an experiment Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Bar Charts

6) A variable that is potentially affected by an experimental treatment is referred to as a(n) ________. A) omitted variable B) independent variable C) dependent variable D) compulsory variable Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Bar Charts 7) When the objective of an experiment or a study is to understand the changes in the attributes of a variable on a month-to-month basis, a ________ is most useful. A) pie chart B) time series graph C) histogram D) bar chart Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Time Series Graphs 8) Which of the following is most likely to be represented by a time series graph? A) The relationship between hourly wages and a worker's productivity B) The growth in consumer income over 5 years C) The contribution of each sector to the total output of an economy D) The different sources of tax revenue for the government Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Time Series Graphs 9) On a line chart, the income of a consumer is measured along the horizontal axis, and his consumption is measured along the vertical axis. The slope of the line is equal to ________. A) change in consumption plus change in income B) change in consumption minus change in income C) change in consumption multiplied by change in income D) change in consumption divided by change in income Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Correlation Does Not Imply Causality

10) The slope of the line on a line chart measures the rate of change in ________. A) only the independent variable B) only the dependent variable C) the dependent variable as the independent variable changes D) the independent variable as the dependent variable changes Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Correlation Does Not Imply Causality 11) As the number of billboards for a firm's product increases from 100 to 500, its sales increase from $1,000 to $10,000. If this information is plotted on a line chart, the slope of the line equals ________. A) $20 B) $0.044 C) $22.5 D) $30.33 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Correlation Does Not Imply Causality

Tobac Co. is a monopolist in the cigarette market in the Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below.

12) What is the slope of this demand curve? A) 25 B) 1/25 C) 50 D) 1/50 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Slope of a Line

The table below provides data on opium sales and farmgate prices of opium in Afghanistan from 1994 to 2008.

13) Which of the following statements is FALSE based on the table above? A) The best way to visualize how the quantity of opium purchased varies with the price of opium is with a scatter plot B) The best way to visualize how the price of opium has changed over time would be with a time series graph. C) The best way to visualize how the quantity of opium purchased varies with the price of opium is with a pie chart D) There might be other factors besides price that are influencing the quantity of opium that is purchased. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Interpreting Graphs and Data

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 3 Optimization: Doing the Best You Can 3.1 Optimization: Choosing the Best Feasible Option 1) Making choices by selecting the best feasible option, given the available information, is referred to as ________. A) delegation B) imposition C) actualization D) optimization Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 2) Which of the following statements is TRUE? A) It is easier for a person to optimize when he has less information. B) Optimization implies choosing the best option from a set of alternatives. C) People always successfully optimize given the limited information they have. D) Optimization is an easy process, and all economic agents are perfect optimizers. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 3) Optimization can be achieved using either of two techniques of cost-benefit analysis. Which of the following correctly identifies the techniques? A) Optimization using total value and optimization using profits B) Optimization using total value and optimization using marginal analysis C) Optimization in revenues and optimization using costs D) Optimization using marginal analysis and optimization using costs Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 4) Optimization using total value calculates ________. A) the total net benefits of different alternatives B) only the benefits of an alternative and not the costs C) only the costs of an alternative and not the benefits D) the change in net benefits resulting from a shift from one alternative to another Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 1 Copyright © 2022 Pearson Education Ltd.

5) John has to choose between a camping holiday and a holiday in Las Vegas. If he evaluates the total net benefit of both alternatives before coming to a decision, he is using the technique of ________. A) marginal analysis B) mean analysis C) optimization using total value D) optimization using marginal analysis Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option 6) Which of the following is NOT a step involved in optimization using total value? A) Calculating the total net benefit of each alternative B) Choosing the alternative with the highest net benefit C) Converting all costs and benefits into a common value of measurement D) Calculating the marginal consequences of moving between alternatives Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 7) Optimization using marginal analysis analyzes ________. A) the total net benefits of different alternatives B) only the costs of an alternative and not the benefits C) the total net benefits of the alternative that looks the most attractive D) the change in the net benefits resulting from a shift from one alternative to another Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 8) Gary has to decide between attending a 2-day art workshop and a 4-day art workshop. If he evaluates only the change in net benefit when he switches between the two options, he is using the technique of ________. A) mean analysis B) before and after comparisons C) optimization using total value D) optimization using marginal analysis Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option

9) The techniques of optimization using total value and optimization using marginal analysis ________. A) cannot be used to compare the same set of alternatives B) compare only the costs and ignore the benefits of the alternatives C) provide identical answers when comparing the same set of alternatives D) may provide different answers when comparing the same set of alternatives Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 10) Which of the following statements identifies a difference between optimization using total value and optimization using marginal analysis? A) Optimization using total value compares only the costs of different alternatives, whereas optimization using marginal analysis compares only the benefits of different alternatives. B) Optimization using total value compares only the benefits from different alternatives, whereas optimization using marginal analysis compares only the costs of different alternatives. C) Optimization using total value calculates the net benefits of different alternatives, whereas optimization using marginal analysis calculates the change in net benefits when switching from one alternative to another. D) Optimization using total value calculates the change in net benefits when switching from one alternative to another, whereas optimization using marginal analysis calculates the net benefits of different alternatives. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 11) Which of the following statements identifies a difference between optimization using total value and optimization using marginal analysis? A) In most cases, optimization using total value is faster and easier than optimization using marginal analysis. B) In many cases, optimization using marginal analysis is faster and easier than optimization using total value. C) Optimization using marginal analysis compares only the cost involved in different alternatives, whereas optimization using total value compares the net benefit of different alternatives. D) Optimization using marginal analysis compares the net benefit of different alternatives, whereas optimization using total value compares only the cost involved in different alternatives. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option

12) Both optimization using total value and optimization using marginal analysis ________. A) consider only the benefits from different alternatives B) consider only the costs incurred in different alternatives C) provide identical answers when comparing two alternatives D) require the calculation of the change in net benefits when switching from one alternative to another Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 13) Which of the following statements identifies a similarity between optimization using total value and optimization using marginal analysis? A) Both techniques consider only the costs of different alternatives. B) Both techniques consider only the total benefits of different alternatives. C) Both techniques evaluate the total net benefit of different alternatives to arrive at a decision. D) Both techniques require the conversion of all costs and benefits into a common unit of measurement. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 14) Which of the following statements is TRUE? A) Marginal analysis is a key component in the process of optimization using total value. B) Only direct costs are considered when the net benefits of the alternatives are calculated. C) In both the techniques of optimization, all costs have to be converted to the same unit of measurement. D) Optimization using total value calculates the change in net benefits when a person switches from one alternative to another. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 15) To calculate the ________ of an alternative, an individual needs to estimate ________ of the alternative. A) marginal benefit; the total cost B) marginal cost; the total benefit C) opportunity cost; the total benefit D) net benefit; both the cost and the benefit Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 4 Copyright © 2022 Pearson Education Ltd.

16) Net benefits of an alternative equal ________. A) benefits minus costs B) benefits divided by costs C) the sum of benefits and costs D) the product of benefits and costs Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 17) If an alternative provides a benefit of $8 to an individual at a cost of $6, the net benefit of the alternative equals ________. A) $0.75 B) $2 C) $14 D) $48 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option 18) When optimizing using total value, if the ________ exceed the ________, Project A is chosen over Project B. A) net benefits of Project A; net benefits of Project B B) total benefits of Project B; total benefits of Project A C) marginal costs of Project A; marginal costs of Project B D) marginal benefits of Project B; marginal benefits of Project A Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 19) If the ________ minus the ________ is positive, Project A is chosen over Project B. A) cost of Project A; cost of Project B B) net benefit of Project B; net benefit of Project A C) net benefit of Project A; net benefit of Project B D) total benefit of Project B; total benefit of Project A Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option

20) If the net benefit of Project A is $5 and that of Project B is $8, switching from Project A to Project B ________. A) reduces the net benefit by $3 B) increases the net benefit by $3 C) increases the net benefit by $8 D) decreases the net benefit by $8 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option 21) If the net benefit of Project A is $20 and that of Project B is $15, switching from Project A to Project B ________. A) reduces the net benefit by $5 B) increases the net benefit by $5 C) reduces the net benefit by $15 D) increases the net benefit by $15 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option 22) If the net benefit of Project A is $10 and that of Project B is $12, which of the following statements is TRUE? A) An individual can optimize by choosing Project A. B) An individual can optimize by choosing Project B. C) Switching from Project A to Project B reduces the net benefit by $2. D) Switching from Project A to Project B increases the net benefit by $1.2. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option 23) If Project A has a cost of $5 and provides a benefit of $10, and Project B has a cost of $2 and provides a benefit of $4, then switching from Project A to Project B ________. A) increases the net benefit by $3 B) decreases the net benefit by $3 C) increases the net benefit by $6 D) decreases the net benefit by $6 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option

24) If Project A has a cost of $2 and provides a benefit of $3 and Project B has a cost of $5 and provides a benefit of $8, which of the following statements is TRUE? A) The net benefit of Project A is $5. B) An individual can optimize by choosing Project B. C) Project A has a higher net benefit than Project B. D) A shift from Project A to Project B increases the net benefit by $1. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option 25) If Project X has a cost of $6 and provides a benefit of $10 and Project Y has a cost of $25 and provides a benefit of $27, which of the following statements is TRUE? A) An individual can optimize by choosing Project X. B) An individual can optimize by choosing Project Y. C) Switching from Project X to Project Y increases net benefit by $2. D) Switching from Project Y to Project X decreases net benefit by $2. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option 26) In most cases, optimization using marginal analysis is faster and easier than optimization using total value because the former ________. A) involves fewer steps to arrive at a conclusion B) uses simpler arithmetic tools in comparison to the latter C) focuses only on the benefits of an option, ignoring all calculations involving costs D) focuses only on the key differences between options and ignores things in common Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option

The table below shows the costs and benefits of three projects that a state government could invest in. Project Cost (millions of $) Benefit (millions of $) New Roads 1.5 5 Increased Teacher Pay 2 7 Expanded Medicaid Coverage 3 7.5 27) Refer to the table above. The net benefit of investing in increased teacher pay is ________. A) $5 million B) $4.5 million C) $7 million D) $3.5 million Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 28) Refer to the table above. Which of the following projects will generate the largest net benefits for the state? A) New Roads B) Increased Teacher Pay C) Expanded Medicaid Coverage D) All of these yield positive net benefits, so the state government would not have a preference. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 29) If the net benefit of investing in Project A is $100 and that of investing in Project B is $90, which of the following statements is TRUE? A) Switching from Project B to Project A increases the net benefit by $100. B) An individual can optimize by choosing Project B. C) Switching from Project A to Project B reduces the net benefit by $10. D) Switching from Project A to Project B increases the net benefit by $10. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option

30) What is meant by the term "optimization?" What do economists usually believe about how individuals optimize? Answer: Choosing the best option from a set of feasible alternatives is referred to as optimization. Whatever choice a person faces, economists believe that he or she is likely to try to choose optimally. Economists do not assume that people always successfully choose the best feasible option, but they believe that people try to optimize and usually do a good job with whatever limited information they have. This does not mean that people are always perfect calculators. Instead, economists believe that people's behavior is only approximated by optimization. In other words, they believe that an agent's actual choice will sometimes differ from that person's optimal choice. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 31) What are the two techniques of achieving optimization? How do the techniques differ? Answer: Optimization can be achieved using either of two techniques, optimization using total value or optimization using marginal analysis. Although both techniques provide identical results, there are differences between them. Optimization using total value analyzes the total net benefit of different alternatives, whereas optimization using marginal analysis analyzes the change in net benefits when switching from one alternative to another. Optimization using marginal analysis is often faster to implement than optimization in using total value, because optimization using marginal analysis only focuses on the way that alternatives differ. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization: Choosing the Best Feasible Option 32) What are the steps involved in optimization using total value? If option A has a cost of $5 and provides a benefit of $8 and option B has a cost of $10 and provides a benefit of $15, which of the two projects is optimal? Answer: The steps involved in optimization using total value are as follows: i) Translating all costs and benefits into common units, like dollars. ii) Calculating the total net benefit of each alternative. iii) Picking the alternative with the highest net benefit. Total net benefit in option A = $(8 − 5) = $3. Total net benefit in option B = $(15 − 10) = $5. Because option B has a higher net benefit than option A, option B is the optimal choice of the two. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option

33) Assume that an individual has to choose between two options, buying a cell phone or buying an iPad. The expected cost of buying a phone is $700 and the expected benefit is $900. The expected cost of buying an iPad is $300 and the expected benefit is $600. How does the individual arrive at the optimal choice if he implements: a) optimization using total value? b) optimization using marginal analysis? Answer: a) The process of optimization using total value requires a comparison of the net benefit of both available options. This is shown as follows: Net benefit of buying a phone = $900 − $700 = $200. Net benefit of buying an iPad = $600 − $300 = $300. Because the net benefit of an iPad exceeds the net benefit of a cell phone, optimization using total value will suggest buying an iPad. b) The process of optimization using marginal analysis requires an estimation of the change in net benefit when an individual shifts from one alternative to another. This is determined as follows: Change in net benefit if the individual chooses to buy an iPad over a cell phone = $300 − $200 = $100, which is positive. Change in net benefit if the individual chooses to buy a phone over an iPad = $200 − $300 = −$100, which is negative. Hence, optimization using marginal analysis will suggest buying an iPad. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option

34) How does optimization using total value differ from optimization using marginal analysis? Assume that the city council has to choose one of the following three alternatives–setting up a school, setting up a hospital, and setting up a playground. The estimates of the expected cost and benefit of all three projects are shown in the following table. How does the city council arrive at the optimal choice if both the techniques of optimization are implemented? Do the results vary? Project Playground School Hospital

Cost ($) 15,000 20,000 50,000

Benefit ($) 30,000 50,000 75,000

Answer: The basic difference between the two techniques is that optimization using total value estimates the total net benefits of different alternatives before arriving at the optimum decision, whereas optimization using marginal analysis estimates the change in net benefits when the decision maker shifts from one alternative to another. Net benefit of setting up a school = $50,000 − $20,000 = $30,000. Net benefit of setting up a hospital = $75,000 − $50,000 = $25,000. Net benefit of setting up a playground = $30,000 − $15,000 = $15,000. Optimization using total value compares the net benefit of all alternatives before arriving at an optimum. The net benefit of setting up a school is the highest among all three alternatives, hence it is the optimum decision when optimizing using total value. Optimization using marginal analysis compares the change in net benefit when switching from one alternative to another. If the city council chooses to set up a school over setting up a playground, the change in net benefit = $30,000 − $15,000 = $15,000. If the city council chooses to build a hospital over setting up a playground, change in net benefit = $25,000 − $15,000 = $10,000. Therefore, setting up a playground is not the optimum choice. Instead of a hospital, if a school is built, change in net benefit = $30,000 − $25,000 = $5,000. Because the change in net benefit when switching from hospital to school is positive, setting up a school is the better option of the two. Hence, setting up a school is the optimum decision among the three alternatives when optimizing using marginal analysis. Thus both optimization techniques suggest that building a school is the optimum choice. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization: Choosing the Best Feasible Option 3.2 Optimization Application: Renting the Optimal Apartment 1) To carry out an optimization analysis, ________. A) different types of costs are measured in different units B) only direct costs incurred in a project are to be estimated C) only indirect costs incurred in a project are to be estimated D) all costs are required to be converted to the same unit of measurement Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization Application: Renting the Optimal Apartment 11 Copyright © 2022 Pearson Education Ltd.

2) If the opportunity cost of time is $20 per hour and an individual spends 20 hours in commuting every month, the opportunity cost of his commute is ________. A) $1 per month B) $20 per month C) $200 per month D) $400 per month Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 3) If the opportunity cost of time is ________ and an individual spends ________ commuting every month, the opportunity cost of her commute is $100 every month. A) $5 per hour; 10 hours B) $8 per hour; 20 hours C) 10 per hour; 10 hours D) $12 per hour; 5 hours Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 4) If an individual's opportunity cost of commute is $300 per month and his monthly commuting time is 60 hours, his opportunity cost of time is ________. A) $5 per hour B) $10 per hour C) $30 per hour D) $60 per hour Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 5) Among a set of alternatives with the same benefits, an individual is said to optimize if she chooses an alternative that ________. A) has the lowest total cost B) has the highest total cost C) has the highest indirect cost D) has the lowest opportunity cost Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization Application: Renting the Optimal Apartment

6) Among a set of alternatives with the same total costs, an individual is said to optimize if she chooses an alternative that has the ________. A) highest total benefit B) highest risk C) lowest opportunity costs D) highest net costs Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization Application: Renting the Optimal Apartment 7) An individual pays $100 every month as rent for an apartment, and his monthly opportunity cost of commuting from the apartment to his place of work is $40. Which of the following statements is then TRUE? A) The direct cost of renting the apartment is $140. B) The indirect cost of renting the apartment is $140. C) The direct cost of renting the apartment is $40, whereas the indirect cost of renting the apartment is $100. D) The direct cost of renting the apartment is $100, whereas the indirect cost of renting the apartment is $40. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment Scenario: Ryan wants to rent an apartment. The following table shows the monthly rent of five apartments and the number of hours per month it takes to commute to work from each apartment. Ryan's opportunity cost of time is $15 per hour.

Apartment 1 2 3 4 5

Commuting Time (hours per month) 40 20 10 4 1

Rent ($ per month) 1,500 1,750 2,000 2,210 2,250

8) Refer to the scenario above. What is the total cost incurred per month if Ryan rents Apartment 3? A) $2,000 B) $2,050 C) $2,150 D) $2,270 Answer: C Difficulty: Medium AACSB: Application of Knowledge 13 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Optimization Application: Renting the Optimal Apartment 9) Refer to the scenario above. What is the total cost incurred per month if Ryan rents Apartment 5? A) $2,150 B) $2,270 C) $2,400 D) $2,265 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 10) Refer to the scenario above. What is the opportunity cost of the commute to work per month if Ryan rents Apartment 2? A) $20 B) $150 C) $200 D) $300 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 11) Refer to the scenario above. The total cost per month is the highest if Apartment ________ is rented. A) 2 B) 3 C) 4 D) 5 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 12) Refer to the scenario above. The total cost per month is the lowest if Ryan chooses to rent Apartment ________. A) 1 B) 2 C) 3 D) 4 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 14 Copyright © 2022 Pearson Education Ltd.

13) Refer to the scenario above. If the opportunity cost of time increases to $60 per hour, renting which apartment will minimize Ryan's total cost every month? A) 2 B) 3 C) 4 D) 5 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 14) An individual decides to rent an apartment for $7,000 per month. The commuting time from this apartment to her office is 80 hours per month. If the individual's opportunity cost of time is $30 per hour, calculate the direct cost, indirect cost, and total cost she would incur per month if she rents the apartment. Answer: The direct cost of renting the apartment equals the monthly rent of the apartment. So, direct cost equals $7,000 every month. The indirect cost of renting the apartment is equal to the commuting time expressed in dollar terms. Because the individual will spend 80 hours in commuting every month and the opportunity cost of one lost hour is $30, her indirect cost equals $30 × 80 = $2,400 per month. The individual's total cost equals the sum of the direct cost and indirect cost. Therefore, total cost is equal to $7,000 + $2,400 = $9,400 every month. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 15) Refer to the table below. Given that an individual's opportunity cost of time is $30 per hour, which of the two apartments should she rent?

Apartment 1 2

Monthly Commuting Time (hours) 60 20

Monthly Rent ($) 3,600 4,500

Answer: The opportunity cost of commuting per month from Apartment 1 = 60 × $30 = $1,800. Total monthly cost of renting Apartment 1 = $1,800 + $3,600 = $5,400. The opportunity cost of commuting per month from Apartment 2 = 20 × $30 = $600. Total monthly cost of renting Apartment 2 = $600 + $4,500 = $5,100. Therefore, the individual chooses Apartment 2, as she incurs a lower cost if she rents Apartment 2 than if she rents Apartment 1. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment

16) Assume that an individual with an opportunity cost of time of $20 per hour has to choose between renting four apartments. The rents of the four apartments and the individual's monthly commuting time to work are shown in the following table. Calculate the direct cost, indirect cost, and total cost that the individual will incur if she rents any of these apartments. Also, determine the apartment that is optimum for the individual. Graph the total cost involved for the various choices.

Apartment 1 2 3 4

Monthly Commuting Time (hours) 60 90 120 150

Rent ($) 2,800 2,200 1,500 1,400

Answer: Direct cost of renting Apartment 1 = $2,800. Indirect cost of renting Apartment 1 = 60 × $20 = $1,200. Total cost of renting Apartment 1 = $2,800 + $1200 = $4,000. Direct cost of renting Apartment 2 = $2,200. Indirect cost of renting Apartment 2 = 90 × $20 = $1,800. Total cost of renting Apartment 2 = $2,200 + $1,800 = $4,000. Direct cost of renting Apartment 3 = $1,500. Indirect cost of renting Apartment 3 = 120 × $20 = $2,400. Total cost involved in renting Apartment 3 = $1,500 + $2,400 = $3,900. Direct cost of renting Apartment 4 = $1,400. Indirect cost of renting Apartment 4 = 150 × $20 = $3,000. Total cost involved in renting Apartment 4 = $1,400 + $3,000 = $4,400. From the above estimations, the total cost is least if the individual rents Apartment 3. Hence, renting Apartment 3 is optimum for the individual. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment

17) Refer to the table above. If the opportunity cost of time increases to $60 per hour, renting which apartment will turn out to be the most expensive every month? A) 1 B) 2 C) 3 D) 4 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Before and After Comparisons 18) The analysis of economic outcomes before and after some economic variable is changed is referred to as ________. A) normative economics B) marginal study C) empiricism D) before and after comparisons Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Before and After Comparisons

19) Which of the following statements is TRUE? A) Marginal analysis is a key tool used while optimizing using total value. B) Before and after comparisons can be used in both optimization using total value and optimization using marginal analysis. C) Marginal analysis is the comparison of economic outcomes before and after some economic variable is changed. D) Before and after comparisons involve calculating the incremental cost of moving from one alternative to the next best alternative. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Before and After Comparisons 20) The analysis of how a customer's taste for cars will change when her wealth triples falls under the scope of ________. A) normative analysis B) marginal research C) cost-benefit analysis D) before and after comparisons Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Before and After Comparisons 21) Which of the following is an example of before and after comparisons? A) The estimation of the quantity demanded of a good when its price is $5 B) The estimation of the demand for a particular good when consumer income is $10 C) The estimation of the ideal number of workers a firm should hire when wage rate is $20 per hour D) The estimation of the supply of a good when the wage rate of labor changes from $30 to $10 per hour Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Before and After Comparisons

22) An individual rents an apartment for $200 per month. His monthly opportunity cost of commuting to work from this apartment is $50. After a year, he moves to an apartment closer to his place of work, but pays a rent of $250. Compared to the initial situation, after a year, his direct cost of renting the apartment ________. A) increases, while the indirect cost of renting the apartment remains unchanged B) increases, while the indirect cost of renting the apartment decreases C) remains the same, while the indirect cost of renting the apartment decreases D) remains the same, while the indirect cost of renting the apartment increases Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Before and After Comparisons The following figure shows an individual's total cost of renting four apartments located at different distances from her place of work.

23) Refer to the figure above. Which apartment is the best feasible choice for the individual? A) Apartment 1 B) Apartment 2 C) Apartment 3 D) Apartment 4 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Before and After Comparisons

24) Refer to the figure above. Other things remaining the same, assume that the individual now has a higher opportunity cost of time. Which of the following statements is TRUE in this context? A) The cost curve will move up. B) The cost curve will move down. C) Optimization using total value will not lead to an efficient outcome. D) Optimization using marginal analysis will not lead to an efficient outcome. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Before and After Comparisons

25) Assume that a firm wants to set up a factory. It considers four different locations. The rent of the factory space and the time taken to transport the products from each of the locations to the market is shown in the table below. It is also given that the opportunity cost of time is $10 per hour. a) Which is the optimum location? b) If the opportunity cost of time changes to $30 per hour, is there any change in the optimum?

Location 1 2 3 4

Time Taken to Transport Products to the Market (hours per month) Rent ($ per month) 180 3,000 150 3,200 100 3,600 60 4,100

Answer: a) The opportunity cost of transporting the products per month from Location 1 = 180 × $10 = $1,800. Total cost of building the factory in Location 1 = $3,000 + $1,800 = $4,800. The opportunity cost of transporting the products per month from Location 2 = 150 × $10 = $1,500. Total cost of building the factory in Location 2 = $3,200 + $1,500 = $4,700. The opportunity cost of transporting the products per month from Location 3 = 100 × $10 = $1,000. Total cost of building the factory in Location 3 = $3,600 + $1,000 = $4,600. The opportunity cost of transporting the products per month from Location 4 = 60 × $10 = $600. Total cost of building the factory in Location 4 = $4,100 + $600 = $4,700. Total cost is the lowest when the firm sets up the factory at Location 3. Thus, this is the optimum location. b) When the opportunity cost of time changes, the total cost associated with each location changes as follows: The opportunity cost of transporting the products per month from Location 1 = 180 × $30 = $5,400. Total cost of building the factory in Location 1 = $3,000 + $5,400 = $8,400. The opportunity cost of transporting the products per month from Location 2 = 150 × $30 = $4,500. Total cost of building the factory in Location 2 = $3,200 + $4,500 = $7,700. The opportunity cost of transporting the products per month from Location 3 = 100 × $30 = $3,000. Total cost of building the factory in Location 3 = $3,600 + $3,000 = $6,600. The opportunity cost of transporting the products per month from Location 4 = 60 × $30 = $1,800. Total cost of building the factory in Location 4 = $4,100 + $1,800 = $5,900. From the above calculations, when the opportunity cost of time increases from $10 per hour to $30 per hour, the optimum location of the factory changes from Location 3 to Location 4. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Before and After Comparisons

Scenario: Aysha wants to rent an apartment. The following table shows the monthly rent of five apartments as well as the number of hours per month it takes to commute to work from each apartment. Aysha works as a restaurant where she can make $20 per hour

Apartment 1 2 3 4 5

Commuting Time (hours per month) 30 20 15 10 5

Rent ($ per month) 1,250 1,400 1,600 1,750 2,000

26) Refer to the scenario above. What is Aysha's total monthly cost of renting apartment 1? A) $1,250 B) $600 C) $1,850 D) $1,280 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 27) Refer to the scenario above. What is Aysha's total monthly cost of renting apartment 2? A) $400 B) $1,400 C) $1,420 D) $1,800 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 28) Refer to the scenario above. What is the opportunity cost Aysha incurs each month if she rents apartment 5? A) $100 B) $200 C) $20 D) $2000 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment

29) Refer to the scenario above. What is the opportunity cost Aysha incurs each month if she rents apartment 4? A) $100 B) $200 C) $20 D) $2000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Application: Renting the Optimal Apartment 30) Refer to the scenario above. Which apartment should Aysha rent? A) 1 B) 2 C) 3 D) 4 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization Application: Renting the Optimal Apartment 31) Refer to the scenario above. If Aysha gets a promotion that raises her pay to $40 per hour, which apartment should she rent?15 A) 2 B) 3 C) 4 D) 5 Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Optimization Application: Renting the Optimal Apartment 3.3 Optimization Using Marginal Analysis 1) Assume that an individual has to decide between a 2-day vacation and a 3-day vacation to the same place. If he uses optimization using marginal analysis, he will ________. A) only think about the net benefits of the extra day B) compare the total net benefits of both alternatives C) choose the 3-day vacation only if the costs incurred on the third day exceed the benefits he receives D) spend more time to make a decision than he would had he used optimization using total value Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization Using Marginal Analysis 24 Copyright © 2022 Pearson Education Ltd.

Scenario: Sarah has to choose between renting a hotel room for 2 days and renting a hotel room for 3 days. 2) Refer to the scenario above. Which of the following statements is TRUE? A) Both optimization techniques will provide an efficient outcome, but optimization using total value will be faster to implement. B) Both optimization techniques will provide an efficient outcome, but optimization using marginal analysis will be faster to implement. C) Only optimization using marginal analysis can be used to arrive at an optimum choice. Optimization using total value will not be applicable in this case. D) Only optimization using total value can be used to arrive at an optimum choice. Optimization using marginal analysis will not be applicable in this case. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization Using Marginal Analysis 3) Refer to the scenario above. If Sarah is optimizing using marginal analysis, then which of the following statements is TRUE? A) She will rent the hotel room for 3 days if the benefit of staying for the third day exceeds the cost of staying for the third day. B) She will rent the hotel room for 3 days if the benefit of staying for the third day exceeds the benefits of staying for the first 2 days. C) She will rent the hotel room for 3 days if the net benefit of staying for 3 days exceeds the net benefit of staying for 2 days. D) She will rent the hotel room for 3 days if the cost of staying for the first 2 days is less than the cost of staying for the third day. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Using Marginal Analysis 4) Refer to the scenario above. Which of the following is TRUE if Sarah is optimizing using total value? A) She will rent the hotel room for 3 days if the net benefit of staying for the third day is negative. B) She will rent the hotel room for 3 days if the cost of staying for 2 days exceeds the cost of staying for 3 days. C) She will rent the hotel room for 3 days if the net benefit of staying for 3 days exceeds the net benefit of staying for 2 days. D) She will rent the hotel room for 3 days if the total benefit of staying for 3 days exceeds the total benefits of staying for 2 days. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Using Marginal Analysis 25 Copyright © 2022 Pearson Education Ltd.

5) A cost-benefit calculation that focuses on the difference between a feasible alternative and the next feasible alternative is called ________. A) marginal analysis B) equilibrium analysis C) empiricism D) economic trade-off Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization Using Marginal Analysis 6) Which of the following is an example of marginal analysis? A) To determine the optimal number of workers, a firm calculates the net benefits of hiring an extra worker. B) To determine the optimal amount of fertilizer to be used, a farmer calculates the total benefits of using a given amount of fertilizer. C) To choose the optimal apartment to rent, an individual estimates the net benefits of renting an apartment close to his place of work. D) To determine the optimal output that a firm should sell, the manager calculates the total revenue earned by selling different levels of output. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Using Marginal Analysis 7) Which of the following statements is TRUE of marginal analysis? A) Marginal analysis is a tool used in optimization using total value. B) Marginal analysis compares the consequences of doing one more step of something. C) Marginal analysis of alternatives will mostly give an outcome different from optimization using total value. D) Marginal analysis involves the calculation of the total net benefits of all the available alternatives. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization Using Marginal Analysis 8) ________ uses the concept of marginal analysis to determine the optimum choice. A) Empiricism B) Optimization using total value C) Before and after comparisons D) Optimization using marginal analysis Answer: D Difficulty: Easy AACSB: Analytical Thinking 26 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Optimization Using Marginal Analysis 9) What is meant by before and after comparisons? Is it different from the concept of marginal analysis? Explain with the help of suitable examples. Answer: Before and after comparisons is the comparison of economic outcomes before and after some economic variable is changed. For example, an individual may choose Apartment A, which is far from his place of work, over Apartment B, which is closer. However, if his opportunity cost of time increases, the total cost of renting Apartment A also increases, and his optimal choice might change. In contrast, marginal analysis is a completely different concept. It is a costbenefit calculation that looks at the differences between feasible alternatives. For example, if a firm that has ten employees wants to hire an eleventh employee, it will not consider the net benefit of the ten employees who are already employed. Instead, the firm will focus only on estimating the net benefit of hiring the eleventh employee to arrive at a decision. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Optimization Using Marginal Analysis 10) What are the different steps involved in optimization using marginal analysis? Answer: Optimization using marginal analysis has three steps: i) Translate all costs and benefits into common units, like dollars. ii) Calculate the marginal consequences of moving between alternatives. iii) Apply the Principle of Optimization at the Margin by choosing the alternative with the property that moving to it makes you better off and moving away from it makes you worse off. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Optimization Using Marginal Analysis 11) Mary has to choose between a 4-day vacation and a 5-day vacation to the same place. To arrive at the optimal choice, which optimization technique will be arithmetically easier and faster to implement and why? Answer: In this case, to arrive at the optimal choice, optimization using marginal analysis will be arithmetically easier to implement than optimization using total value. If she optimizes using total value, she would evaluate the total net benefit of a 4-day trip and compare it to the total net benefit of a 5-day trip. In contrast, optimization using marginal analysis will only require an estimation of the net benefit of the fifth day, as the first 4 days are common to both options. This makes the marginal analysis option easier and faster to implement. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Using Marginal Analysis

12) Shirley has to choose between a 2-day trip and a 3-day trip to Hollywood. The table below shows the expected benefit and cost for the different days. Apply both optimization using total value and optimization using marginal analysis to determine what Shirley's optimum decision should be. Does the decision differ with the techniques used? Which technique is faster to implement? Day 1 2 3

Cost $750 $900 $600

Benefit $800 $1,000 $800

Answer: Optimization using total value requires a comparison of the net benefit of the 2-day trip and net benefit of the 3-day trip: Net benefit of the 2-day trip = $(800 − 750) + $(1000 − 900) = $50 + $100 = $150. Net benefit of the 3-day trip = $(800 − 750) + $(1000 − 900) + $(800 − 600) = $50 + $100 + $200 = $350. Because the net benefit of a 3-day trip is higher than the net benefit of a 2-day trip, Shirley should choose a 3-day trip. Optimization using marginal analysis requires the decision to be made only on the basis of the net benefit of the third day: Net benefit of the third day = $800 − $600 = $200, which is positive. Hence, optimization using marginal analysis also suggests that Shirley should take the 3-day trip. Both methods to optimization will always give identical results, although optimization using marginal analysis is faster to implement. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Optimization Using Marginal Analysis 13) ________ is the incremental cost generated by moving from one feasible alternative to the next feasible alternative. A) Total cost B) Indirect cost C) Marginal cost D) Opportunity cost Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Marginal Cost

14) If the total cost incurred by a firm in hiring ten workers is $45 and the total cost incurred when the eleventh worker is hired is $60, the marginal cost of hiring the eleventh worker is ________. A) $1.33 B) $15 C) $20 D) $105 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost 15) In choosing between apartments in two different locations, the marginal commuting cost is given by ________. A) the sum of the commuting cost from each apartment to the destination B) the commuting cost from the apartment located closer to the destination C) the commuting cost from the apartment located farther away from the destination D) the difference between the commuting cost from two different apartments to the destination Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Marginal Cost 16) If the marginal rent cost of moving from Apartment 1 to Apartment 2 is −$60 and the marginal commuting cost of moving from Apartment 1 to Apartment 2 is $40, moving from Apartment 1 to 2 will ________. A) cost the renter $60 more in rent and $40 more in commuting B) save the renter $60 more in rent and $40 more in commuting C) save the renter $60 in rent but cost $40 more in commuting D) cost the renter $60 more in rent but save $40 in commuting Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost

Scenario: A firm wants to set up a factory. It has four different options. The rent of the factory in each of the four different locations and the time taken to transport the product from each location to the market is shown in the table below. The opportunity cost of time is $10 per hour.

Factory Location Very Far Far Close Very Close

Monthly Commuting Time (hours) 30 25 15 5

Monthly Rent ($) 2,060 2,100 2,300 2,500

17) Refer to the scenario above. If the firm chooses factory Far over Close, what is its marginal opportunity cost of transporting products to the market? A) $100 B) −$200 C) $50 D) $150 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Marginal Cost 18) Refer to the scenario above. What is the marginal rent cost if the firm chooses factory Very Close over factory Close? A) −$100 B) −$200 C) $100 D) $200 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost 19) Refer to the scenario above. What is the marginal opportunity cost of transporting products to the market if the firm chooses factory Far over factory Very Far? A) −$50 B) −$100 C) $50 D) $150 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost

20) Refer to the scenario above. What is the marginal rent cost if the firm chooses factory Far over factory Very Far? A) $40 B) $100 C) $150 D) −$150 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost 21) Refer to the scenario above. For which of the following choices is the marginal total cost the lowest? A) Choosing factory Close over factory Far B) Choosing factory Far over factory Very Far C) Choosing factory Very Close over factory Close D) Choosing factory Close over factory Very Far Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost 22) Refer to the scenario above. Which is the optimum location for the firm to set up its factory? A) Far B) Very Far C) Close D) Very Close Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost 23) The Principle of Optimization at the Margin states that ________. A) an optimal alternative has the lowest indirect costs in comparison to other feasible alternatives B) an optimal alternative has the highest net benefits in comparison to other feasible alternatives C) moving toward the optimal alternative makes the decision maker better off and moving away from it makes him worse off D) moving toward the optimal alternative makes the decision maker worse off and moving away from it makes him better off Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Marginal Cost

Scenario: Assume that there are five apartments located at different distances from an individual's place of work—very close, close, far, very far, and extremely far. The individual makes his choice by studying the change in costs as he moves farther from his place of work. He has to choose between renting one of the five apartments. The movement from apartment Very Close to Close has a marginal cost of −$60, a movement from apartment Close to Far has a marginal cost of −$40, a movement from apartment Far to Very Far has a marginal cost of −$10, and a movement from apartment Very Far to Extremely Far has a marginal cost of $20. 24) Refer to the scenario above. Which of the following shifts will increase the total cost? A) A shift from apartment Close to apartment Far B) A shift from apartment Far to apartment Very Far C) A shift from apartment Very Close to apartment Close D) A shift from apartment Very Far to apartment Extremely Far Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost 25) Refer to the scenario above. Which of the following is the optimum choice? A) Apartment Very Close B) Apartment Close C) Apartment Far D) Apartment Very Far Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost 26) Refer to the scenario above. Which of the following is used to arrive at the optimum decision in the scenario? A) Optimization using total value B) Before and after comparisons C) Total net benefit approach D) Principle of Optimization at the Margin Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost

27) Total cost falls when marginal cost is ________, and total cost rises when marginal cost is ________. A) zero; negative B) zero; positive C) positive; negative D) negative; positive Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost 28) What is the Principle of Optimization at the Margin? Explain with an example. Answer: The Principle of Optimization at the Margin states that an optimal alternative has the property that moving to it makes the decision maker better off, and moving away from it makes the decision maker worse off. For example, if an individual has to choose between alternative apartments, she will choose moving toward the apartment that lowers her total cost, and moving away from the apartment that increases her total cost. Such an apartment will be an optimal choice according to the Principle of Optimization at the Margin. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Marginal Cost 29) If the marginal total cost when moving from Option A to Option B is negative and the marginal total cost when moving from Option B to Option A is positive, which of the two options is better? What is the underlying principle behind the decision? Answer: A negative marginal total cost implies that the decision maker is gaining from the switch between options. A positive marginal cost implies that the decision maker is losing from the switch between options. In this case, moving to Option B makes the decision maker better off, while moving away from it makes the decision maker worse off. Hence, Option B is the better of the two. The underlying principle behind this decision is referred to as the Principle of Optimization at the Margin. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost

30) From the table below, choose the optimum option using marginal analysis. Option 1 2 3 4 5 6

Total Cost ($) 150 100 80 70 90 120

Answer: To arrive at an optimum decision using marginal analysis, marginal total costs have to be estimated. This is done in the following table.

Option 1 2 3 4 5 6

Total Cost ($) 150 100 80 70 90 120

Marginal Total Cost ($) -50 -20 -10 20 30

Option 4 is the optimum option in this case. This is because it is the only option that moving toward makes the decision maker better off and moving away from makes the decision maker worse off. In other words, according to the Principle of Optimization at the Margin, Option 4 is the optimum choice. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost 31) Does optimization at the margin have any advantage over optimization using total value? Explain with the help of a suitable example. Answer: Optimization at the margin is less time consuming and simpler, because the decision maker can ignore everything about the different alternatives that are being compared except the particular attributes that are different. For example, if two apartments are located adjacent to each other, and the only difference between them is the rent, optimization using total value would require the calculation of net benefits of each apartment by considering all costs and benefits. In contrast, because marginal analysis only considers the differences between the two, all attributes that are common in the two apartments can be ignored and the decision maker can focus only on the attributes that are different, in this case the rent. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Marginal Cost

32) What is meant by the term "marginal analysis"? Suppose an individual has to choose among renting four apartments at different distances from his place of work. The individual has to commute to work 5 days per week and would require different quantities of gasoline depending on the apartment he decides to rent. The monthly rents and expected gasoline consumption from each of the apartments is shown in the table below. If the price of gasoline is $5 per gallon, using marginal analysis, determine the optimum choice for the individual. Which principle is used for this optimization? What does it state?

Apartment 1 2 3 4

Gasoline Consumption (gallons per month) 5 10 15 20

Rent ($ per month) 1,100 1,000 960 940

Answer: Marginal analysis is a cost-benefit analysis that compares the consequences of doing one step more of something. Hence, it is a cost-benefit calculation that studies the difference between a feasible alternative and the next feasible alternative. To arrive at the optimum choice of apartment using marginal analysis, it is essential to calculate the marginal commuting cost and the marginal rent cost for movement between each set of alternatives. This is shown in the table below. Gasoline Marginal Marginal Marginal Consumption Commuting Commuting Rent ($ Rent Cost Total Cost (gallons per cost ($ per Cost ($ per per ($ per ($ per Apartment month) month) month) month) month) month) 1 5 25 – 1,100 – – 2 10 50 25 1,000 -100 -75 3 15 75 25 960 -40 -15 4 20 100 25 940 -20 5 The marginal total cost of moving from Apartment 1 to Apartment 2 is −$75. This implies that the individual gains $75 if he moves from Apartment 1 to Apartment 2. This move is beneficial. The second movement—from Apartment 2 to Apartment 3—has a marginal total cost of −$15. This implies that the individual gains $15 if he moves from Apartment 2 to Apartment 3. This move is beneficial too. The third move—from Apartment 3 to Apartment 4—as a marginal total cost of $5. This implies that the individual loses $5 if he moves from Apartment 3 to Apartment 4. This move is not beneficial. From this analysis, it is clear that moving toward Apartment 3 is beneficial, whereas moving away from Apartment 3 is not. This implies Apartment 3 is the optimum choice for the individual. The principle used to arrive at the optimum choice is referred to as the Principle of Optimization at the Margin. It states that an optimal alternative has the property that moving to it makes the decision maker better off and moving away from it makes the decision maker worse off. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Marginal Cost

33) Kevin is a student who is planning to attend a university in California. In the evening, he takes music lessons. Kevin has to find an apartment to rent. The apartment should be at a suitable distance from two places, his university and his music classes. The commuting times from apartments in four different locations to both destinations are shown in the table below. Given that Kevin's opportunity cost of time is $10 per hour, find his optimum choice by applying: a) Optimization using total value b) Optimization using marginal analysis Commuting Time Commuting Time to University (hours to Music Classes Apartment per month) (hours per month) Rent ($ per month) 1 10 10 2,500 2 16 24 2,200 3 36 24 1,900 4 45 35 1,800

Answer: a) To optimize using total value, it is required to calculate the total cost of renting all apartments. This is shown in the table below. Commuting Commuting Time to Total Time to Music Total Opportunity Total University Classes Commuting Cost of Rent ($ Cost ($ (hours per (hours per Time (hours Commute ($ per per Apartment month) month) per month) per month) month) month) 1 10 10 20 200 2,500 2,700 2 16 24 40 400 2,200 2,600 3 36 24 60 600 1,900 2,500 4 45 35 80 800 1,800 2,600 From the table above, it is seen that the total cost to Kevin will be the least if he chooses to rent Apartment 3. Hence, optimizing using total value suggests that Apartment 3 is the optimum choice for Kevin. b) To optimize using marginal analysis, it is required to calculate the marginal total cost of switching between each consecutive set of alternatives. This is shown in the table below. Total Marginal Total Opportunity Opportunity Marginal Marginal Commuting Cost of Cost of Rent ($ Rent ($ Total Cost Time (hours Commute ($ Commute ($ per per ($ per Apartment per month) per month) per month) month) month) month) 1 20 200 – 2,500 0 – 2 40 400 200 2,200 —300 —100 3 60 600 200 1,900 —300 —100 4 80 800 200 1,800 —100 100 The table shows that Kevin is better off when he moves toward Apartment 3 and is worse off when he moves away from Apartment 3. Hence, according to the Principle of Optimization at the Margin, it can be concluded that Apartment 3 is the optimum choice for Kevin. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Marginal Cost

34) Which of the following statements is TRUE? A) Optimizers with the highest opportunity cost of time push up the rental price of apartments with the highest commute time. B) Optimizers with the lowest opportunity cost of time push up the rental price of apartments with the lowest commute time. C) As the rental prices of downtown apartments rise, only workers with the highest opportunity cost of time will be willing to rent them. D) As the rental prices of downtown apartments rise, only workers with the lowest opportunity cost of time will be willing to rent them. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Does Location Affect the Rental Cost of Housing? 35) In a marketplace, the rental price of apartments is determined by negotiations between ________. A) renters and regulators B) renters and landlords C) landlords and regulators D) politicians and regulators Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Does Location Affect the Rental Cost of Housing? 36) In a marketplace, prices ________. A) are determined through auctions B) are determined by politicians and regulators C) act as incentives that allow for the efficient allocation of resources D) act as a measure of value and do not affect the allocation of resources Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Does Location Affect the Rental Cost of Housing?

37) Spending more time commuting in exchange for a lower monthly rent is an example of ________. A) before and after comparisons B) a trade-off C) optimization using total value D) a marginal optimization Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Does Location Affect the Rental Cost of Housing? 38) Assume the cost of producing an extra latte for Ling's Lattes is represented by the equation MC = 0.5*q, where q is the number of lattes. If Ling's Lattes can earn $4 for each additional latte they sell, what is the optimal number of lattes Ling's Lattes should produce? A) 8 B) 4 C) 2 D) 1 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Optimization Using Marginal Analysis 39) How do markets provide for an efficient allocation of scarce resources? Answer: The market prices of the various products, as determined by the market forces, provide incentives that implicitly allocate economic resources. The market allows the optimizing buyers and sellers to freely negotiate the prices of various goods and services. For example, in the market for apartments, optimizing landlords and optimizing renters can freely negotiate the rental price of an apartment. These market prices then provide incentives that allow for an efficient allocation of scarce resources. This allocation mechanism implies, for example, that mostly highly-paid workers–and others with a high opportunity cost of time–tend to rent the apartments with the best locations. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Does Location Affect the Rental Cost of Housing?

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 4 Demand, Supply, and Equilibrium 4.1 Markets 1) Why do economists study perfectly competitive markets even though few, if any, markets in the real world are perfectly competitive? A) Because insights we gain from studying the perfectly competitive market are directly applicable to real markets, even though they are not perfectly competitive B) Because the behavior of buyers and sellers can be studied theoretically only in the perfectly competitive market model C) Because the perfectly competitive market is a good approximation to many markets in the real world and helps us understand how real markets work D) Because the perfectly competitive market is the most relevant model for actual government economic policies Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Markets 2) The automobile market in the United States is often said to be highly competitive. But it is not perfectly competitive. What makes this market not perfectly competitive? A) Different car companies make different vehicles with different features. B) An individual car buyer can dictate what price he or she pays for a vehicle. C) More than three major car companies exist in this market. D) An individual seller can dictate what price a consumer pays for a vehicle. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Markets 3) The gasoline market in the United States is often said to be highly competitive. But it is not perfectly competitive. What makes this market not perfectly competitive? A) If you don't like the price at one gas station, you can go to another one. B) Different companies put different additives (designed to reduce engine deposits) in the gas they sell. C) An individual seller can dictate what price a consumer pays for its gas. D) Gas stations located near each other tend to charge the same or very similar prices. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Markets

4) The gasoline market in the United States is often said to be highly competitive. It is not perfectly competitive, but it has features and results that are similar to those of a perfectly competitive market, such as ________. A) an individual buyer cannot influence the market price of gasoline by himself B) gas stations located near each other tend to charge the same or very similar prices C) an individual gas station cannot influence the market price by itself D) all of the above Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Markets 5) Which of the following does NOT have a market in the real world? A) First-class mail delivery in the United States, where the U.S. Postal Service is the only legal carrier of such mail B) Kidneys for transplant, for which you cannot legally receive or pay money C) Illegal narcotic substances D) None of the above Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Markets 6) A(n) ________ is a group of buyers and sellers who are trading goods and/or services. A) firm B) market C) enterprise D) government Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Markets 7) Which of the following is NOT an example of a market? A) A cattle auction, where farmers and ranchers bring cattle to be purchased by packing plants B) Etsy.com, a Web site where artists, designers, and craftspersons offer items they have made to interested buyers C) A city requires homeowners to pay $500 for putting in a sidewalk on their street D) The National Residency Matching Program, where medical residents express their preferences for residencies, hospitals express their preferences for medical residents, and these preferences are used to match residents to residencies Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Markets 2 Copyright © 2022 Pearson Education Ltd.

8) Which of the following is TRUE of a market? A) A market must be under continuous surveillance and government control. B) A market always requires a specific physical location. C) Goods and services are exchanged at fixed prices in all markets. D) Price acts as a selection device for buyers and sellers in every market. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Markets 9) If all sellers and all buyers face the same price during an exchange, it is referred to as the ________. A) mark-up price B) market price C) discounted price D) cost price Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Markets 10) Which of the following is NOT a required characteristic of a market? A) A collection of economic agents (e.g., buyers and sellers) B) Trade or exchange of a good or service C) Rules and arrangements for trading D) Government setting the price of the good or service Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Markets 11) Which of the following examples best approximates a competitive market? A) The market for F-35 fighter planes B) The market for Tesla electric cars C) The market for soybeans in the United States D) The market for Jackson Pollock paintings Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Markets

12) Explain the role of prices in a market. Answer: Markets use prices to allocate goods and services. Prices act as a selection device that encourages trade between the sellers who can produce goods at low cost and the buyers who place a high value on the goods. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Markets 13) Should an economist consider a Web-based job search portal like Monster.com as a market? Answer: Economists define a market as a group of economic agents who are trading a good or service, and the rules and arrangements for trading. It need not have a specific physical location. Monster.com is a Web-based job market that operates wherever there's a computer and an Internet connection. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Markets 14) In competitive markets, firms ________. A) coordinate pricing decisions with other firms B) take the market price as given C) have the government set maximum and minimum prices D) set the market price Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Markets 15) In a perfectly competitive market, ________. A) all exchanges take place involuntarily B) there is only one seller and many buyers C) all sellers sell an identical good or a service D) there is no provision for the protection of property rights Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Competitive Markets

16) Which of the following statements correctly describes a perfectly competitive market? A) All participants in a perfectly competitive market are price-takers. B) Haggling and bargaining is commonly observed in a perfectly competitive market. C) In a perfectly competitive market, individual sellers and buyers can influence the market price. D) Buyers in a perfectly competitive market pay different prices according to their individual demand. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Competitive Markets 17) Suppose the market for cement is such that the output of all sellers is identical in composition and quality. While there are a large number of buyers and sellers, everyone conducts transactions at a common market price. Which of the following statements is TRUE about the structure of the cement market? A) The cement market is perfectly competitive. B) The cement market is government regulated. C) All participants in the cement market are price-makers. D) All transactions in the cement market are likely to be involuntary. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Competitive Markets 18) Which of the following is a feature of a perfectly competitive market? A) There is only one seller of a commodity. B) The government rations commodities. C) The product of each seller differs marginally from its rival products. D) Each seller is too small to influence the market price. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Competitive Markets 19) Which of the following statements correctly describes a competitive market? A) Buyers and sellers negotiate prices before making exchanges. B) The market price for the same good varies from seller to seller. C) A single seller sometimes has the ability to dictate the market price. D) The market price is determined by the interaction of demand and supply. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Competitive Markets

20) A seller who is a price-taker charges ________. A) the market price B) a price above the market price C) a price below the market price D) different prices to different buyers Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Competitive Markets 21) Which of the following is the most likely to be bought and sold in a perfectly competitive market? A) 24-karat gold B) cars C) breakfast cereal D) electricity Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Markets 22) What are the key features of a perfectly competitive market? Answer: In a perfectly competitive market, (i) all sellers sell an identical good or service, and (ii) any individual buyer or any individual seller is not powerful enough to affect the market price of that good or service. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Competitive Markets 4.2 How Do Buyers Behave? 1) The quantity demanded of a good is ________. A) determined independently of the market price of the good B) always determined by government intervention C) the amount of the good that sellers are willing to supply at a given market price D) the amount of the good that buyers are willing to purchase at a given market price Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How Do Buyers Behave?

2) The demand schedule for a commodity illustrates how the consumption of a commodity changes with changes in ________. A) supply B) income C) its price D) tastes and preferences Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How Do Buyers Behave? 3) Suppose Apple raises the cost of downloading a song from iTunes from $0.99 per song to $1.49 per song. This price increase will cause a(n) ________. A) increase in demand B) decrease in demand C) increase in quantity demanded D) decrease in quantity demanded Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How Do Buyers Behave?

Scenario: A market researcher asks three consumers, A, B, and C, about their willingness to pay for different quantities of a 20-ounce bottle of Lemon-Lime Gatorade. She collects the following information.

4) Refer to the scenario above. Which consumer has the highest willingness to pay for Gatorade? A) Consumer A B) Consumer B C) Consumer C D) Consumers A and B Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How Do Buyers Behave? 5) Refer to the scenario above. If the price of Gatorade decreases from $4.00 per bottle to $3.50 per bottle, what is consumer C's change in quantity demanded? A) No increase B) Increase of 1 bottle C) Increase of 2 bottles D) Increase of 4 bottles Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How Do Buyers Behave?

6) Refer to the scenario above. Derive the market quantity demanded at each price and sketch the market demand curve for the graph below.

Answer: The table and graph below show the market quantity demanded and the market demand curve:

Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How Do Buyers Behave?

7) Refer to the scenario above. What is the change in the quantity demanded in the market if the price of Gatorade falls from $4 per 20-ounce bottle to $3 per 20-ounce bottle? A) No increase B) Increase of 1 bottle C) Increase of 2 bottles D) Increase of 4 bottles Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How Do Buyers Behave? 8) The ________ plots the relationship between prices and the quantity that buyers are willing to purchase. A) marginal cost curve B) supply curve C) demand curve D) budget constraint Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Demand Curves 9) The demand curve for most goods is normally ________. A) upward sloping B) downward sloping C) parallel to the y-axis D) parallel to the x-axis Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Demand Curves

10) Which of the following best describes the difference between a demand curve and a demand schedule? A) A demand curve can be derived from a demand schedule, but a demand schedule cannot be derived from a demand curve. B) A demand curve is a graphical representation of the relationship between the quantity of a good and its price, whereas a demand schedule is a tabular representation. C) A demand curve shows the different quantities of a good demanded at different prices, whereas a demand schedule shows the different quantities of a good demanded at different incomes. D) A demand curve shows the different quantities of a good demanded at different incomes, whereas a demand schedule shows the different quantities of a good demanded at different prices. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Curves 11) The Law of Demand states that ________. A) the demand for a commodity is directly related to consumers' income, all other things remaining constant B) the demand for a commodity always equals the supply of the commodity C) the quantity demanded of a commodity varies inversely with the price of the commodity, all other things remaining constant D) the quantity demanded of a commodity is the same for all consumers in a perfectly competitive market Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Demand Curves 12) Which of the following examples best describes the Law of Demand? A) When John's income doubles, his telephone bill also doubles. B) When the price of bread doubles, John's consumption of bread halves. C) When the price of watches increases, a local manufacturer starts offering more watches for sale. D) When a new anti-tobacco commercial is released, the consumption of tobacco products decreases sharply. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Curves

13) The willingness to pay for a commodity ________. A) decreases as consumption of the commodity increases B) increases as consumption of the commodity increases C) is always less than the market price of the commodity D) is always greater than the market price of the commodity Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Willingness to Pay 14) Which of the following statements is TRUE of the concept of willingness to pay? A) The willingness to pay is the lowest price that a buyer is willing to pay for an extra unit of a commodity. B) The willingness to pay for a commodity increases exponentially as the consumption of the commodity increases. C) The willingness to pay for a commodity increases linearly as the consumption of the commodity increases. D) If a consumer is consuming 10 units of a commodity and she is ready to pay $2 for the eleventh unit, her willingness to pay for the eleventh unit is $2. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Willingness to Pay 15) The buyers of a good will want to purchase it as long as their willingness to pay for the good is ________. A) equal to zero B) greater than zero C) less than the price D) greater than or equal to the price Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Willingness to Pay 16) The concept of diminishing marginal benefit states that ________. A) lower levels of consumption give lower level of utility B) the demand for a commodity declines as its price increases C) the demand for a commodity is more dependent on income than on price D) the willingness to pay for an additional unit declines as more of a good is consumed Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Willingness to Pay

17) Jenny likes chocolates. One day, a friend offers her a chocolate bar and she is extremely happy on receiving it. As the day progresses, many other people also buy her chocolate. As she gets more and more chocolates, her excitement on receiving each bar is seen to gradually lessen. Which economic principle is reflected in this example? A) The Law of Equi-Marginal Utility B) Aggregation of demand behavior C) The concept of diminishing marginal benefit D) The Law of Increasing Willingness to Pay Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Willingness to Pay 18) Which of the following examples best describes the concept of diminishing marginal benefit? A) If the weather gets cold, the demand for ice cream will fall. B) With each additional pen Jill buys, her willingness to pay for another pen decreases. C) Each additional unit of ice cream that John consumes gives him more and more satisfaction. D) If a seller of notebooks in a perfectly competitive market charges above the market price, his profit decreases. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Willingness to Pay 19) During the Battle of the Bulge in December 1944, American soldiers near Bastogne, Belgium, offered as much as $73 for a can of Campbell's soup that sold for $0.13 in U.S. grocery stores ($73 was nearly an entire month's pay for an army sergeant at that time). These large amounts of money offered for soup represent a(n) ________. A) exception to the law of demand B) high willingness to pay C) low willingness to pay D) decrease in demand caused by a decrease in income Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Willingness to Pay

20) The following figure shows the demand curves for pens for two consumers.

Assuming that the market consists of only these two consumers, what is the market demand for pens when the price is $4? A) 15 units B) 25 units C) 40 units D) 65 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From Individual Demand Curves to Aggregated Demand Curves 21) The market demand is the ________ of the individual demand of all the potential buyers. A) sum B) product C) square of the sum D) square root of the sum Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Building the Market Demand Curve

The following table shows the demand schedules of three consumers of wine. Assume that these three buyers constitute the entire market. Price Sandra's Demand David's Demand ($ per bottle) (bottles) (bottles) 8 2 6 14 15 4 23 2 24 27

Mary's Demand (bottles) 10 18 24 28

22) Refer to the table above. If the market price of wine is $8 per bottle, and the market demand for wine is 19 bottles, David's consumption of wine is ________. A) 4 bottles B) 7 bottles C) 9 bottles D) 12 bottles Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Building the Market Demand Curve 23) Refer to the table above. If the market price of wine is $4 per bottle, and the market demand for wine is 65 bottles, Sandra's demand for wine is ________. A) 18 bottles. B) 40 bottles. C) 47 bottles. D) 111 bottles. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Building the Market Demand Curve

The following table shows the demand schedules of three consumers of wine. Assume that these three buyers constitute the entire market. Price ($ per unit) 4 3 2 1

Consumer 1 Demand (units) 5 10 16 20

Consumer 2 Demand (units) 10 20 26 31

Consumer 3 Demand (units) 17 20 23 25

24) Refer to the table above. What is the market demand for wine when the price is $1? A) 50 units B) 51 units C) 76 units D) 80 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Building the Market Demand Curve 25) Refer to the table above. What is the market demand for wine when the price is $3? A) 28 units B) 35 units C) 66 units D) 50 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Building the Market Demand Curve

26) The following table shows the demand for notebooks of four consumers. Price ($ per unit) 8 6 4 1

Consumer 3 Consumer 1 Consumer 2 Demand Consumer 4 Demand (units) Demand (units) (units) Demand (units) 8 6 9 10 16 10 15 18 20 13 21 24 22 17 24 27

Define the term "market demand." If these four consumers constitute the entire market, calculate the market demand for notebooks at $1, $4, $6, and $8, respectively. Answer: The term "market demand" refers to the sum of the individual demands of all potential buyers in a market. Market demand at $1 = 22 + 17 + 24 + 27 = 90 units Market demand at $4 = 20 + 13 + 21 + 24 = 78 units Market demand at $6 = 16 + 10 + 15 + 18 = 59 units Market demand at $8 = 8 + 6 + 9 + 10 = 33 units Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Building the Market Demand Curve

The figure below shows Sue's and Carlos' demand curves for gasoline. It would be useful to find the equation of the demand curves to answer the questions below.

27) Refer to the figure above. If the price of gasoline is 12.00 euros per liter, the total quantity of gasoline demanded is ________ liters. A) 0 B) 400 C) 1,000 D) 1,600 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Building the Market Demand Curve 28) Refer to the figure above. If the price of gasoline is 3.00 euros per liter, the total quantity of gasoline demanded is ________ liters. A) 1,600 B) 2,400 C) 4,300 D) 5,100 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Building the Market Demand Curve

29) Refer to the figure above. The total demand curve has the vertical intercept at ________ and the horizontal intercept at ________, and its slope ________. A) 15.00 euros; 7,000 liters; changes at 10.00 euros B) 15.00 euros; 7,000 liters; changes at 8.12 euros C) 18.00 euros; 7,000 liters; is twice as steep as Sue's demand curve D) 10.00 euros; 7,000 liters; is half as steep as Carlos's demand curve Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Building the Market Demand Curve 30) A change in the quantity demanded of a good is ________. A) the outcome of a change in consumer income B) represented by a shift of a demand curve C) the outcome of a change in tastes and preferences D) represented by a movement along a demand curve Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shifting the Demand Curve 31) Which of the following factors will NOT cause a shift in the demand for a good? A) A change in consumer incomes B) A change in tastes and preferences C) A change in the number of consumers D) A change in the market price of the good Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shifting the Demand Curve 32) An increase in the demand for a good is represented by ________. A) a leftward shift of a demand curve B) a rightward shift of a demand curve C) a leftward movement along a demand curve D) a rightward movement along a demand curve Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shifting the Demand Curve

33) Two goods are said to be substitutes when a fall in the price of one good ________. A) leads to a rise in the price of the other good B) does not affect the demand for the other good C) leads to a leftward shift in the demand for the other good D) leads to a rightward shift in the demand for the other good Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shifting the Demand Curve 34) Which of the following pairs of goods is likely to be considered substitutes? A) Coffee and sugar B) Printers and printing ink C) A Ford car and public transportation D) A Nokia cell phone and a Nokia cell phone charger Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve 35) Two goods are said to be complements when a fall in the price of one good ________. A) leads to a fall in the price of the other good B) does not affect the demand for the other good C) leads to a leftward shift in the demand for the other good D) leads to a rightward shift in the demand for the other good Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shifting the Demand Curve 36) Which of the following pairs of goods is likely to be considered complements? A) Pens and writing pads B) Laptops and electric heaters C) Motorcycles and typewriters D) Nokia and Samsung cell phones Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve

37) Which of the following factors is likely to lead to an increase in the quantity demanded of pens? A) A fall in the price of pens B) A fall in the price of paper C) A rise in the incomes of all consumers D) A fall in the incomes of all consumers Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve 38) Las Vegas, Nevada, is a popular vacation destination for residents of Hawaii. If the Hawaiian economy experiences strong economic growth and, as a result, household incomes increase on average by 10 percent, what will likely happen to the demand for airplane tickets from Hawaii to Las Vegas? A) Demand will increase. B) Demand will decrease. C) No shift in demand will occur; quantity demanded will increase. D) No shift in demand will occur; quantity demanded will decrease. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Shifting the Demand Curve 39) The acai berry and products made from it are a popular dietary supplement, believed to reverse diabetes and lead to weight loss. Suppose that a peer-reviewed medical study reveals that there are no health benefits from consuming acai berry products. The likely effect of this medical study will be to ________. A) not cause a change in demand but to decrease quantity demanded B) not cause a change in demand but to increase quantity demanded C) cause a decrease in demand D) cause an increase in demand Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shifting the Demand Curve

Scenario: Suppose Major League Baseball (MLB) is considering expansion to a U.S. city that currently does not have a MLB franchise. The league has compiled the following information on five cities viewed as the top contenders for an expansion franchise:

MLB decides Charlotte is the most attractive candidate to receive an expansion franchise and is contemplating how demographic and economic information is likely to affect demand to attend MLB games in Charlotte. 40) Refer to the scenario above. Household income is expected to grow by 5.5 percent per year in Charlotte. If MLB game attendance is a normal good, income growth will cause a(n) ________. A) increase in quantity demanded B) decrease in quantity demanded C) increase in demand D) decrease in demand Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve 41) Refer to the scenario above. The Charlotte Metropolitan Statistical Area (seven counties in North Carolina and three counties in South Carolina) is expected to grow at an annual rate of 1.3 percent. Population growth will cause a(n) ________. A) increase in demand B) decrease in demand C) increase in quantity demanded D) decrease in quantity demanded Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve

42) Refer to the scenario above. Suppose attending other major league sports events is a substitute for attending MLB games. If the Carolina Panthers decrease their ticket prices by 2.6 percent, how will this affect demand for MLB games in Charlotte? A) Cause an increase in demand B) Cause a decrease in demand C) Cause an increase in quantity demanded D) Cause a decrease in quantity demanded Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve 43) Refer to the scenario above. Suppose Charlotte's NBA franchise, the Charlotte Hornets, decides to relocate to Seattle, Washington. How will the city's loss of this professional sports franchise affect demand for MLB game attendance in Charlotte? A) Cause an increase in only quantity demanded B) Cause an increase in demand C) Cause a decrease in only quantity demanded D) Cause a decrease in demand Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve 44) Refer to the scenario above. MLB forecasted that parking for MLB games in Charlotte would cost $12, but it now learns that parking will actually cost $16. How will the increased price of parking affect demand for MLB game attendance in Charlotte? A) Quantity demanded will increase. B) Quantity demanded will decrease. C) Demand will increase. D) Demand will decrease. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve

45) Refer to the scenario above. Attendance at games of the minor league baseball franchise in Charlotte, the Charlotte Knights, leads all of Minor League Baseball and has been growing 8 percent per year for the past 5 years. How will baseball's growing popularity in Charlotte affect demand for MLB game attendance in Charlotte? A) Cause an increase in demand B) Cause an increase in quantity demanded C) Cause a decrease in quantity demanded D) Case a decrease in demand Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Shifting the Demand Curve 46) Which of the following factors is expected to cause the demand curve for coffee to shift to the right? A) A fall in the manufacturing cost of coffee B) A higher tax on the sale of tea, a substitute for coffee C) A higher personal tax on the income of all consumers D) An increase in the supply of coffee due to better weather Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve 47) Assume that the economy is in a recession and consumers are expecting a fall in their income levels. This will cause a(n) ________. A) leftward shift in the market demand for all goods B) rightward shift in the market demand for all goods C) increase in the total quantity demanded of all goods D) decrease in the total quantity demanded of all goods Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve 48) Which of the following is likely to cause the demand curve for cars to shift to the left? A) A rise in the price of gasoline B) An increase in the economy's national income C) An increase in the cost of production, leading to an increase in the price of cars D) A rise in the price of cars Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve

49) Which of the following is likely to shift the market demand curve for school textbooks to the right? A) An increase in school tuition fees B) A fall in the price of school textbooks C) A fall in the total income of all consumers D) An increase in the enrollment rates in high schools Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve 50) Differentiate between a change in demand and a change in quantity demanded. Answer: A change in demand refers to the change in the quantity of a good purchased due to changes in any factors other than price. These factors may include a change in income, tastes and preferences, future expectations, or a change in the number and scale of buyers. A change in demand is graphically represented by a shift of the demand curve. In contrast, a change in quantity demanded refers to a change in the quantity of a good purchased due to a change in the good's price, other things remaining the same. Graphically, a change in quantity demanded is represented by a movement along the same demand curve. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Shifting the Demand Curve 51) How would the following events affect the market demand for laser printers? a) A recession in the economy leading to a fall in income levels b) A fivefold increase in the price of printing paper Answer: a) A recession in the economy that causes a fall in income levels will cause a fall in the overall demand in the economy, including a fall in the demand for laser printers. This will be represented by a leftward shift in the demand curve for laser printers. b) Printing paper and laser printers are complements. Therefore, a fivefold increase in the price of printing paper will make printing more expensive and subsequently reduce the demand for laser printers. This will be represented by a leftward shift in the market demand for laser printers. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve

52) With real-world examples, illustrate the various factors that can cause a shift in the demand curve of a commodity. Answer: The demand curve of a commodity can shift for the following reasons. i) Tastes and preferences: a change in the tastes and preferences of individuals can lead to a change in demand without any change in the commodity's price. For example, if new research proves that caffeine can be very harmful to those who consume it regularly, it is likely that the demand for coffee might decrease, even though the price of coffee may not have increased. ii) The income and wealth of consumers: the income and wealth of individuals play an important role in determining demand. For example, a consumer who goes on vacation only once a year might start taking more vacations if his income increases. Thus, as income increases, the demand curve for a commodity, say movie tickets or vacations, shifts to the right. iii) The availability and prices of related goods: related goods are of two types, substitutes and complements. Two goods are substitutes if an increase in the price of one good leads to an increase in the demand for the other good, and vice versa. In contrast, two goods are complements if an increase in the price of one good leads to a decrease in the demand for the other good. For example, if the price of public transport decreases, the demand for cars is likely to fall. These two goods are substitutes. However, if the price of gasoline goes up, the demand for cars is likely to fall. Gasoline and cars are complements. iv) The number and scale of buyers: the market demand for a commodity greatly depends on the number and scale of buyers. For example, if the enrollment rates in schools go up, the demand for textbooks is likely to increase, regardless of a change in textbook price. v) Expectations about the future: expectations about the future also play an important role in determining the demand for a commodity. For example, if consumers expect the price of refrigerators to increase substantially in the near future, consumers may demand more refrigerators in the present. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve

53) In a market for apples, a consumer purchases 30 pounds when the price of apples is $1 per pound and the consumer's income is $5,000 per month. When the price of apples increases to $2 per pound, without any change in the consumer's income, she decides to purchase only 15 pounds of apples. Suppose, after a given period of time, the consumer's income falls to $3,000 per month. Her consumption of apples also decreases to 10 pounds. Using a graph, illustrate the difference between the change in quantity demanded and the change in demand for apples. Answer: Initially the consumer purchases 30 pounds at a price of $1 per pound and her income is $5,000. Eventually, due to an increase in the price of apples, the consumer reduces her consumption by 15 pounds. Because the change in consumption stems from a change in the price of apples, it represents a change in quantity demanded. A change in quantity demanded due to an increase in the price of apples is shown by an upward movement along the same demand curve. The change in quantity demanded is 15 units in this case. The decrease in the consumption of apples due to a decrease in the consumer's income, the price of apples remaining unchanged, indicates a change in demand for apples. The change in the demand for apples in this case is shown by a leftward shift of the demand curve.

In the figure, the movement from point A to B can be attributed to the rise in the price of apples from $1 to $2. This represents a change in quantity demanded. The movement from point B to C can be attributed to the fall in the consumer's income. This represents a change in demand. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Demand Curve

54) Which statement is consistent with the study reported in the Evidence-Based Economics element in this chapter? A) The relatively low quantity of gasoline demanded in Brazil explains why its government taxes gasoline heavily. B) The relatively modest quantity of gasoline demanded in Mexico explains why the gasoline price in Mexico is between that of Brazil and Venezuela. C) The very low gasoline price due to large subsidies explains why more gasoline is consumed in Venezuela than in other countries. D) The very high gasoline price due to high taxes explains why more gasoline is consumed in Mexico than in Brazil. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Much More Gasoline Would People Buy If Its Price Were Lower? 55) How does the study reported in the Evidence-Based Economics element in this chapter demonstrate the law of demand? A) It relies on theoretical graphs of the demand curve for gasoline. B) It uses different tax and subsidy policies across Latin American countries as a natural experiment. C) It compares the quantity demanded before and after the Venezuelan government ended gasoline subsidies. D) It compares the quantity demanded between Latin American countries and Middle East countries. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Much More Gasoline Would People Buy If Its Price Were Lower?

56) Price of Ice Cream Cones Jesse $1 5 2 4 3 3 4 2 5 1

Missy 6 4 2 1 0

The table above shows the quantity of ice cream cones demanded by Jesse and Missy, the only two people in town who eat ice cream cones. What is the market quantity demanded if the price is $3? A) 5 B) 3 C) 2 D) 1 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deriving the Demand Curve\Consumer Choice 57) Price of Ice Cream Cones Jesse $1 5 2 4 3 3 4 2 5 1

Missy 6 4 2 1 0

The table above shows the quantity of ice cream cones demanded by Jesse and Missy, the only two people in town who eat ice cream cones. What can we say about the market quantity demanded at a price of $2 per cone if Missy were to win $10000 in the lottery? A) It would be 8. B) It would definitely be more than 8. C) It would be less than 8 if ice cream cones are an inferior good. D) It would be 4. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Deriving the Demand Curve\Consumer Choice

58) Price of Ice Cream Cones Jesse $1 5 2 4 3 3 4 2 5 1

Missy 6 4 2 1 0

The table above shows the quantity of ice cream cones demanded by Jesse and Missy, the only two people in town who eat ice cream cones. What can we say about the market quantity demanded at a price of $4 per cone if Jesse suddenly became lactose intolerant and could no longer eat ice cream cones? A) The quantity demanded in the market would be 1. B) The quantity demanded in the market would be more than 3. C) The quantity demanded in the market would be 3. D) The market demand curve would be the same as Missy's demand curve. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Deriving the Demand Curve\Consumer Choice Raleigh and Austin are a young couple, and the only people in their family. Raleigh's monthly demand for pints of ice cream is given by QD = 20 - P and Austin's monthly demand for pints of ice cream is given by QD = 10 - 2 P. 59) How many pints of ice cream will their family buy when the price of a pint of ice cream is $4? A) 18 B) 8 C) 16 D) 26 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deriving the Demand Curve\Consumer Choice 60) How many pints of ice cream will their family buy when the price of a pint of ice cream is $10? A) 10 B) 0 C) -10 D) 20 Answer: A Difficulty: Hard AACSB: Application of Knowledge 31 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Deriving the Demand Curve\Consumer Choice 61) How many pints of ice cream will their family buy when the price of a pint of ice cream is $6? A) 14 B) 12 C) 10 D) 0 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Deriving the Demand Curve\Consumer Choice 62) Which of the following would NOT cause their family demand for pints of ice cream to increase? A) A decrease in the price of pie, which is frequently consumed with ice cream B) An increase in the price of pudding, a dessert that people may consume instead of ice cream C) Raleigh and Austin have a child that also like to eat ice cream D) A decrease in the price of pints of ice cream Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deriving the Demand Curve\Consumer Choice 63) Assume that people like to eat cookies while drinking milk. If the price of milk falls, what would happen to demand for cookies? A) The demand curve would shift right. B) The demand curve would shift left. C) The demand curve would not shift. D) We do not have enough information to answer this question. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Demand Curves 4.3 How Do Sellers Behave? 1) The quantity supplied of a good is ________. A) inversely related to the price of the good B) determined irrespective of the market price C) always equal to the quantity demanded of the good D) the amount of the good that sellers are ready to supply at a given price Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How Do Sellers Behave? 32 Copyright © 2022 Pearson Education Ltd.

2) A supply schedule is a table that reports the ________. A) expected excess supply in the market at different prices B) profits earned by producers at different levels of production C) different quantities of a good that producers are willing to sell at different income levels D) different quantities of a good that producers are willing to sell at different prices Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Supply Curves 3) The ________ plots the relationship between prices and the quantity producers are willing to sell. A) average cost curve B) supply curve C) demand curve D) fixed cost curve Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Supply Curves 4) The Law of Supply states that ________. A) supply creates its own demand B) the quantity supplied of a good rises when the price rises, all other things remaining constant C) at the equilibrium price, there is always some excess supply in the market D) the quantity supplied of a good will always equal the quantity of the good demanded Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Supply Curves 5) Which of the following is the best example of the Law of Supply? A) When the cost of production of cotton fell, the market price of cotton also fell. B) When the market price of pens increased, sellers started supplying more pens. C) When the market price of pens increased, sellers started supplying fewer pens. D) When the cost of production of cotton increased, all suppliers' willingness to accept decreased. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply Curves

6) All else being equal, an increase in the price of Nike Air Jordan XXXI Fly Low shoes will cause an ________. A) increase in quantity supplied B) increase in supply C) increase in quantity demanded D) increase in demand Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Supply Curves 7) A seller's willingness to accept is the same as his ________ cost of production. A) total B) fixed C) average D) marginal Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Willingness to Accept 8) Willingness to accept is ________. A) always lower than the marginal cost of production B) always higher than the marginal cost of production C) the lowest price that a producer is willing to receive to sell an extra unit of a good D) the highest price that a producer is willing to receive to sell an extra unit of a good Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Willingness to Accept 9) Define marginal cost. Is it different from the concept of willingness to accept? Answer: Marginal cost in production refers to the extra cost incurred in producing an additional unit of a commodity. Willingness to accept is the lowest price that a firm is willing to receive to sell an additional unit. In a competitive market, marginal cost is the same as a seller's willingness to accept. This is because the lowest price that any seller is willing to accept for an additional unit will equal the marginal cost of production of that unit. If she asks for a higher price, she will lose almost all of her buyers, and if she asks for a lower price, her cost of producing an additional unit will exceed the revenue she makes from selling it. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Willingness to Accept

The figure below shows the supply curves for gasoline for two oil companies (MaxOil and MagnusPetro). It would be useful to find the equations of the two supply curves to answer the questions below.

10) Refer to the figure above. MaxOil can produce gasoline ________. A) at a lower marginal cost than MagnusPetro up to the 1 millionth liter B) at a higher marginal cost than MagnusPetro beyond the 1 millionth liter C) at the same marginal cost as MagnusPetro up to the 1 millionth liter D) at the same marginal cost as MagnusPetro beyond the 1 millionth liter Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Willingness to Accept 11) Refer to the figure above. MagnusPetro is willing to sell the ________ for ________. A) 1 millionth liter; at most 10.00 euros B) 2.5 millionth liter; at most 10.00 euros C) 1 millionth liter; at least 10.00 euros D) 2.5 millionth liter; at least 10.00 euros Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Willingness to Accept

12) Refer to the figure above. The total demand curve has the vertical intercept at ________ and its slope changes at ________. A) 5.00 euros; 10.00 euros B) 5.00 euros; 7.00 euros C) 2.00 euros; 5.00 euros D) 2.00 euros; 7.00 euros Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From Individual Supply Curve to the Market Supply Curve 13) Refer to the figure above. Suppose that MaxOil, through a negotiation with the labor union representing its workforce, reduced its contribution to workers' health insurance. Meanwhile, MagnusPetro successfully negotiated to lower the price of ethanol (to be blended with its gasoline) with a supplier. How do these changes affect the supply curves? A) Both companies supply curves and the total supply curve will shift leftward. B) Both companies supply curves and the total supply curve will shift rightward. C) MaxOil's supply curve will shift leftward, MagnusPetro's supply curve will shift rightward, and the total supply curve will shift leftward. D) MaxOil's supply curve will shift rightward, MagnusPetro's supply curve will shift leftward, and the total supply curve will shift rightward. Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: From Individual Supply Curve to the Market Supply Curve 14) Refer to the figure above. Suppose that MaxOil and MagnusPetro merged and became a single company, Empoleum. Then, all else being equal, the ________. A) total supply curve will not change B) total supply curve will shift rightward C) total supply curve will shift leftward D) quantity supplied will double at each price Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From Individual Supply Curve to the Market Supply Curve 15) The market supply is the ________ of the individual supplies of all the potential sellers. A) sum B) product C) square of the sum D) square root of the sum Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Individual Supply Curve to the Market Supply Curve 37 Copyright © 2022 Pearson Education Ltd.

The following table shows the supply schedule of bread for three sellers in the economy. Assume that these three sellers constitute the entire market.

Price ($ per loaf) $4 $3 $2 $1

Seller 1 Seller 2 Seller 3 Quantity Supplied Quantity Supplied Quantity Supplied (loaves) (loaves) (loaves) 15 40 12 15 6 9 24 2 6 11

16) Refer to the table above. If the market supply of bread at a price of $3 per loaf is 45 loaves, Seller 3's quantity supplied is ________ loaves. A) 15 B) 18 C) 24 D) 20 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve 17) Refer to the table above. If the market supply of bread at a price of $4 per loaf is 75 loaves, Seller 2's quantity supplied is ________ loaves. A) 20 B) 30 C) 35 D) 55 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve 18) Refer to the table above. Assuming that the market consists of only these three sellers, what is the market quantity supplied when the price is $2 per loaf? A) 39 loaves B) 41 loaves C) 52 loaves D) 89 loaves Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve

19) Refer to the table above. Assuming that the market consists of only these three sellers, what is the market quantity supplied when the price is $1 per loaf? A) 2 loaves B) 6 loaves C) 11 loaves D) 19 loaves Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve 20) An increase in the price of aviation fuel will cause which of the following for the supply of flights from New York to Los Angeles? A) No change in supply, but an increase in quantity supplied B) No change in supply, but a decrease in quantity supplied C) An increase in supply D) A decrease in supply Answer: D Explanation: (an increase in the price of an input will cause a decrease in supply) Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Individual Supply Curve to the Market Supply Curve

The table below provides supply schedules for small, average, and large soybean growers in Iowa.

21) Refer to the table above. The Iowa soybean producer with the lowest willingness to accept is the ________. A) small farm B) average farm C) large farm D) both the average and large farms Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Individual Supply Curve to the Market Supply Curve 22) Refer to the table above. Which producer exhibits the greatest increase in quantity supplied for a $1.00 per bushel increase in the price of soybeans? A) The small Iowa farm B) The average Iowa farm C) The large Iowa farm D) Both the average and large Iowa farms Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Individual Supply Curve to the Market Supply Curve

23) Refer to the table above. Derive the market quantity supplied at each price and sketch the market supply curve in the graph below.

Answer:

Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Individual Supply Curve to the Market Supply Curve 24) Based on the derived market quantity supplied, what is the increase in market quantity supplied of soybeans if the price of soybeans increases from $4.00 per bushel to $5.00 per bushel? A) 400 bushels B) 750 bushels C) 5,000 bushels D) 6,150 bushels Answer: D Difficulty: Easy AACSB: Analytical Thinking 42 Copyright © 2022 Pearson Education Ltd.

TopicEntry: From the Individual Supply Curve to the Market Supply Curve 25) Which of the following is likely to lead to a rightward shift in the supply curve of cotton? A) An increase in labor productivity due to training programs B) A rise in labor costs due to wage demands by labor unions C) An increase in the price of cotton D) A decrease in the price of cotton Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Supply Curve 26) A fall in the price of flour, used in making cakes, is likely to ________ of cakes. A) increase the supply B) decrease the supply C) increase the quantity supplied D) decrease the quantity supplied Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Supply Curve 27) Which of the following is likely to lead to an increase in the quantity supplied of steel? A) A rise in the market price of steel B) An expected increase in the demand for steel in the future C) A fall in the wage rate of labor employed in the steel industry D) An increase in the productivity of capital due to technological innovation Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Supply Curve 28) Assume that a worker in a technology firm can produce 3 circuit boards in an hour. Due to subsequent innovation, she is now able to produce 6 circuit boards per hour. Other things remaining the same, the firm's supply curve is likely to ________. A) shift to the left B) shift to the right C) become steeper D) remain unchanged Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Shifting the Supply Curve

29) The development of genetically modified soybean seeds such as Roundup Ready seeds lowered tillage costs for soybean growers. How will this technological advance affect the supply of soybeans? A) Increase in only quantity supplied B) Increase in supply C) Decrease in only quantity supplied D) Decrease in supply Answer: B Explanation: (lower tillage costs are like a decrease in the price of an input) Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Shifting the Supply Curve 30) Which of the following is likely to cause the supply curve for steel window frames to shift to the right? A) A decrease in the cost of production of steel due to a new subsidy B) A fall in the production of steel window frames due to factory lockouts C) A rise in the market price of steel window frames due to an increase in demand D) An increase in the wages of labor working in steel firms due to demands by trade unions Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Supply Curve 31) An expected increase in the market price of oil in the coming year is likely to ________ in the current year. A) shift the supply curve of oil to the left B) shift the supply curve of oil to the right C) shift the demand curve for oil to the left D) cause no changes in the demand and supply curves of oil Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Supply Curve

The following table shows the supply schedule of wheat for three farmers in the economy. Assume that these three farmers constitute the entire market. Farmer 1 Farmer 2 Farmer 3 Price Quantity Supplied Quantity Supplied Quantity Supplied ($ per bushel) (bushels) (bushels) (bushels) $10 8 17 30 $8 6 14 28 $6 4 11 24 $4 2 8 18 $2 0 5 8 $0 0 0 0 32) Which farmer has the highest marginal cost of producing the 8th bushel of wheat? A) Farmer 1 B) Farmer 2 C) Farmer 3 D) They all have the same marginal cost of producing the 8th bushel of wheat. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve 33) Which farmer would be willing to accept the lowest price to sell 8 bushels of wheat? A) Farmer 1 B) Farmer 2 C) Farmer 3 D) Since the farmers are all price takers, they would all be willing to accept the same price. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve 34) What is the quantity supplied in the market if the price is $6 per bushel? A) 4 B) 15 C) 28 D) 39 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve

35) What is the quantity supplied in the market if the price is $2 per bushel? A) 4 B) 13 C) 28 D) 39 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve 36) How much will the quantity supplied change if the price rises from $8 to $10 per bushel? A) Quantity supplied will decrease by 7. B) Quantity supplied will increase by 7. C) Quantity supplied will decrease by 55. D) Quantity supplied will increase by 55. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve 37) Which of the following would cause the supply curve for wheat to increase? A) A technological advance that allows farmers to harvest wheat twice as fast. B) A drought C) An increase in the price of wheat D) An increase in the price of fertilizer Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply Curves 38) If Darvez is willing to supply his labor according to the following supply: QS = 4P, Elliot is willing to supply their labor according to the following supply equation: QS = 3P - 9, and Ekta is willing to supply her labor according to the following supply equation: QS = 2P - 20, where Q is hours of labor and P is the price of labor (or the wage rate). How many hours will they all be willing to work if the market wage rate is $10 per hour? A) 61 B) 81 C) 24 D) 40 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve

39) If Darvez is willing to supply his labor according to the following supply: QS = 4P, Elliot is willing to supply their labor according to the following supply equation: QS = 3P - 9, and Ekta is willing to supply her labor according to the following supply equation: QS = 2P - 20, where Q is hours of labor and P is the price of labor (or the wage rate). If the wage falls from $10 to $8 per hour, how many fewer hours will they all be willing to work? A) 16 B) 20 C) 41 D) 45 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: From the Individual Supply Curve to the Market Supply Curve 40) How are the following events likely to affect the market supply of rice in an economy? a) A fall in the wage rate of farm labor b) An increase in the productivity of farm capital due to better technology c) An increase in the use of agricultural land for non-agricultural purposes Answer: a) A fall in the wage rate of farm labor will lower the cost of producing rice, allowing farmers to supply more at the same market price. There will be an increase in the supply of rice, and this will be represented by a rightward shift in the market supply curve. b) An increase in the productivity of farm capital implies a fall in the cost of production. This will allow farmers to supply more at a given price. This will be represented by a rightward shift in the market supply curve for rice. c) An increase in the use of agricultural land for non-agricultural purposes will imply a fall in the scale and size of rice producers. There will be a decrease in the supply of rice, and this will be represented by a leftward shift in the market supply curve of rice. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Supply Curve

41) With real-world examples, explain the various factors that can cause a shift in the supply curve of a commodity. Answer: The supply curve of a commodity can shift for the following reasons. i) The price of inputs used to produce the good: the price of inputs plays an important role in a producer's decision on how much of a good to supply. For example, a fall in the price of plastic is likely to increase the supply of plastic cups at every price level. ii) The technology used to produce the good: technology plays an important role in determining supply. If a new innovation increases labor productivity, it is likely that firms will start supplying more. For example, a new method of manufacturing cars can increase the number of cars supplied to the market at every price level. iii) The number and scale of sellers: the number and scale of sellers also determines the market supply. For example, if new firms enter the market for cigarettes, the supply of cigarettes will increase at every price level. iv) Expectations about the future: expectations about the future greatly influence producers' decisions. For example, if the producers of winter coats expect the next winter to be colder than normal, they will increase the production of winter coats. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Shifting the Supply Curve 42) Explain how the following will affect the supply curve of coffee. a) A fall in the wages paid to coffee workers b) An increase in the availability of high-yielding coffee plants c) A decrease in the quantity of land under coffee cultivation Answer: a) A fall in the wages paid to workers will shift the supply curve of coffee to the right. This implies an increase in the supply of coffee. b) An increase in the availability of high-yielding coffee plants will shift the supply curve of coffee to the right. This implies an increase in the supply of coffee. c) A decrease in the quantity of land under coffee cultivation will shift the supply curve of coffee to the left. This implies a decrease in the supply of coffee. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shifting the Supply Curve

4.4 Supply and Demand in Equilibrium 1) Consider a market where the demand curve is downward sloping and the supply curve is upward sloping (so they are neither vertical nor horizontal). If the consumers' willingness to pay for the hundredth unit and the seller's willingness to accept for the 175th unit are both $5.00, then ________. A) the equilibrium price is $5.00 B) the equilibrium quantity is 100 units C) there is an excess supply of 75 units at the price of $5.00 D) there is an excess demand of 75 units at the price of $5.00 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 2) Consider a market where the demand curve is downward sloping and the supply curve is upward sloping (so they are neither vertical nor horizontal). If the consumers' willingness to pay for the hundredth unit is $7.00 and the seller's willingness to accept for the hundredth unit is $10.00, then the equilibrium ________. A) quantity is less than 100 units B) quantity is more than 100 units C) price is less than $7.00 D) price is more than $10.00 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 3) Consider a market where the demand curve is downward sloping and the supply curve is upward sloping (so they are neither vertical nor horizontal). If the consumers' willingness to pay for the hundredth unit is $9.00 and the seller's willingness to accept for the hundredth unit $9.00, then the ________. A) equilibrium quantity is less than 100 units B) equilibrium quantity is more than 100 units C) willingness to accept exceeds the willingness to pay for the ninety-ninth unit D) willingness to pay exceeds the willingness to accept for the ninety-ninth unit Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium

4) The equilibrium quantity in a perfectly competitive market is determined at the point of ________. A) intersection of the demand and supply curves B) tangency between the demand and supply curves C) intersection of the supply curve and the quantity axis D) intersection of the demand curve and the quantity axis Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 5) Which of the following statements correctly describes perfectly competitive market equilibrium? A) Competitive markets converge to the price at which quantity supplied and quantity demanded are equal. B) Government intervention is necessary for the competitive market to reach equilibrium. C) There is always excess supply or excess demand when the competitive market is in equilibrium. D) Multiple equilibriums are possible for a given set of demand and supply curves in a competitive market. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 6) At the competitive equilibrium, the ________. A) demand curve is tangential to the supply curve B) quantity demanded exceeds the quantity supplied of a good C) quantity supplied exceeds the quantity demanded of a good D) quantity demanded is equal to the quantity supplied of a good Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 7) In a perfectly competitive market, the market clearing price is ________ the equilibrium price. A) always equal to B) unrelated to C) always lower than D) always higher than Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium

8) Assume that a seller in a perfectly competitive market charges more than the equilibrium price. It is likely that this seller will ________. A) increase his profit B) increase his sales C) lose only a few buyers D) lose almost all of his buyers Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 9) A surplus occurs in a market when ________. A) demand exceeds supply B) the price is lower than the equilibrium price C) the price is higher than the equilibrium price D) the marginal cost of production is negligible Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 10) At a price of $1 per table, the quantity supplied of tables is 100 units, whereas the quantity demanded is 70 units. Given this information, which of the following statements is TRUE? A) The equilibrium price is $1 per table. B) The market clearing price is $1 per table. C) At a price of $1 per table, there is a surplus in the market. D) At a price of $1 per table, there is a shortage in the market. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 11) A shortage occurs in a market when ________. A) supply exceeds demand B) price is lower than the equilibrium price C) price is higher than the equilibrium price D) the marginal utility of consumption is negligible Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

12) In a perfectly competitive market, situations of surplus or shortage of a good ________. A) can exist simultaneously B) are permanent phenomena C) exist until the government or any ruling authority intervenes D) self-correct due to the competitive nature of the market Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium The following table shows the market demand schedule and supply schedule for notebooks. Price ($ per unit) 1 2 3 4 5 6 7 8 9

Quantity Demanded (units) 20 16 14 12 10 7 4 2 1

Quantity Supplied (units) 4 6 10 12 14 17 20 22 25

13) Refer to the table above. What is the equilibrium price of notebooks? A) $2 B) $4 C) $6 D) $7 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 14) Refer to the table above. What is the equilibrium quantity of notebooks? A) 4 units B) 10 units C) 12 units D) 20 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

15) Refer to the table above. What is the shortage in the market when the price of a notebook is $1? A) 0 units B) 10 units C) 14 units D) 16 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 16) Refer to the table above. What is the shortage in the market when the price of a notebook is $3? A) 4 units B) 10 units C) 16 units D) 20 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 17) Refer to the table above. What is the surplus in the market when the price of a notebook is $9? A) 16 units B) 20 units C) 24 units D) 26 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 18) Refer to the table above. Which of the following statements is TRUE? A) There is a surplus of 4 notebooks in the market when the price of one notebook is $5. B) There is a surplus of 10 notebooks in the market when the price of one notebook is $8. C) There is a shortage of 4 notebooks in the market when the price of one notebook is $6. D) There is a shortage of 12 notebooks in the market when the price of one notebook is $4. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

19) Refer to the table above. At what price does the market for notebooks clear? A) $2 B) $3 C) $4 D) $5 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 20) Why is the competitive equilibrium price often referred to as the market clearing price? Answer: The competitive equilibrium price is determined at the point of intersection of the market demand and the market supply curves. At the point of intersection, the quantity demanded is equal to the quantity supplied in the market, which implies that there is no excess supply or excess demand in the market. Because quantity demanded equals quantity supplied and markets clear at the competitive equilibrium price, the price is also referred to as the market clearing price. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium

The numbers in the table below characterize the market for raccoon skins in Minnesota during the 2010—2011 trapping season. The demand schedule that prevailed in November and December of 2010 is denoted by "Original Quantity Demanded," and the demand schedule that prevailed from late January onward is denoted by "Quantity Demanded— Late January."

21) Refer to the table above. Given the original demand, at a price of $22 per raccoon skin, there is a ________. A) surplus of 160 skins B) surplus of 340 skins C) shortage of 340 skins D) shortage of 160 skins Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 22) Refer to the table above. Given the original demand, at a price of $18 per raccoon skin, there is a ________. A) surplus of 140 skins B) surplus of 280 skins C) shortage of 280 skins D) shortage of 140 skins Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium

23) Refer to the table above. The original equilibrium price is ________ per skin and the original equilibrium quantity is ________ skins. A) $22; 360 B) $20; 300 C) $16; 500 D) $14; 180 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 24) If there is excess demand in a perfectly competitive market, does the government need to intervene to restore the equilibrium price and quantity? Why or why not? Answer: No. In a perfectly competitive market, no government intervention is required to restore equilibrium, as equilibrium is automatically restored. A situation of excess demand occurs when the market price is below the equilibrium price. Because quantity demanded exceeds quantity supplied in the market, some consumers will be willing to pay higher prices to buy goods. This will act as an incentive for suppliers to supply more, eliminating the shortage in the market. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

25) Suppose the equilibrium price and quantity of bicycles is determined at $40 and 200 units, respectively. For some reason, the market price of the bicycles initially increases to $60 and then decreases to $20. How will these deviations from the equilibrium price be corrected in a perfectly competitive market? Explain with the help of suitable diagrams. Answer: The equilibrium in a perfectly competitive market is determined at the intersection of the demand and supply curves of bicycles, or in other words, at the point where the quantity supplied of bicycles equals the quantity demanded. In the following figure, the equilibrium price is $40 and the equilibrium quantity is 200 units.

Suppose the price in the market increases to $60, as shown in the following figure.

At this higher price, sellers tend to supply more, whereas buyers tend to demand less. This creates a surplus in the market. In this case, the excess supply is 300 − 100 = 200 bicycles. Because these 200 units will remain unsold as long as the price is $60, the excess supply will exert downward pressure on prices. Sellers will start undercutting each other's prices to get rid of the rising inventory of unsold goods. This will continue until the market price falls to the competitive equilibrium price. When the market price is above the equilibrium price, competition among sellers pushes prices down to the equilibrium price level. Now suppose the price in the market falls to $20, as shown in the following figure. 57 Copyright © 2022 Pearson Education Ltd.

At lower prices, sellers tend to supply less, while buyers tend to demand more. This creates a shortage in the market. In this case, the excess demand is 300 − 100 = 200 bicycles. Excess demand implies that all buyers who want a particular commodity will not be able to acquire it. Buyers who aren't getting the goods they want will compete with one another by offering to pay higher prices to get the limited supply of the good. This will continue until the market price rises to the competitive equilibrium price of $40. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

26) The market demand schedule and supply schedule for digital cameras is shown in the table below. Illustrate the answers with the help of a graph. Price ($ per unit) 10 20 30 40 50

Quantity Demanded (units) 400 360 300 240 200

Quantity Supplied (units) 150 210 300 340 360

a) Determine the equilibrium quantity and price. b) What is the excess demand in the market if the price is set at $20? c) What is the excess supply in the market if the price is set at $40? Answer: a) The equilibrium quantity and price are determined at the point where the quantity demanded equals the quantity supplied. From the demand and supply schedule, it can be seen that when the price is $30 per unit, both the quantity supplied and the quantity demanded are equal to 300 units. Therefore, the equilibrium quantity is 300 units and the equilibrium price is $30 per unit. This is shown in the following figure.

b) If the price is set at $20, the quantity demanded is 360 units and the quantity supplied is 210 units, leading to excess demand of 150 units (360 − 210 = 150) in the market. This is shown in the following figure.

c) If the price is set at $40, the quantity demanded is 240 units and the quantity supplied is 340 units, leading to an excess supply of 100 units (340 − 240 = 100) in the market. This is shown in the following figure.

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

27) Assume that the market for bread is perfectly competitive. The demand for bread is given by the equation D = 120 − 10P, and the market supply for bread is given by S = 60 + 5P. Determine the equilibrium price and quantity of bread. What happens if the price of the bread is set at $10 per loaf? What happens if the market price is set at $2 per loaf? Answer: In a perfectly competitive market, the equilibrium price and quantity of a good are determined at the point where the quantity demanded is equal to the quantity supplied. To determine the equilibrium price and quantity of bread, demand is set to be equal to supply: D = S, or 120 − 10P = 60 + 5P, or 60 = 15P. Therefore, P = $4. Therefore, the equilibrium price of bread is $4 per loaf. The equilibrium quantity of bread can be determined by plugging the equilibrium price into either the demand equation or the supply equation. The equilibrium quantity Q = 120 - (10 × 4) = 120 - 40 = 80 loaves. When the market is in equilibrium, the price of bread is $4 per loaf and 80 loaves of bread are sold in the market. If the market price is set at $10 per loaf, quantity demanded is 120 − (10 × 10), or 120 - 100, or 20 loaves, whereas quantity supplied is 60 + (5 × 10), or 110 loaves. Therefore, there will be excess supply of (110 − 20), or 90 loaves in the market. If the market price is set at $2 per loaf, quantity demanded is 120 − (10 × 2), or (120 - 20), or 100 loaves, whereas quantity supplied is 60 + (5 × 2), or (60 + 10), or 70 loaves. Therefore, there will be an excess demand of (100 - 70), or 30 loaves in the market. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

28) What is the difference between the following two situations? a) A shortage in the market for lightbulbs b) A surplus in the market for lightbulbs Illustrate your answers with the help of suitable diagrams. Answer: a) A shortage in the market for lightbulbs refers to a situation of excess demand for lightbulbs. If the price is fixed below the competitive equilibrium, the quantity demanded of the commodity exceeds the quantity supplied of the commodity. The following figure illustrates how a shortage occurs in the market.

In the figure, the intersection of the demand (DD) and supply (SS) curves determines the competitive equilibrium price and quantity. The equilibrium price is $5 and the equilibrium quantity is 60 bulbs. Suppose the price is set at $3. The quantity demanded of the commodity at $3 is 90 bulbs, but the quantity supplied at that price is only 30 bulbs. Therefore, there is a shortage of 60 bulbs in the market.

b) A surplus in the market for lightbulbs refers to a situation of excess supply of lightbulbs. If the price of a commodity is fixed above the equilibrium price, the quantity supplied of the commodity exceeds the quantity demanded of the commodity. The following graph illustrates a surplus in the market.

In the graph, the intersection of the demand (DD) and supply (SS) curves determines the competitive equilibrium price and quantity. The equilibrium price is $5, and the equilibrium quantity is 60 bulbs. Suppose the price is set at $7. The quantity supplied of the commodity at $7 is 90 bulbs, whereas the quantity demanded is only 32 bulbs. Therefore, there is a surplus of 58 bulbs in the market. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

29) Assume that the market for cell phones comprises two buyers and two sellers. The following table shows the demand and supply of cell phones at different prices. Using the information in the table, determine the market equilibrium price and quantity. Cell Phones Cell Phones Price ($) Demanded (Buyer 1) Demanded (Buyer 2) 10 100 80 20 80 65 30 75 50 40 60 45 50 30 30 60 20 22

Price ($) 10 20 30 40 50 60

Cell Phones Supplied Cell Phones Supplied (Seller 1) (Seller 2) 10 25 30 40 50 45 55 50 65 60 75 70

Answer: To determine the market equilibrium quantity and price, the first step requires estimation of the market demand and market supply of cell phones. The market demand can be estimated by summing the quantity demanded of each buyer at the different price levels. This is shown in the table below. Cell Phones Cell Phones Market Demand Price ($) Demanded (Buyer 1) Demanded (Buyer 2) for Cell Phones 10 100 80 180 20 80 65 145 30 75 50 125 40 60 45 105 50 30 30 60 60 20 22 42 The market supply can be estimated by summing the quantity supplied of each seller at the different price levels. This is shown in the table below. Cell Phones Supplied Cell Phones Supplied Market Supply of Price ($) (Seller 1) (Seller 2) Cell Phones 10 10 25 35 20 30 40 70 30 50 45 95 40 55 50 105 50 65 60 125 60 75 70 145 From the two tables above, it is seen that at a market price of $40, the quantity demanded is 105 cell phones and the quantity supplied is also 105 cell phones. Hence, the equilibrium price is $40, and the equilibrium quantity is 105 cell phones. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

The following figure shows the demand and supply curves for USB flash drives at different price levels. D is the demand curve, and S1 is the initial supply curve.

30) Refer to the figure above. When the demand curve for flash drives is D and the supply curve of flash drives is S1, the equilibrium price is ________. A) $3 B) $4 C) $5 D) $7 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 31) Refer to the figure above. When the demand curve for flash drives is D and the supply curve of flash drives is S1, the equilibrium quantity is ________. A) 10 units B) 20 units C) 40 units D) 60 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium

32) Refer to the figure above. When the demand curve for flash drives is D and the supply curve of flash drives is S1, what is the surplus in the market if the price is $7? A) 10 units B) 20 units C) 50 units D) 60 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 33) Refer to the figure above. When the demand curve for flash drives is D and the supply curve of flash drives is S1, what is the shortage in the market if the price is $4? A) 0 units B) 10 units C) 20 units D) 40 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Supply and Demand in Equilibrium 34) Refer to the figure above. If the supply curve for flash drives shifts from S1 to S2, with no change in the demand curve, the new competitive equilibrium price is ________. A) $3 B) $4 C) $5 D) $7 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 35) Refer to the figure above. If the supply curve for flash drives shifts from S1 to S2, with no change in the demand curve, the new competitive equilibrium quantity is ________ units. A) 10 B) 20 C) 40 D) 60 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium

36) Refer to the figure above. When the supply curve of flash drives is S2 and the demand curve of flash drives is D, what is the surplus in the market when the price is $7? A) 0 units B) 10 units C) 20 units D) 40 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 37) Refer to the figure above. When the supply curve of flash drives is S1 and the demand curve for flash drives is D, what is the shortage in the market when the price is $5? A) 0 units B) 10 units C) 40 units D) 50 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 38) In 2007, an unseasonably dry spring led to a sharp decline in the quantity harvested of black morels, a wild mushroom found throughout the upper Midwest. Due to the scant harvest, the price of black morels rose from $9 per pound to nearly $45 per pound. In 2008, slightly abovenormal rainfall levels led to a large black morel harvest. Assuming that the demand for black morels did not change from 2007 to 2008, we would expect the 2008 black morel supply to ________ and the equilibrium price of black morels to ________. A) increase; rise B) increase; fall C) decrease; fall D) decrease; rise Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium

The following figure shows the demand and supply curves for gas. D1 is the initial demand curve, and S is the supply curve.

39) Refer to the figure above. When the demand curve for gas is D1 and the supply curve for gas is S, the equilibrium price is ________. A) $3 B) $5 C) $6 D) $8 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 40) Refer to the figure above. When the demand curve for gas is D2 and the supply curve for gas is S, the surplus in the market when price is $8 is ________ gallons. A) 20 B) 25 C) 50 D) 55 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium

41) Refer to the figure above. When the demand curve for gas is D2 and the supply curve of gas is S, the equilibrium quantity is ________ gallons. A) 20 B) 40 C) 50 D) 70 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 42) Other things remaining the same, a leftward shift in the supply curve will lead to a(n) ________. A) decrease in the equilibrium price and the equilibrium quantity B) increase in the equilibrium price and the equilibrium quantity C) decrease in the equilibrium price and an increase in the equilibrium quantity D) increase in the equilibrium price and a decrease in the equilibrium quantity Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 43) Other things remaining same, a leftward shift in the demand curve will lead to a(n) ________. A) increase in the equilibrium price and the equilibrium quantity B) decrease in the equilibrium price and the equilibrium quantity C) decrease in the equilibrium price and an increase in the equilibrium quantity D) increase in the equilibrium price and a decrease in the equilibrium quantity Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 44) Other things remaining the same, a rightward shift in the supply curve will lead to a(n) ________. A) increase in the equilibrium price and the equilibrium quantity B) decrease in the equilibrium price and the equilibrium quantity C) decrease in the equilibrium price and an increase in the equilibrium quantity D) increase in the equilibrium price and a decrease in the equilibrium quantity Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium

45) Other things remaining same, a rightward shift in the demand curve will lead to a(n) ________. A) increase in the equilibrium price and the equilibrium quantity B) decrease in the equilibrium price and the equilibrium quantity C) decrease in the equilibrium price and an increase in the equilibrium quantity D) increase in the equilibrium price and a decrease in the equilibrium quantity Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 46) If the demand for gem-quality diamonds decreases AND the supply of gem-quality diamonds decreases, what can be said about equilibrium price and quantity in this market? A) Equilibrium price and quantity will both fall. B) Equilibrium price and quantity will both rise. C) Equilibrium quantity will fall, but the change in equilibrium price is uncertain. D) Equilibrium quantity will rise, but the change in equilibrium price is uncertain. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium 47) Suppose Z is a normal good. The equilibrium price and quantity of Z in the year 2013 was $25 and 60 units, respectively. In 2017, the equilibrium price of Z had increased to $35 and the equilibrium quantity had increased to 70 units. Other things remaining the same, which of the following could explain this change? A) A leftward shift of the supply curve of Z B) A rightward shift of the supply curve of Z C) A leftward shift of the demand curve for Z D) A rightward shift of the demand curve for Z Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 48) Suppose Z is a normal good. The equilibrium price and quantity of Z in the year 2013 was $25 and 60 units, respectively. In 2017, the equilibrium price of Z had increased to $35 but the equilibrium quantity had decreased to 50 units. Other things remaining the same, which of the following could explain this change? A) A leftward shift of the supply curve of Z B) A rightward shift of the supply curve of Z C) A leftward shift of the demand curve for Z D) A rightward shift of the demand curve for Z Answer: A Difficulty: Hard AACSB: Application of Knowledge 71 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Curve Shifting in Competitive Equilibrium 49) Suppose Z is a normal good. The equilibrium price and equilibrium quantity of Z in the year 2013 was $25 and 60 units, respectively. In 2017, the equilibrium price of Z had decreased to $15 and the equilibrium quantity had also decreased to 50 units. Other things remaining the same, which of the following could explain this change? A) A leftward shift of the supply curve of Z B) A rightward shift of the supply curve of Z C) A leftward shift of the demand curve for Z D) A rightward shift of the demand curve for Z Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 50) If the demand and supply curves for a commodity shift to the right by the same amount, then in comparison to the initial equilibrium, the new equilibrium will be characterized by ________. A) a higher quantity and price B) a lower quantity and a higher price C) the same quantity and a lower price D) a higher quantity and the same price Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 51) If the demand and supply curves for a commodity both shift to the left by the same amount, then in comparison to the initial equilibrium, the new equilibrium will be characterized by ________. A) a higher price and quantity B) the same price and a higher quantity C) the same price and a lower quantity D) a lower price and a higher quantity Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium

52) Assume that the supply curve for a commodity shifts to the right and the demand curve shifts to the left, and the shift in demand is greater than the shift in supply. Then in comparison to the initial equilibrium, the new equilibrium will be characterized by ________. A) a lower price and quantity B) a higher price and a lower quantity C) the same price and a lower quantity D) a lower price and a higher quantity Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 53) Assume that the supply curve for a commodity shifts to the left and the demand curve shifts to the right, and the shift in demand is greater than the shift in supply. Then in comparison to the initial equilibrium, the new equilibrium will be characterized by a ________. A) lower price and quantity B) higher price and quantity C) higher price and a lower quantity D) lower price and a higher quantity Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 54) Assume that the supply curve for a commodity shifts to the left and the demand curve shifts to the right, both by the same degree. Then, in comparison to the initial equilibrium, the new equilibrium will be characterized by ________. A) a lower price and quantity B) the same price and quantity C) a lower price and the same quantity D) a higher price and the same quantity Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Curve Shifting in Competitive Equilibrium 55) Refer to the scenario above. You can conclude that commercial grade emerald prices ________. A) increased B) remained the same C) decreased D) was uncertain Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium 73 Copyright © 2022 Pearson Education Ltd.

56) Refer to the scenario above. If you are told that the increase in emerald sales was due to an increase in the supply of 1-carat commercial grade emeralds, you can conclude that commercial grade emerald prices ________. A) increased B) remained constant C) decreased D) was uncertain Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium

The table below provides data on opium sales and farmgate prices of opium in Afghanistan from 1994 to 2008.

57) Refer to the table above. From 2000 to 2001, opium sales fell by 95 percent and opium prices increased by 975 percent. If you are told that demand curve for opium in Afghanistan remained constant from 2000 to 2001, what was the likely change in opium supply? A) Increase in only quantity supplied B) Decrease in only quantity supplied C) Increase in supply D) Decrease in supply Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium

58) Refer to the table above. From 2007 to 2008, opium sales fell by roughly 6.1 percent and opium prices fell by 18.6 percent. If you are told that the supply curve of opium remained constant from 2007 to 2008, what was the likely change in opium demand? A) Decrease in demand B) Increase in demand C) Increase in only quantity demanded D) Decrease in only quantity demanded Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium 59) What will happen to the equilibrium price and quantity of cars if there is an increase in the price of gasoline? Answer: An increase in the price of gasoline will cause the demand for cars to shift left, supply remaining unchanged. With supply unchanged and a leftward shift in the demand for cars, both the equilibrium price and quantity of cars will decrease. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium

60) Using graphs, explain how the equilibrium price and quantity of laptops will change when: a) the demand curve for laptops shifts right and the supply curve for laptops shifts left. The shift in the demand curve is greater than the shift in the supply curve. b) both the demand and supply curves for laptops shift right by the same amount. c) the demand curve for laptops shifts right without any change in the supply curve. Answer: a) In the figure below, the initial equilibrium is determined by the intersection of the supply curve S1 and the demand curve D1. The initial equilibrium price is P*, and the equilibrium quantity is Q*. If the supply curve shifts left to S2, and the demand curve shifts to D2, the new equilibrium price is Pnew, and the equilibrium quantity is Qnew. The figure shows that at the new equilibrium, both the equilibrium price and quantity are higher than at the initial equilibrium.

b) In the figure below, the initial equilibrium is determined by the intersection of the supply curve S1 and the demand curve D1. The initial equilibrium price is P*, and the equilibrium quantity is Q*. If the supply and demand curves both shift to the right to S2 and D2, respectively, there is an increase in the equilibrium quantity of laptops but the equilibrium price remains unchanged.

c) In the figure below, the initial equilibrium is determined at the intersection of the supply curve, S1, and the demand curve D1. The initial equilibrium price is P*, and the equilibrium quantity is Q*. If the demand curve shifts right to D2, the supply curve remaining unchanged, the market reaches a new equilibrium at a higher price Pnew and a higher quantity Qnew.

The figure below shows the market demand and the market supply curve for gasoline. It would be useful to find the equations of the curves to answer the questions below.

61) Refer to the figure above. Suppose that a government regulation mandates a higher quality of gasoline, which raises the marginal cost of each liter by 2.00 euros. Meanwhile, the popularity of hybrid and other energy-efficient vehicles lowers consumers' willingness to pay by 2.00 euros. Then the new equilibrium quantity is ________ and the new equilibrium price ________. A) 800,000 liters; is higher than the old equilibrium price B) 600,000 liters; is same as the old equilibrium price C) 500,000 liters; is lower than the old equilibrium price D) 400,000 liters; could be either higher or lower than the old equilibrium price Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium 62) Refer to the figure above. Which of the following events would, all else being equal, unambiguously increase the equilibrium quantity? A) Wider availability of public transportation B) Political instability in oil-producing nations C) Increase in prices of cars and decrease in wages of oil industry workers D) Decrease in prices of cars and increase in competition among oil-producing countries Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium 79 Copyright © 2022 Pearson Education Ltd.

63) On April 20, 2020 oil prices closed at -$37.63 per barrel. Which of the following statements is FALSE regarding these negative oil prices? A) The reason for the decrease in the price of oil was that people knew the price was going to decrease and stopped buying oil. B) The negative price of oil indicates that oil producers were paying people to take their oil because they had nowhere to store it. C) The reason for the sudden decrease in the price of oil stemmed from the lockdowns associated with the coronavirus. D) The negative oil prices only lasted for one day. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: The Day Oil Became Garbage 64) People frequently eat chips and guacamole together. Suppose the price of chips increases and there is a shortage of avocados, which are used to produce guacamole. How will these affect the equilibrium price and quantity of guacamole? A) The change in price is ambiguous, quantity will decrease. B) Price will remain the same, quantity will decrease. C) Both price and quantity will decrease. D) Price will decrease, the change in quantity is ambiguous. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium 65) Suppose there has been an increase in the equilibrium price and quantity in the market for chickens. Which of the following events could have caused this? A) A study recently came out highlighting the salmonella outbreaks linked to backyard chickens. B) More poultry farmers have started hatching chicks. C) People quarantining at home have decided they want to try raising backyard chickens. D) The price of chicken coops has gone up. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium 66) Which of the following would cause a decrease in price and quantity in the market for paperback textbooks? A) Students expect the price of textbooks to rise. B) College enrollment increases. C) The price of e-textbooks decreases. D) The price of paper decreases. Answer: C Difficulty: Medium AACSB: Analytical Thinking 80 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Curve Shifting in Competitive Equilibrium The market for running shoes can be represented by the following equations: QD = 2000 10P and QS = 10P - 80. 67) Refer to the information above on the market for running shoes. What is the equilibrium price of running shoes? A) $96 B) $104 C) $192 D) $208 Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 68) Refer to the information above on the market for running shoes. What is the equilibrium quantity of running shoes? A) 1040 B) 960 C) 2000 D) 1840 Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 69) Refer to the information above on the market for running shoes. Which of the following is TRUE if the price of running shoes is $80? A) There will be excess supply of 1200. B) The quantity supplied will be 1200. C) There will be excess demand of 480. D) The quantity demanded will be 720. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 70) Refer to the information above on the market for running shoes. Which of the following is TRUE if the price of running shoes is $110? A) There will be excess supply of 120. B) There will be excess demand of 120. C) There will be excess supply of 170. D) There will be excess demand of 170. Answer: A Difficulty: Hard 81 Copyright © 2022 Pearson Education Ltd.

AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 71) Refer to the information above on the market for running shoes. If another shoe store enters the market and increases the quantity supplied of running shoes by 100 at each price, what will be the new equilibrium price of running shoes? A) $99 B) $101 C) $109 D) $202 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 72) Refer to the information above on the market for running shoes. As the weather gets cold people stop running, which decreases the quantity demanded of running shoes by 40 at each price. what will be the new equilibrium price of running shoes? A) $102 B) $94 C) $104 D) $204 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 73) Refer to the information above on the market for running shoes. If both the price of rubber, which is used to make the soles of running shoes, increases and the weather gets colder and people stop running, what happens to the equilibrium price and quantity of running shoes? A) The price will increase and the change in quantity will be ambiguous. B) The change in price will be ambiguous and the quantity will decrease. C) The price will increase and the quantity will decrease. D) The price will decrease and the quantity will decrease. Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium

The market for soda in Newtown can be represented by QD = 100 - 10P and QS = 10P, where Q is the number of cases and P is the price per case. 74) Use the information above on the market for soda in Newtown. What is the equilibrium price in the market for soda? A) $50 B) $10 C) $5 D) $4 Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 75) Use the information above on the market for soda in Newtown. What is the equilibrium quantity in the market for soda? A) 50 cases B) 100 cases C) 60 cases D) 40 cases Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 76) Use the information above on the market for soda in Newtown. What would happen if the price of soda were $8 per case? A) There would be excess supply of 60 cases. B) There would be excess demand of 60 cases. C) There would be excess supply of 30 cases. D) There would be excess demand of 30 cases. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 77) Use the information above on the market for soda in Newtown. What would happen if the price of soda were $3 per case? A) There would be excess supply of 40 cases. B) There would be excess demand of 40 cases. C) There would be excess supply of 20 cases. D) There would be excess demand of 20 cases. Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Supply and Demand in Equilibrium 83 Copyright © 2022 Pearson Education Ltd.

78) Use the information above on the market for soda in Newtown. What would happen to the equilibrium price and quantity of soda if the price of sugar decreased while the city council imposes a tax on sugary beverages? A) The equilibrium price and quantity would fall. B) The equilibrium price would fall and the change in quantity would be ambiguous. C) The change in price is ambiguous and the quantity would increase. D) The equilibrium price would fall and the quantity would increase. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Curve Shifting in Competitive Equilibrium 4.5 What Would Happen If the Government Tried to Dictate the Price of Gasoline? 1) A price ceiling imposed by the government ________. A) can create situations of excess demand B) is a tax that increases the market price of a good C) involves pricing a commodity above the market price D) helps establish equilibrium in case of a shortage or surplus Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline? 2) Which of the following was an effect of the price ceiling placed on gasoline in the United States in the 1970s? A) The inventory of unsold gas increased, and gas stations incurred losses. B) Those who valued gas the most were able to buy gas under the price ceiling. C) Gas stations ran out of gas as the quantity of gas demanded exceeded the quantity supplied. D) Car owners started buying luxury cars that were less fuel efficient as the price of gas was very low. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline?

Scenario: Suppose that the government imposes a price control on gasoline where the legal price is set at $1.50 per gallon while the equilibrium price would be $2.25. A shortage ensues. Worried that you may not have enough gas to commute to school and do errands, you get up before dawn to go to a gas station to fill up the tank. But you find yourself waiting in a long line. Fortunately, the station did not run out of gas before your turn came up, and you were happy to drive away with a full tank. 3) Refer to the scenario above. The shortage results because ________. A) consumers demand more than sellers can produce B) consumers demand more than sellers are willing to supply at the legal price C) consumers demand more than the quantity of the resource that physically exists D) the government withholds a large quantity of the resources under the price control Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline? 4) Refer to the scenario above. For the last gallon of gas that the seller is willing to produce at $1.50, the consumers are willing to pay ________. A) more than $2.25 B) more than $1.50 but less than $2.25 C) exactly $1.50 D) less than $1.50 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline? 5) Refer to the scenario above. Your total cost of getting gas ________. A) is lower than the equilibrium price thanks to the price ceiling B) is exactly the same as the equilibrium price because you managed to get gas C) may be higher than the equilibrium price because of your opportunity cost of waiting in line and uncertainty about availability of gasoline D) may be higher than the equilibrium price because the seller usually charges an illegally higher price Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline?

6) If the current market price of wheat in the United States is $6 per bushel and the federal government sets the maximum price of wheat at $4 per bushel, what happens to the market price and quantity of wheat in the U.S. wheat market? A) The market price of wheat falls and the quantity traded rises. B) The market price of wheat falls and the quantity traded falls. C) There is no change in the market price of wheat or the quantity traded. D) The answer cannot be determined given the information provided. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline?

Scenario: Suppose the market for wheat in the United States is given by the demand and supply schedules in the table below (as well as the accompanying graph).

Suppose the U.S. government imposes a minimum price for wheat (price floor) of $6 per bushel. 7) Refer to the scenario above. The quantity demanded of wheat at the minimum price is ________. A) 6 million bushels B) 8 million bushels C) 12 million bushels D) unknown Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline? 8) Refer to the scenario above. At the minimum price of $6 per bushel, there is a ________ of ________ million bushels. A) shortage; 3 B) shortage; 6 C) surplus; 3 D) surplus; 6 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline? 9) Refer to the scenario above. The quantity of wheat traded in the market at the minimum price of $6 per bushel is ________. A) 2 million bushels B) 6 million bushels C) 8 million bushels D) 12 million bushels Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Controls (Section 4.5) 10) Which of the following could explain why there was a stampede at the Richmond International Raceway where 1,000 laptops were being sold at $50 each? A) The demand for laptops is not very responsive to price. B) The price of $50 per laptop was above the equilibrium price of laptops. C) The quantity of laptops demanded at $50 was higher than the quantity supplied. D) The people who bought the laptops at that price were those who valued laptops the most. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: The Unintended Consequences of Fixing Market Prices 88 Copyright © 2022 Pearson Education Ltd.

11) Suppose the government decides that a particular commodity is a luxury and fixes its price above the market-determined price. What implications could this policy have? Answer: If the government fixes the price of a commodity above the market-determined price, it will provide an incentive to sellers to supply more. This will result in an excess supply of the commodity. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Choice and Consequence: The Unintended Consequences of Fixing Market Prices 12) Suppose that, when you arrive at the sale site for $50 Apple laptops (described in the text) at 1:45 A.M., you find more than 2,000 people already waiting for the site to open. You turn around and go home to get some sleep. Later you buy an Apple laptop, the same model as the $50 one, for $1,070. This indicates that ________. A) more than fifty people in the crowd were physically stronger than you B) you are willing to pay at most $1,070 for the laptop C) your opportunity cost of waiting at the site (and pushing and shoving) is at most $1,020 D) your opportunity cost of waiting at the site (and pushing and shoving) is at least $1,020 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Choice and Consequence: The Unintended Consequences of Fixing Market Prices 13) Why is an auction, or even a random lottery, considered better than the Henrico County scheme used to sell Apple laptops for $50? A) Because it results in each laptop being sold at the equilibrium price B) Because it avoids costs associated with waiting and injuries from a stampede C) Because it avoids Henrico County government's control of the market D) Because it will lower the price of laptops other than the 1,000 units offered by the government of Henrico County Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Choice and Consequence: The Unintended Consequences of Fixing Market Prices

The table below shows the market supply and demand schedules for barrels of oil. Price Per Barrel $25 $50 $75 $100 $125 $150

Quantity Demanded 525 450 375 300 225 150

Quantity Supplied 150 200 250 300 350 400

14) If the government set a price ceiling of $125 per barrel for oil, what would happen in the market for gasoline? A) Nothing, this is not a binding price ceiling. B) There would be excess demand of 75 barrels. C) There would be excess supply of 75 barrels. D) Supply will increase. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline? 15) If the government set a price ceiling of $50 per barrel for oil, what would happen in the market for gasoline? A) Nothing, this is not a binding price ceiling. B) There would be excess demand of 150 barrels. C) There would be excess supply of 150 barrels. D) Demand will increase. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: What Would Happen If the Government Tried to Dictate the Price of Gasoline?

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 5 Consumers and Incentives Introduction 1) Which of the following correctly describes incentives? A) Incentives refer to the maximum price that a buyer is willing to pay for a good. B) Incentives are rewards or penalties that motivate people to behave in a particular way. C) Incentives are prices that are fixed by the government and not by market forces. D) Incentives refer to the minimum price at which a seller is willing to sell a product. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introduction 2) Which of the following statements is TRUE of incentives? A) Incentives can be financial or moral, but not coercive. B) Incentives can be financial or coercive, but not moral. C) Incentives are designed to change behavior. D) Incentives are always in the form of rewards. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introduction 3) Which of the following is NOT an example of an incentive? A) Your teacher offers you extra credit to show up to class. B) Your bank offers you $100 to open a checking account. C) Your friend gives you a hug when you have a bad day. D) You take yourself out to a nice dinner if you can get all A's in a semester. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introduction 5.1 The Buyer's Problem 1) Which of the following is NOT a determining factor of consumers' purchase decisions? A) Consumers' tastes and preferences B) The market price of the finished goods C) The cost of factor inputs D) Consumers' income Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Buyer's Problem 1 Copyright © 2022 Pearson Education Ltd.

2) Your mom has clipped two coupons from the Sunday paper. The first coupon is for a $5 off of a $10 shampoo, and the second one is for a $5 off of a $50 haircut. Your mom says the first coupon is more valuable. A) You agree, because the first coupon entails a 50% savings versus a 10% savings in the second one. B) You agree, because the first coupon is for a product, while the second one is for a service. C) You disagree, because both coupons entail a $5 saving. D) You disagree, because restaurant coupons are harder to find. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Absolute versus Percentage 3) A consumer's budget refers to the ________. A) wealth the consumer has acquired over time B) average prices of the goods and services bought by the consumer C) amount of money the consumer can spend on various goods and services D) difference between the consumer's willingness to pay for goods and services and the amount actually paid. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Buyer's Problem 4) Which of the following statements is TRUE? A) A consumer's tastes and preferences do not change over time. B) A consumer's tastes and preferences determine the satisfaction she receives from consumption. C) A consumer's tastes and preferences are not revealed through her buying decisions and consumption patterns. D) A consumer's tastes and preferences do not play an important role in arriving at a buying decision. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: What You Like 5) Suppose the prices of a pair of jeans, a shirt, and a tie are $30, $20, and $10, respectively. Which of the following statements is TRUE in this context? A) The opportunity cost of buying a pair of jeans is 2 ties. B) The opportunity cost of buying a tie is 3 pairs of jeans. C) The opportunity cost of buying a tie is 2 shirts. D) The opportunity cost of buying a shirt is 2 ties. Answer: D Difficulty: Medium 2 Copyright © 2022 Pearson Education Ltd.

AACSB: Application of Knowledge TopicEntry: Prices of Goods and Services Scenario: Suppose pairs of jeans (j) cost $60 per pair, sweaters (s) cost $20 each, and you have $300 of income. Assume you purchase only jeans and sweaters with your income. Your budget constraint is: $60 - j + $20 - s = $300. The graph below shows 4 consumption bundles (combinations of jeans and sweaters).

6) Your budget set contains ________. A) only those bundles of jeans and sweaters that exhaust less than all your income B) all bundles of jeans and sweaters that are affordable with your income C) all bundles of jeans and sweaters that exhaust all your income D) all bundles of jeans that are NOT affordable with your income Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Buyer's Problem 7) In the graph above, which bundles of jeans and sweaters are in your budget set? A) Only Bundle D (2 pairs of jeans and 8 sweaters) B) Bundle D (2 pairs of jeans and 8 sweaters) and Bundle A (5 pairs of jeans and no sweaters) C) Bundles D (2 pairs of jeans and 8 sweaters), A (5 pairs of jeans and no sweaters), and B (4 pairs of jeans and 4 sweaters) D) Bundles D (2 pairs of jeans and 8 sweaters), A (5 pairs of jeans and no sweaters), and C (3 pairs of jeans and 6 sweaters) Answer: D Difficulty: Medium AACSB: Analytical Thinking 3 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Buyer's Problem 8) Your budget constraint contains ________. A) only those bundles of jeans and sweaters that exhaust less than all your income B) all bundles of jeans and sweaters that are affordable with your income C) all bundles of jeans and sweaters that exhaust all your income D) all bundles of jeans that are NOT affordable with your income Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Buyer's Problem 9) In the graph above, which bundles of jeans and sweaters are on your budget constraint? A) Bundles A (5 pairs of jeans, 0 sweaters) and C (3 pairs of jeans and 6 sweaters) B) Bundles A (5 pairs of jeans, 0 sweaters), B (4 pairs of jeans and 4 sweaters), and C (3 pairs of jeans and 6 sweaters) C) Bundles A (5 pairs of jeans, 0 sweaters), C (3 pairs of jeans and 6 sweaters), and D (2 pairs of jeans and 8 sweaters) D) Bundles B (4 pairs of jeans and 4 sweaters), C (3 pairs of jeans and 6 sweaters), and D (2 pairs of jeans and 8 sweaters) Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Buyer's Problem 10) Given your budget constraint $60j + $20s = $300 and the graph above, what is the opportunity cost of a pair of jeans? A) of a sweater B) 1 sweater C) 2 sweaters D) 3 sweaters Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Buyer's Problem 11) Given your budget constraint $60j + $20s = $300 and the graph above, what is the opportunity cost of a sweater? A) of a pair of jeans B)

of a pair of jeans

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Buyer's Problem 12) Which of the following statements is TRUE? A) A consumer's buying decisions do not indicate anything about her tastes and preferences. B) A consumer's demand for a good determines the price of the good in a perfectly competitive market. C) The relative prices of goods do not affect a consumer's buying decision. D) A consumer in a perfectly competitive market buys only a tiny fraction of the total amount produced. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices of Goods and Services 13) In a perfectly competitive market, all consumers ________. A) may buy one or many unit of the good, without the price changing B) bid the lowest price for the good they want to consume C) tend to buy equal amounts of a good D) have exactly the same tastes and preferences Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices of Goods and Services 14) The set of all possible bundles of goods and services that can be purchased with a consumer's income is referred to as a ________. A) demand set B) supply set C) budget set D) universal set Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How Much Money You Have to Spend 15) If a consumer purchases any combination of goods on her budget constraint ________. A) she will minimize total utility B) she will exhaust her entire income C) she will maximize her marginal utility obtained from the consumption of each additional amount of both goods D) she will maximize her marginal benefit obtained from the consumption of each additional amount of both goods Answer: B Difficulty: Medium 5 Copyright © 2022 Pearson Education Ltd.

AACSB: Analytical Thinking TopicEntry: How Much Money You Have to Spend

16) Assume that a consumer can spend $20 on two goods–pens and pencils. If the price of one pen is $5 and the price of one pencil is $2, which of the following combinations of the two goods represents a point on the consumer's budget constraint? A) 3 pens and 2 pencils B) 1 pen and 10 pencils C) 2 pens and 5 pencils D) 2 pens and 3 pencils Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend 17) Assume that a combination of 10 bottles of wine and 2 cartons of milk lies on a consumer's budget constraint. If the price of one bottle of wine is $10 and the price of one carton of milk is $1, what is the consumer's income? A) $100 B) $20 C) $120 D) $102 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend

The following figure displays John's budget constraint when he spends his income on tables and chairs.

18) Refer to the figure above. If John spends his entire income on tables, how many tables can he purchase? A) 8 B) 10 C) 30 D) 40 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend 19) Refer to the figure above. If John spends his entire income on chairs, how many chairs can he purchase? A) 3 B) 8 C) 20 D) 40 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend 20) Refer to the figure above. If John decides to spend his entire income on tables and the price of a table is $2, what is John's income? A) $20 B) $40 C) $60 D) $80 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend 8 Copyright © 2022 Pearson Education Ltd.

21) Refer to the figure above. Which of the following statements is TRUE? A) The opportunity cost of buying one chair is 5 tables. B) The price of tables is more than the price of chairs. C) The opportunity cost of buying tables increases as more tables are bought. D) The opportunity cost of buying one table is 7 chairs. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend The following figure shows the budget constraint of Lesley when she is faced with two goods: burgers and ice cream.

22) Refer to the figure above. If the line represents Lesley's budget constraint, and Lesley has $60 budget to be spent on burgers and ice cream, what is the price of burger and ice cream? A) Pburger = $10, and Picecream = $6 B) Pburger = $5, and Picecream = $3 C) Pburger = $12, and Picecream = $3 D) Only the ratio of the prices can be determined. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend

23) Refer to the figure above. If the price of a burger doubled, Lesley's new budget constraint ________. A) will start from the same point on the vertical axis, but will cross the horizontal axis at 3 B) will start from the same point on the vertical axis, but will cross the horizontal axis at 12 C) will start from the same point on the horizontal axis, but will cross the vertical axis at 5 D) will start from the same point on the horizontal axis, but will cross the vertical axis at 20 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Changes 24) Refer to the figure above. If Lesley's budget for burgers and ice creams is cut by half, Lesley's new budget constraint ________. A) will cross the vertical axis at 5, and will cross the horizontal axis at 3 B) will start from the same point on the vertical axis, but will cross the horizontal axis at 3 C) will start from the same point on the horizontal axis, but will cross the vertical axis at 5 D) will cross the vertical axis at 20, and will cross the horizontal axis at 12 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Income Changes 25) A budget constraint is a straight line because ________. A) the tastes and preferences of a consumer change along the constraint B) a consumer faces a fixed price for both goods that does not change with changes in consumption C) the opportunity cost of buying each of the goods changes along the constraint D) a consumer has a limited money income Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How Much Money You Have to Spend 26) The slope of a consumer's budget constraint equals ________. A) the ratio of the income of the consumer to the price of the good measured along the horizontal axis B) the ratio of the price of the good measured along the vertical axis to the price of the good measured along the horizontal axis C) the ratio of the price of the good measured along the horizontal axis to the price of the good measured along the vertical axis D) the ratio of the income of the consumer to the price of the good measured along the vertical axis Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How Much Money You Have to Spend 10 Copyright © 2022 Pearson Education Ltd.

27) What are the factors that determine a buyer's purchasing decision? Answer: i) Tastes and preferences: A buyer's purchasing decision reveals her tastes and preferences. The tastes and preferences of the buyer show that from the set of all the goods that she is able to buy, she most prefers the goods that she chooses to buy. ii) The prices of goods and services: The prices of goods and services are the most important determinants of a buyer's purchasing decision. When considering prices, the buyer not only considers the price of the good she is considering for purchase but also the prices of all other available goods. iii) The budget set: A buyer's purchasing decision depends on the amount of income she has to spend on goods and services. A buyer's budget constraint shows all possible bundles of goods and services that she can purchase with her entire income. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Buyer's Problem 28) Define a budget set. Is it the same as a budget constraint? Answer: A budget set is the set of all possible bundles of goods and services that a consumer can purchase with her income. It is not the same as a budget constraint. A budget constraint represents the combination of goods and services a consumer can purchase that exactly exhausts her income. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How Much Money You Have to Spend

29) Assume that a consumer has an income of $200 that has to be spent on two goods, decorative lights and shoes. If the price per light is $10 and the price of one pair of shoes is also $10, graphically illustrate her budget set and constraint. Also, calculate the opportunity cost of purchasing either good. Answer: If QL denotes the quantity of lights and QS denotes the quantity of shoes that the consumer purchases, then her budget constraint is given by the following: 10 QL + 10 QS = 200. When the consumer spends her entire income on lights, that is, QS = 0, the quantity of lights she can purchase is QL = 200/10 = 20 units. Similarly, when the consumer spends her entire income on shoes, that is, QL = 0, the quantity of shoes she can purchase is QS = 200/10 = 20 units. Some other points on the budget constraint can also be estimated by plugging in different values of QL and QS in the constraint. For example, QL = 5, QS = 15 and QS = 12, QL = 8. Using these values, the budget constraint can be plotted as follows:

The opportunity cost of the two goods is determined by the slope of the budget constraint or the ratio of the prices of the two goods. In this case, the opportunity cost of purchasing an additional pair of shoes is equal to 10/10 = 1. The opportunity cost of one good is the reciprocal of the other. In this particular example, however, the reciprocal of 1 is 1, so both goods have the same opportunity cost. Hence, the opportunity cost of buying one light is one pair of shoes and the opportunity cost of buying one pair of shoes is one light. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend 30) Assume that a combination of 50 facemasks and 5 bottles of hand sanitizer lies on a consumer's budget constraint. If the price of one facemask is $1 and the price of one bottle of hand sanitizer is $5, what is the consumer's income? A) $275 B) $55 C) $255 D) $75 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend 12 Copyright © 2022 Pearson Education Ltd.

31) Assume that Ashante has $50 to spend on either books or song downloads. If the price of book is $5 and the price of one song download is $1, which of the following combinations of the two goods represents a point on their budget constraint? A) 5 books and 20 songs B) 8 books and 10 songs C) 1 books and 50 songs D) 5 books and 30 songs Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend 32) Assume that Ashante has $50 to spend on either books or song downloads. If the price of book is $5 and the price of one song download is $1, what is the opportunity cost of a book? A) 10 songs B) 20 songs C) 5 songs D) 1/5 of a song Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Much Money You Have to Spend 5.2 Putting It All Together 1) While making a purchase decision, a buyer should buy the good that yields the highest ________. A) marginal benefit per dollar spent B) average benefit plus marginal benefit per dollar spent C) total utility per dollar spent D) average benefit per dollar spent Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together

The following table shows the total benefit that Jenny derives from consuming different quantities of chocolate. Quantity of Chocolate Consumed 0 1 2 3 4 5

Total Benefit ($) 0 10 18 24 29 30

2) Refer to the table above. What is the marginal benefit that Jenny derives from the second unit of chocolate? A) $0 B) $8 C) $9 D) $18 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together 3) Refer to the table above. What is the marginal benefit that Jenny derives from the fifth unit of chocolate? A) $0 B) $1 C) $6 D) $30 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together 4) Refer to the table above. If Jenny consumes a sixth unit of chocolate and the marginal benefit derived from that unit is -1, the total benefit derived from the sixth unit will be equal to ________. A) $0 B) $3 C) $29 D) $39 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together

5) Refer to the table above. If the price of one chocolate is $2, the marginal benefit per dollar spent on the fourth unit of chocolate will equal ________. A) $4 B) $2 C) $2.5 D) $5 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together 6) As a result in this decrease in your income from $300 to $240, the opportunity cost of a pair of jeans ________. A) remains unchanged at 3 sweaters B) falls to 2 sweaters C) falls to 1 sweater D) falls to sweaters Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together

7) Now suppose your income returns to its original level, $300, the price of sweaters remains constant at $20, but the price of jeans falls from $60 per pair to $30 per pair, so your new budget constraint is $30j + $20s = $300. This rotation of your budget constraint is shown in the graph below.

As a result of the decrease in the price of jeans from $60 per pair to $30 per pair, the opportunity cost of a pair of jeans ________. A) remains unchanged at 3 sweaters B) falls to 2 sweaters C) falls to 1.5 sweaters D) falls to sweaters Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together 8) Maylin goes to her local sporting goods store to buy socks and jogging shorts. Socks cost $10 per pair and jogging shorts cost $15 each. At her current consumption bundle pair of 4 pairs of socks and 2 jogging shorts, her marginal benefit from the last pair of socks is 20 and the marginal benefit of the last jogging short is 30. Maylin should ________. A) buy the same number of socks but buy an additional jogging short B) buy one more pair of socks and one fewer jogging short C) buy one more jogging short and one fewer pair of socks D) leave her consumption bundle unchanged Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Putting It All Together

Scenario: Joey is a college student living in Boston. He has preferences over only two goods, small pies at Pizzeria Regina (denoted by PR) and Red Sox games (denoted by RS). Joey has $150 per month in disposable income to spend on baseball games and pizza, the price of a small pie at Pizzeria Regina is $10 (pPR = $10) and the price of a Red Sox ticket is $20 (pRS = $20). 9) Joey's budget constraint is given by $ ________ PR + $ ________ RS = $________. Answer: $10PR + $20RS = $150 Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Putting It All Together 10) The opportunity cost of a Red Sox ticket is ________ small Pizzeria Regina Pies. Answer: $150 Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Putting It All Together

11) Using the table below, solve for the bundle of small Regina Pizzeria pies and Red Sox games that maximizes Joey's utility/well-being/satisfaction.

Answer: 2 small Pizzeria Regina pies; 5 small Pizzeria Regina pies and 5 Red Sox games (see table below)

Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Putting It All Together

12) Dawn has preferences for minor league baseball games and NASCAR races. Minor league baseball tickets are $10 per game and NASCAR tickets are $20/race. Dawn's monthly budget of $90 allows her to buy five minor league baseball tickets and two NASCAR tickets. At this consumption bundle, her marginal benefit of the last baseball game is 30 and the marginal benefit of the last NASCAR ticket is 40. Dawn ________. A) could increase her total benefit by buying more minor league baseball tickets and fewer NASCAR race tickets B) could increase her total benefit by buying NASCAR race tickets and fewer minor league baseball tickets C) is maximizing her total benefit with her current consumption bundle D) Cannot answer the question given the information provided Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together 13) An optimizing consumer makes her purchase decisions based on ________. A) the total benefits at various levels of consumption B) the benefits per dollar spent at the margin C) the total benefits per dollar spent at various levels of consumption D) the benefits from the first dollar spent on consumption Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Putting It All Together 14) An optimizing consumer has to choose between two goods: Good A priced at PA and Good B priced at PB. Given that MBA is the marginal benefit from consuming Good A and MBB is the marginal benefit from consuming Good B, the consumer's well-being will be maximized at the point where ________. A) MBA = MBB B) MBA/PB = MBB/PA C) MBA/PA = MBB/PB D) MBA = MBB/PB Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together

15) A buyer has $20 to spend on rice and beans. Rice costs $2 and beans cost $3 per pound. The buyer is buying the combination of 4 pounds of rice and 4 pounds of beans. At this combination, her marginal benefit from rice is $14 and her marginal benefit from beans is $18. This buyer should ________. A) buy less beans and more rice B) buy more rice and less beans C) buy more of both rice and beans D) not change his consumption Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Putting It All Together 16) In equilibrium, ________. A) the ratio of total benefits to price should be identical across all goods B) the ratio of total benefits to income should be identical across all goods C) the ratio of marginal benefits to price should be identical across all goods D) the ratio of marginal benefits to income should be identical across all goods Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together 17) Anne has chosen how many bagels and how many units of cream cheese she would buy this month. She has $20 to spend on these two goods. Suppose that her chosen combination, the marginal benefit per dollar for bagels is $6, and her marginal benefit per dollar for cream cheese is $10. By reallocating one dollar from ________ to ________ she can add ________ to her benefit. A) bagels; cream cheese; $4 B) bagels; cream cheese; $10 C) cream cheese; bagels; $6 D) cream cheese; bagels; $10 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together

18) Anne has chosen how many bagels and how many units of cream cheese she would buy this month. She has $20 to spend on these two goods. Suppose that her chosen combination, the marginal benefit per dollar for bagels is $6, and her marginal benefit per dollar for cream cheese is $10. If she decides to buy more bagels and less cream cheese, ________. A) her marginal benefit per dollar for bagels will increase, and her marginal benefit per dollar for cream cheese will decrease B) her marginal benefit per dollar for bagels will decrease, and her marginal benefit per dollar for cream cheese will increase C) her marginal benefit per dollar for bagels will increase, and her marginal benefit per dollar for cream cheese will remain the same D) her marginal benefit per dollar for bagels will decrease, and her marginal benefit per dollar for cream cheese will remain the same Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together Scenario: The following table shows the marginal benefit that a consumer derives by consuming different quantities of juice and milk. Quantity (Quarts) 0 1 2 3 4 5

Juice ($4/quart) Marginal Benefits ($) 12 8 6 4 3

Milk ($2/quart) Marginal Benefits ($) 10 7 5 2 1

19) Refer to the table above. What is the total benefit that the consumer derives when he consumes 4 quarts of milk? A) $8 B) $22 C) $24 D) $25 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together

20) Refer to the table above. If the income of the consumer is $24, the optimal choice of the consumer will include ________. A) 1 quart of juice and 1 quart of milk B) 3 quarts of juice and 4 quarts of milk C) 4 quarts of juice and 4 quarts of milk D) 4 quarts of juice and 5 quarts of milk Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together The following table shows the marginal benefit that Marcus derives by consuming different quantities of hotdog and soda. The price of a hotdog is $3, and the price of a soda is $1. Quantity 1 2 3 4 5 6

Soda Marginal Benefits ($) 10 8 6 4 2 1

Hotdog Marginal Benefits ($) 18 12 6 3 1 0.6

21) Refer to the table above. What is the optimal combination of Soda and Hotdog for Marcus, if his weekly budget for hotdog and soda is $14? A) 2 sodas, and 4 hotdogs B) 3 sodas, and 3 hotdogs C) 6 sodas, and 5 hotdogs D) 5 sodas, and 3 hotdogs Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together 22) Refer to the table above. What is the optimal combination of Soda and Hotdog for Marcus, if his weekly budget for hotdog and soda is $10? A) 2 sodas, and 4 hotdogs B) 3 sodas, and 3 hotdogs C) 6 sodas, and 5 hotdogs D) 4 sodas, and 2 hotdogs Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together

23) Refer to the table above. The price of a soda increases from $1 to $2. What is the optimal combination of Soda and Hotdog for Marcus, if his weekly budget for hotdog and soda is $10? A) 2 sodas, and 2 hotdogs B) 3 sodas, and 3 hotdogs C) 6 sodas, and 5 hotdogs D) 4 sodas, and 2 hotdogs Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together 24) A change in the slope of a consumer's budget constraint indicates a change in the ________. A) price of either good purchased by the consumer B) consumer's income C) level of consumer satisfaction obtained from the consumption of both goods D) consumer's tastes and preferences Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Changes 25) Assume that an individual spends her income on sweaters and shirts. If the price of a sweater increases, ________. A) the opportunity cost of buying sweaters increases B) the total benefit obtained from the purchase of shirts decreases C) the opportunity cost of buying shirts increases D) the marginal benefit obtained from the purchase of an additional unit of sweater increases Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Price Changes 26) If the price of the good measured along the vertical axis increases without a change in the price of the good measured along the horizontal axis, a consumer's budget constraint ________. A) pivots rightward without a change in the intercept on the horizontal axis B) pivots leftward without a change in the intercept on the horizontal axis C) shifts to the right D) shifts to the left Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Changes

27) A decrease in the price of either good purchased by a consumer will cause the consumer's budget constraint to ________. A) pivot leftward B) pivot rightward C) shift leftward D) shift rightward Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Changes 28) If the quantity of tea is measured on the horizontal axis and the quantity of coffee is measured on the vertical axis, an increase in the price of coffee will cause a budget constraint to ________. A) pivot leftward along the vertical axis B) pivot rightward along the vertical axis C) pivot leftward along the horizontal axis D) pivot rightward along the horizontal axis Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Changes 29) Which of the following will lead to a change in the opportunity cost of buying a pen in terms of a pencil? A) An increase in the consumer's income B) A decrease in the consumer's income C) A twofold increase in the prices of both pens and pencils D) A twofold increase in the price of pens and a threefold increase in the price of pencils Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Changes 30) If the quantity of milk is measured on the horizontal axis and the quantity of juice is measured on the vertical axis, a decrease in the price of milk will cause a budget constraint to ________. A) pivot rightward along the vertical axis B) pivot rightward along the horizontal axis C) shift to the left D) shift to the right Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Changes 24 Copyright © 2022 Pearson Education Ltd.

The following figure shows a consumer's budget constraint for jeans and sweaters.

31) Refer to the figure above. Suppose B1 is the original budget constraint of a consumer. A change in the budget constraint from B1 to B2 indicates ________. A) an increase in the price of sweaters B) a decrease in the price of sweaters C) an increase in the consumer's income D) a decrease in the consumer's income. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Changes 32) Refer to the figure above. Suppose B2 is the original budget constraint of a consumer. A change in the budget constraint from B2 to B3 indicates ________. A) a decrease in the price of jeans B) a decrease in the price of sweaters C) an increase in the consumer's income D) a decrease in the consumer's income Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Income Changes

33) Refer to the figure above. Suppose the price of a sweater is $3. If the budget constraint of a consumer is B3, then her income will be equal to ________. A) $45 B) $90 C) $135 D) $270 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Income Changes 34) A consumer has $100 that she can spend on tables and chairs. If her income increases to $200 and the prices of tables and chairs remains unchanged, her budget constraint, with the quantity of chairs on the horizontal axis and the quantity of tables on the vertical axis, will ________. A) pivot inward along the vertical axis B) pivot outward along the horizontal axis C) shift to the left D) shift to the right Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Income Changes 35) Maia has $100 that she can spend on tables and chairs. If the chairs go on sale for 50% off, and the price of tables remains unchanged, her budget constraint, with the quantity of chairs on the horizontal axis and the quantity of tables on the vertical axis, will ________. A) pivot outward along the vertical axis B) pivot outward along the horizontal axis C) shift to the left D) shift to the right Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Changes; Income Changes 36) Maia has $100 that she can spend on tables and chairs. If the price of tables increases, and the price of chairs remains unchanged, her budget constraint, with the quantity of chairs on the horizontal axis and the quantity of tables on the vertical axis, will ________. A) pivot inward along the vertical axis B) pivot inward along the horizontal axis C) shift to the left D) shift to the right Answer: A Difficulty: Easy AACSB: Analytical Thinking 26 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Price Changes 37) Maia has $100 that she can spend on tables and chairs. If both the tables and chairs go on sale for 50% off, her budget constraint, with the quantity of chairs on the horizontal axis and the quantity of tables on the vertical axis, will ________. A) pivot outward along the vertical axis B) pivot outward along the horizontal axis C) shift to the left D) shift to the right Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Changes; Income Changes 38) Maia has $100 that she can spend on tables and chairs. If, due to the more intensive cleaning protocols stores are now required to engage in, the price of both tables and chairs increase by 25%, her budget constraint, with the quantity of chairs on the horizontal axis and the quantity of tables on the vertical axis, will ________. A) pivot outward along the vertical axis B) pivot outward along the horizontal axis C) shift to the left D) shift to the right Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Changes; Income Changes

39) On the graph below, the original budget constraint is represented by the solid line, whereas the new budget constraint is represented by a dashed line. Which of the following represents an increase in the price of pillows? A)

Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Changes

40) On the graph below, the original budget constraint is represented by the solid line, whereas the new budget constraint is represented by a dashed line. Which of the following represents a half-off sale on both pillows and blankets? A)

Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Changes; Income Changes 41) How does a decrease in the price of one good affect a consumer's budget constraint? How is the effect different from a decrease in the consumer's income? Answer: A decrease in the price of one good causes a consumer's budget constraint to pivot rightward along the axis that measures the quantity of the good in question. This is because the consumer can buy more units of a good when its price falls. The slope of the budget constraint also changes because the opportunity cost of purchasing a unit of a good changes when the price of the good falls. In the case of a decrease in the consumer's income, the budget constraint shifts to the left. The slope will not change, as the opportunity cost of purchasing a unit of a good does not change with a change in income. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Changes; Income Changes

42) Jack has an income of $150 per month that he can spend on two goods: shoes and jeans. From the following table, estimate the bundle that maximizes Jack's well-being. Quantity (units) 0 1 2 3 4 5 6

Shoes ($20/pair) Marginal Benefits ($) – 40 33 28 23 20 15

Jeans ($10/pair) Marginal Benefits ($) – 35 33 22 15 10 7.5

Answer: To estimate the bundle that maximizes Jack's well-being, the marginal benefit per dollar spent has to be calculated for both goods.

To maximize Jack's well-being, the marginal benefit per dollar spent must be equal for both goods. There are two combinations for which the marginal benefit per dollar spent on shoes is identical to that spent on jeans: 6 pairs of shoes and 6 pairs of jeans and 5 pairs of shoes and 5 pairs of jeans. If Jack buys 6 pairs of shoes and 6 pairs of jeans, his expenditure will be equal to (6 × $20) + (6 × $10) = $180, which exceeds his income. In contrast, if Jack buys 5 pairs of shoes and 5 pairs of jeans, his expenditure will be equal to (5 × $20) + (5 × $10) = $100 + $50 = $150, which exactly exhausts his income. Therefore, Jack should buy 5 pairs of shoes and 5 pairs of jeans to maximize his utility. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Putting It All Together

43) From the information provided in the following table, determine the optimal bundle that a consumer with an income of $34 must choose to maximize her well-being. Quantity 0 1 2 3 4 5 6 7 8

Pen(s) ($2/unit) Total Benefits ($) – 10 18 25 31 36 40 43 44

Notebook(s) ($4/unit) Total Benefits ($) – 19 38 52 60 66 70 72 73

Answer: To estimate the optimal bundle for the consumer, the marginal benefit per dollar spent on pens and notebooks must be equal across the two goods. This optimal bundle should completely exhaust the consumer's income.

There are four bundles for which the marginal benefit per dollar spent on each good across the two goods is equal. These are the following: i) 3 pens and 3 notepads. ii) 6 pens and 4 notepads. iii) 7 pens and 5 notepads. iv) 8 pens and 7 notepads. Out of all the bundles that equalize marginal benefit per dollar spent across the two goods, if the consumer purchases the bundle that consists of 7 pens and 5 notepads, her expenditure will be equal to (7 × $2) + (5 × $4) = $34, which is equal to her income. Hence, the optimal bundle that maximizes the consumer's well-being consists of 7 pens and 5 notepads. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Putting It All Together 5.3 From the Buyer's Problem to the Demand Curve 1) Willingness to pay ________. A) is the lowest price that a buyer is willing and able to pay for a unit of good B) is the highest price that a buyer is willing and able to pay for a unit of good C) is equal to the price of the lowest-priced good in a consumption bundle D) is equal to the price of the highest-priced good in a consumption bundle Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Buyer's Problem to the Demand Curve 34 Copyright © 2022 Pearson Education Ltd.

2) As the ________ increases, ________. A) quantity demanded of a good; its price increases B) quantity demanded of a good; its price decreases C) price of a good; its quantity demanded increases D) price of a good; its quantity demanded decreases Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Buyer's Problem to the Demand Curve 3) Lily wants to maximize her benefit of consuming apples and bananas, given her fixed budget of $10 for these two fruits. The price of an apple is $1, and the price of a banana is $0.50. In order to derive Lily's demand curve for bananas, we need to ________. A) solve the buyer's problem for her once, and find the optimal number of bananas, when price of a bananas is $0.50 B) solve the buyer's problem for her multiple times and find the optimal number of bananas, when price of a bananas is at a different level each time C) draw a downward sloping line with slope of -1 D) draw a downward sloping line with slope of -2 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Buyer's Problem to the Demand Curve

Scenario: Maylin is shopping at the sporting goods store for socks and running shoes. She has determined the following total benefit derived from each quantity of socks and running shoe.

Pairs Total Marginal Price of Benefit, Benefit, of MB/ Socks Socks Socks Socks Price 0 0 NA $10 NA 1 100 $10 2 190 $10 3 270 $10 4 340 $10 5 400 $10 6 450 $10 7 490 $10 8 520 $10 9 540 $10 10 550 $10

Total Marginal Benefit, Benefit, Price of Running Running Running Running MB/ Shorts Shorts Shorts Shorts Price 0 0 NA $10 NA 1 200 $10 2 380 $10 3 540 $10 4 680 $10 5 800 $10 6 900 $10 7 980 $10 8 1040 $10 9 1080 $10 20 1100 $10

4) If Maylin has $150 of income to spend on socks and running shorts, socks cost $10 per pair and running shorts are $10 each, what consumption bundle maximizes Maylin's total benefit? A) 1 pair of socks and 6 running shorts B) 3 pairs of socks and 7 running shorts C) 5 pairs of socks and 8 running shorts D) 6 pairs of socks and 9 running shorts Answer: D Explanation: (see table below)

Pairs Total of Benefit, Socks Socks 0 0 1 100 2 190 3 270 4 340 5 400 6 450 7 490 8 520 9 540 10 550

Marginal Benefit, Socks NA 100 90 80 70 60 50 40 30 20 10

Total Marginal Price Benefit, Benefit, of MB/ Running Running Running Socks Price Shorts Shorts Shorts $10 NA 0 0 NA $10 10 1 200 200 $10 9 2 380 180 $10 8 3 540 160 $10 7 4 680 140 $10 6 5 800 120 $10 5 6 900 100 $10 4 7 980 80 $10 3 8 1040 60 $10 2 9 1080 50 $10 1 20 1100 40

Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Deriving the Demand Curve\Consumer Choice

Price of Running Shorts $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10

MB/ Price NA 20 18 16 14 12 10 8 6 5 4

5) Now suppose the price of running shorts doubles to $20, socks remain priced at $10 per pair, and Maylin has $150 of income. What consumption bundle maximizes Maylin's total benefit at the new, higher price of running shorts? A) 5 pairs of socks and 5 running shorts B) 4 pairs of socks and 4 running shorts C) 3 pairs of socks and 3 running shorts D) 2 pairs of socks and 2 running shorts Answer: A Explanation: (see table below)

Pairs Total of Benefit, Socks Socks 0 0 1 100 2 190 3 270 4 340 5 400 6 450 7 490 8 520 9 540 10 550

Marginal Benefit, Socks NA 100 90 80 70 60 50 40 30 20 10

Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Deriving the Demand Curve\Consumer Choice

Price of Running Shorts $20 $20 $20 $20 $20 $20 $20 $20 $20 $20 $20

MB/ Price NA 10 9 8 7 6 5 4 3 2.5 2

6) Given your answers to Questions 1) and 2) above, sketch Maylin's demand curve for running shorts in the graph below, assuming her demand curve is linear.

Answer: A downward sloping straight line through the two points 9 running shorts at $10/short and 5 running shorts at $20/short. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Deriving the Demand Curve\Consumer Choice

Scenario: Maura is at the drug store buying floss and soap. She has determined the following total benefit derived from each quantity of floss and soap. Total Marginal Price Benefit, Benefit, of MB/ Floss Floss Floss Floss Price 0 0 NA $2 NA 1 60 $2 2 110 $2 3 150 $2 4 180 $2 5 200 $2 6 215 $2 7 225 $2 8 230 $2

Soap 0 1 2 3 4 5 6 7 8

Total Marginal Price of Benefit, Benefit, Running MB/ Soap Soap Soap Price 0 NA $1 NA 60 $1 110 $1 150 $1 180 $1 200 $1 215 $1 225 $1 230 $1

7) Use the scenario above to answer the following question. If Maura has $11 of income to spend on floss and soap, floss costs $2 per roll and soap costs $1 per bar, what consumption bundle maximizes Maura's total benefit? A) 2 rolls of floss and 7 bars of soap B) 3 rolls of floss and 6 bars of soap C) 4 rolls of floss and 3 bars of soap D) 5 rolls of floss and 7 bars of soap Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Deriving the Demand Curve\Consumer Choice 8) Use the scenario above to answer the following question. If Maura has $15 of income to spend on floss and soap, floss cost $2 per roll and soap costs $1 per bar, what consumption bundle maximizes Maura's total benefit? A) 5 rolls of floss and 6 bars of soap B) 4 rolls of floss and 7 bars of soap C) 4 rolls of floss and 6 bars of soap D) 5 rolls of floss and 7 bars of soap Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Deriving the Demand Curve\Consumer Choice

9) Use the scenario above to answer the following question. Now suppose Maura has $11 of income, and the price of floss falls to $1. What consumption bundle maximizes Maura's total benefit? A) 4 rolls of floss and 7 bars of soap B) 5 rolls of floss and 6 bars of soap C) 6 rolls of floss and 6 bars of soap D) 5 rolls of floss and 7 bars of soap Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Deriving the Demand Curve\Consumer Choice

10) Based on the chart in the scenario above, which of the following shows two points on Maura's demand curve for floss assuming she has $11 to spend? A)

Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Deriving the Demand Curve\Consumer Choice

11) Based on the chart from the scenario above, which of the following shows two points on Maura's demand curve for soap assuming she has $11 to spend? A)

Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Deriving the Demand Curve\Consumer Choice 5.4 Consumer Surplus 1) Consumer surplus is ________. A) the difference between the willingness to pay for a good and the price paid for the good B) the sum of the willingness to pay for a good and the price paid for the good C) the product of the willingness to pay for a good and the price paid for the good D) the ratio of the willingness to pay for a good to the price paid for the good Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Consumer Surplus 2) John is ready to pay $5 for an extra loaf of bread. Because of an ongoing discount in the grocery store, he gets a loaf for $2. After the discount, John's consumer surplus from the purchase is ________. A) $2 B) $2.50 C) $3 D) $10 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus

3) Willingness to pay is the ________ for a unit of good. For a trade to take place, the willingness to pay must be ________. A) lowest price that a buyer is willing to pay; lower than the price of the good B) lowest price that a buyer is willing to pay; higher than the price of the good C) highest price that a buyer is willing to pay; lower than the price of the good D) highest price that a buyer is willing to pay; higher than the price of the good Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus 4) For an individual, consumer surplus measures ________. A) willingness to pay B) the price paid for the good C) willingness to pay less the price paid for the good D) willingness to pay plus the price paid for the good Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Consumer Surplus

5) Sam has determined that his demand for the new energy drink Brawndo is characterized by the following schedule:

If the market price of Brawndo is $4 per can, Sam's total willingness to pay for the 6 cans he purchases is ________. A) $42 B) $39 C) $18 D) $15 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Surplus 6) Using Sam's demand schedule for Brawndo above and the market price of $4 per can, Sam's total consumer surplus from purchasing 6 cans at the market price is ________. A) $39 B) $24 C) $18 D) $15 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Surplus

7) The weekly quantity demanded of frozen pizzas in Decorah, IA as a function of price is shown in the graph below. The market price of frozen pizzas is $10, and at that price 600 pizzas are sold. Consumer surplus in this market is ________.

A) $10,500 B) $9,000 C) $6,000 D) $4,500 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Surplus

8) Now suppose the demand curve remains constant but the market price of frozen pizzas in Decorah, IA increases to $14 per pizza. The loss in consumer surplus in this market due to the $4 increase in the price of frozen pizza is ________.

A) $4,840 B) $2,080 C) $1,760 D) $320 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Surplus

9) Which of the following statements correctly differentiates between consumer surplus and net benefits? A) Consumer surplus at different levels of consumption can be calculated mathematically, whereas net benefits at different levels of consumption cannot be estimated. B) Consumer surplus at different levels of consumption cannot be estimated, whereas net benefits at different levels of consumption can be calculated mathematically. C) Consumer surplus measures the difference between the willingness to pay for a good and the price paid for the good, whereas net benefits measure the overall satisfaction gained from the consumption of a good. D) Consumer surplus measures the overall satisfaction gained from the consumption of a good, whereas net benefits measure the difference between the willingness to pay for a good and the price paid for the good. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Consumer Surplus 10) If the price of a good increases, ________. A) the budget constraint shifts to the right B) the budget constraint shifts to the left C) consumer surplus increases D) consumer surplus decreases Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Consumer Surplus

The following table shows the benefit that Evan derives from consuming pizza. The price of a slice of pizza is $4. Slice 0 1 2 3 4 5

Total Benefit 0 10 18 24 27 28

11) Refer to the table above. If Evan eats 2 slices of pizza, how much consumer surplus does get? A) $18 B) $22 C) $6 D) $10 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus 12) Refer to the table above. The optimal number of slices of pizza for Evan is ________, and he will get ________ in consumer surplus from it. A) 4; $15 B) 3; $12 C) 1; $8 D) 2; $10 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus

The following figure illustrates the market demand curve for wine.

13) Refer to the figure above. What is the market-wide consumer surplus when the market price of wine is $9 per bottle? A) $180,000 B) $90,000 C) $60,000 D) $210,000 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus 14) Refer to the figure above. What is the market-wide consumer surplus when the market price of wine is $18 per bottle? A) $36,000 B) $3,000 C) $45,000 D) $210,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus

15) Refer to the figure above. What is the loss in the market-wide consumer surplus when the price of wine changes from $9 per bottle to $18 per bottle? A) $144,000 B) $30,000 C) $57,000 D) $0 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: An Empty Feeling: Loss in Consumer Surplus When Price Increases The following figure shows the market demand curve for calculators.

16) Refer to the figure above. What is the market-wide consumer surplus when the market price of calculators is $6 per unit? A) $20 B) $35 C) $50 D) $70 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus

17) Refer to the figure above. What is the market-wide consumer surplus when the market price of calculators is $3 per unit? A) $600 B) $725 C) $1,000 D) $1,120 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus 18) Refer to the figure above. What is the gain in the market-wide consumer surplus when the price of calculators changes from $6 per unit to $3 per unit? A) $565 B) $580 C) $950 D) $1,050 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus The following table shows the marginal benefit that Marcus derives by consuming different quantities of hotdog and soda. The price of a hotdog is $3, and the price of a soda is $1. Quantity 1 2 3 4 5 6

Soda Marginal Benefits ($) 10 8 6 4 2 1

Hotdog Marginal Benefits ($) 18 12 6 3 1 0.6

19) Refer to the table above. If Marcus consumes 3 hotdogs and 0 sodas -not necessarily his optimal choice- how much consumer surplus is he enjoying? A) $27 B) $9 C) $6 D) $24 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus

20) Refer to the table above. If Marcus consumes 2 hotdogs and 2 sodas, not necessarily his optimal choice, how much consumer surplus is he enjoying? A) $43 B) $49 C) $8 D) $24 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus 21) Refer to the table above. What is the maximum amount of consumer surplus that Marcus can get, if he has $14 budget to spend on these two goods? A) $52 B) $40 C) $8 D) $14 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Consumer Surplus The market for running shoes can be represented by the following equations: QD = 2000 10P and QS = 10P - 80. 22) What is consumer surplus if this market is in equilibrium? A) $46080 B) $92160 C) $54080 D) $910080 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Consumer Surplus 23) What is consumer surplus if the price of running shoes is $110? A) $40500 B) $81000 C) $45900 D) $52020 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Consumer Surplus

The figure below shows the domestic supply and demand of a product in the United States.

24) What is the consumer surplus in this market at the equilibrium price? A) $160 B) $320 C) $810 D) $720 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Surplus 25) If the price rose fro $10 to $12, what would happen to consumer surplus? A) It would decrease by $70. B) It would decrease by $90. C) It would increase by $140. D) It would increase by $90. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Surplus

Jacinda, Emmanuel, Angela, Hillary, and Barack each want to buy a set of outfits in the popular mobile game, Among Us. The table below indicates their willingness to pay for this set of outfits. Assume they will each only purchase a maximum of one set. Willingness to Pay Jacinda $4.10 Emmanuel $3.15 Angela $3.05 Hillary $3.30 Barack $2.85 26) What is their consumer surplus if the price of a set of outfits is $3.15? A) $1.10 B) $2.05 C) $1.00 D) $0.90 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Surplus 27) What is their consumer surplus if the price of a set of outfits is $3.00? A) $1.60 B) $1.55 C) $1.10 D) $0.50 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Surplus

The figure above shows the demand curve for succulent starts at the Zen Succulent. 28) If the price of a succulent start is $4, what is consumer surplus? A) $80 B) $160 C) $40 D) $320 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus 29) If the price of a succulent start is $6, what is consumer surplus? A) $20 B) $180 C) $40 D) $80 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus 30) If the price of a succulent start falls from $4 to $3, what happens to consumer surplus? A) Consumer surplus falls by $45. B) Consumer surplus rises by $45. C) Consumer surplus falls by $80. D) Consumer surplus riss by $125. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus

31) a) Define the term "consumer surplus." If your willingness to pay for a good is $500 and you get it at a discounted price of $275, what is your consumer surplus? b) In the following figure, calculate the consumer surplus when the market price is $20.

Answer: a) Consumer surplus is the difference between the willingness to pay for a given unit of a good and the price paid for that unit of the good. If a consumer is willing to pay $500 for a good and it is available for $275, consumer surplus is $500 − $275 or $225. b) Graphically, consumer surplus is the area of the triangle below the market demand curve and above the market price. In the figure, consumer surplus = 1/2 × 75 × (45 − 20) = $937.50. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus

32) The following figure illustrates the market demand curve for cell phones. If the market price of cell phones is $50, what will be the market-wide consumer surplus? If the government decides to fix the price of cell phones at $80, what will be the change in consumer surplus?

Answer: Consumer surplus refers to the difference between consumers' willingness to pay for a good and the market price of the good. Hence, the market-wide consumer surplus is equal to the area of the triangle below the market demand curve for a good and above the market price of the good. From the figure, it is observed that at a market price of $50, the quantity demanded is 2,000 units. Market-wide consumer surplus = 1/2 × 2,000 × $(110 − 50) = 1/2 × 2,000 × $60 = $60,000. Any increase in the price of a good leads to a loss in consumer surplus. After the government decides to fix the price of cell phones at $80, the market-wide consumer surplus = 1/2 × 1,000 × $(110 − 80) = 1/2 × 1,000 × $30 = $15,000. Hence, if the government decides to fix the price of cell phones at $80, it will lead to a loss of $45,000 in the market-wide consumer surplus. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: An Empty Feeling: Loss in Consumer Surplus When Price Increases 5.5 Demand Elasticities 1) Elasticity is ________. A) the sum of the percentage changes in two variables B) the difference between the percentage changes in two variables C) the product of the percentage changes in two variables D) the ratio of the percentage changes in two variables Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Demand Elasticities

2) Which of the following is the best example of the Law of Demand? A) When Alex received a pay hike, his consumption of all goods increased. B) When the price of gasoline increased, the demand for cars fell. C) When the price of Nokia phones increased, the demand for Samsung phones increased. D) When the price of tea increased, the quantity demanded of tea decreased. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Price Elasticity of Demand 3) The percentage change in the quantity demanded of a good due to a percentage change in its price is referred to as ________. A) the cross-price elasticity of demand B) the price elasticity of demand C) the income elasticity of demand D) consumer surplus Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Price Elasticity of Demand 4) The negative value of the price elasticity of demand for a good can be attributed to ________. A) the Law of Demand B) the Law of Supply C) the Law of Increasing Marginal Utility D) the Law of Diminishing Marginal Rate of Substitution Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Price Elasticity of Demand 5) The demand for a good is relatively elastic if the responsiveness of consumers to a change in the price of ________. A) the good is high B) the good is low C) a related good is low D) a related good is high Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Price Elasticity of Demand

6) The demand for a good is elastic. This means that if there is a 10% change in price of this good, ________. A) the quantity demanded will change more than 10% B) the quantity demanded will change less than 10% C) the quantity demanded will change 10% as well D) the quantity demanded will not change at all Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Price Elasticity of Demand 7) Consider the following demand curve. Which statement is TRUE?

A) The price elasticity of demand is larger in point A, compared to point B. B) The price elasticity of demand is smaller in point A, compared to point B. C) The price elasticity of demand is in point A and point B are equal. D) The price elasticity of demand is positive in point A, but negative in point B. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Price Elasticity of Demand

8) The demand curves for good A and B are depicted in the following graph. We can conclude that ________.

A) the price elasticity of demand for good A is smaller than good B B) the price elasticity of demand for good A is larger than good B C) good A is perfectly elastic D) good A is perfectly inelastic Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Price Elasticity of Demand 9) The Law of Demand explains why ________. A) the price elasticity of demand has a positive value B) the income elasticity of demand has a positive value C) the price elasticity of demand has a negative value D) the income elasticity of demand has a negative value Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Price Elasticity of Demand 10) Ryan buys 4 pairs of jeans when the price is $25. He buys 3 pairs when the price increases to $50. Ryan's percentage change in quantity demanded is ________, when the price increase by ________ percent, and thus his price elasticity of demand is ________. A) -25%; + 100%; -0.25 B) -25%; + 100%; -4 C) +25%; - 100%; -4 D) -15%; + 75%; -0.25 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Price Elasticity of Demand

11) Which of the following formulas is used to calculate the "point" elasticity of demand? A) Point elasticity of demand = [(Q2 − Q1)/(Q2)]/[(P2 − P1)/(P2)] B) Point elasticity of demand = [(Q2 + Q1)/(Q2/2)]/[(P2 + P1)/(P2/2)] C) Point elasticity of demand = [(Q2 − Q1)/(Q2 + Q1)/2]/[(P2 − P1)/(P2 + P1)/2] D) Point elasticity of demand = [(Q1 − Q2)/(Q2 + Q1)]/[(P1 − P2)/(P2 + P1)] Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Price Elasticity of Demand 12) Which of the following formulas is used to calculate the arc elasticity of demand? A) Arc elasticity of demand = [(Q2 − Q1)/(Q2/2)]/[(P2 − P1)/(P2/2)] B) Arc elasticity of demand = [(Q2 + Q1)/(Q2/2)]/[(P2 + P1)/(P2/2)] C) Arc elasticity of demand = [(Q2 − Q1)/(Q2 + Q1)/2]/[(P2 − P1)/(P2 + P1)/2] D) Arc elasticity of demand = [(Q1 − Q2)/(Q2 + Q1)]/[(P1 − P2)/(P2 + P1)] Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Moving Up and Down the Demand Curve 13) When the price of milk is $3 per bottle, Steve consumes 20 bottles of milk. When the price increases to $6, Steve's consumption falls to 15 bottles. Therefore, Steve's arc elasticity of demand for milk is ________. A) −0.25 B) −0.43 C) −0.50 D) −0.75 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Moving Up and Down the Demand Curve 14) When the price of a bar of chocolate is $2, Sharon consumes 10 chocolates. If her arc elasticity of demand for chocolates is −1, how many bars of chocolates will she consume when the price increases to $4? A) 5 B) 6 C) 8 D) 9 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Moving Up and Down the Demand Curve

Scenario: When the price of wine is $10 per bottle, Thomas purchases 30 bottles of wine per month. Suppose the government levies a 50 percent tax on all alcoholic beverages. The burden of this tax is to be completely borne by the consumers. This reduces Thomas's consumption to 20 bottles of wine per month. 15) Refer to the scenario above. Thomas's arc elasticity of demand for wine is ________. A) −0.33 B) −0.67 C) −0.25 D) −1 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Moving Up and Down the Demand Curve 16) Refer to the scenario above. After the implementation of the tax, Thomas's expenditure on wine will ________. A) remain the same B) increase by $50 C) decrease by $50 D) increase by $100 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Price Elasticity of Demand

The following figure illustrates the market demand curve for solar-powered lights.

17) Refer to the figure above. What is the absolute value of the arc elasticity of demand for solarpowered lights when their price falls from $8 to $4? A) 2 B) 4 C) 8 D) 10 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Moving Up and Down the Demand Curve 18) Refer to the figure above. What is the absolute value of the arc elasticity of demand for solarpowered lights when their price decreases from $5 to $2? A) 0.64 B) 1.25 C) 1.75 D) 2.00 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Moving Up and Down the Demand Curve 19) Refer to the figure above. What is the absolute value of the arc elasticity of demand for solarpowered lights when their price increases from $6 to $8? A) 1.25 B) 2.75 C) 3.50 D) 4.00 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Moving Up and Down the Demand Curve 66 Copyright © 2022 Pearson Education Ltd.

20) When the price of a cookie is $4, Gary purchases 50 cookies. When the price of a cookie increases to $6, he purchases 20 cookies. Given the information, what is the absolute value of Gary's arc elasticity of demand for cookies? A) 1.2 B) 2.14 C) 3.26 D) 5 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Moving Up and Down the Demand Curve 21) Gabriel's demand for chocolate bars is inelastic. If the price of chocolate bars increases, he will ________. A) spend the same amount of money on chocolate as before B) spend less amount of money on chocolate than before C) spend more amount of money on chocolate than before D) buy the same number of chocolate bars as before Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Elasticity of Demand 22) Sofia is selling homemade cakes. The demand for homemade cakes is elastic. If Sofia reduces the price of her cakes, ________. A) her revenue will increase B) her revenue will decrease C) her revenue will not change D) she will not make any revenue Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price Elasticity of Demand 23) Madeline spends exactly $10 on coffee each week. The absolute value of her price elasticity of demand for coffee is likely to be ________. A) less than 1 B) more than 1 C) more than 1 but less than 3 D) equal to 1 Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Elasticity of Demand

24) When the price of one burger is $4, Kate consumes 2 burgers. When the price of one burger decreases to $2, she consumes 4 burgers. Given the information, what is the absolute value of Kate's arc elasticity of demand for burgers? A) 1.2 B) 1.0 C) 4 D) 5 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Moving Up and Down the Demand Curve 25) A good is said to have a relatively elastic demand if the value of the price elasticity of demand for the good is ________. A) equal to 0 B) between 0 and 0.5 C) between 0.5 and 1 D) greater than 1 Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Elasticity Measures 26) A perfectly elastic demand curve ________. A) is parallel to the price axis B) is parallel to the quantity axis C) slopes upward D) slopes downward Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Elasticity Measures 27) If a 10 percent increase in the price of a good causes a 10 percent decrease in the quantity demanded of the good, the good has an elasticity of demand equal to ________. A) zero B) infinity C) one D) two Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Elasticity Measures

28) If a good has a price elasticity of demand equal to 0, ________. A) the percentage change in the quantity demanded of the good will be greater than the percentage change in its price B) the demand curve for the good will be upward-sloping C) the smallest increase in its price will cause consumers to stop consuming it completely D) the quantity demanded of the good will be completely unaffected by a change in its price Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Elasticity Measures 29) If the value of the price elasticity of demand for a good is equal to infinity, the good has a ________ demand. A) perfectly elastic B) perfectly inelastic C) unit elastic D) relatively inelastic Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Elasticity Measures 30) Sandra consumes two goods: tea and coffee. Her demand for tea is inelastic, while her demand for coffee is elastic. If there is an increase in the price of both tea and coffee, ________. A) Sandra's expenditure on both tea and coffee will increase B) Sandra's expenditure on both tea and coffee will decrease C) Sandra's expenditure on tea will increase and her expenditure on coffee will decrease D) Sandra's expenditure on coffee will increase and her expenditure on tea will decrease Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Elasticity Measures 31) Which of the following is TRUE of a good with a perfectly elastic demand? A) For a given price change, the percentage change in quantity demanded of the good will be less than the percentage change in price. B) The demand curve for the good initially slopes upward, reaches its maximum, and then slopes downward. C) Even the smallest increase in the price of the good will cause consumers to stop consuming it completely. D) The quantity demanded of the good is completely unaffected by a price change. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Elasticity Measures 69 Copyright © 2022 Pearson Education Ltd.

32) In case of a downward-sloping, linear demand curve, the price elasticity of demand for a good ________. A) is zero between any two points on the curve B) is one between any two points on the curve C) is different at different points on the curve D) is equal to the slope between different points on the demand curve Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Elasticity Measures 33) At the midpoint of a downward-sloping, linear demand curve for a good, the price elasticity of demand for the good is ________. A) equal to zero B) between zero and one C) equal to one D) greater than one Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Elasticity Measures 34) At all points below the midpoint of a downward-sloping, linear demand curve for a good, the value of the price elasticity of demand for the good is ________. A) equal to infinity B) greater than one, but less than infinity C) less than one D) equal to one Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Elasticity Measures 35) At all points above the midpoint of a downward-sloping, linear demand curve for a good, the value of the price elasticity of demand for the good is ________. A) equal to one B) equal to zero C) greater than one D) less than one, but greater than zero Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Elasticity Measures

36) Which of the following statements correctly differentiates between the slope of a demand curve and the price elasticity of demand along a linear demand curve? A) The price elasticity of demand for a good is the same at different points on the demand curve, whereas the slope of the demand curve varies depending on the point where it is measured. B) The price elasticity of demand for a good varies along the demand curve, whereas the slope of the demand curve remains the same at different points on the curve. C) The price elasticity of demand is a unit-free measure, whereas the slope of a demand curve is measured in dollars. D) The price elasticity of demand is measured in dollars, whereas the slope of a demand curve is a unit-free measure. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Elasticity Measures 37) Which of the following is TRUE of a good that has a price elasticity of demand of −3? A) If the income of a consumer increases by 3 percent, the quantity demanded of the good will increase by 1 percent. B) If the income of a consumer increases by 1 percent, the quantity demanded of the good will increase by 3 percent. C) If the price of the good increases by 1 percent, the quantity demanded of the good will decrease by 3 percent. D) If the price of the good increases by 3 percent, the quantity demanded of the good will increase by 1 percent. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Elasticity Measures

38) a) Classify and draw the demand curves for two goods with the following price elasticities of demand: i) Price elasticity of demand = ∞ ii) Price elasticity of demand = 0 b) Consider two goods: A and B. Good A has many close substitutes, while Good B has only a few. An individual spends an equal amount of his budget on both goods. Given this information, which of the two goods will have a higher price elasticity of demand? c) Consider two goods: A and B. Both goods have the same number of substitutes, but consumers spend a higher proportion of their income on Good A than on Good B. Given this information, which of the two goods will have a higher price elasticity of demand? Answer: a) Based on the magnitude of the price elasticity of demand, the classifications of demand for these goods are given below: i) When the price elasticity of demand for a good is infinite, its demand is perfectly elastic. When the demand is perfectly elastic, even the smallest increase in price causes consumers to stop consuming the good altogether.

ii) When the price elasticity of demand for a good is zero, its demand is perfectly inelastic. The quantity demanded of such goods is completely unaffected by price changes.

b) Generally, when the number of close substitutes for a good increases, the price elasticity of demand for the good increases. Hence, given the information, Good A is likely to have a higher price elasticity of demand than Good B. c) Generally, as an individual spends more of her budget on a particular good, the price elasticity of demand for the good increases. Hence, given the information, Good A is likely to have a higher price elasticity of demand than Good B. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Elasticity Measures 39) a) Gary is a heavy smoker who spends $400 per week on cigarettes. The government decides to levy a 20 percent tax on all cigarettes. The burden of this tax will be completely borne by consumers. After the tax is levied, Gary's expenditure on cigarettes increases to $432 per week. If each pack of cigarettes sells for $20, calculate Gary's price elasticity of demand for cigarettes and comment on the elasticity of demand for addictive goods. b) If the demand for a good has an absolute price elasticity greater than one, what will happen to the total expenditure on the good if its price increases? c) If the demand for a good has an absolute price elasticity equal to one, what will happen to the total expenditure on the good if its price increases? Answer: a) Initially when the price of cigarettes is $20 per pack, Gary's consumption of cigarettes is 20 packs every week. The price per pack after the tax is levied is $24. Gary's consumption of cigarettes after the tax is levied = ($432/$24) = 18 packs. Gary's price elasticity of demand for cigarettes = [(18 − 20)/(18 + 20)/2]/[(24 − 20)/(24 + 20)/2] = −0.58. Given the information, the demand for addictive goods is relatively inelastic. b) If the absolute value of the price elasticity of demand for a good is greater than one, then an increase in the price of the good will result in a decrease in the total expenditure on the good. c) If the absolute value of the price elasticity of demand for a good is equal to one, then an increase in the price of the good will not affect the total expenditure on the good. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Elasticity Measures 40) Which of the following goods is likely to have the highest price elasticity of demand? A) Salt B) Gasoline C) Life-saving drugs D) Ketchup Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Determinants of the Price Elasticity of Demand

41) Which of the following goods is likely to have the lowest price elasticity of demand? A) Life-saving drugs B) Olive oil C) Chocolates D) Decorative flowers Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Determinants of the Price Elasticity of Demand 42) The demand for a good that is a necessity is likely to be ________. A) unit elastic B) perfectly elastic C) relatively elastic, but not perfectly elastic D) inelastic Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Determinants of the Price Elasticity of Demand 43) As the number of substitutes available for a good increases, the price elasticity of demand for the good ________. A) initially increases and then decreases B) initially decreases and then increases C) decreases D) increases Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of the Price Elasticity of Demand 44) What are the determinants of the price elasticity of demand? Answer: There are three important determinants of the price elasticity of demand. These are the following: i) Closeness of substitutes: As the number of available substitutes for a good increases, the price elasticity of demand for the good increases. ii) The budget share spent on the good: As a consumer spends more of her budget on a particular good, the good's price elasticity of demand increases. iii) Available time to adjust: The price elasticity of demand is lower for a good in the short run than in the long run. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of the Price Elasticity of Demand

45) Greenaqua Corp. is the only supplier of bottled drinking water in Lithasia. Its positive economic profits in the short run attract new companies to the market. If new companies producing their own line of bottled drinking water enter the market, which of the following statements is likely to be TRUE? A) The profits Greenaqua Corp. earn on their line of bottled drinking water is likely to increase. B) The price elasticity of demand for Greenaqua Corp.'s bottled drinking water is likely to increase. C) The price elasticity of demand for Greenaqua Corp.'s bottled drinking water is likely to decrease. D) The price elasticity of demand for Greenaqua Corp.'s bottled drinking water is likely to remain the same. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Determinants of the Price Elasticity of Demand 46) When a consumer spends a larger share of her income on a particular good, the price elasticity of demand for that good ________. A) increases B) decreases C) initially decreases and then increases D) remains the same Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of the Price Elasticity of Demand 47) Which of the following statements is TRUE of the price elasticity of demand? A) As the number of substitutes for a good increases, the price elasticity of demand for that good decreases. B) If a consumer's budget share of a good increases, the price elasticity of demand for that good is likely to decrease. C) The price elasticity of demand for a good is generally higher in the long run than in the short run. D) If the price elasticity of demand for a good equals zero, the demand for the good is likely to be highly responsive to price changes. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of the Price Elasticity of Demand

48) The cross-price elasticity of demand for a good is the ________. A) percentage change in the quantity demanded of the good due to a percentage change in consumer's income B) percentage change in the quantity demanded of the good due to a percentage change in the good's price C) percentage change in the quantity demanded of the good due to a percentage change in tax rates D) percentage change in the quantity demanded of the good due to a percentage change in the prices of related goods Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cross-Price Elasticity of Demand 49) Which of the following statements is TRUE of the cross-price elasticity of demand? A) The cross-price elasticity of demand between substitutes is zero. B) The cross-price elasticity of demand between complements is zero. C) The cross-price elasticity of demand between substitutes is negative. D) The cross-price elasticity of demand between complements is negative. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cross-Price Elasticity of Demand 50) Which of the following pairs of goods is likely to have a negative cross-price elasticity? A) Pens and paper notebooks B) Nokia and Samsung cell phones C) Compact discs (CDs) and electronic music files D) Motorcycles and typewriters Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cross-Price Elasticity of Demand 51) Which of the following pairs of goods is most likely to have a positive cross-price elasticity? A) Printers and ink cartridges B) A privately-owned car and public transportation C) Coffee and sugar D) Motorcycles and typewriters Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cross-Price Elasticity of Demand

52) Holly spends exactly $50 on coffee each month. The price of tea decrease, while the price of coffee remains the same. Holly's cross price elasticity of demand of coffee with respect to tea is ________. A) 0 B) positive C) negative D) between 1 and 2 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Cross-Price Elasticity of Demand 53) When the price of margarine is $2 per pound, 10 pounds of butter are demanded. When the price of margarine increases to $6 per pound, 30 pounds of butter are demanded. What is the cross-price elasticity between the two goods? A) −1 B) 1 C) 2 D) 5 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cross-Price Elasticity of Demand 54) When the price of one pen is $1, the number of notebooks demanded is 50. When the price per pen increases to $5, the number of notebooks demanded decreases to 30. What is the crossprice elasticity of demand between the two goods using the arc elasticity method? A) 0.1 B) −0.375 C) 3 D) −3 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cross-Price Elasticity of Demand

55) Which of the following statements correctly identifies the difference between the cross-price elasticity of demand and the income elasticity of demand? A) The income elasticity of demand has only positive values, whereas the cross-price elasticity of demand can have both positive and negative values. B) The cross-price elasticity of demand has only negative values, whereas the income-elasticity of demand can have both positive and negative values. C) The income elasticity of demand for a good is independent of the price changes of related goods, whereas the cross-price elasticity of demand for a good is independent of the income changes of the consumer. D) The income elasticity of demand for a good is zero for normal goods, whereas the cross-price elasticity of demand for a good is always positive for normal goods. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cross-Price Elasticity of Demand; The Income Elasticity of Demand 56) Suppose the government imposes a tax on Good X. In order to estimate the effect of the tax on the quantity demanded Good Y, a related good, we can use the concept of ________. A) the price elasticity of demand B) deadweight loss C) the cross-price elasticity of demand D) the budget constraint Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Cross-Price Elasticity of Demand 57) The ________ measures the change in the quantity demanded of a good due to a percentage change in consumers' income. A) substitution effect of a price change B) income effect of a price change C) cross-price elasticity of demand D) income elasticity of demand Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Income Elasticity of Demand 58) Which of the following statements is TRUE about the income elasticity of demand? A) The income elasticity of demand for normal goods is always zero. B) The income elasticity of demand for inferior goods is always zero. C) The income elasticity of demand for normal goods is always positive. D) The income elasticity of demand for inferior goods is always positive. Answer: C Difficulty: Easy AACSB: Analytical Thinking 78 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Income Elasticity of Demand 59) Which of the following statements best describes a normal good? A) A normal good is a good that is rationed by the government. B) A normal good is a good that is readily available in the market. C) A normal good is a good whose supply increases with a decrease in its price. D) A normal good is a good whose demand increases with an increase in consumers' income. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Income Elasticity of Demand 60) Which of the following statements best describes an inferior good? A) An inferior good is a good whose quantity supplied always exceeds its quantity demanded. B) An inferior good is a good whose demand decreases with an increase in consumers' income. C) An inferior good is a good that is sold at a subsidized price. D) An inferior good is a good that is rationed by the government. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Income Elasticity of Demand 61) Kate's income is increased by 25%. Her quantity demanded of restaurant meals increases from 10 to 12. Restaurant meals are considered ________ for Kate. A) luxury good B) normal good C) inferior good D) inelastic good Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Income Elasticity of Demand 62) Luxury goods have an income elasticity ________. A) less than zero B) between zero and one C) equal to one D) greater than one Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Income Elasticity of Demand

63) Gary consumes 10,000 kilowatt-hours of electricity when his income is $500. When his income increases to $1,000, his consumption of electricity increases to 18,000 kilowatt-hours. What is Gary's income elasticity of demand for electricity? A) 0.5 B) 0.8 C) 1.8 D) 2 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Income Elasticity of Demand 64) Which of the following goods is likely to have an income elasticity of demand greater than one? A) Salt B) Gasoline C) Diamond jewelry D) Bread Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Income Elasticity of Demand 65) Define the following terms: a) The price elasticity of demand b) The income elasticity of demand c) The cross-price elasticity of demand Answer: a) The price elasticity of demand measures the responsiveness of the quantity demanded of a good to its price change. It is measured as the ratio of the percentage change in the quantity demanded of the good to the percentage change in the price of the good. b) The income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in consumers' income. It is measured as the ratio of the percentage change in the quantity demanded of the good to the percentage change in the income of consumers. c) The cross-price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in the price of a related good. It is measured as the ratio of the percentage change in the quantity demanded to the percentage change in the price of a related good. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Price Elasticity of Demand; The Cross-Price Elasticity of Demand; The Income Elasticity of Demand

66) Differentiate between the following. a) Normal goods and inferior goods b) Substitutes and complements Answer: a) A normal good is a good whose consumption increases with an increase in a consumer's income. Hence, it has a positive income elasticity of demand. The consumption of an inferior good decreases with an increase in the consumer's income. Hence, inferior goods have a negative income elasticity of demand. b) Two goods are said to be substitutes when an increase in the price of one good leads to an increase in the demand for the other good. Hence, substitute goods have a positive cross-price elasticity of demand. Two goods are said to be complements if an increase in the price of one good leads to a fall in the demand for the other good. Hence, complement goods have a negative cross-price elasticity of demand. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cross-Price Elasticity of Demand; The Income Elasticity of Demand 67) When the price of a flashlight is $5, the number of flashlights demanded is 600 units. When the price increases to $20 per unit, the quantity demanded falls to 200 units. Moreover, if the price of the cells used to operate these flashlights falls by 200 percent, the demand for flashlights increases from 200 units to 300 units. a) Calculate the arc price elasticity of demand. b) Calculate the cross-price elasticity of demand. c) When Joe earns $30, he purchases 20 flashlights. When his income increases to $120, his quantity demanded increases to 60 units. Calculate Joe's income elasticity of demand for flashlights. Answer: a) Arc price elasticity of demand = [(200 − 600)/[(200 + 600)/2)]/(20 − 5)/[(20 + 5)/2] = (−400/400)/(15/12.5) = −1/1.2 = −0.83. b) The cross-price elasticity of demand for a good is the ratio of the percentage change in the quantity demanded of the good to the percentage change in the price of a related good. In this case, when the price of cells falls by 200 percent, the percentage change in the number of flashlights demanded = [(300 − 200)/200] × 100 = 50 percent. Hence, the cross-price elasticity of demand between flashlights and cells = 50/ − 200 = −0.25. c) The income elasticity of demand for a good is the ratio of the percentage change in the quantity demanded of a good to the percentage change in the consumer's income. When Joe's income increases from $30 to $120, the percentage change in the number of flashlights demanded is [(60 - 20)/20] × 100 = 200 percent. The percentage change in Joe's income = [(120 − 30)/30] × 100 = 300 percent. Joe's income elasticity of demand for flashlights = 200/300 = 0.67. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Price Elasticity of Demand; The Cross-Price Elasticity of Demand; The Income Elasticity of Demand

68) If the cross-price elasticity of demand for a good is estimated to be −3.9, estimate the percentage change in the quantity demanded of the good when the price of the related good increases from $30 per unit to $75 per unit. Also, if it is known that the income elasticity of demand for the same good is 2.5, estimate the percentage change in the quantity demanded of the good when consumer income increases from $100 to $300. Answer: The percentage change in the price of the related good = [($75 − $30)/ $30] × 100 = 150 percent The cross-price elasticity of demand = −3.9. The expected percentage change in quantity demanded= 150 × −3.9 = -585 percent. Thus, the quantity demanded of the good is expected to fall by 585 percent when the price of the related good increases from $30 per unit to $75 per unit. The percentage change in income = [($300 − $100)/100)] × 100 = 200 percent. The income elasticity of demand = 2.5. The expected percentage change in quantity demanded = 200 × 2.5 = 500 percent. Hence, the quantity demanded of the good is expected to increase by 500 percent when consumer income increases from $100 to $300. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Price Elasticity of Demand; The Income Elasticity of Demand 69) From a firm's point of view, when the demand for a good has a price elasticity of 0.5, then, all things remaining the same, a(n) ________. A) increase in the price of the good will decrease the firm's revenue B) increase in the price of the good will increase the firm's revenue C) change in the price of the good will not affect the firm's revenue D) change in the price of the good will not affect the quantity demanded of the good by consumers Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: Should McDonald's Be Interested in Elasticities? 70) Price elasticity of demand measures ________. A) the slope of the demand function B) the change in demand due to a change in the good's own price C) the change in quantity demanded to a change in the good's own price D) the percentage change in quantity demanded due to a percentage change in the good's own price Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Elasticities

71) April runs a small bakery in northern Minnesota. Her most popular item is her homemade cranberry scone. As a pricing experiment, April raises the price of her raspberry scones by 5 percent and sees daily sales fall by 2 percent. From this experiment, April can estimate the price elasticity of demand for her cranberry scones as approximately ________. A) 0.4 percent B) 2 percent C) 2.5 percent D) 5 percent Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Elasticities/Own Price Elasticity of Demand The manager of the Kendall Square Bertucci's conducted a pricing experiment in August 2016. For the week of August 14-20, 2016, he lowered the price of Bertucci's signature pizza, the small Bertucci, from $13.00 to $11.00. As a result, weekly sales of the small Bertucci rose from 15,000 to 21,000 (see the table below).

The manager knows his costs did not change from week to week and is confident there were no other external shocks to demand during this time. 72) Using the arc or midpoint elasticity formula, the price elasticity of demand for the small Bertucci pizza at the Kendall Square Bertucci's restaurant is ________. A) 3 B) 2.6 C) 2 D) 1.57 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Elasticities/Arc Elasticity of Demand

73) Economists estimate that the income elasticity of demand for women's hairstyling services is +3.5, suggesting that ________. A) hairstyling services are an inferior good and quantity demanded will decrease as incomes increase B) hairstyling services are an inferior good and quantity demanded will increase as incomes increase C) hairstyling services are a normal good and quantity demanded will decrease as incomes increase D) hairstyling services are a normal good and quantity demanded will increase as incomes increase Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Elasticities/Income Elasticity of Demand 74) Consider the demand curve represented by P =10-Q. Which of the following statements is TRUE? A) Total revenue will increase if the price increases from $3 to $4. B) Total expenditure will decrease if price increases from $3 to $4. C) Demand will decrease if price increases from $3 to $4. D) Demand is unit elastic along this demand curve. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Elasticities 75) Consider the demand curve represented by P =10-Q. This demand curve is the LEAST price elastic between which two quantities? A) Q=1 and Q=2 B) Q=4 and Q=5 C) Q=7 and Q=8 D) The price elasticity of demand is constant along a linear demand curve. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Demand Elasticities

76) Two media companies are planning to release new streaming services, and they want to know whether or not these services will compete with one another. Which of the following would indicate that consumers would view these streaming services as substitutes? A) a cross-price elasticity of demand that is greater than 0 B) a cross-price elasticity of demand that is less than 0 C) a price-elasticity of demand that is greater than 1 D) a price-elasticity of demand that is less than 1 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Elasticities 77) In the market for wonkles and treakles, suppose that the price of a wonkle has increased from $10 to $20. At the same time, the quantity demanded of treakles has decreased from 7 to 6. Wonkles and treakles can best be described as ________. A) complements in consumption B) substitutes in consumption C) inferior goods D) inelastic goods Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Elasticities 78) If North Carolina is increases its minimum wage from $7 per hour to $15 per hour and the number of people looking for work increases by 20%, we can say that ________. A) labor supply is price-elastic B) labor is a normal good C) labor supply is price-inelastic D) labor is income inelastic Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Elasticities 79) Varsity Theater is looking for ways to make up lost revenue from the the coronavirus lockdowns. They have calculated the price elasticity of demand for movie tickets to be -1.6. They are considering increasing ticket prices by 15%. Would this increase their total revenue? A) No, because the quantity of tickets purchased would decrease by 24% B) No, because the quantity of tickets purchased would decrease by 9.38% C) Yes, because the quantity of tickets purchased would increase by 24% D) Yes, because the quantity of tickets purchased would increase by 9.38% Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Demand Elasticities/Own Price Elasticity of Demand 85 Copyright © 2022 Pearson Education Ltd.

80) In the market for widgets and gizmos, suppose that the price of a widget has decreased from $8 to $6. At the same time, the quantity demanded of gizmos has decreased from 10 to 6. Widgets and Gizmos can best be described as ________. A) complements in consumption B) substitutes in consumption C) inferior goods D) elastic goods Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Demand Elasticities

The figure above shows the demand curve for succulent starts at the Zen Succulent. 81) If the price of a succulent start falls from $3 to $2, which of the following is TRUE? A) Demand for succulent starts is price-elastic and total revenue will increase. B) Demand for succulent starts is price-inelastic and total revenue will increase. C) Demand for succulent starts is price-elastic and total revenue will decrease. D) Demand for succulent starts is price-inelastic and total revenue will decrease. Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Consumer Surplus 82) If the price of a succulent start falls from $6 to $5, which of the following is TRUE? A) Demand for succulent starts is price-elastic and total revenue will increase. B) Demand for succulent starts is price-inelastic and total revenue will increase. C) Demand for succulent starts is price-elastic and total revenue will decrease. D) Demand for succulent starts is price-inelastic and total revenue will decrease. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Consumer Surplus 86 Copyright © 2022 Pearson Education Ltd.

83) If the price of a succulent start rises from $6 to $7, which of the following is TRUE? A) Demand for succulent starts is price-elastic and total revenue will increase. B) Demand for succulent starts is price-inelastic and total revenue will increase. C) Demand for succulent starts is price-elastic and total revenue will decrease. D) Demand for succulent starts is price-inelastic and total revenue will decrease. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Consumer Surplus 84) At which price is demand for succulent starts unit-elastic? A) $1 B) $3 C) $4 D) $8 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus 85) What is the arc elasticity between prices of $2 and $1 per succulent start? (be sure to use the midpoint method) A) 0.10 B) 0.29 C) 3.5 D) 4.33 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Surplus

86) Suppose the demand for Big Macs at McDonald's restaurants in the United States has a price elasticity of demand of 0.6. Based on simple economic theory, will the company's revenues increase if Big Mac prices were raised? Would your pricing recommendation change if you learned the cross-price elasticity of demand for large soft drinks with respect to Big Mac prices is -1.8 and the cross-price elasticity of demand for large French fries with respect to Big Mac prices is -2.4? Explain. Answer: Simple economic theory suggests the firm should raise prices to increase revenues if it is operating on the inelastic portion of the demand curve, and an own price elasticity of 0.6 is on the inelastic portion of the demand curve. But McDonald's faces a joint-pricing problem; it cares about profits (and revenues from all food item sales at its restaurants), not just the revenues from Big Mac Sales. Since large soft drinks and large fries are complementary goods to Big Macs, a 10 percent increase in Big Mac prices will lower large soft drink sales by approximately 18 percent and lower sales of large French fries by approximately 24 percent. Hence, McDonald's may maximize restaurant revenues (and more importantly profits) by moderating price increases of Big Macs, even deciding to price along the inelastic portion of the demand curve for Big Macs. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Demand Curves\Cross-Price Elasticities of Demand\Relation Between Own-Price Elasticity and Revenues\Joint-Pricing Problems Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint 1) ________ is a measure of the satisfaction or happiness that comes from consuming a good or service. A) A budget B) Utility C) The income effect D) The substitution effect Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint 2) A(n) ________ shows the bundles of two goods that provide an equal level of satisfaction to the consumer. A) budget set B) indifference curve C) demand curve D) budget constraint Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the 89 Copyright © 2022 Pearson Education Ltd.

Budget Constraint 3) The consumption bundle that maximizes a consumer's satisfaction given her income is located ________. A) at the point of tangency of the consumer's demand curve and indifference curve B) at any point of intersection of the consumer's demand curve and indifference curves C) at the point of tangency of the consumer's budget constraint and indifference curve D) at any point of intersection of the consumer's demand curve and indifference curves Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint 4) For any two indifference curves, the one on the right indicates ________. A) the same level of utility as the one on the left B) the same bundle of goods as the one on the left C) a higher level of utility than the one on the left D) a lower level of consumer income than the one on the left Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint 5) For a given level of total utility, ________. A) there is exactly one indifference curve B) there are exactly two indifference curves C) there are exactly three indifference curves D) there are exactly four indifference curves Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint

The following figure shows the indifference curves (IC) and the budget constraint (BC) of a consumer who needs to decide between the number of trousers and shirts he should purchase.

6) Refer to the figure above. Which indifference curve depicts the highest level of utility? A) IC1 B) IC2 C) IC3 D) IC4 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint 7) Refer to the figure above. Given the consumer's budget constraint, the consumption bundle that maximizes his satisfaction consists of ________. A) 0 shirts and 40 pairs of trousers B) 10 shirts and 30 pairs of trousers C) 20 shirts and 15 pairs of trousers D) 35 shirts and 10 pairs of trousers Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint

8) Refer to the figure above. In comparison to the bundles on IC1, the bundles on IC3 ________. A) give the same level of utility and are affordable B) give the same level of utility but are not affordable C) give a higher level of utility and are affordable D) give a higher level of utility but are not affordable Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint 9) Which of the following is the best example the income effect of a price change? A) When Gary's income doubles, his wine consumption doubles, the price of wine remaining unchanged. B) When the price of diesel falls, consumers start purchasing more petroleum-powered vehicles. C) While purchasing shirts and jeans, when the price of a pair of jeans falls, Jack purchases more of both jeans and shirts. D) While purchasing pens and pencils, when the price of pens falls, Jill purchases more pens and fewer pencils. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint 10) The substitution effect of a price change is represented by ________. A) a movement along the same indifference curve B) a movement to a different indifference curve C) a change from the initial budget constraint to a new budget constraint D) a change in the slope of the initial budget constraint Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint

11) Define the following terms: a) Indifference curve b) Utility Answer: a) An indifference curve is a graph that shows all bundles of goods and services that provide an equal level of satisfaction for the consumer. b) Utility refers to a measure of satisfaction or happiness that a consumer receives from consuming a good or service. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint 12) In a set of indifference curves, why do the indifference curves that lie to the right represent higher levels of utility? Answer: An indifference curve represents the different bundles of goods and services that provide a buyer with the same level of utility. Compared to any indifference curve, an indifference curve on the right represents bundles that consist of more of either or both goods and no less of either good than the indifference curve on the left. Hence, it allows for a higher level of consumption and represents a higher level of utility. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint

13) In the following figure, BC is the budget constraint and IC1 and IC2 are two indifference curves of a consumer. Despite IC2 representing a higher level of satisfaction, why does the optimal bundle for the consumer lie on indifference curve IC1?

Answer: The budget constraint represents the different combinations of two goods that are affordable to the consumer. Hence, only the combinations that lie on the interior of the line or on the line are feasible for the consumer. Although IC2 represents a higher level of utility than IC1, the bundles on IC2 are not affordable by the consumer. Her optimal bundle is determined by the point of tangency of the budget constraint and the highest indifference curve that the consumer can reach given her income, which in this case is IC1. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint 14) Differentiate between the income effect and the substitution effect of a fall in the price of a good. Answer: A fall in the price of a good makes consumers feel wealthier, which allows them to consume more of all goods. This is referred to as the income effect of a price fall and is represented by a movement to a higher indifference curve. Also, when the price of a good falls, the good becomes relatively cheaper than other goods. As such, consumers have a tendency to substitute other goods with this good. This is referred to as the substitution effect, and it is represented by a movement along the original indifference curve. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint

15) The following figure shows some indifference curves and the budget constraint of a consumer. Determine the commodity bundle that will maximize the consumer's satisfaction given her budget. Which combination of Good 1 and Good 2 optimizes the consumer's budget?

Answer: IC1, IC2, and IC3 are three indifference curves that depict different levels of satisfaction from the consumption of Good 1 and Good 2. In comparison to IC1 and IC2, the bundles on IC3 contain more of both goods and depict a higher level of satisfaction. Although IC3 gives a higher level of satisfaction, it lies outside the budget constraint and is hence unattainable by the consumer. In other words, her income is not sufficient to purchase bundles on IC3. IC1 is attainable by the consumer because it lies below the budget constraint, but it gives a lower level of satisfaction than IC2. Therefore, the consumer will be interested in expanding her consumption to IC2, which contains bundles consisting of more of both goods. All points on IC2 are not attainable because of the budget constraint, but the point of tangency between IC2 and the budget constraint is attainable and provides the same level of satisfaction as the other points on IC2. Hence, the point of tangency between the budget constraint and the highest attainable indifference curve represents the bundle that maximizes the consumer's satisfaction given a fixed income. This optimal bundle contains 4 units of Good 1 and 4 units of Good 2. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint

16) Using an example of a bundle of two goods, graphically illustrate the substitution effect and the income effect if the price of any one good falls. Answer: Suppose a consumer spends her income on only two goods: jeans and shoes. The optimal combination of both goods is determined at the point of tangency of the consumer's budget constraint and the highest possible indifference curve. If the price of any one good falls, her optimal bundle changes as a result of a change in her budget constraint. There are two effects of a decrease in the price of a good: a substitution effect and an income effect. If the price of shoes falls, the consumer will feel wealthier as she will save some income if she consumes the initial bundle. This saved income will allow her to move to a higher indifference curve, and this effect is referred to as the income effect of a price decrease. On the other hand, because of a decrease in the price of shoes, shoes will become relatively cheaper than jeans and the consumer will want to substitute her consumption of jeans with more shoes. This is referred to as the substitution effect of a price decrease. These effects are illustrated in the figure below.

Before the price decrease, the budget constraint of the consumer is given by BC1. It is tangent to IC1 at point a, where the consumption of jeans is J2 and shoes is S1. A decrease in the price of shoes causes the budget constraint to pivot rightward along the horizontal axis to BC2. Now, the consumer can reach a higher indifference curve, IC2. But if she has to maintain the same level of utility as before, she will settle at the point of tangency of BC3 and IC1. This is shown by point b, where J1 pairs of jeans and S2 pairs of shoes are consumed. From the figure it is seen that J1 < J2 and S2 > S1. Hence, because of a decrease in the price of shoes, the consumer is now consuming more shoes and fewer jeans than she did when consuming the initial utilitymaximizing bundle. This change in consumption from point a to b is referred to as the substitution effect of the price change. A decrease in the price of shoes has now made the consumer relatively wealthier. This will allow her to reach a higher indifference curve, in this case, IC2. Hence, her new optimizing bundle will be determined at the point of tangency of IC2 and BC2, which is shown by point c. This bundle contains S3 pairs of shoes and J2 pairs of jeans. From the figure, J2 > J1 and S3 > S2; that is, there is an increase in the consumption of both goods in comparison to the previous utility-maximizing bundle. This movement from point b to point c summarizes the income effect of a fall in the price of shoes. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Appendix: Representing Preferences with Indifference Curves: Another Use of the Budget Constraint

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 6 Sellers and Incentives 6.1 Sellers in a Perfectly Competitive Market 1) Which of the following statements is TRUE of a perfectly competitive market? A) Sellers in the market produce differentiated goods. B) There is free entry and exit in the market. C) There are only a few buyers and sellers in the market. D) Sellers and buyers both set prices to compete in the market. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 2) In a perfectly competitive market, sellers ________. A) coordinate to set the market price B) are told the price to charge by the government C) each have the power to set the price D) are price takers Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 3) In a perfectly competitive market, ________. A) sellers produce identical goods B) there are restrictions on the entry of new firms C) each seller charges a different price for its product D) bargaining over prices is a common phenomenon Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 4) In a competitive market, there are a ________ number of buyers and a ________ number of sellers. A) large; small B) small; large C) small; small D) large; large Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 1 Copyright © 2022 Pearson Education Ltd.

5) In a perfectly competitive market, an individual seller sells only a negligible fraction of the total amount of the good produced. This is why ________. A) he can independently determine the market price B) he can charge prices above the equilibrium price C) his individual choices do not affect market price D) he always earns positive profits Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 6) In a perfectly competitive market, an individual seller cannot change the price of his product. This is because ________. A) she sells only a small fraction of the total amount of this product in the market B) changing the price in this type of market is against the law C) the price is already the optimal choice for her D) she always earns positive profits Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 7) John is a tomato farmer and sells his crops in a perfectly competitive market at the price of $1 per pound. John wants to increase his farm revenue, ________. A) so he would need to charge a higher price for his tomatoes to do so B) so he would need to produce more tomatoes to do so C) so he would need to produce fewer tomatoes to do so D) but there is no way he can do so. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 8) Sellers in a perfectly competitive market ________. A) are price takers B) sell differentiated goods and services C) are not allowed to exit the market D) are few in number Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market

9) A firm is said to be a price taker if it ________. A) can affect the market price of a good by changing its supply B) sells as much of any good as it wants at the prevailing market price C) consults the government before fixing the prices of its goods and services D) is not free to enter a new market or exit from a market Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 10) Price in a perfectly competitive market is ________. A) affected by government policies B) determined by the dominant seller C) affected by the combined decision of all buyers and sellers D) determined by buyers alone Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 11) Which of the following examples best describes the concept of free entry? A) Jack opening an account on eBay to sell his old cell phone B) Purecircuit Corp. wanting to expand its production and therefore doubling its annual recruitment C) System Corp. deciding to charge a price lower than the market price to increase its market share D) The government entering the market for gasoline to correct any shortage or surplus in the market Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market 12) Which of the following markets is NOT characterized by free entry and exit? A) Car manufacturing B) Agriculture C) Convenience stores D) Landscaping services Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market

Scenario: According to New York Department of State, Division of Licensing Services, "The practice of 'cosmetology' means providing service to the hair, head, face, neck, or scalp of a human being, including but not limited to shaving, trimming, and cutting the hair or beard either by hand or mechanical appliances and the application of antiseptics, powders, oils, clays, lotions or applying tonics to the hair, head, or scalp, and in addition includes providing, for a fee or any consideration or exchange, whether direct or indirect, services for the application of dyes, reactive chemicals, or other preparations to alter the color or to straighten, curl, or alter the structure of the hair of a human being." You must acquire a license to be a beautician to offer any of the services described above in New York State, as in many other states. Many aspiring beauticians enroll in accredited cosmetology schools to complete a 1,000-hour approved course of study and to pass both the New York State written and practical examinations to get a license to operate. 13) Refer to the scenario above. Which condition of a perfectly competitive market could most directly be hampered by the licensing requirement? A) Each seller produces a negligible fraction of the total market supply. B) Each seller produces an identical good or service. C) Free entry to and exit from the market. D) None. The market for beauticians' services satisfy all the condition for perfect competition. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market

Scenario: For the better part of a decade, Della Tarpinian has been locked in a Kafkaesque battle with a trade association she doesn't belong to, the Kentucky Bar Association. She's been fined $5,000 and ordered to pay the costs of her investigation, for violating rules that the average non-lawyer might find maddeningly vague and hard to understand, such as: "A person is guilty of unlawful practice of law when, without a license issued by the Supreme Court, he engages in the practice of law." That one tripped up Tarpinian, 53, who runs a small document-preparation firm in Owensboro, Kentucky, specializing in uncontested divorces, wills, and other simple legal matters. After a lengthy investigation, the Kentucky Bar determined that Tarpinian's clients couldn't possibly have figured out how to fill out the paperwork they filed in court without her coaching them behind the scenes. What surprised Tarpinian–and many other document preparers around the country–is that the Bar could drag her before the state Supreme Court and have her fined for, as she sees it, competing against its members. Especially since a jury acquitted Tarpinian of similar charges in a 2004 criminal trial, after less than half an hour of deliberations. (Source: "Non-Lawyers Find It Hard Avoid Breaking Bar's Vague Rules," Forbes, July 25, 2011.) 14) Refer to the scenario above. Which condition of a perfectly competitive market could most directly be hampered in the market for legal advice? A) Each seller produces a negligible fraction of the total market supply. B) Each seller produces an identical good or service. C) Free entry to and exit from the market. D) Preparation services satisfies all the condition for perfect competition. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market

Scenario: In 2012, the company behind the EpiPen settled a lawsuit by agreeing to allow a generic competitor into the market in 2015, potentially cutting into a big part of its business. The company, Mylan, had already been steadily increasing the price of EpiPen, an injector containing a drug that can save people from life-threatening allergy attacks. After the settlement, it started to raise the price even faster. Now, as Mylan faces growing public furor over its pricing of EpiPen, the company's history of pricing the product highlights a common tactic in the drug industry: sharply raising prices in the years just before a generic competitor reaches the market, as a sort of final attempt to milk big profits from the brand-name drug. Whether the looming generic competition was a motive for the price increases is not entirely clear, because Mylan has declined to answer questions about its thinking. But while the company was once taking two 10 percent price increases a year, it has made two 15 percent increases annually starting in 2014, when the generic competition seemed imminent. Over all, the list price for a pack of two EpiPens is now over $600, up from a little more than $100 in 2007, the year Mylan acquired the product. Most of that increase–a rise to $609 from $265–has come in the last three years. (Source: "Mylan Raised EpiPen's Price Before the Expected Arrival of a Generic," New York Times, August 24, 2016.) 15) Refer to the scenario above. Which condition of a perfectly competitive market could most directly be hampered in the market for epinephrine autoinjectors? A) Each seller produces a negligible fraction of the total market supply. B) Each seller produces an identical good or service. C) There is free entry to and exit from the market. D) None. The market for the product satisfies all the condition for perfect competition. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market

Scenario: In October 2005, the Korean company Samsung pleaded guilty to conspiring with other companies, including Infineon and Hynix Semiconductor, to fix the price of dynamic random access memory (DRAM) chips. Samsung was the third company to be charged in connection with the international cartel and was fined $300 million, the second largest antitrust penalty in U.S. history. In October 2004, four executives from Infineon, a German chip maker, received reduced sentences of 4 to 6 months in federal prison and $250,000 in fines after agreeing to aid the U.S. Department of Justice with their ongoing investigation of the conspiracy. (Source: "Price Fixing," Wikipedia.) 16) Refer to the scenario above. Which condition of a perfectly competitive market could most directly be hampered in the market for DRAMs? A) Each seller produces a negligible fraction of the total market supply. B) Each seller produces an identical good or service. C) There is free entry to and exit from the market. D) None. The market for the chips satisfies all the condition for perfect competition. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market Scenario: Kellogg's makes Raisin Bran, Granola Raisin & Honey Frosted Flakes cereal, Apple Jacks cereal, and Smorz cereal, among others–in all more than forty varieties of breakfast cereal. General Mills, one of Kellogg's many competitors, make Cheerios, Chex, Trix, and so on. 17) Refer to the scenario above. Which condition of a perfectly competitive market could most directly be violated in the market for breakfast cereal? A) Each seller produces a negligible fraction of the total market supply. B) Each seller produces an identical good or service. C) Free entry to and exit from the market. D) None. The market for cereals satisfies all the condition for perfect competition. Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market 18) What conditions characterize the sellers' side in a perfectly competitive market? Answer: Three conditions characterize the sellers' side in a perfectly competitive market: i) A large number of sellers participate in the market, and no single seller has a large market share. ii) All sellers in the market produce identical goods. iii) There is free entry and exit of sellers in the market. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market 7 Copyright © 2022 Pearson Education Ltd.

19) Price in a perfectly competitive market will change if ________. A) a firm decides to reduce its quantity supplied B) a few firms decide to collude and reduce their quantity supplied at the same time C) a major power outage forces all firms to reduce their quantity supplied D) a dominant firm decides to reduce its price Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market 20) The assumption that each firm in a perfectly competitive market is a price taker basically means that ________. A) market price is independent of the level of industry output B) each firm's supply curve is perfectly elastic C) the firm can take any price it wants to choose and still sell all its output D) changes in the output of an individual firm do not affect the market price Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market 21) Which one of the following characteristics of a market would you expect to be inconsistent with price-taking behavior? A) There are a large number of firms in the industry. B) Each firm's product is distinguishable from that of its competitors. C) Each firm's share of total industry output is insignificant. D) Each firm behaves as if it faces a perfectly elastic demand curve. Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market 22) Which market is more likely to be perfectly competitive? A) Electric cars in the United States B) Bowls of white rice in Chinatown, New York City C) Vodka in Russia during the Soviet union era D) Luxury watches in Switzerland Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Sellers in a Perfectly Competitive Market

23) Which of the following firms is the most likely to operate in a perfectly competitive industry? A) A farm in Kansas that grows corn B) Time Warner Cable, which is the only cable and internet provider in Durham, NC C) Thundercloud Subs, one of many sandwich shops in Austin, TX focusing on cold submarine sandwiches D) Exxon, one of the few domestic oil refiners and gasoline producers Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sellers in a Perfectly Competitive Market 6.2 The Seller's Problem 1) The primary goal of a seller is to ________. A) minimize deadweight loss B) maximize profits C) maximize opportunity cost D) minimize consumer surplus Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Seller's Problem 2) The profits of sellers represent their ________. A) revenue B) net benefits C) sales D) inventory Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Seller's Problem 3) Which of the following is NOT an element of a seller's decision-making process in a perfectly competitive market? A) The relationship between inputs and output B) The cost of inputs C) The price of output D) The number of buyers in the market Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Seller's Problem

4) Consider a textile factory operating in the short run. Classify the following costs that the firm incurs as variable costs, sunk costs, or fixed costs. a) The cost of issuing identity cards to all workers b) The wages paid to the workers of the factory c) The yearly rent paid for production space d) The tax paid on the sale of its products Answer: a) The cost of issuing identity cards to all employees is a sunk cost, as it is not considered while making future production decisions. b) The wages paid to workers at the factory are variable costs, as they change with changes in the output of the textile factory. c) The yearly rent paid for the production space is a fixed cost, as the factory has to pay this rent irrespective of the output produced. d) The tax paid on the sale of the factory's products is a variable cost, as the tax will vary depending on the output sold by the firm. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Seller's Problem According to the U.S. Internal Revenue Service, "A section 501(c)(3) [a.k.a. non-profit] organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization." 5) Refer to the scenario above. The IRS rule implies that ________. A) it is illegal for a nonprofit organization to make a profit B) a nonprofit organization must make zero profit (break even) C) it is illegal for a nonprofit organization to maximize the profit D) a nonprofit organization can use its profit only to further its mission Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Seller's Problem 6) A firm ________. A) includes many people and cannot consist of only one person. B) is a business entity that produces goods or services C) is a business entity that is owned by the government D) is always a price taker Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 10 Copyright © 2022 Pearson Education Ltd.

7) The process by which inputs are transformed to outputs is referred to as ________. A) production B) distribution C) depreciation D) accumulation Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 8) A production function establishes the relationship between ________. A) the market price of a good and the sales revenue generated B) the quantity of output produced and a firm's profit C) the quantity of inputs used and the quantity of output produced D) the market price of a good and the quantity of output supplied Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 9) Which of the following statements is TRUE in the short run? A) Only some of a firm's input can be varied. B) All firms earn zero economic profits. C) All factors of production can be changed. D) All factors of production are fixed. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 10) In the long run, ________. A) all factors of production are fixed B) only some inputs of a firm can be changed C) all firms earn positive economic profits D) all factors of production can be changed Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs

Scenario: David runs a janitorial service company. The following table shows the total number of rooms that can be cleaned by the specified number of workers and industrial vacuum cleaners. Workers 0 1 2 3 4 5 6

Vacuum Cleaners 1 1 1 1 1 1 1

Clean Rooms 0 6 10 13 15 16 16

11) Refer to the scenario above. The variable input in this janitorial service is ________, and the fixed input is ________. A) vacuum cleaners; workers B) vacuum cleaners; clean rooms C) clean rooms; vacuum cleaners D) workers; vacuum cleaners Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 12) Refer to the scenario above. There is a(n) ________ relationship between the variable input and the output in this production process. A) increasing B) decreasing C) increasing at first, and then decreasing D) decreasing at first, and then increasing Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 13) Which of the following statements is TRUE in the long run? A) There are no fixed inputs. B) Capital cannot be changed. C) Labor cannot be changed. D) A firm cannot alter its level of output. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs

14) A firm uses workers, land, and machinery in its production process. Which of the following statements is TRUE in the long run? A) The only way the firm can change its output level is by changing the number of workers. B) The only way the firm can change its output level is by changing the amount of land it owns. C) The only way the firm can change its output level is by changing the amount of machinery it owns. D) The firm can change its output level by changing any or all of its three inputs. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 15) The change in the total output of a firm associated with using one more unit of an input is referred to as the ________. A) marginal product of the input B) total product C) average product of the input D) variable product of the input Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 16) A firm produced 376 units with ten workers. When an eleventh worker was hired, the output increased to 398 units. The marginal product of the eleventh worker is ________. A) 22 units B) 37.6 units C) 36.18 units D) 398 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 17) A firm produces 200 units of a good when it employs seven workers. The marginal product of an eighth worker is 46 units. If the eighth worker is hired, the firm's total product will increase to ________. A) 208 units B) 228 units C) 246 units D) 322 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 13 Copyright © 2022 Pearson Education Ltd.

The following table shows the total output produced by different numbers of workers in a shoe factory. Output per Day (pairs) 0 50 112 180 225 260 280

Number of Workers 0 1 2 3 4 5 6

18) Refer to the table above. What is the marginal product of the third worker? A) 60 pairs of shoes B) 68 pairs of shoes C) 112 pairs of shoes D) 180 pairs of shoes Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 19) Refer to the table above. What is the marginal product of the sixth worker? A) 20 pairs of shoes B) 46.7 pairs of shoes C) 60 pairs of shoes D) 280 pairs of shoes Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 20) Refer to the table above. If the factory plans to hire a seventh worker whose marginal product is 15 pairs, the total output after he is hired will be ________. A) 15 pairs B) 105 pairs C) 280 pairs D) 295 pairs Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs

21) Refer to the table above. Which of the following statements is TRUE about the marginal product of labor? A) The marginal product of labor initially decreases and then increases. B) The marginal product of labor initially increases and then decreases. C) The marginal product of labor is always negative for the first unit of labor. D) The marginal product of labor remains unchanged as the number of laborers increases. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs Scenario: Selma runs a pastry shop. The following table shows the total number of cupcakes produced as a function of the number of hours of labor put into making them. Hours of Labor 0 1 2 3 4 5 6

Cupcakes 0 10 25 35 44 52 58

22) Refer to the scenario above. What is the marginal product of the third hour of labor? A) 25 cupcakes B) 35 cupcakes C) 10 cupcakes D) 8 cupcakes Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 23) Refer to the scenario above. What is the marginal product of the fifth hour of labor? A) 52 cupcakes B) 35 cupcakes C) 10 cupcakes D) 8 cupcakes Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs

24) Refer to the scenario above. The "specialization" effect in this production process is observed when the ________ hour of labor is employed. A) second B) third C) fourth D) fifth Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 25) Refer to the scenario above. The "diminishing marginal returns" in this production process is observed when the ________ hour of labor is employed. A) second B) third C) fourth D) fifth Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs The following graph shows the short-run production function of a firm.

26) Refer to the graph above. What is the marginal product of the second input? A) 80 units B) 40 units C) 10 units D) 30 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 16 Copyright © 2022 Pearson Education Ltd.

27) Refer to the graph above. When does the "diminishing marginal returns to inputs" begin? A) When the first unit of input is hired B) When the second unit of input is hired C) When the third unit of input is hired D) When the fourth unit of input is hired Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 28) Refer to the graph above. When do we observe a negative return to inputs? A) When the tenth unit of input is hired B) When the second unit of input is hired C) This production process does not exhibit negative returns D) When the first unit of input is hired Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 29) Increases in the marginal product of labor can be attributed to ________. A) the specialization of workers B) the depreciation of capital C) diminishing returns to workers D) better use of work space Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 30) Specialization is the result of ________. A) hiring experienced workers B) paying higher wages to experienced workers C) workers developing a certain skill set D) increased demand for a firm's commodity Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs

31) Which of the following is an example of specialization? A) The output of workers in a chocolate factory doubling when a new manager was appointed B) The cost of production of a light bulb making factory decreasing as its capacity increased C) Different workers in a shoe factory being allotted different parts of shoe making instead of a worker making an entire shoe D) The import of better technology and machinery from developed countries greatly increasing the number of laser printers manufactured by a company Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 32) The Law of Diminishing Returns states that ________. A) successive increases in inputs eventually lead to less additional output when one of the inputs is fixed B) successive increases in product prices lead to a fall in revenue C) the demand for a good decreases as the price of the good increases, all other things remaining constant D) the net benefits of a perfectly competitive firm decrease as more firms enter the market Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 33) Which production function in the figure below exhibits diminishing returns with respect to labor input?

A) Production function A B) Production function B C) Production function C D) None of the production functions Answer: B Difficulty: Medium AACSB: Analytical Thinking 18 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 34) Which of the following statements is TRUE of the marginal product of an input? A) The marginal product of an input is given by the ratio of the firm's total output to the units of the input used. B) The marginal product of an input increases as more and more of the input is used. C) The marginal product of an input can be negative. D) The marginal product of the first unit of a variable input is zero. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 35) Which of the following is an example of diminishing marginal returns? A) The revenue of a cell phone manufacturer decreasing when it increases its product price B) The additional output produced by a firm decreasing as more workers are hired C) The profits of an entrepreneur increasing substantially after she fires a few of her employees D) The total output of a firm decreasing as more workers are hired Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs The following table shows the total output of bread produced by different numbers of workers in a bakery. Number of Loaves 0 12 26 40 50 58 60 59

Number of Workers 0 1 2 3 4 5 6 7

36) Refer to the table above. Diminishing marginal returns begin to occur when ________. A) the second worker is hired B) the fourth worker is hired C) the fifth worker is hired D) the seventh worker is hired Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 19 Copyright © 2022 Pearson Education Ltd.

37) Refer to the table above. The marginal product of workers falls below zero when the ________ worker is hired. A) first B) fourth C) sixth D) seventh Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 38) Billy runs an accounting firm. He has three full-time employees who are paid an annual salary of $135,000 each. For 4 weeks during the tax preparation season, Billy hires additional staff on a temporary basis to meet the surge in demand for his firm's service. Billy must also pay a premium for professional liability insurance for the whole firm every month. For Billy's firm, ________. A) the full-time employees and the liability insurance are fixed inputs B) all employees, full-time and temporary, are variable inputs C) the liability insurance is a variable input D) all inputs are variable Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 39) Which of the following business is most likely to have the largest amount (or value) of fixed input? A) A lawn-care service B) An airline company C) A law firm D) A barber shop Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 40) Define the terms "production" and "production function." Differentiate between the short run and the long run based on the usage of inputs by a firm. Answer: Production refers to the process of transforming inputs to outputs. The relationship between the quantity of inputs used and the quantity of outputs produced is referred to as the production function. In terms of usage of inputs, the basic difference between the short run and the long run is that only some of the firm's inputs can be varied in the short run, while other inputs are fixed. However, in the long run, a firm can vary all its inputs and there are no fixed inputs. Difficulty: Easy AACSB: Analytical Thinking 20 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 41) Is it possible for an input to have a negative marginal product? Answer: Yes. Sometimes if a variable input continues to be used even after diminishing returns set in, it can actually lead to a fall in total output. Hence, it is possible for an input to have a negative marginal product. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 42) Consider the following two scenarios: i) The marginal product of a worker in a firm is 10 units. When an additional worker is employed, his marginal product is less than 10 units. ii) The average total cost of a firm producing 10 units of output is $200. When it produces an additional unit, the average total cost increases to $300. a) What is the difference between these scenarios? b) What could be the reason behind both phenomena occurring? c) Does specialization explain either of the two scenarios? Answer: a) The first scenario represents diminishing marginal returns (in this case, the diminishing marginal product of labor), while the second scenario represents increasing variable cost (for a given set of fixed costs), which results from increasing marginal cost, which in turn results from diminishing marginal returns. b) The Law of Diminishing Returns states that in all production processes, if more and more of one input is added, keeping all other inputs fixed, the marginal product of that input will start to decrease eventually, a result of decreasing productivity. Diminishing returns occur when only one input is increased, keeping all the other inputs fixed. Hence, it is a short-run phenomenon. The reason for diminishing returns is that the overemployment of one input with other inputs held fixed will eventually lead to fewer fixed inputs available per unit of the variable input. This will lead to a fall in the productivity of the variable input after a certain point. As productivity decreases (less additional output for each additional input), the average cost increases. This stage is characterized by the upward-sloping portion of the average (variable and total) cost curves. c) Specialization does not explain either of the above two scenarios. Specialization occurs when workers develop a particular skill set because they perform a particular task over a period of time. Instead of leading to diminishing returns, specialization is likely to result in an increase in returns with increasing input or output. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Making the Goods: How Inputs Are Turned into Outputs

The following graph represents the total production of a firm on the y-axis, and the number of employees on the x-axis.

43) Refer to the figure above. Specialization begins to occur when ________. A) the second worker is hired B) the third worker is hired C) the fourth worker is hired D) the fifth worker is hired Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 44) Refer to the figure above. Diminishing marginal returns begin to occur when ________. A) the second worker is hired B) the third worker is hired C) the fourth worker is hired D) the fifth worker is hired Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 45) Refer to the figure above. Marginal product of labor falls below zero when ________. A) the second worker is hired B) the third worker is hired C) the fourth worker is hired D) the fifth worker is hired Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs

The following figure depicts the marginal cost curve, the average total curve, and the average variable cost curve of a certain firm.

46) Refer to the figure above. What is the price on the market when the firm makes a profit of $4.50? A) $4 B) $5 C) $6 D) $8 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 47) Refer to the figure above. What is the price on the market when the firm makes a profit of $3.00? A) $4 B) $5 C) $6 D) $8 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves

48) What a firm must pay for its inputs is referred to as its ________. A) production value B) cost of production C) opportunity cost D) loss in production Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 49) Marginal cost is the ________. A) cost(s) a firm must pay even if it produces zero output B) total cost of producing a given level of output C) average cost of producing a given level of output D) change in total cost from producing one more unit of output Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 50) Which of the following is the difference between variable costs and fixed costs? A) Variable costs are the costs incurred on variable factors of production, whereas fixed costs are the costs incurred on all factors of production. B) Variable costs of a firm are zero after a firm shuts down, whereas the firm continues to incur the fixed costs of production in the short run. C) Variable costs exist even when production is zero, whereas fixed costs exist only when there is some positive level of production. D) Variable costs are incurred by a firm only in the long run, whereas the firm incurs some fixed costs in both the short run and the long run. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 51) Which of the costs below is an example of a fixed cost in the short run? A) The cost of paper to a copy shop B) The wages paid to workers at a landscaping firm C) Fuel costs to a taxicab service D) A 3-year lease on retail space at the local mall for a clothing retailer Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves

52) The total cost of production refers to the ________. A) sum of variable costs and fixed costs B) product of variable costs and fixed costs C) difference between variable costs and fixed costs D) ratio of variable costs to fixed costs Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves The following table shows the total output, variable costs, fixed costs, total costs, average total costs, and marginal costs of a firm, with some cells in the table intentionally left blank. Total Output (units) 0 5 10 14 17

Variable Fixed Costs ($) Costs ($) 0 100 10

Total Cost ($)

Average Total Cost ($)

Marginal Cost ($) n.a.

122 2.50 8.24

53) Refer to the table above. What is the total cost of this firm when it doesn't produce any output? A) $100 B) $120 C) $0 D) $15 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 54) Refer to the table above. What is the total cost of producing 5 units of output? A) $100 B) $120 C) $110 D) $30 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves

55) Refer to the table above. What is the average total cost of producing 5 units of output? A) $10 B) $22 C) $11 D) $30 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 56) Refer to the table above. What is the marginal cost when the firm produces 5 units of output? A) $10 B) $0.50 C) $1 D) $2 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 57) Refer to the table above. What is the variable cost of producing 17 units of output? A) $100 B) $8.23 C) $40 D) $50 Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 58) Refer to the table above. What is the fixed cost of this firm when it produces 14 units of output? A) $100 B) $120 C) $0 D) $15 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves

The following table shows the total output, number of workers employed, variable costs, and fixed costs of a firm. Number of Workers 0 1 2 3 4 5 6 7 8

Total Output (units) 0 25 55 86 110 130 145 155 160

Variable Costs ($) 0 10 20 30 40 50 60 70 80

Fixed Costs ($) 150 150 150 150 150 150 150 150 150

59) Refer to the table above. Suppose the only variable input that the firm uses is labor. What is the wage paid to a worker in the firm? A) $1 B) $5 C) $10 D) $15 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 60) Refer to the table above. When the ________ is employed, diminishing marginal returns set in. A) second worker B) fourth worker C) sixth worker D) eighth worker Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 61) Refer to the table above. What is the total cost of producing 145 units of the good? A) $90 B) $180 C) $190 D) $210 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 27 Copyright © 2022 Pearson Education Ltd.

62) Refer to the table above. What is the average variable cost of producing 86 units of the good? A) $30 B) $0.35 C) $2.1 D) $10 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 63) Refer to the table above. What is the average fixed cost of producing 110 units of the good? A) $1.36 B) $1.72 C) $37.50 D) $150 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 64) Refer to the table above. What is the average total cost of producing 160 units of the good? A) $0.50 B) $0.93 C) $1.44 D) $2 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 65) Refer to the table above. What is the firm's marginal cost per unit of output when it produces the 55th unit of the good? A) $0.33 B) $0.50 C) $0.66 D) $0.75 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves

66) Refer to the table above. What is the firm's marginal cost per unit of output when it produces the 155th unit of the good? A) $0.66 B) $1 C) $1.33 D) $1.50 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 67) If marginal cost is less than average total cost, ________. A) output must be falling B) average total cost must be decreasing C) average total cost must be increasing D) marginal cost must be increasing Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 68) The total cost of a firm is $50, the average variable cost is $2, and the average fixed cost is $3. How many units of output does the firm produce? A) 5 units B) 10 units C) 15 units D) 18 units Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 69) Marginal cost is the change in the ________. A) total cost associated with producing one more unit of output B) average total cost associated with producing one more unit of output C) average variable cost associated with producing one more unit of output D) opportunity cost associated with producing one more unit of output Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves

Scenario: A car repair shop hires workers and pays them the federal minimum wage of $7.25. The following table shows the marginal returns to each worker in terms of number of cars repaired. Worker 1 2 3 4 5 6 7

Marginal Returns 10 9 8 7 6 5 4

70) Refer to the scenario above. Which statement is TRUE? A) When this firm hires its third worker, the new worker will add 8 more repaired cars to the firm's output. B) When this firm hires its third worker, the total number of repaired cars in this shop will be 8. C) When this firm hires its third worker, the new worker will add 1 less repaired car to the firm's output. D) When this firm hires its third worker, the new worker will add 1 more repaired car to the firm's output. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 71) Refer to the scenario above. If this firm hires 3 workers, how many cars in total can the shop repair per day? A) 8 B) 9 C) 27 D) 20 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves

72) Refer to the scenario above. In addition, suppose the fixed cost of operating this shop is $1,000 per day. If 3 workers are hired at the federal minimum wage of $7.25, what is the total cost of this shop? A) $21.75 B) $1,021.75 C) $1,042.75 D) $3,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 73) Refer to the scenario above. In addition, suppose the fixed cost of operating this shop is $1,000 per day. If we calculate the marginal cost of this firm, we expect it to be ________. A) increasing B) decreasing C) first decreasing, and then increasing D) first decreasing, and then flat Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 74) A firm's production process does NOT exhibit diminishing returns. The returns to additional units of input for this firm happens to be constant. The marginal cost curve of this firm is ________. A) continuously increasing B) continuously decreasing C) first decreasing, and then increasing D) horizontal Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 75) A firm producing 10 units of output incurs a total cost of $800. When it produces 11 units, the total cost increases to $890. What is the marginal cost of producing the eleventh unit? A) $10 B) $80 C) $90 D) $100 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 31 Copyright © 2022 Pearson Education Ltd.

76) When the marginal product ________, the marginal cost ________. A) increases; remains the same B) remains the same; increases C) increases; increases D) increases; decreases Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 77) When the marginal cost curve lies below the average cost curve, ________. A) the marginal cost curve is vertical B) the marginal cost curve is horizontal C) the average cost curve slopes downward D) the average cost curve slopes upward Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 78) When the marginal cost curve lies above the average cost curve, ________. A) the marginal cost curve slopes upward, while the average cost curve slopes downward B) the marginal cost curve slopes downward, while the average cost curve slopes upward C) both the marginal cost curve and the average cost curve slope upward D) both the marginal cost curve and the average cost curve slope downward Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 79) The marginal cost curve intersects ________. A) the total cost curve, the fixed cost curve, and the variable cost curve at their minimums B) the average fixed cost curve at its maximum C) the average fixed cost curve at its minimum D) both the average variable cost curve and the average total cost curve at their minimums Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves

80) Average fixed costs for a firm are ________. A) greater than average total cost B) independent of the level of output C) increasing as the level of output increases D) decreasing as the level of output increases Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 81) A bakery that produces 100 loaves of bread has a variable cost of $50 and a fixed cost of $200. Calculate the total cost, average total cost, average variable cost, and average fixed cost of the bakery. Answer: The total cost of the bakery = $50 + $200 = $250. The average total cost of the bakery = $250/100 = $2.50. The average variable cost of the bakery = $50/100 = $0.50. The average fixed cost of the bakery = $200/100 = $2. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 82) The output of a bakery is 250 loaves of bread when 10 workers are employed. If one more worker is hired, the total output increases to 275 loaves. Given that labor is the only variable input that the bakery uses and the market wage rate is $10, calculate the marginal cost when employment is increased from 10 to 11 workers. Answer: The marginal cost when 275 loaves are produced = Change in total cost / Change in total output = $10/25 = $0.40. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves

83) The following table shows the output and cost figures for a bakery. Calculate the missing values in the table. Output Number per Average Average Average of Day Marginal Variable Fixed Total Total Fixed Variable Marginal Workers (units) Product Cost ($) Cost ($) Cost ($) Cost ($) Cost ($) Cost ($) Cost ($) 0 0 0 300 ___ 1 150 ___ 20 300 ___ ___ ___ ___ ___ 2 315 40 300 ___ ___ ___ ___ ___ 3 ___ 160 60 300 ___ ___ ___ ___ ___ 4 ___ 140 80 300 ___ ___ ___ ___ ___ 5 730 ___ 100 300 ___ ___ ___ ___ ___ 6 830 ___ 120 300 ___ ___ ___ ___ ___ 7 900 ___ 140 300 ___ ___ ___ ___ ___ 8 ___ 60 160 300 ___ ___ ___ ___ ___ Answer: The values are shown in the following table. Output Number per Fixed Total Average Average Average of Day Marginal Variable Cost Cost Total Fixed Variable Marginal Workers (units) Product Cost ($) ($) ($) Cost ($) Cost ($) Cost ($) Cost ($) 0 0 0 300 300 1 150 150 20 300 320 2.133 2 0.133 0.133 2 315 165 40 300 340 1.079 0.952 0.127 0.121 3 475 160 60 300 360 0.758 0.631 0.126 0.125 4 615 140 80 300 380 0.617 0.488 0.130 0.143 5 730 115 100 300 400 0.548 0.411 0.136 0.174 6 830 100 120 300 420 0.506 0.361 0.145 0.2 7 900 70 140 300 440 0.489 0.333 0.156 0.286 8 960 60 160 300 460 0.479 0.312 0.166 0.333 Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Cost of Doing Business: Introducing Cost Curves 84) The total revenue earned from the sale of a good is ________. A) the price at which the good is sold B) the difference between the price and the cost of production of the good C) the product of the price and the quantity of the good sold in the market D) the product of the cost of production and the quantity of the good sold in the market Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Rewards of Doing Business: Introducing Revenue Curves 34 Copyright © 2022 Pearson Education Ltd.

85) A firm sells 20 units of a good at a price of $5 per unit. If the average cost of production of the good equals $3 per unit, the firm's revenue is ________. A) $40 B) $60 C) $100 D) $120 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Rewards of Doing Business: Introducing Revenue Curves 86) A firm earns a total revenue of $600 from selling its product at a price of $200 per unit. If the per-unit cost of producing the good is $150, the firm sells ________ unit of the good. A) 5 B) 2 C) 3 D) 4 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Rewards of Doing Business: Introducing Revenue Curves 87) The equilibrium price in a market corresponds to the point where the ________. A) market demand and a firm's average cost curves intersect B) market supply and a firm's average cost curves intersect C) market demand and the market supply curves intersect D) market supply and a firm's revenue curves intersect Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Rewards of Doing Business: Introducing Revenue Curves 88) Marginal revenue is ________. A) the change in total revenue associated with producing one more unit of output B) the product of the price of a good and its quantity sold minus the cost of production C) always greater than total revenue D) always equal to price Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Rewards of Doing Business: Introducing Revenue Curves

89) The equilibrium price of a good sold in a competitive market is $10. If an individual firm decides to sell its product at a price higher than $10, ________. A) the firm's profits will increase B) the firm's revenue will increase C) the firm will lose all its consumers D) the firm's cost of production will decrease Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Rewards of Doing Business: Introducing Revenue Curves 90) For a perfectly competitive firm, profit maximization requires producing ________. A) the level of output where marginal revenue equals marginal cost B) at a level of output where marginal revenue is greater than marginal cost C) at a level of output where marginal revenue is greater than price D) at the level of output where marginal revenue is zero Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Rewards of Doing Business: Introducing Revenue Curves 91) The profits of a firm equal ________. A) total revenues minus marginal costs B) the price charged by the firm minus fixed costs C) total revenues minus total costs D) its total revenues Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can 92) If price is greater than average total cost for a perfectly competitive firm, ________. A) average fixed costs must be increasing B) the firm is earning positive economic profits C) the firm is earning zero economic profits D) the firm is realizing economic losses (economic profits are negative) Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can

93) A firm sells 30 units of its product at a price of $5 per unit. It incurs a fixed cost of $100 and a variable cost of $20. The firm's profit is ________. A) $30 B) $50 C) $100 D) $150 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can 94) A firm will maximize profit at the level of output where ________. A) its marginal revenue equals its total cost B) its marginal revenue equals its marginal cost C) its total cost equals its total revenue D) its average revenue equals its average cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can 95) In a perfectly competitive market, ________. A) price is always greater than marginal revenue B) price is always equal to marginal revenue C) price is always greater than marginal cost D) price is always equal to average cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can 96) Which of the following relationships correctly identifies the profit-maximizing condition of a firm that sells a divisible good in a perfectly competitive market? A) Marginal cost < Price = Marginal revenue B) Marginal cost > Price = Marginal revenue C) Marginal cost = Price = Marginal revenue D) Marginal cost = Price < Marginal revenue Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can

97) If the marginal cost of producing a good for a perfectly competitive firm is $50 and the market price of the good is $100, the firm should ________. A) decrease its output B) increase its output C) try to increase the market price D) try to decrease the market price Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can 98) A firm has an average total cost of $50. If it sells 20 units of its product at $80 each, what is its profit? A) $30 B) $600 C) $1,000 D) $1,600 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can The figure below shows cost curves of a firm in a competitive market. The firm always makes the choice to maximize its profit.

99) Refer to the figure above. If the market price of the product is $3.25, what is the firm's revenue? A) $3,900 B) $3,575 C) $2,700 D) $2,100 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can 38 Copyright © 2022 Pearson Education Ltd.

100) Refer to the figure above. If the market price of the product is $3.25, what is the firm's total cost? A) $3,900 B) $3,575 C) $2,700 D) $2,100 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can 101) Refer to the figure above. If the market price of the product is $3.25, what is the firm's fixed cost? A) $1,200 B) $1,100 C) $900 D) $600 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can 102) Which of the following is TRUE? A) Accounting profits = Revenues − Implicit costs − Explicit costs B) Economic profits = Revenues − Explicit costs C) Accounting profits = Revenues − Implicit costs D) Economic profits = Accounting profits − Implicit costs Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can

Assume Catrina's Crepes has the following production schedule and that workers are paid $500 per week and the rent on the shop is $1000 per week. Labor Output (workers per (crepes per week) week) 0 0 1 30 2 70 3 120 4 160 5 190 6 210 7 220 103) Which of the following statements is FALSE? A) Catrina's crepes begins to see the benefits of specialization when they produce more than 160 crepes. B) Catrina's Crepes experiences increasing returns to labor between 0 crepes and 120 crepes. C) Catrina's Crepes experiences diminishing returns to labor between 160 and 220 crepes. D) The marginal product of the 4th worker is 40 crepes. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Making the Goods: How Inputs Are Turned into Outputs 104) Which of the following cost curves would shift if the rent on Catrina's shop went up by $100 per month? A) AFC and ATC B) AFC, ATC, and MC C) AFC, AVC, ATC, and MC D) This would not shift the cost curves. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 105) Which of the following cost curves would shift if the wages of workers went up by $100 per month? A) AFC and ATC B) AVC, ATC, and MC C) AFC, AVC, ATC, and MC D) This would not shift the cost curves. Answer: B Difficulty: Medium AACSB: Analytical Thinking 40 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Cost of Doing Business: Introducing Cost Curves 106) If Catrina hires more workers, which of her cost curves would shift? A) AFC and ATC B) AVC, ATC, and MC C) AFC, AVC, ATC, and MC D) This would not shift the cost curves. Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Cost of Doing Business: Introducing Cost Curves 107) Differentiate between the terms "revenue" and "profit." Assume that a firm sells 20 units of a good at a price of $5 per unit. If the average total cost of the firm is $3 per unit, calculate the firm's profit. Answer: The revenue of a firm is equal to the product of the price of a good and the quantity of the good sold. In contrast, the profit of a firm is equal to the difference between the total revenue that a firm earns and the total costs it incurs. If a firm sells 20 units of a good at $5 each, its revenue is equal to 20 × $5 or $100. If the average total cost of the firm is $3, the total cost it incurs is 20 × $3 or $60. Hence, profits of the firm equal $100 − $60 or $40. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can

108) Given the following price, quantity, and cost numbers, estimate the profit-maximizing output, assuming that the firm is operating in a perfectly competitive market. What is the fixed cost that the firm faces? What is the profit at the profit-maximizing output? Price ($) 10 10 10 10 10 10 10 10

Quantity Sold (units) 0 1 2 3 4 5 6 7

Total Cost ($) 15 18 22 27 33 41 51 62

Answer: A fixed cost is the cost that a firm incurs irrespective of the output it is producing. The total cost of the firm when quantity sold is 0 is $15; hence, the fixed cost is $15. Under perfect competition, a firm maximizes profits at the level of production where its marginal revenue is equal to its marginal cost. This is displayed in the following table.

Price ($) 10 10 10 10 10 10 10 10

Quantity Sold Total Cost Total Revenue Marginal Marginal (units) ($) ($) Cost ($) Revenue ($) 0 15 0 – – 1 18 10 3 10 2 22 20 4 10 3 27 30 5 10 4 33 40 6 10 5 41 50 8 10 6 51 60 10 10 7 62 70 11 10

The marginal revenue is equal to the marginal cost when 6 units are sold at a price of $10 each. Hence, 6 units is the profit-maximizing quantity of output. The profit at this output is total revenue − total cost = $60 − $51 = $9. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can

109) Assume that the market demand for pens is given by QD = 650 − 25P and the market supply of pens is given by QS = 200 + 20P. If a firm sells 20 pens and faces an average total cost of $6, calculate the firm's profit. Answer: To determine the firm's profit, it is essential to determine the equilibrium price that the firm faces. At equilibrium, QD = QS, or 650 − 25P = 200 + 20P, or 450 = 45P, so P = $10. Profits = Total revenues − Total costs, or Profits = (Price × Quantity) − (Average total cost × Quantity), so Profits = (10 × 20) − (6 × 20) = 200 − 120 = $80. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Putting It All Together: Using the Three Components to Do the Best You Can 6.3 From the Seller's Problem to the Supply Curve 1) A supply curve shows the relationship between ________. A) output and the total cost of production B) output and prices C) output and consumer income D) output and revenue Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Seller's Problem to the Supply Curve 2) The price elasticity of supply is the ________. A) price associated with a particular quantity supplied B) change in price due to a change in quantity supplied C) percentage change in price due to a change in quantity supplied D) percentage change in price due to a percentage change in quantity supplied Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Seller's Problem to the Supply Curve

The figure below shows the cost curves of a firm in a competitive market. The firm always makes the choice to maximize its profit.

3) Refer to the figure above. If the market price of the product is $3.25, the firm's profit maximizing output is ________ and the firm's maximum profit is ________. A) 1,200 units; $1,200 B) 1,200 units; $1,800 C) 1,100 units; $875 D) 1,100 units; $600 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: From the Seller's Problem to the Supply Curve 4) Refer to the figure above. If the market price of the product is $2.00, the firm's profit maximizing output is ________ and its maximum profit is ________. A) 900 units; -$600 B) 900 units; -$300 C) 1,100 units; $0.00 D) 1,100 units; $300 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: From the Seller's Problem to the Supply Curve 5) Refer to the figure above. If the market price of the product is $1.50, the firm's profit maximizing output is ________ and its maximum profit is ________. A) 1,200 units; -$900 B) 1,100 units; -$300 C) 900 units; $0.00 D) 0 or 900 units; -$600 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Seller's Problem to the Supply Curve 44 Copyright © 2022 Pearson Education Ltd.

6) Refer to the figure above. If the price is more than $1.50 but at most $2.00, the firm should produce ________. A) 0 units to avoid paying the variable cost B) 0 units to break even C) the quantity at which the marginal cost equals the price to avoid paying the fixed cost D) the quantity at which the marginal cost equals the price, even though the firm would make a loss Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Seller's Problem to the Supply Curve 7) Refer to the figure above. The short-run supply curve of the firm is ________. A) vertical at 0 units between the price $0 and $2.25, then it follows the marginal cost curve B) vertical at 0 units between the price $0 and $1.50, then it follow the marginal cost curve C) the upward-sloping portion of the marginal cost curve only D) the downward-sloping portion of the average variable cost until it crosses the marginal cost curve, then it follows the marginal cost curve Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: From the Seller's Problem to the Supply Curve 8) Which of the following is TRUE of the price elasticity of supply? A) Price elasticity of supply = Percentage change in quantity supplied/Absolute change in price B) Price elasticity of supply = Percentage change in quantity supplied/Percentage change in price C) Price elasticity of supply = Percentage change in quantity supplied × Absolute change in price D) Price elasticity of supply = Percentage change in quantity supplied × Percentage change in price Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply 9) When the price of a good increases by 300 percent, the quantity supplied of the good increases from 200 units to 900 units. The price elasticity of supply of the good is ________. A) 1.17 B) 1.5 C) 3 D) 4.5 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply 45 Copyright © 2022 Pearson Education Ltd.

10) The following graph shows the supply curve of a product. What is the arc price elasticity of supply of this product when its price changes from $12 to $8?

A) 1 B) 1.25 C) 0.50 D) 0.75 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply

11) The supply curve of good A, and the supply curve if good B are both depicted in the following graph. Which statement is TRUE?

A) Supply of good A is more elastic than the supply of good B. B) Supply of good B is more elastic than the supply of good B. C) Supply of good A is unit elastic. D) Supply of good B is perfectly inelastic. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply 12) If the price elasticity of supply of a good is 2, a 200 percent increase in the price of the good will change the quantity supplied by ________. A) 50 percent B) 100 percent C) 200 percent D) 400 percent Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply

13) If a firm's supply curve is linear qs = p with a slope of 1 (see the graph below),

then the firm's price elasticity of supply is ________. A) perfectly inelastic (zero) B) perfectly elastic (+∞) C) unit elastic D) elastic Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply 14) If the supply of a good is unit-elastic, then a 50 percent increase in the price of the good will result in a ________ in quantity supplied. A) 50 percent increase B) 50 percent decrease C) 25 percent increase D) 25 percent decrease Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply

15) A good is said to have an elastic supply if its price elasticity of supply is ________. A) equal to zero B) between zero and one C) equal to one D) greater than one Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply 16) If the percentage change in the quantity supplied of a good is less than the percentage change in the price of the good, the price elasticity of the good is likely to be ________. A) less than one B) equal to one C) equal to two D) equal to infinity Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply 17) If a small decrease in the price of a good decreases the quantity supplied to zero, the supply of the good is said to be ________. A) unit elastic B) inelastic C) perfectly inelastic D) perfectly elastic Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply 18) Which of the following is TRUE of a good with a perfectly elastic supply? A) Any increase in the price of the good will lead to a decrease in the seller's revenue. B) Any increase in the price of the good will decrease the quantity supplied of the good by more than the price change. C) Any increase in the price of the good will induce a firm to supply its maximum possible quantity of the good. D) Any increase in the price of the good will increase the quantity supplied of the good exactly by an amount equal to the price change. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply

19) A good with a perfectly inelastic supply has a price elasticity of supply that is ________. A) equal to zero B) between zero and one C) equal to one D) greater than one Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply 20) As the amount of inventory maintained by a firm increases, ________. A) the elasticity of supply of its product increases B) the elasticity of supply of its product decreases C) the elasticity of demand for its product increases D) the elasticity of demand for its product decreases Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply The following figure depicts the supply curve of a certain firm.

21) Refer to the figure above. If the elasticity of supply is 0,2630 when the price changes from 30 to 70, what is the quantity at the price of $30? A) 220 B) 222 C) 224 D) 226 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply

22) Refer to the figure above. If the elasticity of supply is 0.5 when the quantity changes from 100 to 150, what is the price at the quantity 100? A) $2,50 B) $4 C) $5 D) $6 Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply 23) Firm A and Firm B produce the same goods but with different inputs. If the inputs used by Firm A are more easily available than the inputs used by Firm B, then which of the following statements is TRUE? A) The elasticity of supply of Firm A and Firm B will be equal. B) The elasticity of supply of Firm A will be higher than the elasticity of supply of Firm B. C) The elasticity of supply of Firm A will be lower than the elasticity of supply of Firm B. D) The elasticity of supply of Firm A and Firm B cannot be compared without information on price change. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply 24) Differentiate between perfectly elastic supply and perfectly inelastic supply. Answer: A good is said to have a perfectly elastic supply when a very small change in the good's price leads to an infinite change in the good's quantity supplied. The price elasticity of supply of such goods equals infinity. In contrast, a good is said to have a perfectly inelastic supply when the quantity supplied of a good does not change with changes in its price, in which case the price elasticity of supply equals zero. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply 25) When the price of a good is $100, 50 units are supplied. When the price increases to $300, 250 units are supplied. Calculate the price elasticity of supply of the good. Answer: The percentage change in the price of the good when price increases from $100 to $300 is 200 percent. The percentage change in the quantity supplied of the good when quantity supplied increases from 50 units to 250 units is 400 percent. Hence, the price elasticity of supply of the good is 400/200 = 2. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply

26) Calculate the price elasticity of supply for the following goods. Also comment on the elasticity in each case. a) When the price of a good is $100, 200 units are supplied. But when the price increases to $300, 220 units are supplied. b) When the price of a good is $50, 50 units are supplied. But when the price decreases to $30, 10 units are supplied. Answer: a) Percentage change in price = 200 percent Percentage change in quantity supplied = 10 percent Price elasticity of supply = 10/200 = 0.05 The good has a relatively inelastic supply. b) Percentage change in price = −40 percent Percentage change in quantity supplied = −80 percent Price elasticity of supply = −80/−40 = 2 The good has a relatively elastic supply. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply 27) A short-run decision by a firm to not produce anything during a specific period is referred to as a(n) ________. A) lockout B) shutdown C) buyout D) exit Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shutdown 28) A firm should shut down in the short run if the price of a good is less than its ________. A) average fixed cost B) average total cost C) average variable cost D) marginal cost Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shutdown

29) If a firm is maximizing profits in the short run at a level of output where Average total cost > Price > Average variable cost, then the firm is ________. A) earning positive economic profits B) breaking even (zero economic profits) C) realizing losses but minimizing losses by continuing to produce D) realizing losses and will minimize losses by shutting down Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Shutdown 30) A firm with a fixed cost of $300 per month and variable cost of $200 per month decides to shut down. In such a situation, it would lose ________. A) $200 per month B) $300 per month C) $500 per month D) $0 per month Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shutdown 31) A firm's optimal output is 1,000 units per month, with a fixed cost of $300 per month and variable cost of $200 per month. The market price of this good is $0.40. The firm decides to shut down. In such a situation, this firm should ________. A) down production in the short run B) not shut down production in the short run C) produce more than 1,000 units D) continue production for 1 month and then shut down Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shutdown 32) A firm is seeing a $500 loss in the short run. The fixed cost of operation for this firm is $1,000. What is the best decision for this firm in the short run? A) This firm should shut down production. B) This firm should not shut down production. C) This firm should produce more than what it is currently producing. D) There is not enough information provided to answer. Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Shutdown

33) A firm is seeing a $500 loss in the short run. The fixed cost of operation for this firm is $200. What is the best decision for this firm in the short run? A) This firm should shut down production. B) This firm should not shut down production. C) This firm should produce more than what it is currently producing. D) There is not enough information provided to answer. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Shutdown 34) The exit of a firm ________. A) is a short-run decision by the firm to not produce anything B) is a long-run decision by the firm to leave a market C) refers to a refusal to work organized by a group of the firm's employees D) refers to the temporary decision of the firm not to hire any new employees Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shutdown 35) ________ are costs that, once committed, can never be recovered and should not affect current and future production costs. A) Opportunity costs B) Marginal costs C) Sunk costs D) Variable costs Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shutdown 36) Which of the following is an example of a sunk cost? A) The cost of painting a new office area B) The wages paid to workers in a mill C) The cost of the raw materials used in a factory D) The cost of the electricity used in an office Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shutdown

37) Which of the following is an example of a variable cost? A) The cost of installing new software on all office computers B) The cost of the electricity used in an office C) The cost of purchasing land for a new office space D) The annual rent paid for an office space Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shutdown 38) A perfectly competitive firm's supply curve in the short run is ________. A) its marginal cost curve B) its marginal cost curve above the marginal revenue schedule C) its marginal cost curve above its average total cost curve D) its marginal cost curve above its average variable cost curve Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Shutdown 39) The short-run supply curve of a competitive firm is the portion of ________. A) its average cost curve that lies above its marginal cost curve B) its average cost curve that lies below its marginal cost curve C) its marginal cost curve that lies above its average variable cost curve D) its marginal cost curve that lies below its average cost curve Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shutdown 40) Why would a firm decide to produce a positive quantity of a output even though it makes negative profits by doing so? A) Because the price is high enough to cover the average fixed cost B) Because the price is high enough to cover the average variable cost C) Because the price is high enough to cover the average total cost D) A firm would never produce when profit is negative. Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Shutdown

41) Using the notation in the text, AFC equals ________. A) ATC - AVC B) ATC at its minimum point C) ATC + AVC D) AVC + MC Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Shutdown 42) A change in the wage rate paid to the variable factor (labor) will shift the ________. A) ATC curve B) AVC curve C) MC curve D) ATC, AVC, and MC curves Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Shutdown 43) Are the terms "shutdown" and "exit" synonymous? What is the optimal shutdown rule for a firm? Answer: No, the terms "shutdown" and "exit" are not synonymous. "Shutdown" refers to a short-run decision by a firm to not produce anything during a specific period of time. When the firm shuts down, it still incurs its fixed costs. In contrast, "exit" refers to a long-run decision by the firm to leave the market. The optimal shutdown rule for the firm suggests that the firm shut down if the price of the good it produces falls below its average variable cost. When the price of the good is less than its average variable cost, for every unit of the good that the firm sells, it pays more for its variable inputs than what it receives from the sale of the good. In such a case, the firm should shut down, because by doing so it would lose only the fixed costs of production rather than the fixed costs plus the uncovered variable costs. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Shutdown 44) Which of the following costs is an example of a sunk cost? A) An oil company's exploration cost B) An oil company's cost to purchase drilling equipment C) An oil company's cost of pipe D) An oil company's cost of its office space Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Shutdown

The graph below shows the market supply curve for succulent starts.

48) What is the arc elasticity of supply between prices of $3 and $5? A) 1.33 B) 1 C) 1.5 D) 0.75 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply 49) What is the price elasticity of supply between prices of $5 and $7? A) 1.2 B) 0.83 C) 1.33 D) 1.25 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Elasticity of Supply 50) Between which prices in the supply of succulent starts the least elastic? A) $7 and $8 B) $5 and $6 C) $3 and 4 D) $1 and $2 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price Elasticity of Supply

6.4 Producer Surplus The figure below shows the marginal cost (circles) and the average variable cost (crosses) of a firm in a competitive market. The firm always makes the choice to maximize its profit.

1) Refer to the figure above. If the market price of the product is $5,000, what is the firm's producer surplus? A) $30,000 B) $18,400 C) $13,700 D) $4,900 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 2) Refer to the figure above. If the market price of the product is $3,400, what is the firm's producer surplus? A) $5,700 B) $3,250 C) $1,700 D) $880 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus

3) Refer to the figure above. If the market price of the product fell from $5,000 to $3,400, what is the loss of the firm's producer surplus? A) $11,250 B) $8,000 C) $1,600 D) $800 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 4) Refer to the figure above. If the market price of the product is $1,700, what is the firm's producer surplus? A) -$800 B) -$300 C) $0 D) $300 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 5) Is the producer surplus same as the profit? A) Yes, they are the same, because the producer surplus is the sum of profits from each unit sold. B) Yes, they are the same, because the profit is the revenue minus the sum of marginal costs of each unit sold. C) No, they are different, because the profit is always at least the producer surplus. D) No, they are different, because the producer surplus does not take into account the fixed cost. Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Producer Surplus 6) Producer surplus for a perfectly competitive firm is ________. A) always zero B) the same as profit C) the area under firm's total cost curve and above marginal cost D) the area under the market price and above the firm's marginal cost curve Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Producer Surplus

7) Graphically, producer surplus is the ________. A) area between the demand curve and the equilibrium price line B) area between the supply curve and the equilibrium price line C) area below the supply curve D) area above the market price of a good Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Producer Surplus 8) In the figure below, the producer surplus from the tenth unit sold is ________.

A) $0 B) $4 C) $7 D) $9 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Producer Surplus

The following figure shows the supply curve of a firm that manufactures shoes.

9) Refer to the figure above. What is the producer surplus when the price is $50? A) $100 B) $200 C) $400 D) $1,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 10) Refer to the figure above. What is the producer surplus when the price is $70? A) $800 B) $1,600 C) $2,000 D) $2,800 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 11) The total producer surplus in the entire market is given by the ________. A) product of all the individual sellers' producer surplus B) sum of all the individual sellers' producer surplus C) area between the market supply curve and the market demand curve D) area between the market demand curve and the price line Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Producer Surplus

12) In the figure below, the firm's total producer surplus, if it is producing 18 units of output and receiving a price of $36 per unit, is ________.

A) $0 B) $162 C) $324 D) $648 Answer: C Explanation:

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Producer Surplus

The following figure depicts the supply curve of a certain firm.

13) Refer to the figure above. If A = 2, and the price elasticity of supply when price changes from 5 to B is 1/3, what is the producer surplus at the price B? A) $20 B) $30 C) $40 D) $50 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 14) Refer to the figure above. If the slope of the supply curve is 1/2, what is the producer surplus at a price of B? A) $20 B) $25 C) $30 D) $50 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 15) Refer to the figure above. If B = 10, and the producer surplus is equal to $50, find A. A) $0 B) $0.5 C) $1 D) $1.5 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus

16) Gary produces handmade baseball gloves. On any given working day, it costs Gary $50 to make the first glove, $60 to make the second, $80 to make the third, and $110 to make the fourth glove. What should Gary do? A) He should shut down production. B) He should not shut down production. C) He should produce more than what he is currently producing. D) There is not enough information provided to answer. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Producer Surplus 17) Consider the following graph, which depicts a competitive market. The producer surplus in this market is equal to ________.

A) $500 B) $1,000 C) $750 D) $0 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Producer Surplus

18) Define producer surplus. Calculate the producer surplus from the following figure.

Answer: Producer surplus is the area between the supply curve and the equilibrium price of a good. It represents a useful tool for measuring the net benefits that sellers receive from participating in a market. In the figure, producer surplus = × (70 - 30) × 50 = × 40 × 50 = $1,000. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus

19) The following figure shows the supply curve, S1, of a firm that manufactures cell phones. a) Calculate the firm's producer surplus when the price of one cell phone is $60. b) If the price of cell phones increases to $100 per unit, what happens to producer surplus? c) Suppose a fall in the price of inputs shifts the supply curve of the firm from S1 to S2. Calculate the new producer surplus at a price of $60 per unit.

Answer: a) Producer surplus for a firm is the area between its supply curve and the price that the firm receives for its product. When the price of a cell phone is $60 and the supply curve of the firm is S1, producer surplus will equal × $(60 − 20) × 50 or $1,000. b) When the price of a cell phone increases to $100, the producer surplus is expected to increase. The new producer surplus will equal × $(100 − 20) × 110 or $4,400. c) When the supply curve shifts to S2 and the price of a cell phone is $60, the new producer surplus will equal

× (60 − 10) × 75 or $1,875.

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus

20) Explain the impact on producer surplus of an increase in the demand for Good X with the help of a suitable diagram. Answer:

See the above figure. Change in producer surplus can be computed as the difference between the producer surplus before the shift in the demand curve and the producer surplus after the shift. The initial demand curve is D1, and it intersects the supply curve, S, at point B. The equilibrium price is P1, and the equilibrium quantity is Q1. Producer surplus for the firm is the area between its supply curve and the market price line. Therefore, the initial producer surplus is equal to the area of the triangle ABP1. After the demand curve shifts to D2, the equilibrium price and quantity change. D2 intersects S at C; the new equilibrium price is P2, and the new equilibrium quantity is Q2. The producer surplus is now equal to the area of the triangle ACP2. The area of the triangle ACP2 is greater than the area of the triangle ABP1. Using this information, we can conclude that a rightward shift in the demand curve for Good X leads to an increase in producer surplus, everything else remaining unchanged. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus

Scenario: A perfectly competitive firm has the following cost functions: Total cost: TC(q) = $10,000 = $100q = $10q2, Marginal cost: MC(q) = $100 + $20q, and it faces a market price of $900 per unit. The average and total cost curves are shown in the following figure.

21) Refer to the scenario above. The firm's average total cost is given by ________. A) $10,000 B) $100 + $20q C) $100 + $10q D) $10,000/q + $100 + $10q Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Producer Surplus 22) The firm maximizes profits by ________. A) shutting down B) producing 11 units of output C) producing 40 units of output D) producing 80 units of output Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Producer Surplus

23) At the profit-maximizing level of output, producer surplus is ________ and the firm's profits are ________. A) $0; $0 B) $32,000; $16,000 C) $16,000; $6,000 D) None of the above Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Producer Surplus The graph below shows the market supply curve for succulent starts.

24) Use the graph of the supply of succulent starts to answer this question. If the price of a succulent start is $7, what is producer surplus? A) $90 B) $180 C) $320 D) $60 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 25) Use the graph of the supply of succulent starts to answer this question. If the price of a succulent start is $5, what is producer surplus? A) $40 B) $80 C) $320 D) $20 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 70 Copyright © 2022 Pearson Education Ltd.

26) Use the graph of the supply of succulent starts to answer this question. If the price of a succulent start rises from $3 to $7, what happens to the producer surplus? A) It increases by $80. B) It increases by $90. C) It deceases by 85. D) It decreases by $5. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producer Surplus 6.5 From the Short Run to the Long Run 1) Which of the following statements is TRUE? A) In the long run, a firm cannot vary any of its inputs. B) In the long run, a firm can vary all its inputs. C) In the short run, a firm cannot vary any of its inputs. D) In the short run, a firm can vary all its inputs. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 2) Which of the following statements is TRUE? A) In the short run, a firm can vary all its inputs. B) In the long run, a firm cannot vary any of its inputs. C) The downward-sloping portion of the long-run average cost curve indicates the presence of economies of scale in production. D) The downward-sloping portion of the long-run average cost curve indicates the presence of diseconomies of scale in production. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 3) Which of the following best describes the long run for a firm? A) The period of time over which all factors of production are variable B) The period of time over which the amount of labor and raw materials are variable C) The period of time over which the amount of labor is variable D) The period of time over which all factors of production are fixed Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 71 Copyright © 2022 Pearson Education Ltd.

Scenario: Jenna makes homemade pastries. Her fixed input in the short run is the mixer. In the long run, she can choose a spatula, hand mixer, or a stand mixer. The following table shows the short-run fixed cost (FC) and variable cost (VC) of weekly production using each different level of the capital input.

Output (pastries) 10 20 50 100 200 500

FC (spatula mixer) 5 5 5 5 5 5

VC (spatula mixer) 40 80 200 400 800 2000

FC VC FC VC (hand mixer) (hand mixer) (stand mixer) (stand mixer) 30 20 200 5 30 40 200 10 30 100 200 25 30 200 200 50 30 400 200 100 30 1000 200 250

4) Refer to the scenario above. If Jenna wants to make 10 pastries per week, which level of capital input should she choose? A) Spatula mixer B) Hand mixer C) Stand mixer D) Any of the three mixers Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 5) Refer to the scenario above. If Jenna wants to make 100 pastries per week, which level of capital input should she choose? A) Spatula mixer B) Hand mixer C) Stand mixer D) Any of the three mixers Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 6) Refer to the scenario above. If Jenna wants to make 500 pastries per week, which level of capital input should she choose? A) Spatula mixer B) Hand mixer C) Stand mixer D) Any of the three mixers Answer: C Difficulty: Medium AACSB: Analytical Thinking 72 Copyright © 2022 Pearson Education Ltd.

TopicEntry: From the Short Run to the Long Run 7) The long-run average cost curve connects the lower part of the short-run cost curves because ________. A) the prices of inputs are less when acquired for a longer time period B) firms have more flexibility to change input combinations in the long run C) the specialization of inputs increases productivity only in the long run D) firms earn positive profits in the long run Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 8) ________ occur when average total cost falls as the quantity produced increases. A) Increasing marginal returns B) Decreasing marginal returns C) Economies of scale D) Diseconomies of scale Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 9) Which of the following is TRUE for a firm that enjoys economies of scale? A) Marginal revenue is falling as output increases. B) Average total cost is falling as output increases. C) Marginal cost is constant as output increases. D) Marginal cost is increasing as output increases. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run

10) The long-run average total cost (LRATC) shown below exhibits ________.

A) economies of scale over all levels of output B) constant returns to scale over all levels of output C) diseconomies of scale over all levels of output D) none of the above Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 11) Which of the following situations depicts diseconomies of scale? A) The average total cost of a firm increasing from $50 to $55 when it increases its production from 10 units to 20 units B) The average total cost of a firm decreasing from $50 to $40 when it increases its production from 10 units to 20 units C) The average total cost of a firm remaining at $50 when it increases its production from 10 units to 20 units D) The average total cost of a firm remaining at $50 when it decreases its production from 20 units to 10 units Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: From the Short Run to the Long Run 12) In the long run, a firm should exit from a market when ________. A) price is less than average total cost B) price is equal to average total cost C) price is equal to marginal cost D) price is more than marginal cost Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run

13) In the long run, a firm should remain in a perfectly competitive industry if ________. A) Price > Marginal revenue B) Price > Average total cost C) Price < Marginal cost D) Price < Average total cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 14) Define the terms "economies of scale," "constant returns to scale," and "diseconomies of scale." Among these three situations, operating in which stage is likely to be the most profitable for a firm? Answer: Economies of scale occur when the average total cost falls as the quantity produced increases. Constant returns to scale exist when the average total cost does not change as the quantity produced changes. Diseconomies of scale occur when the average total cost rises as the quantity produced increases. Operating at a stage in which economies of scale occur is likely to be the most profitable from a firm's point of view. This is because it allows a firm to expand its production with a decrease in the cost incurred per unit of additional output produced. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run

15) If the market for bottled water is perfectly competitive, how will the following aspects differ in the short run and in the long run? a) The use of inputs b) The market supply curve of bottled water when firms have identical cost structures c) The profitability of firms with identical cost structures earning economic profits d) Condition to stop production e) The average cost curves of a firm f) The number of firms Answer: a) In the short run, only variable inputs like the labor employed in production can be changed by firms producing bottled water, while a few other inputs remain fixed. In contrast, in the long run, there are no fixed inputs, and the firm can vary the quantity of all inputs used. b) The market supply curve of bottled water when firms have identical cost structures will be upward sloping in the short run. In contrast, the market supply curve of firms with identical cost structures will be horizontal in the long run. c) Firms with identical cost structures can earn positive economic profits in the short run. However, all firms with identical costs in the market for bottled water will earn zero economic profits in the long run. d) In the short run, firms should continue production as long as the prices of bottled water are greater than or equal to the average variable costs of the firms. If the prices fall below the average variable costs, the firms should stop production in the short run. In the long run, firms should stop producing bottled water or exit from the market if the prices of bottled water are less than the average total costs of the firms, or if the total costs exceed total revenues. e) The short-run average cost curve of a firm will lie above the long-run average cost curve of the firm. This happens because a few inputs are fixed in the short run and the firm cannot optimally combine fixed and variable inputs at times. In contrast, all inputs are variable in the long run, allowing for better input combinations and thus lower costs. f) The number of firms operating in the market is fixed in the short run. In the long run, there is a possibility of entry and exit of firms, and therefore the number of firms operating in the market can change. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: From the Short Run to the Long Run

16) In The Wealth of Nations, Adam Smith argued that "the division of labor [specialization] was limited by the extent of the market." (Bracketed remark added.) Which of the following best explains Smith's argument? A) Specialization and the firm's moving down its average total cost curve requires that the demand facing the firm is sufficiently large. B) Specialization and the firm's moving down its average total cost curve requires the firm to have increasing marginal costs. C) Specialization and the firm moving down its average total cost curve requires the government to grant firm's legal monopolies. D) Specialization and the firm moving down its average total cost curve will lead to the firm realizing economic losses. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 17) The long-run supply curve of a firm is ________. A) its marginal cost curve B) its average total cost curve C) the portion of its marginal cost curve that lies above its average total cost curve D) the portion of its marginal cost curve that lies below its average total cost curve Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Supply Curve

Scenario: Emily runs a small coffee roasting company. Labor is the only variable input. Output depends on the size of the coffee roaster (a fixed input) that she rents. She can fit only one roaster in her shop. The table below summarizes possible output per month depending on the number of workers employed and the size of a roaster Emily rents. Assume that workers cannot produce any quantity other than ones shown in the table. So, for example, if Emily wants to produce 3,000 kg per month with a small roaster, then she would have to hire 3 workers and produce 4,000 kg. Emily pays $2,400 per month to each worker she employs. Monthly rental prices are $400 for a small roaster, $650 for a medium roaster, and $880 for a large roaster. In addition, Emily's opportunity cost of being an entrepreneur is $12,000 per month because, with her MBA degree, she could be working for a management consulting firm. You should consider this as a part of the fixed cost.

18) Refer to the scenario above. If Emily wants to produce 2,400 kg per month, then the minimum total average cost is ________, which is achieved by renting a ________ roaster. A) $4.9; small B) $4.15; medium C) $2.54; medium D) $2.95; large Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 19) Refer to the scenario above. If Emily wants to produce 4,000 kg per month, then the minimum total average cost is ________, which is achieved by renting a ________ roaster. A) $4.9; small B) $4.15; medium C) $2.54; medium D) $2.95; large Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run

The figure below shows short-run average total cost curves for a firm under four different production technologies. Assume that there are only four different technologies that the firm could use.

20) Refer to the figure above. The minimum average total cost to produce a quantity between QD and QF is achieved by using technology ________. A) 1 B) 2 C) 3 D) 4 Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run 21) Refer to the figure above. Between the output quantity QA and QC, the long-run average total cost curve of the firm exhibits ________. A) economies of scale B) constant returns to scale C) diseconomies of scale D) diminishing marginal product Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run

22) Refer to the figure above. The long-run average total cost curve of the firm goes through points ________. A) B, D, E, F B) A, B, D, E C) A, D, F, G D) B, C, E, G Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run Scenario: Emily runs a small coffee roasting company. Labor is the only variable input. Output depends on the size of the coffee roaster (a fixed input) that she rents. She can fit only one roaster in her shop. The table below summarizes possible output per month depending on the number of workers employed and the size of a roaster Emily rents. Assume that workers cannot produce any quantity other than ones shown in the table. So, for example, if Emily wants to produce 3,000 kg per month with a small roaster, then she would have to hire 3 workers and produce 4,000 kg. Emily pays $2,400 per month to each worker she employs. Monthly rental prices are $400 for a small roaster, $650 for a medium roaster, and $880 for a large roaster. In addition, Emily's opportunity cost of being an entrepreneur is $12,000 per month because, with her MBA degree, she could be working for a management consulting firm. You should consider this as a part of the fixed cost.

23) Refer to the scenario above. If Emily wants to produce 1,000 kg per month, then the minimum total average cost is ________, which is achieved by renting a ________ roaster. A) $14.8; small B) $9.41; medium C) $3.28; large D) $6.37; large Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run

24) Consider a perfectly competitive market for pears, which is currently in long-run equilibrium. Marnie is a pear producer in this market. If the market price of chocolate, often eaten with pears, were to increase, what can we say about Marnie's future in the market? A) Marnie will face losses in the short-run and could potentially exit the industry in the long-run. B) Marnie will shutdown in the short-run and will exit the industry in the long-run. C) Marnie will break even in the short-run and will stay in the industry in the long-run. D) Marnie will shutdown in the short-run and will make zero-profits in the industry in the longrun. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run Assume Catrina's Crepes has the following production schedule and that workers are paid $500 per week and the rent on the shop is $1000 per week. Labor (workers per Output (crepes week) per week) 0 0 1 30 2 70 3 120 4 160 5 190 6 210 7 220 25) If the price of a crepe is $15, which of the following statements is TRUE about Catrina's crepes in the short-run and long-run? A) Catrina will produce crepes in the short-run and exit the industry in the long-run. B) Catrina will shutdown in the short-run and exit the industry in the long-run. C) Catrina will produce crepes in the short-run and stay in the industry in the long-run. D) Catrina will shutdown in the short-run and break even in the long-run. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: From the Short Run to the Long Run

6.6 From the Firm to the Market: Long-Run Competitive Equilibrium 1) The firm's long-run supply curve is ________. A) the firm's average total cost curve B) the upward-sloping portion of the firm's average total cost curve C) the firm's marginal cost curve D) the firm's marginal cost curve above the minimum of average total cost Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Firm to the Market: Long-Run Competitive Equilibrium 2) Firms in a perfectly competitive industry earn zero profits in the long run because ________. A) demand decreases B) costs increase C) the absence of barriers to entry enables free entry and exit D) the government sets prices Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: From the Firm to the Market: Long-Run Competitive Equilibrium 3) In a perfectly competitive market, firms earn zero economic profits in the long run. Why? Answer: In a perfectly competitive market, firms earn zero economic profits in the long run because of free entry and exit. When the existing firms in the market earn positive economic profits, it acts as an incentive for new firms to enter the market. As there are no entry and exit restrictions in the perfectly competitive market, firms can enter and exit at will. The entry of new firms into the market shifts the market supply curve to the right, causing a fall in the market price. This process continues until the market price equals the minimum average total cost of the market and all firms earn zero economic profits. Similarly, when firms are earning negative economic profits, a few firms will leave the market, shifting the market supply to the left, thereby increasing the price. This process will continue until all existing firms in the market earn zero economic profits. Zero economic profits mean that ALL opportunity costs are covered, including even normal profits. This means that the firm is paying all its bills and covering its implicit costs, including the normal return on its investment. Such a firm is earning enough of an accounting profit to keep it in the industry–no more and no less. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Firm to the Market: Long-Run Competitive Equilibrium

The following figure depicts a firm's long-run average total cost and selected short-run average total cost curves.

4) Refer to the figure above. If this firm is producing at point B, we could say that it ________. A) is maximizing profits B) is minimizing the cost of producing Q1 C) can lower its costs by moving to point A D) would minimize total costs by moving to point E Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Firm to the Market: Long-Run Competitive Equilibrium 5) Refer to the figure above. The firm is currently producing at point B. An increase in its capital may be represented by ________. A) a movement to A B) a movement to C C) a movement to D D) a movement to E Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Firm to the Market: Long-Run Competitive Equilibrium

6) Refer to the figure above. The firm is currently producing at point A. If it increases its employment of labor, it will move toward ________. A) any point on the short-run average total cost curve B) point B C) point C D) point D Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Firm to the Market: Long-Run Competitive Equilibrium 7) Refer to the figure above. The firm is currently producing at point D. What prevents the firm from producing at E? A) Beyond D, the cost of labor becomes too expensive. B) The firm can produce at E in the short run but decides not to do so, because at D the firm maximizes profits. C) Producing at E is currently impossible, because too much time is needed to gather the level of capital to produce at E. D) It is uncertain if producing at E is better than producing at D, because prices are likely to rise in the future. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Firm to the Market: Long-Run Competitive Equilibrium 8) Refer to the figure above. The firm is currently producing at C. In the short run, the firm should ________. A) reduce its production to Q1 B) not change its production plan C) invest in capital and produce at a lower cost D) increase its production to Q3 to benefit from economies of scale Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: From the Firm to the Market: Long-Run Competitive Equilibrium

9) Which of the following statements is TRUE? A) The number of firms in the industry is fixed in the short run, but the number can change in the long run. B) Free entry and exit of firms is possible in the short run, but the entry and exit of firms is restricted in the long run. C) The short-run average cost curves lies below the long-run average cost curves in both the short run and the long run. D) A firm can vary all its factors of production in both the short run and the long run. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Firm Entry 10) The entry and exit of firms in a perfectly competitive market is mostly dependent on ________. A) the number of firms in the market B) government regulations C) the profitability of the existing firms D) the number of consumers in the market Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Firm Entry 11) Free entry is said to exist in an industry when ________. A) all firms entering the industry enjoy economies of scale B) entry to the industry is unfettered by any special legal or technical barriers C) equal amounts of inputs are available to all firms entering the industry D) the government subsidizes costs for all new firms entering the industry Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Firm Entry 12) The entry of new firms into an existing market causes ________. A) an upward movement along the market supply curve B) a downward movement along the market supply curve C) a rightward shift of the market supply curve D) a leftward shift of the market supply curve Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Firm Entry

13) If new firms enter an existing market, ________. A) the market price is likely to fall B) the market demand is likely to increase C) the market supply is likely to fall D) the profits of all firms are likely to increase Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Firm Entry 14) If firms in a perfectly competitive market are realizing economic losses in the short run, ________. A) entry will occur, the market supply curve will shift out, and the market price will rise B) entry will occur, the market supply curve will shift out, and the market price will fall C) exit will occur, the market supply will shift in, and the market price will rise D) exit will occur, the market supply will shift in, and the market price will fall Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Firm Entry

The following figure shows the cost curves on a firm that operates in a competitive market. Assume that all the firms in this market have identical cost structure.

15) Refer to the graph above. Which of the following graphs correctly represents this competitive market's demand and supply in the short run? A)

Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Firm Entry

16) Refer to the graph above. Which of the following graphs, correctly represents this competitive market's demand and supply in the long run? A)

17) A firm is interested in entering a perfectly competitive market where all its competitors have cost structures identical to this firm and are earning positive economic profits. Using graphs, comment on the long-run profitability of the firms in this scenario. Answer: All the firms with identical cost structures earn zero economic profits in the long run.

In the graph, D1 and S1 represent the initial industry supply and demand curves, respectively. The price determined at the intersection of the two curves is P2, which is higher than the minimum average total cost of the industry, ATC. Therefore, the existing firms in the market earn positive economic profits. Being attracted by the positive profits earned by the existing firms, new firms enter the market in the long run. Similar to the firm in question, there will be other firms that would want to enter the market. The entry of new firms will shift the industry supply curve to the right. New firms will continue to enter and supply will continue to increase. This will continue until the supply curve reaches S2 and the market price equals the minimum average total cost of the industry. Therefore, the free entry and exit of firms will push the longrun price down to the minimum average cost of the industry. The firms at that point earn zero profits. Whenever the price is greater than the minimum average cost of the industry, the firms in the industry earn positive economic profits. This attracts more firms into the market, and the price falls until all firms earn zero economic profits. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Firm Entry 18) When price is less than the firms' minimum average total cost in a perfectly competitive market in the long run, ________. A) new firms will enter the market B) existing firms will leave the market C) prices are likely to fall further D) firms' profits are likely to be their maximum Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Firm Exit

19) In a perfectly competitive market, the price in the long run will always ________. A) be more than the minimum average total cost of the industry B) be less than the minimum average total cost of the industry C) equal the minimum average total cost of the industry D) equal the average fixed cost of the industry Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run 20) The long-run supply curve for a firm in a perfectly competitive industry is ________. A) negatively sloped B) positively sloped C) vertical D) horizontal Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run 21) In a perfectly competitive market, the long-run market price is ________. A) equal to the average fixed cost of the industry B) less than the minimum average cost of the industry C) more than the minimum average cost of the industry because of the free entry and exit of firms D) equal to the minimum average cost of the industry because of the free entry and exit of firms Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run 22) In a perfectly competitive market, all firms in the long run earn ________. A) positive economic profit B) positive accounting profit C) zero economic profit D) zero accounting profit Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run

23) Which of the following is TRUE of perfect competition in the long run? A) Firms earn positive economic profit because of economies of scale. B) Firms earn positive accounting profit because of government regulations. C) Firms earn zero economic profit because of free entry and exit of firms. D) Firms earn negative economic profit because of free entry and exit of firms. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run The figure below shows the supply and the demand for a good (left) and the cost curves of an individual firm in this market (right). Assume that all firms in this market, including the potential entrants, have identical cost curves. Initially, the market is in equilibrium at point A.

24) Refer to the figure above. At the equilibrium A, each firm in the market earns ________ and there will be ________. A) positive economic profit; entries of new firms B) negative economic profit; exit of existing firms C) zero economic profit; both entry and exit of firms D) zero accounting profit; entries of new firms Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run

25) Refer to the figure above. Suppose that new firms enter the market and the quantity supplied increases by 8 units at each price. Then at the new equilibrium, each firm in the market earns ________ and there will be ________. A) positive economic profit; entries of new firms B) negative economic profit; exit of existing firms C) zero economic profit; neither entry nor exit of firms D) zero accounting profit; both entry and exit of firms Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run 26) Refer to the figure above. As firms enter or exit, the market will tend toward the long-run equilibrium, where each firm earns ________ at the price ________. A) positive economic profit; $3 B) negative economic profit; $2 C) zero economic profit; $2 D) zero accounting profit; $0 Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run 27) Refer to the figure above. Suppose that the market has reached the long-run equilibrium. Then, due to news of the product's defects and recall, the demand falls by 4 units at each price. At the new equilibrium, each firm in the market earns ________ and there will be ________. A) positive economic profit; entries of new firms B) negative economic profit; exit of existing firms C) zero economic profit; neither entry nor exit of firms D) zero accounting profit; both entry and exit of firms Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run 28) Refer to the figure above. Suppose that the market has reached the long-run equilibrium. Then, due to news of the product's defects and recall, the demand falls by 2 units at each price. The market will tend toward the new long run equilibrium where ________. A) the price is $1.00 and the quantity sold is 6 units B) the price is $2.00 and the quantity sold is 2 units C) the price is $2.00 and the quantity sold is 4 units D) the price is $3.00 and the quantity sold is 2 units Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Zero Profits in the Long Run 94 Copyright © 2022 Pearson Education Ltd.

29) Suppose the market for AR-15 style rifles in the United States was in an initial long-run equilibrium. In the fall of 2012, the demand for these rifles increased substantially due to concerns that President Obama would either ban or restrict the sale of these semi-automatic rifles. As a result, the market price of these rifles increased, and gun manufacturers earned positive economic profits (shown in the figure below).

The presence of economic profits in the short-run will lead to the ________. A) entry of new firms and cause the market supply curve to shift out until the final market price equals the minimum of the average total cost for the representative firm B) entry of new firms and cause the market demand curve to shift in until the final market price equals the minimum of the average total cost for the representative firm C) exit of existing firms from the industry and cause the market supply curve to shift in, raising profits for existing firms D) exit of existing firms from the industry and cause the market demand curve to shift in until the final market price equals the minimum of the average total cost for the representative firm Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Zero Profits in the Long Run 30) A ________ is a payment or a tax break used as an incentive for an agent to complete an activity. A) tariff B) subsidy C) wage D) rent Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Would an Ethanol Subsidy Affect Ethanol 95 Copyright © 2022 Pearson Education Ltd.

Producers? 31) Suppose ethanol is produced in a perfectly competitive market. If a subsidy is paid to ethanol producers, the ethanol producers' profit will ________. A) increase in the short run but reduce to zero in the long run B) increase in the short run and in the long run C) increase in the short run but become negative in the long run D) decrease in the short run but reduce to zero in the long run Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Would an Ethanol Subsidy Affect Ethanol Producers? 32) Suppose ethanol is produced in a perfectly competitive market. If a subsidy is paid to ethanol producers, the number of producers in this market will ________ in the long run. A) increase B) decrease C) first decrease and then increase D) remain the same Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Would an Ethanol Subsidy Affect Ethanol Producers? 33) Which of the following is NOT a way that the market for ridesharing services is a "good approximation of a perfectly competitive market"? A) There are a small number of ridesharing firms in each city. B) No individual driver is able to influence the ride price. C) There are a large number of riders. D) Drivers make zero-profit in the long-run. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: The Effect of Uber Driver Entry in the Long-Run

34) Which of the following statements explains why Uber drivers did not see increases in their earnings despite the increase in the base fare that riders paid? A) The increased base fare drew more drivers into the market, which increased supply of rides and pushed down prices. B) There were fewer riders once the base fare increased, which decreased demand and pushed prices down. C) The increased base fare encouraged existing drivers to drive more, which increased the supply of rides and pushed prices down. D) The increased availability of rides increased people's usage of ridesharing services, which kept drivers earnings the same. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: The Effect of Uber Driver Entry in the Long-Run 35) Assume the market for Uber rides is in equilibrium but that then a snowstorm causes riders' willingness to pay for a ride to rise. Which of the following describes what would happen in the market for rides? A) The price of a ride would increase, which would increase the number of existing drivers on the road. B) The price of a ride would increase, which would draw more people to apply to be Uber drivers. C) The price of a ride would fall as more drivers enter the market. D) The price of a ride would fall because there would be fewer riders and drivers. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: The Effect of Uber Driver Entry in the Long-Run Appendix: From the Firm to the Market: Long-Run Competitive Equilibrium 1) In a perfectly competitive market, a marginal entrant ________. A) earns positive economic profits in the long run B) is the first firm to enter the market C) is indifferent between entering and not entering the market D) determines the market price of the good it produces Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures

2) Which of the following statements is TRUE? A) The marginal entrant in a market earns the highest profit. B) The marginal entrant has the lowest cost among all the firms in a market. C) Differences in technology and experience can lead to firms having different costs even under perfect competition. D) In a market that has identical cost structures for all firms, there is a possibility of positive economic profits in both the short run and the long run. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures 3) In a competitive industry where different firms have different cost structures, the industry supply curve is ________. A) upward sloping B) downward sloping C) vertical D) horizontal Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures 4) In a competitive industry, some firms earn positive economic profits, while some earn zero economic profit in the long run because ________. A) of the free entry and exit of firms B) the firms have different cost structures C) the firms sell their output at different prices D) the industry supply curve is perfectly elastic Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Appendix: When Firms Have Different Cost Structures 5) Which of the following statements is TRUE in the short run? A) Identical firms can enjoy positive economic profits. B) Identical firms face a downward-sloping supply curve. C) Nonidentical firms face a downward-sloping supply curve. D) Nonidentical firms cannot enjoy positive economic profits. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures

6) Which of the following statements is TRUE in the long run? A) Identical firms can enjoy positive economic profits. B) Identical firms face an upward-sloping supply curve. C) Nonidentical firms can enjoy positive economic profits. D) Nonidentical firms face a horizontal supply curve. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures 7) Is it true that in the long run it is impossible for firms functioning in a perfectly competitive market to earn positive economic profits? Explain your answer. Answer: No, even in a perfectly competitive market, firms may earn positive economic profits in the long run. This happens when firms do not have identical cost structures. For example, when there is an increase in the demand for a good in the market, the price of the good goes up. This encourages new firms to enter the market, but these newer firms have higher costs of production than the incumbent firms. The equilibrium price in the market equals the average total cost of the marginal entrant (that is, the entrant who earns zero economic profits). This results in an upward-sloping supply curve and causes the price to be above the average total cost of the firms with a lower average total cost of production. As a result, these low-cost firms can earn positive economic profits even in the long run. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures 8) Why is the profitability of firms under perfect competition different when they have nonidentical cost structures in comparison to identical cost structures? Answer: The pattern of entry into the industry is different for firms that have nonidentical cost structures and for firms that have identical cost structures. In the former case, it is the set of firms with the lowest average total cost curve that enters the market first and earns highest economic profits. The next set of firms that enters has a higher average total cost than the initial set of market entrants. Eventually, a firm with an even higher average total cost curve enters the market, and this firm earns zero economic profits. This firm is called the marginal entrant, as it is indifferent between entering the market and staying out of the market. The price in the market is equal to the marginal entrant's long-run average total cost because there is absolutely no incentive for the firm to enter for any price below this price. Because the price equals the longrun average total cost curve of the marginal entrant and not the minimum average total cost curve of the industry, the market supply curve is upward sloping rather than horizontal. In contrast, in a market where all firms have an identical cost structures, the long-run price equals the minimum average total cost of the industry, which is the same for all firms. Hence, the market supply curve in this case is horizontal and there are no economic profits in the long run. Because, in the case of nonidentical cost structures, firms face an upward-sloping market supply curve even in the long run, low-cost firms can make positive economic profits. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures 99 Copyright © 2022 Pearson Education Ltd.

Scenario: The figure below shows the supply and the demand for a good (left) and the cost curves of an individual firm in this market (right). Initially, all firms in this market have identical cost curves MC1 and ATC1, and the market is in equilibrium at point A. Subsequently, a new production technology has been developed for this product. Some of the existing firms as well as some new firms have adopted the new technology, and their cost curves are MC2 and ATC2.

9) Refer to the figure above. At A, the market is ________. A) in the long-run equilibrium, and each firm in the market earns zero economic profit B) in the long-run equilibrium, and each firm in the market earns positive economic profit C) in the short-run equilibrium, and each firm in the market earns zero economic profit D) in the short-run equilibrium, and each firm in the market earns positive economic profit Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures 10) Refer to the figure above. At the initial equilibrium A, ________. A) only the firms with new technology enter the market B) only the firms with old technology enter the market C) both firms with old and new technologies enter the market D) existing firms (with old technology) exit the market Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures

11) Refer to the figure above. Suppose that, due to firm entries, the supply curve has shifted so that the equilibrium price falls to $2.00. Then ________. A) only the firms with new technology enter the market B) only the firms with old technology enter the market C) all firms, with old and new technologies, enter the market D) existing firms (with old technology) exit the market Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures 12) Refer to the figure above. Suppose that, due to firm entries, the supply curve has shifted so that the equilibrium price has reached $1.50. Subsequently, further entries lower the equilibrium price to $0.90. At this point, ________. A) only the firms with new technology enter the market B) only the firms with old technology enter the market C) existing firms (with old technology) exit the market D) existing firms (with new technology) exit the market Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures 13) Refer to the figure above. At the long-run equilibrium, ________. A) only the firms with new technology will be in the market B) only the firms with old technology will be in the market C) both firms with new and old technology will be in the market D) firms with old technology will re-enter the market Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures 14) Which of the following statements is TRUE about a perfectly competitive markets when firms have different cost structures? A) The marginal firm will earn zero profits in the long-run. B) The industry supply curve in the long-run is horizontal. C) Firms will earn zero profits in the long-run. D) The firms with the highest costs will be the last to exit the industry. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Appendix: When Firms Have Different Cost Structures

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 7 Perfect Competition and the Invisible Hand 7.1 Perfect Competition and Efficiency 1) A ________ is the price at which a trading partner is indifferent between making the trade and not doing so. A) market value B) reservation value C) shadow value D) discounted value Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 2) For a buyer, reservation value is the same as ________. A) willingness to pay B) willingness to accept (marginal cost) C) total benefit D) price Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 3) The reservation value of a buyer reflects her ________. A) willingness to pay for a good or service B) trade-off between buying various goods and services C) total utility from a good or service D) total income Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 4) A buyer is willing to buy 10 units of a good at a maximum price of $10 per unit. The reservation value of the buyer in this case is ________. A) $1 B) $10 C) $20 D) $100 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency 1 Copyright © 2022 Pearson Education Ltd.

5) The reservation value of a seller reflects her ________. A) willingness to pay for using a resource B) marginal cost C) marginal revenue D) total cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 6) The marginal cost and total revenue of a firm are $5 and $275, respectively. The reservation value of the seller in this case is ________. A) $0 B) $5 C) $55 D) $275 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency 7) A seller is willing to sell 5 units of a good at a minimum price of $1 per unit. The reservation value of the seller in this case is ________. A) $1 B) $5 C) $6 D) $10 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency 8) The equilibrium price and quantity of a good under perfect competition are determined by the intersection of the ________. A) market demand and total revenue curves B) total revenue and total cost curves C) market demand and market supply curves D) market supply and total revenue curves Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency

The following table displays the reservation values of eight buyers and eight sellers, who each want to buy or sell a calculator. Buyer 1 2 3 4 5 6 7 8

Reservation Value of Buyer ($) 20 17 16 14 12 9 6 2

Seller 1 2 3 4 5 6 7 8

Reservation Value of Seller ($) 2 5 6 8 12 15 18 20

9) Refer to the table above. If the market is perfectly competitive, the equilibrium price of calculators is ________. A) $2 B) $6 C) $12 D) $20 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency 10) Refer to the table above. If the market is perfectly competitive, the equilibrium quantity of calculators is ________. A) 3 units B) 5 units C) 6 units D) 8 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency

Scenario: Suppose a competitive market has ten buyers and ten sellers. The product exchanged in this market is beach hats, which are indivisible. The following table shows the reservation values for both buyers and sellers. Buyer Adam Ben Casey Dan Eva Frank Gary Hank Ian Jeff

Reservation Value of Buyer ($) 15 14 13 12 11 10 9 8 7 6

Seller Ken Lena Matt Noah Oscar Pete Quinn Ray Sam Tina

Reservation Value of Seller ($) 1 2 4 6 8 10 12 14 16 18

11) Refer to the scenario above. If the market is perfectly competitive, the equilibrium quantity of hats is ________. A) 6 B) 5 C) 10 D) 4 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency 12) Refer to the scenario above. If the market is perfectly competitive, the equilibrium price of a hat is ________. A) $2 B) $6 C) $10 D) $12 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency

13) Refer to the scenario above. Suppose the equilibrium price in this market is $10. What is the amount of consumer surplus in this market? A) $6 B) $12 C) $10 D) $15 Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 14) Refer to the scenario above. Suppose the equilibrium price in this market is $10. What is the amount of producer surplus in this market? A) $6 B) $10 C) $15 D) $29 Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 15) Refer to the scenario above. Suppose the equilibrium price in this market is $10. What is the amount of social surplus in this market? A) $44 B) $30 C) $15 D) $39 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 16) Refer to the scenario above. Suppose the equilibrium price in this market is $10., but only 2 hats are allowed to be exchanged in this market. What is the amount of social surplus in this market under this restriction? A) $20 B) $10 C) $26 D) $29 Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency

17) Refer to the scenario above. Suppose a price floor of $12 is imposed on this market., which does not allow the price of hats drop below $12. Under this restriction, ________ hats are exchanged in this market, and the social surplus will be ________. A) 4; $41 B) 6; $38 C) 6; $29 D) 2; $40 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 18) What does the concept of the invisible hand imply? Answer: The "invisible hand" is an idea in economics suggesting that when all assumptions of a perfectly competitive market are in place, the pursuit of individual self-interest promotes the well-being of society as a whole, almost as if each individual were guided by an invisible hand to do so. Thus, under perfect competition, when individuals are working to maximize personal profits, they end up promoting social interests. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 19) Define "reservation values." If a buyer of a product has a reservation value of $10, the seller of the product has a reservation value of $3, and the equilibrium price of the product is determined to be $5, calculate the consumer surplus and the producer surplus. Answer: A reservation value is the price at which a trading partner is indifferent between making the trade and not doing so. For a buyer, this is the highest price she is willing to pay for a good or service. For a seller, it is the lowest price he is willing to accept for a good or service. Consumer surplus = $10 − $5 = $5 Producer surplus = $5 − $3 = $2 Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency 20) Consumer surplus is the ________. A) difference between the buyer's reservation value and the price he actually pays B) product of a buyer's reservation value and the price he actually pays C) sum of a buyer's reservation value and the price he actually pays D) ratio of a buyer's reservation value to the price he actually pays Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Social Surplus

21) Producer surplus is the ________. A) sum of a seller's reservation value and the price he finally receives B) difference between a seller's reservation value and the price he finally receives C) product of a seller's reservation value and the price he finally receives D) ratio of a seller's reservation value to the price he finally receives Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Social Surplus 22) If a seller's reservation value for a good is $10 and the price at which the good is sold is $15, his producer surplus is ________. A) $25 B) $150 C) $1.5 D) $5 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 23) If a seller's marginal cost is $25 and the price at which the good is sold is $15, the producer surplus is ________. A) −$10 B) $10 C) $15 D) $25 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 24) If a seller enjoys a producer surplus of $30 when she sells a good for $79, her reservation value for the good is ________. A) $30 B) $49 C) $79 D) $109 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus

25) If a buyer's reservation value for a good is $15 and the price at which he purchases the good is $8, his consumer surplus is ________. A) $7 B) $1.8 C) −$7 D) $120 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 26) If a buyer enjoys a consumer surplus of $25 when he purchases a good for $50, his willingness to pay for the good is ________. A) $2 B) $25 C) $50 D) $75 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 27) When buyers and sellers optimize in a perfectly competitive market, ________. A) social surplus is maximized B) social surplus is minimized C) only consumer surplus is maximized D) only consumer surplus is minimized Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Social Surplus 28) Social surplus is the consumer surplus ________. A) multiplied by the producer surplus B) minus the producer surplus C) divided by the producer surplus D) plus the producer surplus Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Social Surplus

29) If the producer surplus in a market for a good is $36 and the consumer surplus in the market for the same good is $9, the social surplus in the market is ________. A) $4 B) $27 C) $45 D) $324 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Social Surplus 30) Suppose a market has only one seller and only one buyer of a good. The buyer has a reservation value of $25 and the seller has a reservation value of $15. The market price of the good is determined to be $20. If they trade, the social surplus will be ________. A) $10 B) $20 C) $40 D) $60 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 31) Suppose a market has only one seller and only one buyer of a good in the market. The buyer is willing to pay $50 for the good and the seller is willing to accept $15. The market price of the good is determined to be $30. If they trade, the social surplus will be ________. A) $15 B) $35 C) $45 D) $65 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 32) For social surplus to be maximized, the ________ buyers are actually making a purchase and the ________ sellers are selling the products. A) lowest-value; highest-cost B) highest-value; lowest-cost C) highest-value; highest-cost D) lowest-value; lowest-value Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Social Surplus 9 Copyright © 2022 Pearson Education Ltd.

33) The total surplus in a market is represented by the area between the ________. A) demand curve and the market price line B) supply curve and the market price line C) demand and supply curves and the price axis D) demand curve and the horizontal axis Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Social Surplus 34) Jack is a prospective buyer of a commodity that Jill is offering to sell. Social surplus in this scenario can be maximized when ________. A) only Jack is optimizing B) only Jill is optimizing C) both Jack and Jill are optimizing D) neither Jack nor Jill is optimizing Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Social Surplus The following table displays the reservation values of buyers and sellers in the market for notebooks, where each individual either wants to buy or sell one notebook. Buyer 1 2 3 4 5 6 7

Reservation Value of Buyer ($) 7 6 5 4 3 2 1

Seller 1 2 3 4 5 6 7

Reservation Value of Seller ($) 1 2 3 4 5 6 7

35) Refer to the table above. If the market for notebooks is perfectly competitive, the equilibrium price is ________. A) $2 B) $3 C) $4 D) $5 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus

36) Refer to the table above. If the market for notebooks is perfectly competitive, the equilibrium quantity is ________. A) 2 units B) 3 units C) 4 units D) 5 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 37) Refer to the table above. If the market is perfectly competitive, what is Buyer 3's consumer surplus? A) $0 B) −$1 C) $1 D) $2 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 38) Refer to the table above. What is Seller 3's producer surplus? A) $1 B) $2 C) $3 D) $4 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 39) Refer to the table above. If only the two highest-value buyers and the two lowest-cost sellers engage in trade, what is the social surplus? A) $6 B) $10 C) $12 D) $20 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus

40) Refer to the table above. If the six highest-value buyers and the six lowest-cost sellers engage in trade, what is the social surplus? A) $6 B) $8 C) $10 D) $12 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 41) Refer to the table above. When the price is ________ and the quantity is ________, social surplus is maximized. A) $8; 5 units B) $6; 4 units C) $4; 4 units D) $2; 8 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 42) Refer to the table above. Maximum social surplus is ________. A) $10 B) $12 C) $14 D) $16 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus

The following figure illustrates the demand and supply of decorative light bulbs in a perfectly competitive market.

43) Refer to the figure above. What is the equilibrium price and quantity of the light bulbs? A) Equilibrium price = $25, equilibrium quantity = 0 units B) Equilibrium price = $25, equilibrium quantity = 15 units C) Equilibrium price = $15, equilibrium quantity = 15 units D) Equilibrium price = $5, equilibrium quantity = 15 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 44) Refer to the figure above. What is the consumer surplus in the market? A) $50 B) $75 C) $100 D) $225 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 45) Refer to the figure above. What is the producer surplus in the market? A) $50 B) $75 C) $150 D) $200 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus

46) Refer to the figure above. What is the social surplus if the market is in equilibrium? A) $50 B) $75 C) $100 D) $150 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 47) Refer to the figure above. What is the maximum possible social surplus? A) $100 B) $150 C) $225 D) $375 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 48) The social surplus in a market is $50. If another economic agent enters the market such that the marginal cost he incurs is $10 and the marginal benefit he receives from the trade is $5, then which of the following statements is TRUE? A) The social surplus will remain the same. B) The social surplus will increase by $5. C) The social surplus will decrease by $5. D) The social surplus will increase by $10. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus

Scenario: The table below lists the willingness to pay for ten potential buyers of a Walter Payton rookie card and the willingness to accept for ten potential sellers of the card. (Walter Payton was a running back for the NFL's Chicago Bears from 1985 to 1987 and was elected into the NFL's Hall of Fame in 1993.) The graph below the table can be used to display the demand and supply schedules.

49) Refer to the scenario above. In the graph above, plot the market demand schedule from the willingness to pay of buyers, and graph the market supply schedule from the willingness to accept of sellers. (Hint: Use the stairstep method similar to Exhibits 7.2 and 7.3 in the textbook; over and down for drawing market demand, and up and over for drawing market supply.) Answer: The completed graph is as follows:

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 50) Refer to the scenario above. The market equilibrium quantity is ________. A) 4 B) 5 C) 6 D) 7 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 51) Refer to the scenario above. In the completed graph, what is the equilibrium price for Walter Payton rookie cards in this market? Explain your choice. A) $120 B) $130 C) Either $140 or $150 D) $160 Answer: C Explanation: The market will be in equilibrium at either price; the price settled on in the market does not affect the equilibrium quantity, just the division of social surplus on the last unit purchased. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Social Surplus

52) Refer to the scenario above. Assuming a market price of $140 per card, consumer surplus in this market is ________. A) $100 B) $125 C) $150 D) $250 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 53) Refer to the scenario above. Assuming a market price of $140 per card, producer surplus in this market is ________. A) $100 B) $125 C) $150 D) $250 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 54) Refer to the scenario above. Social surplus in this market is ________. A) $200 B) $225 C) $250 D) $500 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus

55) The following figure shows the demand and supply of a good. Calculate the social surplus using this figure. What is the maximum possible social surplus in this market?

Answer: Social surplus refers to the sum of consumer surplus and producer surplus. In this figure, Consumer surplus = $(1/2 × 4 × 5) = $10 Producer surplus = $(1/2 × 4 × 5) = $10 Social surplus = $10 + $10 = $20 In the figure, because market price is determined at the point of intersection of demand and supply, it is a free market economy that is in equilibrium. Because social surplus is maximized when the market is in equilibrium, the maximum possible social surplus is $20. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus

56) The following table displays the reservation values of 10 sellers and 10 buyers in a market for cameras where each individual wants to buy or sell one camera.

Buyer 1 2 3 4 5 6 7 8 9 10

Reservation Value of Buyer ($) 100 86 74 60 55 50 34 26 12 6

Reservation Value of Seller ($) 5 18 22 26 35 50 65 75 85 100

Seller 1 2 3 4 5 6 7 8 9 10

a) What is the equilibrium price and quantity of cameras? b) What is the social surplus when four highest-value buyers trade with four lowest-cost sellers? c) What is the social surplus when eight highest-value buyers trade with eight lowest-cost sellers? d) What is the highest possible social surplus in the market? At what quantity does it occur? Answer: a) The equilibrium price is determined at $50, and the equilibrium quantity is 6 units. The equilibrium quantity is 6 units because 6 buyers are willing to pay at least $50 for a camera, and 6 sellers are willing to sell a camera for no less than $50. b) Social surplus is the sum of consumer surplus and producer surplus. The consumer surplus and producer surplus are as calculated in the following table. Buyer

Value ($)

1 2 3 4 5 6 7 8 9 10

100 86 74 60 55 50 34 26 12 6

Consumer Surplus ($) 50 36 24 10 5 0 −16 −24 −38 −44

Seller

Value ($)

1 2 3 4 5 6 7 8 9 10

5 18 22 26 35 50 65 75 85 100

Producer Surplus ($) 45 32 28 24 15 0 −15 −25 −35 −50

The social surplus when the four highest-value buyers trade with the four lowest-cost sellers is $(50 + 45 + 36 + 32 + 24 + 28 + 10 + 24) = $249. c) The social surplus when the eight highest-value buyers trade with the eight lowest-cost sellers 19 Copyright © 2022 Pearson Education Ltd.

is $(50 + 45 + 36 + 32 + 24 + 28 + 10 + 24 + 5 + 15 − 16 - 15 − 24 - 25) = $189. d) The highest possible social surplus will occur at a quantity of 6 units. The social surplus when six highest-value buyers trade with the six lowest-cost sellers is $(50 + 45 + 36 + 32 + 24 + 28 + 10 + 24 + 5 + 15) = $269. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Social Surplus The tables below show reservation values of buyers and sellers in a market. There are three buyers and two sellers. Each buyer's reservation values for the fourth unit and above are negative, and each seller can produce at most four units.

57) Refer to the tables above. What is the range of equilibrium prices? What is the equilibrium quantity? A) $25 and $30; 4 units B) $25 and $45; 5 units C) $30 and $35; 5 units D) $35 and $45; 6 units Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Social Surplus 58) Refer to the tables above. How many units does each buyer buy, and how many units does each seller sell at the equilibrium? A) Buyer 1: 2 units, Buyer 2: 2 units, Buyer 3: 2 units; Seller 1: 2 units, Seller 2: 3 units B) Buyer 1: 2 units, Buyer 2: 1 unit, Buyer 3: 2 units; Seller 1: 3 units, Seller 2: 2 units C) Buyer 1: 1 unit, Buyer 2: 2 units, Buyer 3: 2 units; Seller 1: 2 units, Seller 2: 3 units D) Buyer 1: 2 units, Buyer 2: 1 unit, Buyer 3: 2 units; Seller 1: 2 units, Seller 2: 3 units Answer: D Difficulty: Hard AACSB: Application of Knowledge 20 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Social Surplus 59) Refer to the tables above. Suppose that the price is $31 per unit. What is the sum of the three buyers' surplus? What is the sum of the two sellers' surplus? What is the social surplus? A) Sum of buyers' surplus = $92; Sum of sellers' surplus = $94; Social surplus = $186 B) Sum of buyers' surplus = $92; Sum of sellers' surplus = $95; Social surplus = $187 C) Sum of buyers' surplus = $86; Sum of sellers' surplus = $95; Social surplus = $181 D) Sum of buyers' surplus = $108; Sum of sellers' surplus = $78; Social surplus = $186 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 60) Refer to the tables above. Suppose that the price is $34 per unit. What is the sum of the three buyers' surplus? What is the sum of the two sellers' surplus? What is the social surplus? A) Sum of buyers' surplus = $77; Sum of sellers' surplus = $115; Social surplus = $187 B) Sum of buyers' surplus = $92; Sum of sellers' surplus = $95; Social surplus = $187 C) Sum of buyers' surplus = $66; Sum of sellers' surplus = $105; Social surplus = $171 D) Sum of buyers' surplus = $108; Sum of sellers' surplus = $78; Social surplus = $186 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 61) Refer to the tables above. Suppose that Buyer 1 buys the first unit of Seller 1, Buyer 2 buys the first unit of Seller 2, and Buyer 3 buys the second and the third units of Seller 2. What is the social surplus? A) $187 B) $186 C) $171 D) $168 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Social Surplus 62) Which of the following statements is TRUE of competitive market equilibrium? A) The determination of equilibrium price and quantity is independent of the demand for goods. B) Social surplus is minimized at the competitive equilibrium. C) At the competitive equilibrium, there are no unexploited gains from trade. D) A competitive equilibrium is determined only by a few large sellers in the market. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Pareto Efficiency 21 Copyright © 2022 Pearson Education Ltd.

63) Which of the following is TRUE of a competitive market equilibrium? A) It minimizes social surplus. B) All the gains from trade are not realized. C) It is Pareto efficient. D) All firms earn positive economic profits. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Pareto Efficiency 64) Efficiency in competitive markets is characterized by ________. A) all buyers pay more than their reservation value B) all sellers receive less than their reservation value C) every buyer whose willingness to pay is greater than or equal to marginal cost is served in the market D) every seller makes positive economic profits in the short run Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Pareto Efficiency 65) An outcome is Pareto efficient if ________. A) an individual can be made better off without making someone else worse off B) the benefits of the outcome are equally distributed among all participants C) no individual can be made better off without making someone else worse off D) the costs of the outcome are equally shared by all participants Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Pareto Efficiency 66) When an outcome is Pareto efficient, ________. A) social surplus is maximized B) producer surplus is less than consumer surplus C) social surplus is minimized D) producer surplus is more than consumer surplus Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Pareto Efficiency

67) Which of the following statements is TRUE of a perfectly competitive market? A) At equilibrium, it is possible to make someone better off without making someone else worse off. B) The equilibrium price in a competitive market efficiently allocates scarce resources to participants. C) The equilibrium price is determined by a few large firms in the market. D) The sum of consumer surplus and producer surplus is not maximized at the equilibrium. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Pareto Efficiency 68) The concept of the invisible hand suggests that ________. A) individuals working for self-interest will eventually maximize the well-being of society B) equilibrium in a competitive market is determined independent of demand and supply C) government intervention is necessary to rectify market imperfections D) the price mechanism allocates resources only to the people with high income in the country Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Pareto Efficiency 69) $100 is to be divided among two individuals–Mary and Jenna. Which of the following allocations is Pareto efficient? A) Mary receives $45, and Jenna receives $45. B) Mary receives $20, and Jenna receives $75. C) Mary receives $1, and Jenna receives $99. D) Mary receives $90, and Jenna receives $9. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Pareto Efficiency 70) $20 is to be divided among two individuals–Gary and Jamie. Which of the following allocations is NOT Pareto efficient? A) Gary receives $1, and Jamie receives $19. B) Gary receives $19, and Jamie receives $1. C) Gary receives $8, and Jamie receives $9. D) Gary receives $15, and Jamie receives $5. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Pareto Efficiency

71) Define a Pareto efficient outcome. Does it ensure equity? Explain with an example. Answer: An outcome is said to be Pareto efficient if it is not possible to make someone better off without making someone else worse off. Pareto efficiency does not ensure equity. For example, suppose that $100 is divided between two individuals such that one individual receives $75 and the other individual receives $25. This allocation is Pareto efficient as it is not possible to make an individual better off without making the other worse off, but the allocation does not represent equity. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Pareto Efficiency The following graph represents the market for a certain good.

72) Refer to the graph above. What is the price when the market outcome is Pareto efficient? A) 7 B) 5 C) 3 D) 1 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Pareto Efficiency 73) Refer to the graph above. Which of the following is TRUE? A) Social surplus could be increased if the producer could manage to sell more than five units at the price of 5. B) Selling a sixth unit at a price of 5 increases social surplus by 1. C) As long as the price of the good is 5, social surplus is maximized independently of the quantity sold. D) As long as the quantity sold is 5, social surplus is maximized independently of the price of the good. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Social Surplus 24 Copyright © 2022 Pearson Education Ltd.

74) Refer to the graph above. Which two outcomes create the same social surplus? A) (Price = 5 and Quantity = 5) and (Price = 5 and Quantity = 6) B) (Price = 4 and Quantity = 4) and (Price = 4 and Quantity = 7) C) (Price = 4 and Quantity = 5) and (Price = 5 and Quantity = 4) D) (Price = 5 and Quantity = 4) and (Price = 5 and Quantity = 6) Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Social Surplus 75) Take a deck of playing cards and remove the aces, jacks, queens, and kings. Imagine that any remaining card in the deck is a single individual, either a seller or a consumer, and all are gathered at a single perfectly competitive market. Red cards are sellers, and black cards are consumers. The number on a card indicates the individual's reservation price. Each seller owns a single unit of an indivisible good. Each consumer can buy at most one unit of the good from a seller. The invisible hand predicts that the market outcome will be ________. A) equilibrium price = 6, and units sold = 5 B) equilibrium price = 6, and units sold = 10 C) equilibrium price = 3, and units sold = 5 D) equilibrium price = 5, and units sold = 6 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Pareto Efficiency 76) Which of the following statements is FALSE? A) Social surplus can be increased by increasing the quantity of a good or service bought and sold. B) If no individual can be made better off without making someone else worse off, then social surplus must be maximized. C) The equilibrium price in a perfectly competitive market will lead to a pareto efficient outcome in the market. D) If someone can be made better off without making anyone else worse off, then it is possible to increase social surplus. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency

The tables below show reservation values of three buyers and three sellers in the market for chipmunk sweaters. Each buyer's reservation values for the third sweater and above are negative, and each seller can produce at most three sweaters. Buyers' Reservation Values Alvin Simon 1st sweater 45 18 2nd sweater 38 15 3rd sweater 25 13

Theodore 30 22 15

Seller's Reservation Values

1st sweater 2nd sweater 3rd sweater

Streamside Forest Fashion Sweaters 5 10 10 20 22 30

Oaken Outfits 15 25 45

77) Which of the following prices would maximize the social surplus in the market for chipmunk sweaters? A) 20 B) 22 C) 25 D) 15 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 78) How many chipmunk sweaters will be sold in equilibrium? A) 5 B) 4 C) 6 D) 7 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 79) What is consumer surplus at a price of $20 per chipmunk sweater? A) 60 B) 40 C) 48 D) 58 Answer: A Difficulty: Hard AACSB: Analytical Thinking 26 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Perfect Competition and Efficiency 80) What is producer surplus at a price of $20 per chipmunk sweater? A) 60 B) 40 C) 35 D) 3 Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 81) What is social surplus at a price of $20 per chipmunk sweater? A) 100 B) 80 C) 120 D) 83 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency 82) What is the social surplus, consumer surplus, and producer surplus if the price is $21 per chipmunk sweater? A) 100, 55, 45 B) 43, 40, 3 C) 100, 60, 40 D) 43, 35, 8 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Perfect Competition and Efficiency

The graph below shows the market demand and supply curves for succulent starts.

83) What is the value of social surplus in equilibrium? A) $122.5 B) $245 C) $280 D) $140 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency 84) Which of the following statements is FALSE? A) At a quantity of 30 succulent starts, social surplus can de decreased by decreasing production and consumption. B) At a quantity of 35 succulent starts, social surplus is maximized. C) At a quantity of 50 succulent starts, social surplus can de increased by decreasing production and consumption. D) At a quantity of 20 succulent starts, social surplus can de increased by increasing production and consumption. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Perfect Competition and Efficiency

7.2 Extending the Reach of the Invisible Hand: From the Individual to the Firm The following figure shows the marginal cost curves of two profit-maximizing firms—Firm A and Firm B—in a perfectly competitive market.

1) Refer to the figure above. Which of the following statements is TRUE? A) Firm A produces at a lower marginal cost. B) For a particular market price, Firm A will enjoy a greater producer surplus. C) Firm B will have a higher reservation value than Firm A. D) The profit-maximizing level of output of Firm B will be greater than that of Firm A at all prices. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 2) Refer to the figure above. Which of the following statements is TRUE? A) Firm B produces at a higher marginal cost than Firm A. B) At a given market price, Firm A will enjoy a greater producer surplus. C) Firm A will have a higher reservation value for the good than Firm B. D) Firm B will produce a lower quantity than Firm A at all prices. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 3) If firms in a competitive industry independently operate to maximize profits, the ________ are eventually equalized across the firms. A) total costs B) marginal costs C) profits D) revenues Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 29 Copyright © 2022 Pearson Education Ltd.

The following graph shows the marginal cost curves of two profit-maximizing firms in a perfectly competitive market.

4) Refer to the graph above. At the competitive equilibrium price in this market, Firm 1 produces ________ compared to Firm 2, and will get ________ in producer surplus. A) more; more B) more; less C) less; more D) less; less Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 5) Refer to the graph above. If the equilibrium price in this market is $5, Firm 1's producer surplus is equal ________, and Firm 2's producer surplus is equal ________. A) $24; $16 B) $24; $40 C) $12; $24 D) $14; $8 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 6) When two firms in a perfectly competitive market seek to maximize profit in the long run, they eventually end up ________. A) producing at a suboptimal level B) minimizing the total cost of production C) earning the same level of profits D) producing the same level of output Answer: B Difficulty: Medium AACSB: Analytical Thinking 30 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 7) If price is greater than the average variable cost, a profit-maximizing firm should ________. A) contract production until price is equal to marginal cost B) expand production until price is equal to marginal cost C) contract production until total revenue is equal to total cost D) expand production until total revenue is equal to total cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 8) If a firm faces an average total cost of $100 and sells its product for $115, how much profit does it make when it sells 20 units of the product? A) $200 B) $115 C) $300 D) $800 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm The following figure shows the marginal cost curve and the average total cost curve of a firm operating in a perfectly competitive industry.

9) Refer to the figure above. What price does the firm face in the market? A) $2 B) $4 C) $6 D) $8 Answer: D Difficulty: Medium AACSB: Application of Knowledge 31 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 10) Refer to the figure above. At what level of output does the firm maximize profits? A) 0 units B) 10 units C) 20 units D) 30 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 11) Refer to the figure above. What is the revenue of the firm when it sells the profit-maximizing level of output? A) $40 B) $160 C) $180 D) $240 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 12) Refer to the figure above. What is the total cost of the firm when it produces the profitmaximizing level of output? A) $60 B) $120 C) $180 D) $240 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 13) Refer to the figure above. Which of the following statements is TRUE? A) The firm maximizes profits if it produces 10 units of the good. B) If the market price is $10, the firm will suffer losses. C) If the market price is $2, the firm will make profits. D) The firm makes maximum profits if it produces 30 units. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

14) Refer to the figure above. What is the maximum profit that the firm can make? A) $30 B) $60 C) $90 D) $180 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm Scenario: A small firm manufactures maple baseball bats in two small production facilities, with the following marginal cost and average total cost equations: Plant 1: Marginal cost: MC1 = 10 + 2Q, Plant 1: Average total cost: ATC1 = 10 + Q. Plant 2: Marginal cost: MC2 = 10 + 2Q, Plant 2: Average total cost: ATC2 = 10 + Q.

15) The owner of this firm insists that each bat-manufacturing facility produce the same number of bats. Under this requirement, how many bats are produced at each facility? Explain your answer. A) 40 B) 45 C) 80 D) 90 Answer: B Explanation: Each facility produces until Price = Marginal cost, and because the cost curves are the same for each facility, profit-maximizing production levels satisfy the owner's demand. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

16) Under the owner's demand to equalize profit at each facility, total profits across the two plants are such that the firm ________. Explain your answer. A) loses $2,025 B) earns zero profit C) earns positive economic profits of $3,625 D) earns positive economic profits of $4,050 Answer: D Explanation: Using the equation for profits as (Price - Average total cost) Quantity = ($100 ($55, since ATC = 10 + Q = 10 + 45 = $55)) 45 = $45 45 = $2,025.

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 17) Refer to the scenario above. Now suppose the plant is sold to a new owner with an undergraduate degree in economics and an MBA in finance. The new owner plans to follow the profit-maximizing rule (produce the level of output at which Marginal Cost = Price) rather than equalize production across both plants. Under this new guidance, production levels at each firm are ________. Explain your answer. A) Produce 45 units of output at Plant 1 and shut down Plant 2 B) Produce 45 units of output at Plant 1 and produce 40 units of output at Plant 2 C) Produce 45 units of output at Plant 1 and produce 45 units of output at Plant 2 D) Produce 40 units of output at Plant 1 and 40 units of output at Plant 2 Answer: C Explanation: Since marginal costs are the same at each plant, dividing production equally (the old rule) is the same as the profit-maximizing rule. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

18) Refer to the scenario above. Given the quantity of bats each facility produces under the new owner's advice to maximize profits by producing until Marginal Cost = Price at each facility, what are the firm's profits? Compare your answer to the profits made under the old owner. A) $2,025 B) $3,625 C) $4,000 D) $4,050 Answer: D Explanation: Profits are the same as under the old owner, because output levels are the same at each facility. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm Scenario: The scenario above changes, because an increase in the wages of workers at Plant 2 causes marginal costs and average total costs at Plant 2 to rise: Plant 2: New marginal cost: MC2 = 20 + 2Q, Plant 2: Average total cost: ATC2 = 20 + Q. Costs at Plant 1 do not change.

19) Refer to the scenario above. Faced with different costs at each facility, what are the levels of output produced at each facility under the new owner's guidance to maximize firm profits? Explain your answer. A) Produce 40 units of output at Plant 1 and shut down Plant 2 B) Produce 45 units of output at Plant 1 and shut down Plant 2 C) Produce 45 units of output at Plant 2 and 40 units of output at Plant 2 D) Produce 45 units of output at Plant 1 and 45 units of output at Plant 2 Answer: C Explanation: Since costs have not changed at Plant 1, the output and profit calculations for that plant are the same as before: produce 45 units of output and realize profits of $2,025. But for Plant 2, now facing higher marginal and average total costs, it should reduce production to 40 units of output, since Price = Marginal Cost implies 100 = 20 + 2 Q so Q = 40, which leads to plant profits of (Price - Average total cost) Quantity = ($100 - $60) 40 = $1,600. Total firm profits are $2,025 + $1,600 = $3,625. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 35 Copyright © 2022 Pearson Education Ltd.

20) Refer to the scenario above. Given costs have changed at Plant 2, what are the firm's total profits now that is maximizing profits but facing different costs at each facility? Explain your answer. A) $3,200 B) $3,625 C) $4,000 D) $4,050 Answer: B Explanation: Plant 1 profits are the same as before, $2,025, but Plant 2 profits are now only $1,600, since it faces higher marginal and average total costs. Plant 2 profits are (Price - Average total cost) Quantity = ($100 - $60) 40 = $1,600. Total firm profits are $2,025 + $1,600 = $3,625. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm The following figure shows the marginal cost curve and the average total cost curve of a firm operating in a perfectly competitive market.

21) Refer to the figure above. Suppose the price in this market is $5. At what level of output does the firm maximize its profits? A) 0 units B) 1,000 units C) 300 units D) 700 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 36 Copyright © 2022 Pearson Education Ltd.

22) Refer to the figure above. Suppose the price in this market is $5. What is the revenue of the firm, when it sells the profit-maximizing level of output? A) $5,000 B) $1,600 C) $1,800 D) $3,500 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 23) Refer to the figure above. Suppose the price in this market is $5. What is the total cost of the firm, when it produces the profit-maximizing level of output? A) $600 B) $1,200 C) $2,800 D) $2,400 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 24) Refer to the figure above. How low can the price in this market go for this firm to still be able to operate in the long run? A) $3 B) $4 C) $5 D) $0 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

Scenario: There are two firms producing ballpoint pens in a perfectly competitive industry. The market price of one pen is $5. Firm A has a lower marginal cost than Firm B. The following graphs illustrate the marginal cost curves of both firms.

25) Refer to the scenario above. If both the firms are optimizing, which of the following statements is TRUE? A) Firm B will produce more than Firm A. B) Firm A will produce more than Firm B. C) Both firms will produce the same quantity. D) The quantity produced by both firms will depend on the demand for pens and not the marginal costs. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 26) Refer to the scenario above. The average total cost of Firm A when it produces 100 pens is $3, and the average total cost of Firm B when it produces 50 pens is $7. At these levels of production, which of the following statements is TRUE? A) Both firms incur losses. B) Firm A incurs a loss, but Firm B makes a profit. C) Firm B incurs a loss, but Firm A makes a profit. D) Both firms make profits. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

27) Refer to the scenario above. If the government enforces a ban on Firm B and asks Firm A to carry out all production, ________. A) Firm A's marginal cost is likely to decrease, but its average cost is likely to increase B) Firm A's marginal cost and average cost are likely to decrease C) Firm A's marginal cost is likely to increase, but its average cost is likely to decrease D) Firm A's marginal cost and average cost are likely to increase Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 28) Refer to the scenario above. If the government removes the ban that it had imposed earlier on Firm B and both Firm A and Firm B aim at maximizing profits, the ________. A) marginal cost of Firm A will eventually be greater than the marginal cost of Firm B B) marginal cost of Firm B will eventually be greater than the marginal cost of Firm A C) marginal cost of both firms will eventually be equalized D) difference in the marginal cost of both firms will eventually increase Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 29) Refer to the scenario above. If both firms operate to maximize profits, the ________. A) total cost of production is minimized B) total combined profits are minimized C) marginal costs of production of both firms are minimized D) marginal costs of production of both firms are maximized Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 30) Refer to the scenario above. If both firms operate without government intervention, ________. A) total costs are maximized B) total profits are maximized C) marginal revenues of both the firms are maximized D) marginal revenues of both the firms are minimized Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

31) Refer to the scenario above. Which of the following statements is TRUE? A) If the production of both firms is equal, social surplus increases. B) No government intervention is required to reach the optimal outcome. C) At the optimal level of production, total costs of production are maximized. D) Even though both firms have different marginal costs, the optimal quantity produced will be the same for both firms. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

Scenario: A manufacturing firm operates three plants with the marginal cost curves shown in the figure and the average total costs summarized in the table below.

32) Refer to the scenario above. If the market price of the firm's product is $80 per 100 kg, which plants should be used to produce the good? A) Plants 1 and 2 B) Plants 2 and 3 C) Plants 1 and 3 D) All plants Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

33) Refer to the scenario above. If the market price of the firm's product is $80 per 100 kg, what is the firm's profit? A) $31,000 B) $28,000 C) $23,000 D) $20,000 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 34) Refer to the scenario above. If the market price of the firm's product is $60 per 100 kg, which plants should be used to produce the good? A) Plants 1 and 2 B) Plants 2 and 3 C) Plants 1 and 3 D) All plants Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 35) Refer to the scenario above. If the market price of the firm's product is $50 per 100 kg, which plant(s) should be used to produce the good? A) Plants 1 and 2 B) Plant 1 only C) Plant 2 only D) No plant. The firm should exit the market. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 36) Refer to the scenario above. The firm should exit the market if the price per 100 kg falls below ________. A) $80 B) $60 C) $50 D) $30 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

37) Which of the following statements is TRUE? A) The total cost of production in a perfectly competitive market can be minimized only when the marginal costs across firms in the market are different. B) When a competitive market is allowed to operate efficiently, firms end up producing goods using the least amount of scarce resources. C) Under a perfectly competitive framework, a ruling authority is essentially required to dictate goals for the betterment of society. D) A firm interested in maximizing profits in a perfectly competitive market will produce output at a level where marginal revenue is equal to the price and greater than the marginal cost. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 38) What role does the invisible hand play when two firms are producing in the same competitive industry? Answer: When two firms are producing in the same competitive industry, the managers of both firms will be interested in maximizing individual profits. Although both firms function independently for their own objectives, the total cost of production will be minimized and the total profits across the two firms will be maximized. This happens because both firms produce where marginal cost is equal to price, and eventually marginal cost across the firms is equalized. Because both firms are manufacturing at their lowest-cost output levels, total cost of production is minimized and total profits are maximized. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 39) In which of the following situations should a profit-maximizing firm leave its output unaltered? A) MR > MC and Price > Average total cost B) MR = MC and Total revenue < Total variable cost C) MR < MC and Price < Average total cost D) MR = MC and Total revenue > Total variable cost Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

The following figure depicts the short-run cost curves of a perfectly competitive firm.

40) Refer to the figure above. If the current market price is $9, the profit-maximizing output of this firm is ________. A) 15 B) 55 C) 70 D) 85 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 41) Refer to the figure above. At the profit-maximizing level of output, totals are equal to ________. A) 135 B) 275 C) 420 D) 765 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 42) Refer to the figure above. Should the market price fall to $4, this film will ________. A) shut down immediately and make zero profit B) shut down immediately and suffer a loss equal to its fixed costs C) continue operating in the short run and suffer a loss that is less than its fixed costs D) produce 60 units and cover exactly its variable cost Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 44 Copyright © 2022 Pearson Education Ltd.

43) Refer to the figure above. A firm could choose to produce a quantity of 60 in the long run if ________. A) this firm could not exit the industry B) the firm was experiencing decreasing returns to scale C) barriers to entry existed D) the firm expected to price to rise in the future Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 44) Which of the following statements is TRUE? A) At the equilibrium price in a competitive market, all firms will face the same marginal cost of production. B) In order to minimize costs, firms must maximize profits C) Firms are trying to produce at the lowest average total cost D) At the equilibrium price in a competitive market, all firms will face the same average cost of production. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm 45) Firm 1 has a marginal cost curve represented by MC =4+q and am average total cost represented by ATC = 4+q/2. Firm 2 has a marginal cost curve represented by MC = 2q and an average total cost represented by ATC = q. If the market price is $10, what should be the output of each firm? A) Firm 1 should produce 6 units of output and firm 2 should produce 5 units of output. B) Firm 1 should produce 12 units of output and firm 2 should produce 10 units of output. C) Firm 1 should produce 6.67 units of output and firm 2 should produce 10 units of output. D) Neither firm should produce any units or output. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

46) The following figure illustrates the marginal cost (MC) curves of two firms operating in the same industry. The marginal cost of Firm B is higher than the marginal cost of Firm A.

a) What is the optimal output of each firm if the market price is $15? b) The government decides to shut down Firm B, as it has a higher marginal cost than Firm A. If it does so and asks Firm A to produce the combined output of firms A and B, will production be efficient? Explain your answer. c) How does the invisible hand work in such an industry? Answer: a) The optimal output of each firm is determined at the point where price is equal to marginal cost, and marginal cost is rising. Hence, the optimal output for Firm A is 40 units and the optimal output for Firm B is 20 units. b) If the government decides to suspend operations at Firm B and asks Firm A to carry out all production, efficiency will be lost. Total production when both firms are producing equals 60 units. If the government stops Firm B from producing and Firm A is asked to carry out the total production, the firm will have to produce 20 more units. The marginal cost of Firm A when it produces 60 units of the good will be $35, which is much higher than the price, and therefore definitely not the lowest-cost level of output for Firm A. Moreover, Firm A was producing 40 units initially, where ATC was below the price line. If the government suspends operations at Firm B, Firm A will have to produce the total market output and will be forced to produce at a point where the ATC lies above the price line. Hence, Firm A, which was making profits when operating along with Firm B, will suffer losses if it produces 60 units of the good alone. c) The invisible hand will work by moving the production of both firms to levels where the marginal costs of both firms are equalized. This happens because the managers of both firms will want to produce at a level where price is equal to the marginal cost. At that level of output, both firms are producing the lowest-cost level of output, and hence the total cost of production across the two firms is also minimized. When the managers of both firms work for their self-interest, they end up minimizing the total costs and maximizing the total profits of the two plants combined. Thus, both firms will end up producing goods using the least amount of scarce resources. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: From the Individual to the Firm

7.3 Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 1) Positive economic profits in a perfectly competitive market imply that ________. A) producers are earning more than their opportunity cost B) existing firms are likely to leave the market C) the cost of production is equalized across producers D) government intervention is required to stabilize the market Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 2) If firms in a perfectly competitive industry are experiencing losses in the short run, we would expect firms to exit this industry and cause the market supply curve to ________. A) shift left until Price = Minimum average total cost B) shift left until Price = Minimum average variable cost C) shift right until Price = Minimum average total cost D) shift right until Price = Minimum average variable cost Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 3) If firms in a perfectly competitive industry are earning positive economic profits in the short run, we would expect firms to enter this industry and cause the market supply curve to ________. A) shift left until price = minimum average total cost B) shift left until price = minimum average variable cost C) shift right until price = minimum average total cost D) shift right until price = minimum average variable cost Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

4) The entry of new firms into a perfectly competitive market will cause ________. A) both the equilibrium price and quantity to increase B) both the equilibrium price and quantity to decrease C) the equilibrium price to increase but the equilibrium quantity to decrease D) the equilibrium price to decrease but the equilibrium quantity to increase Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 5) The entry of new firms into a perfectly competitive market will cause a(n) ________. A) increase in the profitability of existing firms B) decrease in the profitability of existing firms C) leftward shift of the demand curve of the good being produced by the firms D) rightward shift of the demand curve of the good being produced by the firms Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 6) In a perfectly competitive market, if market price is higher than the average total cost of production, ________. A) firms will incur losses in the long run B) firms will make profits in the long run C) new firms will enter the industry D) firms will exit the industry Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 7) The incentive for new firms to enter a perfectly competitive market is primarily the ________. A) existence of a large number of firms in the market B) positive profits earned by the existing firms in the market C) high level of government intervention in the market D) large number of buyers in the market Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

8) Which of the following suggests that a competitive firm earns zero economic profits? A) P = MC > ATC B) P > MC = ATC C) P = MC = ATC D) P > MC > ATC Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 9) When positive economic profits exist in an industry, ________. A) the market price of the good produced by the industry is less than the average total cost of the industry B) resources flow from less productive uses to that particular industry C) there is an exit of firms from the industry D) the market price of the good produced by the industry is less than the marginal cost faced by the industry Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 10) The phenomenon that causes resources in perfectly competitive industries to shift toward their highest valued use in the long run is for entry and exit to occur until ________. A) the market price equals the minimum of marginal cost B) the market price equals the minimum of average variable cost C) the market price equals the minimum of average total cost D) all firms earn positive economic profits Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

11) Which of the following statements is TRUE? A) In a competitive market, the invisible hand encourages the movement of resources from more productive uses to less productive uses. B) In a competitive market, firms in the long run tend to earn positive economic profits. C) Competitive equilibrium provides incentives for entrepreneurs to shift their resources from unprofitable industries to profitable ones. D) At the competitive equilibrium, production occurs at the point of maximum average total cost. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 12) Which of the following statements is TRUE of perfect competition? A) The outcome in a perfectly competitive market is Pareto inefficient. B) The total value of production across a perfectly competitive industry is maximized. C) Firms under perfect competition produce at a point where price is greater than marginal cost. D) Consumers in a competitive market purchase at a point where marginal utility is greater than price. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 13) Which of the following statements is TRUE? A) Production in a perfectly competitive market is efficient because resources in the market leave those sectors in which price cannot cover their costs of production and enter those sectors in which price can cover their costs of production. B) Production in a perfectly competitive market is suboptimal because the absence of free entry and exit of firms allows firms to specialize in only one particular industry. C) Production in a perfectly competitive market is Pareto inefficient because the government or a central planner carefully analyzes the needs and requirements of society and instructs firms on what to produce and in what quantity. D) Production in a perfectly competitive market is Pareto efficient because the government or a central planner carefully analyzes the needs and requirements of society and instructs firms on what to produce and in what quantity. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

14) A market economy produces the optimal amount of each good at least cost when ________. A) P > ATC B) P = ATC C) P > AVC D) P = MR Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 15) In a perfectly competitive market, if market price is lower than the average total cost of production, ________. A) new firms will enter the market B) existing firms will leave the market C) all existing firms will earn positive economic profits D) all existing firms will earn zero economic profits Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 16) When existing firms leave a perfectly competitive industry, ________. A) the equilibrium price decreases, and the equilibrium quantity increases B) the equilibrium price increases, and the equilibrium quantity decreases C) both the equilibrium price and quantity increase D) both the equilibrium price and quantity decrease Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 17) When existing firms leave a perfectly competitive market, it causes ________. A) an increase in the profitability of existing firms B) a decrease in the profitability of existing firms C) a rightward shift in the demand curve of the good being produced by the firms D) a leftward shift in the demand curve of the good being produced by the firms Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

18) When sellers in a perfectly competitive market attempt to maximize their own profits, they ________. A) eventually end up minimizing the value of total production B) earn positive economic profits even in the long run C) move scarce resources to their highest-valued use D) eventually divert resources to their lower-valued uses Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 19) If restrictions on entry and exit of firms are introduced in free markets, ________. A) all existing firms will earn equal profits in the long run B) existing firms will incur equal losses in the long run C) the market will allocate resources efficiently D) resources in the market will not allocated efficiently Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

The following figure represents the cost curves of two firms operating in different perfectly competitive industries. This economy consists only of industries 1 and 2.

20) Refer to the figure above. If the market price in industry 1 is $3 and the market price in industry 2 is $4, we should expect ________ in the long run. A) firm A to exit industry 1 and enter industry 2 B) firm B to exit industry 2 and enter industry 1 C) firm A to exit industry 1 and not enter industry 2 D) both firms to stay in their respective industries Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 21) Refer to the figure above. If the market price in industry 1 is $7 and the market price in industry 2 is $3, we should expect ________ in the long run. A) firm A to exit industry 1 and enter industry 2 B) both fims to stay in their respective industries C) firm B to exit industry 2 and not enter industry 1 D) firm B to exit industry 2 and enter industry 1 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

22) The existence of positive profits in a perfectly competitive industry ________. A) provides an incentive for firms to increase their price B) encourages new firms to enter the industry C) encourages firms to increase their supply D) signals that the price has reached its long-term level Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries A firm owns two production plants. The following figures depict the cost curves for each plant. One homogeneous good is produced in both plants.

23) Refer to the figure above. In the short run, if the market price is $4, the firm should ________. A) shut down production in both plants B) produce 40 units in plant A and 50 units in plant B C) produce 90 units in plant B since the MC is smaller there D) produce 50 units in both plants Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

24) Refer to the figure above. In the short run, if the market price is $6 the firm should ________. A) produce 50 units in plant A and 60 units in plant B B) produce 60 units in both plants C) produce 110 units in plant B since MC > ATC when the price is $6 D) produce 50 units in both plants Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

Scenario: The rare earth element neodymium is one of the essential ingredients in the magnets used in computer hard drives and loudspeakers, among many other devices. The figures below shows a hypothetical pictures of supply and demand for neodymium, loudspeakers, and computer hard drives. The latter two are accompanied by the pictures of cost curves for a typical firm in those markets. Initially, all markets are in the long-run equilibrium at the prices shown. Then a surge in demand for loudspeakers takes place due to a rapidly increasing popularity of hi-fidelity audio equipment in China. This will cause a change in the loudspeaker market (Step 1), which in turn causes a change in the neodymium market (Step 2), which will cause a change in the hard drive market and the loudspeaker market (Step 3), and so on.

25) Refer to the scenario above. What is expected to happen in the loudspeaker market after the surge in demand for loudspeakers (in Step 1)? A) The market will remain at the initial equilibrium. B) There will be a decrease in the quantity demanded due to higher price. C) There will be an increase in supply due to entry. D) There will be a decrease in supply due to exit. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 26) Refer to the scenario above. Taking into account the initial reaction in the loudspeaker market in Step 1, what is expected to happen in the neodymium market (in Step 2)? A) Demand will increase, and the equilibrium price will rise. B) Demand will increase, and the equilibrium price will fall. C) Supply will increase, and the equilibrium price will rise. D) Supply will increase, and the equilibrium price will fall. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 27) Refer to the scenario above. Taking into account the reaction of the neodymium market in Step 2, what is expected to happen in the computer hard drive market (in Step 3)? A) The cost will rise, but the market will remain at the initial equilibrium. B) The cost will fall, and there will be an increase in the quantity supplied due to higher price. C) The cost will fall, and there will be an increase in supply due to entry. D) The cost will rise, and there will be a decrease in supply due to exit. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 28) Refer to the scenario above. Taking into account the reaction of the neodymium market in Step 2, what is expected to happen in the loudspeaker market (in Step 3)? A) The cost will rise, but the market will remain at the initial equilibrium. B) The cost will fall, and there will be an increase in the quantity supplied due to higher price. C) The cost will rise, but the supply may increase due to entry. D) The cost will fall, but the supply may decrease due to exit. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across 57 Copyright © 2022 Pearson Education Ltd.

Industries 29) If a new production process is developed that allows firms to produce the same output with fewer inputs, then the prices of the inputs ________. A) will rise due to increased supply of the inputs B) may rise due to increased production by existing firms and new firms' entry C) will fall due to increased demand for the inputs D) may fall due to decreased production by existing firms and/or exit Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries The following figure shows the marginal cost curve and the average total cost curve of a firm operating in a perfectly competitive market. All of the other firms in this market have a cost structure similar to this firm's.

30) Refer to the figure above. Suppose the price in this market is $5. We expect ________. A) the firms to start exiting this market B) the firms to start entering this market C) no entry or exit in this market D) exit from this market, followed by entry of firms into this market Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 58 Copyright © 2022 Pearson Education Ltd.

31) Refer to the figure above. Suppose the price in this market is $2.50. We expect ________. A) the firms to start exiting this market B) the firms start entering this market C) no entry or exit in this market D) exit from this market, followed by entry of firms into this market Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 32) Refer to the figure above. Suppose the price in this market is $3. We expect ________. A) the firms to start exiting this market B) the firms start entering this market C) no entry or exit in this market D) exit from this market, followed by entry of firms into this market Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 33) What are the key functions of the equilibrium price in a perfectly competitive market? Answer: There are three key functions of equilibrium price in a perfectly competitive market: i) it efficiently allocates scarce resources to market participants, ii) it efficiently allocates the production of goods within an industry, and iii) it efficiently allocates scarce resources across industries. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 34) How do perfectly competitive markets allow for the movement of resources from less productive industries to more productive industries? Answer: Perfectly competitive markets are characterized by the free entry and exit of firms. Whenever firms in a particular industry are seen earning positive economic profits, other firms are attracted to the industry. The firms that enter the profit-making industry bring resources from other industries where they may not have been fully utilized. Similarly, when an industry incurs losses, some firms move out of the industry. This allows for the movement of resources from the less productive, loss-incurring industry to other industries. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

35) What is likely to happen to the allocation of resources if there is a sudden increase in the demand for a good produced by a perfectly competitive industry? Answer: If there is an increase in the demand for a good produced by a perfectly competitive industry, the equilibrium price in the industry will increase and the existing firms will earn higher profits. This will act as an incentive for newer firms to enter the industry. As such, resources and firms will move into the industry because of the sudden increase in the demand for this good. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 36) Suppose the firms in a perfectly competitive industry are earning positive economic profits. How will these positive profits affect the flow of resources into the industry? How will the equilibrium quantity and price change in the industry because of the profits? Answer: A perfectly competitive market is characterized by the free entry and exit of firms in the long run. Profits earned by firms in an industry are the rationale behind the entry and exit of firms in that industry. If firms in a particular industry are earning positive economic profits, this will act as an incentive for newer firms to enter that industry. Among the firms that enter the industry, some would be new firms and some would be firms that are exiting from other industries. In a perfectly competitive framework, firms exit an industry when the industry suffers losses. Guided by profits, some firms exit loss-making industries to participate in profit-making industries. Hence, the invisible hand guides resources from other industries to the profit-making industry without requiring intervention from any authority. Resources are thus put to their best uses through the functioning of the invisible hand. When new firms enter the industry, the supply curve of the industry will shift rightward without any change in demand. An increase in supply, without any change in demand, will lead to a higher equilibrium quantity available at a lower equilibrium price. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 37) The U.S. coal industry has endured several years of economic losses as natural gas has replaced coal in electricity generation and other uses. At the same time, the solar panel industry in the United States has recorded large positive economic profits. If these markets are perfectly competitive, we would expect ________. A) neither entry nor exit from the U.S. coal industry but entry into the solar panel industry B) exit from the U.S. coal industry but no entry into the solar panel industry C) exit from the U.S. coal industry and entry into the solar panel industry D) entry into both the U.S. coal industry and the solar panel industry Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 60 Copyright © 2022 Pearson Education Ltd.

38) If exit occurs from the U.S. coal industry and entry occurs into the U.S. solar panel industry, we would expect ________. A) wages to fall in both the U.S. coal and steel industries B) wages to fall in the U.S. coal industry but remain constant in the solar panel industry C) wages to fall in the U.S. coal industry and to rise in the solar panel industry D) wages to fall in the U.S. coal industry and to rise in the solar panel industry only if the government imposes a wage ceiling in the solar panel industry Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries The graph below shows the market demand and supply curves for succulent starts.

39) If firms in the market for succulent starts are currently making zero economic profits, which of the following scenarios would lead more firms to enter and begin selling succulent starts? A) Taylor Swift posts about her love of succulents on Instagram, leading more people to want to own succulents of their own. B) A new study finds that succulents are toxic to small children. C) The price of clay pots, used to grow succulents decreases. D) The price of orchids, a substitute in consumption for succulents, decreases. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries

40) Assume firms in the market for succulent starts are currently making negative economic profits, which of the following statements is FALSE? A) Firms will exit the industry, decreasing both price and quantity of succulent starts bought and sold. B) Firms' minimum ATC must be higher than $4.50. C) Firms will produce where their MC=$4.50, as long as they are covering their variable costs. D) If the price of snake plants, a complement in consumption for succulents, increases the price could increase enough that firms stop exiting the industry. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extending the Reach of the Invisible Hand: Allocation of Resources Across Industries 7.4 Prices Guide the Invisible Hand 1) Which of the following statements is TRUE of market prices in a perfectly competitive market? A) Market prices are determined by the government. B) Market prices allow for the efficient allocation of scarce resources. C) Market prices are not stable and fluctuate widely. D) Market prices do not act as incentives for buyers. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 2) The invisible hand is mostly guided by ________. A) the costs of production B) the quantity of goods and services sold C) market prices D) government intervention Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 3) Without any restrictions in a perfectly competitive market, if there is a sudden rightward shift in the demand for a good, sellers of the good will ________. A) increase the supply of the good at the same price B) increase the quantity of the good supplied in the market C) decrease the supply of the good at the same price D) decrease the quantity supplied Answer: B Difficulty: Medium AACSB: Analytical Thinking 62 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Prices Guide the Invisible Hand 4) A price control is ________. A) a market-determined equilibrium price B) a non-market price imposition C) the price at which quantity demanded equals quantity supplied D) the price that maximizes social surplus Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 5) If prices are held below the equilibrium price, ________. A) there will be a surplus in the market B) there will be a shortage in the market C) social surplus will be maximized D) all firms will earn positive economic profits Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 6) If prices are held above the equilibrium price, ________. A) social surplus will be maximized B) all firms will incur losses C) there will be a surplus in the market D) there will be a shortage in the market Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 7) With an increase in the demand for a good, if prices are NOT allowed to increase, ________. A) social surplus will be maintained at maximum B) firms will have no incentive to increase the quantity supplied of the good C) a surplus will occur in the market D) overall efficiency will increase in the market Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

The following figure shows the demand and supply curves for a good. The initial demand curve is D1 and the supply curve is S. Later, due to an external shock, the demand curve shifts to D2.

8) Refer to the figure above. What is the initial equilibrium price of the good? A) $20 B) $40 C) $60 D) $80 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 9) Refer to the figure above. What is the initial equilibrium quantity of the good? A) 20 units B) 30 units C) 35 units D) 50 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 10) Refer to the figure above. What is the equilibrium price after the demand curve shifts to D2? A) $20 B) $40 C) $60 D) $80 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 64 Copyright © 2022 Pearson Education Ltd.

11) Refer to the figure above. What is the equilibrium quantity after the demand curve shifts to D2? A) 20 units B) 30 units C) 35 units D) 50 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 12) Refer to the figure above. After the demand curve shifts to D2, if the price is held below the new equilibrium, then ________. A) the quantity demanded will equal the quantity supplied B) the quantity demanded will be greater than the quantity supplied C) the quantity demanded will be less than the quantity supplied D) there will be zero deadweight loss Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 13) Which of the following is likely to happen if the government imposes a price control at $60, when the demand curve shifts to D2? A) There will be a shortage of 15 units of the good in the market. B) There will be a surplus of 15 units of the good in the market. C) There will be a shortage of 10 units of the good in the market. D) There will be a surplus of 10 units of the good in the market. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 14) Which of the following statements is TRUE? A) Price controls strengthen the functioning of the invisible hand. B) Price controls weaken the functioning of the invisible hand. C) Price controls always benefit buyers and make sellers worse off. D) Price controls always benefit sellers and make buyers worse off. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

15) Which of the following statements differentiates between a shortage and a surplus? A) A shortage occurs when price is held at the equilibrium price, but a surplus occurs when price is held above the equilibrium price. B) A shortage occurs when price is held below the equilibrium price, but a surplus occurs when price is held at the equilibrium price. C) A shortage occurs when quantity supplied exceeds quantity demanded, whereas a surplus occurs when quantity demanded exceeds quantity supplied. D) A shortage occurs when quantity demanded exceeds quantity supplied, whereas a surplus occurs when quantity supplied exceeds quantity demanded. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand The following figure illustrates the demand and supply curves for a good.

16) Refer to the figure above. What is the equilibrium price and quantity of the good? A) Equilibrium price is $40, equilibrium quantity is 20 units. B) Equilibrium price is $60, equilibrium quantity is 10 units. C) Equilibrium price is $60, equilibrium quantity is 20 units. D) Equilibrium price os $80, equilibrium quantity is 30 units. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand

17) Refer to the figure above. Which of the following is likely to happen if a price control below the equilibrium price is imposed? A) Quantity supplied will exceed quantity demanded. B) Quantity demanded will exceed quantity supplied. C) Consumer surplus will decrease. D) Producer surplus will increase. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 18) Refer to the figure above. Which of the following is likely to happen if a price control of $40 is imposed? A) There will be a surplus of 10 units in the market. B) There will be a shortage of 10 units in the market. C) There will be a surplus of 20 units in the market. D) There will be a shortage of 20 units in the market. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 19) Refer to the figure above. Which of the following is likely to happen if a price control above the equilibrium price is imposed? A) Quantity demanded will exceed quantity supplied. B) Quantity supplied will exceed quantity demanded. C) Consumer surplus will increase. D) Producer surplus will decrease. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 20) Refer to the figure above. Which of the following is likely to happen if a price control of $80 is imposed in the market? A) There will be a surplus of 25 units in the market. B) There will be a shortage of 25 units in the market. C) There will be a surplus of 10 units in the market. D) There will be a shortage of 10 units in the market. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand

Scenario: The retail market for beef in Argentina is given by the following demand and supply schedules, where the price is in Argentine pesos per kilo and the quantity is millions of kilos per year. Demand: QD = 220 P, Supply: QS = 20 + P.

21) Refer to the scenario above. The market equilibrium quantity is ________ million kilos of beef per year and the market equilibrium price is ________ pesos per kilo. A) 80; 140 B) 100; 120 C) 60; 80 D) None of the above Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

22) Refer to the scenario above. In the initial competitive market equilibrium, consumer surplus is ________ million pesos, producer surplus is ________ million pesos, and social surplus is ________ million pesos. A) 5,000; 5,000; 10,000 B) 10,000; 10,000; 20,000 C) 5,000; 10,000; 15,000 D) 10,000; 5,000; 15,000 Answer: A Explanation: See the graph below for an explanation of the answer.

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

Scenario: Keeping beef prices low makes the Argentine government popular among lower income urban voters, whose food costs use up a substantial portion of their incomes. So the Argentine government imposes a price ceiling of 60 pesos per kilo on retail beef. 23) Refer to the scenario above. At this price control price, consumers demand ________ million kilos of beef, but suppliers are willing to supply only ________ million kilos, so there is ________ of ________ million kilos of beef. A) 120; 120; neither surplus nor shortage; zero B) 80; 120; a surplus; 40 C) 160; 40; a shortage; 120 D) 120; 80; a shortage; 40 Answer: C Explanation: See the graph below for a graphical explanation of the answer.

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

After the imposition of the price controls, consumer surplus is represented in the graph below.

24) Refer to the graph above. Which areas represent consumer surplus after price controls are imposed? A) A B) A + B C) A + B + C D) A + B + D Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 25) In the graph above, producer surplus for Argentine beef retailers after the imposition of the price control is given by which areas? A) F B) D + F C) D + E + F D) C + D + E + F Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

26) In the graph above, the deadweight loss arising from the Argentine government's price control on beef is given by which areas? A) B + C + D + E B) B + C C) D + E D) C + E Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 27) Whenever there is a binding price ceiling (a price control that sets the price below the market equilibrium price) that changes the equilibrium quantity, all of the below occur EXCEPT which option? A) Demand increases. B) There is a loss of social surplus. C) Consumer surplus in the aggregate increases and producer surplus in the aggregate decreases. D) Some consumers are made better off (they can purchase the good or service at a lower price) while other potential consumers are made worse off (queued out of the market). Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 28) What is the economic variable that guides the invisible hand? Answer: The invisible hand is guided by the market price. Market prices act as the most important piece of information, leading the right buyers to buy and the right sellers to sell–no more, no less. It ensures that self-interest and social interest are perfectly aligned. It also allows economic agents make optimal decisions. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 29) What are price controls? How do they affect a market? Answer: Price controls are non-market price impositions. When price controls hold, the incentives that equilibrium prices provide to buyers and sellers are eliminated. If a price control is imposed above the equilibrium price of a good, the quantity supplied of the good exceeds the quantity demanded of the good. This represents a surplus in the market. If a price control is imposed below the equilibrium price of a good, the quantity demanded of the good exceeds the quantity supplied of the good. This results in a shortage in the market. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

30) Is the invisible hand likely to work better in a market with price controls or without price controls? Explain your answer. Answer: In a perfectly competitive market, market prices align self-interest and social interest. Market prices act as the most important piece of information, leading the right buyers to buy and the right sellers to sell. Prices also allow entrepreneurs to allocate the production of goods within the same industry and also across industries. Hence, it is the market price that guides the invisible hand. When prices are allowed to move freely, social surplus is maximized in a perfectly competitive market. For example, if the demand for a commodity increases in the market of a particular region, prices go up, which encourages new firms to enter the market. But if some ruling authority does not allow the price to change according to the market conditions and instead fixes it, the invisible hand will cease to operate. Price controls are such non-market price impositions, and they limit the functioning of the invisible hand. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand 31) The following figure illustrates the demand and supply curves in the market for watches. Calculate the shortage or surplus in the market when the price is first held at $20 and then at $40.

Answer: The equilibrium price in the figure is $30, as given by the point of intersection between the demand and the supply curves. If the price is fixed at $40, quantity supplied is 60 units, whereas quantity demanded is 10 units. Hence, there is a surplus of 50 units in the market. In contrast, if the price is fixed at $20, quantity demanded is 60 units, and quantity supplied is 20 units. There will be a shortage of 40 units in the market. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Prices Guide the Invisible Hand

Scenario: The figure on the left shows the demand for fuel by Lisa and Nick during ordinary times. Assume that Lisa and Nick are the only consumers. In the figure on the right, D0 is the market demand, and S0 is the supply in ordinary times in the town. Then a hurricane hits the town. The acute needs for fuel to operate electric generators pushes the demand to D1. Meanwhile, the supply plummets to S1 because some of the fuel storage tanks owned by the town seller have been damaged by the storm. This pushes the price up to $5 per liter and only Lisa can afford some fuel. Suppose that fuel sellers outside the affected area have a cost of production such that MC = ATC at $2.50 per liter, which includes the cost of transporting the fuel under hazardous conditions.

32) Refer to the scenario above. Nick complains to the town council of price gouging by the fuel sellers. In response, an anti-price-gouging law is immediately passed that puts the price ceiling at $1.75 per liter. What will likely happen next? A) Neither Lisa nor Nick will be able to obtain the fuel. B) Both Lisa and Nick will be able to obtain the fuel. C) Lisa can, but Nick still would not be able to obtain the fuel. D) Nick can obtain the fuel, but Lisa will be priced out. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 33) Refer to the scenario above. What will likely happen if no law against price gouging is enacted? A) The price will fall, because outside sellers will increase the supply. B) The price will rise, because outside sellers will engage in price gouging. C) The price will stay the same at $5.00. D) The price will fall to the original level of $1.00. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 74 Copyright © 2022 Pearson Education Ltd.

34) Refer to the scenario above. Suppose that, in addition to an anti price gouging law prohibiting private sellers to sell fuel in town at price above $1.75, the town council decided to buy the fuel from private sellers at $1.75, using the tax revenue, so the council can distribute it to Lisa and Nick. Will this government action alleviate the situation? A) Yes. There will be a surplus. B) Yes. The council will be able to meet the demand from Lisa and Nick. C) No. There will still be a shortage. D) No. The council will turn around and charge $5.00 to Lisa and Nick. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 35) The decrease in social surplus from a market distortion is referred to as ________. A) deadweight loss B) market loss C) revenue loss D) Pareto loss Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Deadweight Loss 36) In a competitive market, a binding price ceiling causes ________ by ________. A) market efficiency; increasing the economic surplus of the last unit of output produced and consumed B) market inefficiency; creating a deadweight loss in economic surplus C) market efficiency; increasing the amount produced and consumed D) market inefficiency; increasing the amount produced and consumed Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deadweight Loss

The following figure illustrates the demand and supply curves for a good in a competitive market.

37) Refer to the figure above. What is the equilibrium price of this good? A) $5 B) $3.50 C) $7 D) $8 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Deadweight Loss 38) Refer to the figure above. Which areas on the graph represent the social surplus in this competitive market? A) F + G B) A + B + C + D + E + H + F + G C) A + B + C + D + E +H D) C + D Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deadweight Loss 39) Refer to the figure above. Suppose a price control of $3.50 is imposed on this market. What would be a consequence of this price control policy? A) A surplus of 4 units B) A shortage of 8 units C) A shortage of 4 units D) A shortage of 7 units. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deadweight Loss 76 Copyright © 2022 Pearson Education Ltd.

40) Refer to the figure above. Suppose a price control of $3.50 is imposed on this market. Which areas on the graph represent the deadweight loss in this market due to this price policy? A) F + G B) A + B + C + D + E + H + F + G C) A + B + C + D + E + H D) C + D Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deadweight Loss 41) Refer to the figure above. Suppose a price control of $7 is imposed on this market. Area(s) ________ on the graph represent the consumer surplus, and area(s) ________ represent the producer surplus in this market after this price policy. A) A + B + E; H B) E; A + B + H C) A + E; B + H D) A + C + E; B + D + H Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Deadweight Loss The following figure depicts the market for a certain good.

42) Refer to the figure above. For what price would a price ceiling policy create a deadweight loss of $10? A) $8 B) $6 C) $4 D) $3 Answer: C Difficulty: Easy AACSB: Analytical Thinking 77 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Deadweight Loss 43) Refer to the figure above. For what price would a price floor policy create a deadweight loss of $10? A) $8 B) $6 C) $4 D) $3 Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Deadweight Loss 44) Refer to the figure above. If the supply were to shift 10 units to the left at any price, what would be the new deadweight loss if the price must be kept at $6? A) $5 B) $10 C) $15 D) $20 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Deadweight Loss 45) Refer to the figure above. If the demand were to shift down by $2 at any quantity, what would be the new deadweight loss if the price must be kept at $6? A) $10 B) $20 C) $30 D) $40 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Deadweight Loss

The following figure shows the demand and supply curves for bottled water.

46) Refer to the figure above. What is the equilibrium price of bottled water? A) $4 B) $8 C) $12 D) $18 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deadweight Loss 47) Refer to the figure above. What is the equilibrium quantity of bottled water? A) 10 units B) 20 units C) 30 units D) 40 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deadweight Loss 48) Refer to the figure above. What is the consumer surplus in the market? A) $60 B) $90 C) $120 D) $160 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deadweight Loss

49) Refer to the figure above. What is the producer surplus in the market? A) $20 B) $40 C) $60 D) $80 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Deadweight Loss 50) Refer to the figure above. If a price control is imposed at $8, what is the new consumer surplus in the market? A) $115 B) $125 C) $130 D) $175 Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Deadweight Loss 51) Refer to the figure above. If a price control is imposed at $8, what is the new producer surplus in the market? A) $20 B) $40 C) $60 D) $80 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Deadweight Loss 52) Refer to the figure above. If a price control is imposed at $8, what is the gain in consumer surplus? A) $5 B) $10 C) $15 D) $20 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Deadweight Loss

53) Refer to the figure above. If a price control is imposed at $8, what is the loss in producer surplus? A) $30 B) $60 C) $90 D) $120 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Deadweight Loss 54) Refer to the figure above. If a price control is imposed at $8, what is the deadweight loss? A) $10 B) $50 C) $65 D) $85 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Deadweight Loss

The following figure shows the supply and demand for Uber rides in downtown Miami. On New Year's Eve the demand for Uber rides in downtown increases significantly.

55) Refer to the figure above. Which statement is TRUE? A) The line D1 represents the demand on ordinary days, and the the line D2 represents demand on New Year's Eve. B) The Uber fare on New Year's Eve is kept lower than its equilibrium amount. C) There will be a shortage of Uber rides in downtown Miami if this market is left unregulated. D) There will be a surplus of Uber rides in downtown Miami on New Year's Eve. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Ubernomics at Work 56) Refer to the figure above. On New Year's Eve, if the market forces are allowed to function, we expect to see ________ Uber rides in downtown Miami. A) a shift rightward in demand, and a movement along the supply curve of B) a shift rightward in demand, and a shift rightward in the supply of C) a shift leftward in demand, and a shift rightward in the supply of D) a movement along the demand curve, and a shift rightward in the supply of Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Ubernomics at Work

57) D. Gale Johnson was an economist at Iowa State and later the University of Chicago who studied Soviet agriculture. Johnson found that on large Soviet collective farms, crops often rotted in the field as mechanical harvesters were not deployed in time for the harvest. They followed a harvest schedule set centrally, and often the harvesting machines sat idle during the peak harvest season. This outcome is an example of ________. Explain your answer. A) the invisible hand B) a sunk cost C) a coordination problem D) an incentive problem Answer: C Explanation: Central planners lacked the on-the-ground information necessary to have managers and workers shift equipment and effort to those fields most ready for harvest. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Command Economy 58) Which of the following best describes a command economy? A) An economy that is characterized by a barter trade of goods and services B) An economy where strong controls are imposed by the ruling authority C) An economy in which resources are allocated through the price mechanism D) An economy in which there are a few privately owned firms Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Command Economy 59) Which of the following statements is TRUE? A) Command economies do a better job at maximizing social welfare in comparison to market economies. B) The incentive problem and the coordination problem lead to lower efficiency in market economies. C) Central planners in command economies have to make decisions that prices would automatically have made in market economies. D) Bringing economic agents together to trade is easier in command economies than in market economies. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Command Economy

60) ________ is the market value of final goods and services produced in a country in a given period of time. A) Gross national product B) Gross domestic product C) Net national product D) Net domestic product Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Command Economy 61) Historical evidence suggests that ________. A) command economies perform better than free economies in the long run B) free economies perform better than command economies in the long run C) social surplus is maximized in a command economy D) command economies perform better than free economies in the short run Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Command Economy 62) Why is it likely that a market economy will perform better than a command economy? Answer: Difficulties like the coordination problem and the incentive problem suggest that the reason for the collapse of most planned economies is that the central planner does not fully understand consumer wants and the production capabilities of every sector of the economy, and it is difficult to incentivize workers if prices are not utilized. Because any individual knows only a small fraction of all that is known collectively, it is impossible to replicate the work of the invisible hand. Therefore, a market economy is likely to perform better than a command economy. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Command Economy 63) The problem of bringing economic agents together to trade is referred to as the ________. A) incentive problem B) coordination problem C) correspondence problem D) scarcity problem Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Central Planner

64) Under Soviet collective farming after World War II, workers on collective farms were allowed to work small plots (no more than 1 hectare or about 2.5 acres) on which they could grow their own food and sell any surplus. Economist D. Gale Johnson found that while these small plots amounted to only 3.5 percent of agricultural land under cultivation in the Soviet Union, they produced more than one-third of the nation's agricultural output. Johnson's findings illustrate which of the following as it relates to central planning of agricultural production on large collective farms? A) Central planning on the collective farms was successful in increasing output. B) Central planning on the collective farms failed to increase demand. C) Central planning on the collective farms resulted in large sunk costs. D) Central planning on the collective farms failed to solve the incentive problem of aligning the interests of the landowner (the government) with the interest of the workers. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Central Planner 65) When the maximizing actions of two economic agents are NOT aligned, these agents face a(n) ________. A) coordination problem B) incentive problem C) correspondence problem D) objective problem Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Central Planner 66) Which of the following is a characteristic of command economies? A) Rewards to economic agents are based on market prices. B) Coordination of economic agents is automatic. C) It is difficult to incentivize economic agents. D) The invisible hand functions without any restraint. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Central Planner 67) Differentiate between the coordination problem and the incentive problem. Answer: The coordination problem refers to the problem of bringing economic agents together to trade, whereas the incentive problem refers to the problem of aligning the interests of economic agents. These problems can occur in a command economy. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Central Planner 85 Copyright © 2022 Pearson Education Ltd.

68) Consider the two economies of Lithasia and Barylia. Economic agents in Lithasia have coordination and incentive problems, while social surplus is maximized in Barylia. Which economic system does each economy most likely have? Explain your answer. Answer: A coordination problem refers to the problem of bringing agents together to trade, and an incentive problem refers to the problem of aligning the interests of economic agents. Because Lithasia has both problems, it most likely has a command economy. In contrast, Barylia is characterized by maximum social surplus. It is likely to have a free market economy. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Central Planner Scenario: The following excerpts describe some practices of determining wages in the Soviet economy. "Centrally-fixed weightings based on an accurate comparison of the cost of living in different regions is one of the advantages of the current [1980s] method of wage regulation. In practice, however, even here we do not find what might have been expected. … government departments enjoying a high status fix higher weightings for their workers than the local average. … As a result, workers earn different rates for the same job. … All this indicates that the advantages of regulating wages centrally for the whole country are often illusory because in principle it cannot be done on the basis of overall productivity. … In the face of life's complexity, wage regulation is not feasible and actual wage trends become semi-random." (Source: Tatiana I. Zaslavskaia.1990. The Second Socialist Revolution: An Alternative Soviet Strategy. New York: I. B. Tauris.) 69) Refer to the scenario above. Which of the following best describes the problem of wage determination by central planners? A) Wages based on the cost of living tend to become random in principle. B) The central planners themselves may have incentives to distort the wages. C) Even if the central planners correctly implement the wage regulation, productivity may fall. D) The cost of living and productivity conflict with each other and the wages tend to become random. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Central Planner 70) Suppose that a central planner in a country determines how much a physician is paid based on the value of inputs to his or her service. So, a specialist such as an oncologist would be paid more than a primary care physician. Which of the following best describes an incentive problem created by this method of payment determination? A) It is difficult for a central planner to know the value of inputs. B) It is difficult to coordinate the care provided by a specialist and a primary care doctor. C) All else being equal, patients would rather see specialists even for minor problems. D) All else being equal, oncologists would adopt a new treatment if it is more expensive. Answer: D Difficulty: Medium AACSB: Application of Knowledge 86 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Central Planner The tables below show reservation values of three buyers and three sellers in the market for chipmunk sweaters. Each buyer's reservation values for the third sweater and above are negative, and each seller can produce at most three sweaters. Buyers' Reservation Values Alvin Simon 1st sweater 45 18 2nd sweater 38 15 3rd sweater 25 13

Theodore 30 22 15

Seller's Reservation Values

1st sweater 2nd sweater 3rd sweater

Streamside Forest Fashion Sweaters 5 10 10 20 22 30

Oaken Outfits 15 25 45

71) Use the information presented above on the market for chipmunk sweaters to answer this question. If there is a regulation put in place forbidding sellers from charging more than $16 per sweater, which of the following statements is TRUE? A) There will be excess demand of 1 chipmunk sweater. B) There will be excess demand of 2 chipmunk sweaters. C) There will be excess supply of 1 chipmunk sweater. D) There will be excess supply of 2 chipmunk sweaters. Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 72) Use the information presented above on the market for chipmunk sweaters to answer this question. If there is a regulation put in place forbidding sellers from charging more than $16 per sweater, which of the following statements is TRUE about the deadweight loss? A) There will be deadweight loss of $35 B) We do not have enough information to determine the deadweight loss. C) There will be no deadweight loss because perfectly competitive markets are always efficient. D) There will be deadweight loss of $65. Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

73) Use the information presented above on the market for chipmunk sweaters to answer this question. If there is a regulation put in place forbidding sellers from charging less than $30 per sweater, which of the following statements is TRUE? A) There will be excess demand of 5 chipmunk sweaters. B) There will be excess demand of 3 chipmunk sweaters. C) There will be excess supply of 5 chipmunk sweaters. D) There will be excess supply of 3 chipmunk sweaters. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 74) Use the information presented above on the market for chipmunk sweaters to answer this question. If there is a regulation put in place forbidding sellers from charging less than $30 per sweater, which of the following statements is TRUE about the deadweight loss? A) There will be deadweight loss of $22. B) We do not have enough information to determine the deadweight loss. C) There will be no deadweight loss because perfectly competitive markets are always efficient. D) There will be deadweight loss of $12. Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

The graph below shows the market demand and supply curves for succulent starts.

75) If the government requires firms not to charge more than $3 for a succulent start, what is the deadweight loss? A) $22.5 B) $45 C) $40 D) $20 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand 76) If the government requires firms not to charge less than $5 for a succulent start, what is the deadweight loss? A) $2.5 B) $5 C) $45 D) $10 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Prices Guide the Invisible Hand

7.5 Equity and Efficiency 1) Which of the following statements is TRUE? A) The command system is remarkable at providing price signals that guide resources in a way that maximizes social surplus. B) Market economies minimize waste and provide incentives for all market participants to promote their own interests. C) The coordination of different economic agents and bringing them together to trade is a central problem of a free market economy. D) The broader interests of societies are met more often in a command system than in a market system. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 2) Efficiency is achieved in competitive markets because ________. A) producer surplus is maximized B) consumer surplus is maximized C) social surplus is maximized (the economic pie is made as large as possible) D) deadweight loss is maximized Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 3) Equity refers to ________. A) minimizing deadweight loss B) ensuring that all producer surplus is transferred to consumers C) making the economic pie as large as possible D) distributing resources across society (how the economic pie is divided) Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 4) ________ relates to the distribution of resources across society. A) Social surplus B) Equity C) Efficiency D) Utility Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 90 Copyright © 2022 Pearson Education Ltd.

5) Which of the following statements is TRUE? A) Social planners are only concerned with efficiency and not equity. B) Social planners are only concerned with equity and not efficiency. C) For some, efficiency means an even distribution of goods across society. D) For some, equity means an even distribution of goods across society. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 6) When one individual holds all the wealth of a country, this situation is ________. A) Pareto efficient but not equitable B) not Pareto efficient but equitable C) not Pareto efficient and not equitable D) Pareto efficient and equitable Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 7) Which is NOT a feature of the market economy? A) It uses price signals to maximize social surplus. B) It provides incentive to market participants to pursue self-interest. C) It allocates resources to where they are best used. D) It provides equity of income and consumption for market participants. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 8) Imagine that the economy resembles a pie. In this analogy, ________ concerns with growing the size of the pie, while ________ concerns with how the pie if distributed among the people. A) equity; efficiency B) equity; optimization C) efficiency; optimization D) efficiency; equity Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity and Efficiency

9) A maximized social surplus in an economy means that ________. A) the sum of consumer and producer surpluses have the largest possible value B) each of the consumer surplus, and the producer surplus have their largest possible values C) it is possible to make some people better off without making any other person worse off D) there is an even distribution of income among the people in that economy Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity and Efficiency The following table displays the reservation values of eight buyers and eight sellers, who each want to buy or sell a calculator. You are in charge of deciding which buyer trades (or not) with which seller at what price as you see fit. You could prescribe different prices to each pair of a buyer and a seller.

Buyer 1 2 3 4 5 6 7 8

Reservation Value of Buyer ($) 20 17 16 14 12 9 6 2

Seller 1 2 3 4 5 6 7 8

Reservation Value of Seller ($) 2 5 6 8 12 15 16 20

10) Refer to the table above. To achieve efficiency, which group of buyers should trade with which group of sellers? A) All buyers and all sellers should trade. B) Buyers 5—8 and sellers 1—4 should trade. C) Buyers 1—5 and sellers 1—5 should trade. D) Buyers 1—4 and sellers 5—8 should trade. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity and Efficiency

11) Refer to the table above. Suppose you want every buyer to be able to get a calculator without paying more than his or her reservation value. Is it possible? If so, what would be the total surplus? A) Yes; $0 B) Yes; $12 C) Yes; -$8 D) No. Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 12) Refer to the table above. Suppose you decided that Buyer 1 and Seller 1 trade at the price that is exactly halfway between their reservation values. Also Buyer 2 and Seller 2, Buyer 3 and Seller 3, Buyer 4 and Seller 4, and Buyer 5 and Seller 5 do the same. The outcome will be ________. Buyer ________ has the largest net benefit of ________. Buyer ________ has the smallest net benefit of ________. A) efficient; 1; $9; 5; $0 B) efficient; 1; $18; 5; $0 C) efficient; 1; $18; 5; $12 D) inefficient; 1; $12; 5; $12 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 13) Suppose that, recognizing that an efficient market outcome may not be equitable, a central planner announces that each agent's net benefit (the difference between the reservation value and the price paid) beyond a certain amount will be taken away and redistributed to other agents whose net benefit is below the specified level. This policy is expected to produce ________. A) an efficient outcome where every agent has the same net benefit B) an efficient outcome where every agent has 0 net benefit C) an inefficient outcome where no trade will occur D) an inefficient outcome where trades will occur at the higher price than at the equilibrium Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Equity and Efficiency

14) Are the concepts of equity and efficiency different? Why or why not? Answer: Yes, the concepts of equity and efficiency are different. Equity focuses on the distributive aspect of resources across society. Hence, equity is more concerned with how the pie is allocated to various economic agents. An economy is said to be efficient when the waste of resources is eliminated and social surplus is maximized. Thus, efficiency relates to making the societal pie as large as possible. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 15) Imagine an economy where the government allocates resources among its citizens. Recently, the government divided $1,000 among ten citizens. The amount each citizen received is displayed in the following table. Citizen 1 2 3 4 5 6 7 8 9 10

Amount Received ($) 100 150 50 10 90 200 10 190 20 180

a) The government claims that this is an efficient allocation. Do you agree? b) Social workers in the economy criticized the government on the basis of this allocation. What could be the grounds for such criticism? Answer: a) Yes, the allocation made by the government is efficient. The sum of the amounts received by the ten individuals equals $1,000. Therefore, the pool of resources has been completely distributed among the ten citizens. It is no longer possible to make someone better off without making someone else worse off. This kind of efficiency is referred to as Pareto efficiency, and the government is correct in making a claim of efficiency in allocating the resource. b) Social workers have criticized the government even though the allocation is efficient. This could be because an efficient allocation does not necessarily imply equity. Equity is concerned with the distribution of resources across society. In other words, equity means an even distribution of goods across society. The government's allocation can be criticized on the ground that the distribution is unequal. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Equity and Efficiency

16) The basic idea behind an auction is that buyers want to buy from sellers with the ________, and sellers want to sell to buyers with the ________. A) lowest ask prices; highest bid prices B) highest ask prices; highest bid prices C) highest ask prices; lowest bid prices D) lowest ask prices; lowest bid prices Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Can Markets Composed of Only Self-Interested People Maximize the Overall Well-Being of Society? 17) A double oral auction is an auction in which ________. A) sellers state asks and buyers state offers one after the other B) sellers state asks and buyers state bids simultaneously C) the highest bidders state their bids at the same time D) bidding starts from the lowest price and proceeds to the highest price Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Can Markets Composed of Only Self-Interested People Maximize the Overall Well-Being of Society? 18) Suppose you are a seller in a a double oral auction, and your reservation value is $10. What should you do? A) You should accept a "bid" for $12. B) You should accept an "ask" for $12. C) You should accept a "bid" for $8. D) You should accept an "ask" for $8. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Can Markets Composed of Only Self-Interested People Maximize the Overall Well-Being of Society? 19) A bilateral negotiation is a bargaining mechanism in which ________. A) a third party or an authority intervenes and decides the prices of the products traded in a market B) a single seller and a single buyer confront one another with bids and asks C) multiple buyers bargain with a single seller to determine the trading price D) multiple sellers bargain with a single buyer to determine the trading price Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Can Markets Composed of Only Self-Interested People Maximize the Overall Well-Being of Society? 95 Copyright © 2022 Pearson Education Ltd.

20) Using bilateral negotiation auctions, economist John List found that ________. A) sellers refused to strike deals with buyers in private negotiations B) exchanges converged fairly rapidly to the market equilibrium price C) buyers failed to capture any consumer surplus D) his findings were very different from economist Vernon Smith's earlier double oral auction experiments Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Can Markets Composed of Only Self-Interested People Maximize the Overall Well-Being of Society? 21) Which of the following statements is TRUE? A) In cases of auctions and bilateral negotiations, prices tend to approach the competitive equilibrium. B) Bilateral negotiations allow a single buyer and a single seller to privately negotiate with bids and asks. C) In auctions, buyers prefer buying from sellers with the highest ask prices. D) In auctions, sellers prefer selling to buyers with the lowest bid prices. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Can Markets Composed of Only Self-Interested People Maximize the Overall Well-Being of Society? 22) Which of the following statements is FALSE? A) Government intervention should be minimized since the free market always maximizes efficiency. B) Taxation can improve equity while decreasing efficiency. C) It is important to consider both equity and efficiency when evaluating an economy. D) Command economies typically focus more on equity than efficiency. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity and Efficiency 23) Differentiate between double oral auctions and bilateral negotiations. Answer: A double oral auction is an auction mechanism in which sellers state asks and buyers state offers simultaneously, whereas a bilateral negotiation is a bargaining mechanism in which a single seller and a single buyer confront one another with bids and asks. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Can Markets Composed of Only Self-Interested People Maximize the Overall Well-Being of Society? 96 Copyright © 2022 Pearson Education Ltd.

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 8 Trade 8.1 The Production Possibilities Curve 1) The underlying motivation for trade, relies on one simple principle. What is it? A) Trade creates employment. B) Trade allows total production to be maximized. C) Trade will increase the profit for firms. D) Trade maximizes the opportunity costs. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve Scenario: Yasmin and Zeek are lawyers working at V, W, and X LLP. Yasmin works 48 hours a week, and Zeek also works 48 hours a week. They handle two types of cases, intellectual property (IP) cases and corporate fraud (CF) cases. It takes Yasmin 6 hours to handle each IP case and 4 hours to handle each CF case. Zeek can finish an IP case in 3 hours and a CF case in 6 hours. 2) Refer to the scenario above. If Yasmin spent all her time on CF cases, how many CF cases can she finish? A) 16 B) 12 C) 8 D) 4 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 3) Refer to the scenario above. If Zeek spent all his time on IP cases, how many IP cases can he finish? A) 16 B) 12 C) 8 D) 4 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve

4) Refer to the scenario above. If you draw the production possibilities curves (PPCs) of the two lawyers where the number of IP cases handled is measured on the x-axis, then ________. A) Zeek's PPC lies above Yasmin's B) Zeek's PPC has the same slope as Yasmin's C) Zeek's PPC is flatter than Yasmin's D) Zeek's PPC is steeper than Yasmin's Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 5) Refer to the scenario above. What is Yasmin's opportunity cost of handling an IP case? A) 6 hours B) 40 minutes C) Two-thirds of a CF case D) One and a half IP cases Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 6) Refer to the scenario above. What is Zeek's opportunity cost of handling a CF case? A) Two IP cases B) One and a half IP cases C) 30 minutes D) 6 hours Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 7) Trade between two nations ________. A) results in the maximization of total production B) reduces global production C) leads to a maximization of production in one nation and a minimization of production in the other D) is inefficient compared to a situation where both nations do not engage in international trade Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve

8) Which of the following best describes a production possibilities curve? A) How much of one good an economy can produce if they forgo production of another good B) The rate at which an economy can trade production of one good for another C) The total amount of goods an economy can produce D) A relationship showing the maximum production of one good for a given level of production of another good Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 9) A production possibilities curve shows the ________. A) relationship between the price of a good and its quantity supplied B) maximum production of one good for a given level of production of another good C) different combinations of two inputs used to produce a given quantity of output D) quantity of output produced and the amount of inputs required for the production of the output Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 10) A curve that shows the various combinations of goods and services that are possible for an economy to produce with a given amount of resources is referred to as a(n) ________. A) supply curve B) indifference curve C) budget constraint D) production possibilities curve Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve Scenario: Jack takes 3 hours to complete a painting and 6 hours to create a sculpture. He has 30 hours of time to spend on both activities. 11) Refer to the scenario above. If Jack has to decide between the number of paintings and sculptures he wants to make in the given time, which of the following will best represent his options? A) A budget constraint B) An indifference curve C) A production possibilities curve D) A supply curve Answer: C Difficulty: Medium AACSB: Application of Knowledge 3 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Production Possibilities Curve 12) Refer to the scenario above. Which of the following combinations will lie on Jack's production possibilities curve? A) 10 paintings and 6 sculptures B) 5 paintings and 1 sculpture C) 10 paintings only D) 10 sculptures only Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 13) Refer to the scenario above. Which of the following combinations will lie below Jack's production possibilities curve? A) 10 paintings and 6 sculptures B) 5 paintings and 1 sculpture C) 10 paintings only D) 10 sculptures only Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 14) Refer to the scenario above. Which of the following combinations will lie above Jack's production possibilities curve? A) 2 paintings and 3 sculptures B) 5 sculptures only C) 10 paintings only D) 3 paintings and 5 sculptures Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 15) A machine can manufacture 1 unit of Good X in 2 hours and 1 unit of Good Y in 1 hour. Assuming that the machine is used for 10 hours, which of the following combinations will lie on the production possibilities curve? A) 5 units of Good X and 2 units of Good Y B) 3 units of Good X and 4 units of Good Y C) 2 units of Good X and 2 units of Good Y D) 6 units of Good X only Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 4 Copyright © 2022 Pearson Education Ltd.

The following figure shows the production possibilities curve for a software engineer who has to divide her available time between producing computer programs and Web sites.

16) Refer to the figure above. Which of the following combinations is attainable but inefficient? A) A B) B C) C D) D Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 17) Refer to the figure above. Which of the following combinations is attainable as well as efficient? A) B B) C C) D D) E Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 18) Refer to the figure above. Which of the following combinations is unattainable? A) A B) B C) D D) E Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve

19) Refer to the figure above. If the engineer spends her entire time on producing Web sites, how many Web sites can she produce? A) 2 B) 5 C) 10 D) 12 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 20) Refer to the figure above. If the engineer spends her entire time producing computer programs, how many computer programs can she produce? A) 12 B) 30 C) 45 D) 50 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Production Possibilities Curve 21) If an economy is producing ON the production possibilities curve, then that economy ________. A) is making full use of its resources B) is not making full use of its resources C) must have the government allocating resources D) is maximizing profits Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 22) Points inside a production possibilities curve are ________ and ________. A) efficient; unattainable B) inefficient; unattainable C) efficient; attainable D) inefficient; attainable Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve

23) Christine is a chef. She can cook a meal in 1 hour and make a cake in 2 hours. She works 10 hours per day. Which of the four lines in the following figure represents her production possibilities curve?

A) Line 1 B) Line 2 C) Line 3 D) Line 4 Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 24) Points on a production possibilities curve are ________ and ________. A) inefficient; attainable B) inefficient; unattainable C) efficient; attainable D) efficient; unattainable Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 25) Points inside a production possibilities curve are ________. A) inefficient, because more goods can be produced with the available resources B) inefficient, because they represent the production of only one good C) efficient, because the combinations represented by those points are attainable D) efficient, because production is maximum at those points with the available resources Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 8 Copyright © 2022 Pearson Education Ltd.

26) The slope of a production possibility curve represents ________. A) the total cost of producing a given level of output B) the opportunity cost of producing one more unit of a good in terms of the forgone production of the other good C) the rate at which people in an economy would like to trade one good for another D) combinations of two goods that are not attainable with existing technology Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 27) Points outside a production possibilities curve are ________. A) feasible and maximize efficiency B) not feasible because of resource constraints C) feasible but not preferred, because they are inefficient D) not feasible, because they do not utilize all of the available resources Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 28) How is a production possibilities curve similar to a budget constraint? Answer: A production possibilities curve shows the various combinations of goods or services that can be produced with a given amount of resources. Budget constraints show the different combinations of goods or services that can be consumed with a given amount of income. Both the budget constraint and the production possibilities curve represent constraints that economic agents face when making optimizing decisions. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 29) Even though points inside a production possibilities curve are attainable, why are they not preferred? Answer: Points that lie inside a production possibilities curve indicate that an economy's resources have not been utilized efficiently and that some resources are lying idle. Therefore, these combinations of goods are inefficient and are not preferred. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve

Scenario: The following production possibilities schedules and curves represent the amount of corn and alfalfa that can be produced on an acre of land in Idaho and Iowa.

These production possibilities schedules are shown in the following figure.

30) Refer to the scenario above. The opportunity cost of a ton of alfalfa in Idaho is ________. A) of a bushel of corn B) 1 bushel of corn C) 15 bushels of corn D) 120 bushels of corn Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve

31) Refer to the scenario above. The opportunity cost of a bushel of corn in Iowa is ________. A) of a ton of alfalfa B) 1 ton of alfalfa C) 6 tons of alfalfa D) 40 tons of alfalfa Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve

32) Assume that a machine is used to produce calculators and cell phones. The machine can be used for a maximum of 10 hours. The productivity table of the machine is shown below. Hours Spent on Number of Hours Spent on Calculators Calculators Produced Cell Phones 10 10 10 9 9 9 8 8 8 7 7 7 6 6 6 5 5 5 4 4 4 3 3 3 2 2 2 1 1 1 0 0 0

Number of Cell Phones Produced 10 9 8 7 6 5 4 3 2 1 0

a) Draw the production possibilities curve from the information given in the table. b) Calculate the opportunity cost of producing either good. Answer: a) Using the tabular information, the production possibilities curve for the machine can be plotted as follows.

b) The opportunity cost of producing either good is equal to the slope of the production possibilities curve, or the amount of one good that has to be given up to produce an extra unit of the other good. From the diagram, we can infer that to produce an extra unit of cell phones, the production of calculators will have to decrease by 1 unit. Therefore, the opportunity cost of producing a cell phone is 1 unit of calculators. And as the production of calculators increases by 1 unit, the production of cell phones decreases by 1 unit. Hence, the opportunity cost of producing 1 calculator is 1 cell phone, and the opportunity cost of producing 1 cell phone is 1 calculator. Difficulty: Medium AACSB: Application of Knowledge 12 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Production Possibilities Curve The following figure depicts a nonlinear production possibilities curve.

33) Refer to the figure above. If the market economy moves from point A to point C, ________. A) there is unemployment in the computer programs industry B) the opportunity cost of producing an additional Web site increases C) technological change has made the production of Web sites more efficient D) society values Web sites more than computer programs Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 34) Refer to the figure above. Point E represents a situation that ________. A) is currently unattainable and can be expected to remain so B) will be attainable only if there is economic growth C) results from inefficient use of resources or failure to use all available resources D) has a higher opportunity cost than do points on the boundary itself Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 35) Refer to the figure above. With currently available resources, point F represents a situation that ________. A) results if resources are not fully employed B) can be achieved if consumers demand fewer Web sites than at point C C) is currently attainable, given available resources D) is currently unattainable, given available resources Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 13 Copyright © 2022 Pearson Education Ltd.

36) Refer to the figure above. Assuming that the initial situation is point B, which one of the following represents a reallocation of resources away from Web sites to computer programs production? A) Point A B) Point C C) Point D D) Point E Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 37) Which of the following causes an outward shift in the Production Possibilities Curve? A) A decrease in unemployment B) A loss in the productive capacity of agricultural acreage caused by a prolonged drought C) An increase in the productivity of all factors of production D) Shifting resources away from the production of one good toward another Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Production Possibilities Curve 38) The slope of a production possibilities curve represents the ________. A) marginal cost of producing the good measured on the x-axis B) marginal cost of producing the good measured on the y-axis C) opportunity cost of producing the goods D) ratio of the average cost of producing both goods Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Calculating Opportunity Cost Scenario: Suppose a country produces only two goods: Good X and Good Y. 39) Refer to the scenario above. The opportunity cost of producing Good X equals ________. A) loss in Good Y/loss in Good X B) loss in Good Y/gain in Good X C) loss in Good X/loss in Good Y D) loss in Good X/gain in Good Y Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost

40) Refer to the scenario above. The opportunity cost of producing Good Y equals ________. A) gain in Good Y/gain in Good X B) loss in Good X/gain in Good Y C) loss in Good X/loss in Good Y D) gain in Good X/gain in Good Y Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost Scenario: Viola and Davis are two students who are taking a math class and an English class. The graph below shows the production possibilities curves for each of them.

41) Refer to the scenario above. What is the opportunity cost of one math homework assignment for Viola? A) 9 English essays B) 3 English essays C) 0.5 English essays D) 0.33 English essays Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost

42) Refer to the scenario above. What is the opportunity cost of one English essay for Viola? A) 9 math homework assignments B) 3 math homework assignments C) 0.5 math homework assignments D) 0.33 math homework assignments Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost 43) Refer to the scenario above. Davis has a ________ opportunity cost of doing math homework assignments and a ________ opportunity cost of writing English essays compared to Viola. A) lower; higher B) higher; higher C) lower; lower D) higher; lower Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Calculating Opportunity Cost Scenario: With her available resources, Wendy can produce 20 greeting cards or 10 earrings. Sarah, with the resources she has, can produce 5 greeting cards or 15 earrings. 44) Refer to the scenario above. What is Wendy's opportunity cost of producing 1 greeting card? A) 0.25 earrings B) 0.5 earrings C) 1 earring D) 2 earrings Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost 45) Refer to the scenario above. What is Wendy's opportunity cost of producing one earring? A) 0.33 greeting cards B) 0.50 greeting cards C) 1 greeting card D) 2 greeting cards Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost

46) Refer to the scenario above. What is Sarah's opportunity cost of producing one greeting card? A) 0.33 earrings B) 0.5 earrings C) 1 earring D) 3 earrings Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost 47) Refer to the scenario above. What is Sarah's opportunity cost of producing 1 earring? A) 0.33 greeting cards B) 1 greeting card C) 1.45 greeting cards D) 3 greeting cards Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost The following figure shows the production possibilities curve for Sheena, who has to split her time between producing Web sites and computer programs.

48) Refer to the figure above. What is the opportunity cost of producing 1 Web site? A) 0.2 computer programs B) 5 computer programs C) 12 computer programs D) 60 computer programs Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost 17 Copyright © 2022 Pearson Education Ltd.

49) Refer to the figure above. What is the opportunity cost of producing 1 computer program? A) 0.2 Web sites B) 5 Web sites C) 8 Web sites D) 12 Web sites Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost Scenario: A machine that can be used to print both notebooks and magazines is available for use for a fixed period of time. If it is used only to print notebooks, 30 notebooks can be printed. If it is used only to print magazines, 15 magazines can be printed. 50) Refer to the scenario above. What is the opportunity cost of printing 1 notebook? A) 0.5 magazines B) 1 magazine C) 2 magazines D) 30 magazines Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost 51) Refer to the scenario above. What is the opportunity cost of printing 1 magazine? A) 1 notebook B) 2 notebooks C) 15 notebooks D) 30 notebooks Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost

52) The following figure illustrates the production possibilities curve of a farmer who has to decide on the quantities of wheat and rice to produce for a given amount of resources. Three possible production combinations—A, B, and C—are marked on the figure.

a) Which of the three combinations of wheat and rice, marked on the graph, is both efficient and attainable? Explain your answer. b) Calculate the opportunity cost of producing both wheat and rice. Answer: a) Point A in the graph represents a combination that is attainable but not efficient. This is because, given the available resources, the farmer can produce more wheat, or rice, or both, than would be produced at point A. Point C is unattainable, because it lies outside the farmer's production possibilities curve. This implies that the farmer does not have enough resources to produce the combination represented by point C. Point B is both attainable and efficient, as it lies on the farmer's production possibilities curve, which implies that the farmer is using all his resources efficiently to produce the 400 pounds of wheat and 600 pounds of rice. b) The opportunity cost of producing 1 pound of rice = 100/100 = 1 pound of wheat. The opportunity cost of producing 1 pound of wheat = 100/100 = 1 pound of rice. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Calculating Opportunity Cost

53) Alexander Selkirk lives on Juan Fernandez Island. He spends his days gathering coconuts and spiny lobsters. If he spends all day gathering coconuts, he can collect 40 coconuts. If he spends all day collecting spiny lobsters, he can capture 20 in a day. His production possibilities curve is shown in the figure below.

As Selkirk collects more coconuts, the opportunity cost of a coconut is ________. A) decreasing B) constant C) increasing D) unpredictable Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Calculating Opportunity Cost 54) Increasing opportunity cost can arise if ________. A) there are economies of scale in production B) marginal costs of production are constant C) production of the good is characterized by diminishing returns D) the production possibility curve is linear Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Calculating Opportunity Cost

8.2 The Basis for Trade: Comparative Advantage Scenario: Yasmin and Zeek are lawyers working at V, W, and X LLP. Yasmin works 48 hours a week, and Zeek also works 48 hours a week. They handle two types of cases, intellectual property (IP) cases and corporate fraud (CF) cases. It takes Yasmin 6 hours to handle each IP case and 4 hours to handle each CF case. Zeek can finish an IP case in 3 hours and a CF case in 6 hours. 1) Refer to the scenario above. Who has a comparative advantage in handling CF cases and why? A) Yasmin, because her opportunity cost of handling a CF case is a third of Zeek's B) Yasmin, because her opportunity cost of handling a CF case is half of Zeek's C) Zeek, because his opportunity cost of handling a CF case is a third of Yasmin's D) Zeek, because his opportunity cost of handling a CF case is half of Yasmin's Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Basis for Trade: Comparative Advantage 2) Refer to the scenario above. Yasmin's supervisor wants her to handle equal numbers of IP and CF cases. How much time would Yasmin spend on each type of case? (Hint: Assume that she can work on a fraction of a case.) A) 24 hours each on IP cases and CF cases B) 28 hours and 48 minutes on IP cases, and 19 hours and 12 minutes on CF cases C) 32 hours and 24 minutes on IP cases and 15 hours and 36 minutes on CF cases D) 36 hours on IP cases and 12 hours on CF cases Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Basis for Trade: Comparative Advantage 3) Refer to the scenario above. Zeek's supervisor wants him to handle equal number of IP and CF cases. How much time would Zeek spend on each type of case? (Hint: Assume that he can work on a fraction of a case.) A) 32 hours on IP cases and 16 hours on CF cases B) 28 hours on IP cases and 20 hours on CF cases C) 24 hours each on IP cases and CF cases D) 16 hours on IP cases and 32 hours on CF cases Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Basis for Trade: Comparative Advantage

4) Refer to the scenario above. Suppose that the two lawyers' boss wants the total number of IP cases worked on by them to equal the total number of CF cases worked on by them. So long as the total number of IP cases equals the total number of CF cases, their boss does not care which lawyer works on how many of which type of case. So Yasmin and Zeek decide to take advantage of their comparative advantages. How would they divide the tasks? A) Yasmin specializes in IP cases, while Zeek specializes in CF cases. B) Yasmin specializes in CF cases, while Zeek specializes in IP cases. C) Yasmin specializes in IP cases, while Zeek works on both types of cases. D) Yasmin specializes in CF cases, while Zeek works on both types of cases. Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Basis for Trade: Comparative Advantage 5) Refer to the scenario above. Suppose that the two lawyers' boss wants the total number of IP cases worked on by them to be equal the total number of CF cases worked on by them. So long as the total number of IP cases equals the total number of CF cases, their boss does not care which lawyer works on how many of which type of case. So Yasmin and Zeek decide to take advantage of their comparative advantages. How many IP and CF cases would they finish? (Hint: Assume that they can work on a fraction of a case.) A) 12 and three halves of each type of case B) 13 and a third of each type of case C) 16 and a half of each type of case D) 24 of each type of case Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Basis for Trade: Comparative Advantage 6) The ability of an individual, firm, or country to produce a certain good at a lower opportunity cost than other producers is referred to as ________. A) marginal advantage B) absolute advantage C) cardinal advantage D) comparative advantage Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Basis for Trade: Comparative Advantage

7) Which of the following statements is TRUE? A) An economic agent can have a comparative advantage in the production of all goods. B) The agent with the higher opportunity cost of producing a good has the comparative advantage in producing that good. C) There are mutually beneficial gains from trade if opportunity costs differ. D) An economic agent who has the absolute advantage in producing a good also has the comparative advantage in producing that good. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Basis for Trade: Comparative Advantage 8) Which of the following statements best describes absolute advantage? A) The party who has the higher opportunity cost of producing the good B) The party who has the lower opportunity cost of producing the good C) The party who can produce more of the good D) The party who can produce less of the good Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Basis for Trade: Comparative Advantage 9) In Lithasia, the opportunity cost of producing a chair is 2 tables and in Barylia, the opportunity cost of producing a chair is 1/2 table. Which of the following statements is TRUE? A) Barylia has a comparative advantage in producing chairs. B) Lithasia has a comparative advantage in producing chairs. C) Barylia has a comparative advantage in producing tables. D) Lithasia has a comparative disadvantage in producing tables. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Basis for Trade: Comparative Advantage 10) Which of the following statements is TRUE? A) When two firms have the same opportunity cost of producing two goods, each firm will always have a comparative advantage in the production of both goods. B) When two firms have different opportunity costs of producing two goods, each firm will always have a comparative advantage in the production of one of the goods. C) The firm that has a lower opportunity cost of producing a good is said to have a comparative disadvantage in the production of that good. D) The firm that faces a lower opportunity cost of producing a good is said to have an absolute disadvantage in the production of that good. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Basis for Trade: Comparative Advantage 23 Copyright © 2022 Pearson Education Ltd.

The following figure shows the production possibilities curves (PPCs) of two individuals, Ryan and Tom.

11) Refer to the figure above. Which of the following statements is TRUE? A) Ryan has a comparative advantage in the production of Good 1, whereas Tom has a comparative advantage in the production of Good 2. B) Ryan has a comparative advantage in the production of Good 2, whereas Tom has a comparative advantage in the production of Good 1. C) Ryan has a comparative advantage in the production of both goods. D) Tom has a comparative advantage in the production of both goods. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Basis for Trade: Comparative Advantage 12) Refer to the figure above. Which of the following statements is TRUE? A) Ryan's opportunity cost of producing Good 1 is higher than that of Tom, whereas Tom's opportunity cost of producing Good 2 is higher than that of Ryan. B) Ryan's opportunity cost of producing Good 2 is higher than Tom's opportunity cost of producing it. C) Ryan has a comparative disadvantage in the production of both goods. D) Tom has a comparative disadvantage in the production of both goods. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Basis for Trade: Comparative Advantage

Scenario: Meryl and Steve are two classmates who form a study group. The graph below shows the production possibilities curves for each of them.

13) Refer to the scenario above. ________ has comparative advantage in doing math homework, and ________ has comparative advantage in writing Econ essays. A) Meryl; Meryl B) Steve; Steve C) Steve; Meryl D) Meryl; Steve Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Basis for Trade: Comparative Advantage 14) Refer to the scenario above. ________ has absolute advantage in doing Econ homework assignments, and ________ has absolute advantage in writing lab reports. A) Meryl; Meryl B) Steve; Steve C) Steve; Meryl D) Meryl; Steve Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Basis for Trade: Comparative Advantage

15) Refer to the scenario above. If Meryl and Steve decide to join forces to do school work and trade, then ________. A) Meryl should specialize in doing Econ homework assignments, and Steve should specialize in writing lab reports B) Steve should specialize in doing Econ homework assignments, and Meryl should specialize in writing lab reports C) Meryl should do half the Econ homework assignments and write half the lab reports, and Steve should do the same D) Meryl should do 3/4 of the Econ homework assignments and 1/4 of the lab reports, and Steve should complete the rest Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Basis for Trade: Comparative Advantage 16) Specialization occurs when each individual, firm, or country ________. A) produces only a few specific goods and relies on trade for the other goods and services it needs B) is self-sufficient and produces all goods and services it needs, without relying on imports C) produces only those goods for which it has a higher opportunity cost of production than that for other nations D) produces only those goods which are in demand in the global market and allow for high rates of profitability Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Specialization

17) The figure below shows the production possibilities curves (PPCs) for Viola and Davis. Which of the lines in the graph correctly represents their joint PPC?

A) Line 1 B) Line 2 C) Line 3 D) Line 4 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Specialization 18) Which of the following statements is TRUE? A) When two nations specialize and trade, there is a loss of efficiency and both the nations are made worse off. B) Trade between two nations is most beneficial when neither has a comparative advantage in the production of any goods and services. C) Trade between nations allows each nation to specialize in the production of goods for which it has comparative advantage. D) Trade between two nations is possible only when the opportunity costs of producing goods and services in both nations are identical. Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Specialization

The following figure depicts the production possibilities curve when Ann and Bob engage in trade. With all her resources, Ann can either produce two computer programs or one Web site. With all his resources, Bob can either produce one computer program or three Web sites.

19) Refer to the figure above. What is the value of A? A) 1 B) 2 C) 3 D) 4 Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Specialization 20) Refer to the figure above. What is the value of B? A) 1 B) 2 C) 3 D) 4 Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Specialization 21) Refer to the figure above. The flatter portion of this curve has a slope equal to ________. A) Ann's PPC B) Bob's PPC C) Ann's minus Bob's PPC D) Ann's plus Bob's PPC Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Specialization 28 Copyright © 2022 Pearson Education Ltd.

22) Refer to the figure above. The steeper portion of this curve has a slope equal to ________. A) Ann's PPC B) Bob's PPC C) Ann's minus Bob's PPC D) Ann's plus Bob's PPC Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Specialization 23) Refer to the figure above. What should be the values of C and D? A) C = 3, D = 4 B) C = 4, D = 3 C) C = 1, D = 1 D) C = 2, D = 3 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Specialization The following figure shows the production possibilities curves (PPCs) of two individuals, Ryan and Tom.

24) Refer to the figure above. Which of the following statements is TRUE? A) Ryan has an absolute advantage in the production of Good 1, whereas Tom has an absolute advantage in the production of Good 2. B) Tom has an absolute advantage in the production of Good 1, whereas Ryan has an absolute advantage in the production of Good 2. C) Ryan has an absolute advantage in the production of both goods. D) Tom has an absolute advantage in the production of both goods. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Absolute Advantage 29 Copyright © 2022 Pearson Education Ltd.

25) Refer to the figure above. Which of the following statements is TRUE? A) Tom has an absolute disadvantage in the production of Good 1, whereas Ryan has an absolute disadvantage in the production of Good 2. B) Ryan has an absolute disadvantage in the production of Good 1, whereas Tom has an absolute disadvantage in the production of Good 2. C) Tom can produce fewer of both goods given the same amount of resources as Ryan. D) Ryan can produce fewer of both goods given the same amount of resources as Tom. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Absolute Advantage 26) A firm producing calculators and cell phones purchases new machinery that increases the productivity of producing calculators. Assuming that the number of calculators produced is measured on the x-axis and the number of cell phones produced is measured on the y-axis, how will the introduction of the new machinery change the firm's production possibilities curve? A) The production possibilities curve will shift to the left. B) The production possibilities curve will shift to the right. C) The production possibilities curve will pivot rightward about the y-axis. D) The production possibilities curve will pivot rightward about the x-axis. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Absolute Advantage 27) The ability of an individual, firm, or country to produce more of a certain good than other competing producers, given the same amount of resources, is referred to as ________. A) marginal advantage B) comparative disadvantage C) absolute advantage D) perfect advantage Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Absolute Advantage

28) Which of the following statements is TRUE? A) When a nation has an absolute advantage over other nations in producing all goods and services, it cannot gain from trade. B) Absolute advantage relates to production per unit of inputs, and comparative advantage involves the opportunity cost of producing different goods. C) When a nation has an absolute disadvantage over other nations in producing a good, it cannot gain from trade. D) Absolute advantage involves the opportunity cost of producing different goods, and comparative advantage relates to production per unit of inputs. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Absolute Advantage 29) What is meant by the term "comparative advantage"? How is it different from absolute advantage? Answer: Comparative advantage is the ability of an individual, firm, or country to produce a certain good at a lower opportunity cost than that of other producers. In contrast, absolute advantage is the ability of an individual, firm, or country to produce more of a certain good than other competing producers, given the same amount of resources. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Absolute Advantage 30) Suppose Country A produces 10 chairs and 6 tables using its resources, and Country B produces 12 chairs and 18 tables. Determine the comparative advantage and the absolute advantage that both countries enjoy. Answer: The opportunity cost of producing a chair in Country A is 0.6 tables, and the opportunity cost of producing a chair in Country B is 1.5 tables. Hence, Country A has a comparative advantage in producing chairs. The opportunity cost of producing a table in Country A is 1.67 chairs, and the opportunity cost of producing a table in Country B is 0.67 chairs. Hence, Country B has a comparative advantage in the production of tables. Because the opportunity cost of producing tables is less in Country B, Country B has a comparative advantage in the production of tables. In contrast, Country A has a comparative advantage in producing chairs. Country B can produce more of both goods than can Country A; therefore, it enjoys an absolute advantage in the production of both goods. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Absolute Advantage

31) The following figure illustrates the production possibilities curve for two individuals, Jack and John. Both of them have to divide their available time of 100 hours between writing economics articles and travel articles.

Comment on the absolute and comparative advantage of both individuals. Answer: Absolute advantage refers to the ability of an individual, firm, or country to produce more of a certain good than other competing producers can, given the same amount of resources. From the figure, it is evident that John can write more of both economics and travel articles than Jack can, given the same 100 hours to spend on the two jobs. Hence, John has an absolute advantage in writing both economics and travel articles. Comparative advantage is the ability of an individual, firm, or country to produce a certain good at a lower opportunity cost than that of other producers. Jack's opportunity cost of writing 1 economics article is 1.4 travel articles, whereas John's opportunity cost of writing 1 economics article is 0.89 travel articles. Because John's opportunity cost of writing an economics article is less than Jack's opportunity cost of writing an economics article, John has a comparative advantage in writing economics articles. Jack's opportunity cost of writing 1 travel article is 0.714 economics articles. John's opportunity cost of writing 1 travel article is 1.125 economics articles. Because Jack's opportunity cost of writing a travel article is less than John's opportunity cost of writing a travel article, Jack has a comparative advantage in writing travel articles. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Absolute Advantage

32) The production possibilities schedules and curves for farms in Idaho and Iowa are shown below.

________ has the absolute advantage in producing alfalfa and ________ has the absolute advantage in producing corn. The state with the lower opportunity cost for producing a ton of alfalfa is ________, so the state with the comparative advantage in producing alfalfa is ________. A) Idaho; Idaho; Idaho; Idaho B) Idaho; Iowa; Idaho; Idaho C) Iowa; Idaho; Iowa; Iowa D) Iowa; Iowa; Iowa; Iowa Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Absolute Advantage

The figure below shows the potential gains from specialization for farms in Idaho and Iowa.

33) Refer to the figure above. Under specialization, Idaho produces ________ and Iowa produces ________. A) 8 tons of alfalfa; 240 bushels of corn B) 6 tons of alfalfa; 120 bushels of corn C) 4 tons of alfalfa; 3 tons of alfalfa D) 60 bushels of corn; 120 bushels of corn Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Absolute Advantage 34) Refer to the figure above. Which of the following terms of trade will result in mutual gains for both Idaho and Iowa? A) Idaho offers to trade 1 ton of alfalfa for 50 bushels of corn. B) Idaho offers to trade 1 ton of alfalfa for 40 bushels of corn. C) Iowa offers to trade 20 bushels of corn for 1 ton of alfalfa. D) Iowa offers to trade 15 bushels of corn for 1 ton of alfalfa. Answer: C Explanation: Note that 20 bushels of corn for 1 ton of alfalfa is the only terms of trade or price that strictly improves the welfare of both Idaho and Iowa. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Absolute Advantage

Scenario: Norway and Sweden each produce cloudberries (CB) and salted cod (SC). Their production possibilities curves for these two goods are shown below.

Production Possibilities: Norway and Sweden (thousands of kilos)

Norway Sweden

Salted Cod 24 9

Cloudberries 24 18

Opportunity Costs: Norway and Sweden

Norway Sweden

Salted Cod 1 kilo of cloudberries 2 kilos of cloudberries

Cloudberries 1 kilo of salted cod 1/2 kilo of salted cod

35) Refer to the scenario above. ________ has the absolute advantage in producing cloudberries, while ________ has the absolute advantage in producing salted cod. A) Norway; Norway B) Norway; Sweden C) Sweden; Norway D) Sweden; Sweden Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Absolute Advantage

36) Refer to the scenario above. ________ has the comparative advantage in producing cloudberries, while ________ has the comparative advantage in producing salted cod. A) Norway; Norway B) Norway; Sweden C) Sweden; Norway D) Sweden; Sweden Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Absolute Advantage 37) Refer to the scenario above. If the terms of trade are 1.5 kilos of cloudberries for a kilo of salted cod, the terms of trade are ________. A) not advantageous for either Norway or Sweden B) advantageous for Norway but not for Sweden C) advantageous for Sweden but not for Norway D) advantageous for both Norway and Sweden Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Absolute Advantage 38) Terms of trade refers to the ________. A) rules and regulations that govern trade between nations B) opportunity cost of producing the same good in two trading nations C) exchange rate of goods for goods D) amount of money that has to be given up to import an additional quantity of a good Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Price of the Trade 39) Which of the following statements is TRUE? A) The principle of comparative advantage provides a basis for trade when two nations have the same opportunity cost of producing a good. B) The principle of absolute advantage provides a basis for the determination of the terms of trade between two trading nations. C) The principle of absolute advantage forms the basis of trade when a nation can produce more goods and services compared to other nations. D) The principle of comparative advantage provides a range of prices within which trade will occur. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Price of the Trade 36 Copyright © 2022 Pearson Education Ltd.

40) Two countries, A and B, produce Good X. Which of the following statements is TRUE of the trading price of Good X? A) The trading price of Good X will be less than the opportunity cost of producing the good in both nations. B) The trading price of Good X will be greater than the opportunity cost of producing the good in both nations. C) The trading price of Good X will lie between the opportunity costs of producing the good in both nations. D) The trading price of Good X will always be equal to the opportunity cost of producing the good in Country A. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Price of the Trade 41) Which of the following statements is TRUE of the gains to trade? A) The gains to trade expand as trading partners become more alike. B) The gains to trade shrink as trading partners become more alike. C) The trading nations can enjoy gains to trade even when none of the nations have a comparative advantage in the production of any good. D) The gains to trade are equal for all trading partners. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Price of the Trade 8.3 Trade Between States 1) A(n) ________ is any good that is produced domestically but sold abroad, and a(n) ________ is any good that is produced abroad but sold domestically. A) public good; private good B) private good; public good C) import; export D) export; import Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade Between States

The figure below shows production possibilities curves for tomatoes and oranges in two prefectures in a country.

2) Refer to the figure above. In Prefecture A, the opportunity cost of producing each additional pound of tomatoes ________. A) increases as more tomatoes are produced B) stays the same as more tomatoes are produced C) decreases as more tomatoes are produced D) increases up to 1 billion (1,000 million) pounds and then decreases after 1 billion pounds Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Trade Between States 3) Refer to the figure above. In Prefecture B, the opportunity cost of producing each additional pound of tomatoes ________. A) increases as more tomatoes are produced B) decreases as more tomatoes are produced C) increases up to 1 billion pounds and then decreases after 1 billion pounds D) decreases up to 1 billion pounds and then decreases after 1 billion pounds Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Trade Between States

4) Refer to the figure above. Which statement is TRUE? A) Prefecture A has a comparative advantage in tomato production. B) Prefecture B has a comparative advantage in tomato production. C) Prefecture A has a comparative advantage in tomato production up to 1 billion pounds, but Prefecture B has a comparative advantage beyond 1 billion pounds. D) Prefecture B has a comparative advantage in tomato production up to 1 billion pounds, but Prefecture A has a comparative advantage beyond 1 billion pounds. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Trade Between States 5) Refer to the figure above. Suppose that Prefecture A produces at point W, while Prefecture B produces at point X. Could there be gains from trade (Prefecture A sells tomatoes to Prefecture B, and Prefecture B sells oranges to Prefecture B)? Why or why not? A) Yes, because Prefecture A has a comparative advantage in tomato production beyond 1 billion pounds while Prefecture B has a comparative advantage in orange production beyond 800 million pounds. B) Yes, because Prefecture A produces more tomatoes while Prefecture B produces more oranges. C) No, because Prefecture A's opportunity cost of producing additional pounds of tomatoes at W is higher than Prefecture B's opportunity cost at X. D) No, because Prefecture A's opportunity cost of producing additional pound of oranges at W is higher than Prefecture B's opportunity cost at X. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Trade Between States 6) Refer to the figure above. Suppose that Prefecture A produces at point Y, while Prefecture B produces at point Z. Could there be gains from trade (Prefecture A sells oranges to Prefecture B, and Prefecture B sells tomatoes to Prefecture B)? Why or why not? A) Yes, because Prefecture A has a comparative advantage in orange production up to 800 million pounds while Prefecture B has a comparative advantage in tomato production beyond 1 billion pounds. B) Yes, because Prefecture A produces more oranges while Prefecture B produces more tomatoes. C) No, because Prefecture A's opportunity cost of producing additional pound of tomatoes at W is higher than Prefecture B's opportunity cost at X. D) No, because Prefecture A's opportunity cost of producing additional pound of oranges at W is higher than Prefecture B's opportunity cost at X. Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Trade Between States 39 Copyright © 2022 Pearson Education Ltd.

7) An export is any good that is ________. A) rationed and licensed by the government B) produced and consumed domestically C) produced by public sector firms D) produced domestically, but sold abroad Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Trade Between States 8) Which of the following represents a good imported to the state of Wyoming? A) Coal from Wyoming shipped to Kansas B) Frozen beef from Wyoming shipped to California C) Medicaid funds from the federal government distributed to Wyoming D) Oranges from Florida shipped to Wyoming Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade Between States 9) An import is any good that is ________. A) produced and consumed domestically B) priced through an auction mechanism C) produced abroad but sold domestically D) rationed and licensed by the government Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade Between States 10) Iowa produces a small amount of wool but buys a large quantity of wool from Montana for use in its (Iowa's) textile industry. Iowa is ________. A) a net importer of wool B) a net exporter of wool C) an exporter of wool D) likely has a comparative advantage in producing wool compared to Montana Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade Between States

11) Which of the following organizations keeps track of all interstate commodity shipments by state of origin and state of destination in the United States? A) Bureau of Trade Statistics B) Bureau of Transportation Statistics C) Bureau for Foreign Assistance D) Bureau of the Treasury Department Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade Between States 12) Which of the following statements is TRUE of the United States? A) There is more value in trade between states in the United States than in international trade. B) The United States has always been a net exporter of goods and services. C) The United States exports more crude oil than it imports. D) The level of imports in the United States has dramatically decreased since 1960. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade Between Countries 13) Which of the following statements is TRUE? A) The production possibilities curve of a nation is fixed in the long run. B) The production possibilities curve can only shift to the right. C) The production possibilities curve of an economy is concave. D) The slope of the production possibilities curve represents the ratio of the marginal cost of producing goods. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economy-Wide PPC 14) The curvature of an economy's production possibilities curve represents ________. A) the increasing marginal cost of producing both goods B) the increasing opportunity cost of producing each good C) diminishing marginal returns to inputs D) increasing terms of trade between both goods Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Economy-Wide PPC

15) Which of the following statements is TRUE? A) An economy's production possibilities curve is convex. B) The opportunity cost of producing a good decreases as more resources are used for its production. C) The production possibilities curve of a country is fixed in the short run. D) The slope of the production possibilities curve represents the terms of trade between two states. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Economy-Wide PPC The following figure represents various production possibilities curves (PPCs) of economies that produce apples and oranges.

16) Refer to the figure above. An economy produces apples and oranges. In this economy, the opportunity cost of producing apples and the opportunity cost of producing oranges are both increasing. In the figure, which curve correctly represents the production possibilities frontier of this economy? A) PPC 1 B) PPC 2 C) PPC 3 D) PPC 4 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Economy-Wide PPC

17) Refer to the figure above. An economy produces apples and oranges. To expand the production of oranges, this economy needs to give up producing more and more apples. Which of the curves in the figure correctly represents the production possibilities frontier of this economy? A) PPC 1 B) PPC 2 C) PPC 3 D) PPC 4 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Economy-Wide PPC 18) An economy produces apples and oranges. The dashed line in the figure below represents the production possibilities curve of this economy. Suppose a productivity catalyst in the form of improved agricultural technology is introduced in the economy. In this case, the production possibilities curve will ________.

A) change to PPC 1 B) change to PPC 2 C) change to PPC 3 D) remain unchanged Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Economy-Wide PPC

19) A production possibilities curve is plotted for a nation producing chairs and tables. Which of the following will cause a parallel shift in this curve? A) An intensive training program that increases the productivity of workers engaged in the production of tables B) An intensive training program that increases the productivity of workers engaged in the production of chairs C) An increase in the price of both chairs and tables D) An increase in the availability of raw materials required for the production of both chairs and tables Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Economy-Wide PPC 20) Which of the following will cause an inward shift of the production possibilities curve of an economy? A) A decrease in the demand for goods and services B) The introduction of better technology C) A decline in the size of the labor force D) An increase in the opportunity cost of the goods being produced Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Economy-Wide PPC 21) Which of the following is NOT a factor in shifting the production possibilities curve? A) The amount of inputs such as labor and capital B) The productivity of inputs C) The level of technology D) Government regulations limiting trade Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economy-Wide PPC

22) A production possibilities curve is plotted for a nation producing cotton and jute. Which of the following will cause a parallel rightward shift of the production possibilities curve? A) The invention of a new fertilizer that increases cotton production by 10 percent, without any effect on jute production B) The invention of a new fertilizer that increases jute production by 5 percent, without any effect on cotton production C) The invention of a new fertilizer that increases the production of both cotton and jute by 10 percent D) A twofold increase in the price of all cotton products and a threefold increase in the price of all jute products Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Economy-Wide PPC 23) Which of the following is likely to rightward shift the production possibilities curve of a nation? A) An increase in the education and experience of the workforce B) An increase in the demand for the nation's exports C) An improvement in the terms of trade that the nation faces D) An increase in the price of the raw materials used by the nation Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Economy-Wide PPC 24) How are the following events likely to affect an economy's production possibilities curve? a) An increase in the working population of the economy b) The import of better production technology c) A natural disaster that destroys some of the economy's resources d) The emigration of workers to other countries Answer: a) An increase in the working population of the economy implies an increase in the amount of resources available for production in the economy. Hence, the production possibilities curve will shift rightward. b) The import of better technology implies that more can be produced with the amount of resources available in the economy. Hence, the production possibilities curve will shift rightward. c) A natural disaster that destroys some of the resources available for production will lead to an inward shift of the production possibilities curve. This is because fewer resources are now available for production purposes. d) If workers migrate to other countries, fewer workers will be available for domestic production. This will cause an inward shift in the economy's production possibilities curve. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Economy-Wide PPC 45 Copyright © 2022 Pearson Education Ltd.

Scenario: Hawaii and South Carolina are trading partners. Hawaii has an absolute advantage in the production of both coffee and tea. The opportunity cost of producing 1 pound of tea in Hawaii is 2 pounds of coffee, and the opportunity cost of producing 1 pound of tea in South Carolina is 1/3 pound of coffee. 25) Refer to the scenario above. Which of the following statements is TRUE? A) Hawaii should specialize in the production of both tea and coffee. B) South Carolina should specialize in the production of both tea and coffee. C) Hawaii should specialize in the production of tea, whereas South Carolina should specialize in the production of coffee. D) Hawaii should specialize in the production of coffee, whereas South Carolina should specialize in the production of tea. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States 26) Refer to the scenario above. If both nations decide to trade, which of the following statements is TRUE? A) Hawaii should export both tea and coffee. B) Hawaii should import both tea and coffee. C) Hawaii should export tea, and South Carolina should export coffee. D) Hawaii should export coffee, and South Carolina should export tea. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States 27) Refer to the scenario above. Which of the following statements is TRUE of the terms of trade of tea for coffee? A) The terms of trade will lie somewhere below 1/3. B) The terms of trade will lie somewhere above 2. C) The terms of trade will lie between 1/3 and 2. D) The terms of trade will equal 0. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States

28) Refer to the scenario above. Which of the following statements is TRUE? A) If the exchange rate is closer to 1 pound of tea for 2 pounds of coffee, Hawaii gains more from trade than South Carolina does. B) If the exchange rate is closer to 1 pound of tea for 1/3 pound of coffee, Hawaii gains more from trade than South Carolina does. C) Hawaii will always gain more from trade than South Carolina does, irrespective of the trading price of tea. D) South Carolina will always gain more from trade than Hawaii does, irrespective of the trading price of tea. Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States The following figure depicts four different scenarios in which the blue line represents California's production possibilities curve (PPC) and the red line represents Texas' PPC. These two states trade wine and cloth.

29) Refer to the figure above. In what scenario(s) does California have a comparative advantage in wine? A) (1) B) (2) C) (1) and (3) D) (1), (2), and (4) Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States 47 Copyright © 2022 Pearson Education Ltd.

30) Refer to the figure above. In what scenario(s) does Texas have a comparative advantage in wine? A) (1) B) (2) C) (2) and (4) D) (4) Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States 31) Refer to the figure above. In what scenario would the terms of trade of cloth for wine be between 0.2 and 0.67? A) (1) B) (2) C) (3) D) (4) Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States 32) Refer to the figure above. In what scenario would the terms of trade of cloth for wine be between 1 and 1.25? A) (1) B) (2) C) (3) D) (4) Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States 33) Refer to the figure above. In what scenario would the terms of trade of wine for cloth be between 0.67 and 0.75? A) (1) B) (2) C) (3) D) (4) Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States

34) The following table shows the quantity of wine or cloth that can be produced in California and Texas when all the resources are devoted to the production of each good. The states have identical resources. State California Texas

Wine 60 units 20 units

Cloth 40 units 30 units

Refer to the table above. Identify the absolute and comparative advantage enjoyed by both states. Which state should specialize in the production of which good? Determine the range of terms of trade between the two states. Answer: Because California can produce more of both wine and cloth, it has an absolute advantage in the production of both goods. Conversely, Texas has an absolute disadvantage in the production of both goods. The opportunity cost of producing 1 unit of wine in California is 0.67 units of cloth. The opportunity cost of producing 1 unit of wine in Texas is 1.5 units of cloth. Because California has a lower opportunity cost of producing wine than Texas does, California has a comparative advantage in producing wine. Hence, it should specialize in the production of wine. The opportunity cost of producing 1 unit of cloth in California is 1.5 units of wine. The opportunity cost of producing 1 unit of cloth in Texas is 0.67 units of wine. Because Texas faces a lower opportunity cost of producing cloth than California, Texas has a comparative advantage in producing cloth. Hence, it should specialize in the production of cloth. The range of the terms of trade (cloth for wine and wine for cloth) between the two states will be between 0.67 and 1.5. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Comparative Advantage and Specialization Among States

35) Suppose an economy produces only solar panels and coal. Between 2005 and 2015, the production possibilities curve (PPC) for this economy shifted out as characterized in the figure below.

Which of the following statements best describes the shift in the PPC between 2005 and 2015? A) Increases in the supply of inputs affected both the coal and solar panel industries equally. B) Technological innovation had a larger positive effect on the production of solar panels. C) Productivity gains had a larger positive effect on the production of coal. D) Productivity gains had equal effects on the production of solar panels and coal. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Comparative Advantage and Specialization Among States Suppose California can produce either grapes for 300 cases of wine or 6000 pounds of blueberries per acre, and North Carolina can produce either grapes for 500 cases of wine or 7000 pounds of blueberries per acre. Also, suppose that California has 4 million acres of farmland that it can devote to the production of either wine grapes or blueberries, while North Carolina has 1 million acres of farmland that it can devote to the production of either wine grapes or blueberries. 36) What is North Carolina's opportunity cost of producing one case of wine? A) 14 pounds of blueberries B) 0.08 pounds of blueberries C) 20 pounds of blueberries D) 0.25 pounds of blueberries Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Trade Between States

37) Which state should specialize in the production of wine? A) North Carolina B) California C) Neither state D) Both states Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Trade Between States 38) Which of the following would be an acceptable trading price for a case of wine (in terms of pounds of blueberries)? A) 15 pounds of blueberries per case of wine B) 0.06 pounds of blueberries per case of wine C) 10 pounds of blueberries per case of wine D) 25 pounds of blueberries per case of wine Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Trade Between States 8.4 Trade Between Countries 1) If a nation is a net importer, it means that the ________. A) nation only imports goods and services and does not export any good B) nation only imports those goods in which it has an absolute disadvantage C) nation's imports are worth more than its exports over a given period of time D) nation prohibits the import of goods and services that can be produced domestically Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Trade Between Countries

The following table shows the value of exports and imports of four countries in 1990. Country A B C D

Exports (billion dollars) Imports (billion dollars) 23,000 21,000 15,000 17,000 26,000 30,000 12,000 11,000

2) Refer to the table above. Which of the following statements is TRUE? A) Country A is a net importer. B) Country B is not a net importer. C) Country C is a net importer. D) Country D is a net importer. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Trade Between Countries 3) Refer to the table above. Which of the following statements is TRUE? A) Country A is a net importer, while Country B is not. B) Country A and Country D are net importers. C) Country D and Country C are net importers. D) Country C is a net importer, while Country A is not. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Trade Between Countries 4) Refer to the table above. Which of the following statements is TRUE? A) Country D is not a net importer. B) Country A and Country B are net importers. C) Country C and Country D are not net importers. D) None of the four countries is a net importer. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Trade Between Countries

5) Which of the following statements is TRUE? A) The growth rate of manufactured exports from the United States exceeded the growth rate of manufactured exports from China in the early 2000s. B) The U.S. economy has failed to meet the demand for manufactured goods domestically. C) U.S. exports are worth more than its imports. D) The import of crude oil by the U.S. has been declining since 1960. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Trade Between Countries The figures below show markets for solar panels and textiles in Banana Republic. Pworld is the world price in each market.

6) Refer to the figures above. When Banana Republic opens up to international trade, the domestic sellers in the solar panel market ________. A) gain the surplus equal to the area B + C B) gain the surplus equal to the area A C) lose the surplus equal to the area B + C D) lose the surplus equal to the area A Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Trade Between Countries 7) Refer to the figures above. When Banana Republic opens up to international trade, the domestic sellers in the textile market ________. A) gain the surplus equal to the area A' + B' + C' B) gain the surplus equal to the area C' C) lose the surplus equal to the area A' + B' + C' D) lose the surplus equal to the area C' Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Trade Between Countries 53 Copyright © 2022 Pearson Education Ltd.

8) Refer to the figures above. When Banana Republic opens up to international trade, the total surplus ________. A) decreases in the solar panel market and increases in the textile market B) increases in the solar panel market and decreases in the textile market C) decreases in both markets D) increases in both markets Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Trade Between Countries 9) Refer to the figures above. When Banana Republic opens up to international trade, consumers overall would be better off if ________. A) A' + D' > A + E B) A + B + C > A' + B' C) B + C > C' D) A + D + E > A' + D' + E' Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Trade Between Countries 10) Refer to the figures above. Suppose that, before Banana Republic opened up its markets to international trade, the domestic markets were in long-run equilibrium. All else being equal, what is expected to happen in the long run after the markets are opened up to trade? A) The new long-run equilibrium is achieved at the world price in each market. B) The price in each market will move toward the original long-run equilibrium price. C) Resources will shift from production of solar panels to production of textiles. D) Resources will shift from production of textiles to production of solar panels. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Trade Between Countries 11) If a country is a price taker for a good in the world market, ________. A) its consumption and production decisions for the good play a key role in determining world prices B) its consumption and production decisions for the good do not affect world prices C) its demand for the good remains the same irrespective of changes in world prices D) it is the only exporter of the good in the world market Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries 54 Copyright © 2022 Pearson Education Ltd.

12) Free trade refers to the ability of ________. A) developing countries to make payments for the import of goods at the end of every year B) all countries to trade without hindrance or encouragement from the government C) developed countries to set the world prices of most goods and services D) developed countries to provide financial aid to the developing nations Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries The domestic supply and demand of a product in Canada is given in the following figure.

13) Refer to the figure above. If the world price of this product is $12 and Canada engages in free trade, Canada will ________. A) import this product but still produce some domestically B) export this product but still consume some domestically C) export the entire amount of this product that is produced in Canada D) import the entire amount of this product that is consumed in Canada Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries

14) Refer to the figure above. If the world price of this product is $1 and Canada engages in free trade, Canada will ________. A) import this product, but still produce some domestically B) export this product, but still consume some domestically C) export the entire amount of this product that is produced in Canada D) import the entire amount of this product that is consumed in Canada Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries 15) A world price for a good is ________. A) the lowest price at which the good is available in any country in the world B) the price prevailing in the country with the largest production of the good C) equal to the lowest opportunity cost of producing the good in any country in the world D) the prevailing price of the good in the global market Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries 16) Which of the following statements is TRUE? A) If the domestic price of a good in a country is higher than the world price, the country will become an exporter of the good. B) Whether a country becomes an importer or an exporter of a good depends only on the domestic price of the good and is independent of the world price of the good. C) If the domestic price of a good in a country is higher than the world price, the country will become an importer of the good. D) Whether a country becomes an importer or an exporter of a good depends only on the world price of the good and is independent of the domestic price of the good. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries

17) Which of the following statements is TRUE? A) If the domestic price of a good in a country is lower than the world price, the country will become an exporter of the good. B) Whether a country becomes an importer or an exporter of a good depends only on the domestic price of the good and is independent of the world price of the good. C) If the domestic price of a good in a country is lower than the world price, the country will become an importer of the good. D) Whether a country becomes an importer or an exporter of a good depends only on the world price of the good and is independent of the domestic price of the good. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries The table below shows the domestic price of a pair of trousers in four countries. Country A B C D

Domestic Price ($) 10 6 13 16

18) Refer to the table above. If the world price for a pair of trousers is $12, then which of the following statements is TRUE? A) All four countries will export trousers. B) All four countries will import trousers. C) Country A and Country B will import trousers, whereas Country C and Country D will export trousers. D) Country C and Country D will import trousers, whereas Country A and Country B will export trousers. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Determinants of Trade Between Countries

19) Refer to the table above. If the world price of trousers is $8 per pair, then which of the following statements is TRUE? A) Country B, Country C, and Country D will export trousers, whereas Country A will import trousers. B) Country A, Country C, and Country D will import trousers, whereas Country B will export trousers. C) Only Country B will import trousers, whereas Country A, Country C, and Country D will export trousers. D) All countries will import trousers. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Determinants of Trade Between Countries 20) Refer to the table above. If the world price of trousers is $5 per pair, then which of the following statements is TRUE? A) All four countries will import trousers. B) All four countries will export trousers. C) Country A and Country D will export trousers, whereas Country B and Country C will import trousers. D) Country B and Country C will export trousers, whereas Country A and Country D will import trousers. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Determinants of Trade Between Countries 21) Refer to the table above. If the world price of trousers is $18 per pair, then which of the following statements is TRUE? A) All four countries will export trousers. B) All four countries will import trousers. C) Country A and Country D will export trousers, whereas Country B and Country C will import trousers. D) Country A and Country D will import trousers, whereas Country B and Country C will export trousers. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Determinants of Trade Between Countries

22) The U.S. wheat market is represented by the demand and supply curves shown in the figure below.

Initially, suppose there is no trade in wheat between the United States and the rest of the world. In this case, consumer surplus is represented by the area ________ and producer surplus is represented by the area ________ in the figure below.

A) A; B B) A + B + C; 0 C) A; B + C D) 0; A + B + C Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries

Scenario: Now suppose the United States can trade wheat with the rest of the world, taking the world price of $2 per bushel as given in the figure below.

23) Refer to the scenario above. With free trade at the world price, the United States ________ wheat in the amount of ________ million metric tons. A) imports; 10 B) imports; 6 C) imports; 4 D) exports; 10 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries 24) Refer to the scenario above. The gain in consumer surplus from free trade is represented by the area ________. A) F + G B) B + F C) B + F + G D) F + G + H + I Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries

Scenario: Now suppose the United States continues to trade wheat freely with the rest of the world but that the world price is $6 per bushel, as shown in the figure below.

25) Refer to the scenario above. At this new world price, the United States ________ wheat in the amount of ________ million metric tons. A) imports; 4 B) imports; 10 C) exports; 6 D) exports; 10 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries 26) Refer to the scenario above. The gain in producer surplus from free trade at the world price of $6 per bushel is represented by area ________. A) B B) B + F C) F + G D) F + G + H + I Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries

27) a) The demand for shoes in Cadbia is given by Qd = 300 − 25P, and the supply of shoes is given by Qs = 100 + 25P. If the world price of shoes is $8, will Cadbia import or export shoes? b) The demand for dark chocolates in Cadbia is given by Qd = 300 − 10P, and the supply of dark chocolates is given by Qs = 100 + 10P. If the world price of dark chocolates is $6, will Cadbia import or export chocolates? Answer: a) The domestic price of shoes in Cadbia is the price at which the quantity demanded of shoes equals the quantity supplied of shoes. This implies: 300 − 25P = 100 + 25P, or 50P = 200, so P = $4. Because the domestic price of shoes in Cadbia is less than the world price of shoes, Cadbia will export shoes. b) The domestic price of dark chocolates in Cadbia is the price at which the quantity demanded of dark chocolates equals the quantity supplied of dark chocolates. This implies: 300 − 10P = 100 + 10P, or 20P = 200, so P = $10. Because the domestic price of dark chocolates in Cadbia is more than the world price of dark chocolates, Cadbia will import dark chocolates. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Determinants of Trade Between Countries 28) What is meant by the world price of a good? How do the domestic price and the world price of a good together determine whether a country will be an importer or an exporter of the good? Answer: The world price of a good is the prevailing price of the good in the world market. The domestic price and the world price of a good play an important role in determining whether a country will export the good or import it. If the domestic price of a good in a country is lower than the world price of the good, the country should export the good. Conversely, if the domestic price of a good is higher than the world price of the good, the country should import the good. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries

The following figure shows the demand curve, D, and the supply curve, S, for calculators in Barylia in four different scenarios. Barylia is open to free trade.

29) Refer to the figure above. Let the world price of calculators be $5. In what scenario(s) does Barylia become a net importer of calculators? A) (2) B) (1) and (2) C) (2) and (3) D) (3) and (4) Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries 30) Refer to the figure above. Let the world price of calculators be $4. In what scenario(s) does Barylia become a net exporter of calculators? A) (1) B) (2) C) (1) and (3) D) (2), (3), and (4) Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries

31) Refer to the figure above. At a world price of $6, in which scenario(s) does Barylia see its domestic quantity demanded decrease? A) (1) B) (2) C) (1) and (2) D) (4) Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries 32) Refer to the figure above. At a world price of $5, in which scenario(s) does Barylia see its domestic quantity demanded increase? A) (1) and (2) B) (3) C) (4) D) (3) and (4) Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of Trade Between Countries 33) Fair trade products consist of goods that are ________. A) usually imported from developing nations B) produced using child labor C) available in all countries across the globe D) exported only by developed nations Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: Fair Trade Products

The following figure shows the demand curve, D, and the supply curve, S, for calculators in Barylia. The world price of calculators is $40.

34) Refer to the figure above. What is the domestic price of calculators in Barylia? A) $10 per unit B) $30 per unit C) $40 per unit D) $50 per unit Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 35) Refer to the figure above. If Barylia does NOT engage in international trade, what is the production of calculators in the country? A) 10 units B) 20 units C) 40 units D) 60 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 36) Refer to the figure above. If the economy of Barylia opens up to free trade, then which of the following statements is TRUE? A) Barylia will start importing calculators. B) Barylia will start exporting calculators. C) Domestic consumers will purchase a greater quantity of calculators than before. D) The production and purchase of calculators in Barylia will remain the same as before. Answer: B Difficulty: Medium AACSB: Application of Knowledge 65 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Exporting Nations: Winners and Losers 37) Refer to the figure above. What is the domestic demand for calculators in Barylia once the economy opens up to free trade? A) 20 units B) 50 units C) 60 units D) 100 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 38) Refer to the figure above. What is the domestic production of calculators in Barylia once the economy opens up to free trade? A) 10 units B) 30 units C) 60 units D) 100 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 39) Refer to the figure above. Which of the following statements is TRUE? A) After the economy opens up to free trade, it will import 40 calculators. B) After the economy opens up to free trade, it will export 40 calculators. C) After the economy opens up to free trade, it will import 70 calculators. D) After the economy opens up to free trade, it will export 70 calculators. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 40) Refer to the figure above. What is the producer surplus before Barylia opens up to free trade? A) $125 B) $250 C) $400 D) $325 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers

41) Refer to the figure above. What is the producer surplus after Barylia opens up to free trade? A) $225 B) $550 C) $750 D) $900 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 42) Refer to the figure above. What is the consumer surplus before Barylia opens up to free trade? A) $250 B) $300 C) $350 D) $400 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 43) Refer to the figure above. What is the consumer surplus after Barylia opens up to free trade? A) $75 B) $90 C) $100 D) $125 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 44) Refer to the figure above. What is the total surplus before Barylia opens up to free trade? A) $250 B) $325 C) $800 D) $1,125 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers

45) Refer to the figure above. What is the total surplus after Barylia opens up to free trade? A) $455 B) $800 C) $1,000 D) $1,200 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 46) Refer to the figure above. Which of the following explains the impact on the domestic buyers and sellers when the country opens to free trade? A) Both the domestic sellers and buyers are made worse off. B) Both the domestic sellers and buyers gain. C) The domestic sellers lose, but the domestic buyers gain. D) The domestic sellers gain, but the domestic buyers lose. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 47) Refer to the figure above. Which of the following statements is TRUE? A) Barylia as a whole gained from opening up to free trade. B) Barylia as a whole lost from opening up to free trade. C) The buyers of calculators in Barylia gained from opening up to free trade. D) The firms in Barylia that manufactured calculators lost from opening up to free trade. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 48) Refer to the figure above. Which of the following best describes a method to compensate the group that was made worse off when Barylia opened to free trade? A) The buyers could be taxed and the tax revenue used to compensate the sellers. B) The sellers could be taxed and the tax revenue used to compensate the buyers. C) Barylia could sell the calculators at a price below the domestic equilibrium price in the global market. D) Barylia could sell the calculators at a price above the world price in the global market. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers

The figure below shows the domestic supply and demand of a product in the United States.

49) Refer to the figure above. If the world price of this product is $14 and the United States engages in free trade, it will ________ units of this product. A) import 40 million B) export 40 million C) export 20 million D) import 20 million Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 50) Refer to the figure above. If the world price of this product is $14, the consumer surplus in the United States before free trade is equal to ________, and the consumer surplus after free trade will equal ________. A) $160; $80 B) $200; $80 C) $160; $40 D) $200; $40 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers

51) Refer to the figure above. If the world price of this product is $14, the producer surplus in the United States before free trade is equal to ________, and the consumer surplus after free trade will equal ________. A) $160; $360 B) $200; $800 C) $160; $280 D) $200; $280 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 52) Refer to the figure above. If the world price of this product is $14, the United States will gain ________ in social surplus if it engages in free trade in this product. A) $160 B) $80 C) $280 D) $40 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 53) Refer to the figure above. Suppose the world price of this product is $14. After the United States engages in free trade in this product, ________. A) the consumers will win, the producers will win, and the overall economy will be better off B) the consumers will win, the producers will lose, but the overall economy will be better off C) the consumers will lose, the producers will win, but the overall economy will be better off D) the consumers will lose, the producers will win, but the overall economy will be worse off Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 54) Refer to the figure above. Suppose the world price of this product is $8. After the United States engages in free trade in this product, ________. A) the consumers will win, the producers will win, and the overall economy will be better off B) the consumers will win, the producers will lose, but the overall economy will be better off C) the consumers will lose, the producers will win, but the overall economy will be better off D) the consumers will lose, the producers will win, but the overall economy will be worse off Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers

55) Refer to the figure above. If the world price of this product is $8, U.S. will gain ________ in social surplus if it engages in free trade in this product. A) $160 B) $80 C) $20 D) $40 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers 56) Suppose a nation opens up to free trade and becomes an exporter of goods. Which of the following is then TRUE of this nation? A) The nation as a whole suffers losses. B) Sellers gain. C) Buyers gain. D) Both buyers and sellers gain. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Exporting Nations: Winners and Losers 57) Suppose a nation opens up to free trade and becomes an exporter of goods. Which of the following is then TRUE? A) The nation as a whole suffers losses. B) Sellers lose. C) Buyers lose. D) Buyers gain. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers

58) The following figure shows the demand curve, D, and supply curve, S, for milk in Cadbia.

a) What is the consumer surplus, producer surplus, and total surplus if Cadbia does not engage in free trade? b) If the world price of milk is $4 per quart, will Cadbia import or export milk? c) What is the change in consumer surplus, producer surplus, and total surplus if Cadbia participates in free trade? Answer: a) The domestic price of milk in Cadbia is determined by the intersection of the demand and supply curves for milk. It is equal to $3. Consumer surplus when Cadbia does not participate in free trade is × (5 − 3) × 40 = $40. Producer surplus when Cadbia does not participate in free trade is

× (3 − 1) × 40 = $40.

Total surplus when Cadbia does not participate in free trade is $40 + $40 = $80. b) If the world price of milk is $4 per quart, Cadbia will export milk. c) Consumer surplus when Cadbia participates in free trade is × (5 − 4) × 20 = $10. Change in consumer surplus when Cadbia participates in free trade is $10 − $40 = −$30. Producer surplus when Cadbia participates in free trade is × (4 − 1) × 60 = $90. Change in producer surplus when Cadbia participates in free trade is $90 − $40 = $50. Total surplus when Cadbia participates in free trade is $90 + $10 = $100. Change in total surplus when Cadbia participates in free trade is $100 − $80 = $20. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Exporting Nations: Winners and Losers

59) How are the domestic sellers and buyers of a good affected if a country starts exporting the good? Answer: If the country starts exporting the good, sellers can sell the good at a price higher than the domestic price. Therefore, sellers gain. In contrast, buyers have to pay a higher price for the good; therefore, they lose. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Exporting Nations: Winners and Losers The following figure shows the demand curve, D, and supply curve, S, of ballpoint pens in Lithasia. The world price of pens is $2.

60) Refer to the figure above. If Lithasia does NOT engage in international trade, what is the domestic production of pens? A) 0 units B) 6 units C) 12 units D) 16 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 61) Refer to the figure above. What is the domestic price of pens in Lithasia? A) $1 B) $2 C) $3 D) $6 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 73 Copyright © 2022 Pearson Education Ltd.

62) Refer to the figure above. If Lithasia opens up to free trade, then which of the following statements is TRUE? A) The domestic production of pens in Lithasia will increase. B) The domestic price of pens will increase. C) Lithasia will start exporting pens. D) Lithasia will start importing pens. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 63) Refer to the figure above. What is the domestic demand for pens in Lithasia after the economy opens up to free trade? A) 6 units B) 12 units C) 16 units D) 22 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 64) Refer to the figure above. What is the domestic production of pens in Lithasia after the economy opens up to free trade? A) 6 units B) 12 units C) 16 units D) 22 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 65) Refer to the figure above. Which of the following statements is correct? A) After the economy is open to free trade, it will export 6 pens. B) After the economy is open to free trade, it will import 6 pens. C) After the economy is open to free trade, it will export 10 pens. D) After the economy is open to free trade, it will import 10 pens. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers

66) Refer to the figure above. What is the producer surplus before Lithasia opens up to free trade? A) $6 B) $12 C) $18 D) $24 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 67) Refer to the figure above. What is the producer surplus after Lithasia opens up to free trade? A) $2 B) $3 C) $6 D) $9 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 68) Refer to the figure above. What is the consumer surplus before Lithasia opens up to free trade? A) $3 B) $12 C) $18 D) $22 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 69) Refer to the figure above. What is the consumer surplus after Lithasia opens up to free trade? A) $1 B) $12 C) $15 D) $32 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers

70) Refer to the figure above. What is the total surplus before Lithasia opens up to free trade? A) $10 B) $20 C) $30 D) $40 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 71) Refer to the figure above. What is the total surplus after Lithasia opens up to free trade? A) $15 B) $25 C) $27 D) $35 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 72) Refer to the figure above. Which of the following statements is TRUE? A) Buyers in Lithasia lost when the country engaged in free trade. B) Sellers in Lithasia gained when the country engaged in free trade. C) The nation gained as a whole by opening up to free trade. D) The nation lost as a whole by opening up to free trade. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers 73) Refer to the figure above. Which of the following methods is the best way to compensate the losers from opening Lithasia to international trade? A) The sellers in Lithasia could be taxed and the revenue could be used to compensate buyers. B) The buyers in Lithasia could be taxed and the revenue could be used to compensate sellers. C) Both buyers and sellers could be taxed and the revenue could be retained by the government. D) The sellers in Lithasia could sell the pens at a price above the equilibrium price in the domestic market. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers

74) If a nation opens up to free trade and becomes an importer of goods, which of the following is then TRUE? A) The nation as a whole loses. B) Sellers gain. C) Buyers gain. D) Buyers lose. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Importing Nations: Winners and Losers 75) If a nation opens up to free trade and becomes an importer of goods, which of the following is then TRUE? A) The nation as a whole loses. B) Sellers lose. C) Sellers gain. D) Buyers lose. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Importing Nations: Winners and Losers 76) How are the domestic sellers and buyers of a good affected if a country starts importing the good? Answer: If a country starts importing the good, buyers can buy the good at a price lower than the domestic price. Therefore, buyers gain. In contrast, sellers face competition because of a lower world price, which reduces the quantity they can sell. Therefore, sellers lose. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Importing Nations: Winners and Losers

77) The following figure shows the demand curve, D, and the supply curve, S, for soap in Barylia.

a) What is the consumer surplus, producer surplus, and total surplus in Barylia if the nation does not participate in free trade? b) If the world price of soap is $2 per unit, will Barylia import or export soap? c) What is the change in consumer surplus, producer surplus, and total surplus if Barylia participates in free trade? Answer: a) The domestic price of soap is determined by the intersection of the demand and supply curves for soap. It is equal to $3. Consumer surplus when Barylia does not participate in free trade is × (5 − 3) × 20 = $20. Producer surplus when Barylia does not participate in free trade is

× (3 − 1) × 20 = $20.

Total surplus when Barylia does not participate in free trade is $20 + $20 = $40. b) If the world price of soap is $2 per unit, Barylia will import soap. c) Consumer surplus when Barylia participates in free trade is × (5 − 2) × 30 = $45. Change in consumer surplus when Barylia participates in free trade is $45 − $20 = $25. Producer surplus when Barylia participates in free trade is × (2 − 1) × 10 = $5. Change in producer surplus when Barylia participates in free trade is $5 − $20 = −$15. Total surplus when Barylia participates in free trade is $45 + $5 = $50. Change in total surplus when Barylia participates in free trade is $50 − $40 = $10. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Importing Nations: Winners and Losers

78) Which of the following statements is TRUE of the world price of a good? A) It is determined by the World Bank. B) It is determined by the intersection of the world supply and world demand curves for the good. C) It is always less than the domestic price of the good in the country that exports the good. D) It is always greater than the domestic price of the good in the country that imports the good. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Where Do World Prices Come From? 79) Which of the following can be a source of a country's comparative advantage? A) The prices of finished goods B) The demand for goods in the global market C) Climatic conditions D) The demand for goods in the domestic market Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of a Country's Comparative Advantage 80) Which of the following can be a source of a country's comparative advantage? A) Resources that are available B) The demand for domestic products abroad C) The world price of goods and services D) The domestic price of finished goods Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of a Country's Comparative Advantage 81) Which of the following can be a source of a country's comparative advantage? A) The rate of inflation in the domestic economy B) The level of unemployment in the country C) Education and experience of the workforce in the country D) Domestic demand for goods produced abroad Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Determinants of a Country's Comparative Advantage

82) Which of the following CANNOT be a source of a country's comparative advantage? A) Climate B) Resource stock available C) Education of workforce D) Domestic prices of goods and services Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of a Country's Comparative Advantage 83) Which of the following statements is FALSE? A) Free trade is generally harmful to a country's labor markets. B) Economists are generally in favor of removing barriers to trade. C) Free trade can create jobs in a country. D) Consumers in a country can benefit from free trade through lower prices. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Trade Between Countries Assume the demand for pears in Genovia is represented by P = 24 - Q and the supply of pears in Genovia is represented by P = 2Q, where Q is measured in thousands of pounds of pears and P is the price per pound. Also, assume that the world price of a pound of pears is $10 per pound. 84) Which of the following statements about Genovia's market for pears is FALSE? A) Genovians will consume 5,000 pounds of pears if the country opens up to free trade. B) Genovians will consume 8,000 pounds of pears if the country does not open up to free trade. C) Genovians will consume 14,000 pounds of pears if the country does open up to free trade. D) Genovia will be a net importer of pears if the country opens up to free trade. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Trade Between Countries 85) What are the determinants of a country's comparative advantage? Answer: The determinants of a country's comparative advantage are the following: i) Natural resources ii) Stocks of human-made resources iii) Technology iv) Education, work habits, and experience of the labor force v) Relative abundance of labor and capital vi) Climate Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Determinants of a Country's Comparative Advantage 80 Copyright © 2022 Pearson Education Ltd.

8.5 Arguments Against Free Trade 1) List the various arguments against free trade. Answer: The various arguments against free trade are as follows: i) National security concerns ii) Fear of the effects of globalization on a nation's culture iii) Environmental and resource concerns iv) Infant industry concerns v) Potential negative effect on local wages and jobs Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Arguments Against Free Trade 2) Which of the following correctly identifies an argument against free trade? A) Trade leads to a minimization of world production. B) Specialization due to trade can hamper national security. C) Trade leads to an exploitation of developed countries. D) The sellers of exporting nations suffer heavy losses due to trade. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: National Security Concerns 3) "Banana republics" refer to nations that ________. A) do not participate in free trade B) are net importers C) specialize in the production of only one good D) produce only agricultural products Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: National Security Concerns 4) How can national security be threatened when a nation engages in free trade and specializes on the basis of comparative advantage? Answer: Free trade is based on comparative advantage and specialization. A country specializes in the production of a good in which it has a comparative advantage. Hence, when a nation engages in free trade, resources that are required for strengthening the defense of a country are likely to be guided toward the production of goods that have an export potential. Moreover, specialization may cause a nation to import military weaponry if it does not have a comparative advantage in its production. If a conflict develops with the country from which such weapons are being imported, it is unlikely that the country will continue to export weapons. This will hamper the ability of a country to preserve its integrity in times of war and thus act as a threat to national security. Difficulty: Easy 81 Copyright © 2022 Pearson Education Ltd.

AACSB: Analytical Thinking TopicEntry: National Security Concerns 5) The shift toward more open, integrated economies that participate in foreign trade and investment is referred to as ________. A) protectionism B) fair trade promotion C) globalization D) traditionalism Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Fear of Globalization 6) Which of the following correctly identifies an argument against globalization? A) Globalization limits the bundle of goods and services available in smaller countries. B) Globalization leads to an exploitation of developed countries. C) Globalization can lead to a loss of indigenous culture and tradition. D) Globalization works against free trade. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Fear of Globalization 7) A few decades ago, there were hardly any Subway restaurants in India. Now they are present in almost every big city. This is an outcome of ________. A) fair trade union practices B) traditionalism C) the protectionist policies adopted by the Indian government D) globalization Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Fear of Globalization 8) Which of the following statements is NOT true of free trade? A) Free trade leads to a maximization of world output. B) Free trade maximizes world living standards. C) Free trade always makes each individual better off. D) Free trade encourages countries to specialize in production Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Fear of Globalization

9) Which of the following correctly identifies an argument against free trade? A) Free trade can lead to excessive exploitation of resources in poor countries. B) Free trade can lead to a loss in the income of the sellers in exporting countries. C) Free trade causes a reduction in total surplus in all countries. D) Free trade leads to a minimization of world production. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Environmental and Resource Concerns 10) ________ countries, in an effort to promote economic growth and jobs, use ________ pollution regulations to attract industry. A) Rich; lax B) Rich; strong C) Poor; lax D) Poor; strong Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Environmental and Resource Concerns 11) The term "infant industries" often refers to ________. A) foreign industries B) fledgling domestic industries C) public sector undertakings D) agriculture-based industries Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Infant Industry Arguments 12) Which of the following correctly identifies an argument against free trade? A) Free trade leads to a loss of revenue for exporting countries. B) Buyers in importing countries suffer losses due to free trade. C) Infant domestic industries fail to compete successfully with the advanced foreign competitors. D) Free trade limits the bundle of goods and services available in smaller countries. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Infant Industry Arguments

13) The use of government regulations and barriers to control trade is referred to as ________. A) globalization B) protectionism C) liberalization D) actualization Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Infant Industry Arguments 14) In the mid-nineteenth century, the American steel rail industry could not compete with the established British steel rail industry, and imports of British steel rails flooded the U.S. market. In response, the U.S. government imposed high tariffs on steel rails until U.S. steel rail mills could compete with their British counterparts. This is an example of ________. A) national security concerns B) effects of globalization on the country's culture C) infant industry arguments D) potential negative effects on local wages and jobs Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Infant Industry Arguments 15) Protectionism leads to ________. A) subsidization of imports B) reduction of trade barriers C) increased export of goods and services D) reduction in the competition faced by domestic firms Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Infant Industry Arguments 16) Which of the following is a tool used for protectionism? A) Service tax B) Bank rate C) Tariffs D) Open market operations Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Infant Industry Arguments

17) What are the infant industry arguments against free trade? Answer: Infant industries are fledgling domestic industries. When an economy opens up to free trade, domestic industries face competition from foreign industries. Initially, these infant industries may not have a comparative advantage in production, but if provided protection from foreign trade, they will likely develop some comparative advantage eventually. However, foreign industries may have access to better technology and human resources and also enjoy economies of scale. Thus, they may be able to produce at a cost lower than new domestic industries. This allows them to price the goods lower than domestic industries. Therefore, domestic infant industries are adversely affected when a country opens up to free trade, and the infant industry argument against free trade suggests that they should be protected until they develop some sort of comparative advantage. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Infant Industry Arguments 18) Taxes levied on goods and services transported across political boundaries are referred to as ________. A) service taxes B) tariffs C) value added taxes D) transport taxes Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Effects of Tariffs

Scenario: You learned in the textbook that protectionism via an imposed tariff is not free, since it interferes with market equilibrium and leads to a loss of social surplus in that market. A rationale for imposing a tariff is to shield domestic firms in a particular industry from foreign competition. But what if domestic firms that export goods and services rely on imported inputs in their production? The pie charts below shows that most U.S. exporters are also importers and vice versa.

(Source: J. Bradford Jensen, Importers are Exporters: Tariffs Would Hurt Our Most Competitive Firms, Trade and Investment Policy Watch, Peterson Institute of International Economics, December 7, 2016, https://piie.com/blogs/trade-investment-policywatch/importers-are-exporters-tariffs-would-hurt-our-most-competitive.) 19) Refer to the scenario above. Which of the following is a likely effect of a tariff on imported steel in the United States (a steel importing country)? A) Domestic firms that use steel as inputs will benefit from a lower production cost. B) Domestic firms that use imported steel as an input will export less of their product. C) Domestic steel producers will lose some producer surplus. D) Domestic demand for steel will increase. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs

20) Refer to the scenario above. Which statement is consistent with the graphic above? A) It is not possible to discourage only imports without discouraging exports at the same time in the United States. B) Tariffs can be an effective tool to promote U.S. exports. C) Most U.S. importers use domestically produced inputs. D) Loss of social surplus due to a tariff in one market could be offset by an increase in social surplus in other markets. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs Scenario: The following figure shows the demand curve, D, and the supply curve, S, of chairs in Barylia. Barylia is open to free trade. The world price of chairs is $3, and the government of Barylia decides to impose a $1 tariff on the import of chairs.

21) Refer to the scenario above. What is the domestic price of chairs in Barylia in the absence of trade? A) $2 B) $3 C) $4 D) $6 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs

22) Refer to the scenario above. What is the consumer surplus when Barylia opens up to free trade? A) $155 B) $215 C) $245 D) $325 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 23) Refer to the scenario above. What is the consumer surplus when Barylia engages in trade and the government imposes a $1 tariff on chairs? A) $100 B) $120 C) $180 D) $200 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 24) Refer to the scenario above. What is the producer surplus when Barylia opens to free trade? A) $2 B) $5 C) $20 D) $21 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 25) Refer to the scenario above. What is the producer surplus when Barylia engages in trade and the government imposes a tariff of $1 on chairs? A) $5 B) $20 C) $30 D) $40 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs

26) Refer to the scenario above. Calculate the revenue earned by the government when it imposes a tariff of $1 on chairs. A) $10 B) $20 C) $30 D) $40 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 27) Refer to the scenario above. What is the deadweight loss of the tariff imposed by the government? A) $10 B) $20 C) $30 D) $40 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 28) Refer to the scenario above. How many chairs were imported by Barylia before the tariff was imposed by the government? A) 25 units B) 50 units C) 55 units D) 60 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 29) Refer to the scenario above. How many chairs does Barylia import when the government imposes a tariff of $1 per unit? A) 10 units B) 20 units C) 30 units D) 40 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs

30) Refer to the scenario above. Calculate the total surplus in Barylia under free trade. A) $150 B) $250 C) $325 D) $375 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 31) Refer to the scenario above. Calculate the total surplus after the government imposes a tariff of $1 per unit. A) $160 B) $240 C) $300 D) $315 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs

Scenario: The domestic supply and demand of a good in the United States is shown in the figure below. Suppose the world price of this good is $4. Suppose the United States is considering levying a $2 tariff per unit on imports of this good.

32) Refer to the scenario above. Before the tariff is imposed, ________ units of this good were imported; after the tariff, ________ units of this good are imported. A) 80; 60 B) 60; 40 C) 60; 50 D) 80; 50 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 33) Refer to the scenario above. Before the tariff is imposed, the consumer surplus in the United States was ________; after the tariff, the consumer surplus becomes ________. A) $360; $160 B) $160; $640 C) $640; $490 D) $490; $360 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 91 Copyright © 2022 Pearson Education Ltd.

34) Refer to the scenario above. The change in producer surplus after the tariff is ________. A) $10 B) $20 C) $40 D) $80 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 35) Refer to the scenario above. The U.S. government will make ________ in revenue from this tariff. A) $160 B) $20 C) $40 D) $80 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs 36) Refer to the scenario above. The U.S. economy will ________ because of this tariff policy. A) lose $20 B) gain $20 C) lose $80 D) gain $80 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Effects of Tariffs

Scenario: Suppose the world price is $2 per bushel, and U.S. wheat growers are dissatisfied with the level of wheat imports into the United States. They lobby Congress for a $1 per bushel tariff on imported wheat. The following figure shows the U.S. wheat market.

37) Refer to the scenario above. How much wheat is imported into the United States after the imposition of the tariff? A) 3 million metric tons B) 4 million metric tons C) 6 million metric tons D) 10 million metric tons Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Effects of Tariffs 38) Refer to the scenario above. The increase in producer surplus caused by the imposition of the tariff is given by what area in the figure? A) B + J + K B) J + K C) C + D + E D) F + G + H + I Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Effects of Tariffs

39) Refer to the scenario above. The decrease in consumer surplus resulting from the tariff is given by which area in the figure? A) A B) F + G+ H + I C) J + K + C + D + E D) C + D + E Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Effects of Tariffs 40) Refer to the scenario above. The tariff revenue collected by the U.S. government is represented by which area in the figure? A) E B) D C) C D) J Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Effects of Tariffs 41) Refer to the scenario above. The deadweight loss arising from the tariff is represented by which area? A) C B) E C) C + D + E D) C + E Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Effects of Tariffs 42) Which of the following is TRUE of protectionism? A) It lowers prices for domestic consumers and increases social surplus. B) It increases prices for domestic consumers and also increases social surplus. C) It increases prices for domestic consumers and lowers social surplus. D) It lowers prices for domestic consumers and also reduces social surplus. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Effects of Tariffs

43) Which of the following is an effect of imposing a tariff on an imported good? A) The domestic price of the imported product decreases. B) The quantity of domestic production increases. C) The quantity of domestic production decreases. D) The tariff imposed on an exported good must be adjusted. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Effects of Tariffs 44) Which of the following is NOT a characteristic of countries in a free trade area? A) Trade is tariff free among members. B) Members have the same tariff structure as the rest of the world. C) Members do not permit the free movement of labor across their borders. D) Members do not have a common monetary policy. Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Effects of Tariffs 45) Which of the following statements is TRUE? A) The U.S. economy has discouraged trade with Mexico and Canada over time. B) Most workers who were displaced because of NAFTA's passage soon found gainful employment. C) The U.S. economy is a net exporter of manufactured goods. D) People who are made worse off by free trade can be easily identified and compensated. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Will Free Trade Cause You to Lose Your Job? 46) Which of the following correctly identifies an argument against free trade? A) Free trade reduces world production. B) Free trade hampers technology transfers. C) Free trade increases the wages in importing countries. D) Free trade may result in job loss in some specific industries in the domestic economy. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Will Free Trade Cause You to Lose Your Job?

47) Compensation of losers from opening an economy to international trade is NOT common, because ________. A) losers don't lose so much that they would require being compensated B) the loss is made up through the availability of a wide array of goods and services C) it is difficult for governments to carry out such compensation policies D) the government would have to transfer huge amounts of money to compensate losers Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Will Free Trade Cause You to Lose Your Job? 48) Which of the following arguments is NOT an explanation of why it is difficult to compensate losers for the effects of opening an economy to international trade? A) Identifying the losers is difficult, as they are spread throughout the economy. B) Free trade gain is made over a wide array of goods and services and is hard to identify. C) It is difficult for governments to carry out such redistribution policies. D) The government wants to keep the gains from trade to finance its own expenses. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Will Free Trade Cause You to Lose Your Job? 49) What are the effects of a tariff on a good on various groups and on the total surplus in the country that imposes the tariff? Answer: The imposition of a tariff increases the price of the good in the importing country and makes sellers better off. Domestic sellers enjoy a greater surplus than they did before the imposition of the tariff. Consumers have to pay a higher price for the imported good, and so they are made worse off. The government earns a revenue equal to the product of the tariff rate and the number of units of the good imported. Overall, the imposition of the tariff results in a fall in total surplus compared to the pre-tariff situation. The loss in total surplus is referred to as the deadweight loss of the tariff. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Will Free Trade Cause You to Lose Your Job?

Scenario: The following quote describes China's effect on world labor markets. China's emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in the US industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. (The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade by David H. Autor, David Born, and Gordon H. Hanson, Annual Review of Economics Vol.8:1-635, October 2016) 50) Refer to the scenario above. Which of the following statements does this quote best exemplify? A) Government might not be able to effectively carry out policies to compensate losers from international trade. B) It is often difficult to pinpoint exactly who the winners are and how much they each gained. C) It is often the case that the losers are spread throughout the economy and sometimes touched in very small ways. D) Losers from trade may be concentrated in certain industries and in certain geographical areas, and the impact may be long lasting. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Will Free Trade Cause You to Lose Your Job? 51) Refer to the scenario above. Which of the following statements stands in contrast to the impact of trade with China experienced by some U.S. workers described in this quote? A) Many workers displaced because of NAFTA's passage soon found gainful employment. B) While U.S. manufacturing employment declined due partly to trade with China, trade with the United States has almost certainly been good for Chinese producers and consumers. C) In recent years (beginning in the 1990s), trade has had a much more important effect on wages in the states than was observed before the 1990s. D) Opening up an economy to trade clearly expands the pie, but some people might end up with a smaller piece than they used to have. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Will Free Trade Cause You to Lose Your Job?

Assume the demand for pears in Genovia is represented by P = 24 - Q and the supply of pears in Genovia is represented by P = 2Q, where Q is measured in thousands of pounds of pears and P is the price per pound. Also, assume that the world price of a pound of pears is $10 per pound. 52) Which of the following statements is FALSE if Genovia imposes a tariff of $4 per pound on pear imports? A) Genovia will experience a loss in social surplus of $16,000 after imposing the tariff. B) Genovian pear producers will produce 7,000 pounds of pears. C) Genovians will consume 10,000 pounds of pears. D) Genovia will collect $12,000 in tariff revenue. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Arguments Against Free Trade

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 9 Externalities and Public Goods 9.1 Externalities 1) An externality occurs when ________. A) the quantity demanded of a good exceeds the quantity supplied B) the quantity supplied of a good exceeds the quantity demanded C) the government regulates production and consumption decisions D) an economic activity affects third parties not engaged in the activity Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Externalities 2) Which of the following is the best definition of an externality? A) When firms sell products at a price greater than marginal cost B) When government intervention in a market reduces consumer surplus C) When an economic activity imposes spillover costs or benefits on a third party D) When a worker takes a job "off the books" to avoid paying taxes Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Externalities 3) The market demand curve for a good shows ________, and the market supply curve shows ________. A) consumers' willingness to pay for the good; producers' marginal cost of producing the good B) producers' marginal cost of producing the good; consumers' willingness to pay for the good C) consumers' willingness to pay for the good; the opportunity cost of producing the good D) consumers' willingness to pay for the good; producers' total cost of producing the good Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Externalities 4) A ________ occurs when an economic activity has a spillover cost that does not affect those directly engaged in the activity. A) positive externality B) negative externality C) gain in producer surplus D) gain in consumer surplus Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Externalities 1 Copyright © 2022 Pearson Education Ltd.

5) Externalities essentially create ________. A) non-excludability in consumption B) non-rivalry in consumption C) a divergence between private and social costs D) a free-rider problem Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Externalities 6) Which of the following is NOT true regarding externalities? A) Externalities have no effect on market efficiency. B) Externalities are imposed on agents other than the parties to an economic exchange. C) Externalities can be either positive or negative. D) Externalities can occur in either consumption or production. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Externalities 7) Traffic congestion is an example of a ________. A) positive externality B) negative externality C) pecuniary externality D) free-rider problem Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 8) The social cost of producing a good that generates negative externalities is the sum of the ________. A) average variable cost and the average fixed cost of production B) average total cost and the marginal cost of production C) private cost and external costs of production D) total fixed cost and the total variable cost of production Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities

9) When the production of a good generates negative externalities, ________. A) the fixed cost of production is zero B) the variable cost of production is zero C) the private cost of production exceeds the social cost of production D) the social cost of production exceeds the private cost of production Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 10) When the production of a good involves negative externalities, the marginal social cost curve will most likely ________. A) be parallel to the horizontal axis B) be parallel to the demand curve C) lie above the supply curve D) lie to the right of the supply curve Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 11) In a market, social surplus is maximized when consumers' willingness to pay for a good equals the ________. A) marginal private cost of producing the good B) average variable cost of producing the good C) marginal social cost of producing the good D) opportunity cost of producing the good Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 12) If negative externalities are present in a market, ________. A) the market price is higher than the socially optimal price B) the quantity supplied in the market is larger than the socially optimal level C) the marginal social cost of production is lower than the marginal private cost D) the average cost of production exceeds the marginal cost of production at all output levels Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities

13) If the production of a good involves negative externalities, ________. A) the quantity of the good supplied in the market is lower than the efficient level B) the optimal price of the good is higher than the market price of the good C) total welfare can be increased by increasing the production of the good D) the average cost of production can be reduced by increasing output above the optimal level Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 14) Deadweight loss refers to the loss in ________. A) producer surplus due to a fall in the market price of a good B) consumer surplus due to an increase in the market price of a good C) total surplus due to a market distortion, such as an externality D) total surplus due to a change in consumers' preferences Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities The following figure shows the private cost and social cost of producing Good X.

15) Refer to the figure above. What does the region EFG represent? A) Consumer surplus B) Producer surplus C) Deadweight loss D) Economic profit Answer: C Difficulty: Medium AACSB: Analytical Thinking 4 Copyright © 2022 Pearson Education Ltd.

TopicEntry: A "Broken" Invisible Hand: Negative Externalities 16) Refer to the figure above. Total welfare can be increased by ________. A) increasing output above Q1 units B) reducing output below Q1 units C) lowering the market price below P1 D) increasing the market price above P2 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 17) Refer to the figure above. Social surplus will be maximized when the quantity supplied of Good X is ________. A) Q1 units B) Q2 units C) greater than Q1 units D) greater than Q2 units Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 18) Refer to the figure above. Which of the following statements is TRUE in this case? A) P1 is the socially optimal price for Good X. B) P2 is the price of Good X in a free market. C) Q2 units is the efficient level of output of Good X. D) Q2 units is the quantity supplied of Good X in a free market. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Negative Externalities

Scenario: In Brazil, more than 60 percent of sugar cane grown is harvested by hand. In São Paulo state, nearly 300,000 workers are employed in sugar cane harvesting. Manual harvesting requires burning the cane fields prior to harvest to remove the cane's sharp leaves and drive snakes from the fields. Burning the cane fields, however, gives off large quantities of ammonia and nitrogen oxide, which lead to ozone creation. In São Paulo state, a layer of ash covers cars, and nitrogen oxide levels double during the harvest period. The nitrogen oxide produced from burning the cane fields can lead to acid rain and changes in water quality. 19) Refer to the scenario above. In the graph below, the socially optimal level of production occurs at which point?

A) Q0 B) Q1 C) Q2 D) Q3 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities

20) Refer to the scenario above. The deadweight loss arising from hand-harvesting is represented by area in the graph below.

A) A B) B C) C D) D Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 21) A chemical factory releases its by-products into a nearby river, which harms aquatic flora and fauna. This is an example of a ________. A) free-rider problem B) negative externality C) pecuniary externality D) positive externality Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Negative Externalities 22) Which of the following is likely to generate a negative externality? A) Smoking a cigarette B) Planting a tree C) Consuming vegetarian food D) Working for long hours Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Negative Externalities

23) Which of the following is likely to give rise to a negative externality? A) A sudden increase in the price of wheat due to a fall in supply B) A sudden increase in the demand for diamonds, leading to an increase in their prices C) Deforestation, leading to the extinction of many species D) Globalization, leading to creation of many new job opportunities Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Negative Externalities 24) The marginal social cost of producing the last unit of a good is $1.10, while the consumers' willingness to pay for the last unit is $0.80. The deadweight loss from the production of the last unit of the good is ________. A) $1.10 B) $1.90 C) $0.50 D) $0.30 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 25) When does the marginal social cost of producing a good exceed the marginal private cost of producing it? Answer: If the production of a good generates a negative externality, the marginal social cost of producing the good exceeds the marginal private cost of producing it. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities

The following figure shows the market supply and demand of a good whose production entails a $2 negative externality per unit.

26) Refer to the figure above. A total of ________ units of this good will be traded in this market, at the price of ________. A) 80; $6 B) 20; $2 C) 60; $8 D) 40; $4 Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 27) Refer to the figure above. The socially optimal price for this good should be ________. A) $6 B) $4 C) $8 D) $7 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities

28) Refer to the figure above. The socially optimal quantity of this good should be ________ units. A) 60 B) 70 C) 80 D) 100 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 29) Refer to the figure above. The total cost of this externality to the society is equal to ________. A) $2 B) $10 C) $20 D) $40 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities 30) Why does the presence of negative externalities in the production of a good lead to an overproduction of the good? Answer: If the production of a good generates negative externalities, the marginal social cost of producing the good exceeds the marginal private cost of producing the good. However, the producers of the good do not take this external cost into account and continue producing as long as the marginal private benefit from production exceeds the marginal private cost. This leads to an overproduction of the good. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Negative Externalities

31) The drainage of chemical fertilizers used on agricultural plots along the banks of the Blue River has led to the formation of a dead zone in the river that cannot support aquatic life. Without any government intervention, will the market for fertilizers produce a socially optimal quantity? Why or why not? Explain your answer with the help of suitable diagrams. Answer: The equilibrium quantity of a good in a free market is determined by the interaction of the market forces of demand, D, and supply, S, as shown in the figure below.

The market demand curve represents the marginal private benefit, and the supply curve represents the marginal private cost. However, in this case, the use of chemical fertilizers imposes an additional cost on society that is not explicitly recognized by its buyers and sellers. As a result, the cost of producing each unit of output increases. The marginal social cost curve (MSC; see the figure below) shows the higher cost of producing each unit of the good.

Social well-being is maximized when Q2 units of fertilizers are traded in the market. Therefore, from the figures, it is evident that in the presence of negative externalities, the market quantity is higher than the socially optimal level. The optimal price that should be charged for Q2 quantity of fertilizers is P2, which is higher than the market price P1. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Negative Externalities

32) If there are costly negative externalities associated with an economic activity and that activity is carried out until the (private) marginal benefit equals the (private) marginal cost, then ________. A) this activity should be subsidized B) the social marginal net benefit is positive C) the private cost exceeds social costs D) too many resources are being allocated to this activity Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Negative Externalities 33) If a ton of newspaper costs $350 to produce and in the process causes $10 worth of pollution damage to the environment, then ________. A) the private cost is $360 per ton B) the social cost is $10 per ton and the private cost is $350 per ton C) the private cost is $360 per ton and the social cost is $340 per ton D) the social cost is $360 per ton and the private cost is $350 per ton Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Negative Externalities 34) The presence of external benefits associated with production implies that ________. A) private output exceeds the socially optimal output B) private output is less than the socially optimal output C) private output corresponds to the socially optimal output D) any of the above, depending on the relative magnitude of social and private benefits Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 35) Suppose only dues-paying members of a private outdoor sports club can access a lake. Club members who are operating their jet skis on the lake disrupt the bass fishing of other club members. This example describes a ________. A) positive externality in production B) negative externality in production C) positive externality in consumption D) negative externality in consumption Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities

36) Due to ongoing budget shortfalls, the city of Detroit has suspended services, such as street cleaning and maintenance of city-owned properties in several neighborhoods. In response, some homeowners in these neighborhoods sweep the streets, replace street lights, and mow the grass on city-owned lots. These actions by homeowners represent ________. A) a positive externality in consumption B) a positive externality in production C) deadweight loss D) a pecuniary externality Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 37) Which of the following occurs when an economic activity has a spillover benefit on third parties not engaged in the activity? A) A negative externality B) A positive externality C) A gain in producer surplus D) A gain in consumer surplus Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 38) A positive externality ________. A) gives rise to external benefits B) leads to increasing returns to scale C) imposes an additional cost on society D) leads to a higher economic profit Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 39) If positive externalities are present in a free market, ________ at any output level. A) the marginal cost of production equals the average cost of production B) the marginal social cost of production exceeds the marginal private cost C) the marginal private benefit from production equals the marginal social benefit D) the marginal social benefit of production exceeds the marginal private benefit Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities

40) Which of the following occurs if the production of a good gives rise to positive externalities? A) The marginal social cost curve lies to the right of the supply curve. B) The marginal social cost curve lies to the left of the supply curve. C) The marginal social benefit curve lies to the right of the demand curve. D) The marginal social benefit curve lies to the left of the demand curve. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 41) Which of the following is TRUE if the production of a good gives rise to a positive externality? A) The marginal social benefit from each level of output exceeds the consumers' willingness to pay. B) The marginal private benefit from production exceeds the marginal social benefit. C) The demand curve for the good shifts to the left in the presence of positive externalities. D) The demand curve for the good shifts to the right in the presence of positive externalities. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 42) The presence of a positive externality in a market leads to a(n) ________. A) underproduction of a good B) overproduction of a good C) gain in producer surplus D) fall in consumer surplus Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 43) If the production of a good involves positive externalities, ________. A) the market price of the good is higher than its optimal price B) the market price of the good is lower than its optimal price C) the average cost of production of the good in the long run is zero D) the variable cost of production of the good is zero Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities

44) The consumption of a good entails a $2 positive external benefit per unit. The following graph shows the market supply and demand of this good. Which of the dashed lines represents the marginal social benefit curve?

A) Line 1 B) Line 2 C) Line 3 D) Line 4 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities

The following figure shows the market supply and demand of a good whose consumption entails a $2 positive external benefit per unit.

45) Refer to the figure above. ________ units of this good will be traded in this market, at the price of ________. A) 8; $6 B) 2; $2 C) 6; $8 D) 4; $4 Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 46) Refer to the figure above. The socially optimal price for this good should be ________. A) $6 B) $4 C) $8 D) $7 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities

47) Refer to the figure above. The socially optimal quantity of this good should be ________ units. A) 6 B) 7 C) 8 D) 10 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities The figure below shows the demand, supply, and marginal social benefit curves for Good Y.

48) Refer to the figure above. The MSB curve lies to the right of the demand curve because the production of Good Y involves ________. A) positive externalities B) negative externalities C) increasing returns to scale D) decreasing returns to scale Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 49) Refer to the figure above. The market price of Good Y is ________. A) $10 B) $17 C) $22 D) $20 Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 17 Copyright © 2022 Pearson Education Ltd.

50) Refer to the figure above. How many units of Good Y will be supplied when the market is free? A) 9 million B) 16 million C) 13 million D) 20 million Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 51) Refer to the figure above. Social welfare will be maximized if ________ units of Good Y are produced. A) 9 million B) 20 million C) 13 million D) 16 million Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 52) Refer to the figure above. The triangular region ABC represents the ________. A) deadweight loss due to the presence of a pecuniary externality B) deadweight loss due to the presence of a negative externality C) economic loss of not recognizing a positive externality D) inefficiency created by not recognizing a negative externality Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 53) Refer to the figure above. Social surplus can be increased by ________. A) increasing output above 13 million units B) reducing output below 13 million units C) charging a price of $10 D) charging a price of $22 Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities

54) The production of a certain fertilizer emits a gas that keeps away mosquitoes and other insects from the surrounding community. This is an example of ________. A) a positive externality B) absolute advantage C) a pecuniary externality D) comparative advantage Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Positive Externalities 55) Which of the following is most likely to give rise to a positive externality? A) A sudden increase in the price of oil due to a supply shock B) A decrease in the price of barley due to a good harvest C) Deforestation leading to the extinction of many species D) The consumption of a drug to cure a communicable disease Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Positive Externalities 56) The local community of the town of Montesia decides to plant trees every month as part of its green initiative. Which of the following is TRUE? A) The marginal social cost of planting trees is lower than the marginal private cost of planting trees. B) The marginal private benefit from planting trees is higher than the marginal social benefit of planting trees. C) There is an external benefit from planting trees. D) There is a deadweight loss in planting trees. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Positive Externalities 57) The marginal social benefit from the production of the last unit of a good is $4,800. If the willingness to pay for that unit is $3,900, what is the external benefit from its production? A) $900 B) $8,700 C) $3,800 D) $4,100 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Positive Externalities

58) Which of the following activities is most likely to give rise to a positive externality? A) Jogging every morning B) Getting a flu vaccination C) Consuming organic products D) Buying a pair of gloves Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Positive Externalities 59) Which of the following results in a positive externality? A) Going to the beach B) Recycling waste C) Buying a room heater D) Following a healthy lifestyle Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Positive Externalities 60) If too little of a good is being produced in the free market, the production of the good is likely to have a ________. A) positive externality B) negative externality C) low per-unit cost of production D) high opportunity cost of production Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities

61) Cleanliness experts say that cleaning a house hygienically helps prevent the spread of germs in the area. What is the inefficiency created by not recognizing the linkage between cleaning the house and preventing the spread of germs? Explain with a suitable diagram. Answer: The optimal quantity of a good in a free market is determined by the interaction of the market forces of demand, D, and supply, S, as shown in the figure below.

The market demand curve represents the marginal private benefit, and the supply curve represents the marginal private cost. In this case, the cleaning of a house creates external social benefits. The marginal social benefit curve, or MSB curve, in the diagram below represents the private and external benefits of cleaning each additional house.

Houses will be cleaned until the marginal cost of cleaning one more house equals the marginal private benefit derived from cleaning, not the marginal social benefit. Therefore, only Q1 number of houses will be cleaned, even though Q2 houses need to be cleaned to maximize social well-being. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Positive Externalities

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure.

62) Refer to the scenario above. Use of polycarbonate panels to board up vacant houses has a ________. A) negative externality B) positive externality C) gain in producer surplus D) gain in consumer surplus Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Positive Externalities 63) Refer to the scenario above. For each additional polycarbonate panel generates ________ worth of social benefit beyond the private marginal benefit. A) $100 B) $75 C) $60 D) $0 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: A "Broken" Invisible Hand: Positive Externalities

64) Refer to the scenario above. If only the private marginal benefits are taken into account, then ________ panels will be bought at ________ per panel. Use the equations for the demand and the supply curves. A) 70; $70 B) 60; $60 C) 50; $60 D) 60; $70 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 65) Refer to the scenario above. If the private marginal benefits as well as external benefits are taken into account, then ________ panels will be bought at ________ per panel. Use the equations of the demand and the supply curves. A) 90; $90 B) 100; $80 C) 80; $100 D) 100; $100 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 66) Refer to the scenario above. The deadweight loss associated with ignoring external benefits is ________. Use the equations of the demand and the supply curves. A) $900 B) $1,000 C) $1,150 D) $1,275 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: A "Broken" Invisible Hand: Positive Externalities 67) A ________ externality occurs when a market transaction affects others through market prices. A) positive B) negative production C) negative consumption D) pecuniary Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Pecuniary Externalities 23 Copyright © 2022 Pearson Education Ltd.

68) Which of the following gives rise to a pecuniary externality? A) Excessive consumption of alcohol leading to bad health B) A sudden increase in the demand for diamonds, leading to an increase in their prices C) Deforestation, leading to the extinction of many species D) Globalization, leading to the displacement of indigenous workers Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Pecuniary Externalities 69) Jack wants to buy a new house. But the surge in housing demand over the past few months has led to a sharp increase in housing prices, making it impossible for him to buy one on his current income. This is an example of a ________. A) positive externality B) negative externality C) pecuniary externality D) conspicuous externality Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Pecuniary Externalities 70) The increasing popularity of hot dogs in a food joint has pushed up their prices, making it unaffordable for many students living in the surrounding areas. This is an example of a ________. A) positive externality B) negative externality C) pecuniary externality D) free-rider problem Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Pecuniary Externalities 71) Which of the following is necessary for markets to operate efficiently? A) A positive externality B) A negative externality C) A pecuniary externality D) Free-riding Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Pecuniary Externalities

Suppose the market demand for Sriracha sauce can be represented by P = 10 - (Q/10) and the market supply of Sriracha sauce can be represented by P = Q/10. Also, assume that the production of Sriracha sauce releases pepper dust into the air that causes the eyes and skin of the townspeople where factories are located to itch and burn. This external cost is valued at $3 per bottle. 72) What is the market quantity and the optimal quantity, respectively in the market for Sriracha sauce? A) 50 bottles; 35 bottles B) 50 bottles; 50 bottles C) 65 bottles; 50 bottles D) 5 bottles; 6.5 bottles Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Externalities 73) Which of the following statements is FALSE in the unregulated market for Sriracha sauce? A) The optimal price is $3 higher than the market price. B) The deadweight loss is $22.5. C) The market price is $5. D) Producer surplus equals $125. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Externalities 74) Which of the following is FALSE regarding coronavirus vaccines? A) We know it is socially optimal for governments to provide the coronavirus vaccine for free. B) There are positive externalities created when any individual decides to get a coronavirus vaccine because they will not transmit the virus to those populations that are not allowed to get vaccinated, such as pregnant women, young children, and those with highly compromised immune systems. C) With no government intervention too few people will decide to get vaccinated. D) While some people consider factor in the protection their vaccine affords others into their decision of whether or not to get a vaccine, many people will only focus on their personal costs and benefits. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Coronavirus Vaccination: Positive Externalities in Spots You Never Imagined

75) What are pecuniary externalities? Explain with the help of an example. Answer: A pecuniary externality occurs when a market transaction affects other people through market prices. For example, if a large number of consumers decide to purchase a car, the price of the car will increase due to an increase in demand. This creates a pecuniary externality for other potential buyers of the car in the form of higher prices. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Pecuniary Externalities 9.2 Private Solutions to Externalities 1) An economic agent ________ when he accounts for the full costs and benefits of his actions. A) is called a free rider B) internalizes an externality C) maximizes his profit D) is called a rent seeker Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Private Solutions to Externalities 2) Which of the following occurs when an externality is internalized? A) An increase in social well-being B) An increase in private benefit C) An increase in deadweight loss D) An increase in returns to scale Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Private Solutions to Externalities Scenario: Ron plays loud music, which prevents his neighbor from studying. He knows that his neighbor values studying at $5,000, while the cost of soundproofing Ron's room is $3,000. 3) Refer to the scenario above. Which of the following problems is likely to occur? A) The tragedy of commons B) A free-rider problem C) A pecuniary externality D) A negative externality Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Private Solution: Bargaining

4) Refer to the scenario above. If Ron has the right to listen to music at night, how much does his neighbor need to pay him to stop playing music? A) Any amount above $5,000 B) Any amount below $3,000 C) Any amount between $3,000 and $5,000 D) Any amount between $5,000 and $8,000 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Private Solution: Bargaining 5) Which of the following will lead to an efficient private solution if negative externalities are present in a market? A) The government paying a subsidy to the parties involved in generating externalities B) The party creating the externality having legal property rights C) The party suffering from the externality having legal property rights D) The parties involved negotiating with each other and reaching an agreement Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Private Solution: Bargaining 6) When does a private solution to a negative externality fail to allocate resources efficiently? Answer: Private bargaining between the party generating a negative externality and the party suffering from it leads to an efficient allocation of resources. However, such a private solution fails to allocate resources efficiently when the transaction costs associated with bargaining are too high and the number of affected people is large. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Private Solution: Bargaining 7) Beth can earn $7,500 renting out her house. However, her neighbor has a pet dog that chases anybody who comes to look at the house. Because her neighbor has the right to keep his pet untied, Beth is unable to find a tenant. If her neighbor values keeping his pet untied at $1,500, what will the efficient outcome be in this case? Answer: An efficient outcome in this case can be achieved if Beth strikes a private deal with her neighbor convincing him to keep his pet indoors. Because Beth can earn $7,500 renting out her house and her neighbor values keeping his pet outdoors at $1,500, total well-being can be increased if Beth pays her neighbor an amount between $1,500 and $7,500 to keep his pet indoors. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Private Solution: Bargaining

Scenario: The following figure shows the private cost and social cost of producing Good X. Firm A is the producer of Good X. The production plant and Bob's house are located next to a river. However, the plant is upstream, and Bob's house is downstream. Since production pollutes the river, Bob suffers from a negative externality.

8) Refer to the scenario above. What is the value of the negative externality imposed on Bob when the firm produces to maximize its private net benefits? A) (b d) e B) (a c) f C) d e D) c f Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Private Solution: Bargaining 9) Refer to the scenario above. What is the value of the negative externality imposed on Bob when the firm produces the socially optimal quantity? A) (b d) e B) (a c) f C) d e D) c f Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Private Solution: Bargaining

10) Refer to the scenario above. If the property rights to the river belong to the firm, what is the maximum transfer between the two party necessary to make the firm produce the socially optimal quantity? A) A payment of ((a c) f) ((b d) e) from the firm to Bob B) A payment of ((a c) f) ((b d) e) from Bob to the firm C) A payment of (a c) (f e)/2 from the firm to Bob D) A payment of (b d) (f e)/2 from Bob to the firm Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Private Solution: Bargaining 11) Refer to the scenario above. If the property rights to the river belong to the firm, what is the minimum transfer between the two party necessary to make the firm produce the socially optimal quantity? A) A payment of ((a c) f) ((b d) e) from the firm to Bob B) A payment of ((a c) f) ((b d) e) from Bob to the firm C) A payment of (a c) (f e)/2 from the firm to Bob D) A payment of (b d) (f e)/2 from Bob to the firm Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Private Solution: Bargaining

12) In 1973, economist Steven N. S. Cheung wrote an article demonstrating that private bargaining between beekeepers and agricultural producers achieved the efficient outcome in the market for pollination services in Washington state ("The Fable of the Bees: An Economic Investigation." Journal of Law and Economics 16, no. 1 (1973): 11—33). Strong colonies of honeybees are necessary for pollinating some crops, and they also increase yields. Colonies that are co-located with good pollen sources produce more honey. Suppose the following facts describe the market for pollination services for seed alfalfa in Washington state: seed alfalfa growers harvest an additional $4,000 worth of alfalfa seed when honeybees are co-located with their crop; beekeepers realize an additional $1,500 worth of honey when their bee colonies are co-located with alfalfa; and the cost of moving to another alfalfa grower's field is $500. What amount of payment from the alfalfa grower to the beekeeper will result in a market for pollination services that achieves the efficient outcome? Explain your answer. A) $0 B) $500 C) $2,000 D) $5,000 Answer: C Explanation: Any payment from the alfalfa grower to the beekeeper that exceeds $1,000 (the gain in the value of honey minus the relocation cost) and is less than $4,000 (the gain in value of alfalfa seed harvest to the grower) will result in (1) a mutually advantageous trade and (2) the creation of a market for pollinating services that achieves the efficient outcome. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Private Solution: Bargaining

Scenario: The following excerpt is from Timothy R. Hylan, Maureen J. Lage, and Michael Treglia, "The Coase Theorem, Free Agency, and Major League Baseball: A Panel Study of Pitcher Mobility from 1961 to 1992" (Southern Economic Journal 62, no. 4 (1996): 1029— 42). Many economists and legal scholars interpret the [Coase] theorem as containing two propositions. The first is that, in the absence of transactions costs and wealth effects, parties will bargain to an efficient outcome. The second holds that the same outcome will be achieved regardless of the distribution of property rights. … Major League Baseball [MLB] presents a natural experiment consisting of an industry in which there has been an explicit change in the assignment of property rights. Beginning in 1879, … a player could negotiate salary only with the team that owned his contract and the team could trade or sell the player as management saw fit. In 1976 this system was replaced by the institution of free agency whereby a player with at least six years of Major League experience acquired the right to sell his services to prospective buyers…. The empirical analysis shows that after the introduction of free agency, the pitchers with greater longevity in the major leagues are less likely to move relative to their mobility in the pre-free agency period. The results also indicate that, in general, better pitchers are less likely to move and that pitchers playing on teams with higher winning percentages or in large market cities were less likely to move. 13) Refer to the scenario above. If the Coase Theorem holds for baseball playing services in MLB, which of the following should be expected after the introduction of free agency? A) Free agents will be paid more than non-free agents. B) Pattern of mobility (changing teams) by players with similar characteristic and performance should be similar before and after the introduction of free agency. C) Outcome of bargaining between teams and players will be inefficient after the introduction of free agency. D) Free agents will be less likely to be unemployed than non-free agents. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem 14) Refer to the scenario above. What does the empirical analysis by these researchers imply? A) MLB incurred a large loss of revenue after 1976. B) Players who became free agents were able to negotiate a better terms than non-free agents. C) The Coase Theorem does not hold for baseball playing services in MLB. D) The Coase Theorem holds for baseball playing services in MLB. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem

15) Refer to the scenario above. Which of the following could be a cause for different patterns of player mobility in MLB before and after 1976? A) Property rights for players' services are not clearly defined in MLB. B) The number of teams relative to the number of players is large. C) MLB is a monopoly in professional baseball games in the United States. D) Transaction costs are associated with negotiating with individual free agents. Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Coase Theorem 16) Which of the following is the best description of the Coase Theorem? A) Tariffs can improve economic efficiency. B) Public goods are over-provided by the private market. C) Bargaining between private parties to an economic exchange results in an efficient allocation of resources. D) Only the government can force private parties to internalize externalities. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem 17) Which of the following is a reason that the Coase Theorem does NOT work in practice? A) Transaction costs B) Taxes C) Lack of clearly defined property rights D) Number of agents involved in bargaining Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem 18) The cost of making an economic exchange is called a(n) ________ cost. A) sunk B) transaction C) social D) accounting Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem

Scenario: A chemical factory is located upstream on a river. The factory dumps its liquid waste into the river. A microbrewery is located downstream on this river; it uses the river water in its production process and values the clean water. The chemical factory can filter its liquid waste before dumping it into the river, but it would be costly to the factory. The table below shows the profit to these two businesses under different circumstances.

Chemical factory Microbrewery

Profit with Filtering $1,000 $400

Profit without Filtering $800 $100

19) Refer to scenario above. Suppose the negotiation between the chemical factory and microbrewery is costless. What is the maximum that the microbrewer would be willing to pay the chemical factory to filter its waste? A) $100 B) $200 C) $300 D) $400 Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem 20) Refer to scenario above. Suppose the negotiation between the chemical factory and microbrewery is costless. What is the minimum offer that the chemical factory would be willing to accept from the microbrewery to to filter its waste? A) $100 B) $200 C) $300 D) $400 Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem 21) Refer to scenario above. Could this externality problem be resolved by private negotiations between the chemical factory and the microbrewery? A) Yes, but only when the negotiations are relatively costless. B) Yes, but the chemical factory should be forced to pay a fine for polluting the river. C) No, because filtering the waste decreases the profit of the chemical factory. D) No, because dumping the waste into the river is free for the chemical factory. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem

22) Refer to scenario above. Suppose the microbrewery has the right to clean water. What would the Coase Theorem suggest as the resolution of this negative externality conflict between these two firms? A) The microbrewery pays $200 to the chemical factory to filter its waste before dumping it into the river. B) The chemical factory voluntarily filters its waste before dumping it into the river. C) The chemical factory pays $200 to the microbrewery to get permission to dump into the river. D) The chemical factory pays $300 to the microbrewery to get permission to dump into the river. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Coase Theorem 23) Refer to scenario above. Suppose the chemical factory has the right to dump its waste into the river. What would the Coase Theorem suggest as the resolution of this negative externality conflict between these two firms? A) The microbrewery pays $100 to the chemical factory to filter its waste before dumping it into the river. B) The chemical factory voluntarily filters its waste before dumping it into the river. C) The microbrewery pays $250 to the the chemical factory to filter its waste before dumping it into the river. D) The chemical factory pays $300 to the microbrewery to get permission to dump into the river. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Coase Theorem 24) Which of the following is an implication of the Coase Theorem? A) Bargaining cannot lead to an efficient allocation of resources. B) Government intervention is not always necessary to solve externality problems. C) Negotiation leads to an efficient outcome if transaction costs are high. D) Taxation leads to an efficient allocation of resources regardless of who holds the property rights. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem 25) Private solutions to externalities are most effective if ________. A) the transaction costs associated with bargaining are low B) the transaction costs associated with bargaining are high C) property rights are not defined clearly D) a large number of people are affected by the externalities Answer: A Difficulty: Easy AACSB: Analytical Thinking 34 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Coase Theorem 26) The Coase Theorem relies on internalizing externalities through ________. A) social enforcement mechanisms B) the provision of corrective subsidies C) the imposition of corrective taxes D) negotiations between the parties involved Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Coase Theorem 27) What does the Coase Theorem predict? Answer: The Coase Theorem predicts that if the production or consumption of a good involves a negative externality, bargaining between the party creating the externality and the party suffering from it will result in an efficient allocation of resources. Bargaining leads to a socially efficient outcome, irrespective of who holds the legal property rights if transaction costs are not too high. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Coase Theorem 28) In episode 12 of the sixth season of The Sopranos, A. J. is watching television with his girlfriend Bianca at her apartment when a group of neighborhood youths begins playing music at a very loud level outside. A. J. approaches the youths and offers them his new mountain bike if they will stop playing the music and leave. The group of youths accepts the mountain bike and leaves. This scene is an example of ________. A) pecuniary externality B) high transaction costs preventing bargaining from reaching the efficient outcome C) the large number of parties involved in an exchange preventing bargaining from reaching the efficient outcome D) the Coase Theorem Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Coase Theorem 29) Energy Star is a voluntary labeling program designed to identify and promote energyefficient products to reduce greenhouse-gas emissions. In this example, ________ is used to solve an externality. A) the Coasian approach B) the Pigouvian approach C) a command-and-control mechanism D) a social enforcement mechanism Answer: D Difficulty: Easy AACSB: Analytical Thinking 35 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Private Solution: Doing the Right Thing 30) The Trump administration proposes to de-fund the Energy Star program. If the program is discontinued, we would expect ________. A) the deadweight loss from greenhouse gas emissions to increase B) an end to negative externalities in the consumption of consumer electronics C) producers to raise the price of consumer electronics D) private parties to achieve the efficient outcome through bargaining Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Private Solution: Doing the Right Thing 31) People seldom break a line while waiting for checkout in a supermarket. In this example, ________ is used to solve an externality. A) the Coasian approach B) the Pigouvian approach C) a command-and-control mechanism D) a social enforcement mechanism Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Private Solution: Doing the Right Thing Javed is a writer who works from home, and he lives next door to Tommen, who is a drummer in a local band. Tommen needs lots of practice to earn his share of the band's profits, which is $300. Javed is trying to finish a piece for which he will get paid $500, but he is being distracted by Tommen's drumming. 32) Which of the following is an efficient solution based on the scenario above? A) Javed offers Tommen $301 to stop drumming. Tommen accepts and both are better off. B) Javed offers Tommen $501 to stop drumming. Tommen accepts and both are better off. C) Tommen offers Javed $299 to allow Tommen to continue drumming. Javed accepts and both are better off. D) Tommen offers Javed $499 to allow Tommen to continue drumming. Javed accepts and both are better off. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Private Solutions to Externalities

33) What would have to be TRUE about transaction costs in order for Tommen and Javed to be able to reach the efficient outcome? A) Transaction costs would have to be less than $200. B) Transaction costs would need to be less than $300. C) Transaction costs would need to be less than $500. D) Transaction costs would need to be $0. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Private Solutions to Externalities 9.3 Government Solutions to Externalities 1) Government invention is required to solve externality problems if ________. A) transaction costs associated with private negotiations are low B) the number of people affected by the externality is small C) the number of people affected by the externality is large D) property rights are clearly defined Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Solutions to Externalities

Scenario: Vacant houses, foreclosed or abandoned, are typically boarded up with plywood that many people consider unsightly and likely to invite vandalism. An alternative is clear plastic (polycarbonate) panels. The figure below shows the demand and the supply of polycarbonate panels used for boarding up houses in a hypothetical town. Suppose that there are 140 houses that are vacant and the town council makes it illegal to use plywood to board them up, leaving only polycarbonate panels as an alternative. To answer some of the questions below, it will be useful to find the equations of the three lines in the figure.

2) Refer to the scenario above. The council's action is an example of ________. A) a command-and-control policy B) a market-based policy C) a corrective tax D) a corrective subsidy Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Regulation: Command-and-Control Policies 3) Refer to the scenario above. What would be the price of a polycarbonate panel after the ban on plywood? A) $200 B) $150 C) $140 D) $100 Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Regulation: Command-and-Control Policies

4) Refer to the scenario above. What is the deadweight loss associated with the council's action relative to the socially efficient outcome? A) $400 B) $900 C) $1,200 D) $1,600 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Government Regulation: Command-and-Control Policies 5) A government regulation that bans the use of a certain polluting technology in the production of a good is an example of a ________ used to solve an externality. A) social enforcement mechanism B) command-and-control approach C) market-based approach D) Coasian approach Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Government Regulation: Command-and-Control Policies 6) A law stating that power plants are allowed zero emissions of sulfur dioxide is an example of ________. A) the Coase Theorem B) command-and-control regulation C) a Pigovian corrective tax D) a Pigovian corrective subsidy Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Regulation: Command-and-Control Policies 7) Oil production by oil companies that use fracking can impose a ________ in the form of ________. A) positive externality; higher employment rate B) positive externality; lower oil price C) negative externality; earthquakes D) negative externality; higher oil price Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: What Can the Government Do to Lower the Number of Earthquakes in Oklahoma?

8) The practice of fracking by the oil and gas companies produces saltwater as its by-product. The disposal of the saltwater can lead to earthquakes. What did the government of the state of Oklahoma do to reduce the number of earthquakes in the state? A) It fined the oil and gas companies a certain fee per each earthquake. B) It banned the practice of fracking. C) It put a limit on how much saltwater the oil and gas companies could dispose of. D) It let the market forces achieve the socially optimal outcome by themselves. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: What Can the Government Do to Lower the Number of Earthquakes in Oklahoma? 9) Which of the following is a market-based alternative to the Kansas state government's approach to reduce earthquakes as described in the textbook? A) Impose a tax according to the amount of saltwater injected B) Impose a tax according to the number of earthquakes C) Pay a subsidy to homeowners whose houses are damaged by earthquakes D) Pay a subsidy to oil companies to develop an extraction technology that requires less saltwater Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: What Can the Government Do to Lower the Number of Earthquakes in Oklahoma? 10) A Pigouvian tax is a tax designed to ________. A) induce the consumers of a good to reduce their consumption of the good B) induce the producers generating negative externalities to reduce production C) induce the producers generating positive externalities to reduce production D) force the producers to stop the production of a good in the short run Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 11) The production of an industrial good in a plant emits harmful gases that cause breathing problems. Which of the following will happen if the government imposes a Pigouvian tax on the plant? A) The marginal external cost will increase. B) The marginal private cost will fall. C) The quantity supplied of the good will decrease. D) The demand for the good will increase. Answer: C Difficulty: Medium AACSB: Application of Knowledge 40 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Government Regulation: Market-Based Approaches 12) When a Pigouvian tax is imposed, ________. A) the marginal private cost curve shifts upward B) the demand curve shifts rightward C) the marginal social cost curve shifts downward D) the marginal social benefit curve shifts downward Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 13) A steel-producing factory in North Palladia generates large amounts of carbon dioxide during its production process. A per-unit tax on the production of steel that equals the marginal ________ of steel production will entirely internalize the externality. A) private cost B) social cost C) external cost D) external benefit Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches 14) Most municipalities and states in the northeastern United States use rock salt to "produce" ice-free roadways in the face of winter snowstorms. But using rock salt has several drawbacks: it speeds up corrosion of bridges and cars; it can choke vegetation; as runoff, it is harmful to creeks and rivers; and it is not very effective in de-icing roads at low temperatures. If the marginal private cost of rock salt is $60 per ton and the marginal external cost of rock salt is $10 per ton, the optimal corrective tax is ________. A) $10 per ton B) $50 per ton C) $60 per ton D) $70 per ton Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches

15) Smoking increases the risk of lung infections not only for active smokers but also for other people inhaling the smoke passively. Which of the following will help reduce smoking? A) A corrective tax B) Life insurance C) Health insurance D) A corrective subsidy Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches Scenario: The production of a good creates a negative externality. The following figure shows the market for this good.

16) Refer to the scenario above. The socially optimal price for this good is ________, while the market price of it is equal to ________. A) $14; $10 B) $20; $10 C) $20; $14 D) $14; $20 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches

17) Refer to the scenario above. The socially optimal level of output for this good is ________, while the market produces ________. A) Q1; Q2 B) Q1; Q3 C) Q2; Q3 D) Q2; Q1 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches 18) Refer to the scenario above. To restore the socially optimal outcome in this market, the government should ________. A) levy a $6 tax per unit on this good B) levy a $10 tax per unit on this good C) pay a $6 subsidy per unit on this good D) not intervene in the market, as the market will provide the socially optimal outcome by itself Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches 19) A corrective subsidy induces the ________ toward the socially optimal level. A) consumers affected by a negative externality to increase the quantity consumed B) producers creating a negative externality to increase the quantity produced C) consumers benefiting from a positive externality to increase the quantity consumed D) producers generating a positive externality to reduce the quantity produced Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 20) A Pigouvian subsidy leads to a socially efficient outcome by ________. A) raising individuals' marginal benefit from consumption B) lowering firms' marginal private cost of production C) lowering individuals' marginal benefit from consumption D) lowering firms' marginal external cost of production Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches

21) Which of the following happens when a Pigouvian subsidy is provided? A) The marginal social cost curve shifts upward. B) The marginal private cost curve shifts downward. C) The marginal social benefit curve shifts downward. D) The marginal private benefit curve shifts upward. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 22) Which of the following is TRUE? A) If the consumption of a good gives rise to a positive externality, it can be internalized by taxing the producers of the good. B) If the production of a good gives rise to a negative externality, it can be internalized by taxing the producers of the good. C) If the production of a good gives rise to a positive externality, it can be internalized by taxing the consumers of the good. D) If the consumption of a good gives rise to a negative externality, it can be internalized by subsidizing the purchase of the good. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 23) A vaccination against a disease helps prevent the spread of the disease. Which of the following can help increase the number of people vaccinated to the socially optimal level? A) A corrective subsidy B) An income tax C) An insurance policy D) A health tax Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches 24) If the consumption of a good involves a positive externality, how can consumers be encouraged to consume more of the good? Answer: If the consumption of a good involves a positive externality, the marginal social benefit derived from the good exceeds the marginal private benefit. However, the consumers of the good do not take this additional benefit into consideration and continue consuming only as long as the marginal private benefit from consumption exceeds the marginal private cost. In this case, if the consumption of the good is subsidized, the marginal private benefit from consumption will increase, causing consumers to consume more. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 44 Copyright © 2022 Pearson Education Ltd.

25) What is a Pigouvian tax? Answer: A Pigouvian tax, or a corrective tax, is a tax designed to induce producers of a negative externality to reduce production to the socially optimal level. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 26) If the production of a chemical in a factory releases a harmful gas, how can the government maximize social well-being in the economy? Answer: The production of the chemical generates negative externalities because it imposes an additional cost on the society. As a result, the marginal social cost of producing each unit of output is higher than the marginal private cost. In the figure below, the marginal social cost curve (MSC) denotes the higher cost of producing each unit of output.

According to the figure, social well-being is maximized if Q2 units of the chemical are traded in the market. The factory, however, will continue production until the marginal private benefit of producing a unit of the chemical equals the marginal private cost of producing it, not the marginal social cost. Therefore, Q1 units of the chemical are sold in the free market. If a per-unit tax equal to the marginal external cost of production is imposed on chemical production, the marginal private cost of production will become equal to the marginal social cost. The marginal private cost curve (S = MPC) will shift to the left and will coincide with the marginal social cost curve (MSC). As a result, the factory will now produce Q2 units of the chemical, and social well-being will be maximized. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches

27) Efficient government intervention requires that ________. A) the costs of government enforcement be zero B) the marginal benefits of intervention be equal to the marginal costs of intervention C) intervention should continue until all negative externalities have been eliminated D) there be no productivity losses in the private sector as a result of government intervention Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches 28) In practice, assessing the benefits and costs of a proposed government program is difficult because ________. A) the effects of the program may be difficult to determine B) many benefits and costs occur in the distant future C) some costs and benefits are difficult, perhaps impossible to quantify D) all of the above Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches 29) It is inefficient for the government to charge a price for consuming a good, such as weather forecasts, because ________. A) too many forecasts will be produced B) the price cannot be set to cover all research costs C) no one will be willing to pay for these forecasts D) the marginal cost of providing this information to another consumer is zero Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches 30) A Pigouvian tax is also called a(n) ________. A) subjective tax B) objective tax C) corrective tax D) subsidy Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches

31) If the government taxed away all profits in a market economy, the likely result would be ________. A) a more rapid shift of resources to expanding industries B) the removal of the incentive for resource allocation C) improved market signals and responses D) enhanced efficiency in resource allocation Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches 32) Suppose the federal government implements a system of tradeable permits that lets power plants buy and sell the right to emit sulfur dioxide. This is an example of ________. A) the Coase Theorem B) a market-based regulatory approach C) a Pigovian corrective tax D) a Pigovian corrective subsidy Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Regulation: Market-Based Approaches

Scenario: Currently, major corn-growing states, such as Iowa, use large amounts of nitrogen-based fertilizers. Many of Iowa's corn-growing regions are characterized by karst topography (water erodes the limestone bedrock and forms sinkholes, caves, and underground streams). In karst landscapes, runoff from corn fields contains high levels of nitrogen in the form of nitrates, which can pollute private and municipal water wells. Suppose the demand and supply for corn are: Corn Demand: QD = 70 - 5p, Corn Supply: QS = 10p - 5, where quantity is millions of bushels of corn and price is dollars per bushel. The marginal private benefit of corn and the marginal private cost of corn production can be derived by rewriting demand and supply with price as a function of quantity: Inverse Demand: p = 14 - 0.2Q Marginal Private Benefit: MPB = 14 - 0.2Q Inverse Supply: p = 0.1Q + 0.5 Marginal Private Cost: MPC = 0.1Q + 0.5 Suppose the marginal external cost (MEC) of nitrogen fertilizer use in corn growing is a constant $1.50 per bushel, so MEC = 1.5. The marginal social cost (MSC) is: MSC = MPC + MEC = 0.1Q + 0.5 + 1.5 MSC = 0.1Q + 2 The figure below shows these marginal benefits and marginal costs.

33) Refer to the scenario above. The private market equilibrium price is ________ per bushel, and the private market equilibrium quantity is ________ bushels. A) $4; 50 million B) $5; 40 million C) $5; 45 million D) $6; 40 million Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 34) Refer to the scenario above. The social optimum occurs at a price of ________ per bushel and a quantity of ________ bushels. A) $4; 35 million B) $5; 30 million C) $5; 45 million D) $6; 40 million Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 35) Refer to the scenario above. The optimal corrective ________ is ________ per bushel. Explain your answer. A) subsidy; $1.50 B) tax; $1.50 C) tax; $4.50 D) tax; $6.00 Answer: B Explanation: Set the Pigovian corrective tax = MEC at social optimum = $1.50 per bushel. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches

36) Refer to the figure below. The deadweight loss arising in the private market equilibrium is area ________ and is equal to ________.

A) A; $60 million B) B; $3.75 million C) C; $3.75 million D) D; $23.75 million Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Government Regulation: Market-Based Approaches 37) Pay-As-You-Throw programs that charge people a small price for each bag of trash they throw out are likely to ________. A) increase waste creation B) increase recycling and reuse C) increase the social cost of waste disposal D) reduce social surplus Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: Pay As You Throw

Suppose the market demand for Sriracha sauce can be represented by P = 10 - (Q/10) and the market supply of Sriracha sauce can be represented by P = Q/10. Also, assume that the production of Sriracha sauce releases pepper dust into the air that causes the eyes and skin of the townspeople where factories are located to itch and burn. This external cost is valued at $3 per bottle. 38) Which of the following could feasibly lead to the optimal level of production of Sriracha sauce? A) A $3 per bottle tax on Sriracha sauce B) A $3 per bottle subsidy on Sriracha sauce C) Private bargaining between Sriracha factories and Sriracha consumers D) A ban on Sriracha sauce Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Externalities 9.4 Public Goods 1) Private goods are ________. A) excludable but non-rival in consumption B) non-excludable and non-rival in consumption C) non-excludable but rival in consumption D) excludable and rival in consumption Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 2) If a good is excludable, ________. A) one person's use of the good reduces the amount of the good available to others B) people can be prevented from using the good C) more than one person cannot use the good at the same time D) several people can use the good simultaneously Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods

3) A good is non-rival in consumption if ________. A) one person's use of the good does not preclude consumption by others B) the government can regulate its production C) people cannot be prevented from using it D) the demand for the good increases with an increase in the consumer's income Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 4) Public goods are ________ in consumption. A) excludable but non-rival B) non-excludable and non-rival C) rival but non-excludable D) excludable and rival Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 5) Which of the following is an example of an ordinary private good? A) Furniture B) The Internet C) Water D) Cable TV Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Public Goods 6) Which of the following is an example of a public good? A) National defense B) Natural forests C) Music downloads D) Designer clothes Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Public Goods

7) ________ are highly excludable but non-rival in consumption. A) Public goods B) Private goods C) Common pool resource goods D) Club goods Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 8) ________ are non-excludable but rival in consumption. A) Public goods B) Private goods C) Common pool resource goods D) Club goods Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 9) ________ are non-excludable in consumption. A) Public goods and private goods B) Public goods and common pool resource goods C) Private goods and club goods D) Club goods and common pool resource goods Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 10) ________ are non-rival in consumption. A) Public goods and private goods B) Public goods and club goods C) Public goods and common pool resource goods D) Private goods and common pool resource goods Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods

11) An online newspaper is an example of a(n) ________. A) ordinary private good B) common pool resource C) public good D) club good Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 12) ________ is an example of a common pool resource good. A) Food B) Water C) National defense D) Wi-Fi Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Public Goods 13) Which of the following is an example of a club good? A) Streetlights B) A diamond ring C) Forests D) Cable TV Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Public Goods 14) A concert in a crowded auditorium is ________ in consumption. A) non-excludable and non-rival B) excludable but non-rival C) excludable and rival D) non-excludable but rival Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods

15) Rides in a public park are ________ in consumption. A) non-excludable and non-rival B) excludable but non-rival C) excludable and rival D) non-excludable but rival Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods 16) The view of a spectacular sunset on a beach is a(n) ________. A) rival and excludable good B) excludable good C) non-rival good D) rival but non-excludable good Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Public Goods 17) Suppose your roommate approaches you and asks if you would like to split the cable bill for your apartment. You decline, citing that you are not home often and are more likely to stream content on your laptop. Your roommate purchases a deluxe cable package, and you frequently watch programs on the television in your apartment. This is an example of a ________. A) common pool resource B) club good C) free-rider problem D) government provision Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 18) Most of the goods produced in an economy are ________. A) private goods B) public goods C) club goods D) inferior goods Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods

19) Which of the following is an example of a public good? A) A house in a tourist destination B) A training program for a company's employees C) A radio broadcast D) A magazine subscription Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods 20) Which of the following goods is rival in consumption and is also excludable? A) A fireworks display B) A movie shown on cable television C) A DVD D) A magic show in a public park Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Public Goods 21) A room heater is a ________. A) club good because it is excludable but non-rival in consumption B) club good because it is non-excludable but rival in consumption C) public good because it is non-excludable and non-rival in consumption D) private good because it is excludable and rival in consumption Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods 22) A street light is a ________. A) private good B) public good C) common pool resource good D) club good Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods

23) Pay-per-view broadcasts are ________. A) public goods B) private goods C) club goods D) common pool resource goods Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods 24) A congested street is ________ in consumption. A) excludable and rival B) non-excludable but rival C) excludable but non-rival D) non-excludable and non-rival Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods 25) ________ occurs when an individual has no incentive to pay for a good because failure to pay does NOT prevent consumption. A) A free-rider problem B) The paradox of thrift C) A tragedy of the commons D) The paradox of plenty Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 26) Which of the following correctly completes the following table?

High Rivalry Low Rivalry

High Excludability x z

Low Excludability y w

A) x = Public Good; y = Private Good; z = Common Pool Resource; w = Club Good B) x = Private Good; y = Public Good; z = Club Good; w = Common Pool Resource C) x = Public Good; y = Common Pool Resource; z = Private Good; w = Club Good D) x = Private Good; y = Common Pool Resource; z = Club Good; w = Public Good Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Public Goods 57 Copyright © 2022 Pearson Education Ltd.

27) A free rider is a person who ________. A) can produce a good at a very low cost B) only consumes products provided by the government C) receives the benefit of a good without paying for it D) purchases products available for discounts Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 28) The free-rider problem exists for goods that are ________. A) excludable B) rival C) free D) non-excludable Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 29) The free-rider problem may arise in the case of ________. A) public goods B) private goods C) club goods D) inferior goods Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 30) Which of the following is likely to have a free-rider problem? A) On-the-job training programs B) Environmental protection programs C) Movie DVDs D) Mobile phones Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Public Goods

31) Rural/Metro—a private, subscription-based fire protection and emergency service provider— was founded by Lou Witzeman in 1948. Witzeman lived in an unincorporated suburb of Phoenix that did not provide fire-fighting services. Witzeman canvassed his neighbors and found that nearly all of them promised to pay him $10/year to provide fire protection. After investing his last $900 in a truck and firefighting equipment, most of his neighbors refused to pay him. This is an example of a ________. A) government provision B) free-rider problem C) common pool resource D) club good Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Public Goods 32) Four roommates have moved into an apartment. However, none of them clean the apartment, thinking that the others will do it. This is an example of ________. A) the free-rider problem B) the paradox of thrift C) the paradox of plenty D) the tragedy of commons Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods 33) You bought a subscription for an online magazine and shared your log-in details with a friend. Your friend is a ________ in this case. A) free-rider B) rent seeker C) speculator D) hedger Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Public Goods

34) The local community in a town has arranged for a fireworks show in a park located in the center of town. The cost of the ticket to watch the show is $5. However, only 40 percent of the tickets are sold, as spectators can watch the show without entering the park. This is an example of ________. A) the free-rider problem B) the paradox of thrift C) the paradox of plenty D) the tragedy of the commons Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods 35) The citizens of a country often refuse to pay voluntarily for national defense because ________. A) national defense is a common pool resource B) nobody can be excluded from being defended by the state C) all citizens do not derive equal satisfaction from national defense D) national defense is rival in consumption Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods Scenario: Suppose there are only three houses on a street. The following table shows each homeowner's willingness to pay for street lights. It costs $700 to install a street light.

First street light Second street light Third street light Fourth street light

Homeowner 1's Willingness to Pay $400 $350 $200 $100

Homeowner 2's Willingness to Pay $300 $200 $110 $30

Homeowner 3's Willingness to Pay $710 $300 $100 $40

36) Refer to the scenario above. The socially optimal number of street lights for this street is ________. A) 0 B) 1 C) 2 D) 3 Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods 60 Copyright © 2022 Pearson Education Ltd.

37) Refer to the scenario above. If each homeowners on this street is left to purchase streetlights independently, then Homeowner 1 would purchase ________, Homeowner 2 would purchase ________, and Homeowner 3 would purchase ________ streetlight(s). A) 1; 0; 2 B) 1; 1; 2 C) 0; 0; 2 D) 0; 0; 1 Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods 38) Alex is a non-union employee in a steel factory in the southern district of Berylia. The union workers of the factory are able to negotiate certain benefits for the employees. Alex enjoys all the benefits, even though he does not pay the union fee. This is an example of ________ behavior. A) rent-seeking B) free-riding C) profit-maximizing D) rationally ignorant Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods 39) Why are public goods non-rival in consumption? Explain with a real-world example. Answer: A public good like national defense is non-rival in consumption. This is because the enjoyment of national security by a citizen of a country does not reduce the level of security enjoyed by others. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Public Goods 40) What is the difference between club goods and common pool resource goods? Give one example of each type of good. Answer: Club goods are highly excludable but non-rival in consumption, while common pool resources are non-excludable but rival in consumption. One example of a club good is a pay-perdownload Web site, and an example of a common pool resource is a natural lake. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods

41) Why do people refuse to pay for public goods? Answer: People often refuse to pay for public goods because these goods are non-excludable and non-rival in consumption. A person can enjoy a public good without paying for it because nobody can be excluded from its consumption and consumption by one individual does not reduce the amount available for consumption by others. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Public Goods 42) How is the market demand curve for a public good derived? Answer: The market demand curve for public goods is derived by the vertical summation of the demand curves of consumers. Adding the individual demand curves vertically gives the measure of the amount of money consumers are willing to pay for each level of the public good. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Public Goods 43) Classify each of the following goods on the basis of the characteristics of excludability and rivalry in consumption, giving appropriate reasons. a) A lighthouse b) A pair of shoes c) A paid Web site d) A congested non-toll road Answer: a) A lighthouse is non-excludable in consumption, because nobody can be prevented from using it. It is also non-rival in consumption, because its use by one person will not reduce the quantity available to others. b) A pair of shoes is excludable in consumption, because people who do not pay for it can be prevented from using it. It is also rival in consumption, because it can be used by only one person at a time. c) A paid Web site is excludable but non-rival in consumption, because people who do not pay for its use can be prevented from using it, but its use by one person will not restrict its use by others. d) A congested road is non-excludable but rival in consumption, because even though nobody can be excluded from its use, its use by one individual will reduce the space available for others. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Public Goods

44) An environmental awareness program was launched in a certain community, and all residents in the community were asked to contribute to its functioning. After a month, the program had to be discontinued due to a lack of funds. Why did the program not receive sufficient funds? Explain your answer. Answer: A community program, such as the one mentioned here, is an example of a public good. Like all public goods, it is non-excludable and non-rival in consumption. None of the residents in the community can be prevented from enjoying the benefits of the program, and the enjoyment of its benefits by one individual does not reduce the amount enjoyed by others. Because nobody can be excluded from its consumption, people can enjoy the benefits of the program without paying for it. Therefore, nobody in the community had an incentive to contribute to its functioning. As a result, the program had to be discontinued due to a lack of funds. This is an example of the free-rider problem in the consumption of public goods. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods

Scenario: Frank and Nancy live in a small community on Cape Cod in Massachusetts. For simplicity, assume Frank and Nancy are the only individuals in the community. Each has a demand for mosquito control, given by the following table, equations, and figure. Assume that mosquito control is a public good. Mosquito control is provided at a constant marginal cost of $120.

Frank's demand: qFrank = 200 - p, Frank's inverse demand = (Marginal Private Benefit): p = 200 - q, Nancy's demand: qNancy = 100 - p, Nancy's inverse demand = (Marginal Private Benefit): p = 100 - q,

45) Refer to the scenario above. In the private market equilibrium, what are the quantities demanded of mosquito control for Frank and Nancy? Explain your answer. A) 0 units for Frank, 0 units for Nancy B) 80 units for Frank, 0 units for Nancy C) 80 units for Frank, 10 unit for Nancy D) 120 unit for Frank, 20 unit for Nancy Answer: B Explanation: Frank demands 80 units of mosquito control (where his marginal private benefit equals marginal cost), and Nancy demands 0 units of mosquito control. Nancy is able to free-ride on Frank's provision, so she enjoys the benefits of 80 units of mosquito control as well. This results in underprovision relative to the social optimum.

Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods

46) Refer to the scenario above. Now suppose that mosquito control will be publicly provided. What is the market equilibrium quantity of mosquito control services provided? Explain your answer graphically. A) 0 units B) 80 units C) 90 units D) 120 units Answer: C Explanation: The following figure graphs the answer.

Difficulty: Hard AACSB: Analytical Thinking, Application of Knowledge TopicEntry: Public Goods

The following figure depicts the demand of Ann, the demand of Bob, and the market demand for Good X. Assume that all demands are linear.

47) Refer to the figure above. If Good X is a private good, what is the market price when the total quantity demanded on the market is 3? A) $8 B) $14 C) $12 D) $10 Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods 48) Refer to the figure above. If Good X is a private good, what is the total quantity demanded on the market if the market price is $4? A) 8 B) 14 C) 12 D) 10 Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods

49) Refer to the figure above. If Good X is a public good, what is the market price when the total quantity demanded on the market is 3? A) $8 B) $14 C) $12 D) $10 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods 50) Refer to the figure above. If Good X is a public good, what is the total quantity demanded on the market if the market price is $4? A) 8 B) 14 C) 12 D) 10 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods 51) To avoid inefficient exclusion, the government often provides for free ________ but ________ goods and services. A) rivalrous; excludable B) non-rivalrous; excludable C) rivalrous; non-excludable D) non-rivalrous; non-excludable Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods

52) Suppose Phillip and Mathew are the only tenants in a building. The owner of the building is considering installing surveillance cameras in the building. The following table shows the amount that Phillip and Mathew are willing to pay for each additional camera. Number of Phillip's Willingness Mathew's Willingness Surveillance Cameras to Pay to Pay 1 $400 $300 2 $310 $200 3 $210 $110 4 $80 $30 If the cost of installing each surveillance camera is $320, how many cameras will the owner of the building install? Answer: The owner of the building will continue installing cameras until the marginal cost of installing an additional camera equals the marginal benefit from its installation. The marginal benefit from the installation of a camera can be estimated from the total willingness to pay for an additional camera. Thus, the owner will continue installing cameras as long as the total willingness to pay for a camera exceeds the marginal cost. The total willingness to pay for the first surveillance camera is $400 + $300, or $700, which exceeds the marginal cost of $320. Therefore, the first camera will be installed. The total willingness to pay for the second camera is $310 + $200, or $510. Therefore, the second camera will also be installed. The total willingness to pay for the third camera is $210 + $110, or $320, which equals the marginal cost. Therefore, the third camera will also be installed. Because the total willingness to pay for the fourth camera is lower than the marginal cost, only three cameras will be installed. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Public Goods

Scenario: Jim and Jane are the only residents of an apartment building. The figures below show their demand curves for security guards (in hours of duty per day) who staff the entrance to the apartment. To answer some of the questions below, it will be useful to find the equations of the two lines in the figure.

53) Refer to the scenario above. To construct the market (Jim and Jane) demand curve for security guards, you must add the two curves ________, since security guard's service is ________. A) horizontally; a rival good and exclusive B) horizontally; a rival good but non-exclusive C) vertically; exclusive but non-rival D) vertically; non-rival and non-exclusive Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods 54) Refer to the figure above. What is the maximum amount of money Jim and Jane together would pay to have 24 hours of security guards' presence? A) $32.50 per hour B) $28.75 per hour C) $16.50 per hour D) $10.00 per hour Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods

55) Refer to the figure above. What is the maximum amount of money Jim and Jane together would pay to have 15 hours of security guards' presence? A) $32.50 per hour B) $28.75 per hour C) $16.50 per hour D) $10.00 per hour Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods 56) Refer to the figure above. If the price of security guards' time is $40 per hour, how many hours of guards' time would be demanded? A) 18 hours B) 12 hours C) 9 hours D) 4 hours Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Public Goods 57) Refer to the figure above. If the market supply of guards' time is as in the figure below, what is the optimal number of guard's time for Jim and Jane?

TopicEntry: Public Goods 58) Five players are given $10 each and asked to contribute a portion of it to the sports development fund. They are told that the total collection will be doubled and distributed equally among each of them. In this case, the players are likely to contribute ________. A) $5 each B) $10 each C) $1 each D) nothing Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: The Free-Rider's Dilemma 59) To derive the market demand for a public good, ________. A) horizontally sum individual demands B) vertically sum individual demands C) horizontally sum individual firm marginal cost curves D) vertically sum individual firm marginal cost curves Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Government Provision of Public Goods 60) A video available on a Web site that allows free download is a ________. A) private good B) public good C) club good D) common pool resource Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Provision of Public Goods 61) The government should provide an additional unit of a public good if ________. A) the marginal cost of providing the additional unit of the good equals the social cost of providing the additional unit B) the marginal cost of providing the additional unit of the good exceeds the marginal benefit C) the marginal benefit exceeds the marginal cost of providing the additional unit of the good D) the marginal cost of providing the additional unit of the good exceeds the average cost of providing the additional unit Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Provision of Public Goods 72 Copyright © 2022 Pearson Education Ltd.

62) Which of the following is TRUE? A) The market demand curve for a public good is always perfectly elastic. B) The market demand curve for a private good has a positive slope. C) The market demand curve for a public good is obtained by the horizontal summation of individual demand curves. D) The market demand curve for a public good is obtained by the vertical summation of individual demand curves. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Provision of Public Goods 63) Tom is willing to contribute $400 toward building a public park, Jack is willing to contribute $500, and Joe is willing to contribute $750. What is the total value of the park if Tom, Jack, and Joe are the only residents in the neighborhood where the park is being built? A) $1,650 B) $1,050 C) $3,300 D) $2,350 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Provision of Public Goods 64) The total willingness to pay for public restrooms in a city is given in the table below. Number of Restrooms Total Willingness to Pay 1 $208,000 2 $199,000 3 $150,000 4 $85,000 If the marginal cost of building a public restroom is $208,000, how many restrooms will be built? A) 1 B) 2 C) 3 D) 4 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Provision of Public Goods

65) Four friends decide to have a party every Saturday. They decide to pool the money to spend on the parties. The table below shows the maximum amount each friend is willing to contribute to each party. Number of parties First party Second party Third party Fourth party

Peter $250 $200 $135 $60

Mary $340 $270 $80 $100

Kate $120 $100 $70 $25

Jacob $215 $160 $100 $40

If the cost of each party is $225, how many parties should they have to maximize total surplus? A) 1 B) 2 C) 3 D) 4 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Provision of Public Goods 66) Suppose there are two tenants, Trey and Tamika, in a duplex who have to decide how many bushes to plant in their front yard. The marginal cost of planting a bush is $4. Trey's willingness to pay for each bush can be represented as P = 4-Q and Tamika's willingness to pay can be represented by P = 6-Q. What is the optimal quantity of bushes for them to plant? A) 3 B) 0 C) 4 D) 2 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Public Goods 9.5 Common Pool Resource Goods 1) Suppose you live in a housing co-op with eleven other college students. The kitchen is constantly a mess; virtually nobody in the house cleans up, and the sink is overflowing with dirty dishes. This is an example of ________. A) a private good B) a private provision C) a club good D) the tragedy of the commons Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods 74 Copyright © 2022 Pearson Education Ltd.

2) The tragedy of the commons occurs because some goods are ________ in consumption. A) excludable B) non-excludable but rival C) non-rival and non-excludable D) non-rival Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Common Pool Resource Goods 3) Which of the following can result in the tragedy of the commons? A) The use of common pool resources above the socially optimal level B) A low level of satisfaction derived from the use of common pool resources C) A high rate of taxation on common pool resources D) The tendency of consumers to use common pool resources without paying for them Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Common Pool Resource Goods 4) Overfishing leading to a rapid depletion of the stock of fish is an example of the ________. A) tragedy of the commons B) free-rider problem C) paradox of thrift D) prisoners' dilemma Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods 5) Electricity generated from coal-burning plants is relatively cheap, but the plants contribute to global warming due to their high level CO2 emissions. The negotiations between developed and developing countries to cut back on coal electricity has failed in the past. This is an example of the ________. A) tragedy of the commons B) free-rider problem C) paradox of thrift D) prisoners' dilemma Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods

6) A retired athlete built a gym near her house that could be used for free by all the residents in the neighborhood. However, the overuse of the facilities soon led to irreparable damages. This is an example of the ________. A) tragedy of the commons B) pecuniary externality C) paradox of thrift D) prisoners' dilemma Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods 7) What causes the overexploitation and depletion of common pool resource goods? Answer: Common pool resources are overexploited because these resources are non-excludable in consumption. However, these goods are rival in consumption. Therefore, the overexploitation of these resources leads to their depletion. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Common Pool Resource Goods 8) Free access and unrestricted mining of iron ore led to the depletion of the iron ore deposits in Rockland. As a result, several economic activities were adversely affected. What caused the overexploitation of these resources when their conservation could have benefited the consumers in the economy? Answer: Common pool resources, such as free-access mines, are non-excludable but rival in consumption. The consumption of such goods gives rise to a negative externality. Each individual, while consuming the goods, only considers his or her own cost of using the good without realizing that this use of the good reduces the amount available to others. This leads to an overexploitation and depletion of these resources. This phenomenon is called the tragedy of the commons and explains the depletion of the iron ore deposits in Rockland. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods

Scenario: The following excerpt is from Michael A. McPherson and Michael L. Nieswiadomy, "African Elephants: The Effects of Property Rights and Political Stability," Contemporary Economic Policy 18, no. 1 (2007). African elephant populations have declined by more than 50% over the past 20 years. International outrage over the slaughter led to a worldwide ban on ivory sales beginning in 1989, despite the objections of many economists and scientists, and of several southern African countries that have established systems of property rights over elephants. Far from declining, elephant populations in many of these countries have increased to levels at or above the carrying capacity of the ecosystem. This article estimates the determinants of changes in elephant populations in 35 African countries over several time periods. The authors find that, controlling for other factors, countries with property rights systems or community wildlife programs have more rapid elephant population growth rates than do those countries that do not. Political instability and the absence of representative governments significantly lower elephant growth rates. 9) Refer to the scenario above. Which of the following is consistent with a solution to the elephant population decline described in the quote? A) Assigning the property rights creates an incentive for owners to manage the resource so it is not depleted. B) Banning the trade of a declining resource is an effective way of managing it. C) Government ownership of a declining resource protects it from depletion. D) There is no effective solution to management of common pool resources. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods 10) Refer to the scenario above. Which of the following is consistent with a solution to the elephant population decline described in the quote? A) Political instability is the main cause of decline in common pool resources. B) Prohibition of trade of some resources is necessary even when property rights for them are well established. C) Property rights could alleviate tragedy of commons problems in the absence of representative government. D) Property rights without an authority to enforce it may be ineffective. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods

11) Which of the following is NOT an example of the tragedy of the commons? A) Extracting water extraction from aquifers B) Cutting trees on public land C) Fishing on a private lake D) Eating from the office donut box Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods 12) The poaching of African elephants for their tusks is a serious problem facing many African nations. One solution is to establish large fenced-in "parks," where elephants are ranched similar to beef cattle on ranches in the western United States. Maintaining elephant herds in large enclosed park-like areas solves the problem of ________. A) low excludability B) non-rivalness in consumption C) public provision D) the free rider Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods 13) Your roommate claims we can understand the near-extinction of the American bison during the latter half of the nineteenth century in America as an economic phenomenon. Since bison herds were ________ "owned," they were a ________, and buffalo hunters generated a ________ externality when hunting them, as the hunters failed to consider how overharvesting could reduce herd numbers in the future. A) publicly; common resource pool good; negative B) publicly; club good; negative C) privately; common resource pool good; positive D) privately; club good; negative Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Common Pool Resource Goods 14) A green pasture has turned barren due to overgrazing. This has happened because the pasture was ________. A) excludable and rival B) non-excludable and non-rival C) excludable but non-rival D) non-excludable but rival Answer: D Difficulty: Easy AACSB: Analytical Thinking 78 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Choice and Consequence: Tragedy of the Commons 15) Which of the following is NOT a solution to the tragedy of the commons? A) levying a tax on the use of the common resource B) privatizing the common resource C) ration the use of the common resource D) granting a subsidy of the use of the common resource Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Tragedy of the Commons 16) The solution to the "tragedy of the commons" in street traffic congestions in London was ________. A) to run an advertise campaign to persuade drivers to use other routes B) to let the market solve the problem by itself C) to build a new highways D) to levy a toll on the highway use Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: EBE: How Can the Queen of England Lower Her Commute Time to Wembley Stadium? 17) The congestion charge is an example of ________ to the negative externality associated with common pool resources. A) a command-and-control government solution B) a market-based government solution C) a social norm solution D) a private bargaining solution Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Can the Queen of England Lower Her Commute Time to Wembley Stadium?

18) What constitutes evidence for the efficacy of the congestion charge described in the text? A) The total emission from vehicles in the regulated area of London declined after the introduction of the congestion charge. B) The distance traveled by all private vehicles in the regulated area of London declined after the introduction of the congestion charge, while more distance was traveled by public transportation. C) The distance traveled by private vehicles in the regulated area of London declined after the introduction of the congestion charge, while more distance was traveled by high-occupancy vehicles and low-emission vehicles. D) The revenue to the city government of London has dramatically increased. Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Can the Queen of England Lower Her Commute Time to Wembley Stadium?

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 10 The Government in the Economy: Taxation and Regulation 10.1 Taxation and Government Spending in the United States 1) Which of the following is TRUE in the United States? A) Local governments cannot collect taxes. B) Only state governments can collect taxes. C) Only the federal government can collect taxes. D) The central and local governments collect taxes. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States 2) Over the years, U.S. government spending has ________. A) increased but government revenue has decreased B) decreased but government revenue has increased C) decreased and government revenue has also decreased D) increased and government revenue has also increased Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States 3) A ________ occurs when government spending exceeds tax revenue. A) budget deficit B) negative externality C) consumer surplus D) positive externality Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States 4) If the total revenue collected by the federal government in a particular year is $1.2 billion and the total amount spent by the government during the same year is $3.8 billion, what is the budget deficit? A) $1.6 billion B) $2.6 billion C) $2.2 billion D) $5 billion Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation and Government Spending in the United States 1 Copyright © 2022 Pearson Education Ltd.

5) The government of Lithasia ran a budget deficit of $60,000 in 2014. If the tax revenue of the Lithasian government in 2014 was $320,000,000, how much did the government spend that year? A) $319,940,000 B) $1,060,000 C) $320,060,000 D) $49,000,000 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation and Government Spending in the United States 6) A budget surplus occurs when ________. A) government spending exceeds tax revenue B) tax revenue exceeds government spending C) imports exceed exports D) exports exceed imports Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States 7) The government of Putania spent $67,000,000 in a particular year, and the total tax receipts of the government in that year were $120,000. Calculate the budget deficit. A) $600,000 B) $680,000 C) $67,120,000 D) $66,880,000 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Taxation and Government Spending in the United States 8) What is the budget surplus if the total amount of taxes collected by a local government is $171,000 and the total amount spent is $90,000? A) $81,000 B) $100,000 C) $70,000 D) $262,000 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation and Government Spending in the United States

9) ________ is the amount of money a government collects through a tax. A) A tax incidence B) Tax bracket C) A tax revenue D) Tax burden Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 10) ________ are the largest source of the federal tax revenue. A) Individual income taxes B) Corporate income taxes C) Excise taxes D) Payroll taxes Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 11) A payroll tax is also known as a(n) ________. A) excise tax B) corporate income tax C) personal income tax D) social insurance tax Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 12) A(n) ________ is a tax on wages that employers are required to withhold from employees' pay. A) social insurance tax B) excise tax C) income tax D) value-added tax Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From?

13) ________ taxes represent about a third of the federal government's receipts. A) Excise B) Corporate income C) Payroll D) Personal income Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 14) Taxes listed as Federal Insurance Contribution Act taxes on the employee paystub are ________. A) payroll taxes B) value-added taxes C) income taxes D) excise taxes Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 15) ________ is generated from taxing profits earned by firms. A) Excise tax B) Sales tax C) Corporate income tax D) Payroll tax Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 16) ________ taxes are taxes paid when purchasing specific goods such as alcohol, tobacco, and gasoline. A) Property B) Payroll C) Wealth D) Excise Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From?

17) The second largest component of the federal government revenues is receipts from ________. A) corporate income taxes B) excise taxes C) social insurance taxes D) value-added taxes Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 18) The contribution of ________ to federal tax receipts is larger than the contribution of ________. A) personal income taxes; corporate income taxes B) corporate income taxes; payroll taxes C) corporate income taxes; personal income taxes D) excise taxes; social insurance taxes Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 19) Which of the following account for the largest portion of state and local government receipts? A) Individual income taxes B) Corporate income taxes C) Miscellaneous taxes and fees D) Property taxes Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 20) Corporate income tax in the United States is mainly collected by the ________ and accounts for roughly ________ of the total tax revenue. A) federal government; 10 percent B) federal government; 30 percent C) state and local governments; 10 percent D) state and local governments; 30 percent Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From?

21) ________ taxes are paid by a buyer as a percentage of the market price of an item. A) Sales B) Wealth C) Payroll D) Property Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 22) A restaurant charges its customers 12 percent of the total food price in tax. This is an example of a ________ tax. A) payroll B) wealth C) property D) sales Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 23) A ________ tax is similar to a sales tax. A) payroll B) value-added C) wealth D) excise Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 24) A tax collected at each stage of the production process is called a(n) ________ tax. A) payroll B) excise C) value-added D) wealth Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From?

25) Local governments usually rely on ________ taxes to fund schools, libraries, and public services such as police and fire protection. A) payroll B) excise C) value-added D) property Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 26) All of the following state governments do not collect individual income taxes from their residents, EXCEPT for ________. A) Florida B) Texas C) Nevada D) Illinois Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 27) Which of the following taxes is collected only by the federal government? A) Corporate income tax B) Social insurance tax C) Property tax D) Excise tax Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 28) Which of the following is collected only by local and state governments? A) Excise tax B) Personal income tax C) Toll tax D) Payroll tax Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From?

29) Which of the following is TRUE of individual income taxes? A) Individual income taxes are collected only by the federal government. B) Individual income taxes are collected only by state governments. C) All states in the U.S. collect individual income taxes. D) The rate of income tax imposed by states in the U.S. varies. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 30) Governments impose taxes for all of the following reasons EXCEPT ________. A) correcting market failures and externalities B) generating profits C) raising revenues D) redistributing income through the use of transfer payments Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 31) A marginal tax rate is the ________. A) total amount of taxes paid B) tax rate on the first dollar of income earned C) tax rate on the last dollar of income earned D) total amount of taxes paid divided by taxable income Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 32) If the marginal tax rate facing a consumer on the last dollar of earned income is greater than the average tax rate, the tax system is ________. A) using only payroll taxes B) proportional C) regressive D) progressive Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From?

33) For 2017, Social Security payroll taxes collected from employees represent 6.2 percent of the first $127,200 of labor income earned, while earnings beyond $127,200 are not taxed. Social security is what type of tax? A) Excise tax B) Regressive tax C) Proportional tax D) Progressive tax Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 34) For 2017, Medicare payroll taxes collected from employees represent 1.45 percent of each dollar of labor income earned. The Medicare payroll tax is what type of tax? A) Sales tax B) Regressive tax C) Proportional tax D) Progressive tax Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 35) For 2017, the U.S. individual income tax has seven different marginal tax rates ranging from 10 percent to 39.6 percent. The U.S. individual income tax is what type of tax? A) Property tax B) Regressive tax C) Proportional tax D) Progressive tax Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Where Does the Money Come From? 36) One reason governments impose taxes is to ________. A) reduce the number of transactions in an economy B) redistribute funds via transfer payments C) increase competition among producers D) increase the volume of exports Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend?

37) What are the objectives of government taxation and spending? Answer: There are four main objectives of government taxation and spending: 1. Correcting market failures and externalities 2. Raising revenues 3. Redistributing funds 4. Financing operations Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 38) Transfer payments refer to payments from the government to ________. A) the employees who work at various public departments B) individual states C) private contractors who undertake infrastructure projects D) certain individuals or groups such as the elderly or the unemployed Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 39) What are transfer payments? Give two examples. Answer: Transfer payments refer to payments from the government to certain individual groups, such as the elderly or the unemployed. Unemployment compensation and Medicare, which provides health insurance to Americans above 65 years of age, are two examples of transfer payments. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 40) The government redistributes funds via transfer payments in order to ________. A) reduce the number of private transactions B) increase competition among domestic producers C) finance the operation of its various departments D) reduce inequality among the citizens Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend?

41) Which of the following accounts for the largest portion of federal government spending? A) Education B) Policing C) Infrastructure D) National defense Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 42) The state governments in the United States spend the largest percentage of their funds on ________. A) public welfare B) Social Security C) national defense D) education Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 43) The federal government spends most of its revenue on which top two categories? A) National defense and Social Security B) Social Security and Medicare C) National defense and education D) Social Security and education Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 44) The two biggest items of spending for state governments are ________. A) highways and Social Security B) Social Security and Medicare C) public welfare and hospitals D) education and public welfare Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend?

45) Which of the following programs provides economic security to the elderly, disabled, widows, and fatherless children in the United States? A) Social Security B) Income security C) The federal household assistance program D) The federal income administration program Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 46) The federal government relies on ________ to limit inequality. A) regressive taxes B) proportional taxes C) progressive taxes D) marginal taxes Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 47) The average tax rate faced by an individual is the ________. A) total tax paid by her divided by the total income earned B) total revenue received by the government divided by the number of taxpayers C) percentage of the last dollar earned that a household pays as a tax D) difference between the highest tax rate and the lowest tax rate Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 48) Mr. Smith pays $20,000 annually in tax. If his annual income is $100,000, what is his average tax? A) 5 percent B) 12 percent C) 2 percent D) 20 percent Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend?

49) Joseph earns $75,000. If his average tax rate is 18 percent, what is the total amount of money that he pays in tax? A) $1,500 B) $13,500 C) $2,700 D) $15,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 50) If Kate pays an average tax rate of 12.5 percent and her total income is $34,000, she pays ________ in tax. A) $5,500 B) $17,000 C) $4,250 D) $3,200 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? Scenario: You are a U.S. taxpayer who had taxable income of $200,000 in 2017. You paid $49,400 in individual income taxes, and you paid 33 cents of the last dollar you earned as individual income tax. 51) Refer to the above scenario. Your marginal tax rate is ________. A) 0 percent B) 24.7 percent C) 33 percent D) 49.4 percent Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend?

52) Refer to the above scenario. What is your average tax rate? Explain your answer. A) 0 percent B) 24.7 percent C) 33 percent D) 49.4 percent Answer: B Explanation: Your marginal tax rate is the tax rate on the last dollar of income earned, which is 33 percent. Your average tax rate is total taxes paid ($49,400) divided by taxable income ($200,000), or 24.7 percent. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 53) The marginal income tax rate is the ________. A) total tax paid by an individual divided by the total income earned B) difference between the highest and lowest income tax rates charged by a state C) percentage of the last dollar earned that a household pays in taxes D) total revenue received by the government divided by the number of taxpayers Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 54) A ________ tax system is one in which tax rates increase with taxable base incomes. A) regressive B) progressive C) proportional D) supplementary Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 55) Which of the following is TRUE of a progressive tax system? A) High-income households pay a higher percentage of their income in taxes. B) Low-income households pay a higher percentage of their income in taxes. C) All households pay the same amount of taxes irrespective of their income. D) All households pay the same percentage of their income in taxes. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend?

56) In a progressive tax system, ________. A) the average tax rate equals the marginal tax rate B) the marginal tax rate exceeds the average tax rate C) the average tax rate exceeds the marginal tax rate D) the average tax rate is equal for all taxpayers Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 57) Differentiate between a progressive tax system and a regressive tax system. Answer: A progressive tax system is one in which tax rates increase with an increase in taxable base incomes, so that the rich pay higher tax rates than the poor, whereas a regressive tax system is one in which tax rates decrease with an increase in taxable income. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? The table below shows the tax brackets for different income groups in a country: Taxable Income $0-$10,500 $10,501-$40,200 $40,201-$98,000 $98,001-$145,000 Above $145,000

Tax Rates 10 percent 15 percent 20 percent 25 percent 30 percent

58) Refer to the table above. This is an example of a ________ tax system. A) progressive B) regressive C) proportional D) cardinal Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 59) Refer to the table above. If Tom has a taxable income of $62,000, he faces a marginal tax rate of ________. A) 10 percent B) 15 percent C) 20 percent D) 30 percent Answer: C Difficulty: Easy AACSB: Application of Knowledge 15 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Why Does the Government Tax and Spend? 60) Refer to the table above. If Jack has an annual income of $40,000, into which tax bracket does he fall? A) 10 percent B) 15 percent C) 23 percent D) 30 percent Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 61) Refer to the table above. If Jack has an annual income of $50,000 and Jill earns $77,500, which of the following is TRUE? A) Jack and Jill pay an equal amount of tax. B) The average rates of tax paid by Jack and Jill are equal. C) The marginal tax rate for Jack is higher than the marginal tax rate for Jill. D) Jack and Jill fall in the same tax bracket. Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 62) Refer to the table above. If Beth earns $60,000 per year, she has to pay a tax of ________. A) $9,465.05 B) $1,600.50 C) $1,000.50 D) $24,000 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 63) Refer to the table above. If Bob earns $105,000 per year, he has to pay a tax of approximately ________. A) $6,400 B) $12,600 C) $18,675 D) $19,600 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend?

64) Refer to the table above. If Bob pays $20,000 in tax, approximately how much does he earn per year? A) $60,760 B) $100,760 C) $110,760 D) $115,760 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 65) Refer to the table above. Bob says that the next dollar he earns will be taxed 50 percent more heavily than the previous dollar he earned. How much has Bob earned so far in the year? A) $10,500 B) $40,200 C) $98,000 D) $145,000 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend?

66) The table below shows the income tax rates applicable to various income groups in Bonland. Taxable Income $0—$6,000 $6,001—$30,000 $30,001—$75,000 $75,001—$125,000 $125,001 and above

Tax Bracket 10 percent 15 percent 18 percent 20 percent 25 percent

If Mary's taxable income is $80,000, calculate her: a) total tax paid. b) marginal tax rate. c) average tax rate. Answer: a) The total amount of tax paid by Mary would be calculated as follows: (6,000 ‒ 0) × 10 percent = $600 + (30,000 ‒ 6,001) × 15 percent = $3,599.85 + (75,000 ‒ 30,001) × 18 percent = $8,099.82 + (80,000 ‒ 75, 001) × 20 percent = $999.80 Therefore, the total amount of tax paid by Mary = $13,299.47. b) Mary falls in the 20 percent tax bracket, and the marginal tax rate paid by her is 20 percent because the tax rate applicable to the last dollar of her income is 20 percent. c) The average tax rate paid by Mary is calculated by dividing the total tax paid by her taxable income, or ($13,300/$80,000) × 100 = 16.63 percent. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 67) A ________ system is one in which households pay the same percentage of their incomes in taxes regardless of their income level. A) progressive B) regressive C) proportional D) complementary Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend?

68) In a proportional tax system, ________. A) the average tax rate faced by an individual exceeds the marginal tax rate B) the marginal tax rate faced by an individual exceeds the average tax rate C) the average tax rate equals the marginal tax rate D) the marginal tax rates faced by all households are equal Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 69) In a ________ tax system, the marginal tax rate declines with income. A) progressive B) regressive C) proportional D) marginal Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 70) In a regressive tax system, ________. A) low-income households pay a higher percentage of their income in taxes B) high-income households pay a higher percentage of their income in taxes C) all households pay the same amount of taxes irrespective of their income D) all households pay the same percentage of their income in taxes Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? Scenario: There are 4 households in a locality. The annual income of the first household is $20,000, the annual income of the second household is $47,000, the annual income of the third household is $50,000, and the annual income of the fourth household is $71,000. 71) Refer to the scenario above. If the local government follows a progressive tax system, which family pays the largest amount in tax? A) The first household B) The second household C) The third household D) The fourth household Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend?

72) Refer to the scenario above. Which family pays the lowest percentage of its income in tax if the government follows a progressive tax system? A) The first household B) The second household C) The third household D) The fourth household Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 73) Refer to the scenario above. If the income tax rate for the fourth household is higher than the income tax rate for the second household, it can be inferred that the government follows a ________ income tax system. A) progressive B) regressive C) proportional D) value-added Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 74) Refer to the scenario above. If each family pays 12 percent of its income in tax every year, the local government follows a(n) ________ tax system. A) cardinal B) ordinal C) progressive D) proportional Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 75) Refer to the scenario above. If the first household pays 20 percent of its income in tax, the second household pays 17.5 percent of its income in tax, the third household pays 13 percent of its income in tax, and the fourth household pays 10 percent of its income in tax, income taxes are ________ in nature. A) progressive B) regressive C) lump sum D) proportional Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 20 Copyright © 2022 Pearson Education Ltd.

76) Refer to the scenario above. Which family pays the highest percentage of its income in tax if the income taxes collected by the local government are regressive in nature? A) The first household B) The second household C) The third household D) The fourth household Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 77) Refer to the scenario above. If the fourth household pays the lowest percentage of its income in tax, it can be inferred that the government follows a ________ tax system. A) progressive B) proportional C) Pigouvian D) regressive Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 78) In the United States, income taxes are ________. A) regressive B) progressive C) proportional D) marginal Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 79) Social Security taxes in the U.S. tend to be ________. A) proportional B) progressive C) regressive D) negative Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend?

80) Property taxes in the U.S. are ________. A) progressive B) regressive C) proportional D) negative Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Why Does the Government Tax and Spend? 81) Differentiate between the average tax rate and the marginal tax rate. Answer: The average tax rate faced by a household is the total tax paid divided by total income earned. The marginal tax rate, on the other hand, refers to how much of the last dollar earned the household will pay in taxes. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Why Does the Government Tax and Spend? 82) The term ________ refers to how the burden of the tax is distributed across various agents in the economy. A) tax funding B) tax incidence C) tax haven D) tax discrimination Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 83) The imposition of all taxes, EXCEPT Pigouvian taxes, leads to ________. A) an increase in consumer surplus B) an increase in producer surplus C) a fall in the price of the good D) a loss in total welfare Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

84) If a tax is imposed per unit of a good sold, ________. A) the supply curve for the good shifts to the right B) the supply curve for the good shifts to the left C) the demand curve for the good shifts to the right D) the demand curve for the good shifts to the left Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 85) If the sellers of a good are taxed for each unit sold, ________. A) the price that the buyers need to pay falls B) a larger quantity of the good is sold C) the price that the sellers receive increases D) a smaller quantity of the good is sold Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

The following figure shows the supply and demand curves in a competitive market for a good. The government is considering a $1.50 tax on this good.

86) Refer to the above figure. If the $1.50 tax is collected from the producers of this good, how many units of it will be supplied to the market? A) 0 units B) 3 units C) 4 units D) 5 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 87) Refer to the above figure. If the $1.50 tax is collected from the producers of this good, the effective price of a unit of this good FOR THE PRODUCERS will be ________. A) $2.50 B) $3.50 C) $4 D) $5 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses

88) Refer to the above figure. If the $1.50 tax is collected from the producers of this good, the effective price of a unit of this good FOR THE CONSUMERS will be ________. A) $2.50 B) $3.50 C) $4 D) $5 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 89) Refer to the above figure. If the $1.50 tax is collected from the producers of this good, the producer surplus will be ________. A) $2.25 B) $3 C) $4.50 D) $5 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 90) Refer to the above figure. If the $1.50 tax is collected from the producers of this good, the consumer surplus will be ________. A) $2.25 B) $3 C) $4.50 D) $5 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 91) Refer to the above figure. If the $1.50 tax is collected from the producers of this good, the government's revenue off of this taxation will be ________. A) $2.25 B) $3 C) $4.50 D) $5 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses

92) Refer to the figure above. If the $1.50 tax is collected from the producers of this good, the deadweight loss of this taxation will be ________. A) $0.25 B) $0.75 C) $1.50 D) $2 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses

Scenario: The market for a particular video game title is shown below in demand and supply schedules, demand and supply equations, and a supply-demand figure.

Demand schedule: Qd = 100 - p, Supply schedule: Qs = p, where price (p) is in dollars and quantity (Q) is 1000s of games.

93) Refer to the scenario above. What are the market equilibrium price and quantity in the video game market? A) $60 per game; 40,000 video games B) $50 per game; 50,000 video games C) $60 per game; 60,000 video games D) $40 per game; 60,000 video games Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

94) Refer to the scenario above. At the original equilibrium, consumer surplus is ________, producer surplus is ________, and social surplus is ________. Show your answer in a graph. A) $1.25 million; $1.25 million; $2.5 million B) $1.25 million; $2.5 million; $3.75 million C) $2.5 million; $1.25 million; $3.75 million D) $2.5 million; $2.5 million; $5 million Answer: A Explanation: The figure below shows these results.

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

95) Refer to the scenario above. The federal government imposes a tax of $10 per video game that is collected from consumers (demanders). After the tax, consumers pay ________ per video game, suppliers receive ________ per video game, and ________ thousand video games are traded in the market. Explain your answers with a graph. A) $60; $50; 50 B) $50; $40; 50 C) $45; $35; 40 D) $55; $45; 45 Answer: D Explanation: The following figure shows the result of the tax imposition.

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

96) Refer to the scenario above. After the imposition of the tax, the government collects ________ in tax revenue, and there is a deadweight loss of ________ in the market. Explain your answer with a graph. A) $500,000; $50,000 B) $450,000; $50,000 C) $450,000; $25,000 D) $400,000; $0 Answer: C Explanation: The following figure illustrates the answer.

Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

97) Refer to the scenario above. For this $10 excise tax collected from video game demanders, what is the incidence on consumers (consumer burden)? Explain your answer. A) $0 B) $225,000 C) $450,000 D) None of the above Answer: B Explanation: See the figure below. The incidence on consumers is the change in the price consumers pay multiplied by the after-tax quantity, or ($55 - $50) 45,000 = $225,000. The incidence on producers is the change in the price producers (sellers) receive multiplied by the after-tax quantity, or ($50 - $45) 45,000 = $225,000. The incidence on consumers equals the incidence on producers, because the relative elasticities of demand and supply are the same (i.e., one side of the market is not more or less elastic relative to the other).

Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

98) Refer to the scenario above. Suppose instead that demand in the video game market is as shown in the figure below (supply remains unchanged). The incidence on consumers (consumer burden) of a $10 excise tax collected from demanders in this market is ________. Explain your answer.

A) $0 B) $43,750 C) $131,250 D) $175,000

Answer: B Explanation: See the figure below. Now demand is elastic relative to supply, and we know that the relatively inelastic side of the market bears more of the economic incidence (burden) of a tax, so we expect that the incidence on consumers will be less than before and the incidence on producers will be greater than before. The incidence on consumers is $43,750, and the incidence on producers is $131,250. Tax revenues collected are $175,000, so consumers bear 25 percent of the burden of the tax while producers bear 75 percent of the burden of the tax.

Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses

The figure below shows the demand (D) and supply (S) curves for Good X before and after a tax is imposed on each unit of the good sold.

99) Refer to the figure above. The consumer surplus before the tax is imposed is given by the area ________. A) BCJ B) BAH C) CAE D) JBHF Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 100) Refer to the figure above. The producer surplus before the imposition of the tax is given by the area ________. A) GHF B) GAE C) JBHF D) JBC Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses

101) Refer to the figure above. The loss in consumer surplus due to the imposition of the tax is given by the areas ________. A) JBIE and BIA B) EAG AND GHF C) CAE AND EAHF D) JBHF AND ABH Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 102) Refer to the figure above. The region ________ shows the producer surplus after the imposition of the tax. A) JBHF B) JBF C) JBC D) HAI Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 103) Refer to the figure above. If a per-unit tax of $3 is imposed on the sale of Good X, what is the tax revenue received by the government? A) $20 million B) $10 million C) $12 million D) $60 million Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 104) Refer to the figure above. If a per-unit tax of $1.50 is imposed on the sale of Good X, what is the size of the deadweight loss due to taxation? A) $5 million B) $7.5 million C) $1.5 million D) $2 million Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses

105) Refer to the figure above. If the pre-tax equilibrium price of Good X was $3 and the price that consumers need to pay after the imposition of a per-unit tax of $3 is $5, the tax incidence on consumers is approximately ________. A) 50 percent B) 2 percent C) 3 percent D) 67 percent Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 106) Refer to the figure above. If the pre-tax equilibrium price of Good X was $3 and the price that sellers receive after the imposition of a tax of $3 is $2, the incidence of the taxation on sellers is approximately ________. A) 1 percent B) 15 percent C) 33 percent D) 21 percent Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 107) Refer to the figure above. The region BAH represents the ________. A) consumer surplus after taxation B) tax incidence on consumers C) tax incidence on producers D) deadweight loss due to taxation Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses

The figure below shows the demand and the supply in a market before and after a tax is imposed. The demand and the supply curves are straight lines.

108) Refer to the figure above. Who is legally responsible to pay the tax? How much is the tax? A) Buyers are required to pay the tax of $0.75 per unit bought to the government. B) Buyers are required to pay the tax of $1.00 per unit bought to the government. C) Sellers are required to pay the tax of $0.75 per unit sold to the government. D) Sellers are required to pay the tax of $1.00 per unit sold to the government. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 109) Refer to the figure above. What is the incidence of this tax on buyers? What is the incidence of this tax on sellers? A) The tax incidence on buyers is 50 percent, and the tax incidence on sellers is 50 percent. B) The tax incidence on buyers is 75 percent, and the tax incidence on sellers is 25 percent. C) The tax incidence on buyers is 25 percent, and the tax incidence on sellers is 50 percent. D) The tax incidence on buyers is 65 percent, and the tax incidence on sellers is 35 percent. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 110) Refer to the figure above. What is the government's tax revenue? A) $4.5 million B) $6 million C) $7.5 million D) Not enough information to compute the answer Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 38 Copyright © 2022 Pearson Education Ltd.

111) Refer to the figure above. What is the deadweight loss due to this tax? A) $500,000 B) $750,000 C) $1,000,000 D) Not enough information to compute the answer Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 112) When the price of laundry detergent is $10 per container, 30 container were purchased per day. Later, the government introduces a per unit tax. Sellers are required to pay the tax per container sold. This raises the price of detergent to $12 per container and reduces purchases to 20 container a day. The tax revenue to the government from this tax is $60 per day. The tax incidence on consumers is ________. A) 66.7 percent B) 50 percent C) 33.3 percent D) 27.5 percent Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 113) If a tax is imposed on each unit of a good purchased, ________. A) the supply curve of the good shifts to the right B) the supply curve of the good shifts to the left C) the demand curve for the good shifts to the right D) the demand curve for the good shifts to the left Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 114) If a tax is imposed on a good, ________. A) consumer surplus increases B) producer surplus increases C) the quantity of the good traded in the market increases D) the equilibrium quantity of the good in the market falls Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses

115) When does the burden of a tax imposed on a good fall more heavily on consumers? Answer: The tax burden falls more heavily on consumers if the demand for the good is less sensitive to price changes than its supply–that is, if the elasticity of demand is less than the elasticity of supply. This is because if demand is inelastic, buyers do not reduce their consumption of the good immediately and continue to purchase the taxed good despite the higher price. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 116) When does the burden of a tax imposed on a good fall more heavily on sellers? Answer: The tax burden falls more heavily on sellers if the supply curve is less elastic than the demand curve. This is because if supply is less elastic than demand, the fall in supply due to the imposition of the tax will be less than the fall in demand due to the tax. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 117) The incidence of a per-unit tax on a good is identical for buyers and sellers of the good if ________. A) the buyers and sellers of the good are equally sensitive to price changes B) the elasticity of market demand exceeds the elasticity of market supply C) the market supply curve is flatter than the market demand curve D) the market demand curve is horizontal Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 118) The tax incidence on buyers is higher if ________. A) the buyers and sellers of a good are equally sensitive to price changes B) the elasticity of the market demand curve is higher than the elasticity of the market supply curve C) the elasticity of the market supply curve is higher than the elasticity of the market demand curve D) the number of sellers in a market is larger than the number of buyers Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

119) If the market supply curve of a commodity is more elastic than its market demand curve, tax incidence is likely to fall ________. A) more on consumers than on producers B) more on producers than on consumers C) entirely on producers D) entirely on consumers Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 120) The demand curve for pizza in Perilia is vertical. If a tax is imposed on each pizza bought, ________. A) the burden of the tax will fall entirely on the buyers B) the burden of the tax will fall entirely on the sellers C) the tax incidence on the sellers will be higher than that on the buyers D) the deadweight loss due to taxation will be large Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 121) The burden of a tax falls more heavily on sellers when ________. A) the good is a luxury good B) the good is a necessary good C) the demand for a good is less price elastic than its supply D) the demand for a good is more price elastic than its supply Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 122) The supply of milk in Nexus City is perfectly elastic. If a tax is imposed on each gallon of milk sold, ________. A) the burden of the tax will fall entirely on the sellers B) the burden of the tax will fall entirely on the buyers C) the tax incidence on the sellers will be higher than that on the buyers D) the deadweight loss due to taxation will be zero Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

123) The tax incidence on sellers is higher if ________. A) the buyers and sellers of a good are equally sensitive to price changes B) the buyers of a good are more sensitive to price changes than the sellers C) the sellers of a good are more sensitive to price changes than the buyers D) the number of buyers in a market is larger than the number of sellers Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 124) The deadweight loss of taxation on a good is higher if ________. A) the demand for or the supply of the good is relatively price elastic B) a progressive tax system is practiced C) a low rate of tax is imposed on the sale of the good D) there is only one seller in the market Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses 125) The demand for chocolate is perfectly inelastic in Carritos Island. If a tax is imposed on chocolate, ________. A) the deadweight loss due to taxation will be high B) the deadweight loss due to taxation will be one C) consumers will stop consuming chocolate D) the tax burden will fall entirely on buyers Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Taxation: Tax Incidence and Deadweight Losses

126) Suppose a tax is imposed on the seller for each unit of "Chocochip," a candy bar. How will this tax affect the consumers? Explain with a diagram. Answer: In the absence of the tax, the equilibrium quantity and price of candy bars are determined by the interaction of the market forces of demand (D) and supply (S), as shown in the figure below. However, when the tax is imposed, the supply curve of candy bars shifts to the left to STax as sellers now have to pay a tax to the government for each unit sold. The intersection of the post-tax supply curve, STax, with the demand curve gives the new equilibrium, ETax, in the market for candy bars. The new equilibrium price is higher as the sellers pass some of the tax burden to the buyers. The increase in the price causes the consumer surplus to fall from CAE to CBETax as consumers now have to pay more for each candy bar purchased and the number of candy bars purchased also falls. However, how much of the tax burden will be borne by the buyers depends on the elasticity of demand and supply. The sellers will have to bear a larger tax burden if the demand curve is more elastic than the supply curve, while the buyers will have to bear a larger tax burden if the supply curve is more elastic than the demand curve.

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses

127) The sale of all alcoholic beverages is taxed in Budopia. If the demand for alcohol in Budopia is perfectly inelastic, how much of the tax burden will be borne by the consumers and why? Answer: In the absence of the tax, the equilibrium quantity and price of the beverages are determined by the interaction of the market forces of demand and supply. However, when the tax is imposed, the supply curve of these beverages shifts to the left as sellers now have to pay a tax to the government for each unit sold. In this case, demand is perfectly inelastic. Perfectly inelastic demand means that consumers are willing to pay any price to get the product. Therefore, the seller can raise the price to recoup the extra cost without losing any sales; he or she would pass along the entire tax to the consumers. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses The following figure depicts the market for a certain good and the incidence of a tax on consumers.

128) Refer to the figure above. The producer surplus after the tax imposed on consumer is ________. A) Region 1 B) Regions 1 and 2 C) Regions 3 and 4 D) Region 4 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 44 Copyright © 2022 Pearson Education Ltd.

129) Refer to the figure above. The incidence of the tax of consumers is ________. A) Region 2 B) Regions 2 and 3 C) Region 3 D) Region 5 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 130) Refer to the figure above. The after-tax social surplus is ________. A) Regions 1 and 4 B) Regions 2 and 3 C) Regions 1,2, 3, and 4 D) Regions 1, 2, 3, 4, and 5 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Taxation: Tax Incidence and Deadweight Losses 131) Which of the following is TRUE? A) A lump-sum tax on a good reduces inequality. B) A lump-sum tax requires the rich and the poor to pay the same amount of taxes. C) A lump-sum tax requires the poor to pay a smaller percentage of their income in tax. D) A lump-sum tax leads to a huge deadweight loss. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: The Deadweight Loss Depends on the Tax 132) Which of the following taxes does NOT lead to a deadweight loss? A) A proportional income tax B) A lump-sum tax C) A progressive income tax D) A proportional tax on property Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: The Deadweight Loss Depends on the Tax

133) The deadweight loss due to a ________ is always smaller than the deadweight loss due to a ________. A) tax on each unit sold; tax on each unit bought B) per unit tax on each unit sold; per unit tax on each unit bought C) tax on each unit sold; lump-sum tax D) lump-sum tax; tax on each unit bought Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Choice and Consequence: The Deadweight Loss Depends on the Tax 134) Each citizen in Nexus City has to pay $20,000 as income tax. This is an example of a ________. A) proportional income tax B) progressive income tax C) lump-sum tax D) regressive income tax Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Choice and Consequence: The Deadweight Loss Depends on the Tax 135) A lump-sum tax is a(n) ________. A) progressive tax B) regressive tax C) proportional tax D) ordinal tax Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: The Deadweight Loss Depends on the Tax

In 2020, the US tax bracket for a single individual were as follows: Tax Rate 10% 12% 22% 24% 32% 35% 37%

Taxable Income Up to $9,875 $9,876 to $40,125 $40,126 to $85,525 $85,526 to $163,300 $163,301 to $207,350 $207,351 to $518,400 $518,401 and above

136) Use the information on tax brackets in 2020 to answer this question. What is the marginal tax rate for someone who had taxable income of $60,000 in 2020? A) 12% B) 15% C) 22% D) 24% Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: Understanding Federal Income Tax Brackets 137) Use the information on tax brackets in 2020 to answer this question. What is the average tax rate for someone who had taxable income of $60,000 in 2020? A) 15% B) 22% C) 7.7% D) 18% Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: Understanding Federal Income Tax Brackets 138) Use the information on tax brackets in 2020 to answer this question. What is the average tax rate for someone who had taxable income of $150,000 in 2020? A) 15% B) 20% C) 22% D) 24% Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: Understanding Federal Income Tax Brackets

Suppose the market for cigarettes can be represented by P = 11 - 0.1*Q and P = 2 + 0.05*Q, where Q is the number of packs of cigarettes and P is the price per pack. 139) Use the information on the market for cigarettes to answer the following question. Suppose the government imposes a tax of $3 per pack of cigarettes. How many packs of cigarettes will be bought and sold? A) 30 packs B) 40 packs C) 50 packs D) 60 packs Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States 140) Use the information on the market for cigarettes to answer the following question. Suppose the government imposes a tax of $3 per pack of cigarettes. Which of the following statements is TRUE? A) Tax revenue will be $120 B) Buyers and sellers will each pay half of the tax C) Producer surplus will be $45 D) The price buyers pay will be $8 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States 141) Which of the following statements is TRUE? A) A tax can distort incentives and create missed opportunities for mutually beneficial transactions. B) Tax incidence is determined by who actually remits the tax payments to the government. C) When taxes are imposed in markets, the quantity bought and sold will be inefficiently high. D) Buyers will end up paying a higher price if the tax is imposed on buyers (a sales tax) than if the same tax is imposed on sellers (an excise tax). Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States

142) Which of the following statements is FALSE regarding taxes and subsidies? A) Subsidies make markets more efficient because they encourage production beyond the equilibrium quantity. B) Taxes make markets less efficient because they lead to production that is lower than the equilibrium quantity. C) Producers will bear more of the tax burden if demand is more elastic than supply. D) If a subsidy is imposed in a market, then the price buyers pay will be lower than the price sellers receive. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States Suppose the market for milk can be represented by P = 12 - 0.15*Q and P = 1 + 0.05*Q, where Q is the number of gallons of milk and P is the price per gallon. 143) Use the information on the market for milk to answer the following question. If the government offers a $1 per gallon subsidy to people who buy milk, how much milk will be bought and sold? A) 60 gallons B) 55 gallons C) 50 gallons D) 75 gallons Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States 144) Use the information on the market for milk to answer the following question. If the government offers a $1 per gallon subsidy to people who buy milk, which of the following statements is TRUE? A) Consumer surplus will equal $226.88 B) Deadweight loss will equal $5 C) The subsidy increases social surplus D) Producer surplus will equal $90 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States

145) Which of the following statements is FALSE if a tax is imposed in a labor market with perfectly inelastic labor supply? A) The tax will cause some workers to lose their jobs B) Workers will bear the full burden of the tax C) This tax will not generate any deadweight loss D) Worker surplus will fall with the tax Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Taxation and Government Spending in the United States 146) Why are lump-sum taxes regressive in nature? Answer: Lump-sum taxes require each individual to pay the same amount in taxes. Therefore, low-income households need to pay a higher percentage of their income in taxes than do highincome households. Therefore, lump-sum taxes are regressive in nature. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: The Deadweight Loss Depends on the Tax 10.2 Regulation 1) Blue laws (bans on stores being open for business on Sunday or the ban on certain items being sold on Sunday) are an example of ________. A) sales taxes B) price floors C) price ceilings D) command-and-control regulation Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Direct Regulation 2) A binding price ceiling will result in ________. A) deadweight loss as long as neither demand nor supply are completely inelastic B) an increase in the market price C) an increase in producer surplus D) an increase in the market quantity Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Direct Regulation

3) A price ceiling refers to ________. A) the lowest price that a producer is willing to accept for a good B) the highest price that a consumer is willing to pay for a good C) the lower limit on the price of a good D) the upper limit on the price of a good Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 4) A rent control is an example of a ________. A) price floor B) price ceiling C) negative externality D) positive externality Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 5) The price of a gallon of gasoline in Bonland is $3.20. However, just before the election, the government decides to fix the price of gasoline at $2.80 per gallon. This is an example of a ________. A) positive externality B) negative externality C) price floor D) price ceiling Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation 6) A gallon of milk costs $4 in Bonland. If the government fixes the price at $3.50, ________. A) the quantity demanded of milk will fall B) the quantity of milk supplied will increase C) a shortage of milk will occur in the market D) there will be an excess supply of milk in the market Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation

7) A price ceiling leads to a(n) ________ if it is set below the equilibrium price. A) the equilibrium market price lies below the price ceiling B) the equilibrium market price lies above the price ceiling C) demand is more price elastic than supply D) demand is less price elastic than supply Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 8) A price ceiling does NOT lead to a deadweight loss if ________. A) the equilibrium market price lies below the price ceiling B) the equilibrium market price lies above the price ceiling C) demand is more price elastic than supply D) demand is less price elastic than supply Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation

The figure below shows the market for Good X:

9) Refer to the figure above. How many units of Good X will be demanded if the government sets a price ceiling of Pc on the good? A) 0 units B) 10 units C) 25 units D) 35 units Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation 10) Refer to the figure above. How many units of Good X will be supplied if the government sets a price ceiling of Pc on the good? A) 0 units B) 10 units C) 25 units D) 35 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation

11) Refer to the figure above. The region ABC shows the ________ due to the price ceiling. A) gain in consumer surplus B) gain in producer surplus C) deadweight loss D) economic loss Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation 12) Refer to the figure above. The region PCCAF shows the ________ after the imposition of the price ceiling. A) government revenue B) consumer surplus C) producer surplus D) deadweight loss Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Direct Regulation 13) Refer to the figure above. The region BPEPCC shows the ________ due to the price ceiling. A) gain in consumer surplus B) loss in consumer surplus C) gain in producer surplus D) loss in producer surplus Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Direct Regulation 14) A price floor is the ________. A) maximum price that a buyer is willing to pay for a good B) minimum price that a seller accepts for a good C) lower limit on the price of a good D) upper limit on the price of a good Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation

15) A binding price floor will result in ________. A) an increase in the market quantity B) a decrease in producer surplus C) deadweight loss as long as neither demand nor supply are completely inelastic D) a decrease in market price Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Direct Regulation 16) A minimum wage policy is an example of a ________. A) price ceiling B) price floor C) positive externality D) negative externality Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 17) The government of Lithasia has decided to set a minimum price for certain agricultural products in order to safeguard farmers' interests. This is an example of a ________. A) price floor B) price ceiling C) Pigouvian tax D) Pigouvian subsidy Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation 18) The government of Lithusia has set a minimum wage for factory workers. This will lead to an ________ if the minimum wage is above the current market wage. A) increase in total surplus B) increase in the number of workers supplied C) excess demand for workers D) increase in income inequality Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Direct Regulation

19) A price floor set above the equilibrium price leads to a(n) ________. A) excess demand for goods in the market B) excess supply of goods in the market C) increase in social well-being D) positive externality Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 20) Consider a market with a price floor above the equilibrium price. A rightward shift of the demand curve will likely ________. A) increase the size of the deadweight loss B) leave the price unchanged and thus quantity traded unchanged as well C) restore market efficiency D) decrease producer surplus Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 21) Consider a market with a price floor below the equilibrium price. A rightward shift of the supply curve will likely ________. A) increase the size of the deadweight loss B) leave the price unchanged and thus quantity traded unchanged as well C) restore market efficiency D) decrease producer surplus Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Direct Regulation 22) Consider a market with a price ceiling below the equilibrium price. A rightward shift of the demand curve will likely ________. A) increase the size of the deadweight loss B) leave the price unchanged and thus quantity traded unchanged as well C) restore market efficiency D) decrease producer surplus Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation

The following figure depicts the demand and the supply for a certain good.

23) Refer to the figure above. What kind of price control would induce an excess demand and create a deadweight loss of $625? A) Price floor at $150 B) Price floor at $100 C) Price ceiling at $150 D) Price ceiling at $100 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Direct Regulation 24) Refer to the figure above. What kind of price control would induce an excess supply and create a deadweight loss of $2,500? A) Price floor at $175 B) Price floor at $75 C) Price ceiling at $175 D) Price ceiling at $75 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Direct Regulation

Scenario: The table below shows the reservation values of ten buyers and a seller for a loaf of bread. Each buyer would buy at most one loaf and the seller can make up to ten loaves. Initially trades happen under the market mechanism with each agent making a decision according to the market price and his or her own reservation value. Then the government imposes a price ceiling of $1.00 per unit.

Buyer 1 2 3 4 5 6 7 8 9 10

Reservation Value of Reservation Value of Buyer ($) Loaf Number Seller ($) 4.00 First loaf 0.60 3.75 Second loaf 0.75 3.50 Third loaf 0.90 3.00 Fourth loaf 1.00 2.25 Fifth loaf 1.25 1.50 Sixth loaf 1.50 1.35 Seventh loaf 2.00 1.20 Eighth loaf 2.75 1.00 Ninth loaf 3.50 0.75 Tenth loaf 3.75

25) Refer to the scenario above. What is the total surplus at the equilibrium before the price ceiling is imposed? A) $13.60 B) $12.00 C) $11.40 D) $9.75 Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 26) Refer to the scenario above. After the price ceiling is imposed, there will be ________. A) a surplus of 2 loaves B) a surplus of 3 loaves C) a shortage of 4 loaves D) a shortage of 5 loaves Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation

27) Refer to the scenario above. After the price ceiling is imposed, there will be a deadweight loss of ________. A) $0.00 B) $1.00 C) $2.00 D) $3.00 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Direct Regulation 28) Refer to scenario above. Suppose that, after the price ceiling is imposed, the seller serves customers on a first-come, first-served basis. This means that the seller's surplus depends on the order in which customers are served. What are the minimum and the maximum possible surpluses for the seller? A) Minimum $0, maximum $12.00 B) Minimum $0.60, maximum $11.40 C) Minimum $1.80, maximum $11.00. D) Minimum $2.75, maximum $9.25. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Direct Regulation 29) Refer to the scenario above. Suppose that, after the price ceiling is imposed, the seller serves customers on a first-come, first-served basis. In the hope of getting the good on the cheap, buyers flock to the store and form a line. Buyer 9 is at the top of the queue and is served immediately. Buyer 2 is next and is served after waiting for 15 minutes. Then Buyer 1 is served after waiting for 30 minutes, followed by Buyer 6 (who waited for an hour). Much to their dismay, other buyers were turned down, and the seller shuts the store. If each buyer has an opportunity cost of time equal to $6 per hour, what is the total net benefit to consumers? A) $3.75 B) $1.50 C) $0.00 D) $1.25 Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Direct Regulation

Scenario: Consider the following figure, which shows a competitive market. Suppose the government imposes a price ceiling policy of $2 on this market.

30) Refer to the above scenario. This $2 price control policy is mainly intended to benefit ________ of this good. A) the consumers B) the producers C) both the consumers and the producers D) neither the consumers nor the producers, but the government itself Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 31) Refer to the above scenario. After the imposition of this $2 price control policy, how many units of this good will be traded in the market? A) 0 units B) 30 units C) 40 units D) 45 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation

32) Refer to the above scenario. After the imposition of this $2 price control policy, what is the amount of producer surplus in the market? A) 0 B) $30 C) $50 D) $75 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation 33) Refer to the above scenario. After the imposition of this $2 price control policy, what is the amount of consumer surplus in the market? A) 0 B) $50 C) $100 D) $120 Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Direct Regulation 34) Refer to the above scenario. After the imposition of this $2 price control policy, what is the amount of consumer surplus in the market? A) 0 B) $50 C) $100 D) $120 Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Direct Regulation 35) Refer to the above scenario. After the imposition of this $2 price control policy, what is the amount of deadweight loss in the market? A) 0 B) $5 C) $10 D) $20 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation

Scenario: Consider a competitive market for baseball hats, a good that is indivisible. The supply and demand in this market are as shown in the following table. Price ($) 1 2 3 4 5 6 7 8 9 10

Quantity Demanded Quantity Supplied 10 0 9 1 8 2 7 3 6 4 5 5 4 6 3 7 2 8 1 9

36) Refer to the above scenario. The equilibrium price in this market is ________, and the number of baseball hats traded in this market is ________. A) $5; 4 hats B) $5; 6 hats C) $6; 5 hats D) $6; 6 hats Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Direct Regulation 37) Refer to the above scenario. The consumer surplus in this market is ________, and the producer surplus in this market is ________. A) $10; $10 B) $8; $6 C) $15; $15 D) $5; $5 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Direct Regulation

38) Refer to the above scenario. If a price control of $4 is imposed on this market, the number of baseball hats traded in this market will be ________. A) 3 hats B) 4 hats C) 5 hats D) 7 hats Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Direct Regulation 39) Refer to the above scenario. If a price control of $4 is imposed on this market, the consumer surplus in this market will be ________, and the producer surplus in this market will be ________. A) $18; $10 B) $10; $10 C) $18; $3 D) $15; $3 Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Direct Regulation 40) Why does a price ceiling set below the equilibrium price of a good lead to a shortage of the good in the market? Answer: A price ceiling is set below the market price of the good. At the lower price, the quantity demanded of the good increases, while the quantity supplied falls. As a result, a shortage of the good occurs in the market. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 41) When is a price ceiling ineffective? Answer: A price ceiling is ineffective when the market price of the good lies below the price ceiling. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Direct Regulation 42) How does a government‒regulated price floor set above the equilibrium price affect the quantity of the good demanded and supplied in the market? Answer: If the government sets a price floor on a good, the price of the good becomes higher than the equilibrium price. As a result, the quantity of the good demanded falls, while the quantity of the good supplied increases. This causes an excess supply of the good in the market. Difficulty: Easy AACSB: Analytical Thinking 63 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Direct Regulation 43) The price of chocolate is increasing rapidly in Richland because of a shortage of cocoa beans, which are roasted and ground to make chocolate. The government of Richland decides to set a price ceiling on chocolate. What will be the cost of this regulation to the economy? Explain with a diagram. Answer: The figure below shows the market for chocolate. QE is the equilibrium quantity of chocolate, and PE is the equilibrium price for chocolate in the absence of a price ceiling. If the government sets a price ceiling on chocolate, the quantity demanded of chocolate will increase from QE to QD and the quantity supplied will fall from QE to QS. This will create a shortage of chocolate equal to QD ‒ QS in the market. Producer surplus falls because producers receive a lower price for chocolates after the price ceiling is imposed. Consumer surplus depends on which consumers get the quantity supplied in the market at the lower price. Nevertheless, the sum of consumer and producer surpluses falls, giving rise to a deadweight loss shown by the triangular area ABC.

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation

44) The average hourly wage of a construction worker in Argonia is $7.50. How will a minimum wage policy of $10 per hour affect the supply of workers? Answer: The figure below shows the market for construction workers in Argonia. When the hourly wage rate is $7.50, the number of workers demanded is QE, which equals the number of workers available in the market. However, if a minimum wage policy of $10 per hour is implemented, the number of workers demanded will fall to QD, while the number of workers available to work will increase to Qs because of the higher wage. This will create an excess supply of workers in the market for construction workers equal to QS ‒ QD.

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Direct Regulation 45) Price controls ________. A) result in deadweight loss if they cause a change in the market quantity B) redistribute surplus from one side of the market to another (e.g. from producers to consumers or vice versa) C) redistribute surplus within the side of the market that is a net beneficiary of the price control from those who are queued out of the market to those who can still buy/sell D) all of the above Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Controls: Price Ceilings and Price Floors

Scenario: Suppose the retail market for gasoline in Wyoming is characterized by the following demand and supply schedules and corresponding supply-demand graph Demand: Qd (p) = 24 - 6 ∙ p, Supply: Qs (p) = 4 ∙ p, where price p is in dollars per gallon, and quantity Q is millions of gallons.

46) Refer to the scenario above. Wyoming imposes a $1 per gallon price ceiling on retail gasoline in the state. At the price ceiling, there is ________ of ________ gallons. Illustrate your answer with a graph. A) neither surplus nor shortage; 0 B) a surplus; 6 million C) a surplus; 14 million D) a shortage; 14 million Answer: D Explanation: The following figure illustrates the effects of the ceiling.

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Controls: Price Ceilings and Price Floors 47) Refer to the scenario above. The price control results in a deadweight loss of ________ million. Explain your answer. A) 0 B) $6.72 C) $13 D) $13.44 Answer: B Explanation: $6.72 million = × (Willingness to pay at million gallons) - Willingness to Accept at 4 million gallons) × 5.6 million gallons =

× [$3.40/gallon - $1/gallon] * [9.6 million gallons

Suppose the market for cigarettes can be represented by P = 11 - 0.1*Q and P = 2 + 0.05*Q, where Q is the number of packs of cigarettes and P is the price per pack. 48) Use the information on the market for cigarettes above. Which of the following price floors in the market for cigarettes would lead to a surplus of cigarettes? A) $6 B) $5 C) $4 D) $3 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Controls: Price Ceilings and Price Floors 49) Use the information on the market for cigarettes above. Which of the following statements is FALSE if the government imposes a $6 price floor in the market for cigarettes? A) The price floor leads to deadweight loss of $15. B) This will lead to a surplus of 30 packs of cigarettes. C) The price floor leads to consumer surplus of $125. D) This price floor decreases social surplus by $7.5. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Controls: Price Ceilings and Price Floors 50) Use the information on the market for cigarettes above. Which of the following could make a price floor of $4 per pack of cigarettes become binding (i.e. have an effect on the market)? A) Tobacco companies develop a technology that can roll and package cigarettes twice as fast as before. B) It becomes more expensive to grow tobacco. C) Vape pens, a substitute in consumption for cigarettes, become more expensive. D) Consumers expect the price of cigarettes to increase in the future. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Controls: Price Ceilings and Price Floors

51) Use the information on the market for cigarettes above. If the government's goal is to decrease the consumption of cigarettes by the largest amount, which of the following policies should they choose? A) A price floor of $7 B) A tax of $2 C) A subsidy of $2 D) A price ceiling of $5 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price Controls: Price Ceilings and Price Floors Suppose the market for milk can be represented by P = 12 - 0.15*Q and P = 1 + 0.05*Q, where Q is the number of gallons of milk and P is the price per gallon. 52) Use the information on the market for milk above. If the government imposes a price ceiling of $3 in the market for milk, how much milk will be consumed? A) 40 gallons B) 50 gallons C) 55 gallons D) 60 gallons Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Controls: Price Ceilings and Price Floors 53) Use the information on the market for milk above. Which of the following price ceilings would affect the quantity of milk consumed? A) $2.75 B) $3.75 C) $4.50 D) $6 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Controls: Price Ceilings and Price Floors 54) Use the information on the market for milk above. If the government imposes a price ceiling of $3 in the market for milk, which of the following statements is FALSE? A) There will be a shortage of 15 gallons of milk. B) The deadweight loss created by this price ceiling will equal $22.50. C) Consumer surplus will increase due to the price ceiling. D) Producer surplus will equal $40. Answer: A Difficulty: Hard AACSB: Analytical Thinking 69 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Price Controls: Price Ceilings and Price Floors 10.3 Government Failures 1) Economists Andrei Shleifer and Robert Vishny argue that governments, like consumers and producers, are rational and self-interested; they care about staying in power and maintaining their bureaucratic empires (what the economists call the "grabbing hand") more than improving social welfare (the "helping hand"). The "grabbing hand" theory of government provides an example of ________. A) the underground economy B) command-and-control regulation C) government failures D) none of the above Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Failures 2) An example of government failure is ________. A) bureaucratic inefficiency B) political corruption C) the slowness of bureaucracies D) all of the above Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Government Failures 3) Which of the following is TRUE? A) Government intervention in the form of direct regulation does not involve any cost. B) The opportunity cost of government work is the tax imposed on the society. C) The allocation of time and talent of individuals to bureaucracy is an important cost of government. D) The larger the size of the bureaucracy, the higher its efficiency. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Direct Costs of Bureaucracies 4) What is the opportunity cost of government work? Answer: The output that could be produced with the time and talent of individuals allotted to bureaucracy is the opportunity cost of government work. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Direct Costs of Bureaucracies 70 Copyright © 2022 Pearson Education Ltd.

5) Government failures refer to ________. A) the absence of government interventions B) policies implemented without the consent of citizens C) the inefficiencies caused by a government's interventions D) the incapacity to form a government Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Direct Costs of Bureaucracies 6) Efficient government intervention requires that ________. A) the cost of government enforcement be zero B) the marginal benefits of intervention be just equal to the marginal costs of intervention C) intervention should continue until all negative externalities have been eliminated D) there be no productivity losses in the private sector as a result of government intervention Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Direct Costs of Bureaucracies 7) Citizens can safely conduct their economic activities when government ________. A) plays no role in the economy B) forcefully competes with other organizations for economic control C) determines the allocation of society's resources D) provides law and order and enforces property rights Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Direct Costs of Bureaucracies 8) Which of the following is NOT considered corruption? A) Inefficient bureaucracy in tax collection B) Misallocation of resources for personal use C) Misuse of public funds D) Accepting gifts from businesses that result in conflicts of interest Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Corruption

9) A(n) ________ market is a non-legal market for regulated goods and services. A) open B) closed C) black D) oligopoly Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Underground Economy 10) A black market is also known as a(n) ________ economy. A) open B) closed C) underground D) emerging Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Underground Economy 11) A black market can emerge for a good if ________. A) the good is taxed heavily B) there is an excess supply of a good C) the consumption of the good is subsidized D) the production of the good is subsidized Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Underground Economy 12) Which of the following is NOT a problem caused by black markets? A) Legally banned goods being traded in black markets B) Black markets posing a threat to legitimate businesses C) An inefficient use of society's resources D) A fall in the demand for goods Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Underground Economy

13) Which price control policy is the most likely to induce the creation of a black market? A) Price floor above the equilibrium price B) Price floor below the equilibrium price C) Price ceiling above the equilibrium price D) Price ceiling below the equilibrium price Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Underground Economy 14) Which of the following can be an objective of a price ceiling policy that may be frustrated by a black market? A) Keep the price of a specific good high B) Restrict output of a specific good C) Increase social surplus D) All of the above Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Underground Economy 15) The "underground economy" is also known as the ________. A) black market B) fossil fuel market C) energy market D) subway transportation Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Underground Economy 16) Which of the following is an example of underground economy? A) A lawn care service that operates on cash B) A pharmaceutical developing cancer drugs C) A non-profit college D) A utility company Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Underground Economy

Buyer 1 2 3 4 5 6 7 8 9 10

Reservation Value Reservation Value of of Buyer ($) Loaf Number Seller ($) 4.00 First loaf 0.60 3.75 Second loaf 0.75 3.50 Third loaf 0.90 3.00 Fourth loaf 1.00 2.25 Fifth loaf 1.25 1.50 Sixth loaf 1.50 1.35 Seventh loaf 2.00 1.20 Eighth loaf 2.75 1.00 Ninth loaf 3.50 0.75 Tenth loaf 3.75

17) Refer to the scenario above. Suppose that, after the price ceiling is imposed, buyers reduce their reservation values by $1.50 because now they take into account the opportunity cost of waiting in line. The loss of social surplus due to the price ceiling and the fall of buyers' reservation values is ________. A) $12.00 B) $8.00 C) $7.00 D) $5.00 Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Underground Economy 18) Refer to the scenario above. Suppose that, after the price ceiling is imposed, the shortage forces buyers to offer bribes to the seller in order to secure a loaf. If each buyer offered as much as his or her reservation value, and the seller sells to the highest bidders, how many loaves will exchange hands? Is the outcome efficient? A) 4 loaves; no the outcome is not efficient B) 5 loaves; no the outcome is not efficient C) 5 loaves; yes the outcome is efficient D) 6 loaves; yes the outcome is efficient Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Underground Economy

19) Refer to the scenario above. Suppose that, after the price ceiling is imposed, the seller uses a lower quality flour that reduces his marginal cost by $0.50 for each loaf. Buyers suspect that the quality may be lower, and their reservation value falls by $0.25. At the legal price, there will be ________. A) a shortage of 1 loaf B) a shortage of 2 loaves C) a surplus of 1 loaf D) a surplus of 2 loaves Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Underground Economy 20) Refer to the scenario above. Suppose that, after the price ceiling is imposed, the government inspector extorts a bribe of $1.00 per loaf from the seller, so the seller can sell each loaf at the market price while the inspector looks the other way. Which of the following is a consequence of the bribe taking? A) There will be a deadweight loss of $5.00. B) There will be no deadweight loss, but the inspector will pocket $5.00. C) There will a deadweight loss of $12.00 D) There will be no deadweight loss, but the social surplus will be reduced by $5.00. Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Underground Economy 21) Refer to the scenario above. Suppose that, after the price ceiling is imposed, the government inspector extorts a bribe of $1.00 per loaf from the seller so the seller can sell each loaf at the market price while the inspector looks the other way. What percentage of the cost of bribing can the seller pass on to the buyers? (Hint: The bribe is just like a tax.) A) 0 percent B) 25 percent C) 50 percent D) 75 percent Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Underground Economy

22) In addition to a state excise tax on cigarettes of $4.35 per pack, New York City imposes an additional $1.50 per pack excise tax. A 2013 report estimated that nearly 60 percent of cigarettes sold in New York are smuggled into the state or purchased online to avoid these taxes. Evasion of the cigarette tax costs the state of New York approximately $1.7 billion in revenue per year. To maximize revenue, what should the state of New York do? Explain your answer. A) Increase the excise tax on cigarettes B) Keep the excise tax on cigarettes constant C) Decrease the excise tax on cigarettes D) Not enough information provided Answer: C Explanation: The best solution is to decrease the tax, as an increase in cigarette taxes INCREASES the incentive to evade the tax. Similar to a Laffer curve, there is a tax rate that maximizes government tax collections. New York would likely increase cigarette tax revenues if they lowered the tax, because they would lessen the incentive for smuggling and tax evasion. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Underground Economy 23) Consider the Choice and Consequence regarding different approached to saving Rhinos. Based on the evidence, which policy seems to have been more successful at increasing rhino populations? A) Granting property rights for rhinos to private ranches and zoos B) Banning rhino poaching and the selling of rhino horns C) Rhino populations increased the most with no government intervention D) Taxing the sale of rhino horns Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Can Market Regulation Save Rhinos from Extinction? 24) Consider the Choice and Consequence regarding different approached to saving Rhinos. Which of the following statements is TRUE regarding rhinos? A) Before privatization, anyone could kill a rhino without repercussions, thus rhinos were nonrival. B) Because killing a rhino means that no one else can kill that rhino, rhinos are excludable. C) Privatizing rhinos gave the ranches and zoos an incentive to protect their rhinos from poachers leading to increased rhino populations. D) The ban on selling rhino horns lowered the price for rhino horns in the black market. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Can Market Regulation Save Rhinos from Extinction?

25) Mention some of the problems incurred by black markets. Answer: Some of the problems that black markets incur are as below: i) When they involve goods and services that have been legally banned, the black market undermines the ban. ii) When black market transactions occur in markets for legal goods and services in order to avoid taxes or regulations, they put legitimate businesses at a disadvantage. iii) To compensate for the lost revenue, governments must levy higher taxes. iv) Criminals spend vast resources trying to elude the law, which is not an effective use of society's resources. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Underground Economy 10.4 Equity Versus Efficiency 1) Distinguish between the concept of equity and that of efficiency. Answer: Equity refers to the equitable allocation or distribution of resources; efficiency focuses on maximizing social surplus. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 2) If a government decides to move from a regressive tax system to a progressive tax system, there will be a(n) ________ in equity and a(n) ________ in efficiency. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 3) Which of the following is NOT an example of the welfare state? A) Unemployment insurance benefits B) Government-financed healthcare C) Government laws establishing property rights D) Supplemental nutrition assistance programs (vouchers given to low-income individuals to purchase food) Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Equity Versus Efficiency

4) What is the type of relationship between social inequality and social surplus? A) Social inequality increases as social surplus increases. B) Social inequality decreases as social surplus increases. C) At first, social inequality increase as social surplus increases. But later the relationship reverses. D) At first, social inequality decrease as social surplus increases. But later the relationship reverses. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 5) Those who support big government are mainly concerned about ________, and those who support a small government are mainly concerned about ________. A) social inequality; social surplus B) social surplus; social inequality C) market competition; social surplus D) social inequality; market competition Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 6) Which of the following is TRUE of welfare states? A) Resources are not equally distributed in a welfare state. B) Resources are efficiently allocated in a welfare state. C) A welfare state entails a huge cost on society. D) A welfare state usually has a regressive tax system. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 7) The equity-efficiency trade-off is best represented by ________. A) a progressive tax system B) a regressive tax system C) the absence of government intervention D) policies that achieve full efficiency and full consumer surplus Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency

The following figure depicts two industries, each facing an identical supply curve.

8) Refer to the figure above. Which of the following is TRUE? A) Increasing equity by decreasing the price by $1 in both industries, using a price ceiling policy below the equilibrium price, requires a smaller loss in efficiency in industry A. B) Increasing equity by decreasing the price by $1 in both industries, using a price ceiling policy below the equilibrium price, requires a smaller loss in efficiency in industry B. C) Increasing equity by increasing the price by $1 in both industries, using a price floor policy above the equilibrium price, requires a greater loss in efficiency in industry A. D) Increasing equity by increasing the price by $1 in both industries, using a price floor policy above the equilibrium price, requires a smaller loss in efficiency in industry B. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 9) Bringing water from people who are not thirsty to people who are thirsty using a leaky bucket is an illustration of ________. A) a loss of efficiency due to free markets B) forgone tax revenues resulting from an inefficient tax system C) costs in the regulation of an economy D) the efficiency costs involved in the redistribution of income Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Equity Versus Efficiency

Scenario: The table below shows the reservation values of ten buyers and a seller for a loaf of bread. Each buyer would buy at most one loaf and the seller can make up to ten loaves.

Buyer 1 2 3 4 5 6 7 8 9 10

10) Refer to the scenario above. What is the efficient outcome? What is the social surplus at the efficient outcome? A) Buyers 1—5 buy from sellers 1—5, and no other trade; $12.00 B) Buyers 1—6 buy from sellers 1—6, and no other trade; $12.00 C) Buyers 1—5 buy from sellers 6—10, and no other trade; $18.30 D) Buyers 5—10 buy from sellers 1—6, and no other trade; $18.00 Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 11) Refer to the scenario above. One way to achieve the efficient outcome is to let the market work so that the equilibrium is reached. What is the difference between the largest and the smallest among buyers' surpluses (including those who do not get a loaf at the equilibrium price)? A) $2.50 B) $3.00 C) $4.50 D) $6.00 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency

12) Refer to the scenario above. Suppose that the government forces the seller to sell 10 loaves, each at its marginal cost, to the government. Then the government sells the 10 loaves to buyers, one for each buyer, at their reservation values. What is the social surplus? What is the difference between the largest and the smallest among buyers' surpluses? A) $2.00; $1.00 B) $1.00; $0.50 C) $0.85; $0.25 D) $0.30; $0.00 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 13) Refer to the scenario above. Suppose that the government forces the seller to sell 10 loaves, each at its marginal cost, to the government. Then the government sells the 10 loaves to buyers, one for each buyer, at their reservation values. Who gets the social surplus? A) Buyers B) The seller C) Government D) Nobody. The social surplus is the deadweight loss. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 14) Refer to the scenario above. Suppose that the government forces the seller to produce 10 loaves and sets the price per loaf at $1.80. At the same time, the government collects a lump-sum tax from those buyers whose reservation values are above $1.80 to subsidize those with reservation values below $1.80. The amount of the lump-sum tax is the same for all buyers who are taxed. What is the social surplus? What is the difference between the largest and the smallest among buyers' surpluses? A) $0.75; $0.00 B) $0.75; $1.11 C) $0.30; $0.00 D) $0.30; $1.56 Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency

15) Explain the equity-efficiency trade-off. Give an example of the conflicting equity and efficiency outcomes of a policy. Answer: The equity-efficiency trade-off refers to the trade-off between ensuring an equitable distribution of resources (equity) and increasing social surplus or total output (efficiency). A progressive tax system helps in the redistribution of income from the rich to the poor and ensures greater equity. However, it discourages the rich to work and save more. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 16) Approximately 80 percent of mothers of infants in the United States use infant formula. Infant formula has an extremely low price elasticity of demand. As a result, the government could raise substantial revenues by placing high excise taxes on infant formula, and these high taxes would generate relatively modest deadweight losses. What is the likely reason that the government does not increase the tax on infant formula? Explain your answer. A) The government cares exclusively about efficiency. B) The government cares exclusively about equity. C) The deadweight loss would be too large. D) The government trades off efficiency to promote equity. Answer: D Explanation: The federal government is trading off efficiency to promote equity. Because the price elasticity of demand for infant formula is extremely inelastic, consumers would bear much of the incidence of any tax on infant formula, meaning a tax increase would increase the price consumers pay. This would impose a hardship on families with low incomes. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Equity Versus Efficiency 17) Under which of the following scenarios would the government be the LEAST likely to face a tradeoff between equity and efficiency? A) The government is considering taxing on carbon emissions to encourage factories to pollute less and limit greenhouse gases that contribute to climate change. B) The government is considering raising tariffs on imports from China to protect domestic producers C) The government is considering implementing a price floor in the market for milk to protect domestic dairy producers D) The government is considering subsidizing purchases of yachts Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency

18) What is a welfare state? Answer: A welfare state refers to the set of insurance, regulation, and transfer programs operated by the government, including unemployment benefits, pensions, and government-runand-financed healthcare. In the United States, for example, the welfare state comprises several programs, such as Medicaid and food stamps, which are targeted at the poor. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Equity Versus Efficiency 10.5 Consumer Sovereignty and Paternalism 1) Consumer sovereignty is the view that consumers have the right to choose ________, and the government should not interfere with these choices. A) the goods that should be subsidized B) the goods that they will consume C) the price that they will pay for a good D) the goods that should be taxed Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Consumer Sovereignty and Paternalism 2) The view that consumers do not always know what is best for them, and that the government should encourage them to modify their behavior, is known as ________. A) the welfare state B) paternalism C) consumer sovereignty D) equity-efficiency trade-off Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Consumer Sovereignty and Paternalism 3) Paternalism is the view that ________. A) consumers do not always know what is best for them, and the government should encourage or induce them to change their actions B) producers do not always have the resources required for the production of a good, and the government should provide them with these resources C) the government should impose a tax on an economic activity only if it generates a negative externality D) the government has the supreme power to decide which goods are to be taxed and which are to be subsidized Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Consumer Sovereignty and Paternalism 83 Copyright © 2022 Pearson Education Ltd.

4) The proposed tax on sugary soft drinks in New York city is an example of ________. A) paternalism B) socialism C) consumer sovereignty D) a market economy Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Consumer Sovereignty and Paternalism 5) The idea behind legalization of recreational marijuana is in line with ________. A) paternalism B) socialism C) consumer sovereignty D) empiricism Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Consumer Sovereignty and Paternalism 6) Which of the following is NOT an example of paternalism philosophy in government? A) Mandating that women watch the ultrasound before getting an abortion B) Withholding social security contribution from workers' paycheck C) Banning substance abuse D) Instituting anti-trust laws Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Sovereignty and Paternalism 7) The sale of a popular energy drink called 7D was banned in Bonland after a study revealed that one of its ingredients increases the risk of cancer. This legislation is an example of ________. A) paternalism B) consumer sovereignty C) indirect regulation D) the internalization of externalities Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Sovereignty and Paternalism

8) To avoid accidents, the government of Richland does not allow boating in lakes during rainstorms. This is an example of ________. A) consumer sovereignty B) consumerism C) bureaucratic red-tapeism D) paternalism Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Sovereignty and Paternalism 9) A new law passed in Bonland requires all bikers to wear helmets while riding. It also states that those who do not wear helmets while riding will be punished. This is an example of ________. A) empiricism B) paternalism C) liberalism D) consumer sovereignty Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Consumer Sovereignty and Paternalism 10) Consumer sovereignty is to free markets what paternalism is to ________. A) government interventions B) corruption C) a welfare state D) government failures Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Consumer Sovereignty and Paternalism

11) Historically, participation in employer-sponsored retirement saving programs has been characterized by "opt in;" eligible employees go to the company's Human Resources office and fill out a form so that they can start having deductions from their paycheck go into a retirement savings account. Recently, many companies have switched to an "opt out" model for their retirement plans: eligible workers are automatically enrolled in the plan and have to go to their Human Resources office and fill out a form if they do not want to participate in the plan. This change in how employees enroll in retirement savings programs at their employer is an example of ________. A) command-and-control regulation B) a nudge C) deadweight loss D) consumer sovereignty Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Sovereignty and Paternalism Scenario: Concerns about its citizens' financial health after retirement, the government of LibPat is considering a few different approaches: (1) the government deducts a certain amount from worker's paychecks and invest on their behalf; (2) the government enrolls workers in a retirement saving plan but gives them a chance to opt out of the plan or choose a different plan; (3) the government runs a nationwide campaign to inform people of the importance of retirement savings. 12) Refer to the scenario above. Which policy allows the most consumer sovereignty? A) 1 B) 2 C) 3 D) 1 or 2 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Consumer Sovereignty and Paternalism 13) Refer to the scenario above. Which policy is most paternalistic? A) 1 B) 2 C) 3 D) 1 or 2 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Consumer Sovereignty and Paternalism

14) Refer to the scenario above. Which of the following best describes the rationale behind policy 2? A) People are against government meddling in their private lives. B) People like consumer sovereignty but tend to have difficulty saving voluntarily for the future. C) People like consumer sovereignty but tend to be ill informed about the need to save for the future. D) People like the government to take care of complicated decisions like retirement savings. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Consumer Sovereignty and Paternalism Scenario: The government of Nudgekistan wants to ban sales of sugary soda out of health concern for its citizens. Rather than a wholesale ban, it bans only the sales of soda in a cup that holds more than 8 ounces. Refills are also banned. On hearing the announcement of the ban, David and Cass, citizens of Nudgekistan, discusses the ban. David says, "This is really coercion by the government to limit the freedom of choice." Cass replies, "Well, if you want more than 8 ounces, you can always buy as many cups as you want. It's not really limiting your choice." 15) Refer to the scenario above. From Cass's point of view, the ban ________. A) leans more toward paternalism than consumer sovereignty B) leans more toward consumer sovereignty than paternalism C) is completely respectful of consumer sovereignty D) is completely paternalistic Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Consumer Sovereignty and Paternalism 16) Refer to the scenario above. Richard, a third citizen, chimes in. "It's a bit like a tax on soda if ________." A) the marginal cost of the second 8 ounce cup is less than the marginal cost of the first 16 ounce cup B) each 8 ounce cup costs more than twice the cost of a 16 ounce cup C) the marginal cost of the second 8 ounce cup is more than the marginal cost of the first 16 ounce cup D) each 8 ounce cup costs more than half the cost of a 16 ounce cup Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Consumer Sovereignty and Paternalism

17) An increase in the income tax rate leads to a large increase in deadweight loss if ________. A) the labor supply curve is highly elastic B) the labor supply curve is perfectly inelastic C) the labor demand curve is elastic D) the labor demand curve is perfectly inelastic Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: What Is the Optimal Size of Government? The following figure shows a competitive labor market (supply and demand for work hours), where the price of work is also known as wages.

18) Refer to the figure above. The line S1 represent a situation where labor supply that is ________, and the line S2 represents a situation where labor supply is ________. A) relatively inelastic; relatively elastic B) relatively elastic; relatively inelastic C) relatively elastic; perfectly inelastic D) perfectly elastic; perfectly inelastic Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: What Is the Optimal Size of Government?

19) Refer to the graph above. If the government levies a tax on wages, the inefficiency (deadweight loss) of this policy is ________. A) more if the labor supply is S1 B) more if the labor supply is S2 C) equal if labor supply is S1 or S2 D) is zero for either S1 or S2 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: What Is the Optimal Size of Government? 20) Why are private enterprises more efficient than government enterprises? Answer: Private enterprises are more efficient than government enterprises because government enterprises are often slow to react to market changes and to adopt new technologies. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: The Efficiency of Government Versus Privately Run Expeditions 21) Compared to publicly funded Arctic exhibitions, privately funded exhibitions ________. A) were more expensive B) had a higher death rate C) had a higher likelihood of achieving their objectives D) had a higher likelihood of losing ships Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: The Efficiency of Government Versus Privately Run Expeditions

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 11 Markets for Factors of Production 11.1 The Competitive Labor Market 1) Which of the following statements is TRUE? A) Firms are the demanders in the market for labor as well as in the market for consumer goods. B) Firms are the suppliers in the market for labor as well as in the market for consumer goods. C) Firms are the demanders in the market for labor, whereas they are the suppliers in the market for consumer goods. D) Firms are the suppliers in the market for labor, whereas they are the demanders in the market for consumer goods. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 2) Which of the following is TRUE of the market for labor? A) Workers are the suppliers of labor. B) Workers are the demanders of labor. C) The labor supply curve is perfectly elastic. D) The labor demand curve is perfectly elastic. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 3) A factor of production refers to any good or service that is ________. A) produced by the government B) produced in a competitive market C) used to produce other goods and services D) produced using scarce economic resources Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 4) Which of the following is an example of a factor of production? A) Land B) Cell phones C) Canned soup D) Television sets Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Competitive Labor Market 1 Copyright © 2022 Pearson Education Ltd.

5) Which of the following is NOT an example of a factor of production? A) Coal B) Tractors C) Cigarettes D) College graduates Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Competitive Labor Market 6) Which of the following correctly identifies the difference between the demand for factors of production and the demand for final goods? A) The demand for factors of production is fixed over time, whereas the demand for final goods changes with changes in tastes and preferences. B) The demand for final goods is fixed over time, whereas the demand for factors of production changes with changes in tastes and preferences. C) The demand for final goods is derived from the demand for labor, whereas the demand for factors of production is independent of the demand for final goods. D) The demand for factors of production is derived from the demand for final goods, whereas the demand for final goods is independent of the demand for factors of production. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 7) Labor demand is described as a derived demand because ________. A) it is derived from the demand for capital equipment B) it is derived from the demand for land C) perfectly competitive firms determine what price to charge for their product and then determine how much labor to hire D) perfectly competitive firms determine how much output to produce and then determine how much labor to hire Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 8) What is a factor of production? Why are the factors of production said to have a derived demand? Answer: A factor of production is a commodity or a service that is used to produce other goods and services. The demand for factors of production is referred to as DERIVED because their demand is determined by the demand for the final goods and services that they are used to produce. Difficulty: Easy AACSB: Analytical Thinking 2 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Competitive Labor Market Scenario: Consider a firm that produces and sells a good for the price of $2 in a perfectly competitive market. The following table shows the relationship between the number of workers and the output of this firm. Suppose the labor market from which this firm hires its employees is competitive. Number of Marginal Product Value of Marginal Output Workers of Labor Product of Labor 0 0 1 15 2 27 3 36 4 42 5 45 6 46 9) Refer to the scenario above. What is the marginal product of labor when the second worker is hired? A) 27 B) 56 C) 12 D) 24 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 10) Refer to the scenario above. What is the marginal product of labor when the third worker is hired? A) 36 B) 72 C) 18 D) 9 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 11) Refer to the scenario above. The marginal product of labor for this firm is ________. A) increasing B) decreasing C) constant D) at first increasing and then constant Answer: C Difficulty: Medium 3 Copyright © 2022 Pearson Education Ltd.

AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 12) Refer to the scenario above. What is the value of the value of marginal product of labor when the third worker is hired? A) $36 B) $72 C) $18 D) $9 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 13) Refer to the scenario above. What is the value of the marginal product of labor when the first worker is hired? A) $15 B) $30 C) $18 D) $9 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 14) Refer to the scenario above. If the wage rate in this market is equal to $18, this firm will hire ________ workers. A) 2 B) 3 C) 4 D) 5 Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 15) Refer to the scenario above. If the wage rate in this market is equal to $6, this firm will hire ________ workers. A) 2 B) 3 C) 4 D) 5 Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market 4 Copyright © 2022 Pearson Education Ltd.

16) Refer to the scenario above. If the wage rate in this market is equal to $9, this firm will hire ________ workers. A) 2 B) 3 C) 4 D) 5 Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Competitive Labor Market The following figure shows the production function for a perfectly competitive firm.

17) Refer to the figure above. Which of the following statements is TRUE? A) The slope of the production function between Points B and C indicates positive returns to labor. B) The slope of the production function between Points A and B indicates increasing returns to labor. C) The slope of the production function between Points A and B indicates decreasing returns to labor. D) The slope of the production function between Points A and C indicates increasing returns to labor. Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Demand for Labor

18) Refer to the figure above. The slope of the production function between ________ and ________ indicates negative returns to labor. A) Point B; Point C B) Point A; Point C C) Point A; Point B D) the origin; Point A Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 19) The value of the marginal product of labor is the ________. A) firm's marginal cost schedule B) firm's marginal revenue schedule C) firm's labor demand schedule D) labor supply schedule facing the firm Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Demand for Labor 20) The value of the marginal product of labor for a firm is the ________. A) firm's product price multiplied by the marginal product of labor B) wage facing the firm multiplied by the marginal product of labor C) firm's average total cost multiplied by the marginal product of labor D) firm's product price multiplied by its marginal revenue Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Demand for Labor 21) The value of the marginal product of labor is the ________. A) value of the output produced by all the workers in a firm B) contribution of an additional unit of labor to a firm's revenue C) extra output that is produced by hiring an additional unit of labor D) amount of output produced by the first unit of labor hired by a firm Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Demand for Labor

22) The value of the marginal product of labor is given by ________. A) the ratio of the marginal product of labor to the wage rate B) the product of the marginal product of labor and the wage rate C) the ratio of the marginal product of labor to the price of the final good produced D) the product of the marginal product of labor and the price of the final good produced Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Demand for Labor 23) The firm's value of marginal product of labor schedule slopes downward due to declining ________. A) marginal revenue B) marginal cost C) product price D) marginal product of labor Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 24) Suppose the market wage facing a firm in the perfectly competitive candle-making industry is $20 per hour, and the firm sells its candles for $2 each. Given this information, the firm should hire workers until the marginal product of labor equals ________. A) 10 candles per hour B) 18 candles per hour C) 20 candles per hour D) 22 candles per hour Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 25) When a firm hires 10 units of labor, 20 pens are produced. When it hires another unit of labor, the total output increases to 23 pens. If the price of one pen is $2, the value of the marginal product of the eleventh unit of labor is ________. A) $1.50 B) $2 C) $4 D) $6 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor

26) If the marginal product of a worker is 10 units and each unit of the good is sold for $5, the value of the marginal product of the worker is ________. A) $2 B) $5 C) $10 D) $50 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 27) If the value of the marginal product of a worker is $20 and the market price of the good she produces is $5, her marginal product is ________. A) 4 units B) 10 units C) 25 units D) 100 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 28) If the value of the marginal product of a worker is $40 and the marginal product of the worker is 8 units, the market price of the good he produces is ________. A) $2 B) $5 C) $8 D) $10 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 29) The profit-maximizing rule for a competitive firm is to hire labor until ________. A) Price = Wage B) Marginal product of labor = Wage C) Value of marginal product of labor = Wage D) Marginal revenue = Wage Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Demand for Labor

The following figure depicts the labor markets of two different firms.

30) Refer to the figure above. If firm A wants to hire 6 employees and pay a wage of $6, what is the market price of its output? A) $ 0.5 B) $ 1 C) $ 2 D) $ 3 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 31) Refer to the figure above. If firm B wants to hire 6 employees and pay a wage of $6, what is the market price of its output? A) $ 0.5 B) $ 1 C) $ 2 D) $ 3 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor

32) Refer to the figure above. Let the price of A's output be PA and the price of B's output be PB. If both firms hire 4 employees at a wage of $8, what is the ratio PA/PB? A) 2 B) C) D) Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 33) Refer to the figure above. Let the price of A's output be PA and the price of B's output be PB. If firm A hires 8 employees at a wage of $12 and firm B hires 2 employees at a wage of $18, what is the ratio PA/PB? A) 3 B) 2 C) D) Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 34) The decision rule for a profit-maximizing firm operating in a competitive market to hire an additional worker is that the value of the ________. A) marginal product of the worker should be equal to or greater than the wage rate B) marginal product of the worker should be equal to or less than the wage rate C) average product of the worker being hired should be equal to the wage rate D) average product of the worker being hired should be less than the wage rate Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor

35) Given that the market wage rate is $50 and both the labor and the goods market are perfectly competitive, a profit-maximizing firm should hire an additional worker if ________. A) the marginal product of the worker is 50 units B) the value of the marginal product of the worker is at least $50 C) the marginal product of the worker is less than 50 units D) the value of the marginal product of the worker is less than $50 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 36) Suppose a firm sells its product in a competitive market. If the ongoing wage rate in a competitive labor market is $30 and the market price of a firm's product is $2, then which of the following statements is TRUE? A) The firm should continue to hire workers until the marginal product of the last worker hired is 2 units. B) The firm should continue to hire workers until the marginal product of the last worker hired is 5 units. C) The firm should continue to hire workers until the marginal product of the last worker hired is 10 units. D) The firm should continue to hire workers until the marginal product of the last worker hired is 15 units. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 37) The negative slope of the labor demand curve can be attributed to ________. A) Moore's Law B) the Law of Accelerating Returns C) the Law of Diminishing Marginal Utility D) the Law of Diminishing Marginal Returns Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Demand for Labor 38) If the market for labor is perfectly competitive, the wage rate for labor equals the ________. A) average cost of hiring labor B) value of the marginal product of labor C) marginal product of the last unit of the labor employed D) price of the product that the firm produces using labor Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Demand for Labor 12 Copyright © 2022 Pearson Education Ltd.

The figure below shows output of a firm at different number of workers. Payment to workers is the only variable cost of the firm.

39) Refer to the figure above. If the price of the output is $5.00 per unit and the wage is $10 per worker, the firm's optimal choice in the short run is to hire ________ workers. A) 3 B) 4 C) 5 D) 6 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 40) Refer to the figure above. If the price of the output is $5.00 per unit and the wage is $30 per worker, the firm's optimal choice in the short run is to hire ________ workers. A) 3 B) 4 C) 5 D) 6 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 41) Refer to the figure above. If the price of the output is $3.00 per unit and the wage is $9.00 per worker, the firm's optimal choice in the short run is to hire ________ workers. A) 3 B) 4 C) 5 D) 6 Answer: C Difficulty: Medium 13 Copyright © 2022 Pearson Education Ltd.

AACSB: Analytical Thinking TopicEntry: The Demand for Labor 42) Refer to the figure above. If the price of the output is $3.00 per unit and the wage is $11.00 per worker, the firm's optimal choice in the short run is to hire ________ workers. A) 3 B) 4 C) 5 D) 6 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 43) Refer to the figure above. If it is optimal for the firm to hire 2 workers in the short run, then the wage per worker must be ________. A) five times the price of output per unit B) three times the price of output per unit C) twice the price of output per unit D) equal to the price of output per unit Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Demand for Labor 44) The demand for labor curve is derived from the ________. A) total product of labor B) supply curve of labor C) average product of labor D) value of the marginal product of labor Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor

The following figure shows the value of the marginal product of labor curve for a perfectly competitive firm.

45) Refer to the figure above. What is the equilibrium quantity of labor hired by the firm when the wage rate is $6 per hour? A) 10 hours B) 30 hours C) 60 hours D) 90 hours Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Demand for Labor 46) Refer to the figure above. What is the equilibrium quantity of labor hired by the firm when the wage rate is $4 per hour? A) 10 hours B) 20 hours C) 50 hours D) 70 hours Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Demand for Labor

47) Refer to the figure above. If the profit-maximizing quantity of labor hired by the firm is 40 hours, the market wage rate must be ________. A) $2 per hour B) $5 per hour C) $7 per hour D) $8 per hour Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 48) If both the goods and the labor market are perfectly competitive, a firm hires labor up to the point where the value of the marginal product of labor equals the wage rate and produces at a point where price is ________. A) equal to average cost B) equal to marginal cost C) less than marginal cost D) higher than marginal cost Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 49) Assume that both the goods and the labor market are perfectly competitive. If at equilibrium, the wage rate is $20 per hour and the marginal product of labor is 4 units, the firm's marginal cost must be equal to ________. A) $5 B) $24 C) $40 D) $80 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 50) Assume that both the goods and the labor market are perfectly competitive. If at equilibrium, the marginal cost faced by a firm is $3 and the market wage rate is $6, the marginal product of the last unit of labor hired by the firm must be ________. A) 0.5 units B) 2 units C) 9 units D) 18 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 16 Copyright © 2022 Pearson Education Ltd.

51) Assume that both the goods and the labor market are perfectly competitive. If at equilibrium, the marginal cost faced by a firm is $6 and the marginal product of the last unit of labor hired by the firm is 2 units, the market wage rate must be ________. A) $3 B) $6 C) $12 D) $18 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 52) Assume that a perfectly competitive firm hires workers from a perfectly competitive market for labor. The marginal product of a worker is 10 units per day. If the good that the worker produces is sold for $5, what is the maximum daily wage that should be offered to the worker? Answer: The maximum wage that a firm should pay a worker is equal to the contribution of the worker to the firm's revenue. This is equal to the value of the marginal product of the worker. In this case, the value of the marginal product of the worker is 10 × $5 = $50. Hence, the maximum wage that should be offered to the worker is $50. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor

Scenario: A small apple orchard operates in a perfectly competitive output market (the market for apples) and input or factor market (the market for apple pickers). The market price of apples is $1 per pound, and the market wage for apple pickers is $50 per day. See the following table.

53) Refer to the scenario above. In the table above, the marginal product of labor for the tenth worker is ________. A) 910 B) 91 C) 50 D) 4.64 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor 54) Refer to the scenario above. What is the value of the marginal product of labor for hiring the tenth worker? A) $910 B) $91 C) $50 D) $0 Answer: C Difficulty: Medium AACSB: Application of Knowledge 18 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Demand for Labor 55) Refer to the scenario above. What is the profit-maximizing number of workers the orchard should hire? A) 5 B) 10 C) 12 D) 14 Answer: A Difficulty: Medium AACSB: Analytical Thinking, Application of Knowledge TopicEntry: The Demand for Labor 56) Refer to the scenario above. Now suppose that new apple-picking baskets increase the productivity of apple pickers, as noted in the following table. The new profit-maximizing number of workers to hire is ________. Marginal Value of Average Product of Marginal Product of Labor Product Product of New New VMPL Labor (L) Output (Q) Labor (APL) (MPL) Price (P) Labor (VMPL) MPL (Orig Price) 0 0 NA $1.00 NA NA 1 120 120.00 $1.00 120 $120 2 250 125.00 $1.00 130 $130 3 390 130.00 $1.00 4 520 130.00 $1.00 5 640 128.00 $1.00 6 750 125.00 $1.00 7 860 122.86 $1.00 8 950 118.75 $1.00 9 1,030 114.44 $1.00 10 1,100 110.00 $1.00 11 1,160 105.45 $1.00 60 12 1,210 100.83 $1.00 50 13 1,250 96.15 $1.00 40 14 1,280 91.43 $1.00 30 15 1,300 86.67 $1.00 20 16 1,310 81.88 $1.00 10 A) 5 B) 10 C) 12 D) 14 Answer: C Difficulty: Medium AACSB: Application of Knowledge 19 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Demand for Labor 57) Refer to the scenario above. Now suppose that apple pickers have the same productivity as they did initially, but the price of apples rises to $1.25 per pound. The profit-maximizing number of workers the orchard should hire is ________. A) 5 B) 10 C) 11 D) 14 Answer: C Explanation:

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 58) Consider a firm that is competitive in both the product and the resource markets. The firm incurs a marginal cost of $5. If the marginal product of an additional worker is 20 units, what is the maximum wage that should be offered to the worker? Answer: In a perfectly competitive market, the market price of a good that a firm charges is equal to the marginal cost of producing the good. Therefore, the market price of the good equals $5. Because a worker should be paid a wage up to his value of marginal product, the maximum wage that should be offered to the worker is 20 × 5 = $100. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor

59) In 1986, Roger Clemens pitched 254 innings and finished with a 24-4 record during the regular season. He struck out 238 batters, recorded an earned run average of 2.148 and a WHIP (walks plus hits per inning pitched) of 0.969. He earned $340,000, which converts to $644,998 in 2007 dollars. In 2007, Roger Clemens pitched 99 innings and finished with a record of 6-6 during the regular season. He recorded 68 strikeouts, an ERA of 4.18 and a WHIP of 1.33. He was paid $17,690,413 for the 2007 season. Which of the following is the most likely explanation for the increase in Clemens' salary from 1986 to 2007? A) The marginal revenue associated with an additional win in baseball increased. B) The marginal revenue associated with an additional win in baseball decreased. C) The quantity demanded of baseball players decreased. D) Clemens' marginal product of labor increased. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Demand for Labor 60) In Major League Baseball, a player's WAR (wins above replacement) is a rough measure of the player's marginal product of labor. Specifically, WAR measures how many additional wins a player's performance would register for the team above the performance of the average player at his position. For 2015, center fielder Mike Trout of the Los Angeles Angels had a war of 7.55. (Assume that Trout's performance in 2016 is expected to be exactly the same as in 2015.) Suppose an additional win is worth $1.7 million to the Angels in 2016. What is Trout's value of marginal product of labor in 2016? Explain your answer. A) $1.7 million B) $7.55 million C) $12.84 million D) $17 million Answer: C Explanation: Trout's value of marginal product of labor is his WAR (which is equivalent to his marginal product of labor) of 7.55 multiplied by the value of an additional win ($1.7 million), or $12.835 million. Since Trout's value of marginal product of labor exceeds his salary request, the Angels expect to increase their team profits by signing him. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Demand for Labor

61) Although the marginal productivity of hair stylists has remained roughly constant since the 1960s, the real wages (wages adjusted for inflation) of hair stylists have increased significantly. Assume that the labor market for hair stylists and the market for hair-styling services are perfectly competitive. What best explains this finding? Explain your answer. A) The marginal cost of hair styling services has decreased. B) The supply of hair styling services has increased. C) The demand for hair styling services has increased. D) None of the above Answer: C Explanation: The marginal revenue (= price) of hair-styling services must have increased, which would be caused by an increase in demand for these services. This is entirely possible, given that real incomes have increased over this time and the demand for hair-styling services likely has a high income elasticity of demand. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Demand for Labor

62) The table below lists salary and "productivity" data for two Major League Baseball pitchers, Sandy Koufax and Clayton Kershaw. The players are not contemporaries; their careers were roughly a half-century apart. Nonetheless, each pitcher is/was considered the dominant pitcher of his era. Comparing productivity for Koufax's 1963 season to Kershaw's 2016 season, Koufax was more productive (in terms of wins, complete games, innings pitched and strikeouts), yet Kershaw's salary was 126 times Koufax's salary, adjusting for inflation. What is the most likely explanation for the salary differential between Koufax and Kershaw? Strikeouts per 9 Salary Games Complete Innings Strike- innings (2016$) Wins Losses Started Games Pitched outs pitched ERA WHIP

Player Year Salary Sandy Koufax 1963 $35,000 $274,337 27 Clayton Kershaw 2016 $34,571,429 $34,571,429 12

323

306

8.9

1.73 0.985

149

172

10.4 1.69 0.725

Answer: Assuming players are paid the value of their marginal product, if marginal product was not greater, then marginal revenue must have been greater. Certainly, the value of a win was much greater to a team in 2016 than in 1963. As evidence that marginal revenues increased, both Koufax and Kershaw play/played for the Los Angeles Dodgers. In 1963, the Dodgers earned $1 million in local TV revenues; that amount was $200 million for 2016. For national TV revenues, Major League Baseball earned $5.2 million in 1963, and $1.5 billion in 2016. Even adjusting for inflation, there were clearly huge increases in TV (and hence total revenues), so the marginal revenue of a win increased greatly. In fairness, Koufax played during the reserve clause era, so the labor market during his playing time was not competitive. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Demand for Labor

63) Consider a printing press that operates in a perfectly competitive market. Also, assume that the market for printing press workers is competitive. The following table shows the employment levels and the daily output of notebooks manufactured by the printing press. Number of Workers Employed 0 1 2 3 4 5 6 7

Output per Day (units) 0 35 75 112 142 165 180 190

a) Calculate the marginal product of the employees. If the price at which a notebook is sold is $2, calculate the value of the marginal product of the employees. b) If the market wage rate is $80, how many employees should the firm hire? c) If the market wage rate is $46, how many employees should the firm hire? Answer: a) The marginal product and the value of marginal product are calculated in the following table. Number of Workers Employed 0 1 2 3 4 5 6 7

Value of Marginal Output per Day Marginal Product Product = Marginal (units) (units) Product × 2 ($) 0 – – 35 35 70 75 40 80 112 37 74 142 30 60 165 23 46 180 15 30 190 10 20

b) A firm should hire until the value of the marginal product of labor is equal to the market wage rate. Therefore, if the ongoing wage rate is $80, the firm should hire 2 workers. c) If the market wage rate is $46, the firm should hire 5 workers. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Demand for Labor

11.2 The Supply of Labor: Your Labor-Leisure Trade-off 1) Non-paying activities in economics are referred to as ________. A) relief B) leisure C) free time D) unemployment Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 2) The price of non-work activities is ________. A) zero B) equal to the opportunity cost of those activities C) less than the opportunity cost of those activities D) greater than the opportunity cost of those activities Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 3) If workers are optimizing their total benefit, they will consume leisure until their ________. A) marginal product of labor equals their wage B) value of marginal product of labor equals their wage C) marginal cost of leisure equals their wage D) marginal benefit of leisure equals their wage Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Supply of Leisure: Your Labor-Leisure Trade-off 4) Suppose you are a worker and the unemployment rate in your labor market is 25 percent. What is the opportunity cost of leisure in this case? A) The market wage B) Greater than the market wage C) Less than the market wage D) Cannot determine given the information provided Answer: C Explanation: If the market wage is w, then you make w with probability 0.75 and you make 0 with probability 0.25, so your expected return to entering the labor market is 0.75ws, not the market wage of w. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Supply of Leisure: Your Labor-Leisure Trade-off 25 Copyright © 2022 Pearson Education Ltd.

5) The condition determining the optimal amount of leisure is that the ________. A) average benefit of leisure should equal zero B) total benefit of leisure should equal the wage rate C) average benefit of leisure should equal the wage rate D) marginal benefit of leisure should equal the wage rate Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 6) Meryl works 10 hours a day in an hourly job that pays $15 per hour. Suppose her wage rate increases to a really high rate of $10,000 per hour. In this case, Meryl will ________. A) supply more than 10 hours of work, because her wage rate is much higher B) supply less than 10 hours of work, because she can now afford the time off C) at first supply more, and then supply less than 10 hours of work D) both A and B apply at the same time, and Meryl's supply will depend of their relative strengths Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 7) Meryl works 10 hours a day in an hourly job that pays $15 per hour. Suppose Meryl's wage rate increases to a really high rate of $10,000 per hour. Your friend argues that Meryl will supply more than 10 hours of work, because her wage rate is much higher. You argue than Meryl will supply less than 10 hours of work, because she can now afford the time off. Your friend is referring to the ________, and you are referring to the ________ of Meryl's wage increase. A) substitution effect; income effect B) leisure effect; wage effect C) income effect; substitution effect D) wage effect; leisure effect Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 8) The market supply curve of labor in a perfectly competitive labor market ________. A) is horizontal or perfectly elastic B) is vertical or perfectly inelastic C) can be derived by vertically adding the individual supply curves of labor D) can be derived by horizontally adding the individual supply curves of labor Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 26 Copyright © 2022 Pearson Education Ltd.

Suppose the market for labor consists of only three workers: Alex, Anna, and Jim. The following table shows the labor supplied by the three workers at different wage rates. Wage Rate ($) 50 75 100

Labor Supplied by Labor Supplied by Labor Supplied by Jim Alex (hours per week) Anna (hours per week) (hours per week) 12 15 23 24 28 42 35 40 —

9) Refer to the table above. What is the market supply of labor per week when the wage rate is $50? A) 12 hours B) 30 hours C) 50 hours D) 71 hours Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 10) Refer to the table above. What is the market supply of labor per week when the wage rate is $75? A) 28 hours B) 50 hours C) 71 hours D) 94 hours Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 11) Refer to the table above. If the market supply of labor per week when the wage rate is $100 is 125 hours, the labor supplied by Jim per month at the market wage rate is ________. A) 12 hours B) 30 hours C) 50 hours D) 75 hours Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off

12) If leisure is a normal good, how will an increase in the wage rate affect an individual's desired quantity supplied of hours worked? A) It will increase, because the income and substitution effects work in the same direction for normal goods. B) It will increase, because the opportunity cost of leisure has increased. C) It may increase or decrease, depending on the relative magnitudes of the income and substitution effects. D) It will decrease because of the income effect. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off The following figure depicts an individual's supply of labor.

13) Refer to the figure above. The substitution effect dominates the income effect only between ________. A) the origin and point A B) the origin and point B C) the origin and point C D) point B and point C Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 14) Refer to the figure above. The income effect dominates the substitution effect only between ________. A) the origin and point A B) the origin and point B C) the origin and point C D) point B and point C Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 28 Copyright © 2022 Pearson Education Ltd.

Scenario: This problem applies the principle of optimization covered in Chapter 5 to the problem of choosing how many hours to work. Paul has to decide how many hours to work per day. His boss is willing to give Paul whatever hours Paul wants up to 8 hours. All else being equal, he would rather not work, that is, Paul has positive marginal benefit from each hour of leisure. But he is an avid collector of presidential campaign buttons. The more leisure he takes, the fewer buttons he can afford. So Paul faces a trade-off between leisure and buttons. Each button costs $1.00. The table below shows Paul's marginal benefits from leisure (MBleisure) and buttons (MBbutton). Leisure First hour Second hour Third hour Fourth hour Fifth hour Sixth hour Seventh hour Eighth hour

MBleisure $8.00 $4.00 $3.20 $2.80 $1.20 $0.60 $0.20 $0.00

Button Number First button Second button Third button Fourth button Fifth button Sixth button Seventh button Eighth button Ninth button Tenth button Eleventh button Twelfth button

MBbutton $10.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.25 $0.50 $0.25 $0.00

15) Refer to the scenario above. If the hourly wage is $1.00, what is the maximum possible number of buttons Paul can afford? A) 8 buttons B) 6 buttons C) 4 buttons D) 2 buttons Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 16) Refer to the scenario above. If the hourly wage is $1.00, how many hours would Paul choose to work? How many buttons would he buy? A) 6 hours; 6 buttons B) 3 hours; 3 buttons C) 2 hours; 2 buttons D) 0 hours; 0 buttons Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 29 Copyright © 2022 Pearson Education Ltd.

17) Refer to the scenario above. If the hourly wage is $1.60, what is the maximum possible number of buttons Paul can afford? A) 16 buttons B) 12 buttons C) 8 buttons D) 4 buttons Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 18) Refer to the scenario above. If the hourly wage is $1.60, how many hours would Paul choose to work? How many buttons would he buy? A) 2 hours; 12 buttons B) 3 hours; 4 buttons C) 4 hours; 5 buttons D) 5 hours; 8 buttons Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 19) Refer to the scenario above. If the hourly wage increases from $1.00 to $1.60, Paul would choose to work ________. A) more hours B) the same number of hours C) fewer hours D) as much as he can (8 hours) Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 20) In the case of leisure, the substitution effect implies that ________. A) when the price of leisure increases, people will work more B) when the price of leisure increases, people will work less and relax more C) if people tend to work more and relax less, the price of leisure increases D) if people tend to work more and relax less, the price of leisure decreases Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Producing Web Sites and Computer Programs

21) As the income of an individual increases, she can afford more leisure. This refers to the ________ of a wage increase. A) income effect B) substitution effect C) transformation effect D) opportunity cost effect Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Producing Web Sites and Computer Programs 22) Which of the following statements is TRUE? A) The slope of the labor supply curve depends only on the income effect of a wage rate change. B) The income effect and the substitution effect of a change in wage rate work in the same direction. C) The income effect and the substitution effect of a change in wage rate work in opposite directions. D) The slope of the labor supply curve depends only on the substitution effect of a wage rate change. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Producing Web Sites and Computer Programs

23) Marnie works at the guest check-in desk during nights at the Hilton Hotel in Portland, OR. She has the ability to determine how many hours she works each week. The hotel grants Marnie an increase in her hourly wage from $14 per hour to $20 per hour. How will Marnie respond? Explain your answer. A) Marnie will increase her hours worked if the income effect of the wage increase is positive. B) Marnie will decrease her hours worked if the income effect of the wage increase is negative. C) Marnie will not change her hours worked, as the income effect of the wage increase is zero. D) Cannot determine given the information provided Answer: A Explanation: If we can determine the direction of the income effect caused by a price change, we can determine whether Marnie increases her desired hours of work. The substitution effect of an increase in the return or reward to working another hour, holding utility constant, will cause Marnie to want to work more hours. If the income effect of a wage increase is also positive (encouraging Marnie to work more), then we can state unambiguously that Marnie will increase her desired hours worked in response to the wage increase. Response B is not correct, because simply knowing that the income effect associated with a wage increase is negative (in response to the higher wage, the income effect says to work less) does not allow us to conclude that Marnie will decrease her hours worked, as we have no way of knowing from this problem whether the income effect of the wage increase is larger than the substitution effect of the wage increase. Response C is not correct, because we have no way of knowing whether a negative income effect would exactly offset the substitution effect. Response D is not correct, because response A gives enough information. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Producing Web Sites and Computer Programs 24) Which of the following statements is TRUE? A) The relationship between labor demand and wage rate and the relationship between labor supply and wage rate are both positive. B) The relationship between labor demand and wage rate and the relationship between labor supply and wage rate are both negative. C) The relationship between labor demand and wage rate is positive, whereas the relationship between labor supply and wage rate is negative. D) The relationship between labor demand and wage rate is negative, whereas the relationship between labor supply and wage rate is positive. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Labor Market Equilibrium: Supply Meets Demand

25) The following table shows the demand and supply of labor in an industry. The equilibrium employment in this market is ________ hours per week and those workers are paid ________ per hour. Wage Rate ($ per hour) 8 9 10 11 12

Labor Supply (hours) 5 7 20 22 25

Labor Demand (hours) 50 45 30 22 10

A) 20; $10 B) 30; $10 C) 50; $10 D) 22; $11 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Labor Market Equilibrium: Supply Meets Demand 26) Which of the following statements is TRUE of the market for labor? A) The supply curve is always more inelastic than the demand curve. B) There is a shortage of labor at the point of intersection of the labor demand and labor supply curves. C) There is a surplus of labor at the point of intersection of the labor demand and labor supply curves. D) Both the equilibrium wage rate and quantity of labor are determined at the point of intersection of the labor demand and labor supply curves. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Market Equilibrium: Supply Meets Demand

The following figure depicts the production of a firm.

27) Refer to the figure above. If the market price of the output is $4 and the firm hires 4 employees, what is the wage rate such that the fourth employee hired brings in profits that exactly equal the marginal cost to the firm? A) $15 B) $30 C) $45 D) $60 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Market Equilibrium: Supply Meets Demand 28) Refer to the figure above. If the current wage rate per worker is $35 and the price of the output is $2, what is the profit-maximizing level of labor use? A) 2 B) 3 C) 4 D) 5 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Market Equilibrium: Supply Meets Demand

29) The following table shows the hours of labor supplied by six workers at different wage rates. Amanda Wendy Shaun Wage Rate (hours (hours (hours (per hour) worked per worked per worked day) day) per day) $12 4 3 2 $18 6 7 4 $24 8 9 9 $30 9 10 11 $36 10 11 12

Kevin (hours worked per day) 4 6 9 11 12

Leo (hours worked per day) 3 7 10 12 13

Ryan (hours worked per day) 5 8 11 13 14

a) If the market for labor consists of only these six workers, calculate the market supply of labor at the different wage rates. b) If the market demand for labor is 56 hours per day, what is the equilibrium wage rate? c) If the market demand for labor is 38 hours per day, what is the equilibrium wage rate? Answer: a) The market supply curve of labor is derived by aggregating the individual supply curves of labor. The following table shows the daily market supply curve of labor. Market Amanda Wendy Shaun Kevin Leo Ryan Wage supply of (hours (hours (hours (hours (hours (hours Rate (per Labor worked worked worked worked worked worked hour) (hours per per day) per day) per day) per day) per day) per day) day) $12 4 3 2 4 3 5 21 $18 6 7 4 6 7 8 38 $24 8 9 9 9 10 11 56 $30 9 10 11 11 12 13 66 $36 10 11 12 12 13 14 72 b) At equilibrium, the market demand for labor is equal to the market supply of labor. The market demand for 56 hours of labor is equal to the market supply of labor of 56 hours when the wage rate is $24 per hour. Hence, the equilibrium wage rate is $24 per hour. c) The market demand of 38 hours of labor is equal to the market supply of labor of 38 hours at the wage rate of $18 per hour. Hence, the equilibrium wage rate is $18 per hour. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Labor Market Equilibrium: Supply Meets Demand

30) The following table shows the demand and supply of labor in the steel manufacturing industry. Wage Rate (per hour) $10 $20 $30 $40 $50

Labor Supply Labor Demand (hours per week) (hours per week) 10 50 20 40 30 30 40 20 50 10

a) What is the equilibrium wage rate and employment level in the industry? Illustrate graphically. b) If the labor demand shifts to the right, without any change in the labor supply curve, what is likely to happen to the equilibrium wage and the employment level? Explain your answer with the help of a suitable diagram. c) If the labor supply curve shifts to the left, without any change in the labor demand curve, what is likely to happen to the equilibrium wage and employment level? Explain your answer with the help of a suitable diagram. Answer: a) The equilibrium wage rate is the wage rate at which the demand for labor equals the supply of labor. At a wage rate of $30 per hour, the labor demand and supply both equal 30 hours per week. Therefore, $30 per hour is the equilibrium wage and the equilibrium level of employment in the firm is 30 hours of labor per week. This is illustrated in the following figure.

b) If the labor demand curve shifts to the right without any change in the supply of labor, the equilibrium wage and employment levels will increase. This is illustrated in the figure below.

In the figure, once the labor demand curve shifts to Labor demandnew, there is an increase in the equilibrium wage and employment level. The new equilibrium wage is Wnew, and the new equilibrium level of employment is Enew. From the figure, it is observed that Wnew is higher than $30 per hour and Enew is also greater than 30 hours. c) If the labor supply curve shifts to the left, without any change in the demand for labor, there will be an increase in the wage rate and a decrease in the equilibrium employment level. This is illustrated in the figure below.

When the labor supply curve shifts leftward to Labor supplynew, there is an increase in the wage rate and a decrease in the employment level. The new wage rate is Wnew, and the new employment level is Enew. From the figure, it is clear that Wnew is higher than $30 per hour and Enew is less than 30 hours. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Labor Market Equilibrium: Supply Meets Demand 37 Copyright © 2022 Pearson Education Ltd.

Scenario: Lydia and Trevor are debating the cause(s) of increases in labor force participation by women in the U.S. economy since World War II. 31) Refer to the scenario above. Trevor argues that increases in the demand for labor throughout the entire economy bid up wages received by everyone in the economy. As a result, some women who previously had not been working at the market wage entered the labor force. According to Trevor, ________. Explain your answer. A) quantity supplied of labor increased B) labor supply increased C) quantity demanded of labor increased D) labor demand increased Answer: D Explanation: Trevor is arguing that the demand for all labor went up in the growing post-war economy, and women's labor is a substitute for men's labor in the economy. If the demand for women's labor increased, the number of women employed (more correctly, the proportion of adult women employed) should increase, which will cause an increase in the equilibrium quantity of women employed and an increase in women's hourly wages. Trevor's argument is illustrated in the following figure.

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Market Equilibrium: Supply Meets Demand

32) Refer to the scenario above. Lydia contends that the increase in female labor force participation was caused by a change in tastes for working among women in the United States after World War II. According to Lydia, ________. Explain your answer. A) quantity supplied of labor increased B) labor supply increased C) quantity demanded of labor increased D) labor demand increased Answer: B Explanation: Lydia is arguing that it was not the demand for women's labor that increased, but rather the supply of women's labor increased as women's tastes or preferences for work increased after World War II. Lydia's hypothesis that the labor supply of women increased suggests that the equilibrium number of women will increase but that the equilibrium wages of women will fall. Lydia's argument is illustrated in the following figure.

Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Market Equilibrium: Supply Meets Demand 33) Refer to the scenario above. Suppose we know that the number of women working increased, as did the market wage earned by women. These facts are consistent with ________. A) labor demand decreasing B) labor demand increasing C) labor supply increasing D) labor supply decreasing Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Market Equilibrium: Supply Meets Demand

34) In Oettinger's paper studying the labor supply decisions of stadium vendors, he considered the following complication. For games played on weekends, for games played in good weather, and for games where the Rangers' opponent was popular and/or enjoying on-field success, the potential to earn more during the game increased, but all other vendors realized this as well. In essence, a vendor might actually make less during a "high total revenue potential" game if lots of other vendors decided to work that game as well. The likelihood of finding that vendors were more likely to "participate" for high total revenue potential games ________ by accounting for the strategic behavior of other vendors. Explain your answer. A) is increased B) is decreased C) stays the same D) cannot be determined given the information provided Answer: B Explanation: Actual vendors have to weigh the potential for earning more because there are more people at the game (more total revenue potential) against the fact that more vendors will be competing for these revenues. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: "Get Your Hot Dogs Here!" 35) If there is an increase in the price of the final good that an industry produces, the labor demand curve for the industry is likely to ________. A) shift to the left B) shift to the right C) become vertical D) become horizontal Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Labor Demand Shifters

Scenario: The following figure shows the labor market for farm workers who pick peaches in Georgia. Suppose that price of peaches suddenly increases.

36) Refer to the scenario above. Before the price of peaches increased, the equilibrium wage rate in this market was ________. A) $8 B) $7.25 C) $2 D) $40 Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Labor Demand Shifters 37) Refer to the scenario above. The increase in price of peaches will cause the labor ________ curve to shift to the ________. A) demand; right B) supply; right C) demand; left D) supply; left Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Demand Shifters

38) Refer to the scenario above. The increase in price of peaches will cause the equilibrium wage rate in this market to ________, and the employment to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Demand Shifters 39) If there is a decrease in the price of the final good that an industry produces, the labor demand curve for the industry is likely to ________. A) shift to the left B) shift to the right C) become vertical D) become horizontal Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Labor Demand Shifters 40) Which of the following is likely to cause flour mills to increase their demand for labor? A) a decrease in the wage rate B) an increase in the wage rate C) an increase in the price of bread D) a decrease in the price of flour products Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 41) Which of the following is likely to lead to a leftward shift in the demand curve for labor in the petroleum extraction industry? A) An increase in the wage rate B) A decrease in the wage rate C) An increase in the price of cars D) An increase in the price of petroleum Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters

42) Which of the following is likely to lead to a rightward shift in the demand curve for labor in the coffee producing industry? A) A decrease in the price of tea B) An increase in the demand for tea C) A decrease in the demand for coffee D) An increase in the demand for coffee Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 43) Which of the following is likely to lead to a leftward shift in the demand curve for labor in the printing ink manufacturing industry? A) A decrease in the price of printers B) An increase in the demand for printers C) An increase in the price of printing ink D) A decrease in the demand for printing paper Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 44) Other things remaining the same, which of the following is likely to happen if the price of flour products decreases? A) Both the wage rate and the employment level in the flour industry will decrease. B) Both the wage rate and the employment level in the flour industry will increase. C) The wage rate will increase and the employment level will decrease in the flour industry. D) The wage rate will decrease and the employment level will increase in the flour industry. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 45) Other things remaining the same, which of the following is likely to happen if the price of cars decreases? A) Both the wage rate and the employment level will decrease in the petroleum extraction industry. B) The wage rate will increase and the employment level will decrease in the petroleum extraction industry. C) The wage rate will decrease and the employment level will increase in the petroleum extraction industry. D) Both the wage rate and the employment level will increase in the petroleum extraction industry. Answer: D Difficulty: Medium AACSB: Application of Knowledge 43 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Labor Demand Shifters 46) If an industry introduces labor-saving technology in production, the demand curve for labor in that industry is likely to ________. A) shift to the left B) shift to the right C) become vertical D) become horizontal Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 47) Other things remaining the same, which of the following is likely to happen if an industry introduces labor-saving technology in production? A) Both the wage rate and the employment level will decrease in the industry. B) Both the wage rate and the employment level will increase in the industry. C) The wage rate will increase and the employment level will decrease in the industry. D) The wage rate will decrease and the employment level will increase in the industry. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 48) Other things remaining the same, if an industry introduces labor-complementary technology in production, the demand curve for labor in that industry is likely to ________. A) shift to the left B) shift to the right C) become vertical D) become horizontal Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 49) Other things remaining the same, which of the following is likely to happen if an industry introduces labor-complementary technology in production? A) There will be a rise in both the wage rate and the employment level in the industry. B) There will be a fall in both the wage rate and the employment level in the industry. C) There will be a fall in the wage rate and a rise in the employment level in the industry. D) There will be a rise in the wage rate and a fall in the employment level in the industry. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 44 Copyright © 2022 Pearson Education Ltd.

50) Which of the following is likely to cause a decrease in both the wage rate and the level of employment in an industry? A) A rightward shift in the supply curve of labor, without any change in the demand curve for labor B) A leftward shift in the supply curve of labor, without any change in the demand curve for labor C) A rightward shift in the demand curve for labor, without any change in the supply curve of labor D) A leftward shift in the demand curve for labor, without any change in the supply curve of labor Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 51) Which of the following is likely to cause an increase in both the wage rate and the level of employment in an industry? A) A leftward shift in the supply curve of labor, without any change in the demand curve for labor B) A leftward shift in the demand curve for labor, without any change in the supply curve of labor C) A rightward shift in the supply curve of labor, without any change in the demand curve for labor D) A rightward shift in the demand curve for labor, without any change in the supply curve of labor Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 52) Other things remaining the same, which of the following is likely to increase both the wage rate and the number of workers hired on a rice farm? A) An increase in the price of rice B) A decrease in the price of rice C) A decrease in population in the area where the farm is located D) An increase in population in the area where the farm is located Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters

53) Other things remaining the same, which of the following is likely to increase both the wage rate and the number of workers hired in a steel-producing factory? A) An increase in the opportunity cost of leisure B) A decrease in the opportunity cost of leisure C) The introduction of labor-saving technology in the factory D) The introduction of labor-complementary technology in the factory Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 54) Other things remaining the same, which of the following is likely to decrease both the wage rate and the number of workers hired on a tea estate? A) An increase in the price of tea B) A decrease in the price of tea C) A decrease in the opportunity cost of leisure D) An increase in the opportunity cost of leisure Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 55) Other things remaining the same, which of the following is likely to cause a decrease in both the wage rate and the number of workers hired in a glass factory? A) The introduction of labor-saving technology in the factory B) The introduction of labor-complementary technology in the factory C) A decrease in population in the region where the factory is located D) An increase in population in the region where the factory is located Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 56) How does the price of a final good that is produced using labor affect the demand for labor? Answer: The demand for labor varies directly with the price of the final good that the labor is used to produce. If the price of the final good increases, then the value of the marginal product of labor increases, which will cause firms to demand more workers. Hence, the demand curve for workers will shift to the right. Conversely, if there is a decrease in the price of the final good, the value of the marginal product of labor will decrease and cause firms to demand fewer workers. Hence, the demand curve for workers will shift to the left. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Demand Shifters

57) What is the difference between labor-saving technology and labor-complementary technology? Answer: Labor-saving technology is a type of technology that substitutes for existing labor inputs, reducing the marginal product of labor. Conversely, labor-complementary technology is a type of technology that can complement existing labor inputs, increasing the marginal product of labor. The introduction of labor-saving technology shifts the demand curve for labor to the left, whereas the use of labor-complementary technology shifts the demand curve for labor to the right. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Demand Shifters 58) Without any change in the supply of labor, how will shifts in the demand for labor affect equilibrium wage and employment? Answer: Because the equilibrium wage and employment are determined at the point of intersection of the labor demand and supply curves, shifts in the demand curve affect these variables. A rightward shift in the labor demand curve, without any change in the labor supply curve, will lead to higher wages and employment levels. In contrast, a leftward shift in the demand curve for labor, without any change in the supply curve of labor, will lead to lower wages and employment levels. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Labor Demand Shifters 59) Without any change in the supply of labor, how are the following events likely to change the equilibrium wage and employment level in a firm that manufactures umbrellas? a) A forecast of higher rainfall this year b) A decrease in the price of raincoats c) The introduction of labor-saving technology in the factory Answer: a) A forecast of higher rainfall this year is likely to increase the demand for umbrellas. An increase in the demand for umbrellas will push the price of umbrellas up, and hence will increase the value of the marginal product of labor. This will increase the demand for labor, which will cause an increase in the wage rate and the employment level in the firm. b) Raincoats are substitutes for umbrellas. With a decrease in the price of raincoats, it is likely that the demand for umbrellas will fall. This will cause a decrease in the price and in the value of the marginal product of labor employed by the firm. The result will be a fall in the demand for labor, which will cause a decrease in the wage rate and the employment level in the firm. c) Labor-saving technology is a type of technology that substitutes for existing labor inputs, reducing the marginal product of labor. Hence, the use of such technology will decrease the value of the marginal product of labor, which will result in a fall in the demand for labor. Eventually, there will be a decrease in the wage rate and employment level in the firm. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 47 Copyright © 2022 Pearson Education Ltd.

60) A firm has to decide on the kind of technology it wants to invest in. It has two options: Technology A, which is labor-saving, and Technology B, which is labor-complementary. Illustrate graphically how the equilibrium wage and employment level in the firm will change if it decides to invest in the following. a) Technology A b) Technology B Answer: a) Labor-saving technology is a type of technology that substitutes for existing labor inputs, reducing the marginal product of labor. Therefore, the use of such technology in production will decrease the value of the marginal product of labor, which will cause a fall in the demand for labor. This is illustrated in the figure below.

Initially, the demand curve for labor is D1 and the supply curve of labor is S. The intersection of these curves determines the equilibrium wage rate at W1 and the equilibrium employment level at E1. If the firm invests in Technology B, the demand curve shifts to the right to D2. The new equilibrium is determined at the intersection of D2 and S. The new equilibrium wage rate is W2 and the new equilibrium quantity is E2. Compared to the initial equilibrium, W2 is higher than W1 and E2 is greater than E1. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Labor Demand Shifters 61) Which of the following would NOT cause the labor supply schedule to increase (shift right)? A) An increase in the working-age population B) A significant reduction in child care costs C) An increase in the firm's product price D) An increase in women's tastes for working Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Factors That Shift Labor Supply 62) Which of the following is likely to cause a rightward shift in the labor supply curve? A) An increase in population B) A decrease in population C) An increase in the price of the final good that the workers produce D) A decrease in the price of the final good that the workers produce Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply

63) Which of the following does NOT cause a shift in the supply curve of labor in an industry? A) Workers' tastes and preferences B) The population of the concerned region C) Opportunity costs faced by the workers D) The price of the final good that labor produces Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply 64) Other things remaining the same, which of the following is likely to happen if all homemakers in an economy start working as paid labor? A) There will be a fall in both the wage rate and the employment level. B) There will be an increase in both the wage rate and the employment level. C) There will be an increase in the wage rate in the country and a fall in the employment level. D) There will be a fall in the wage rate in the country and an increase in the employment level. Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply 65) Other things remaining the same, which of the following is likely to cause a leftward shift in the supply curve of labor? A) A decrease in population B) An increase in population C) A decrease in the demand for the final product that is produced by labor D) An increase in the demand for the final product that is produced by labor Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply

Scenario: The labor market in Delaware is depicted in the following figure. Suppose 10,000 out-of-state workers move to Delaware.

66) Refer to the scenario above. After this migration, the wage rate in Delaware will equal ________. A) $6 B) $7 C) $8 D) $6.50 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply 67) Refer to the scenario above. Before this migration, the employment in Delaware was equal to ________, and after this migration the employment will equal ________. A) 25,000; 20,000 B) 25,000; 30,000 C) 25,000; 35,000 D) 20,000; 25,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply

68) Which of the following is likely to cause an increase in the wage rate and a fall in the employment level in a country? A) A rightward shift in the demand curve for labor, without any change in the supply curve of labor B) A leftward shift in the demand curve for labor, without any change in the supply curve of labor C) A leftward shift in the supply curve of labor, without any change in the demand curve for labor D) A rightward shift in the supply curve of labor, without any change in the demand curve for labor Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply 69) Which of the following is likely to cause a decrease in the wage rate and an increase in the employment level of a country? A) A leftward shift in the demand curve for labor, without any change in the supply curve of labor B) A leftward shift in the supply curve of labor, without any change in the demand curve for labor C) A rightward shift in the supply curve of labor, without any change in the demand curve for labor D) A rightward shift in the demand curve for labor, without any change in the supply curve of labor Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply 70) Which of the following is likely to lead to a rightward shift in the supply curve of labor in an industry? A) The introduction of labor-saving technology B) A decrease in the opportunity cost of leisure C) An increase in the number of immigrants from foreign countries D) The introduction of labor-complementary technology Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply

71) Which of the following is likely to lead to a leftward shift in the supply curve of labor to a firm? A) The introduction of labor-saving technology B) The establishment of a new firm nearby that offers higher wages C) An increase in the opportunity cost of leisure D) The introduction of labor-complementary technology Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply 72) Which of the following is likely to cause a fall in the wage rate and an increase in the number of workers hired in a local cotton mill? A) A reduction in wages paid in a nearby jute mill B) The introduction of labor-saving technology in the mill C) The introduction of labor-complementary technology in the mill D) A decrease in the population of the region in which the cotton mill is located Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply 73) Which of the following is likely to cause a rise in the wage rate and a decrease in the number of workers hired in a garage? A) The shutdown of a nearby garage B) A decrease in the price of the services provided by the garage C) An increase in the price of the services provided by the garage D) The opening of a new garage nearby that offers higher wages to its workers Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply Suppose the demand for restaurant servers in Whoville can be represented by L = 300 20w and the supply of burger flippers in Whoville can be represented by L = 80w - 100, where L is the number of workers hired each day and w is the daily wage rate. 74) What is the equilibrium wage rate? A) $4 per day B) $220 per day C) $3.33 per day D) $6.67 per day Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 53 Copyright © 2022 Pearson Education Ltd.

75) If 40 potential restaurant servers leave Whoville, what will be the new equilibrium wage rate? A) $4.40 per day B) $212 per day C) $3.80 per day D) $6.67 per day Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 76) Which of the following would cause an increase in the wage rate and an increase in the number of workers hired as restaurant servers in Whoville? A) If demand for restaurant meals in Whoville increases B) If more potential restaurant servers move to Whoville C) If wages at restaurants in Seusstown, the neighboring town increase D) If restaurants in Whoville adopt technology that helps to automate the ordering process for customers. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Supply of Labor: Your Labor-Leisure Trade-off 77) What are the factors that affect the supply curve of labor? Answer: There are three factors that affect the supply curve of labor: i) changes in population, ii) changes in the tastes of workers, and iii) changes in opportunity costs. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Factors That Shift Labor Supply 78) Without any change in the demand for labor, how will shifts in the supply of labor affect equilibrium wage and employment? Answer: Because the equilibrium wage and employment are determined at the point of intersection of the labor demand and supply curves, shifts in the supply curve affect these variables. A rightward shift in the labor supply curve, without any change in the labor demand curve, will lead to lower wages and a higher employment level. In contrast, a leftward shift in the supply curve of labor, without any change in the demand curve for labor, will lead to higher wages and a lower employment level. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Factors That Shift Labor Supply

79) If a school that offers higher wages to its staff is set up near a school that offers comparatively lower wages to its staff, what will be the effect on the wage rate and the staff strength of the school that pays lower wages? Answer: In such a case, it is likely that some members of staff will shift from the school paying lower wages to the school paying higher wages. This shift will, in turn, lead to an increase in wages and a smaller staff in the school paying lower wages. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply 80) Without any change in the demand for labor, how are the following events likely to change the equilibrium wage and employment level in a dairy farm? a) An increase in the population of the region where the dairy farm is located b) The establishment of a cotton mill that pays higher hourly wages and is located near the dairy farm c) The shutdown of a rice farm located near the dairy farm Answer: a) An increase in the population of the region where the dairy farm is located is likely to increase the supply of labor in the region. An increase in the supply of labor, without any change in the demand for labor, will increase the employment level and decrease the wage rate in the dairy farm. b) The availability of any employment opportunity that pays a higher wage than the dairy farm will increase the opportunity cost of working at the farm. This will cause a decrease in the supply of labor to the farm. A decrease in the supply of labor, without any change in the demand for labor, will decrease the employment level and increase the wage rate in the dairy farm. c) The shutdown of a rice farm located near the dairy farm will increase the supply of labor to the dairy farm. An increase in the supply of labor, without any change in the demand for labor, will increase the employment level and decrease the wage rate in the dairy farm. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply

81) Illustrate graphically how the following events are likely to affect the equilibrium wage and employment level in a leather factory. a) An increase in the population of the region where the factory is located, without any change in the demand for leather b) The establishment of a textile firm in close vicinity that offers higher daily wages than the leather factory offers Answer: a) An increase in the population of the region where the factory is located will lead to an increase in the supply of labor to the factory. It is represented by a rightward shift in the labor supply curve and will result in lower wages and a higher employment level in the factory. This is illustrated in the figure below.

Initially, the demand curve for labor is D and the supply curve of labor is S1. The intersection of these curves determines the equilibrium wage rate at W1 and the equilibrium employment level at E1. If the population of the region where the factory is located increases, the supply curve shifts to the right to S2. The new equilibrium is determined at the intersection of D and S2. The new equilibrium wage rate is W2, and the new equilibrium quantity is E2. Compared to the initial equilibrium, W2 is less than W1 and E2 is greater than E1. b) The establishment of a textile firm that offers higher wages than the leather factory will increase the opportunity cost of working at the leather factory. Some workers are likely to quit the leather factory and join the textile firm. This will cause a leftward shift in the supply curve of labor. A leftward shift in the supply curve of labor without any change in the demand for labor will lead to a higher wage rate and a lower employment level in the leather factory. This is illustrated in the figure below.

Initially, the demand curve for labor is D, and the supply curve of labor is S1. The intersection of these curves determines the equilibrium wage rate at W1 and the equilibrium employment level at E1. When a textile firm that offers higher wages is established, the supply curve of labor of the leather factory shifts to the left to S2. The new equilibrium is determined at the intersection of D and S2. The new equilibrium wage rate is W2, and the new equilibrium quantity is E2. Compared to the initial equilibrium, W2 is greater than W1 and E2 is less than E1. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Factors That Shift Labor Supply 11.3 Wage Inequality 1) All the following are causes of wage inequality EXCEPT ________. A) discrimination in the job market B) differences in the competitiveness of industries C) differences in compensating wages D) differences in human capital Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Wage Inequality

2) Which of the following is NOT a factor that can cause wage inequality among workers producing the same good? A) Differences in compensating wages B) Differences in productivity and human capital C) The nature and extent of discrimination in the job market D) The market price of the final good being produced by the workers Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Wage Inequality 3) A person's stock of skills to produce economic value is referred to as ________. A) fixed capital B) human capital C) personal wealth D) personal capital Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Differences in Human Capital 4) Sara is a high school graduate, and James is a college graduate. Which of the following statements is TRUE? A) Sara is likely to have a higher level of human capital than James. B) James is likely to have a higher level of human capital than Sara. C) Both Sara and James are likely to earn the same wage in the labor market. D) Both Sara and James are likely to have the same level of human capital. Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Differences in Human Capital 5) Sandra has been working as a software engineer for five years, and Jack has been working as a software engineer for two years. Which of the following statements is TRUE of Sandra and Jack? A) Sandra is likely to earn lower wages than Jack. B) Sandra is likely to earn the same wage as Jack. C) Sandra is likely to be more productive at work than Jack. D) Sandra and Jack are likely to be equally productive at work. Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Differences in Human Capital

6) Which of the following statements is TRUE? A) Firm-specific human capital adds to productivity in only one firm. B) Firm-specific human capital is equally productive in all industries in an economy. C) Firm-specific human capital is equally productive in all firms in a particular industry. D) Industry-specific human capital is equally productive in all industries in an economy. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Differences in Human Capital 7) Which of the following is a likely reason for wage inequality between men and women? A) Men generally tend to have higher education qualifications than women. B) Women generally tend to have higher educational qualifications than men. C) Men tend to spend more time out of the labor force compared to women. D) Women tend to spend more time out of the labor force compared to men. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Differences in Human Capital 8) In 2017, a Private First Class (PFC, rank of E-2) in the U.S. Army earns $21,521 in base pay per year. The median annual earnings for full-time workers aged 16—24 in the United States is $22,152. The fact that Army PFCs earn about $500 less per year than similar civilians is best explained by ________. A) a compensating wage differential for the dangers of serving in the Army B) the Army providing general skills (discipline, accountability, mission orientation) C) the Army providing institution-specific skills D) discrimination against Army enlisted personnel Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Differences in Human Capital 9) Which of the following statements is TRUE? A) A worker who undertakes general training is likely to earn above her value of the marginal product. B) Firm-specific training results in gains to a worker and not to an employer in the labor market. C) Job-specific training results in gains to a worker's employer, but it does not result in gains to the worker in the labor market. D) Training received by a worker does not affect his wages, because wage rates are determined by the forces of demand and supply in the labor market. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Differences in Human Capital 59 Copyright © 2022 Pearson Education Ltd.

10) A college graduate getting paid more than a high school graduate is due to ________. A) compensating wage differentials B) discrimination in the job market C) differences in human capital D) the glass ceiling in the job market Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Differences in Human Capital 11) Which of the following statements is TRUE? A) Firm-specific training results in losses to a worker. B) Firm-specific training results in losses to a worker's employer. C) A worker is more likely to pay for firm-specific training than for general training. D) A worker is more likely to pay for general training than for firm-specific training. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Paying for Worker Training 12) A compensating wage differential is a wage premium paid to ________. A) recognize a more efficient employee B) attract workers who have a family to support C) improve the goodwill of a firm hiring workers D) attract workers to otherwise undesirable occupations Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Differences in Compensating Wage Differentials 13) Roadies who travel with bands on tour setting up and taking down equipment typically earn relatively low pay and work long and irregular hours. This finding is consistent with ________. A) statistical discrimination B) a positive compensating wage differential for the adverse work environment C) a negative compensating wage differential for the prestige/status of traveling with a band D) taste-based discrimination Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Differences in Compensating Wage Differentials

14) A truck driver getting paid more than a school teacher is due to ________. A) compensating wage differentials B) discrimination in the job market C) differences in human capital D) glass ceiling in the job market Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Differences in Compensating Wage Differentials 15) A night shift cashier getting paid more than day shift cashiers is due to ________. A) compensating wage differentials B) discrimination in the job market C) differences in human capital D) glass ceiling in the job market Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Differences in Compensating Wage Differentials 16) What is the difference between wage differentials caused by differences in human capital and compensating wage differentials? Answer: Human capital refers to an individual's stock of skills to produce economic value. With higher levels of education and experience, the human capital of an individual increases. Hence, people with a higher level of human capital tend to get higher wages than people with a lower level of human capital. In contrast, compensating wage differentials arise from the nature of the job rather than the human capital involved. A compensating wage differential is a wage premium paid to attract workers to otherwise undesirable occupations. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Differences in Compensating Wage Differentials 17) Discrimination that occurs when people's preferences cause them to discriminate against a certain group is referred to as ________. A) group discrimination B) special interest group discrimination C) cultural discrimination D) taste-based discrimination Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market

18) An employer discriminating against Asian workers is an example of ________. A) special interest group discrimination B) cultural discrimination C) statistical discrimination D) taste-based discrimination Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Discrimination in the Job Market 19) If a firm pays married women less than other individuals with the same human capital (e.g., the same productivity), this is an example of ________. A) compensating wage differential B) taste-based discrimination C) statistical discrimination D) none of the above Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 20) If a firm offers higher starting salaries to Asian job candidates than to white job candidates because Asians as a group have higher SAT scores, this is an example of ________. A) positive compensating wage differential B) negative compensating wage differential C) taste-based discrimination D) statistical discrimination Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 21) The market implications of taste-based discrimination were in part developed by ________. A) Gary Becker B) Amartya Sen C) Simon Kuznets D) Paul Samuelson Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market

22) When expectations cause people to discriminate against a certain group, it is referred to as ________. A) preferential bias B) cultural discrimination C) statistical discrimination D) taste-based discrimination Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 23) Based on research conducted on the productivity of Hispanic and non-Hispanic workers, an employer decides to hire non-Hispanic workers. This is an example of ________. A) cultural discrimination B) special interest group discrimination C) statistical discrimination D) taste-based discrimination Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Discrimination in the Job Market 24) Which of the following statements is TRUE? A) Employers are willing to forgo profits when engaging in special interest group discrimination. B) Employers are willing to forgo profits when engaging in cultural discrimination. C) Employers are willing to forgo profits when engaging in statistical discrimination. D) Employers are willing to forgo profits when engaging in taste-based discrimination. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 25) Employers engaging in ________ are trying to enhance their profits. A) psychological bias B) moral discrimination C) statistical discrimination D) taste-based discrimination Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market

26) Which of the following correctly identifies a difference between taste-based discrimination and statistical discrimination? A) Taste-based discrimination is observed in the service sector, whereas statistical discrimination is observed in the manufacturing sector. B) Taste-based discrimination is observed in the manufacturing sector, whereas statistical discrimination is observed in the service sector. C) Employers engaging in taste-based discrimination are willing to forgo profits, whereas employers engaging in statistical discrimination are trying to enhance profits. D) Employers engaging in statistical discrimination are willing to forgo profits, whereas employers engaging in taste-based discrimination are trying to enhance profits. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 27) Suppose that employers engage in statistical discrimination based on the information that, on average, women cost more to employ than men for various reasons. As a result, employers pay women less, on average, than they pay men. Assuming that the information is correct, what would be an effect of the law that requires employers to pay the same wage as men for the same job? A) More women will be employed. B) Fewer women will be employed. C) No change in women's employment, but more men will be employed. D) No change in men's employment, but more women will be employed. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 28) Suppose that, on average, women are less likely to ask for a raise or aggressively negotiate for conditions of employment. All else being equal, employers who use statistical discrimination would ________. A) hire more women but pay them less than men B) hire more women and pay men less than women C) hire fewer women and pay them more than men D) hire fewer women and pay them same as men Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market

29) Alejandro is a computer programmer employed by XYZ Tech Corp. He is Hispanic. He gets an offer from another company that is trying to lure him away from XYZ and is willing to pay him a higher salary than XYZ pays him. Alejandro asks his boss whether the company is willing to match the offer to keep him at XYZ. His boss says, "Don't let the door hit you on your way out." Why did the boss fail to match the other firm's offer? A) taste-based discrimination B) statistical discrimination C) compensating differential D) not clear why XYZ did not match the other firm's offer Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 30) Takashi, an Asian, and Sally, a Caucasian, apply for a job that requires math skills. Takashi gets a job, because the employer bases the decision on the idea that Asians are, on average, better at math than Caucasians. This is an example of ________. A) taste-based discrimination B) statistical discrimination C) compensating differential D) difference in human capital Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 31) Takashi, an Asian, and Sally, a Caucasian, apply for a job that requires math skills. The employer administers a math test. Sally gets a high score, while Takashi does dismally. The employer knows that Asians are, on average, better at math than Caucasians are. If the employer statistically discriminates candidates but does not discriminate based on taste, ________. A) Sally would be hired B) Takashi would be hired C) both Sally and Takashi would be hired D) neither Sally nor Takashi would be hired Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market

32) Ryan and David are two recent high school graduates with the same GPA who are applying for a job. Ryan has graduated from a public school in inner city, and David has graduated from a public school in the suburbs. David gets the job. This is likely due to ________. A) compensating wage differentials B) statistical discrimination in the job market C) taste-based discrimination in the job market D) glass ceiling in the job market Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 33) Paul wants to renovate his home and is accepting bids from different contractors. An African-American contractor bids $5,000 for the job, and a Caucasian contractor bids $5,200 for the job. Paul hires the Caucasian contractor. This is likely due to ________. A) compensating wage differentials B) statistical discrimination in the job market C) taste-based discrimination in the job market D) gender wage gap Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 34) Differentiate between taste-based discrimination and statistical discrimination. Answer: Taste-based discrimination occurs when people's preferences cause them to discriminate against a certain group. In the case of the labor market, employers are willing to forgo profits when engaging in taste-based discrimination. In contrast, statistical discrimination occurs when employers engage in discrimination to increase profits. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market 35) Why is statistical discrimination difficult to eliminate? A) Human beings naturally classify others into categories. B) Discrimination increases profits. C) Firms may be pressured to discriminate as it can save them money. D) Laws against discrimination are hard to implement. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Discrimination in the Job Market

36) Which of the following is NOT an important feature of the labor market that may give rise to differences in wages across workers? A) Differences in human capital B) Differences in physical capital C) Differences in compensating wages D) The nature and extent of discrimination in the job market Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Discrimination in the Job Market Scenario: There are two regional labor markets in a country, X and Y. Workers are equally qualified to perform the same type of job in either region. The labor demand in both markets is identical. 37) Refer to the scenario above. If in equilibrium the wage in X is greater than the wage in Y, what can explain this wage difference? A) Differences in human capital B) Differences in compensating wages C) Taste-based discrimination D) Statistical discrimination Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Discrimination in the Job Market 38) Refer to the scenario above. Let the cost of living be the same in the two regions, and suppose that workers have no non-monetary preferences with respect to the region in which they work and live. If the current wage in market X is larger than in market Y, how do you expect the markets to react? A) No change will occur because of the differences in compensating wages. B) Labor supply should increase in market X and decrease in market Y. C) Labor demand should increase in market X and decrease in market Y. D) D Labor demand should decrease in market X and increase in market Y. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Discrimination in the Job Market

39) Which of the following statements is TRUE? A) Lower wages are normally offered for jobs with better amenities. B) Jobs that are relatively risky pay a lower wage than other, safer jobs. C) Educational qualifications and wage rates are negatively correlated. D) Incentives are normally higher for desirable occupations than for undesirable occupations. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Compensating Wage Differentials 40) Which of the following is TRUE of the wage gap between the top 10 percent of earners and the bottom 10 percent of earners in the U.S. economy? A) The wage gap has increased over time. B) The wage gap has decreased over time. C) The wage gap has remained the same over time. D) There is hardly any wage gap between the two groups in the U.S. economy. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Changes in Wage Inequality over Time 41) The adoption of new technologies and the use of sophisticated equipment in the provision of medical care has greatly increased the demand for highly skilled workers relative to less-skilled workers. This development is an example of ________. A) firm-specific training B) skill-biased technological change C) taste-based discrimination D) statistical discrimination Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Changes in Wage Inequality over Time 42) Technological changes that increase the productivity of skilled workers relative to that of unskilled workers are referred to as ________ technological changes. A) skill-biased B) labor-saving C) unskilled-biased D) labor-complementary Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Changes in Wage Inequality over Time

43) Since 1967, there has not been much of a change in the income of the bottom 10 percent of earners in the U.S. economy. This can be attributed to the ________. A) adoption of labor-saving technology B) cultural and social changes in the economy C) adoption of labor-complementary technology D) adoption of skill-biased technology by most firms Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Changes in Wage Inequality over Time 44) Advances in computing power are an example of ________ technological changes. A) labor-saving B) skill-biased C) unskilled-biased D) labor-complementary Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Changes in Wage Inequality over Time 45) Advances in statistical software are an example of ________ technological changes. A) skill-biased B) labor-saving C) unskilled-biased D) labor-complementary Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Changes in Wage Inequality over Time 46) A skill-biased technological change is likely to ________. A) increase the wage of skilled labor B) increase the wage of unskilled labor C) decrease the demand for skilled labor D) increase the marginal productivity of unskilled labor Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Changes in Wage Inequality over Time

47) If a technological change lowers the wage of unskilled workers, it is an example of ________ technological change. A) a skill-biased B) an unskilled-biased C) a preferential-biased D) a statistical-biased Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Changes in Wage Inequality over Time 48) Which of the following statements is TRUE? A) Recent technological advancements tend to be complementary with skilled workers and substitutable with unskilled workers. B) If men earn more than women with the same level of education, employers must be engaging in taste-based discrimination. C) Increased wage inequality over time in the US has occurred because wages for low earners have been falling while wages for high earners have remained constant. D) Statistical discrimination cannot persist in the long run because firms are not maximizing profits. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Wage Inequality 49) Which of the following is NOT a reason that men might earn more than women on average? A) Women tend to have more education than men. B) Men are less likely to take time out of the labor force when they have children. C) Many people, both men and women, treat women as though they are less competent than men. D) Men are less risk averse and more likely to work in riskier jobs. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Wage Inequality 50) How are skilled and unskilled workers in an economy likely to be affected if firms adopt skill-biased technologies? Answer: A skill-biased technology change increases the productivity of skilled workers relative to that of unskilled workers. This increases the marginal productivity of skilled workers, causing the demand for their labor and their wages to increase. Conversely, such technology decreases the labor demand for unskilled workers and lowers their wages. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Changes in Wage Inequality over Time 70 Copyright © 2022 Pearson Education Ltd.

11.4 The Market for Other Factors of Production: Physical Capital and Land 1) Goods that are used for the production of other goods are referred to as ________. A) consumer durable goods B) consumer capital C) physical capital D) public goods Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 2) Which of the following is an example of capital? A) A cell phone bought by an individual for her younger brother B) A tractor used by a farmer for plowing his field C) A used television set purchased by a family D) Alcoholic beverages served at a corporate event Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 3) A firm should hire physical capital until ________. A) the marginal product of capital equals the rental price of capital B) the value of the marginal product of capital equals the rental price of capital C) the firm's product price equals the rental price of capital D) the wage paid to workers equals the rental price of capital Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 4) If the rental price of physical capital falls, the firm's ________. A) demand for physical capital will fall B) quantity demanded of physical capital will fall C) quantity demanded of physical capital will increase D) demand for physical capital will increase Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

5) If the marginal product of capital increases, the firm's ________. A) demand for capital will decrease B) quantity demanded of capital will decrease C) quantity demanded of capital will increase D) demand for capital will increase Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 6) If a firm's product price falls, ________. A) demand for capital will decrease B) quantity demanded of capital will decrease C) quantity demanded of capital will increase D) demand for capital will increase Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 7) A firm should consume physical capital until the value of the ________. A) total product of physical capital equals the price of physical capital B) average product of physical capital equals the price of physical capital C) marginal product of physical capital equals the price of physical capital D) marginal product of physical capital equals the value of the marginal product of labor Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 8) If the marginal product of a unit of physical capital is 10 units of output and the final good that the physical capital is used to produce is sold for $5, the value of the marginal product of physical capital equals ________. A) $2 B) $10 C) $20 D) $50 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

9) If the value of the marginal product of physical capital is $10 and the marginal product of physical capital is 5 units, the price of the finished good that the capital is used to produce is ________. A) $1 B) $2 C) $5 D) $10 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 10) If the value of the marginal product of physical capital is $30 and the price of the final good that is produced using the physical capital is $15, the marginal product of the physical capital used is ________. A) 2 units B) 5 units C) 15 units D) 30 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 11) The market price of physical capital is $10, and the market wage rate is $5. If a firm is optimally hiring an additional unit of physical capital, the value of the marginal product of physical capital is ________. A) $1 B) $2 C) $10 D) $50 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 12) If the value of the marginal product of physical capital is $20 and the value of the marginal product of labor is $5, the highest price that a firm should pay for an additional unit of physical capital is ________. A) $4 B) $5 C) $20 D) $100 Answer: C Difficulty: Medium AACSB: Application of Knowledge 73 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 13) Land is ________. A) an artificially created input whose supply is fixed B) a naturally occurring input whose supply is fixed C) an artificially created input whose supply is variable D) a naturally occurring input whose supply is variable Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 14) A firm will continue to purchase and use land until the value of the ________. A) marginal product of land equals the price of land B) average product of land equals the marginal product of land C) marginal product of land equals the marginal product of labor D) marginal product of land equals the marginal product of capital Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 15) Which of the following statements correctly identifies a difference between labor and capital? A) Capital can be rented or owned by a firm, but labor cannot be owned. B) Labor can be rented or owned by a firm, but capital cannot be owned. C) Labor is hired until the marginal product of labor equals the price of labor, whereas capital is hired until the average product of capital equals the price of capital. D) Labor is hired until the average product of labor equals the price of labor, whereas capital is hired until the marginal product of capital equals the price of capital. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 16) Which of the following statements correctly identifies a difference between labor and land? A) Land can be rented but not owned by a firm, whereas labor can be rented or owned. B) Labor can be rented but not owned, whereas land can be rented or owned by a firm. C) Labor is hired until the marginal product of labor equals the price of labor, whereas land is rented until the average product of land equals the price of land. D) Labor is hired until the average product of labor equals the price of labor, whereas land is rented until the marginal product of land equals the price of land. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 74 Copyright © 2022 Pearson Education Ltd.

17) Which of the following correctly identifies the characteristics of land and capital? A) Land and capital can both be rented and owned. B) Land is rented, whereas capital is owned. C) Land can be owned or rented, whereas capital can only be owned by a firm. D) Capital can be owned or rented by a firm, whereas land can only be owned by a firm. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 18) Which of the following correctly identifies a difference between land and capital? A) Land can be owned or rented by a firm, whereas capital cannot be owned. B) Capital can be owned or rented by a firm, whereas land cannot be owned. C) Land is created, whereas capital is a naturally occurring resource. D) Capital is created, whereas land is a naturally occurring resource. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 19) The cost of using a good for some specific period of time is called the ________ of the good. A) issue price B) rental price C) auction price D) market price Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

The following figure shows price versus demand in a given market.

20) Refer to the figure above. What is the optimal number of machines rented if the market rental price is $5 per month? A) 20 machines B) 40 machines C) 80 machines D) 100 machines Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 21) Refer to the figure above. What is the optimal number of machines rented if the market rental price is $8 per month? A) 20 machines B) 40 machines C) 160 machines D) 180 machines Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

22) Refer to the figure above. If the optimal number of machines rented is 100, the market rental price must be ________. A) $3 per month B) $4 per month C) $5 per month D) $7 per month Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land The following table shows the output of chairs produced by a firm at different units of capital rented. The price per chair is $10. Number of Machines Used 0 1 2 3 4 5 6 7

Daily Output (units) 0 10 28 46 60 70 76 80

23) Refer to the table above. When does diminishing marginal returns to capital set in? A) When the second machine is used B) When the third machine is used C) When the fourth machine is used D) When the fifth machine is used Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 24) Refer to the table above. If the rental price of machines is $140 per day, how many machines should the firm rent? A) 2 B) 3 C) 4 D) 5 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 78 Copyright © 2022 Pearson Education Ltd.

25) Refer to the table above. If the rental price of machines is $100 per day, how many machines should the firm rent to maximize profits? A) 4 B) 5 C) 6 D) 7 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 26) Refer to the table above. If the rental price of machines is $40 per day, how many machines should the firm rent to maximize profits? A) 2 B) 4 C) 6 D) 7 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 27) Refer to the table above. If the price of a chair increases to $15 and the rental price of machines is $90 per day, how many machines should the firm rent to maximize profits? A) 1 B) 3 C) 5 D) 6 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 28) Refer to the table above. If the price of a chair increases to $20 and the rental price of machines is $200 per day, how many machines should the firm rent to maximize profits? A) 2 B) 3 C) 4 D) 5 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

29) Refer to the table above. If the price of a chair decreases to $5 and the rental price of machines is $50 per day, how many machines should the firm rent? A) 2 B) 3 C) 5 D) 7 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land Scenario: Victoria Corp. makes running shoes by employing a robotics technology that requires at most a few, but highly skilled, workers for monitoring and maintenance of the robots. Each robot costs $240,000. The table below shows the marginal product of capital (MPK) per month when the firm employs one worker versus when it employs two workers. Each pair of Victoria shoes sells for $150.

30) Refer to the scenario above. If the firm decides to employ one worker, how many robots should it use? A) None B) 1 C) 2 D) 3 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 31) Refer to the scenario above. If the firm decides to employ one worker, and the wage is $40,000 per month, the firm's maximum profit is ________. A) $10,000 B) $20,000 C) $30,000 D) $40,000 Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

32) Refer to the scenario above. If the firm decides to employ two workers, how many robots should it use? A) None B) 1 C) 2 D) 3 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 33) Refer to the scenario above. If the firm decides to employ two workers, and the wage for each worker is $40,000 per month, the firm's maximum profit is ________. A) $10,000 B) $20,000 C) $30,000 D) $40,000 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 34) Refer to the scenario above. If the wage is $40,000 per month per worker, should the firm hire one worker or two workers? A) One worker, because one worker costs less than two workers B) One worker, because the firm's maximum profit will be higher than it would be for hiring two C) Two workers, because two workers generate more revenue D) Two workers, because the firm's maximum profit will be higher than it would be hiring one Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

Scenario: Mark grows herbs in his backyard. The following table shows his output as a function of the square feet of land used. Land (square feet) 0 1 2 3 4 5 6

Output (pounds) 0 10 22 31 39 46 52

35) Refer to the scenario above. What is the marginal product of land when the second square foot of land is used? A) 8 B) 9 C) 10 D) 12 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 36) Refer to the scenario above. What is the marginal product of land when the third square foot of land is used? A) 8 B) 9 C) 10 D) 12 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 37) Refer to the scenario above. If Mark can sell his herbs at the price of $2.50 per pound, what is the value marginal product of land when the second square foot of land is used? A) $55 B) $5 C) $10 D) $30 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 82 Copyright © 2022 Pearson Education Ltd.

38) Refer to the scenario above. Suppose Mark can sell his herbs at the price of $2.50 per pound, and that the rental price of land is $70 per square foot. How big of an herb garden should Mark maintain? A) A 2 square foot garden B) A 3 square foot garden C) A 4 square foot garden D) A 5 square foot garden Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 39) Refer to the scenario above. Suppose Mark can sell his herbs at the price of $2.50 per pound, and that the rental price of land is $80 per square foot. How big of an herb garden should Mark maintain? A) A 2 square foot garden B) A 3 square foot garden C) A 4 square foot garden D) A 5 square foot garden Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 40) Suppose a firm uses land, labor, and capital for its production process. If it is renting the equilibrium quantity of all three factors of production, then which of the following conditions will be TRUE? A) Marginal product from the last dollar spent on land = Marginal product from the last dollar spent on labor > Marginal product from the last dollar spent on capital B) Marginal product from the last dollar spent on land > Marginal product from the last dollar spent on labor > Marginal product from the last dollar spent on capital C) Marginal product from the last dollar spent on land > Marginal product from the last dollar spent on labor = Marginal product from the last dollar spent on capital D) Marginal product from the last dollar spent on land = Marginal product from the last dollar spent on labor = Marginal product from the last dollar spent on capital Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

41) The following table shows the number of machines used and the daily output of a firm manufacturing notebooks. Number of Machines Used 0 1 2 3 4 5 6 7

Daily Output 0 10 26 38 50 60 66 70

a) Calculate the marginal product of capital at different levels of employment. If the market price of each notebook is $3, calculate the value of the marginal product of capital. b) How many machines should the firm rent if the rental price of each machine is $12 per day? How many machines should the firm rent if the rental price increases to $30 per day? Answer: a) The marginal product and the value of the marginal product are calculated in the following table. Number of Machines Used 0 1 2 3 4 5 6 7

Daily Output (units) 0 10 26 38 50 60 66 70

Value of Marginal Marginal Product = Marginal Product (units) Product × $3 ($) — — 10 30 16 48 12 36 12 36 10 30 6 18 4 12

b) The firm should rent machines to a point where the value of the marginal product of capital equals the rental price of capital. If the rental price is $12 per day, the firm should rent 7 machines. If the rental price increases to $30 per day, the firm should rent 5 machines. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

The following figure depicts a specific firm's production with respect to the number of machine used.

42) Refer to the figure above. If the rental price of machines is $120 per day and the value of one unit of output is $20, how many machines should the firm rent to maximize profits? A) 2 B) 3 C) 4 D) 5 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 43) Refer to the figure above. If the rental price of machines is $80 per day and the value of one unit of output is $20, how many machines should the firm rent to maximize profits? A) 2 B) 3 C) 4 D) 5 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land

44) Refer to the figure above. If the rental price of machines is $40 per day and the value of one unit of output is $20, how many machines should the firm rent to maximize profits? A) 2 B) 3 C) 4 D) 5 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 45) Refer to the table above. If the rental price of machines is $180 per day and the firm decides to use 3 machines, what must be the value of a unit of output? A) $10 B) $20 C) $30 D) $60 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 46) Refer to Goldin and Rouse's study of auditions at national orchestras reported in the Evidence-Based Economics segment in the textbook. What is the evidence for discrimination in national orchestras presented in the study of audition data? Answer: Female musicians who made it to the final stage of auditions, after preliminary and semifinal stages, were 33 percent more likely to be hired if the audition was blind, meaning that the judges did not observe the gender of the person auditioning. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Is There Discrimination in the Labor Market?

47) Refer to Charles and Guryan's study of wage data reported in Evidence-Based Economics segment in the textbook. They have found that there is a gap in wages between AfricanAmericans and Caucasian-Americans. a) How much of the gap is attributed to discrimination? b) What other factors did the economists consider as possible causes for the gap? Why is it important to consider other factors? c) Is the discrimination found in the study taste-based or statistical? Answer: a) As much as 25 percent of the difference in wages between the two groups is attributable to discrimination. b) The economists also took into account the possibility that the wage gap may be due to difference in human capital, productivity, and compensating wage differentials. If the types of jobs or skill level required for jobs are systematically different between the two groups of workers, we would see the wage gap even if employers do not engage in discrimination. c) It is not reported whether the discrimination found by the economists is taste-based or statistical. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Is There Discrimination in the Labor Market? 48) All of the following are research studies that try to measure discrimination in the job market, EXCEPT for ________. A) blind auditions for hiring musicians B) sending job applications with identical resumes with white- and black-sounding names C) accounting for human capital and compensating wage differentials of men and women D) comparing the wages of veterans versus civilians Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Is There Discrimination in the Labor Market? 49) Which of the following statements is FALSE about the evidence presented on discrimination in labor markets? A) It is easy for economists to identify whether discrimination in labor markets is taste-based or statistical. B) The studies by Goldin and Rouse on orchestra auditions and Bertrand and Mullainathan on ethnic sounding names on resumes are field experiments. C) The study by Bertrand, Goldin, and Katz showed that differences in family responsibilities may be a large contributor to male-female wage differences. D) Charles and Kuryan found that wage differences between Caucasians and African-Americans are large even after controlling for other factors that might contribute to wage differences, but found that this unexplained wage difference has been shrinking over time. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Market for Other Factors of Production: Physical Capital and Land 87 Copyright © 2022 Pearson Education Ltd.

Appendix: Monpsony in the Labor Market 1) Which of the following statements is TRUE? A) Monopsony power in labor markets decreases social surplus relative to perfectly competitive labor markets. B) Employment will be lower with monopsony power in labor markets than in perfectly competitive labor markets, but wages will be higher. C) Worker surplus can either be higher or lower when there is monopsony power in labor markets. D) Firms face the entire downward sloping market labor demand curve when they are a monopsonist whereas perfectly competitive firms face a horizontal labor demand curve. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Appendix: Monopsony Power in Labor Markets A monopsonist's demand for labor can be written as VMPL = 40 — 0.01L. Labor is supplied to the firm according to w = 5 + 0.02L. Thus, the firm's marginal cost of hiring workers when it hires off of this supply schedule is MCL = 5 + 0.04L, where w is the daily wage and L is the number of days of work. 2) How many days of work should the monopsonist hire? A) 700 B) 900 C) 1166.67 D) 1500 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Appendix: Monopsony Power in Labor Markets 3) Which of the following statements is TRUE regarding the monopsonist above? A) The monopsony outcome generates a loss of roughly $3267 in social surplus B) The monopsonist will pay $33 per day C) Worker surplus will equal $14700 D) Firm surplus will equal $2450 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Appendix: Monopsony Power in Labor Markets

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 12 Monopoly 12.1 Introducing a New Market Structure Scenario: The following excerpt is from "Throwing the Book at Apple" (Wall Street Journal, Review and Outlook, June 12, 2013): At the time, prior to the existence of the tablet device market that Jobs created with the iPad, Apple did not sell e-books. Amazon sold nine of every 10. Justice claims Jobs then forced Amazon and every other e-book distributor to adopt a new e-book pricing model that harmed consumers. Yet the average retail price for "trade" e-books has since dropped to $7.34 from $7.97, and Amazon's Kindle is still the industry leader with Apple trailing in third. Over the same period readers bought 447% more e-books, and they can choose from dozens of tablets for titles and other media content. 1) Refer to the scenario above. Is Apple Inc. a monopolist in the e-book market? A) Yes, because it is the only seller of e-books without actual or potential competitors. B) Yes, because it has the power to affect the prices of e-books. C) No, because it is not the only seller of e-books without actual or potential competitors. D) No, because it does not have the power to affect the prices of e-books. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 2) Refer to the scenario above. What market structure best describes the e-book market? A) A monopoly B) A competitive market with a few dominant firms producing substitutes C) A competitive market with a few dominant firms producing identical goods D) A perfectly competitive market Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introducing a New Market Structure

3) Suppose that a firm in a competitive market succeeds in producing a superior product and selling it at a price that generates a large demand. As a result, the firm's market share is almost 100 percent. Meanwhile, other firms are trying to regain their market shares through research and development. Is this firm a monopolist? A) Yes, because it has a power to dictate the price consumers must pay. B) Yes, because it is virtually the only firm in the market. C) No, because it does not have a power to dictate the price consumers must pay. D) No, because it faces potential competition from other companies. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introducing a New Market Structure 4) U.S. Code Title 18 § 1696 states Whoever establishes any private express for the conveyance of letters or packets, or in any manner causes or provides for the conveyance of the same by regular trips or at stated periods over any post route which is or may be established by law, or from any city, town, or place to any other city, town, or place, between which the mail is regularly carried, shall be fined not more than $500 or imprisoned not more than six months, or both…. The Code of Federal Regulation (CFR) Title 39 Section 310.2 states It is generally unlawful under the Private Express Statutes for any person other than the Postal Service in any manner to send or carry a letter on a post route or in any manner to cause or assist such activity. Violation may result in injunction, fine or imprisonment or both and payment of postage lost as a result of the illegal activity… Under these laws, the U.S. Postal Service ________. A) has a monopoly power over private express mail B) has a comparative advantage over private express mail C) competes in an oligopoly market for private express mail D) competes in a monopolistic competition against other private express mail carriers Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introducing a New Market Structure

5) A market structure in which there is no competition is referred to as a(n) ________. A) monopoly B) oligopoly C) monopsony D) monopolistically competitive market Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 6) Compared to a firm under perfect competition, a monopolist ________. A) charges less and produces less B) charges less and produces more C) charges more and produces less D) charges more and produces more Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 7) Compared to a perfectly competitive industry, ________ in a monopoly. A) both consumer surplus and social surplus are larger B) consumer surplus is lower but social surplus is larger C) both consumer surplus and social surplus are smaller D) consumer surplus is higher but social surplus is smaller Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 8) A market structure in which identical goods are produced by several different firms and sold at the market-determined price is referred to as ________. A) an oligopoly B) a monopoly C) perfect competition D) monopolistic competition Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure

9) The effect of the invisible hand is likely to be the strongest in ________. A) an oligopoly B) a monopoly C) perfect competition D) monopolistic competition Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 10) Which of the following market structures provides socially efficient outcomes? A) An oligopoly B) A monopoly C) Perfect competition D) Monopolistic competition Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 11) A price-maker is a firm that ________. A) has the power to affect the price of the product it sells B) earns economic profits in both the short run and the long run C) can sell any quantity of its product at the prevailing market price D) sells its products at a price equal to the marginal cost of production Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 12) Firms with market power ________. A) are price takers B) have constant marginal costs C) always earn positive economic profits D) have the ability to affect price Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure

13) ________ refers to the ability of sellers to affect market prices. A) Goodwill B) Market hold C) Market power D) Capital adequacy Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 14) A firm with market power ________. A) faces a horizontal demand curve B) faces a downward-sloping demand curve C) has no ability to affect price D) has long-run economic profits of zero Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 15) In which of the following market structures does a seller have NO market power? A) Monopoly B) Oligopoly C) Perfect competition D) Monopolistic competition Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 16) Sellers in ________ are likely to have the highest market power. A) a monopoly B) an oligopoly C) perfect competition D) monopolistic competition Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure

17) A monopoly is characterized by ________. A) taking price as given B) producing where Price = Marginal cost C) selling a good for which there are no close substitutes D) selling identical goods Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 18) ________ is a market structure where only one firm provides a good or service that has no close substitutes. A) An oligopoly B) A monopoly C) Perfect competition D) Monopolistic competition Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 19) Diet Coke ________ considered a product in a monopoly market, because ________. A) is; it has only one producer: CocaCola company B) is not; it has many substitutes C) is; the CocaCola company has market power D) is not; because it is produced in factories around the world Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 20) The price chosen by a monopolist ________. A) maximizes social surplus B) maximizes consumer surplus C) is dependent on the production of other firms D) is independent of the production of other firms Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure

21) Compared to other market structures, monopolists ________. A) maximize social surplus B) encourage the entry and exit of new firms C) set price lower than marginal revenue D) produce goods that do not have close substitutes Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 22) Which of the following statements is TRUE? A) A monopolist's product often has close substitutes. B) Firms under perfect competition produce differentiated products. C) Firms under monopolistic competition produce identical products. D) Firms under oligopoly produce either identical or differentiated products. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 23) Which of the following is an example of a good produced under perfect competition? A) Cars B) Corn C) Bottled water D) Patented software Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introducing a New Market Structure 24) Which of the following is an example of a good produced under monopoly? A) DVDs B) Books C) Aerated drinks D) Patented software Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introducing a New Market Structure

25) In the long run, a monopolist ________. A) will earn zero economic profits B) always earns positive economic profits C) may earn positive economic profits D) will produce where Price = Marginal cost Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introducing a New Market Structure 26) A fundamental feature of a monopolistic market is that the firm ________. A) can sell any quantity it desires at the current market price B) can obtain any price for any quantity of output C) faces a perfectly inelastic demand curve D) faces the price and quantity trade-off dictated by market demand Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introducing a New Market Structure 27) Which of the following is an example of a good produced under monopoly? A) Steak at a steakhouse B) A Mac laptop C) Diet Coke D) A patented drug Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introducing a New Market Structure 28) Which of the following products is most likely sold in a monopolistic market? A) Electricity B) Your economics textbook C) iPhones D) a Spotify subscription Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introducing a New Market Structure

29) Suppose there are two market structures: Market A and Market B. Market A is characterized by the free entry and exit of firms, and the firms in the market face a horizontal demand curve. Market B has only one seller. a) Identify the market structures. b) Comment on the pricing mechanism, long-run profitability, and social surplus under both market structures. Answer: a) Firms in Market A face a horizontal demand curve. This implies that the market demand is perfectly elastic and that all firms will be price-takers. Hence, Market A is a perfectly competitive market. Market B has only one seller. A market where there is a single seller is a monopoly. Hence, Market B is a monopoly. b) Firms in Market A will price their products at the marginal cost corresponding to the output sold. In contrast, the seller in Market B will price its product higher than the marginal cost corresponding to the output sold. Firms in Market A will earn zero profits in the long run, whereas the seller in Market B can earn positive economic profits in the long run. Social surplus is maximized in Market A, whereas social surplus is not maximized in Market B. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Introducing a New Market Structure 12.2 Sources of Market Power 1) The monopoly market structure is characterized by ________. A) low barriers to entry B) free entry and exit C) high barriers to entry D) government regulation of price Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sources of Market Power 2) Which of the following statements is TRUE? A) A monopoly is characterized by no entry barriers. B) Perfect competition is characterized by high entry barriers. C) Firms in a market with entry barriers are likely to have more market power than firms in a market with no entry barriers. D) Firms in a market with no entry barriers are likely to have more market power than firms in a market with entry barriers. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sources of Market Power

3) Which of the following is NOT a barrier to entry? A) Economies of scale B) Patent laws C) Decreasing marginal costs D) Licensing Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sources of Market Power 4) Natural barriers to entry ________. A) include patent laws and exclusive franchises B) most commonly arise through economies of scale C) result from an increasing long-run average cost curve D) must be sustained by government regulation Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sources of Market Power 5) When a firm obtains market power through barriers to entry created not by the firm, but by the government, it is referred to as ________. A) legal market power B) regulated market power C) natural market power D) differentiated market power Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Legal Market Power 6) A ________ is the privilege granted to an individual or company by the government that gives them the sole right to produce and sell a good. A) brand B) patent C) copyright D) trademark Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Legal Market Power

7) Which of the following is an example of legal market power? A) A patent B) The presence of a network externality C) Control of a key resource D) Economies of scale Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Legal Market Power 8) Greenaqua Corp. was given the exclusive right to produce and sell its newly introduced water purifier for 20 years. The right granted to Greenaqua is an example of a ________. A) patent B) blueprint C) copyright D) trademark Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Legal Market Power 9) A ________ is an exclusive right granted by the government to an author's intellectual property. A) patent B) blueprint C) copyright D) trademark Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Legal Market Power 10) A copyright is a source of ________ market power. A) legal B) natural C) regulated D) competitive Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Legal Market Power

11) A musician was guaranteed by the government that no one else could replicate or sell her music CDs. This is an example of a ________. A) brand B) patent C) copyright D) trademark Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Legal Market Power 12) Differentiate between a patent and a copyright. Answer: A patent is the privilege granted to an individual or company by the government that gives them the sole right to produce and sell a good. On the other hand, a copyright is an exclusive right granted by the government to an author's intellectual property. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Legal Market Power 13) U.S. Code Title 18 § 1696 states Whoever establishes any private express for the conveyance of letters or packets, or in any manner causes or provides for the conveyance of the same by regular trips or at stated periods over any post route which is or may be established by law, or from any city, town, or place to any other city, town, or place, between which the mail is regularly carried, shall be fined not more than $500 or imprisoned not more than six months, or both…. The Code of Federal Regulation (CFR) Title 39 Section 310.2 states It is generally unlawful under the Private Express Statutes for any person other than the Postal Service in any manner to send or carry a letter on a post route or in any manner to cause or assist such activity. Violation may result in injunction, fine or imprisonment or both and payment of postage lost as a result of the illegal activity… Under these laws, the U.S. Postal Service has ________. A) a legal market power in the private express mail market B) a natural market power in the private express mail market C) no market power in the private express mail market D) no market power in the non-private express mail market Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Legal Market Power

14) Which of the following is a current example of a monopoly granted by legal market power? (You need to do some information gathering for this problem.) A) Diamond mining B) Alcohol sales in Sweden C) Telecommunication in the United States D) Oil market Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Legal Market Power 15) Which of the following is an example of a monopolist granted a legal market power? (You need to do some information gathering for this problem.) A) American Telephone and Telegraph Company until 1984 B) Major League Baseball in the United States C) Salt Commission in China in the eighth and ninth centuries (Tang Dynasty). D) All of the above Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Legal Market Power 16) If a monopolist owns or controls a key resource necessary for production, the ownership of the resource is a source of ________ market power. A) legal B) natural C) regulated D) restricted Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Natural Market Power 17) Which of the following is NOT an example of natural market power? A) Economies of scale B) A copyright C) Control of a key resource D) Presence of a network externality Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Natural Market Power

18) In Barylia, Greenaqua Corp. is the sole controller of a resource required for the production of bottled drinking water. Therefore, Greenaqua Corp. enjoys ________ market power. A) legal B) natural C) regulated D) competitive Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Natural Market Power 19) During the early twentieth century, Alcoa bought up several bauxite (a source of aluminum ore) mines in the Caribbean. This is an example of ________. A) natural market power B) low barriers to entry C) legal market power D) a patent Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Natural Market Power 20) Economies of scale in production act as a source of ________ market power. A) legal B) natural C) competitive D) regulated Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Natural Market Power

21) Which of the following graphs correctly represents a natural monopoly market?

A) Market 1 B) Market 2 C) Market 3 D) Both market 1 and market 3 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Natural Market Power 22) Natural monopolies are characterized by facing a(n) ________. A) horizontal demand curve B) constant average cost curve C) declining average cost curve D) increasing average cost curve Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Natural Market Power 23) You are good at creating Web sites. You make a social media Web site similar to Facebook, but after a while your Web site does not get enough attention and your business fails. This is because ________. A) Facebook has a patent on social media and it challenges you in court B) of the increasing average costs of running the Web site C) of the network externality already established for Facebook D) of the high costs of entering this market Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Control of Key Resources

24) A key resource is a material that is ________. A) unlimited in supply B) rationed by the government C) available only to monopolies D) essential for the production of a good Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Control of Key Resources 25) A network externality occurs when ________. A) the value of a product increases as more consumers start to use it B) firms collude to sell products at a price higher than the equilibrium market price C) a firm that has control over key resources auctions the resources off to other firms D) the government interferes to prevent the concentration of market power in the hands of a few firms Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Control of Key Resources 26) John uses WhatsApp Messenger to communicate with his friends. When he initially started using it, the messenger was not very popular among his friends, and John did not spend much time on it. As more and more of John's friends started using the messenger, the messenger's value to John increased substantially. What kind of externality is reflected in this example? Answer: This is an example of a network externality. A network externality occurs when a product's value increases as more consumers begin to use it. As more of John's friends started using the messenger, he could communicate with more people, increasing the messenger's value to John. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Control of Key Resources 27) Suppose that a fire-fighting service is offered by private firms and property owners can purchase the service for a fee (or not purchase the service). Does fire-fighting service have network externalities? Answer: It does not. A product or service has a network externality when its value increases as more consumers begin to use it. Having a fire-fighting service benefits a property owner in case a fire starts in his/her property but it also benefits (external benefit) the property owner's neighbors because the chance of fire spreading is reduced. The more neighbors buy the service, the more external benefit a property owner enjoys. Thus it is possible that a sufficiently cautious property owner decides not to buy the service. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Control of Key Resources 16 Copyright © 2022 Pearson Education Ltd.

28) As a firm increases its output, its average total cost decreases. This is an outcome of ________. A) the law of demand B) economies of scale C) diseconomies of scale D) the law of diminishing returns Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Economies of Scale 29) Average total cost decreases with an increase in output because ________. A) total variable cost decreases with an increase in output B) average fixed cost decreases with an increase in output C) the marginal cost of production increases with an increase in output D) diminishing marginal returns set in after a particular level of production Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale 30) The main source of natural market power for a monopoly firm is ________. A) the existence of economies of scale in production B) patents and copyrights C) government-regulated pricing policy D) the price elasticity of demand for the product produced by the firm Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Economies of Scale

31) Firm A is a monopoly because of network effects, whereas Firm B is a natural monopoly. Which of the following statements is likely to be TRUE in this context? A) The average total costs of both firms decrease as they increase their output. B) The value of the product that both firms produce increases with an increase in the number of buyers. C) Firm A enjoys a monopoly status because its marginal cost decreases with increase in output, whereas Firm B enjoys a monopoly status because the value of its product increases as more consumers buy it. D) Firm B enjoys a monopoly status because its average total cost decreases with increase in output, whereas Firm A enjoys a monopoly status because the value of its product increases as more consumers buy it. Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Economies of Scale 32) Which of the following statements is TRUE? A) Network effects arise because of economies of scale. B) Economies of scale arise because of network effects. C) Economies of scale act as barriers to entry into a market. D) Network effects provide incentives for new sellers to enter the market. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale 33) Why does the economy of scale lead to a monopoly situation in the market? A) Because it provides legal barriers to entry into this market B) Because a new firm in this market will face high average costs and cannot compete C) Because it gives control of natural resources to only one firm D) Because network effects provide incentives for new sellers to enter the market Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale 34) Which of the following statements is TRUE? A) Network effects act as barriers to entry in a market. B) Economies of scale act as incentives for new firms to enter a market. C) If a firm is enjoying economies of scale, then its product must have network effects. D) If a firm's product has network effects, then the firm must be enjoying economies of scale. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale 18 Copyright © 2022 Pearson Education Ltd.

35) Which of the following statements correctly identifies a similarity between network effects and economies of scale? A) Both are related to the costs incurred by a firm. B) Both act as barriers to entry in a market. C) Both act as disincentives to monopolies. D) Both are related to the number of consumers using a firm's product. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale 36) If a new seller enters a market to compete with an existing natural monopoly, it will ________. A) decrease costs for both sellers B) increase the costs of production for both sellers C) increase the production costs for the existing seller, and decrease the production costs for the new entrant D) decrease the production costs for the existing seller, and increase the production costs for the new entrant Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale 37) Everything else remaining unchanged, if a new seller enters a market to compete with an existing monopoly that is enjoying economies of scale, it will lead to ________. A) higher profits for both firms B) higher profits for the existing firm C) lower profits for the existing firm D) greater market power for the existing firm Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale

38) Which of the following statements is TRUE? A) A natural monopoly always arises from government intervention in the market. B) An increase in consumer demand can change a natural monopoly into a multiseller market. C) A natural monopoly earns higher profits than a monopolistically competitive firm because it faces an upward-sloping market demand curve. D) A natural monopoly earns higher profits than a monopolistically competitive firm because it faces a horizontal market demand curve. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale 39) What are the types of market power? How do they arise? Answer: There are two types of market power: i) Legal market power: Legal market power arises when the government grants exclusive production rights to particular firms, thus creating barriers to entry. ii) Natural market power: Natural market power arises when barriers to entry occur naturally. This can happen when a firm owns or controls a key resource necessary for production or when a firm enjoys economies of scale over the relevant range of output. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale 40) Which of the following is NOT an example of economies of scale? A) To produce tap water, the water companies had to invest in a huge network of water pipes. B) Supermarkets can benefit from economies of scale, because they can buy food in bulk and get lower average costs. C) Producing oil from tar sands in Alberta can generate profits only when the world price of a barrel of oil is high. D) A bigger financial firm gets a lower rate of interest when borrowing. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Economies of Scale 41) Which of the following is NOT an example of a natural monopoly? A) Drinking water distribution B) Electricity transmission C) Interstate highway construction D) Alcohol sales Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Economies of Scale 42) Which of the following is NOT a barrier to entry? 20 Copyright © 2022 Pearson Education Ltd.

A) Netflix streams many newly released movies. B) Alcoa owns a majority of the world's bauxite mines. C) Moderna is the only firm legally allowed to produce and sell its coronavirus vaccine. D) Spectrum Cable has a network of cable throughout Durham, NC allowing them to provide cable TV and internet service to households at a very low marginal cost and a lower average total cost than their competitors. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Sources of Market Power 43) The Bubba Gump Shrimp Company had a monopoly in the shrimping industry in Alabama when a hurricane destroyed all shrimp boats except theirs. Which of the following statements is TRUE? A) The Bubba Gump Shrimp Company will briefly have control of a key resource for shrimping. B) Bubba Gump's monopoly is due to economies of scale. C) Bubba Gump's monopoly is due to network externalities. D) The Bubba Gump Shrimp Company would easily be able to maintain monopoly power and monopoly profits in the long run. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sources of Market Power 12.3 The Monopolist's Problem 1) A monopolist faces ________. A) the market demand curve B) a horizontal demand curve at the market price C) a vertical demand curve D) several close substitutes for its product or service Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Monopolist's Problem

2) Which of the following statements is TRUE? A) A monopolist faces an upward-sloping demand curve. B) A perfectly competitive firm faces an upward-sloping demand curve. C) A monopolist can increase the price of its product and not lose all of its business. D) A perfectly competitive firm can increase the price of its product without losing its business. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Monopolist's Problem 3) Which of the following statements is TRUE? A) A monopoly is a price-taker because it faces a downward-sloping demand curve. B) A monopoly is a price-maker because it faces a downward-sloping demand curve. C) A perfectly competitive firm is a price-taker because it faces a downward-sloping demand curve. D) A perfectly competitive firm is a price-maker because it faces a downward-sloping demand curve. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Monopolist's Problem 4) If a monopolist decides to charge a higher price for its product, it will yield a ________ revenue per unit sold and ________ number of units sold. A) lower; higher B) lower; lower C) higher; lower D) higher; higher Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Monopolist's Problem 5) How is the demand curve faced by a perfectly competitive firm different from that faced by a monopoly? How does it affect its pricing policies? Answer: A perfectly competitive firm faces a horizontal demand curve for their product, while a monopolist faces a downward-sloping demand curve for its product. A horizontal demand curve implies perfectly elastic demand. This means that if perfectly competitive firms lose all their business if they set their product prices above the market price. This makes them price-takers. In contrast, the downward-sloping demand curve faced by a monopolist implies that a monopolist can sell a lower quantity at a higher price, and vice versa. Hence, monopolies have the option of setting the market price for their products, which makes them price-makers. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Monopolist's Problem 22 Copyright © 2022 Pearson Education Ltd.

6) Which of the following firms is most likely to have a constant marginal cost? A) A firm that is a price-taker B) A firm that has extremely high fixed costs C) A firm that has extremely high variable costs D) A firm that faces a horizontal demand curve Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Revenue Curves 7) For a monopolist, ________. A) Marginal revenue > Price B) Marginal revenue = Price C) Marginal revenue < Price D) Price = Marginal cost Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Revenue Curves 8) Marginal revenue is less than the price for a monopolist because ________. A) a monopolist must lower its price to sell another unit of output B) the firm sets the price C) there are no close substitutes for the firm's product D) none of the above Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Revenue Curves

The following table shows the quantities of a good sold by a monopolist at different prices. Quantity (units) 150 200 250 300 350 400 450

Price ($) 9 8 7 6 5 4 3

9) Refer to the table above. What is the total revenue of the monopolist when it charges a price of $9? A) $1,250 B) $1,350 C) $1,750 D) $2,250 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 10) Refer to the table above. What is the total revenue of the monopolist when it charges a price of $6? A) $1,550 B) $1,800 C) $2,150 D) $3,200 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 11) Refer to the table above. What is the total revenue of the monopolist when it charges a price of $3? A) $1,050 B) $1,350 C) $1,750 D) $2,750 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves

12) Refer to the table above. Which of the following statements is TRUE of the monopolist's total revenue? A) As the monopolist reduces the price of its product from $9 to $3, its total revenue decreases. B) As the monopolist reduces the price of its product from $9 to $3, its total revenue increases. C) As the monopolist reduces the price of its product from $9 to $3, its total revenue increases and then decreases. D) As the monopolist reduces the price of its product from $9 to $3, its total revenue decreases and then increases. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 13) Refer to the table above. What is the marginal revenue of the monopolist when it sells 200 units of its product? A) $2 B) $5 C) $7 D) $9 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 14) Refer to the table above. What is the marginal revenue of the monopolist when it sells 300 units of its product? A) $1 B) $2 C) $3 D) $4 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 15) Refer to the table above. What is the marginal revenue of the monopolist when it sells 400 units of its product? A) $2 B) ‒$2 C) $3 D) ‒$3 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 25 Copyright © 2022 Pearson Education Ltd.

16) Refer to the table above. Which of the following statements is TRUE of the monopolist's marginal revenue? A) As the monopolist reduces the price of its product from $9 to $3, the marginal revenue decreases. B) As the monopolist reduces the price of its product from $9 to $3, the marginal revenue increases. C) As the monopolist reduces the price of its product from $9 to $3, the marginal revenue first increases and then decreases. D) As the monopolist reduces the price of its product from $9 to $3, the marginal revenue first decreases and then increases. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves

The figure below shows the demand curve in a monopoly market.

17) Refer to the figure above. Which of the four dashed lines represent the marginal revenue of this monopoly firm? A) Line 1 B) Line 2 C) Line 3 D) Line 4 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Revenue Curves 18) Refer to the figure above. This monopolist initially produced 6 units and now has a new plan to produce 8 units of this good. The price effect of this plan on the revenue of the monopolist is ________. A) $3 B) +$6 C) $1 D) +$7 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Revenue Curves

19) Refer to the figure above. This monopolist initially produced 6 units, and now has a new plan to produce 8 units of this good. The quantity effect of this plan on the revenue of the monopolist is ________. A) $3 B) +$6 C) $1 D) +$7 Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Revenue Curves Scenario: Mr. Olivander has a monopoly on supplying magic wands. The table below shows the demand schedule for magic wands per day. Price $100 $90 $65 $55 $35 $20 $15

Quantity Demanded 0 1 2 3 5 9 12

20) Refer to the scenario above. What is Mr. Olivander's total revenue when he charges a price of $65 for his wands? A) $65 B) $130 C) $30 D) $170 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 21) Refer to the scenario above. What is Mr. Olivander's marginal revenue when he sells three wands? A) $55 B) $130 C) $30 D) $35 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 28 Copyright © 2022 Pearson Education Ltd.

22) Refer to the scenario above. Mr. Olivander used to sell only one wand per day. Now he plans to increase his sale to two wands. The price effect of this plan is a ________, and the quantity effect of this plan is a ________ in his revenue. A) $25 decrease; $65 increase B) $90 decrease; $65 increase C) $130 increase; $90 decrease D) $65 decrease; $90 increase Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Revenue Curves 23) Refer to the scenario above. Mr. Olivander used to sell two wands per day. Now he plans to cut back his sale to only one wand. The price effect of this plan is a ________, and the quantity effect of this plan is a ________ in his revenue. A) $25 decrease; $130 increase B) $90 decrease; $65 increase C) $25 increase; $65 decrease D) $65 decrease; $90 increase Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Revenue Curves 24) Refer to the scenario above. Mr. Olivander used to sell five wands per day. Now he plans to increase his sale to nine wands. The price effect of this plan is a ________, and the quantity effect of this plan is a ________ in his revenue. A) $15 decrease; $20 increase B) $125 decrease; $80 increase C) $45 increase; $90 decrease D) $35 decrease; $120 increase Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Revenue Curves

25) The quantity effect of a price decrease by a monopolist is based on the law of ________. A) supply B) demand C) increasing returns D) diminishing returns Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Revenue Curves 26) The quantity effect of a price reduction causes a(n) ________. A) decrease in revenue due to a lower price B) increase in revenue due to increased sales C) increase in labor demand due to increased sales of the product D) decrease in labor demand due to a lower price of the final product Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Revenue Curves 27) For a firm with market power, the price effect is the ________. A) increase in revenue from selling one more unit of output B) decrease in revenue from selling one more unit of output C) decrease in revenue arising from the reduction in price necessary to sell another unit of output D) increase in revenue arising from the reduction in price necessary to sell another unit of output Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Revenue Curves 28) Over a particular price range, if the quantity effect of a price decrease is larger than the price effect, it implies that ________ for that price range. A) demand is inelastic B) demand is elastic C) the demand curve is vertical D) the demand curve is upward sloping Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Revenue Curves

29) Over a particular price range, if the quantity effect of a price decrease is smaller than the price effect, it implies that ________ for that price range. A) demand is elastic B) demand is inelastic C) the demand curve is horizontal D) the demand curve is upward sloping Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Revenue Curves Scenario: When a monopolist charges $5 for its product, it sells 250 units of the product. When it decreases the price of the product to $4, it sells 325 units of the product. 30) Refer to the scenario above. What is the quantity effect of the price change? A) $50 B) $75 C) $150 D) $300 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 31) Refer to the scenario above. What is the price effect of the price change? A) $50 B) $75 C) $100 D) $250 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 32) Refer to the scenario above. What is the change in total revenue due to the price reduction? A) Total revenue increases by $25. B) Total revenue increases by $50. C) Total revenue decreases by $105. D) Total revenue decreases by $175. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves

33) Refer to the scenario above. Which of the following is TRUE of the demand curve for the product in the price range $4 to $5? A) The demand curve is elastic. B) The demand curve is inelastic. C) The demand curve is horizontal. D) The demand curve is upward sloping. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves Scenario: When a monopolist charges $10 for its product, it sells 500 units of the product. When it lowers the price to $6, it sells 1,400 units of the product. 34) Refer to the scenario above. What is the quantity effect of the price change? A) $1,400 B) $2,700 C) $5,400 D) $6,750 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 35) Refer to the scenario above. What is the price effect of the price change? A) $1,750 B) $2,000 C) $3,750 D) $5,400 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 36) Refer to the scenario above. What is the change in total revenue due to the price change? A) Total revenue increases by $350. B) Total revenue increases by $3,400. C) Total revenue decreases by $1,650. D) Total revenue decreases by $2,275. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves

37) Refer to the scenario above. Which of the following statements is TRUE of the demand curve that the monopolist faces in the price range $6 to $10? A) The demand curve is elastic. B) The demand curve is inelastic. C) The demand curve is vertical. D) The demand curve is upward sloping. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves The following figure shows the demand curve faced by a monopolist.

38) Refer to the figure above. What is the quantity effect of a price reduction from $6 to $4? A) $600 B) $800 C) $1,000 D) $1,200 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves

39) Refer to the figure above. What is the price effect of a price reduction from $6 to $4? A) $300 B) $600 C) $900 D) $1,200 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 40) Refer to the figure above. What is the change in total revenue due to a price reduction from $6 to $4? A) Total revenue increases by $300. B) Total revenue decreases by $600. C) Total revenue increases by $200. D) Total revenue increases by $600. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 41) Refer to the figure above. What is the quantity effect of a price increase from $3 to $5? A) $200 B) $600 C) $800 D) $1,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 42) Refer to the figure above. What is the price effect of a price increase from $3 to $5? A) $200 B) $400 C) $800 D) $1,000 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves

43) Refer to the figure above. What is the change in total revenue due to a price increase from $3 to $5? A) Total revenue increases by $100. B) Total revenue decreases by $100. C) Total revenue increases by $200. D) Total revenue decreases by $200. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves 44) Which of the following is TRUE of a decrease in product prices? A) The quantity effect always dominates the price effect. B) The price effect always dominates the quantity effect. C) When the price effect dominates the quantity effect, total revenue increases. D) When the quantity effect dominates the price effect, total revenue increases. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Revenue Curves 45) Which of the following is TRUE of a decrease in product prices? A) The quantity effect always dominates the price effect. B) The price effect always dominates the quantity effect. C) When the quantity effect dominates the price effect, total revenue decreases. D) When the price effect dominates the quantity effect, total revenue decreases. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Revenue Curves 46) Which of the following is TRUE of an increase in product prices? A) The quantity effect always dominates the price effect. B) The price effect always dominates the quantity effect. C) When the quantity effect dominates the price effect, total revenue increases. D) When the quantity effect dominates the price effect, total revenue decreases. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Revenue Curves

47) Which of the following is TRUE of an increase in product prices? A) The price effect is always zero. B) The quantity effect is always zero. C) When the price effect dominates the quantity effect, total revenue increases. D) When the price effect dominates the quantity effect, total revenue decreases. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Revenue Curves 48) Differentiate between the quantity effect and price effect of a price cut by a monopoly. Answer: When a monopoly cuts the price of its product, it has two effects: a quantity effect and a price effect. Because of a lower market price, consumers purchase a greater quantity of the product, which increases revenue to an extent. This is referred to as the quantity effect. However, because of the price cut, some of the monopolist's revenue is lost from the output that it was selling before the price cut. This is referred to as the price effect. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Revenue Curves

49) The following figure shows the demand curve faced by a monopolist.

a) Calculate the quantity effect and price effect of a price cut from $6 to $5. Estimate the change in total revenue due to the price cut. b) Comment on the elasticity of the demand curve between the price range $5 to $6. Answer: a) When a monopolist cuts the price of its product, there is an increase in the quantity sold. The effect of this increase on the revenue of the monopolist is referred to as the quantity effect. Along with the quantity effect, when a monopolist cuts the price of its product, some of its revenue is lost from the quantity that it was selling before the price change. This is referred to as the price effect. The change in total revenue is an outcome of both of these effects. When the price is decreased from $6 to $5, the quantity sold increases from 300 units to 400 units. The quantity effect of the price cut = (400 ‒ 300) × 5 = $500. The price effect of the price cut from $6 to $5 is equal to the revenue lost on the first 300 units due to the price change. Hence, price effect of the price cut = $1 × 300 = $300. The change in total revenue due to the price cut from $6 to $5 = $500 ‒ $300 = $200. The total revenue increases by $200 when the monopolist cuts the price from $6 to $5. b) Because there is an increase in the total revenue of the monopolist when the price is reduced from $6 to $5, the demand curve is elastic for this price range. Demand is also elastic when the quantity effect is larger than the price effect. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Revenue Curves

50) The following table shows the quantities sold of a monopolist's product at different prices. Quantity (units) 0 10 20 30 40 50 60 70 80 90

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

Comment on the relationship between total revenue and marginal revenue from the table. Answer: Total revenue and marginal revenue are calculated in the following table. Quantity (units)

Price ($)

Total Revenue ($)

0 10 20 30 40 50 60 70 80 90

10 9 8 7 6 5 4 3 2 1

0 90 160 210 240 250 240 210 160 90

Marginal Revenue ($) – 9 7 5 3 1 ‒1 ‒3 ‒5 ‒7

From the calculations in the table, total revenue increases when marginal revenue is positive, and total revenue decreases when marginal revenue is negative. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Revenue Curves

51) Which of the following characterizes the relation between total revenue and marginal revenue for a firm with market power? A) Marginal revenue is negative when total revenue is increasing. B) Marginal revenue is positive when total revenue is decreasing. C) Marginal revenue is zero when total revenue is maximized. D) Marginal revenue is greater than total revenue. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 52) If a firm can sell 10 units of output for $15 each or 11 units at $14 each, the additional revenue from selling the eleventh unit is ________. A) $14 B) $4 C) $150 D) $154 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price, Marginal Revenue, and Total Revenue 53) If a firm can sell 15 units of output for $10 each or 14 units at $12 each, the additional revenue from selling the fifteenth unit is ________. A) $18 B) $150 C) -$18 D) -$12 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 54) A monopolist faces a linear, downward-sloping demand curve. If the slope of the demand curve is 1 and the monopolist can sell one unit of output at a price of $10, what is the marginal revenue from selling the third unit of output? A) $1 B) $3 C) $8 D) $6 Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 55) A monopolist faces a linear, downward-sloping demand curve. If the slope of the demand 39 Copyright © 2022 Pearson Education Ltd.

curve is 2 (where price is on the y-axis and quantity on the x-axis) and the monopolist can sell four units of output at a price of $16. What is the marginal revenue from selling the fourth unit of output? A) $1 B) $4 C) $10 D) $18 Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 56) A monopolist faces a linear, downward-sloping demand curve. If the slope of the demand curve is 1 and the monopolist can sell one unit of output at a price of $10, what is the total revenue from selling the fourth unit of output? A) $28 B) $20 C) $34 D) $7 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue

The following figure shows price versus quantity for a market.

57) Refer to the figure above. On what interval of quantity does total revenue increase when quantity increases? A) From 0 to Q1 B) From 0 to Q2 C) From 0 to Q3 D) Total revenue is always increasing when quantity increases. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 58) Refer to the figure above. On what interval of quantity does total revenue decrease when quantity increases? A) From 0 to Q2 B) From Q1 to Q2 C) From Q2 to infinity D) Total revenue never decreases when quantity increases. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue

59) Which of the following statements is TRUE of the demand curve and the marginal revenue curve of a monopolist? A) Both curves have the same intercept on the price axis. B) The demand curve is downward sloping, while the marginal revenue curve is upward sloping. C) The intercept of the demand curve on the price axis is higher than the intercept of the marginal revenue curve. D) The intercept of the demand curve on the price axis is lower than the intercept of the marginal revenue curve. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 60) Which of the following statements is TRUE of the demand curve and the marginal revenue curve of a monopolist? A) Both curves overlap at all levels of output. B) Both curves have the same intercept on the quantity axis. C) The demand curve has a higher intercept on the quantity axis than the marginal revenue curve. D) Both curves have different intercepts on the quantity axis and the price axis. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 61) When a monopolist sells positive levels of output, its demand curve ________. A) lies below its marginal revenue curve B) lies above its marginal revenue curve C) and marginal revenue curve overlap D) is vertical, whereas its marginal revenue curve is horizontal Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue

62) As a monopolist expands its output, ________. A) the difference between the demand curve and the marginal revenue curve decreases B) the difference between the demand curve and the marginal revenue curve increases C) the slope of the demand curve decreases, while the slope of the marginal revenue curve increases D) the slope of the demand curve increases, while the slope of the marginal revenue curve decreases Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 63) If a monopolist faces a linear demand curve, its marginal revenue curve will be ________. A) horizontal B) vertical C) twice as steep as the demand curve D) four times as steep as the demand curve Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 64) The total revenue curve of a monopolist is ________. A) positively sloped when marginal revenue is negative B) negatively sloped when marginal revenue is negative C) positively sloped when the marginal revenue curve is upward sloping D) negatively sloped when the marginal revenue curve is downward sloping Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 65) The total revenue curve of a monopolist is at its maximum when marginal ________. A) cost is zero B) cost is positive C) revenue is zero D) revenue is positive Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue

Scenario: Tobac Co. is a monopolist in the cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve.

66) Refer to the scenario above. What is Tobac Co.'s total revenue when it sells 50 million packs of cigarettes? A) $100 million B) $200 million C) $300 million D) $400 million Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue

67) Refer to the scenario above. By how much does Tobac Co.'s revenue go up (or down) when its quantity sold goes up from 50 million to 100 million packs of cigarettes? A) $100 million B) $50 million C) $25 million D) $12.5 million Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 68) Refer to the scenario above. When the quantity sold goes up from 50 million to 100 million packs of cigarettes, the price effect on the firm's revenue is ________ and the quantity effect is ________. A) -$100 million; $100 million B) -$100 million; $200 million C) $100 million; -$100 million D) $100 million; -$200 million Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 69) Refer to the scenario above. When the quantity sold goes up from 100 million to 150 million packs of cigarettes, the price effect on the firm's revenue is ________ and the quantity effect is ________. A) -$200 million; $100 million B) -$100 million; $200 million C) $200 million; -$100 million D) $100 million; -$200 million Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 70) Refer to the scenario above. Tobac Co.'s total revenue is maximized when it sells ________ packs of cigarettes at ________ per pack. A) 150 million; $2.00 B) 125 million; $3.00 C) 100 million; $4.00 D) 75 million; $5.00 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price, Marginal Revenue, and Total Revenue 45 Copyright © 2022 Pearson Education Ltd.

71) Which of the following statements is FALSE? A) If the price effect dominates when the monopolist increases price, then the monopolist is producing on an elastic portion of the demand curve. B) The monopolist faces the entire downward sloping market demand curve. C) If the quantity effect dominates when the monopolist increases price, then the monopolist is producing on an elastic portion of the demand curve. D) If marginal revenue is positive, total revenue increases with a price decrease. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Monopolist's Problem Suppose there is only one producer of popsicles in Icetown. The market demand for popsicles can be represented by P = 10 - (Q/10), where Q is the number of popsicles and P is the price per popsicle. Also suppose this produce faces marginal costs of MC = .05*Q and average total costs of ATC = (100/Q) + 0.025Q. 72) If the price of popsicles increases from $6 to $7, which of the following is TRUE? A) The quantity effect decreases revenue by $10. B) The price effect increases revenue by $10. C) The price effect decreases revenue by $30. D) The quantity effect decreases revenue by $30. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Monopolist's Problem 73) If the firm increases production of popsicles from 40 to 50, which of the following is TRUE? A) Total revenue will increase by $10. B) Total revenue will decrease by $10. C) Total revenue will increase by $30. D) Total revenue will decrease by $30. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Monopolist's Problem

74) Which of the following represents this firms marginal revenue curve? A) MR=10-(Q/20) B) MR=10-(Q/5) C) MR=20-(Q/10) D) MR=5-(Q/10) Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Monopolist's Problem Suppose there is only one dairy in Cowtopia, and the market demand curve for milk can be represented by P = 12 - 0.2*Q, where Q is gallons of milk and P is the price of a gallon of milk. Also suppose this dairy faces marginal costs of MC = 2 and average total costs of ATC = 2 + (100/Q). 75) Which of the following represents the marginal revenue curve faced by the Cowtopian dairy? A) MR = 12 - 0.4*Q B) MR = 12 - 0.1*Q C) MR = 24 - 0.2*Q D) MR = 6 - 0.1*Q Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Monopolist's Problem 76) Suppose the Cowtopian dairy is currently charging $7 per gallon and is selling 25 gallons of milk. Which of the following statements is TRUE? A) Total revenue would increase if the dairy decreased the price. B) Total revenue would decrease if the dairy increased production. C) The dairy's marginal revenue would equal $7. D) If the dairy raises the price of milk, the price effect will outweigh the quantity effect. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Monopolist's Problem

77) Suppose the Cowtopian dairy raises the price of a gallon of milk from $4 to $5. Which of the following statements is FALSE? A) The quantity effect will increase total revenue by $20. B) The quantity sold would decrease from 40 gallons to 30 gallons. C) The price effect will increase total revenue by $35. D) Total Revenue will increase. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Monopolist's Problem

12.4 Choosing the Optimal Quantity and Price Scenario: Tobac Co. is a monopolist in the cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve.

1) Refer to the scenario above. If the quantity sold is 50 million packs, then the firm's total revenue is ________ and the total cost is ________. A) $400 million; $200 million B) $300 million; $150 million C) $250 million; $100 million D) $200 million; $50 million Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price

2) Refer to the scenario above. If the quantity sold is 100 million packs, then the firm's total revenue is ________ and the total cost is ________. A) $400 million; $250 million B) $300 million; $150 million C) $250 million; $100 million D) $200 million; $50 million Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price 3) Refer to the scenario above. If the quantity sold is 150 million packs, the firm's profit is ________. A) $100 million B) $50 million C) $0 D) -$50 million Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price 4) Refer to the scenario above. The firm's profit is maximized when the quantity sold is ________ packs. A) 50 million B) 75 million C) 100 million D) 125 million Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price 5) Refer to the scenario above. The firm's maximum profit is ________. A) $200 million B) $175 million C) $150 million D) $125 million Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price

6) If the marginal revenue of a producer exceeds his marginal cost, ________. A) profit is maximized B) profit is minimized C) additional production enhances profits D) additional production reduces profits Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Producing the Optimal Quantity 7) At a certain level of production, the marginal revenue and the marginal cost of a monopolist are $8 and $6, respectively. Which of the following statements is TRUE in this context? A) The monopolist should expand production. B) The monopolist should contract production. C) The profits of the monopolist are maximized. D) The profits of the monopolist are minimized. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity 8) If the marginal cost of a monopolist exceeds its marginal revenue, ________. A) additional production reduces profits B) additional production enhances profits C) the difference between the marginal revenue curve and demand curve is at its highest D) the difference between the marginal revenue curve and demand curve is at its lowest Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Producing the Optimal Quantity 9) A profit-maximizing monopolist produces the quantity at which ________. A) Price = Marginal revenue B) Price = Marginal cost C) Marginal revenue = Marginal cost D) Price = Average total cost Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Producing the Optimal Quantity

10) At the profit-maximizing level of production of a monopolist, ________. A) marginal revenue equals marginal cost B) marginal revenue exceeds marginal cost C) marginal revenue is less than marginal cost D) both marginal revenue and marginal cost are negative Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Producing the Optimal Quantity Scenario: Mr. Olivander has a monopoly on supplying magic wands. The table below shows the demand schedule for magic wands per day. Price $100 $90 $65 $55 $35 $20 $15

Quantity Demanded 0 1 2 3 5 9 12

11) Refer to the scenario above. If the marginal cost of a magic wand is $10, how many wands should Mr. Olivander sell to maximize his profit? A) 5 B) 9 C) 12 D) 1 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity 12) Refer to the scenario above. If the marginal cost of a magic wand is $20, how many wands should Mr. Olivander sell to maximize his profit? A) 5 B) 9 C) 12 D) 1 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity

13) Refer to the scenario above. If the marginal cost of a magic wand is $10, what price should Mr. Olivander charge to maximize his profit? A) $65 B) $55 C) $35 D) $20 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity The following figure shows the demand and marginal revenue (MR) curves faced by a monopolist.

14) Refer to the figure above. What is the profit-maximizing quantity that the monopolist should produce if it faces a constant marginal cost of $3? A) 200 units B) 300 units C) 400 units D) 600 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity

15) Refer to the figure above. What is the profit-maximizing quantity that the monopolist should produce if it faces a constant marginal cost of $5? A) 200 units B) 300 units C) 400 units D) 600 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity 16) Which of the following statements correctly identifies a similarity between monopoly and perfect competition? A) Entry is restricted in both market structures. B) Price equals marginal cost in both market structures. C) Production is expanded until marginal revenue equals marginal cost in both market structures. D) Firms face an upward-sloping demand curve and a downward-sloping marginal revenue curve in both market structures. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Producing the Optimal Quantity 17) Which of the following statements is TRUE of price-makers? A) The supply curve of price-makers is downward sloping. B) The demand curve that price-makers face is upward sloping. C) Price-makers set the price of a good after they determine how much to produce. D) Price-makers determine how much to produce after they set the price of a good. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Producing the Optimal Quantity

18) The following table shows the different quantities sold by a monopolist at different prices. Quantity (units) 1,000 1,350 1,700 2,100 2,650 3,000 3,300

Price ($) 14 12 10 8 6 4 2

a) Estimate the total revenue and marginal revenue of the monopolist at the different quantities. b) If the monopolist faces a constant marginal cost of $2.29, what is the optimal output it should produce? Answer: a) The total revenue and marginal revenue of the monopolist are shown in the following table. Quantity (units)

Price ($)

1,000 1,350 1,700 2,100 2,650 3,000 3,300

14 12 10 8 6 4 2

Total Revenue ($) 14,000 16,200 17,000 16,800 15,900 12,000 6,600

Marginal Revenue ($) – 6.29 2.29 ‒0.5 ‒1.64 ‒11.14 ‒18

b) The optimal output of a monopolist is achieved at a point where its marginal revenue equals its marginal cost. Because the marginal cost is $2.29, the monopolist should produce 1,700 units of its product. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity

The following figure shows the marginal revenue (MR) and demand curves faced by a

monopolist. 19) Refer to the figure above. If the monopolist faces a constant marginal cost of $2, what is the optimal quantity that it should produce? A) 20 units B) 40 units C) 45 units D) 80 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity 20) Refer to the figure above. If the monopolist faces a constant marginal cost of $6, what is the optimal quantity that it should produce? A) 20 units B) 30 units C) 40 units D) 60 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity

21) Refer to the figure above. If the monopolist faces a constant marginal cost of $10, what is the optimal quantity that it should produce? A) 20 units B) 30 units C) 40 units D) 80 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Producing the Optimal Quantity 22) Refer to the figure above. If the monopolist faces a constant marginal cost of $6, at what price should it sell its output to maximize profits? A) $2 B) $6 C) $10 D) $12 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Setting the Optimal Price 23) Refer to the figure above. If the monopolist faces a constant marginal cost of $10, at what price should it sell its output? A) $2 B) $10 C) $12 D) $14 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Setting the Optimal Price 24) Refer to the figure above. If the monopolist faces a constant marginal cost of $2, at what price should it sell its output? A) $2 B) $6 C) $10 D) $12 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Setting the Optimal Price

25) A profit-maximizing monopolist ________. A) can set any price she chooses B) produces until Marginal revenue = Marginal cost and reads the price off the demand curve at that quantity C) takes the market price as given D) produces the level of output at which Price = Average total cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Setting the Optimal Price The following figure shows the marginal revenue (MR), marginal cost (MC), and demand (D) curves for a firm operating as a monopoly.

26) Refer to the figure above. The level of output that corresponds to maximum revenue is ________. A) P1 B) P2 C) P3 D) P4 Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Setting the Optimal Price

27) Refer to the figure above. If the monopolist sets its price to the optimal price, what would be its profits? A) P3 Q3 B) P2 Q2 C) The area below the demand curve and above P1. D) (P1 P4) Q1 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Setting the Optimal Price 28) Refer to the figure above. Compared to the competitive market outcome, when the monopolists sets its price to the optimal price, by how much is the quantity traded diminished? A) By Q1 B) By Q3 C) By Q3 Q1 D) By Q1 Q2 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Setting the Optimal Price 29) Refer to the figure above. Compared to the competitive market outcome, when the monopolists sets its price to the optimal price, by how much is the price increased? A) By P1 B) By P3 C) By P3 P4 D) By P1 Q3 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Setting the Optimal Price

The following figure represents the cost and revenue curves of a firm that is producing a service in a monopoly market.

30) Refer to the figure above. What is the optimal quantity that the monopolist should produce? A) Q1 B) Q2 C) Q4 D) Q5 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Setting the Optimal Price

31) Refer to the figure above. What is the price that this monopolist should charge in order to maximize its profit? A) P5 B) P2 C) P3 D) P4 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Setting the Optimal Price 32) The pricing rule for a monopolist who produces a divisible good is ________. A) P = MR > MC B) P > MR > MC C) P = MR = MC D) P > MR = MC Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Setting the Optimal Price 33) Which of the following statements correctly differentiates between a monopoly and a perfectly competitive firm? A) A perfectly competitive firm faces an upward-sloping demand curve, whereas a monopoly faces a horizontal demand curve. B) A perfectly competitive firm sets its product price at its marginal cost, whereas a monopoly sets the price above its marginal cost. C) A perfectly competitive firm faces a horizontal demand curve, whereas a monopoly faces an upward sloping-demand curve. D) A perfectly competitive firm sets its product price above its marginal cost, whereas a monopoly sets its product price equal to its marginal cost. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Setting the Optimal Price 34) How does a monopoly decide the optimal amount of a good that it produces? How does it set the price for its product? Answer: A monopoly determines the optimal output at the point where its marginal revenue equals its marginal cost. Once the optimal output is determined, the maximum price that consumers are willing to pay for the product is determined from the demand curve. This price is the highest price that a monopoly can charge for the quantity of output it produces. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Setting the Optimal Price 61 Copyright © 2022 Pearson Education Ltd.

35) For a profit-maximizing monopolist, profits are given by ________. A) [Price - Marginal cost] Quantity B) [Price - Average total cost] Quantity C) Marginal revenue - Total cost D) Total revenue - Marginal cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How a Monopolist Calculates Profits 36) A monopolist faces an average total cost of $6 when it produces 200 units of its product. If it sells the 200 units at $8 per unit, the monopolist ________. A) incurs a loss of $200 B) incurs a loss of $400 C) makes a profit of $200 D) makes a profit of $400 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits 37) A monopolist faces an average total cost of $10 when it produces 400 units of its product. If it sells the 400 units at $6 per unit, the monopolist ________. A) makes a profit of $600 B) incurs a loss of $600 C) makes a profit of $1,600 D) incurs a loss of $1,600 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits

38) The following figure shows the demand curve and the marginal revenue (MR) curve of a monopolist supplying petroleum.

a) If the monopolist faces a constant marginal cost of $3, what is the optimal output that it should produce? b) If the monopolist faces a constant marginal cost of $3, at what price should it sell the optimal output? c) If the average total cost of the monopolist is $4 per gallon when it produces the optimal output, determine its profit or loss. Answer: a) The optimal output of a monopolist is determined at the point where its marginal revenue equals marginal cost. Marginal revenue is equal to the marginal cost when quantity is 3,000 gallons. Hence, the monopolist should produce 3,000 gallons of petroleum. b) To maximize profits, a monopolist charges the highest possible price it can after it produces the optimal output. This price is derived from the demand curve that the monopolist faces. The highest price that the monopoly can charge when it wants to sell all 3,000 gallons of petroleum is equal to $6. c) If the average cost of the monopolist equals $4 per gallon when it produces the optimal quantity, its profits will equal ($6 ‒ $4) × 3,000 = $6,000. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits

39) The figure below shows the cost and revenue curves of a firm in a monopoly market. The profit of this monopolist is represented by the area ________.

A) AGRO B) AGMD C) BHJE D) AGKF Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits

The figure below shows the cost and revenue curves of a firm in a monopoly market.

40) Refer to the figure above. What is the optimal output for this firm? A) 10 B) 12 C) 15 D) 16 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits 41) Refer to the figure above. How much would this monopolist charge for its product? A) $2 B) $3.50 C) $4 D) $7 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits

42) Refer to the figure above. How much profit does this firm make? A) $20 B) $50 C) $70 D) $64 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits The following figure shows the graph of a monopoly market. The marginal revenue curve has been omitted.

43) Refer to the figure above. What is the optimal output for this firm? A) 10 B) 12 C) 15 D) 16 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits

44) Refer to the figure above. How much would this monopolist charge for its product? A) $2 B) $3 C) $5 D) $10 Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits 45) Refer to the figure above. How much profit does this firm make? A) $20 B) $50 C) $70 D) $64 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits The following figure shows the marginal revenue (MR) curve and the demand curve faced by a monopolist. The monopolist faces a constant marginal cost of $3.

46) Refer to the figure above. What is the optimal quantity that the monopolist should produce? A) 30 units B) 45 units C) 60 units D) 90 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits 67 Copyright © 2022 Pearson Education Ltd.

47) Refer to the figure above. What is the price at which the monopolist should sell its output? A) $3 B) $4 C) $6 D) $9 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits 48) Refer to the figure above. If the average cost faced by the monopolist when it produces and sells the optimal output is $4, the monopolist ________. A) incurs a loss of $60 B) incurs a loss of $120 C) makes a profit of $60 D) makes a profit of $90 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits

Scenario: Suppose the monopolist faces the following demand, total revenue, and marginal revenue curves: Demand: Qd = 100 - p, Total Revenue: TR(Q) = 100 ∙ Q - Q2, Marginal Revenue: MR(Q) = 100 - 2 ∙ Q. This monopolist's total cost, average total cost, and marginal cost curves are given by Total Cost: TC(Q) = 10 ∙ Q +

∙ Q2,

Average Total Cost: ATC(Q) = 10 +

∙ Q,

Marginal Cost: MC(Q) = 10 + Q. The monopolist's profit function is given by Profits: π (P,Q) = Total Revenue - Total Cost Profits: π (P,Q) = P ∙ Q - TC(Q), Profits: π (P,Q) = Q ∙ , Profits: π (P,Q) =

∙ Q,

Profits: π (P,Q) = [P - ATC(Q)] ∙ Q, so Profits: π (P,Q) = Total Revenue - Total Cost Profits: π (P,Q) = [100 ∙ Q - Q2] Profits: π (P,Q) =

, or

∙ Q.

These revenue and cost curves are presented in table form below.

maximize profits by producing ________ units of output. A) 10 B) 20 C) 30 D) 50 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How a Monopolist Calculates Profits 50) To maximize profits, the monopolist should charge a price of ________ per unit. A) $90 B) $80 C) $70 D) $50 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How a Monopolist Calculates Profits 51) At the profit-maximizing level of output and price determined above, the monopolist's profits are ________. A) $750 B) $1,200 C) $1,350 D) $0 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How a Monopolist Calculates Profits 52) A monopoly produces and sells 300 units of its product for $8 per unit. If the total cost incurred by the monopoly is $1,800, determine its profit or loss. Answer: Profits = Total revenue ‒ Total cost = $2,400 ‒ $1,800 = $600 Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolist Calculates Profits

53) Which of the following statements is TRUE of a monopolist's supply curve? A) The supply curve is vertical. B) The supply curve is upward-sloping. C) The supply curve is downward-sloping. D) A monopolist does not have a supply curve. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Does a Monopoly Have a Supply Curve? 54) Which of the following statements is TRUE? A) A monopolist has a vertical supply curve because it is a price-taker. B) A monopolist's supply curve is the supply curve of the entire market. C) A monopolist does not have a supply curve because its production decision is independent of price. D) A monopolist has a horizontal supply curve because it is the only seller in the market. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Does a Monopoly Have a Supply Curve? 55) The supply curve for a monopolist is ________. A) the marginal cost curve B) the marginal cost curve above average total cost C) the increasing portion of the average total cost curve D) nonexistent Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Does a Monopoly Have a Supply Curve? Suppose there is only one producer of popsicles in Icetown. The market demand for popsicles can be represented by P = 10 - (Q/10), where Q is the number of popsicles and P is the price per popsicle. Also suppose this produce faces marginal costs of MC = .05*Q and average total costs of ATC = (100/Q) + 0.025Q. 56) Which of the following statements is FALSE regarding Icetowns sole popsicle seller? A) The monopolist's total costs at the profit maximizing quantity are $3.50. B) The monopolist will sell 40 popsicles. C) The monopolist will make profits of $100. D) The monopolists' total revenue at the profit maximizing quantity is $240. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price 71 Copyright © 2022 Pearson Education Ltd.

57) What price should the monopolist charge for a popsicle? A) $6 B) $5 C) $3.33 D) $2 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price Suppose there is only one dairy in Cowtopia, and the market demand curve for milk can be represented by P = 12 - 0.2*Q, where Q is gallons of milk and P is the price of a gallon of milk. Also suppose this dairy faces marginal costs of MC = 2 and average total costs of ATC = 2 + (100/Q). 58) How much milk should the profit-maximizing dairy sell? A) 25 gallons B) 50 gallons C) 14 gallons D) 36 gallons Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Choosing the Optimal Quantity and Price 59) Which of the following statements is FALSE regarding the profit maximizing Cowtopian dairy? A) The monopolist will make losses of $25. B) The monopolist will charge a price of $7 per gallon. C) The monopolist will have average total costs of $6. D) The monopolist has economies of scale. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price

60) Does a monopolist have a supply curve? Explain your answer. Answer: A monopolist does not have a supply curve. Since monopolists are price-makers, they do not vary their production based on market price. Instead, they set the market price. Like sellers in competitive markets, monopolists will produce at the point where their marginal revenue is equal to their marginal cost. A monopolist's marginal revenue depends on the negatively sloped demand curve that it faces. Because a monopolist's production decision is based on demand, it cannot be depicted as an independent supply curve. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Does a Monopoly Have a Supply Curve? 12.5 The "Broken" Invisible Hand: The Cost of Monopoly The following figure shows the marginal revenue (MR) and average total cost (ATC) and marginal cost (MC) curves of a monopolist.

1) Refer to the figure above. The output produced in this market is ________ units, while the output produced under a comparable perfectly competitive market would have been ________ units. A) 12; 17 B) 10; 17 C) 12; 24 D) 10; 16 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 2) Refer to the figure above. The consumer surplus in this market is ________, while the 73 Copyright © 2022 Pearson Education Ltd.

consumer surplus under the competitive market would have been ________. A) $30; $64 B) $15; $64 C) $60; $144 D) $15; $144 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly The following figure shows the revenue and cost curves of a monopolist.

3) Refer to the figure above. The output produced in this market is ________ units, while the output produced under a comparable perfectly competitive market is ________ units. A) 15; 30 B) 10; 24 C) 13; 26 D) 10; 26 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

4) Refer to the figure above. The consumer surplus in this market is ________, while the consumer surplus in the competitive circumstance would have been ________. A) $25; $144 B) $25; $169 C) $50; $144 D) $35; $100 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 5) Refer to the figure above. Compared to a competitive market, how much is the deadweight loss of this monopoly? A) $64 B) $25 C) $144 D) $50 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

The following figure shows the market demand curve for penicillin, an antibiotic medicine. Initially, the market was supplied by perfectly competitive firms. Later, the government granted the exclusive right to produce and sell penicillin to one firm. The figure also shows the marginal revenue curve (MR) of the firm once it begins to operate as a monopoly. The marginal cost is constant at $3, irrespective of the market structure.

6) Refer to the figure above. What is the quantity supplied in the market when the market is perfectly competitive? A) 30 units B) 45 units C) 60 units D) 90 units Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 7) Refer to the figure above. What is the price that a perfectly competitive firm would charge? A) $0 B) $3 C) $6 D) $9 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

8) Refer to the figure above. What is the consumer surplus when the market is perfectly competitive? A) $30 B) $60 C) $90 D) $180 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 9) Refer to the figure above. What is the deadweight loss when the market is perfectly competitive? A) $0 B) $30 C) $45 D) $90 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 10) Refer to the figure above. What is the quantity supplied in the market when the market is supplied by one firm? A) 30 units B) 45 units C) 60 units D) 90 units Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 11) Refer to the figure above. What is the price that the monopolistic firm would charge? A) $0 B) $3 C) $6 D) $9 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

12) Refer to the figure above. What is the consumer surplus when the market changes to a monopoly? A) $30 B) $45 C) $60 D) $90 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 13) Refer to the figure above. What is the change in consumer surplus when the market changes from perfect competition to a monopoly? A) Consumer surplus increases by 30 units. B) Consumer surplus decreases by 45 units. C) Consumer surplus increases by 90 units. D) Consumer surplus decreases by 135 units. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 14) Refer to the figure above. What is the surplus enjoyed by the firm when it is the sole supplier of the medicine? A) $30 B) $60 C) $90 D) $180 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 15) Refer to the figure above. What is the deadweight loss when the market is converted into a monopoly? A) $0 B) $45 C) $90 D) $180 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

16) Refer to the figure above. After the market changes from perfect competition to a monopoly, ________. A) social surplus decreases B) the market price decreases C) deadweight loss decreases D) consumer surplus increases Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 17) The following figure shows the demand curve and the marginal revenue curve (MR) faced by a monopolist. The monopolist has a constant marginal cost of $3.

Calculate consumer surplus, monopoly's surplus, and deadweight loss. Answer: Consumer surplus = 0.5 × (9 ‒ 6) × 300 = 150 × 3 = $450. Monopoly surplus = 3 × 300 = $900. Deadweight loss = 0.5 × (6 ‒ 3) × (600 ‒ 300) = $450. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

The following figure is a supply-demand diagram that characterizes the demand, marginal revenue, and cost curves for a profit-maximizing monopolist.

18) Refer to the figure above. Under monopoly, consumer surplus is ________. A) Area A B) Areas A + B C) Areas A+ B + C D) Areas A + B + C + D + E Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 19) Refer to the figure above. Under monopoly, producer surplus is ________. A) Area B B) Areas B + C C) Areas A + B + C D) Areas A + B + C + D Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

20) Refer to the figure above. Under monopoly, deadweight loss is ________. A) zero B) Areas B + C C) Area D D) Areas D + E Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 21) Refer to the figure above. Under monopoly, social surplus is ________. A) Areas A + B + C + D + E B) Areas A + B + C + D C) Areas A + C D) Areas A + B + C Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 22) Refer to the figure above. If the industry were perfectly competitive (marginal cost pricing) rather than a monopoly, social surplus would be ________. A) Areas A + B + C + D + E B) Areas A + B + C + D C) Areas A + B + C D) Areas A + C Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

23) The following figure shows the demand curve for Good X in a perfectly competitive market. Later, the government grants one of the firms the exclusive right to manufacture and sell Good X. MR represents the marginal revenue curve of the firm when it operates as a monopoly. The marginal cost of producing Good X is constant at $5.

a) What is the quantity supplied when the market is perfectly competitive? What happens to the quantity supplied once the market changes to a monopoly? b) What is the market price when the market is perfectly competitive? What is the market price when the market changes to a monopoly? c) Compare the consumer surplus when the market is perfectly competitive and the consumer surplus when the market is a monopoly. Is there any producer surplus or deadweight loss in either case? If yes, then how much? Answer: a) A perfectly competitive firm equates price and marginal cost. At a price of $5 per unit, the quantity supplied in a perfectly competitive market is 8,000 units. A monopolist supplies output at a point where its marginal revenue (MR) equals its marginal cost. The quantity supplied when the market changes to a monopoly is 4,000 units. b) A perfectly competitive firm will sell its product at the marginal cost of production. Therefore, the optimal price when the market is perfectly competitive is $5 per unit. The monopolist charges the highest price possible for its profit-maximizing output level, which is shown by the demand curve. When the market changes to a monopoly, 4,000 units will be sold at a higher price of $7 per unit. c) The consumer surplus when the market is perfectly competitive = 0.5 × (9 ‒ 5) × 8,000 = $16,000. When the market changes to a monopoly, the consumer surplus decreases. The increase in price creates some producer surplus, also referred to as monopoly surplus, and some deadweight loss. Consumer surplus under monopoly = 0.5 × (9 ‒ 7) × 4,000 = $4,000. Monopoly surplus = (7 ‒ 5) × 4,000 = $8,000. Deadweight loss under monopoly = 0.5 × (7 ‒ 5) × (8,000 ‒ 4,000) = $4,000. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 82 Copyright © 2022 Pearson Education Ltd.

The following figure shows the demand (D), marginal cost (MC), and marginal revenue (MR) for a monopolist firm.

24) Refer to the figure above. Compared to the competitive market outcome, the single-price profit-maximizing monopoly reduces consumer surplus by ________. A) (P1 P4) Q1 + (Q3 Q1) (P1 P4)/2 B) (P1 P3) Q1 + (Q3 Q1) (P1 P3)/2 C) (P1 P4) Q1 D) (P1 P3) Q1 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 25) Refer to the figure above. Refer to the figure above. Compared to the competitive market outcome, the single-price profit-maximizing monopoly reduces the social surplus by ________. A) (P1 P4) Q1 + (Q3 Q1) (P1 P4)/2 B) (P1 P3) Q1 + (Q3 Q1) (P1 P3)/2 C) (P1 P2) Q1 + (Q3 Q1) (P1 P2)/2 D) (Q3 Q1) (P1 P4)/2 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

26) Refer to the figure above. How much of the loss in consumer surplus generated by the singleprice profit-maximizing monopoly remains part of social surplus? A) (P1 P4) Q1 + (Q3 Q1) (P1 P4)/2 B) (P1 P3) Q1 + (Q3 Q1) (P1 P3)/2 C) (P1 P2) Q1 + (Q3 Q1) (P1 P2)/2 D) (Q3 Q1) (P1 P4)/2 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly Scenario: Tobac Co. is a monopolist in cigarette market in Nicotiana Republic where the U.S. dollar is used as its official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. The fixed cost of the firm is $50 million. To answer the questions below, it is useful to know that the equation of the (inverse) demand curve is P = 8 - 0.04Q, where Q is the quantity demanded (in millions of packs) and P is the price per pack (in $). Also, you should draw in the marginal revenue curve.

27) Refer to the scenario above. If the market for cigarettes in Nicotiana Republic were perfectly competitive, ________ cigarettes would be sold for ________ per pack. A) 50 million; $6.00 B) 75 million; $5.00 C) 100 million; $4.00 D) 150 million; $2.00 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 84 Copyright © 2022 Pearson Education Ltd.

28) Refer to the scenario above. When Tobac Co.'s profit is maximized, each pack of cigarette is sold for ________. A) $5.00 B) $4.00 C) $3.00 D) $2.00 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 29) Refer to the scenario above. When Tobac Co.'s profit is maximized, the consumer surplus is ________ and the producer surplus is ________. A) $225 million; $75 million B) $200 million; $100 million C) $150 million; $150 million D) $112.5 million; $225 million Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 30) Refer to the scenario above. When Tobac Co.'s profit is maximized, the deadweight loss is ________. A) $140.5 million B) $125 million C) $112.5 million D) $100 million Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly

Suppose there is only one producer of popsicles in Icetown. The market demand for popsicles can be represented by P = 10 - (Q/10), where Q is the number of popsicles and P is the price per popsicle. Also suppose this produce faces marginal costs of MC = .05*Q and average total costs of ATC = (100/Q) + 0.025Q. 31) What is the deadweight loss when the monopolist produces at their profit-maximizing quantity (rounded to the nearest dollar)? A) $53 B) $107 C) $27 D) $80 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly 32) Which of the following statements is TRUE regarding the market for popsicles in Icetown? A) The social surplus that will be generated when the firm produces their profit maximizing quantity is $280 B) The consumer surplus that will be generated when the firm produces their profit maximizing quantity is $240 C) The producer surplus that will be generated when the firm produces their profit maximizing quantity is $40 D) There will be no deadweight loss as long as the firm produces their profit maximizing quantity Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand: The Cost of Monopoly Suppose there is only one dairy in Cowtopia, and the market demand curve for milk can be represented by P = 12 - 0.2*Q, where Q is gallons of milk and P is the price of a gallon of milk. Also suppose this dairy faces marginal costs of MC = 2 and average total costs of ATC = 2 + (100/Q). 33) How much social surplus is lost because this market is NOT operating competitively? A) $62.50 B) $125 C) $187.50 D) $31.25 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Choosing the Optimal Quantity and Price 34) Which of the following statements is TRUE regarding the milk market? 86 Copyright © 2022 Pearson Education Ltd.

A) Consumer surplus is equal to $62.50. B) Producer surplus is equal to $0. C) Social surplus is equal to $125. D) Because MC is constant, there is no deadweight loss. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price 12.6 Restoring Efficiency 1) Which of the following statements is TRUE? A) Under monopoly, the seller sets the price of its good below marginal costs. B) Under perfect competition, sellers set the price of their goods below marginal costs. C) Under monopoly, prospective buyers may not be able to buy a good even if they have a willingness to pay above marginal costs. D) Under perfect competition, prospective buyers may not be able to buy a good even if they have a willingness to pay above marginal costs. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Restoring Efficiency 2) Which of the following does a social planner necessarily need to know to restore efficiency in a monopoly market? A) The monopolist's marginal costs only B) The buyers' demand for a close substitute of the product sold in the market C) The monopolist's marginal revenue and the tax levied on the sale of the good D) The monopolist's marginal costs and the buyers' willingness to pay for the good Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Restoring Efficiency 3) Which of the following statements explains why monopolies weaken the functioning of the invisible hand? A) A monopoly is a price-taker. B) The quantity produced by a monopoly is too low. C) A monopolist faces an upward-sloping demand curve. D) A monopolist sets the price of its good below marginal costs. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Restoring Efficiency 4) When firms charge different prices to different consumers for the same good or service, it is 87 Copyright © 2022 Pearson Education Ltd.

referred to as ________. A) a price bias B) shadow pricing C) predatory pricing D) price discrimination Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 5) A firm's objective behind charging different prices to different consumers for the same good is to enhance ________. A) goodwill B) its profits C) social surplus D) its market power Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 6) Firms that provide services (e.g., haircuts, landscaping, medical care, and dental care) are better able to engage in price discrimination. Why might this be the case? A) Service firms have more information about their customers. B) Service firms can readily prevent arbitrage. C) Service firms can easily identify customer attributes associated with willingness to pay. D) Service firms have more information about their costs. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 7) Perfect price discrimination occurs when a firm charges ________. A) wealthier buyers a lower price B) each buyer exactly their willingness to pay C) the same buyer different prices at different points of time D) different buyers based on the characteristics of their purchase Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination

8) Perfect price discrimination is also referred to as ________ price discrimination. A) first-degree B) second-degree C) third-degree D) fourth-degree Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 9) Economist Reuben Kessel wrote an influential article in 1958 analyzing price discrimination by medical care providers. Kessel interviewed several doctors and dentists in Los Angeles, and found that these providers often provided fee-for-service treatment to traveling business professionals but charged each patient a different amount. These health care providers told Kessel they had their receptionists see the make of car the individual was driving when determining the fee (along with other information the provider gleaned about the client). Assume this information revealed each client's willingness to pay. This is an example of ________. A) first-degree price discrimination B) second-degree price discrimination C) third-degree price discrimination D) simple monopoly pricing Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination 10) Second-degree price discrimination occurs when ________. A) each consumer is charged exactly their willingness to pay B) different groups of consumers are charged different prices C) consumers are charged different prices at different times D) consumers are charged different prices based on the characteristics of their purchases Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination

11) Suppose a cereal manufacturer offers one of its cereal brands in two sizes: a 12 ounce box and a 40 ounce box. The per-ounce price of cereal in the 40 ounce box is much less than the perounce price charged for the 12 ounce box, and this price differential is not a function of differences in packaging costs. This is an example of ________. A) first-degree price discrimination B) second-degree price discrimination C) third-degree price discrimination D) simple monopoly pricing Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination 12) Buyers who buy in bulk are often offered discounts. This is an example of ________. A) marginal pricing B) first-degree price discrimination C) third-degree price discrimination D) second-degree price discrimination Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination 13) Third-degree price discrimination occurs when ________. A) different groups of consumers are charged different prices B) consumers are charged different prices at different times C) consumers are charged different prices according to their willingness to pay D) consumers are charged different prices based on the characteristics of their purchases Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination

14) Several businesses and organizations in Hawaii, including hotels, practice what is called kama'aina pricing. Under this pricing strategy, customers with a valid Hawaii driver's license are charged the lowest price, customers with a valid military identification card are charged slightly higher prices, and all other customers are charged the highest price for the identical good or service. This is an example of ________. A) first-degree price discrimination B) second-degree price discrimination C) third-degree price discrimination D) simple monopoly pricing Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination 15) A certain amusement park offers a 50 percent discount to kids between the ages of 8 and 14 years. This is an example of ________. A) fair-returns pricing B) first-degree price discrimination C) third-degree price discrimination D) second-degree price discrimination Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination 16) If a monopoly engages in first-degree price discrimination, ________. A) social surplus is maximized B) consumer surplus is maximized C) producer surplus is minimized D) deadweight loss is maximized Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 17) If a monopoly engages in first-degree price discrimination, ________. A) social surplus is zero B) producer surplus is zero C) deadweight loss is zero D) consumer surplus is positive Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 18) The outcome of first-degree price discrimination is ________. 91 Copyright © 2022 Pearson Education Ltd.

A) Pareto efficient with equity B) Pareto efficient with inequity C) Pareto inefficient with inequity D) Pareto inefficient with equity Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 19) Price discrimination is never perfect because it ________. A) increases consumer surplus B) is regulated by the government C) lowers the profits of producers to an extent D) is impossible to know every consumers' willingness to pay Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 20) When the price of the same product varies based on locational attributes, it is an example of ________. A) fair-returns pricing B) first-degree price discrimination C) second-degree price discrimination D) third-degree price discrimination Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination

21) Which of the following statements is TRUE? A) The basis for both first-degree and third-degree price discrimination is differences in buyers' willingness to pay for a good. B) The basis for both first-degree and third-degree price discrimination is differences in sellers' willingness to accept payment for a good. C) The basis for first-degree price discrimination is differences in buyers' willingness to pay, whereas the basis for third-degree price discrimination is differences in sellers' willingness to accept payment for a good. D) The basis for first-degree price discrimination is differences in seller's willingness to accept payment for a good, whereas the basis for third-degree price discrimination is differences in buyers' willingness to pay for a good. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 22) What are the different types of price discrimination? Answer: There are three different types of price discrimination: i) First-degree price discrimination: Consumers are charged the maximum price they are willing to pay. ii) Second-degree price discrimination: Consumers are charged different prices according to the characteristics of their purchases. iii) Third-degree price discrimination: Different groups of consumers are charged different prices for the same good or service. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 23) In practice, price discrimination is never perfect. Why? Answer: There are two reasons price discrimination is never perfect in practice: i) It is very difficult to charge a unique price to each and every consumer. ii) It is impossible to know every consumer's willingness to pay for a product. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination

24) Peak-load pricing is when a firm charges a different price during the peak (e.g., highest demand) period than during off-peak times, because the marginal cost of providing the good or service during the peak is higher. For example, an electricity producer builds generating capacity to serve peak-period demand but only needs to call on this full capacity during a handful of days of the year. Building capacity to meet peak demand means that there is a discrete change in the marginal cost of providing the good or service across a binding capacity constraint. Is this an example of price discrimination? If so, to which degree? If not, explain why not. A) Yes; first-degree price discrimination B) Yes; second-degree price discrimination C) Yes; third-degree price discrimination D) No; because the good or service is not the same (it has different marginal costs in peak versus nonpeak periods) Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination 25) Among the following, which is the best example of price discrimination? A) Air fares are usually more expensive in December. B) A local transit company allows senior citizens, the unemployed, and children to ride at reduced fares. C) Taxi fares vary according to the distance traveled. D) Cinemas usually charge lower prices on Tuesdays. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 26) Perfect price discrimination implies that ________. A) demand is perfectly elastic B) demand is perfectly inelastic C) the firm produces a smaller output than it would as a single-price monopolist D) the firm produces a larger output than it would as a single-price monopolist Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination

27) When price discrimination does NOT increase output, it increases a monopoly's profits because it ________. A) increases the willingness of households to pay for a good B) allows the firm to capture some consumer surplus C) allows the firm to exploit economies of scale more fully D) shifts the demand curve the firm faces Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination 28) Which of the following is NOT true of price discrimination among units of output? A) Output is generally larger than under a single-price monopoly. B) Any given level of output yields a larger total revenue than a single-price monopoly. C) If discrimination does not increase output, consumer surplus diminishes. D) Lower-income individuals will always be charged lower prices. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination

29) Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack. If Tobac Co. could successfully carry out the firstdegree (or perfect) price discrimination, the social surplus would ________ and the consumer surplus would be ________.

A) not be maximized; $112.5 million B) not be maximized; $0 C) be maximized; $0 D) be maximized; $450 million Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination

Scenario: Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm has a constant marginal cost of $2.00 per pack and the fixed cost is $20 million. Through market research, the firm has found that there are two types of customer, Type 1 and Type 2. The demand curves of the two types of customers, and the total market demand curve, along with respective marginal revenue curves, are shown in the following figure.

30) Refer to the scenario above. If Tobac Co. could successfully carry out the third-degree price discrimination, the firm would charge type 1 customers ________ per pack and type 2 customers ________ per pack. A) $5.00; $7.00 B) $7.00; $5.00 C) $2.00; $2.00 D) $12.00; $8.00 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Three Degrees of Price Discrimination 31) Refer to the scenario above. If Tobac Co. could successfully carry out the third-degree price discrimination, the firm's maximum profit would be ________. A) $450 million B) $400 million C) $320 million D) $260 million Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 32) Refer to the scenario above. If Tobac Co. could not carry out price discrimination, the firm would sell ________ as it would under the third-degree price discrimination. A) half as many packs B) as many packs C) twice as many packs D) three times as many packs Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 33) Refer to the scenario above. If Tobac Co. could not carry out price discrimination, the firm's maximum profit would be ________. A) $246.4 million B) $266.4 million C) $406.4 million D) $426.4 million Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination The following figure shows the costs and revenue curves of a firm in a monopoly market. 99 Copyright © 2022 Pearson Education Ltd.

34) Refer to the figure above. If this monopolist engages in the "first degree price discrimination," he will charge ________ per unit of its output. A) different prices B) P2 C) P3 D) P4 Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination 35) Refer to the figure above. If this monopolist engages in the first-degree price discrimination, it will produce and sell ________ units of output. A) Q5 B) Q2 C) Q3 D) Q4 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination

36) Refer to the figure above. If this monopolist engages in the first-degree price discrimination, the consumer surplus in this market is equal to ________. A) the area below the D curve, and above the P2 level B) the area below the D curve, and above the P3 level C) the area below the D curve, and above the P4 level D) zero Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Three Degrees of Price Discrimination Suppose there is only one dairy in Cowtopia, and the market demand curve for milk can be represented by P = 12 - 0.2*Q, where Q is gallons of milk and P is the price of a gallon of milk. Also suppose this dairy faces marginal costs of MC = 2 and average total costs of ATC = 2 + (100/Q). 37) If the dairy is able to perfectly price discriminate, which of the following statements is FALSE? A) The dairy will make losses because of their high fixed costs B) Consumer surplus will be zero C) Producer surplus will equal $250 D) 50 gallons of milk will be bought and sold Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Choosing the Optimal Quantity and Price 12.7 Government Policy Toward Monopoly 1) The policy that aims to regulate and prevent anti-competitive pricing in the United States is referred to as ________ policy. A) antitrust B) anticompetition C) monopoly regulation D) consumer protection Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Policy Toward Monopoly

2) In the United States, the ________ is a law that keeps markets open and competitive. A) Sherman Act B) Samuelson Act C) Monopoly Act D) Pro-competition Act Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Government Policy Toward Monopoly 3) The socially optimal price is to set the price for a regulated monopolist ________. A) greater than marginal revenue B) equal to marginal cost C) equal to minimum average variable cost D) equal to average total cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Regulation 4) An efficient price is a price set at ________ cost. A) marginal B) fixed C) average fixed D) average variable Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Regulation 5) A socially optimal price regulation will NOT work if marginal cost is ________. A) less than average total cost B) less than average fixed cost C) greater than average total cost D) greater than average fixed cost Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Regulation

6) If the government imposes marginal cost pricing on a firm with a natural monopoly, the firm will ________. A) earn a positive economic profit B) earn zero economic profit C) earn a negative economic profit D) earn any level of profit or loss Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Regulation 7) A socially optimal price maximizes ________. A) consumer surplus and minimizes producer surplus B) producer surplus and minimizes consumer surplus C) total surplus D) deadweight loss Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Regulation 8) At a certain level of production, the average total cost faced by a monopolist is $6 and the marginal cost faced by the monopolist is $4. If the government decides to regulate the market by setting the price at the efficient price, the good will be sold at a price of ________. A) $2 per unit B) $4 per unit C) $6 per unit D) $10 per unit Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Price Regulation 9) Fair-returns pricing describes a situation in which government regulation of price sets the monopolist's price at ________. A) marginal cost B) minimum average variable cost C) minimum average total cost D) average total cost Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Regulation

10) Which of the following correctly identifies a problem with price regulation? A) It minimizes social surplus. B) It minimizes consumer surplus. C) Sellers do not have an incentive to cut costs. D) Government intervention increases deadweight loss. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Regulation 11) Under fair-returns price regulation, ________. A) deadweight loss is likely to be maximized B) deadweight loss is likely to be minimized C) firms are less likely to innovate because they earn zero profits D) firms are more likely to innovate because they earn positive profits Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Price Regulation 12) Suppose the government imposes fair-returns pricing on a monopolist. This policy creates incentives for the firm to overinvest in capital. As a result, the firm will have ________. A) a strong incentive to minimize costs of producing a given level of output B) no incentive to minimize costs of producing a given level of output C) a strong incentive to innovate D) a strong incentive to produce new goods Answer: B Explanation: Loosely interpreted, this is the Averech-Johnson condition. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price Regulation 13) Differentiate between a socially optimal price and a fair-returns price. Answer: A price set at the marginal cost of production is referred to as a socially optimal price. A price set at the average total cost of production is referred to as a fair-returns price. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Regulation

14) What are the problems associated with price regulation? Answer: The main problem with price regulation is that it reduces firms' incentive to minimize costs, because a firm is guaranteed to make zero economic profits with price regulation. Another problem associated with price regulation is that the incentive to innovate and produce new goods and services is greatly reduced, because firms earn fewer profits. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Price Regulation The following figure shows the demand curve, the marginal revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve of a monopolist.

15) Refer to the figure above. What is the profit-maximizing quantity for the monopolist? A) 300 units B) 400 units C) 500 units D) 550 units Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Regulation 16) Refer to the figure above. What is the profit-maximizing price for the monopolist? A) $3 B) $4 C) $5 D) $6 Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Regulation 17) Refer to the figure above. When the monopolist is free to set the price, ________. A) it makes a profit of $150 105 Copyright © 2022 Pearson Education Ltd.

B) it incurs a loss of $150 C) it makes a profit of $300 D) it incurs a loss of $300 Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Regulation 18) Refer to the figure above. If the monopolist is forced by regulation to charge the fair-returns price for the profit-maximizing output it produces, ________. A) it makes a profit of $100 B) it makes a profit of $200 C) it incurs a loss of $100 D) it makes zero profit Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Price Regulation

Scenario: Tobac Co. is a monopolist in cigarette market in Nicotiana Republic, where the U.S. dollar is used as the official currency. The firm faces the demand curve shown below. The firm has a constant marginal cost of $2.00 per pack and a fixed cost of $50 million.

19) Refer to the scenario above. If Tobac Co. is forced by the government to charge the fairreturn price, the firm's profit would be ________. A) -$50 million B) negative but more than -$50 million C) $0 D) positive but less than $300 million Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Price Regulation 20) Refer to the scenario above. Tobac Co. is forced by the government to charge the fair-return price, the producer surplus would be ________. A) more than $50 million B) $50 million C) $0 D) negative Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price Regulation

The following figure shows the costs and revenue curves of a firm in a monopoly market.

21) Refer to the figure above. If the government decides to regulate this market at the socially optimal price level, it mandates the monopolist to sell its product ________. A) at P1 B) at P2 C) at P3 D) at any price level the monopolist wants Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Regulation 22) Refer to the figure above. If the government decides to regulate this market at the socially optimal price level, the monopolist will ________. A) make zero profit B) make a positive profit C) make a negative profit D) exit this market Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Regulation

23) Refer to the figure above. If the government decides to regulate this market at the socially optimal price level, it mandates the monopolist to sell its product at the price of ________. A) $2 B) $5 C) $3 D) $10 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Regulation 24) Refer to the figure above. If the government decides to regulate this market at the socially optimal price level, the profit of this monopolist will equal ________. A) zero B) -$26 C) $26 D) -$12 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Regulation 25) Refer to the figure above. If the government decides to regulate this market, the best strategy would be to ________. A) set the price at $3 B) set the price at $2 C) levy a $2 tax on the monopolist D) levy a $1 tax on the monopolist Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Price Regulation

The following figure shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for a monopolist.

26) Refer to the figure above. The monopolist can freely set its price, but the government agreed to compensate consumers for their loss in consumer surplus in comparison to the competitive outcome. What is the amount of compensation per unit of output traded? A) (Q3 Q1) (P1 P4)/2 Q1 B) (Q3 Q1) (P1 P4)/2 Q3 C) (Q3 Q1) (P1 P3)/2 Q1 D) (P1 P3) [Q1 + (Q3 Q1)/2]/Q1 Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price Regulation 27) Refer to the figure above. The monopolist is forced to charge the competitive price, but the government agreed to compensate the monopolist for its loss in producer surplus, in comparison to the profit-maximizing outcome. What is the amount of compensation per unit of output traded? A) (Q3 Q1) (P1 P4)/2 Q3 B) [(P1 P3) Q1 - (Q3 Q1) (P3 P4)/2]/2 C) (Q3 Q1) (P1 P3)/2 Q1 D) (P1 P3) [Q1 + (Q3 Q1)/2]/Q3 Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Price Regulation

28) The problem of superbugs, which are bacteria that resist all available forms of antibiotics, is becoming a serious challenge for doctors. Developing new antibiotics is very costly. Can a monopoly be good for the society in this regard? A) Yes, because innovation is more likely in a monopoly. B) No, because the price of the antibiotic will increase in a monopoly. C) No, because the firms in a competitive market invest more in research and development to remain competitive. D) Yes, because there will be smaller deadweight loss in the market. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Can a Monopoly Ever Be Good for Society? 29) The investment by firms in the creation of products not yet available on the market is referred to as ________. A) working capital B) creative capital C) innovation funds D) research and development Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Can a Monopoly Ever Be Good for Society? 30) Which of the following statements is TRUE of a perfectly competitive market? A) Innovation is less likely in a competitive market because of the free entry and exit of firms. B) Innovation is likely in a competitive market because of the free entry and exit of firms. C) The firms in a competitive market invest more in research and development because they face an inelastic demand curve. D) The firms in a competitive market invest more in research and development because their demand for resources is perfectly elastic. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Can a Monopoly Ever Be Good for Society? 31) Encouraging the formation of monopolies provides firms an incentive to ________. A) innovate B) increase social surplus C) hire fewer resources in production D) decrease deadweight loss Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Can a Monopoly Ever Be Good for Society? 111 Copyright © 2022 Pearson Education Ltd.

32) Which of the following firms is most likely to spend on innovation? A) A perfectly competitive firm B) A monopoly with absolutely no competition C) A firm that is the only controller of a key resource necessary for production D) A firm that enjoys some monopolistic power, but faces strong competition from its rivals Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Can a Monopoly Ever Be Good for Society? 33) The example of decoding the human genome through both a private effort (Celera) and an open-source effort (the Human Genome Project) illustrates that ________. A) monopolies are always inefficient B) patent protection is necessary to provide firms an incentive to innovate C) patent protection may sometimes hinder innovation D) marginal cost pricing is the most efficient form of price regulation Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Can a Monopoly Ever Be Good for Society? 34) What makes World's Fair of 1876, in Philadelphia a natural experiment suitable to study the impact of patent protection on innovation? (The author of the study also used the data from the 1851 Fair in London.) A) Many countries with similar patent laws were represented in the fair, but it was difficult to hold a patent outside the country of origin. B) Many countries with varying patent laws were represented in the fair, and it was difficult to hold a patent outside the country of origin. C) Many different types of innovations were exhibited in the fair from countries with similar patent laws. D) Many innovations of same types were exhibited in the fair from countries with varying patent laws. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Can a Monopoly Ever Be Good for Society?

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 13 Game Theory and Strategic Play Introduction 1) ________ describes an individual's optimal actions in settings where interactions with others determine her well-being. A) Game theory B) Utility optimization C) Strategic equilibrium D) Cost-benefit analysis Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introduction 2) Game theory is the study of ________. A) policy analysis B) strategic interactions C) program evaluation D) irrational decision making Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introduction 3) ________ helps an individual make economic decisions when the individual's behavior determines the payoffs to others. A) Empiricism B) Macroeconomics C) Game theory D) Public economics Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Introduction 4) Which of the following is likely to use the concepts of game theory? A) Household budgeting B) The exit decisions of competitive firms in the long run C) International trade negotiation D) The pricing decision of a firm operating in a competitive market Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Introduction 1 Copyright © 2022 Pearson Education Ltd.

13.1 Simultaneous-Move Games 1) A ________ is a complete plan describing how a player will act. A) strategy B) payoff C) hypothesis D) policy Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 2) A payoff matrix shows the ________. A) various combinations of inputs required to produce a good B) return from each action that players can take in a game C) different combinations of two goods that can be bought with a given income D) payments made to the owners of each factor of production for the production of a good Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 3) Which of the following is TRUE of a payoff matrix? A) It represents only the best response of each player in a game. B) It takes into account all relevant costs and benefits associated with each action of the players. C) It shows the payments made to the owners of each factor of production for the production of a good. D) It does not represent all the costs and benefits associated with the choices of the players. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 4) A game is called a simultaneous-move game if ________. A) players choose their actions at the same time B) one player chooses her action after the other player makes a move C) players choose mixed strategies to play the game D) players choose their dominant strategies to play the game Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games

5) Which of the following is TRUE of a simultaneous-move game? A) Players choose their actions after knowing the action of the first player. B) All relevant benefits and costs of each action are taken into account. C) It involves strategic interactions among a large number of players. D) It cannot be represented by a payoff matrix. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 6) In a simultaneous-move game, ________. A) each player has to make his choice after knowing his rival's choice B) each player has to make his choice without knowing his rival's choice C) there is always more than one Nash equilibrium D) there is always more than one dominant strategy equilibrium Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 7) Which of the following games is a simultaneous-move game? A) In a Senate race, an incumbent senator (from a rightist party) runs against a challenger (from a leftist party) B) The game of chess C) The rock-paper-scissors game D) The game of poker Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 8) Which of the following games is NOT a simultaneous-move game? A) A tourist bargains with a local vendor for the price of souvenirs on a beach in the Dominican Republic. B) Two bidders place a bid in a sealed envelope during an auction. The highest bidder wins the auction. C) Two drivers drive toward each other on a collision course; the first to swerve loses. D) Ann and Bob must meet at 8 P.M. However, there are two possible meeting points, and they cannot communicate before the meeting. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games

Scenario: Suppose two soda brands, Mountain Dew and Mello Yello, are trying to decide whether to launch advertising campaigns for their respective products. These decisions will be taken simultaneously, the brands will not be cooperating, and we will assume each brand's strategist knows her own and her opponent's payoffs in all cases. The payoff matrix for this game is shown below.

9) Refer to the scenario above. If both brands choose to advertise, their respective payoffs are ________. A) profits of 10 cents per can for Mountain Dew and of 5 cents per can for Mello Yello B) profits of 15 cents per can for Mountain Dew and of 0 cents per can for Mello Yello C) profits of 6 cents per can for Mountain Dew and of 8 cents per can for Mello Yello D) profits of 10 cents per can for Mountain Dew and of 2 cents per can for Mello Yello Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 10) Refer to the scenario above. Does Mountain Dew have a dominant strategy? A) No. B) Yes. Regardless of whether Mello Yello chooses to advertise, Mountain Dew's profits are always highest if it advertises. C) Yes. Regardless of whether Mello Yello chooses to advertise, Mountain Dew's profits are always highest if it does not advertise. D) Not enough information is provided to answer the question. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games

11) Refer to the scenario above. Does Mello Yello have a dominant strategy? A) No. B) Yes. Regardless of whether Mountain Dew chooses to advertise, Mello Yello's profits are always highest if it advertises. C) Yes. Regardless of whether Mountain Dew chooses to advertise, Mello Yello's profits are always highest if it does not advertise. D) Not enough information is provided to answer the question. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 12) Refer to the scenario above. Is there a dominant strategy equilibrium? A) No B) Yes: Mountain Dew does not advertise, Mello Yello does not advertise. C) Yes: Mountain Dew advertises, Mello Yello advertises. D) Yes: Mountain Dew advertises, Mello Yello does not advertise. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games

Scenario: Contiguous states often use tax policy to attract residents, firms, and economic activity. These "tax competitions" between states can be modeled with game theory. Suppose New Jersey currently has a state sales tax of 7 percent and Pennsylvania has a state sales tax of 6 percent. The game shown below models the effect of a reduction in each state's sales tax rate to 3 percent on each state's sales tax revenue. Assume the motivation of each state is to maximize tax revenue. The first number in a cell is the payoff to New Jersey; the second number is the payoff to Pennsylvania.

(Source: John Greenwald, "A No-Win War Between the States," Time, April 8, 1996, 44—45. 13) Refer to the scenario above. Does New Jersey have a dominant strategy? A) No. B) Yes. Regardless of whether Pennsylvania decides to lower its sales tax rate, New Jersey will always gain more revenue by lowering their sales tax rate to 3 percent. C) Yes. Regardless of whether Pennsylvania decides to lower its sales tax rate, New Jersey will always gain more revenue by maintaining their sales tax rate at 7 percent. D) Not enough information is provided to answer the question. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 14) Refer to the scenario above. Does Pennsylvania have a dominant strategy? A) No. B) Yes. Regardless of whether New Jersey decides to lower its sales tax rate, Pennsylvania will always gain more revenue by lowering their sales tax rate to 3 percent. C) Yes. Regardless of whether New Jersey decides to lower its sales tax rate, Pennsylvania will always gain more revenue by maintaining their sales tax rate at 6 percent. D) Not enough information is provided to answer the question. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games

15) Refer to the scenario above. Is there a dominant strategy equilibrium? A) No. B) Yes, New Jersey lowers its sales tax rate to 3 percent and Pennsylvania maintains its sales tax rate. C) Yes, both New Jersey and Pennsylvania maintain their sales tax rates. D) Yes, both New Jersey and Pennsylvania lower their sales tax rates to 3 percent. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 16) Refer to the scenario above. Is there a set of payoffs that is superior to the payoffs realized at the dominant strategy equilibrium? A) No. B) Yes, New Jersey maintains its sales tax rate, realizing $18 million in tax revenues, and Pennsylvania lowers its sales tax rate, realizing $22 million in tax revenues. C) Yes, New Jersey maintains its sales tax rate, realizing $24 million in tax revenues, and Pennsylvania also maintains its sales tax rate, realizing $20 million in tax revenues. D) Yes, New Jersey lowers its sales tax rate, realizing $26 million in tax revenues, and Pennsylvania maintains its sales tax rate, realizing $14 million in tax revenues. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 17) The prisoners' dilemma is an example of a(n) ________ game. A) simultaneous-move B) extensive-form C) zero-sum D) mixed-strategy Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Best Responses and the Prisoners' Dilemma 18) A best response is ________. A) one player's optimal action choice taken irrespective of the action of the other player B) one player's optimal action choice taking the other player's action as given C) an action choice that always results in a zero payoff to the opponent D) an action choice that results in equal payoffs to all the players in a game Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Best Responses and the Prisoners' Dilemma

Scenario: Two rival firms are considering sponsoring an event. Each firm believes that sponsoring the event will increase its sales by a certain percentage. The payoff matrix showing the increase in sales for the firms is given below. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

19) Refer to the scenario above. What is likely to be the impact on Firm A's sales if Firm A decides to sponsor the event? A) A 5 percent increase in sales B) A 2 percent increase in sales C) A 0 percent increase in sales D) A 10 percent increase in sales Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma 20) Refer to the scenario above. What is likely to be the impact on Firm A's sales if Firm A decides not to sponsor the event? A) A 7 percent increase in sales B) A 0 percent increase in sales C) A 2 percent increase in sales D) A 10 percent increase in sales Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma 21) Refer to the scenario above. What is likely to be the impact on Firm B's sales if Firm B decides to sponsor the event? A) A 5 percent increase in sales B) A 2 percent increase in sales C) A 7 percent increase in sales D) A 0 percent increase in sales Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma

22) Refer to the scenario above. What is likely to be the impact on Firm B's sales if Firm B decides not to sponsor the event? A) A 5 percent increase in sales B) A 7 percent increase in sales C) A 0 percent increase in sales D) A 2 percent increase in sales Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma Scenario: Rita and Mike have been caught cheating on an examination. They are taken to separate rooms for interrogation. Their payoff matrix is given below. The first outcome listed in each cell is the payoff to the row player, and the second outcome listed is the payoff to the column player.

23) Refer to the scenario above. This is an example of a(n) ________. A) extensive-form game B) simultaneous-move game C) zero-sum game D) mixed-strategy game Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma 24) Refer to the scenario above. Which of the following is TRUE? A) Mike's best response is to hold out if Rita confesses. B) Rita's best response is to hold out if she expects Mike not to confess C) Rita's best response is not to confess irrespective of what Mike does. D) Mike's best response is to confess irrespective of what Rita does. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma

25) Refer to the scenario above. What will likely be the outcome of this game? A) Mike will confess, while Rita will not confess. B) Rita will confess, while Mike will not confess. C) Neither of them will confess. D) Both of them will confess. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma 26) Refer to the scenario above. Which of the following is likely to happen if Rita confesses and Mike does NOT confess? A) Both of them will be let free. B) Rita will be let free, while Mike will be suspended. C) 10 points will be deducted from their respective scores. D) 10 points will be deducted from Mike's score, while Rita will be suspended. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma 27) Refer to the scenario above. Which of the following is likely to happen if Rita does NOT confess? A) Both of them will be let free. B) Mike will be let free, while Rita will be suspended. C) 10 points will be deducted from their respective scores. D) 10 points will be deducted from Rita's score, while Mike will be suspended. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma

Scenario: Company A and Company B are considering spending a certain sum of money to advertise their new range of products. If Company A chooses to advertise while Company B does not, Company A's annual sales will increase by $5 million, while Company B's sales will remain unchanged. If Company B chooses to advertise while Company A does not, Company B's annual sales will increase by $5 million, while Company A will not experience any change in its sales. If both the companies decide to advertise, their sales will increase sales by $2 million each, and if neither of them spends on advertisement, their sales will remain unchanged. 28) Refer to the scenario above. Which of the following is TRUE? A) Company A should not advertise its products irrespective of what Company B does. B) Company B should not advertise if Company A decides to advertise its products. C) Company A should advertise if Company B decides to advertise its products. D) Company B should not advertise its product irrespective of what Company A does. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma 29) Refer to the scenario above. If the cost of advertising is negligible, what will be the outcome of this game? A) Company A will advertise its products while Company B will not advertise. B) Company B will advertise, while Company A will not advertise. C) Both the companies will advertise their products. D) Neither of the companies will advertise its products. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Best Responses and the Prisoners' Dilemma 30) Refer to the scenario above. Suppose the cost of advertising in this industry is very high and each company will incur a cost of $3 million annually if they choose to advertise. Which of the following is TRUE in this case? A) Company A's best response is to advertise if Company B advertises. B) Company B's best response is to advertise irrespective of what Company A does. C) Company A's dominant strategy is to advertise. D) This game does not have a dominant strategy equilibrium. Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium

31) A dominant strategy ________. A) always results in equal payoffs to all the players in a game B) always results in a zero payoff to the opponent C) results in a high payoff irrespective of the strategy chosen by the other player D) always results in a low payoff irrespective of the strategy chosen by the other player Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 32) Which of the following is TRUE? A) A dominant strategy equilibrium always leads to the best outcome for each player. B) A dominant strategy equilibrium cannot be a Nash equilibrium. C) A dominant strategy equilibrium is a Nash equilibrium if each player chooses a strategy that is a best response to the strategies of others. D) A dominant strategy equilibrium occurs if the sum of the players' payoff is zero. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 33) A player has a dominant strategy when ________. A) her chosen strategy gives her a lower payoff than the other player B) her chosen strategy matches the best response of the other player in the game C) she has many best responses to any strategy of the other player in the game D) she has only one best response to every possible strategy of the other player Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 34) Which of the following statements is TRUE? A) In any game, the best response of a player is also her dominant strategy. B) The best response of a player is not always her dominant strategy. C) The prisoners' dilemma game is an example of a zero-sum game. D) The prisoners' dilemma game is an example of an extensive-form game. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium

35) Which of the following is TRUE of the prisoners' dilemma game? A) The prisoners' dilemma game has multiple Nash equilibria. B) There is no dominant strategy equilibrium in the prisoners' dilemma game. C) The dominant strategy equilibrium in the prisoners' dilemma game is also the Nash equilibrium. D) The prisoners' dilemma game is an extensive-form game. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium Scenario: The payoff matrix given below shows the payoffs to two rival firms in millions of U.S. dollars for each strategy they choose. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

36) Refer to the scenario above. Which of the following is TRUE? A) Firm A's dominant strategy is Strategy X. B) Firm B's dominant strategy is Strategy Y. C) Firm A is better off choosing Strategy X when Firm B chooses Strategy Y. D) Firm B is better off choosing Strategy X when Firm A chooses Strategy Y. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 37) Refer to the scenario above. In this game, the dominant strategy equilibrium occurs if ________. A) Firm A chooses Strategy Y and Firm B chooses Strategy X B) Firm B chooses Strategy Y and Firm B chooses Strategy X C) both Firm A and Firm B choose Strategy X D) both Firm A and Firm B choose Strategy Y Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium

38) Refer to the scenario above. In the dominant strategy equilibrium, the payoff to Firm A is ________. A) $1.2 million B) $3.0 million C) $3.5 million D) $2.5 million Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 39) Refer to the scenario above. In the dominant strategy equilibrium, the payoff to Firm B is ________. A) $1.2 million B) $3.0 million C) $2.5 million D) $2 million Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 40) Refer to the scenario above. The sum of the firms' payoffs is maximum when ________. A) both the firms choose Strategy X B) both the firms choose Strategy Y C) Firm A chooses Strategy X and Firm B chooses Strategy Y D) Firm A chooses Strategy Y and Firm B chooses Strategy X Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 41) How does a dominant strategy equilibrium occur in a simultaneous-move game? Answer: A dominant strategy equilibrium occurs in a simultaneous-move game when each player has one best response to every possible strategy of the other player(s). Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium

Scenario: Your friend Joe and you decide to race your new cars. However, both of you are caught speeding by a police patrol. The matrix below shows the respective payoffs for each choice of actions. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

42) Refer to the scenario above. Which of the following is TRUE? A) Your dominant strategy is to bribe irrespective of what Joe does. B) Your dominant strategy is not to bribe irrespective of what Joe does. C) You should bribe if Joe bribes. D) Joe should bribe if you bribe. Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 43) Refer to the scenario above. Which of the following strategy combinations denotes the dominant strategy equilibrium in this case? A) (Bribe, Bribe) B) (Bribe, Do not bribe) C) (Do not bribe, Bribe) D) (Do not bribe, Do not bribe) Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 44) Refer to the scenario above. Suppose a new legislative policy decreases the fine for speeding to $50. This reduction in the fine to $50 ________. A) makes it profitable for you to bribe B) makes it profitable for Joe to bribe C) changes the outcome of the game D) will not change your dominant strategy Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 15 Copyright © 2022 Pearson Education Ltd.

Scenario: Miguel and Stephanie are competitors who sell tacos out of their food trucks by the same beach. For each taco they sell, they get a profit of $1.00. Each morning they must decide at which of the three legally permitted locations, A, B, or C, they should park their trucks. The picture below shows the three locations.

In each of the three locations, there are 100 customers per day, and each customer buys a taco from the nearest vendor. If the two trucks are in the same location, then each vendor gets half of the customers. So, for example, if Miguel's truck is in location A, and Stephanie's is also in location A, then half of customers from locations A, B, and C will buy from Miguel's and the other half will buy from Stephanie's, so that each gets a profit of $150. If Miguel's truck is in location A and Stephanie's is in location B, then everyone in location A will buy from Miguel and everyone from locations B and C will buy from Stephanie, so that Miguel's profit is $100 while Stephanie's is $200. If Miguel's truck is in location A and Stephanie's is in location C, then everyone in A plus a half from B will buy from Miguel, and everyone in C plus half from B will buy from Stephanie so that each vendor gets a profit of $150, and so on. The table below is the payoff matrix for this game. The first number in each cell is Miguel's profit, and the second number is Stephanie's profit.

45) Refer to the scenario above. If Miguel's truck is in location A, what is Stephanie's best response? A) Location A B) Location B C) Location C D) Location A or C Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium

46) Refer to the scenario above. If Miguel's truck is located at B, what is Stephanie's best response? A) Location A B) Location B C) Location C D) Location A or B Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 47) Refer to the scenario above. If Miguel's truck is located at C, what is Stephanie's best response? A) Location A B) Location B C) Location C D) Location B or C Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 48) Refer to the scenario above. Does Stephanie have a dominant strategy? A) Yes, it is location A. B) Yes, it is location B. C) Yes, it is location C D) No, she does not have a dominant strategy. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 49) Refer to the scenario above. Does Miguel have a dominant strategy? A) Yes, it is location A. B) Yes, it is location B. C) Yes, it is location C D) No, he does not have a dominant strategy. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium

The following figure depicts four simultaneous-move games. The first element of each payoff cell is the payoff to Player A, and the second element is the payoff to Player B.

50) Refer to the figure above. In which of these simultaneous-move games does only player A have a dominant strategy? A) (1) B) (2) C) (3) D) (4) Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 51) Refer to the figure above. In which of these simultaneous-move games does only player B have a dominant strategy? A) (1) B) (2) C) (3) D) (4) Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 18 Copyright © 2022 Pearson Education Ltd.

52) Refer to the figure above. In which of these simultaneous-move games, do both players A and B have a dominant strategy? A) (1) B) (2) C) (3) D) (4) Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium The following payoff matrix represents a simultaneous-move game between two players: Alec and Ben. Each player has to choices: Red and Yellow. The first number in each cell is the payoff to Alec, and the second number is the payoff to Ben.

53) Refer to the table above. Which statement is TRUE? A) Alec and Ben both have a dominant strategy in this game. B) Only Alec has a dominant strategy in this game. C) Only Ben has a dominant strategy in this game. D) Neither Alec nor Ben have a dominant strategy in this game. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium 54) Refer to the table above. Which statement is TRUE? A) Alec and Ben both choosing Red is the dominant strategy equilibrium of this game. B) Alec and Ben both choosing Yellow is the dominant strategy equilibrium of this game. C) Alec choosing Red and Ben choosing Yellow is the dominant strategy equilibrium of this game. D) There is no dominant strategy equilibrium in this game. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Dominant Strategies and Dominant Strategy Equilibrium

The following payoff matrix represents a simultaneous-move game between two players: John and Trevor. Each player has to choices: Black or White. The first number in each cell is the payoff to John, and the second number is the payoff to Trevor.

55) Refer to the table above. Which statement is TRUE? A) John and Trevor both have a dominant strategy in this game. B) Only John has a dominant strategy in this game. C) Only Trevor has a dominant strategy in this game. D) Neither John nor Trevor have a dominant strategy in this game. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Games without Dominant Strategies 56) Refer to the table above. If John chooses ________, Trevor is better off choosing ________. And if Trevor chooses ________, John is better off choosing ________. A) Black; White; Black; White B) White; White; White; White C) Black; Black; Black; White D) Black; White; White; Black Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Games without Dominant Strategies 57) Refer to the table above. What is the equilibrium of this game? A) John and Trevor both choose Red. B) John and Trevor both choose Yellow. C) John chooses Red and Trevor chooses Yellow. D) There is no dominant strategy equilibrium in this game. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Games without Dominant Strategies

Scenario: Jack and Jill have gone cycling and have come to a place where the road is obstructed by a fallen tree. They can move the tree if both of them try. If neither of them tries, they have to turn back and reach home very late. However, if one of them tries while the other does not help, the one who tries will have a muscle sprain and will not be able to move the tree. The matrix below shows the utility each player derives in each situation. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

58) Refer to the scenario above. This is an example of a(n) ________. A) simultaneous-move game B) extensive-form game C) mixed-strategy game D) symmetric game Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Games without Dominant Strategies 59) Refer to the scenario above. Jack will derive ________ units of utility if Jill tries to move the tree while he does not try at all. A) 5 B) -5 C) 2 D) 10 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Games without Dominant Strategies 60) Refer to the scenario above. Jack will derive ________ units of utility if Jill tries to move the tree while he does not try at all. A) 5 B) −5 C) 2 D) 10 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Games without Dominant Strategies 21 Copyright © 2022 Pearson Education Ltd.

61) Refer to the scenario above. Jack will derive ________ units of utility if he tries to move the tree while Jill does not try at all. A) 5 B) −5 C) −2 D) 10 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Games without Dominant Strategies 62) Refer to the scenario above. Jack and Jill will derive maximum utility if ________. A) Jack tries to move the tree while Jill does not B) Jill tries to move the tree while jack does not C) both of them try to move the tree D) neither of them tries to move the tree Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Games without Dominant Strategies 63) Refer to the scenario above. Jill will derive ________ units of utility if she tries to move the tree while Jack does not try at all. A) 5 B) −5 C) −2 D) 10 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Games without Dominant Strategies 64) Refer to the scenario above. Which of the following is TRUE in this case? A) Jack is better off not trying to move the tree if Jill does not try at all. B) Jill is better off trying to move the tree if Jack does not try at all. C) Jack is better off trying to move the tree regardless of what Jill does. D) Jill is better off not trying if Jack tries to move the tree. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Games without Dominant Strategies

65) Refer to the scenario above. This game ________. A) has a unique Nash equilibrium B) has a unique dominant strategy equilibrium C) does not have a dominant strategy equilibrium D) does not have a Nash equilibrium Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Games without Dominant Strategies Dominic and Deckard have gotten into a bit of a disagreement and are now speeding headfirst towards each other in their cars. If neither swerve, they will certainly crash and damage their cars, but they get to keep their pride giving each of them a payoff of -50. If both swerve, both lose face, but their cars will remain undamaged giving them each a payoff of 0. If Dominic swerves but Deckard doesn't, they will not crash, but Dominic will lose face and get a payoff of -100 while Deckard will feel superior and get a payoff of 100. If Deckard swerves but Dominic doesn't, they will not crash, but Deckard will lose face and get a payoff of -100 while Dominic will feel superior and get a payoff of 100. 66) Does either Dominic or Deckard have a dominant strategy? A) Dominic only has a dominant strategy. B) Deckard only has a dominant strategy. C) Both have dominant strategies. D) Neither has a dominant strategy. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 67) Which of the following statements is FALSE? A) Dominic should swerve if he knows Deckard is going to go straight. B) Deckard's dominant strategy is to go straight. C) Deckard's best response is to go straight if he knows Deckard is going to swerve. D) Dominic's best response is to go straight if he knows that Deckard is going to swerve. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games

Ron and Hermione are trying to decide what to do on a Friday night. They are each working in their rooms, and cannot communicate. They have to decide where to meet: • At the Three Broomsticks to watch the Quidditch Cup • At the library to study They are each only happy if they are together, but Ron has a preference for the Three Broomsticks while Hermione has a preference for the library. Therefore, their payoffs are zero if they end up in different locations, one if they end up together in their non-preferred location, and 2 if they end up in their preferred location. 68) Does either Ron or Hermione have a dominant strategy? A) Ron only has a dominant strategy. B) Hermione only has a dominant strategy. C) Both have dominant strategies. D) Neither has a dominant strategy. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Simultaneous-Move Games 13.2 Nash Equilibrium 1) A Nash equilibrium occurs if each player chooses ________. A) strategies that are mutual best responses B) his or her dominant strategy C) only a pure strategy D) only a mixed strategy Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Nash Equilibrium 2) Which of the following is TRUE of a Nash equilibrium? A) A game can have only one Nash equilibrium. B) No player can improve his payoff by changing his strategy in a Nash equilibrium. C) A Nash equilibrium cannot occur if each player is aware of the strategies of other players. D) A Nash equilibrium occurs if each player earns a zero payoff irrespective of the strategy he chooses. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Nash Equilibrium

3) In a game, a Nash equilibrium is reached only if the players ________. A) understand the game and the payoffs associated with each strategy B) follow a mixed strategy C) use backward induction to develop their strategies D) have no best response for the choices made by other players Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Nash Equilibrium 4) Consider another version of the advertising game between Mountain Dew and Mello Yello. Again, each brand is deciding whether to launch an advertising campaign. These decisions will be taken simultaneously, the brands will not be cooperating, and we will assume each brand's strategist knows her own and her opponent's payoffs in all cases. The payoff matrix is listed below.

Is there a Nash equilibrium in this advertising game? A) Yes, Mountain Dew chooses to not advertise, Mello Yello chooses to advertise. B) Yes, both Mountain Dew and Mello Yello choose to advertise. C) Yes, both Mountain Dew and Mello Yello choose to not advertise. D) Yes, both B and C Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Nash Equilibrium

Scenario: The payoff matrix given below shows the payoffs to two firms in millions of U.S. dollars for choosing two alternative strategies. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

5) Refer to the scenario above. Which of the following is TRUE in this case? A) This game has multiple Nash equilibria. B) This game does not have a Nash equilibrium. C) The dominant strategy equilibrium of this game is also its Nash equilibrium. D) The dominant strategy equilibrium of this game is not Pareto efficient. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Nash Equilibrium 6) Refer to the scenario above. Which of the following will happen in equilibrium? A) Firm A will choose Strategy X, and Firm B will choose Strategy Y. B) Firm A will choose Strategy Y, and Firm B will choose Strategy X. C) Both the firms will choose Strategy X. D) Both the firms will choose Strategy Y. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 7) Refer to the scenario above. What is the payoff to Firm A in equilibrium? A) $2.4 million B) $2.6 million C) $5.2 million D) $3.0 million Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium

8) Refer to the scenario above. What is the payoff to Firm B in equilibrium? A) $2.6 million B) $0 C) $4 million D) $3 million Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium Scenario: The following payoff matrix represents a simultaneous-move game between two players: Kay and Jack. Each player has two choices: Black or White. The first number in each cell is the payoff to Kay, and the second number is the payoff to Jack.

9) Refer to the scenario above. Which is TRUE? A) This game has one Nash equilibrium. B) This game has two Nash equilibria. C) This game has a dominant strategy equilibrium. D) This game has two dominant strategy equilibria. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Finding a Nash Equilibrium 10) Refer to the scenario above. If Kay and Jay both choose White, ________. A) Kay will be better off if she switches to Black B) Kay will be better off if she doesn't change her choice C) Kay will get a payoff of $50 D) Jay will get a payoff of $30 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Finding a Nash Equilibrium

Scenario: The following payoff matrix represents a simultaneous-move game between two players: Dan and Jessa. Each player has two choices: Strategy X or Strategy Y. The first number in each cell is the payoff to Dan, and the second number is the payoff to Jessa.

11) Refer to the scenario above. Which statement is TRUE? A) Dan's dominant strategy is Y. B) Jessa's dominant strategy is X. C) Dan does not have a dominant strategy. D) Dan will choose Y only when Jessa chooses Y. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Finding a Nash Equilibrium 12) Refer to the scenario above. Which statement is TRUE? A) This game has one Nash equilibrium. B) This game has two Nash equilibria. C) This game does not have a dominant strategy equilibrium. D) This game has two dominant strategy equilibria. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Finding a Nash Equilibrium 13) Refer to the scenario above. If Dan and Jessa both choose Y, ________. A) Jessa will be better off if she switches to X B) Dan will be better off if he doesn't change his choice C) they will be at the Nash equilibrium D) they will be at the dominant strategy equilibrium Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Finding a Nash Equilibrium

Scenario: Two rival firms have to choose between two strategies to maximize their benefits. The two alternative strategies available are Strategy X and Strategy Y. The matrix below shows the respective payoffs for each strategy chosen by the firms. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

14) Refer to the scenario above. Which of the following is TRUE in this case? A) Firm A's dominant strategy is to choose Strategy X. B) Firm B's dominant strategy is to choose Strategy Y. C) Firm A will choose strategy X if Firm B chooses Strategy Y. D) Firm A will choose strategy Y if Firm B chooses Strategy Y. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 15) Refer to the scenario above. This game ________. A) has two Nash equilibria B) has a unique Nash equilibrium C) has a dominant strategy equilibrium D) does not have a Nash equilibrium Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium

Scenario: To win candy bars, Tom and Sam are playing a game in which they are blindfolded and are asked to raise either their right hand or their left hand when a bell rings. The matrix below shows their payoffs in different situations. Payoff here denotes the number of candy bars they get. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

16) Refer to the scenario above. Which of the following strategy combinations denotes a Nash equilibrium? A) (Left, Left) B) (Left, Right) C) (Right, Left) D) (Right, Right) Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 17) Refer to the scenario above. Tom will receive ________ if he raises his right hand and Sam raises his left hand. A) 3 candy bars B) 0 candy bars C) 2 candy bars D) 1 candy bar Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 18) Refer to the scenario above. Tom will receive ________ if he raises his left hand and Sam raises his right hand. A) 2 candy bars B) 3 candy bars C) 0 candy bars D) 1 candy bar Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium

19) Refer to the scenario above. Which of the following is TRUE? A) This game does not have a dominant strategy equilibrium. B) This game does not have a Nash equilibrium. C) This game has two Nash equilibria. D) This game has a unique Nash equilibrium. Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium Scenario: Two firms in a market sell identical goods and charge a price of $5 per unit. However, the cost of a crucial input used in producing these goods has increased. As a result, both firms are considering increasing the price of the good to $6. If the firms do not raise their prices at the same time, the firm that raises the price stands to lose market share. The payoff matrix shows the respective payoffs on the basis of the prices charged by each firm. Here, payoffs denote the number of units sold by each firm. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

20) Refer to the scenario above. This is an example of a(n) ________. A) simultaneous-move game B) mixed-strategy game C) extensive-form game D) symmetric game Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 21) Refer to the scenario above. Which of the following is TRUE in this case? A) Firm 1's dominant strategy is to charge $6. B) Firm 1's dominant strategy is to charge $5. C) Firm 2's dominant strategy is to charge $6. D) This game does not have a dominant strategy equilibrium. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium

22) Refer to the scenario above. Which of the following is TRUE? A) A Nash equilibrium occurs if Firm 1 charges a price of $5 and Firm 2 charges a price of $6. B) The dominant strategy equilibrium is the Nash equilibrium. C) A Nash equilibrium occurs if Firm 1 charges $6 and Firm 2 charges $5. D) This game does not have a Nash equilibrium. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 23) Refer to the scenario above. The best approach to play this game is to use ________. A) a dominant strategy B) backward induction to come to a decision C) credible commitments to influence the payoffs of the game D) a mixed strategy Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium

24) Refer to the scenario above. Is Miguel choosing A and Stephanie choosing C a Nash equilibrium? Why? A) Yes it is, because if Miguel chose A, then C is Stephanie's best response. B) Yes it is, because if Miguel chose A, then C is Stephanie's best response; and if Stephanie chose C, then A is Miguel's best response. C) No it is not, because if Miguel chose A, then C is Stephanie's best response, but if Stephanie chose C, then A is not Miguel's best response. D) No it is not, because if Stephanie chose C, then A is not Miguel's best response. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium

25) Refer to the scenario above. Is Miguel choosing B and Stephanie choosing A a Nash equilibrium? Why? A) Yes it is, because if Miguel chose B, then A is Stephanie's best response. B) Yes it is, because if Miguel chose B, then A is Stephanie's best response; and if Stephanie chose A, then B is Miguel's best response. C) No it is not, because if Miguel chose B, then A is not Stephanie's best response. D) No it is not. because if Stephanie chose A, then B is not Miguel's best response. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 26) Refer to the scenario above. What, if any, is a Nash equilibrium for this game? A) Miguel choosing A and Stephanie choosing B B) Miguel and Stephanie choosing B C) Miguel choosing C and Stephanie choosing B D) No Nash equilibrium for this game Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium Scenario: Jim and Janis must complete a task together at their job. Jim can put no effort, low effort, or high effort into the job, while Janis, being more conscientious than Jim, has choice of low effort or high effort. Their compensation, summarized in the payoff matrix below (in thousands of dollars), depends on the quality of their work, which in turn depends on the efforts they put into the task. The first number in each cell is Jim's payoff, and the second number is Janis' payoff.

27) Refer to the scenario above. If a < 3, then ________ form a Nash equilibrium. A) low efforts by both workers B) high efforts by both workers C) low effort by Jim and high effort by Janis D) high effort by Jim and low effort by Janis Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Finding a Nash Equilibrium 34 Copyright © 2022 Pearson Education Ltd.

28) Refer to the scenario above. If a > 3, then ________. A) low effort by Jim and high effort by Janis form a Nash equilibrium B) high effort by Jim and low effort by Janis form a Nash equilibrium. C) low effort by Jim and low effort by Janis form a Nash equilibrium D) no pair of effort levels forms a Nash equilibrium Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Finding a Nash Equilibrium 29) How do we arrive at a Nash equilibrium in a matrix game? Answer: The key to finding a Nash equilibrium in a matrix game is to follow the logic of finding the best responses. Once the best response of each player to the strategies of the other player is determined, we need to check whether either player has an incentive to change her strategy. If each player follows her best responses to the strategies of other player, neither of them will have an incentive to change their strategies. Thus, Nash equilibrium will be reached. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Finding a Nash Equilibrium

30) Fast Run and Go! are two rival brands of sports apparels. The payoff matrix below shows their revenue in millions of U.S. dollars if they lower the price of their products. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

Find the Nash equilibrium for this game. Answer: The key to finding Nash equilibria in matrix games is to follow the logic of finding the best responses. In this case, if Fast Run lowers its price, Go! will earn $10 million dollars if it lowers its price, while it will earn only $2 million if it chooses not to lower its price. Therefore, Go! is better off by lowering its price if Fast Run lowers its price. If Fast Run does not lower its price, Go! will earn $15 million dollars by lowering its price, while it will earn only $2 million if it does not lower its price. Go! is again better off by lowering its price. Similarly, if Go! lowers its price, Fast Run will earn $10 million dollars if it lowers its price, while it will earn only $1 million if it does not lower its price. Therefore, Fast Run is better off by lowering its price if Go! lowers its price. If Go! does not lower its price, Fast Run will earn $15 million dollars by lowering its price, while it will earn only $2 million if it does not lower its price. Therefore, Fast Run is again better off by lowering its price. In equilibrium, both firms will lower their prices. This is the Nash equilibrium, because neither of the two firms has an incentive to change its strategies once this equilibrium is reached. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium

31) A road that runs by your house has been damaged by a thunderstorm. The local authority will repair the road if at least one person lodges a complaint. There are only two houses on the road, yours and your neighbor's. The matrix below shows your payoffs depending on who decides to lodge a complaint. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

a) Does this game have a Nash equilibrium? Explain your answer. b) Does this game have a dominant strategy equilibrium? Explain your answer. Answer: a) An equilibrium is called a Nash equilibrium if players do not want to change their strategies once this equilibrium is reached. This game has two Nash equilibria that occur when one of you lodges a complaint while the other does not. Consider the situation in which you decide to lodge a complaint while your neighbor does not. In this case, neither has an incentive to change his or her decision as this will lead to lower payoffs. Similarly, if your neighbor decides to lodge a complaint while you decide to wait, neither of you will be able to earn a higher payoff by changing your respective decisions. b) You are better off lodging a complaint if your neighbor does not lodge a complaint, and you are better off waiting if your neighbor lodges a complaint. Therefore, you do not have a dominant strategy to play this game. Similarly, your neighbor does not have a dominant strategy. Therefore, there is no dominant strategy for either player in this game. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium

The following figure depicts four simultaneous-move games. The first element of each payoff cell is the payoff to Player A. The other element is the payoff to Player B.

32) Refer to the figure above. In which one of these simultaneous-play games is the unique Nash equilibrium Players A and B both choosing X? A) (1) B) (2) C) (3) D) (4) Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 33) Refer to the figure above. In which one of these simultaneous-play games is the unique Nash equilibrium Player A choosing X and Player B choosing Y? A) (1) B) (2) C) (3) D) (4) Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 38 Copyright © 2022 Pearson Education Ltd.

34) Refer to the figure above. In which one of these simultaneous-play games is there no Nash equilibrium? A) (1) B) (2) C) (3) D) (4) Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium 35) Refer to the figure above. In which one of these simultaneous-play games are there two Nash equilibria? A) (1) B) (2) C) (3) D) (4) Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Finding a Nash Equilibrium Dominic and Deckard have gotten into a bit of a disagreement and are now speeding headfirst towards each other in their cars. If neither swerve, they will certainly crash and damage their cars, but they get to keep their pride giving each of them a payoff of -50. If both swerve, both lose face, but their cars will remain undamaged giving them each a payoff of 0. If Dominic swerves but Deckard doesn't, they will not crash, but Dominic will lose face and get a payoff of -100 while Deckard will feel superior and get a payoff of 100. If Deckard swerves but Dominic doesn't, they will not crash, but Deckard will lose face and get a payoff of -100 while Dominic will feel superior and get a payoff of 100. 36) What is the Nash equilibrium of this game? A) Neither Dominic nor Deckard swerve. B) Both Dominic and Deckard swerve. C) Dominic swerves and Deckard does not. D) Deckard swerves and Dominic does not. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Nash Equilibrium

Ron and Hermione are trying to decide what to do on a Friday night. They are each working in their rooms, and cannot communicate. They have to decide where to meet: • At the Three Broomsticks to watch the Quidditch Cup • At the library to study They are each only happy if they are together, but Ron has a preference for the Three Broomsticks while Hermione has a preference for the library. Therefore, their payoffs are zero if they end up in different locations, one if they end up together in their non-preferred location, and 2 if they end up in their preferred location. 37) How many Nash Equilibria does this game have? A) None B) One C) Two D) Three Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Nash Equilibrium 38) Which of the following are Nash equilibria of this game? I. Both Ron and Hermione go to the Three Broomsticks II. Both Ron and Hermione go to the Library III. Ron goes to the Three Broomsticks and Hermione goes to the Library IV. Ron goes to the Library and Hermione goes to the Three Broomsticks A) I and II B) III and IV C) III only D) II only Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Nash Equilibrium

13.3 Applications of Nash Equilibria 1) Mr. Smith wants to go on a vacation with his wife. Mrs. Smith wants to go to a beach. He, however, wants to go trekking in the hills. The payoff matrix given below shows the units of satisfaction derived in each situation. The first number listed in each cell is the payoff to Mr. Smith, and the second number listed is the payoff to Mrs. Smith.

This game has ________. A) multiple dominant strategy equilibria B) multiple Nash equilibria C) only one Nash equilibrium D) only one dominant strategy equilibrium Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria Scenario: The matrix below shows the payoffs to two firms when they choose between two different strategies. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

2) Refer to the scenario above. What is the sum of the payoffs to the firms if both firms use strategy A? A) 1 B) −2 C) 2 D) 0 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria

3) Refer to the scenario above. Which of the following is TRUE of this game? A) This game has two dominant strategy equilibria. B) This game has multiple Nash equilibria. C) This game has a unique Nash equilibrium. D) This game does not have a dominant strategy equilibrium. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria

The following figure depicts four simultaneous-move games. The first element of each payoff cell is the payoff to Player A. The other element is the payoff to Player B.

4) Refer to the figure above. Which of these simultaneous-move games best represents the following scenario: a penalty kick in soccer. Player A is the striker and Player B is the goalie. For the striker, Action X means kicking the ball toward the left side of the net, while Y means kicking toward the right side of the net. For the goalie, X means that the goalie dives toward the left of the net and Y means that the goalie dives toward the right. A) (1) B) (2) C) (3) D) (4) Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria

5) Refer to the figure above. Which of these simultaneous-move games best represents the following scenario: the prisoner's dilemma, where X means confess and Y means hold out. A) (1) B) (2) C) (3) D) (4) Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria 6) Refer to the figure above. Which of these simultaneous-move games best represents the following scenario: the battle of the sexes. The husband prefers to go see a boxing match (X), while the wife prefers to go to the ballet (Y). However, they both prefer being together than being alone. A) (1) B) (2) C) (3) D) (4) Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria 7) Refer to the figure above. Which of these simultaneous-move games best represent the following scenario: a coordination game. Ann and Bob have the opportunity to either go to the same party (X) or stay at their respective homes (Y). They would be much happier if they both went to the party, but staying at home is better than going to the party alone. A) (1) B) (2) C) (3) D) (4) Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria

Scenario: Diana and Artemis can either jointly hunt stags (adult deer) or individually hunt rabbits. Hunting stags requires cooperation, but if the two cooperate, then they get a large amount of meat. If either hunts stags alone, the chance of success is zero. Hunting rabbits is easy for an individual and even easier for if the two cooperate, but rabbits would provide smaller amounts of meat than would stags. The payoff matrix below reflects this situation. Payoffs are days' worth of meat.

8) Refer to the scenario above. What should be the value of b? A) 7 days' worth of meat B) 4 days' worth of meat C) 1 days' worth of meat D) no meat Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria 9) Refer to the scenario above. Which of the following best reflects the rewards from the hunters' choices? A) a > c > d B) a > d > c C) a = d > c D) a > d = c Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria 10) Refer to the scenario above. Which of the following is TRUE? A) Both hunters hunting stags is the unique Nash equilibrium. B) One hunting stags and the other hunting rabbits is a Nash equilibrium. C) Both hunters hunting stags is a Nash equilibrium, and so is both hunting rabbits. D) No pair of strategies form a Nash equilibrium. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Applications of Nash Equilibria

11) In the tragedy of the commons game illustrated in the text using manufacturing firms located along the Gowanus Canal, the outcome of both firms polluting is ________. A) a dominant strategy equilibrium B) a Nash equilibrium C) dominated by the outcome of both firms choosing not to pollute D) all of the above Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Tragedy of the Commons Revisited Scenario: Consider the tragedy of the commons problem. Suppose two firms (Row Inc. and Colm Inc.) are involved in a production process that exploits a natural resource. Each firm has two options: 1 and 2. The matrix below shows the game matrix for these two firms. The first number listed in each cell is the payoff to Row Inc., and the second number listed is the payoff to Colm Inc.

12) Refer to the scenario above. Considering the tragedy of the commons that these two firms are involved in, Strategy 1 is ________, and Strategy 2 is ________. A) to pollute the natural resource; not to pollute the natural resource B) not to pollute the natural resource; to pollute the natural resource C) pay a low fee to use the natural resource; pay a high fee to use the natural resource D) pay a high fee to use the natural resource; pay a low fee to use the natural resource Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Tragedy of the Commons Revisited 13) Refer to the scenario above. This game is ________. A) a zero-sum game for Row Inc. and for Colm Inc. B) not a zero-sum game for Row Inc. and Colm Inc. C) a zero-sum game for Row Inc. but not a zero-sum game for Colm Inc. D) not a zero-sum game for Row Inc. but is a zero-sum game for Colm Inc. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Tragedy of the Commons Revisited

14) Refer to the scenario above. What is the equilibrium outcome in this case? A) Both firms choosing Strategy 2 B) Both firms choosing Strategy 1 C) Row Inc. choosing Strategy 1 and Colm Inc. choosing Strategy 2 D) Colm Inc. choosing Strategy 1 and Row Inc. choosing Strategy 2 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Tragedy of the Commons Revisited 15) Refer to the scenario above. This game ________. A) does not have a dominant strategy equilibrium B) does not have a Nash equilibrium C) has multiple Nash equilibria D) has a dominant strategy equilibrium Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Tragedy of the Commons Revisited 16) Refer to the scenario above. If these two firms plan to operate in the long run, they will collectively be better off if ________. A) Row Inc. chooses Strategy 1, and Colm Inc. chooses Strategy 2 B) Colm Inc. chooses strategy 1, and Row Inc. chooses Strategy 2 C) both firms choose Strategy 2 D) both firms choose Strategy 1 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Tragedy of the Commons Revisited

Scenario: Two factories dump their waste in a river. This has led to the contamination of the water, which is also used by the factories in their production processes. The matrix below shows the profits of the two firms based on their respective decisions to dump their waste in the river. Note that each firm's choice affects the other firm's profit. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

17) Refer to the scenario above. What is the equilibrium outcome in this case? A) Both firms will dump their waste into the river. B) Neither of the firms will dump its waste into the river. C) Firm 1 will dump its waste into the river, and Firm 2 will not dump its waste. D) Firm 2 will dump its waste into the river, and Firm 1 will not dump its waste. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Tragedy of the Commons Revisited 18) Refer to the scenario above. Which of the following is TRUE? A) Firm 1's dominant strategy is not to dump its waste into the river. B) The dominant strategy equilibrium is the Nash equilibrium. C) The dominant strategy equilibrium is not the Nash equilibrium. D) Firm 2's dominant strategy is not to dump its waste into the river. Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Tragedy of the Commons Revisited 19) In a zero-sum game, ________. A) each player earns a zero payoff irrespective of the strategy he or she chooses B) each player has a dominant strategy C) each player chooses a pure strategy D) one player's loss is another player's gain Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero-Sum Games

20) Which of the following situations is an example of a zero-sum game? A) Two nations trying to strengthen their diplomatic relations B) Two business firms deciding their terms of partnership C) Two players playing a single game of chess D) Two teams deciding on the rules of a game Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Zero-Sum Games 21) Economist Harold Hotelling modeled a location game between two hot dog vendors on a linear beach that contained a fixed number of customers. Customers patronized the hot dog vendor closest to their position on the beach. From any initial starting point, a hot dog vendor could move closer to the center of the beach and steal some customers away from his rival. This is an example of ________. A) a mixed strategy B) the tragedy of the commons C) a zero-sum game D) none of the above Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Zero-Sum Games 22) A strategy is called a pure strategy if it involves choosing ________. A) one particular action for a situation B) different combinations of actions for a situation C) an action that yields a higher payoff to the opponent D) an action that yields a zero payoff to the player Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero-Sum Games 23) A strategy is called a mixed strategy if it involves choosing ________. A) one particular action for a situation B) different actions randomly C) an action that yields a higher payoff to the opponent D) an action that yields a zero payoff to the player Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Zero-Sum Games

Scenario: Consider the following non-cooperative, simultaneous-move game where each player knows her own and her opponent's payoffs. This game is called the dating dilemma. Hayley and Jack are a couple deciding what to do on a Saturday afternoon in the summer. Hayley wants to go to the Museum of Modern Art (MoMA), while Jack wants to go to a New York Mets game. Neither Jack nor Hayley will derive any benefit from going to their preferred activity without their partner. The payoff matrix for this game is presented below.

24) Refer to the scenario above. Does Hayley have a pure strategy? A) Yes, always choose to go to the MoMA B) Yes, always choose to go to the Mets game C) No D) Cannot determine given the information provided Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Zero-Sum Games 25) Refer to the scenario above. Are there any Nash equilibria? A) Yes, Hayley and Jack both choose to go to the Mets game B) Yes, Hayley chooses to go to the MoMA and Jack chooses to go to the Mets game C) Yes, Hayley and Jack both choose to go to the MoMA D) A and C Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Zero-Sum Games

26) Refer to the scenario above. Suppose Hayley and Jack face this quandary repeatedly. What might each individual do when faced with repeated play of this game? A) Always choose their own preferred activity B) Always choose their partner's preferred activity C) Randomize their choice of their own and their partner's preferred activities D) None of the above Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Zero-Sum Games Scenario: Two friends have agreed on a unique strategy to decide who will complete his homework first and help the other. They have agreed to simultaneously display one of three different symbols using their hands–a rock, paper, or scissors. They have decided to follow simple rules to determine the winner of the game: rock breaks scissors, scissors cut paper, and paper covers rock. If both of them hold out the same symbol, the game is a tie. 27) Refer to the scenario above. This is an example of ________. A) a zero-sum game B) a variable-sum game C) an extensive-form game D) the prisoners' dilemma Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Zero-Sum Games 28) Refer to the scenario above. Which of the following is a winning strategy for this game? A) Always choosing rock B) Always choosing paper C) Always choosing scissors D) A random mix of all three symbols Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Zero-Sum Games

29) Tom and Billy are playing a game. They both toss a coin simultaneously. If the results of the tosses are the same, both heads or both tails, Tom wins. If the results of the tosses are different, one heads and one tails, Billy wins. This is an example of ________. A) the prisoners' dilemma B) a variable-sum game C) a zero-sum game D) an extensive-form game Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Zero-Sum Games Scenario: Vladimir and Alphonso are collectors of Toy Story figurines. Each has six dollar bills to spend on three figurines—Sheriff Woody, Buzz Lightyear, and Jessie—that are put up for auction where Vlad and Alph are the only bidders. They simultaneously and independently write down their bids, in whole numbers adding up to $6, for the three figurines and give them to the auctioneer. Whoever wrote the higher number for a figurine wins it. For example, if Vlad bids ($3, $1, $2), meaning $3 for Sheriff Woody, $1 for Buzz Lightyear, and $2 for Jessie, and Alph bids ($2, $3, $1), then Vlad wins Sheriff Woody and Jessie, while Alph wins Buzz Lightyear. If there is a tie, then a fair coin is flipped to determine the winner so that each bidder has 50 percent chance of winning a figurine. Vlad and Alph consider this case as "winning" a figurine. Vlad and Alph care only about how many more, or less, figurines they win compared to the other. 30) Refer to the scenario above. This game is an example of ________. A) the prisoners' dilemma B) a non-zero-sum game C) a zero-sum game D) the tragedy of commons Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Zero-Sum Games 31) Refer to the scenario above. If Vlad bid ($2, $2, $2), then he can win at least ________, no matter what Alph does. A) one and a half figurines B) two figurines C) one figurine D) zero figurines Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Zero-Sum Games 52 Copyright © 2022 Pearson Education Ltd.

32) What is a zero-sum game? Explain with an example. Answer: A zero-sum game is one in which one player's gain is another player's loss, so the sum of the payoffs is zero. A game of poker is an example of a zero-sum game, because one player's loss is another player's gain in this game. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero-Sum Games 33) Differentiate between a pure strategy and a mixed strategy. Answer: A pure strategy involves choosing one particular action for a situation, while a mixed strategy involves choosing different actions with different probabilities. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Zero-Sum Games 34) Why does a penalty kicker in a soccer game use a mixed strategy? Answer: If a penalty kicker chooses a pure strategy of kicking in one particular direction, the goalie will notice, and her best response would be to dive in the same direction. This will result in a negative payoff to the kicker. However, if the kicker chooses a mixed strategy by kicking either left or right randomly, the goalie will not be able to choose a strategy for herself. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Zero-Sum Games

35) Two friends, Pat and Julie, are going to a concert. They play a simple game in which they hold out one or two fingers to decide who will pay for the other's ticket. Pat wins if the fingers held out add up to an even number; Julie wins if the fingers held out add up to an odd number. The price of the ticket is $9. a) Construct a payoff matrix for the game. b) Is there a unique Nash equilibrium in this game? c) Which strategy should a player use to maximize her chances of winning the game? Answer: a) The payoff matrix for the game is shown below. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

b) The payoff matrix represents a zero-sum game. One player's loss is another's gain in this game, so the sum of the payoffs is zero. A zero-sum game does not have a Nash equilibrium. This is because a player can always increase her payoff if she can determine the other player's move. In this particular case, Pat always has an incentive to hold out one finger if Julie chooses one and to hold out two fingers if Julie holds out two. Similarly, Julie always has an incentive to hold out one finger if Pat holds out two and two if Pat holds out one. Therefore, this game does not have a unique Nash equilibrium. c) In games like this, the best strategy is not to consistently choose any one particular action. Players should randomly choose either of the two alternatives. Choosing randomly and behaving unpredictably increase the chances of winning this game. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Zero-Sum Games

13.4 How Do People Actually Play Such Games? Scenario: The following table represents the game matrix for the penalty kicks in a soccer game. There are two players in the game: the kicker and the goalie. The kicker has two choices: to kick the ball to the right or to the left. The goalie also has two choice to jump to the right, or to the left. Each goal counts to +1 point for the kicker and -1 points for the goalie. The symbols in the table stand for the numerical payoff to each player. The first symbol listed in each cell is the payoff to the kicker, and the second number listed is the payoff to the goalie.

1) Refer to the scenario above. The symbol x is equal to ________, and the symbol y is equal to ________. A) 0; -1 B) 1; 0 C) 1; -1 D) -1; 1 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? 2) Refer to the scenario above. The symbol z is equal to ________, and the symbol t is equal to ________. A) 0; -1 B) 1; 0 C) 1; -1 D) -1; 1 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games?

3) Refer to the scenario above. The symbol k is equal to ________, and the symbol j is equal to ________. A) 0; -1 B) 1; 0 C) 1; -1 D) -1; 1 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? 4) Refer to the scenario above. The symbol p is equal to ________, and the symbol w is equal to ________. A) 0; -1 B) 1; 0 C) 1; -1 D) -1; 1 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? 5) Refer to the scenario above. This game is ________. A) a zero-sum game for both players B) not a zero-sum game for either players C) a zero-sum game for the kicker, but not for the goalie D) a zero-sum game for the goalie, but not for the kicker Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? 6) Refer to the scenario above. This game ________. A) does not have a dominant strategy equilibrium B) does not have a Nash equilibrium C) has multiple Nash equilibria D) has a dominant strategy equilibrium Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games?

7) Refer to the scenario above. In this game, choosing a ________ has a clear advantage for the kicker, and choosing a ________ has clear advantage for the goalie. A) pure strategy; mixed strategy B) mixed strategy; pure strategy C) pure strategy; pure strategy D) mixed strategy; mixed strategy Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? Scenario: Two friends are playing a game. The rules of the game are simple. Each player is given a bag containing a white ball and a black ball, and the two friends are asked to simultaneously draw one ball each. They are informed about their payoffs just before the game begins, which are shown in the matrix below. The first number listed in each cell is the payoff to the row player, and the second number listed is the payoff to the column player.

8) Refer to the scenario above. Which of the following is TRUE? A) Player 1 should draw a white ball if he expects Player 2 to draw a white ball. B) Player 1 should draw a black ball if he expects Player 2 to draw a white ball. C) Player 1's dominant strategy is to draw a white ball. D) Player 2's dominant strategy is to draw a white ball. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? 9) Refer to the scenario above. Which of the following is TRUE in this case? A) There will be a Nash equilibrium if both players draw white balls. B) There will be a Nash equilibrium if Player 1 draws a black ball and Player 2 draws a white ball. C) There are three Nash equilibria in this game. D) There will be a Nash equilibrium if Player 2 draws a black ball and Player 1 draws a black ball. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? 57 Copyright © 2022 Pearson Education Ltd.

10) The optimal strategy of a goalie in penalty kicking is similar to that in ________. A) a zero-sum game B) a symmetric game C) an extensive-form game D) the prisoners' dilemma Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? Scenario: The ultimatum game is a two-player game played as follows. One player, the proposer, is told to divide a sum of money between the two players. The proposer proposes how to divide the sum. The other player, the responder, then chooses to either accept or reject the proposal. If the responder accepts the proposal, the money is split according to the proposal. If the responder rejects the proposal, neither receives any money. When this game is played by real people from a common social group, it is frequently observed that the proposer offers close to 50-50 split and the responder rejects offers below 30 percent of the sum. 11) Refer to the scenario above. According to the theory you learned in the textbook, if the proposer offered 50 percent, should the responder accept? A) Yes, because, if the responder rejected the offer, he will end up with nothing. B) Yes, because 50 percent is the maximum the proposer will ever offer. C) No, because, if the responder rejected the offer, he will get more. D) No, because, 50 percent is the minimum the responder can expect from the proposer. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? 12) Refer to the scenario above. According to the theory presented in the textbook, if the proposer offered 1 percent, should the responder accept? A) Yes, because, if the responder rejected the offer, he will end up with nothing. B) Yes, because 1 percent is the maximum the proposer will ever offer. C) No, because, if the responder rejected the offer, he will get more. D) No, because, 1 percent is the minimum the responder can expect from the proposer. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games?

13) Refer to the scenario above. According to the theory presented in the textbook, if the proposer offered 0 percent, should the responder accept? A) He can either accept it or reject it, because he will end up with nothing anyway. B) Yes, because 0 percent is the maximum the proposer can ever offer. C) No, because, if the responder rejected the offer, he will get more. D) No, because, 0 percent is the minimum the responder can expect from the proposer. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? 14) Refer to the scenario above. According to the theory presented in the textbook, which of the following would happen in the Nash equilibrium? A) The proposer offers 50 percent. The responder rejects it. B) The proposer offers 100 percent. The responder accepts it. C) The proposer offers 0 percent. The responder accepts it. D) The proposer offers 25 percent. The responder rejects it. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? 15) Does game theory always predict real-world situations involving strategic interactions? Why or why not? Answer: Game theory might not always be able to predict real-world situations involving strategic interactions for two reasons. First, in real-world situations, the payoffs are determined by the attitudes and feelings of individuals as well as by their monetary returns. Second, game theory is in fact a theory, and such models are not literal descriptions of how the world works– they are merely useful abstractions. As such, game theory ignores some details that might affect the outcome. In many situations, one player may be more cunning, wiser, or more experienced than another. For example, of two chess players, the more experienced, more clever player is likely to win. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How Do People Actually Play Such Games?

16) Maria Brown is a young tennis player who has shot to fame after defeating Sarah Knowles in three consecutive matches. In the fourth match, Sarah decides to serve to the left each time. Is this an optimal winning strategy for Sarah? Answer: Tennis is an example of a zero-sum game. This is because one player's loss is the other player's gain and, hence, the sum of their payoffs is zero. The optimal winning strategy for playing such games is to choose randomly among alternative strategies. In this case, if Sarah decides to serve to the left each time, Maria will soon figure out Sarah's strategy and will not fail to return Sarah's serve. However, if Sarah behaves unpredictably and randomly chooses between serving to the left and to the right, Maria will not be able to figure out Sarah's strategy before the serve and is more likely to fail to return the serve. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How Do People Actually Play Such Games? Scenario: A common game played in many MBA-level classes on microeconomic theory and strategy is the dollar auction game. In this game, the professor takes on the role of auctioneer, offering to auction off a dollar bill to the highest bidder. This is an open-outcry auction, so students just shout out their bids. The one catch to the game is that the winning bidder pays her bid (the highest bid received), but the second-highest bidder must also pay the auctioneer the amount of her highest bid. 17) Refer to the scenario above. In the dollar auction, what is your equilibrium bidding strategy? A) Bid $0.50 B) Bid $0.99 C) Bid $1.00 D) Don't bid at all Answer: D Explanation: The dollar auction is similar to the rock-paper-scissors game in that there is no pure strategy equilibrium. In the dollar auction, there is not even an argument to be made for a mixed (randomized) bidding strategy. Once you place a bid, you will always have an incentive to keep raising your bid so as not to have to pay as the second-highest bidder. But the expected value of any positive bid will ultimately be negative, so the optimal strategy is to not bid at all. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: How Do People Actually Play Such Games?

18) Another game frequently played in MBA strategy classes is the acquire a company game. The set-up of the game is as follows. Company A has only one asset, offshore oil leases. The expected profit from these leases is uniformly distributed between $0 and $100 million, so the expected value to company A is $50 million. Company B is thinking of acquiring Company A. Company B's management is more efficient than A's; specifically, the value of A's assets under B's management is 1.5 times greater. For example, the expected value of A's oil leases under B's management is 1.5 $50 million, or $75 million. Company B can submit a written bid to acquire Company A. A will review the bid, and accept or reject the offer after learning the value of the oil leases with certainty. You are advising Company B on its potential acquisition of Company A. What is the optimal bid for Company B to submit? A) Do not submit a bid B) Bid $50 million C) Bid $75 million D) Bid $100 million Answer: A Explanation: The optimal bid is to not bid at all. Any bid accepted by Company A is always weakly greater than the value of the oil leases, because Company A knows with certainty the value of the oil leases when it reviews Company B's offer. The most common bid submitted in classroom experiments is $75 million, which is just 1.5 times Company A's expected value of the oil leases ($50 million). But Company A will only accept B's bid of $75 million when the oil leases are worth $75 million or less; it will reject B's bid of $75 million when the oil leases are worth more than $75 million. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: How Do People Actually Play Such Games?

19) Refer to Evidence-Based Economics element in section 13.4 of the text. a) Describe a variation of beauty contest game used in the experiment. b) Explain why every player submitting 0 is the Nash equilibrium. c) Describe the results of the experiment. Answer: a) Each player picks a (whole) number between 0 and 100 and submits it. If a player picks a number that is closest to 2/3 of the average of all numbers submitted, she wins. Otherwise, the player loses. b) Since 100 is the highest number anyone can pick, the of the average submission cannot exceed 67, that is, submitting 67 or above is dominated. If no player submits more than 67, then the of the average cannot exceed 45. So submitting 45 or above is now dominated. Continuing this reasoning eventually leads to the conclusion that 0 is the only number that is left undominated. c) Experimental subjects initially submit numbers higher than 0 (specifically, an average of 23). As they play the game more often, however, the average submission approaches 0. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Is There Value in Putting Yourself in Someone Else's Shoes? 13.5 Extensive-Form Games 1) A ________ is an extensive-form representation of a game. A) payoff matrix B) game tree C) Nash equilibrium D) pure strategy Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extensive-Form Games 2) Gary and Christine are two players in game in which Gary's decisions are based on the choice made by Christine. This is an example of a(n) ________. A) simultaneous-move game B) extensive-form game C) pure-strategy game D) zero-sum game Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Extensive-Form Games

3) Which of the following is TRUE of an extensive-form game? A) The sum of the payoffs to the players in the game is always constant. B) It involves simultaneous decision making by the players. C) It involves sequential decision making by the players. D) The players in the game earn equal payoffs in equilibrium. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extensive-Form Games 4) The difference between an extensive-form game and a simultaneous-move game is that ________. A) simultaneous-move games have two players, but extensive-form games can have more than two players B) simultaneous-move games have zero-sum payoffs, but extensive-form games do not C) in extensive-form games the player can observe the other player's action before deciding, but in simultaneous-move they can't D) in simultaneous-more games players have only two actions to choose from, but in extensiveform games the players can have more than two choices Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extensive-Form Games 5) A ________ is used to represent a simultaneous-move game, and a ________ is used to represent an extensive-form game. A) payoff matrix; payoff matrix B) game tree; game tree C) payoff matrix; game tree D) game tree; payoff matrix Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extensive-Form Games 6) Differentiate between an extensive-form game and a simultaneous-move game. Answer: An extensive-form game is a representation of a strategic situation in terms of a game tree that specifies the order of play and payoffs that result from different strategies, while a simultaneous-move game is one in which each player chooses his or her action at the same time. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extensive-Form Games

7) Differentiate between a payoff matrix and a game tree. Answer: A payoff matrix and a game tree both show the payoff for each action players can take. However, a payoff matrix is used for a simultaneous-move game, while a game tree is used for an extensive-form game. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Extensive-Form Games

8) Suppose two outdoor apparel firms, L.L. Bean and Eddie Bauer, are contemplating introducing the same new product to their existing product lines. For this problem, assume that Eddie Bauer "moves" (makes this decision) first, and then L.L. Bean makes its decision. Each firm can choose to either introduce the new product or continue with the existing product. Eddie Bauer moves first, and there is "full information," meaning that each firm knows the potential payoffs (profits associated with each action). In the extensive form of this sequential game, shown in the figure below, profits (shown in parentheses in the art) are annual profits in thousands of dollars.

Given the information above, which of the following statements is TRUE? Explain how you arrived at your answer. A) Eddie Bauer should always choose to maintain the existing product only. B) L.L. Bean should choose to introduce the new product if Eddie Bauer chooses to introduce the new product. C) L.L. Bean should choose to maintain the existing product only if Eddie Bauer chooses to maintain the existing product. D) L.L. Bean should choose to maintain the existing product only if Eddie Bauer chooses to introduce the new product. Answer: B Explanation: We solve these types of problems by working backward, a technique called backward induction. Essentially, Eddie Bauer can figure out what L.L. Bean will do in period 2 based on its own (Eddie Bauer's) strategy in period 2, because each firm has complete information (e.g., Eddie Bauer knows the payoffs L.L. Bean will receive by following each strategy). So, Eddie Bauer asks itself, if we maintain the existing product, what will L.L. Bean's best response be? L.L. Bean earns profits of 200 if it chooses to introduce a new product, but only 50 if it maintains the existing product only. So L.L. Bean's best response to Eddie Bauer's decision to maintain the existing product only is to introduce a new product. Knowing L.L. Bean's best response, Eddie Bauer can see that its profits in Period 2 will be —40 if it chooses to maintain the existing product only. 65 Copyright © 2022 Pearson Education Ltd.

If Eddie Bauer chooses to introduce a new product, L.L. Bean will incur a loss of 40 if it also maintains the existing product only, or a profit of 20 if it also introduces a new product. So, L.L. Bean's best response to Eddie Bauer's introduction of a new product is to also introduce a new product. If L.L. Bean pursues a strategy of introducing a new product in period 2 in response to Eddie Bauer's introduction of a new product in period 1, Eddie Bauer will earn profits of 20 in period 2. So by solving this game backward, Eddie Bauer realizes it will incur a loss of 40 by choosing to maintain the existing product only, or a profit of 20 if it chooses to introduce a new product. Since we assume firms are profit maximizers, Eddie Bauer's optimal period 1 strategy is to introduce a new product, because this strategy maximizes period 2 profits, given L.L. Bean's best response in period 2. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Extensive-Form Games Scenario: Two firms in a market must choose between two alternative strategies: X and Y. The figure below shows the game tree that these firms can use to make their decisions.

9) Refer to the scenario above. Which of the following is TRUE? A) Firm 2 should follow Strategy X if Firm 1 follows Strategy X. B) Firm 2 should follow Strategy Y if Firm 1 follows Strategy Y. C) Firm 2 should follow Strategy X if Firm 1 follows Strategy Y. D) Firm 1 should always follow Strategy X. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction 66 Copyright © 2022 Pearson Education Ltd.

10) Refer to the scenario above. In equilibrium, ________. A) Firm 1 will follow Strategy Y and Firm 2 will follow Strategy X B) Firm 1 will follow Strategy X and Firm 2 will follow Strategy Y C) both firms will follow Strategy X D) both firms will follow Strategy Y Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction Scenario: Two rival firms charge equal prices for their products, which are perfect substitutes. Firm 1 is considering offering a 10 percent discount on the market price to increase sales. The game tree below shows the respective payoffs to each firm, depending on the decisions each makes.

11) Refer to the scenario above. Which of the following is TRUE? A) Firm 2 should never offer a discount regardless of Firm 1's choice. B) Firm 2 should offer a discount if Firm 1 offers a discount. C) Firm 2 should always offer a discount regardless of Firm 1's plan. D) Firm 1 should never choose to offer a discount regardless of Firm 2's plan. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Backward Induction

12) Refer to the scenario above. In equilibrium, ________. A) both firms will offer a discount B) neither firm will offer a discount C) Firm 1 will offer a discount, while Firm 2 will not offer a discount D) Firm 1 will continue charging the original price, while Firm 2 will offer a discount Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Backward Induction 13) What is backward induction? Answer: Backward induction is the process of solving an extensive-form game by first considering the last mover's decision to deduce the decisions of all previous movers. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Backward Induction Scenario: Beth and Charles are playing a trust game. At the beginning of the game, Beth has to choose whether to trust Charles. If she trusts him, he can choose to either defect or cooperate. The diagram below shows their respective payoffs in different situations.

14) Refer to the scenario above. This is an example of ________. A) a zero-sum game B) an extensive-form game C) the free-rider problem D) the tragedy of commons Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Backward Induction

15) Refer to the scenario above. In equilibrium, Beth's payoff is ________. A) $10 B) $0 C) $20 D) $50 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Backward Induction 16) Refer to the scenario above. Charles will receive a payoff of ________ if Beth trusts him and he defects. A) $50 B) $0 C) $20 D) $10 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Backward Induction 17) Refer to the scenario above. If this game is repeated several times, and reputational considerations are taken into account, Beth will ________ Charles and Charles will ________ every time. A) not trust; defect B) trust; defect C) trust; cooperate D) not trust; cooperate Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction 18) Refer to the scenario above. If this game is repeated several times, and reputational considerations are taken into account, Beth will earn ________ and Charles will earn ________ every time. A) $0; $10 B) $10; $10 C) $0; $50 D) $20; $20 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction

Scenario: Alex puts $100 on the table. Bob chooses either to take $51 for himself and $49 for Clare or pass. If Bob passes, then Alex adds another $2 and Clare chooses either to take $52 for herself and $50 for Bob or pass. If Clare passes, then Alex adds another $2 and Bob chooses either to take $53 for himself and $51 for Clare or pass, and so on. In other words, a player chooses either to take $2 more for himself/herself or pass, and, every time a player passes, Alex adds another $2. The game ends if $200 is on the table or either Bob or Clare chooses not to pass before that. If the amount on the table reached $200, then Bob and Clare get $99.99 each (Alex takes two pennies back). The figure below shows the extensive form of this game. Bob's payoff is written first and Clare's second.

19) Refer to the scenario above. If the game reached Clare's turn with $198 on the table, she should ________. A) end the game B) either pass or end the game C) pass D) neither pass nor end the game Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Backward Induction 20) Refer to the scenario above. If the game reached Bob's turn with $196 on the table, he should ________. A) end the game B) either pass or end the game C) pass D) neither pass nor end the game Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction 21) Refer to the scenario above. In the equilibrium, ________. A) Bob and Clare pass until $200 is on the table B) Bob pass until $198 is on the table, then Clare ends the game C) Clare ends the game in her first move D) Bob ends the game in his first move Answer: D Difficulty: Hard AACSB: Application of Knowledge 70 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Backward Induction 22) Refer to the scenario above. Suppose that, if the game reached the end with $200 on the table, Bob and Clare get $100 each instead of $99.99. Then which of the following could happen in an equilibrium? A) Bob passes until $198 is on the table, and Clare ends the game. B) Bob passes every time it is his turn, and Clare does the same. C) Bob ends the game in his first turn. D) Bob ends the game when $150 is on the table. Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction 23) Refer to the scenario above. Suppose that, if the game reached the end with $200 on the table, Bob and Clare get $100 each instead of $99.99. Then which of the following could happen in an equilibrium? A) Bob passes until $198 is on the table and Clare ends the game. B) Bob passes in his first turn and Clare ends the game in her first turn. C) Bob ends the game in his first turn. D) Bob ends the game when $150 is on the table. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction 24) Suppose you and your roommate are trying to decide how to divide up the remaining slice of pizza left over from the night before. Your roommate has the following proposal. You get to divide the remaining slice of pizza, but he gets to choose which of the two pieces of pizza to consume. As a result, you decide to cut the remaining slice of pizza into equal portions. This is an example of ________. A) a game tree B) backward induction C) commitment D) first-mover advantage Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Backward Induction

25) Bill and Tom are playing a game. At each round of the game, they have to choose either Strategy X or Strategy Y. However, Tom can make a decision only after Bill has made his decision. If they both choose X, each gains $100, and if both of them choose Y, each gains $50. However, if Bill chooses X and Tom chooses Y, Bill gains $60 while Tom gains $140. Similarly, when Bill chooses Y and Tom chooses X, Tom gains $60 while Bill gains $140. a) Draw a game tree to represent this game. b) What type of game is being played? What is the procedure used to solve such a game? c) What is Tom's optimal strategy if Bill chooses Strategy X? d) What is Bill's payoff in equilibrium? Answer: a) The game tree for this game is shown below.

b) This is an extensive-form game. The procedure that is used to solve this type of game is called backward induction. Backward induction is the procedure of solving an extensive-form game by first considering the last mover's decision. c) If Bill chooses Strategy X, Tom will gain $100 by choosing Strategy X while he will gain $140 by choosing Strategy Y. Therefore, Tom's optimal strategy is Y if Bill chooses Strategy X. d) Tom will choose Strategy Y if Bill chooses Strategy X because it will give him a higher payoff. Tom will choose Strategy X if Bill chooses Strategy Y because it will give him a higher payoff. Given this information, Bill will choose the strategy that will give him a higher payoff. Therefore, Bill will choose Strategy Y and his payoff will be $140 in equilibrium. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction

26) Aqua Inc. and Flora Inc. are two rival firms in the market for baby care products. Both firms are considering opening a new outlet for their products. They have two alternative location choices, one in College Town (CT) and the other on Whale Street (WS). The marketing team at Flora has decided to choose the location for its outlet after Aqua chooses the location for its outlet. The game tree given below shows the payoff to each firm for its decisions.

Using the process of backward induction, find out where Aqua should open its outlet. Answer: Backward induction is the procedure of solving an extensive-form game by first considering the last mover's decision. Here, Aqua is the first mover, and Flora makes its decision based on Aqua's choice. Therefore, Aqua needs to consider Flora's decision before making its decision. If Aqua opens its outlet in College Town, Flora will choose to open its outlet on Whale Street because it will earn $40,000 if it opens its outlet on Whale Street, while it will earn only $15,000 if it opens its outlet in College Town. Similarly, if Aqua opens its outlet on Whale Street, Flora will choose to open its outlet in College Town because it will earn $30,000 if it opens its outlet in College Town and only $5,000 if it opens its outlet on Whale Street. Given this information, Aqua should choose a location that will ensure a higher payoff. Therefore, Aqua should open its outlet on Whale Street. Aqua will earn a payoff of $50,000 in equilibrium, while Flora will earn a payoff of $30,000. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction

27) Two rival cosmetics brands are considering launching a new product. If Firm 1 launches a product for older women while Firm 2 targets college students, Firm 1 will earn $40,000, while Firm 2 will earn $50,000. If both the firms launch a product for older women, Firm 1 will earn $20,000, while Firm 2 will earn $15,000. If Firm 1 launches a product for college students while Firm 2 targets older women, Firm 1 will earn $60,000, while Firm 2 will earn $40,000. If both firms target college students, both firms will earn $30,000. However, Firm 2 will choose its target consumers after Firm 1 has chosen its target consumers. a) Draw a game tree to represent this situation. b) What is the equilibrium outcome of this game? c) Will there be a change in the equilibrium outcome if the firms make decisions simultaneously? Answer: a) The game tree for this game is shown below (OW denotes older women, while CS denotes college students).

b) If Firm 1 targets older women, Firm 2 will target college students, because by doing so it will earn $50,000, while it will earn only $15,000 if it targets older women. But if Firm 1 targets college students, Firm 2 will target older women, because it will then earn $40,000, while it will earn only $30,000 if it targets college students. Given this information, Firm 1 will choose its target market in such a way that it ensures a higher payoff. Therefore, Firm 1 will launch a product for college students and earn a payoff of $60,000 in equilibrium, while Firm 2 will earn $40,000. c) There will be no change in the equilibrium outcome if the firms make decisions simultaneously. Nash equilibrium will occur when Firm 1 launches a product for college students, and Firm 2 launches a product for older women. A change in their strategies will not lead to higher payoffs. Difficulty: Hard AACSB: Application of Knowledge 74 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Backward Induction The following figure depicts four sequential games. Player A is the first to move and Player B is the second to move.

28) Refer to the figure above. In which game do both players lose money in equilibrium? A) (1) B) (2) C) (3) D) (4) Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Backward Induction 75 Copyright © 2022 Pearson Education Ltd.

29) Refer to the figure above. In which game does Player A win money while Player B loses money in equilibrium? A) (1) B) (2) C) (3) D) (4) Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Backward Induction 30) Refer to the figure above. In which game does Player A lose money while Player B wins money in equilibrium? A) (1) B) (2) C) (3) D) (4) Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Backward Induction 31) Refer to the figure above. In which game do both players win money in equilibrium? A) (1) B) (2) C) (3) D) (4) Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Backward Induction 32) Refer to the figure above. In which game(s) would Player B strictly prefer moving first instead of moving second? A) (1) B) (2) and (3) C) (2) and (4) D) (1) and (3) Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Backward Induction

33) When does a game have a first-mover advantage? Answer: A game has first-mover advantage when the first player to act in a sequential game gets a benefit from doing so. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: First-Mover Advantage, Commitment, and Vengeance 34) Sam Walton chose a very different strategy for locating his Walmart discount stores than did his rivals in the 1960s. Specifically, Walton chose to locate his stores in cities that were much smaller than locations chosen by his rivals. Walton believed that once he located a store in these smaller communities, there would be no incentive for a rival discount retailer to build another store in the community. This is an example of ________. A) a game tree B) vengeance C) Commitment D) first-mover advantage Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: First-Mover Advantage, Commitment, and Vengeance 35) Suppose you and your roommate are trying to decide how to divide up the remaining slice of pizza left over from the night before. You assert that because you went down to the dorm lobby and picked up the pizza, you get to "cut and choose." This is an example of ________. A) a game tree B) backward induction C) commitment D) first-mover advantage Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: First-Mover Advantage, Commitment, and Vengeance 36) What does the term "commitment" refer to in game theory? Answer: The term "commitment" refers to the ability to choose and stick with an action that might later be costly. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: First-Mover Advantage, Commitment, and Vengeance

37) John and Jacob are participating in a contest as a team. In the first round of the game, John has to decide whether or not he trusts Jacob. If John trusts Jacob, Jacob can choose to either defect or cooperate. If Jacob defects, Jacob will win $200 while John will gain nothing and if Jacob cooperates, both of them will win $100. However, in case John does not trust Jacob, both will win only $10. What is the payoff to the players in equilibrium? Can the equilibrium of this game be any different and under what circumstances? Answer: This is an example of an extensive-form game. The equilibrium of this game is determined using the process of backward induction. Backward induction is the procedure of solving an extensive-form game by first considering the last mover's decision. In this case, Jacob is the last mover. If John trusts Jacob, Jacob can choose to either defect or cooperate. If Jacob defects, Jacob will win $200 while John will lose and if Jacob cooperates, both of them will win $100. Because Jacob is better off by defecting, he will choose to defect and John will lose the game. Therefore, John will not trust Jacob and in equilibrium, they will both earn $10. If this game is repeated several times, Jacob might develop a reputation of trustworthiness. As a result, John will trust Jacob and Jacob will cooperate with John. Therefore, in equilibrium both of them would win $100. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Is There Value in Putting Yourself in Someone Else's Shoes in Extensive-Form Games?

38) Recall the trust game reported in the Evidence-Based Economics element in section 13.5. Consider the game where the trust game is played twice in succession.

Payoffs are the sum of payoff in each round. For example, suppose you choose Trust and Bernie chooses Cheat in the first round, then you choose Don't Trust in the second round (Bernie could choose either, because it does not get to his turn anyway). Then you earn $0 and Bernie earns $30 in the first round, and you earn $10 and Bernie earns $10 in the second round, so that your total payoff is $10 and Bernie's is $40. a) Apply backward induction to this game. How do you and Bernie behave in the two-round version? b) What would be the backward induction solution if the trust game is repeated three times? Four times? Twenty thousand times? Does this agree with what you read in the Evidence-Based Economics element in section 13.5? Answer: a) In the second round, no matter what happened in the first round, Bernie has no incentive to cooperate because there is no more round. Knowing this, you would rationally choose not to trust Bernie. Knowing all this, the same thing will happen in the first round. Consequently, the backward induction outcome in each round is the same as the outcome of the one-shot play of the game: Don't Trust for you and Cheat for Bernie every time. b) No matter how many times this game is repeated, you would choose not to trust Bernie, and Bernie will cheat every time in the backward induction equilibrium. This is because, at the very last round, no matter what happened in the past, Bernie has no incentive to cooperate because there is no more round, and, knowing this, you would rationally choose not to trust Bernie. Knowing all this, the same thing will happen in the second to the last round and so on. Consequently, the backward induction outcome in each round is the same as the outcome of the one-shot play of the game. However, the account in the textbook reports how real people play this type of game differently from what the theory predicts. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Is There Value in Putting Yourself in Someone Else's Shoes in Extensive-Form Games? 79 Copyright © 2022 Pearson Education Ltd.

Scenario: Consider a trust game between an employer and a worker. The employer will either trust or not trust the worker. If the employer trusts the worker, she will hire him and then the worker would either work faithfully for the employer, or shirk in his work. The diagram below shows their respective payoffs in different situations.

39) Refer to the scenario above. The equilibrium of this game is ________. A) when the employer doesn't trust the worker B) when the employer trusts the worker, and the worker works faithfully C) when the employer trusts the worker, and the worker shirks D) nonexistent Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Is There Value in Putting Yourself in Someone Else's Shoes in Extensive-Form Games? 40) Refer to the scenario above. If the interaction between the employer and the worker is to be repeated for many periods in future, the equilibrium of this game is ________. A) when the employer doesn't trust the worker B) when the employer trusts the worker, and the worker works faithfully C) when the employer trusts the worker, and the worker shirks D) nonexistent Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Is There Value in Putting Yourself in Someone Else's Shoes in Extensive-Form Games?

41) Why do some people tip generously at restaurants to which they never plan to return? Answer: Some people tip generously at restaurants to which they never plan to return because of their social preferences, meaning that the individual's benefits are defined not only by his or her payoffs but also by the payoffs to others. Social preferences often play an important role in economic transactions. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: There Is More to Life Than Money

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 14 Oligopoly and Monopolistic Competition 14.1 Two More Market Structures 1) Goods that are similar but are NOT perfect substitutes are called ________ goods. A) differentiated B) homogeneous C) normal D) inferior Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures 2) Differentiated products can be found in ________. A) perfect competition and monopoly market structures B) perfect competition only C) oligopoly and monopolistic competition market structures D) monopoly only Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures 3) Homogeneous goods are ________. A) perfect complements B) perfect substitutes C) similar but not identical D) always inferior goods Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures 4) Homogeneous products are found in ________. A) perfect competition and oligopoly market structures B) monopoly only C) perfect competition only D) perfect competition and monopoly market structures Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures

5) Which option correctly sorts different market structures in terms of competitiveness, from the most competitive to the least? A) Perfect competition, monopolistic competition, oligopoly, monopoly B) Perfect competition, oligopoly, monopolistic competition, monopoly C) Monopolistic competition, perfect competition, monopoly, oligopoly D) Perfect competition, monopolistic competition, monopoly, oligopoly Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures 6) Which option correctly sorts different market structures in terms of number of firms operating in them, from the most to the least? A) Perfect competition, monopolistic competition, oligopoly, monopoly B) Perfect competition, oligopoly, monopolistic competition, monopoly C) Monopolistic competition, perfect competition, monopoly, oligopoly D) Perfect competition, monopolistic competition, monopoly, oligopoly Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures 7) ________ are examples of differentiated goods. A) Books and cosmetics B) Fuel and water C) Potatoes grown by different farmers D) Tea and energy drinks Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Two More Market Structures 8) The U.S. car manufacturing industry is an example of ________. A) oligopoly with homogeneous products B) oligopoly with differentiated products C) monopolistic competition D) perfect competition Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures

9) The U.S. book publishing industry is an example of ________. A) perfect competition B) oligopoly with differentiated products C) oligopoly with homogeneous products D) monopolistic competition Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures 10) ________ is a market structure in which there are a few rival firms. A) Perfect competition B) Monopolistic competition C) A monopoly D) An oligopoly Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures 11) Which of the following markets is an oligopoly? A) The market for premium apparel B) The market for books C) The market for video games D) The market for wheat Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Two More Market Structures 12) ________ is a market structure in which many rival firms produce differentiated products. A) Perfect competition B) Monopolistic competition C) A monopoly D) An oligopoly Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Two More Market Structures

13) Which of the following is an example of a monopolistically competitive market? A) The market for wheat B) The market for coffee beans C) The market for shampoo D) The market for premium cars Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Two More Market Structures 14) All firms in a monopolistically competitive industry face a ________ demand curve, so they have ________. A) flat; no market power B) flat; market power C) downward-sloping; no market power D) downward-sloping; market power Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Two More Market Structures 15) U.S. Code Title 18 § 1696 states Whoever establishes any private express for the conveyance of letters or packets, or in any manner causes or provides for the conveyance of the same by regular trips or at stated periods over any post route which is or may be established by law, or from any city, town, or place to any other city, town, or place, between which the mail is regularly carried, shall be fined not more than $500 or imprisoned not more than six months, or both. The Code of Federal Regulation (CFR) Title 39 Section 310.2 states It is generally unlawful under the Private Express Statutes for any person other than the Postal Service in any manner to send or carry a letter on a post route or in any manner to cause or assist such activity. Violation may result in injunction, fine or imprisonment or both and payment of postage lost as a result of the illegal activity. Under these laws, the U.S. Postal Service ________. A) has a monopoly power over private express mail B) has a comparative advantage over private express mail C) competes in an oligopoly market for private express mail D) competes in a monopolistic competition against other private express mail carriers Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Two More Market Structures 4 Copyright © 2022 Pearson Education Ltd.

16) The Code of Federal Regulation (CFR) Title 39 Section 320.6 allows delivery of certain types of mail, generally called "extremely urgent" mail, by someone other than the U.S. Postal Service. Today, FedEx and UPS hold more than 75 percent of market share in the delivery of items permitted under the law. This is an example of ________. A) a (near) monopoly B) a (near) duopoly C) a monopolistic competition D) a competitive market Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Two More Market Structures 17) The pie chart below shows the market shares of various desktop operating systems in 2013 (http://www.netmarketshare.com/).

Different operating systems have different look and feel and different features from one another. Based on this information, which of the following best describes the structure of desktop OS market? A) A monopoly B) A monopolistic competition C) An oligopoly with differentiated products D) An oligopoly with homogeneous products Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Two More Market Structures

18) There are about 2,000 nail salons in New York City. Most salons are small businesses and offer a wide array of services. Based on this information, which of the following best describes the structure of this market in New York City? A) A monopoly B) A monopolistic competition C) An oligopoly with differentiated products D) An oligopoly with homogeneous products Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Two More Market Structures 19) The difference between an oligopoly with differentiated products and a monopolistic competition is ________. A) how many inputs firms use B) how many products firms produce C) how many firms there are in the market D) how much influence firms have over prices Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Two More Market Structures 20) Differentiate between oligopoly and monopolistic competition on the basis of the number of firms and the degree of product differentiation. Answer: There are fewer firms in an oligopoly than in a monopolistically competitive market. There are two categories of oligopoly on the basis of the degree of product differentiation: oligopoly with homogeneous products and oligopoly with differentiated products. All firms in monopolistic competition produce differentiated products. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Two More Market Structures

14.2 Oligopoly 1) Which of the following is a difference between an oligopoly with homogeneous products and a monopoly? A) The firms in an oligopoly with homogeneous products earn positive economic profits in the long run, while a monopoly earns zero economic profits in the long run. B) The firms in an oligopoly with homogeneous products face stiff competition from their rivals, while there is no competition in a monopoly. C) There are huge barriers to entry in an oligopoly with identical products, while there are no barriers to entry in a monopoly. D) The firms in an oligopoly with identical products charge a price higher than marginal cost in the long run, while a monopoly charges a price lower than marginal cost in the long run. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly 2) An oligopoly market with identical products is similar to a ________, but the key difference is ________. A) monopolistic competition market; oligopoly markets are more efficient B) perfect competition market; oligopoly markets are more efficient C) monopoly; the oligopolist must recognize the behavior of its competitors D) monopolistic competition; the oligopolist is a price-taker Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly 3) An oligopoly market with differentiated products is similar to a ________, but the key difference is ________. A) monopolistic competition market; oligopoly markets are more efficient B) perfect competition market; oligopoly markets are more efficient C) monopoly; the oligopolist must recognize the behavior of its competitors D) monopolistic competition; there is no free entry in oligopoly Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly

4) Which of the following is a difference between an oligopoly with differentiated products and a monopolistically competitive market? A) There are no barriers to entry in an oligopoly with differentiated products, while there are huge barriers to entry in a monopolistically competitive market. B) There are huge barriers to entry in an oligopoly with differentiated products, while there are minimal barriers to entry in a monopolistically competitive market. C) Firms in an oligopoly with differentiated products charge a price higher than marginal cost in the long run, while firms in a monopolistically competitive market charge a price lower than marginal cost in the long run. D) Firms in an oligopoly with differentiated products charge a price lower than average total cost in the long run, while firms in a monopolistically competitive market charge a price higher than average total cost in the long run. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly 5) Which of the following is a feature of an oligopoly? A) There are a large number of sellers in this market. B) There are no barriers to entry in this market. C) Each firm in this market earns zero economic profits. D) Each firm's actions affect the decisions of its rivals in this market. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly 6) A duopoly (two-firm industry) is an example of ________. A) perfect competition B) monopolistic competition C) oligopoly D) monopoly Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Homogeneous Products 7) A duopoly in which each firm produces a homogeneous good is called a ________. A) Bertrand competition B) Cournot competition C) Stackelberg competition D) Sweazy competition Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Homogeneous Products 8 Copyright © 2022 Pearson Education Ltd.

8) ________ is a market structure with only two competing firms A) A duopoly B) Perfect competition C) A monopoly D) Monopolistic competition Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Homogeneous Products 9) An oligopoly model in which sellers compete on prices rather than quantities is called a ________ model. A) Bertrand B) Cournot C) Pigouvian D) Pareto Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Homogeneous Products 10) Under Bertrand competition, ________. A) each firm produces until Price = Marginal cost B) each firm produces until Price = Average variable cost C) each firm produces until Marginal revenue = Marginal cost and then reads price off of the demand curve D) none of the above Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Homogeneous Products 11) Under Bertrand competition, ________. A) the Nash equilibrium is marginal cost pricing (the perfectly competitive outcome) B) the Nash equilibrium is monopoly pricing C) there are multiple Nash equilibria D) there is no set of strategies that lead to a Nash equilibrium Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Homogeneous Products

12) There are two firms in an industry, and their products are perfect substitutes for each other. Each firm had a market share of 50 percent and charged equal prices. However, when the demand for the good declined because of a recession, Firm A lowered its price to increase its sales. Firm B responded by lowering its price further. This is an example of the ________ of oligopoly. A) Bertrand model B) Cournot model C) Pigouvian model D) Pareto model Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products Scenario: Suppose there are only two firms in an industry, and their products are perfect substitutes for each other. Each firm had a fixed marginal cost of $5 and zero fixed cost of operation. The highest the consumers of this product are willing to pay for it is $10, and there are 200 consumers in this market. 13) Refer to the scenario above. Suppose Firm 1 announces that it will charge $10 for its product. Then the optimal decision of Firm 2 will be to charge ________, and Firm 2 will then get ________ of the market share. A) $9.99; 100 percent B) $10; 50 percent C) $5; 100 percent D) $5; 50 percent Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products 14) Refer to the scenario above. Suppose Firm 1 and Firm 2 have to come up with a pricing strategy simultaneously. In this case, Firm 1 will charge ________, and firm 2 will charge ________. A) $10; $10 B) $10; $5 C) $5; $10 D) $5; $5 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products

Scenario: The market demand for soccer balls in a small town is 2,500 units, and there are two rival sports brands selling soccer balls in this town, Sporty and Go! The products of the two brands are identical. 15) Refer to the scenario above. If ________, the demand for Sporty's soccer balls will be 1,250 units. A) the price charged by Sporty is higher than the price charged by Go! B) the price charged by Go! is higher than the price charged by Sporty C) the price charged by Sporty is equal to the price charged by Go! D) the price charged by Sporty is higher than the cost of production of each ball Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products 16) Refer to the scenario above. If ________, the demand for Sporty's soccer balls will be 2,500 units. A) the price charged by Sporty is higher than the price charged by Go! B) the price charged by Go! is higher than the price charged by Sporty C) the price charged by Sporty is equal to the price charged by Go! D) the price charged by Go! is higher than the unit cost of producing a ball Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products 17) Refer to the scenario above. If ________, the demand for Go!'s soccer balls will be 2,500 units. A) the price charged by Sporty is higher than the price charged by Go! B) the price charged by Go! is higher than the price charged by Sporty C) the price charged by Sporty is equal to the price charged by Go! D) the price charged by Go! is higher than the cost of producing a ball Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products

18) Alpha Corp. and Beta Corp. are the only firms in an industry. It is found that Alpha loses its entire market share to Beta when Beta lowers its price. What is the optimum pricing strategy for Alpha? Answer: Alpha and Beta are operating in a duopoly with homogeneous products. Because the firms produce identical products, a slight reduction in the price charged by one firm causes its rival to lose all its customers to this firm. The optimal strategy for firms in this case is to lower price as long as the rival's price exceeds the marginal cost of production. This process of lowering price slightly below the rival's price is known as undercutting. Such price cutting in a duopoly with homogeneous products continues as long as price exceeds marginal cost. In equilibrium, both firms charge a price equal to marginal cost. This equilibrium is called the Nash equilibrium because once this equilibrium is reached, neither firm can increase its profit further by changing its strategy. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products Scenario: The market demand for Good A in Corinthia is 3,000 units, and is shown below. There are two rival firms, Aqua Inc. and Blu Corp., in this town that produce good A. The products of the two brands are identical.

19) Refer to the scenario above. The market for Good A in Corinthia is an example of a ________. A) monopoly B) duopoly C) monopolistically competitive market D) perfectly competitive market Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products

20) Refer to the scenario above. If Aqua Inc. charges a price of $70 for each unit of Good A and Blu Corp. charges a price of $50, Blu Corp. will face a demand of ________ units. A) 1,000 B) 1,500 C) 2,000 D) 3,000 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products 21) Refer to the scenario above. Each firm will face a demand of ________ units of Good A if both of them charge a price of $60. A) 1,000 B) 1,500 C) 2,000 D) 3,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products 22) Refer to the scenario above. If Aqua Inc. charges a price of $20 for each unit of Good A and Blu Corp. charges a price of $60, Blu Corp. will ________. A) face the entire market demand B) lose all its customers to Aqua Inc. C) face a demand of 2,000 units D) face a demand of 1,500 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Homogeneous Products 23) Refer to the scenario above. If the marginal cost of producing the last unit of the good is $40, a Nash equilibrium will occur when both firms charge a price of ________. A) $20 B) $40 C) $60 D) $70 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits?

24) There are two firms in an industry, Firm A and Firm B. Both firms sell a homogeneous product. If one firm sets a price higher than the other firm, then all the demand goes to the firm setting the lower price. If prices are equal, the demand is shared equally between the two firms. The following figure depicts the demand faced by Firm A. What is Firm B's strategy that could explain such a demand curve faced by Firm A?

A) Firm B sets its price to p. B) Firm B sets its price to p'. C) Firm B equates Firm A's price for any price between p and p' and never sets a price outside this interval. D) Firm B sets its price to p' whenever the price of Firm A is greater than p, and sets a price equal to Firm A's whenever Firm A sets its price below p. Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 25) A duopolist faces the entire market demand for its product if ________. A) it charges a lower price than its rival B) it charges a higher price than its rival C) it charges the same price as its rival D) it charges a price higher than its cost of production Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 26) The quantity demanded for a duopolist's product is zero if ________. A) it charges a lower price than its rival B) it charges a higher price than its rival C) it charges the same price as its rival D) it can produce the product at a low cost Answer: B Difficulty: Easy AACSB: Analytical Thinking 14 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 27) La Dila and Swiss Pro are the only two firms in an industry. The firms initially charge equal prices for their products, which are perfect substitutes. What happens if La Dila decides to lower its price slightly? A) La Dila will lose all its market share. B) Swiss Pro will gain market share. C) La Dila will face the entire market demand. D) Swiss Pro will earn positive economic profits. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 28) La Dila and Swiss Pro are the only two firms in an industry. The firms charge equal prices for their products, which are perfect substitutes. La Dila decides to lower its price slightly. Swiss Pro responds by cutting its price further. This price cutting will continue as long as each firm's ________. A) price is lower than its marginal cost B) price is higher than its marginal cost C) price is higher than zero D) price is higher than its average fixed cost Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits?

The following table shows the payoffs (profits) of the two firms in a duopoly industry who produce a nondifferentiated product. Each firm has two options: charge a high price of $70, or the minimum possible price of $50. The first number in the payoff cells is the profit of Firm A, and the second number is the profit of Firm B. Assume that both firms are after maximum profit.

29) Refer to the table above. What is the equilibrium result in this duopoly market? A) Firm A charging $70, and Firm B charging $70 B) Firm A charging $70, and Firm B charging $50 C) Firm A charging $50, and Firm B charging $70 D) Firm A charging $50, and Firm B charging $50 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 30) Refer to the table above. If both firms decide to collude and charge $70 for their product, A) Firm A is going to change its pricing strategy to $50. B) Firm B is going to change its pricing strategy to $50. C) Both Firm A and Firm B are going to change their pricing strategy to $50. D) Both firms will gain a profit (payoff) greater than $1000 each. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 31) In a duopoly with homogeneous products, the best response of a firm is to charge a lower price than its rival as long as ________. A) the rival's price is above marginal cost B) the rival's price is below marginal cost C) the rival's price is above average cost D) the rival's price is below average cost Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits?

32) In an oligopoly industry with differentiated products, price ________. A) typically increases as the number of firms increases B) is unaffected by the number of firms in the industry C) typically decreases as the number of firms increases D) is always the same as the monopoly price Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 33) If firms in a duopoly with homogeneous products compete on price, a Nash equilibrium is reached when each firm charges a price ________. A) equal to its average cost B) higher than its average cost C) equal to its marginal cost D) lower than its marginal cost Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 34) Which of the following is TRUE when a Nash equilibrium is reached in a duopoly with homogeneous products? A) Both firms earn positive economic profits. B) Each firm charges a price equal to its average fixed cost. C) Both firms earn zero economic profits. D) Both firms incur huge losses. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 35) Which of the following will happen if a firm in a duopoly with homogeneous products increases its price above its marginal cost once a Nash equilibrium is reached? A) The firm will earn huge economic profits. B) The firm will gain market share. C) The firm will lose all its customers to its rival. D) The firm will continue to earn zero economic profits. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits?

36) The market outcome in a duopoly with homogeneous products is similar to that in ________. A) a perfectly competitive market B) a monopolistically competitive market C) a monopoly D) an oligopoly with differentiated products Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 37) What does the term "undercutting" refer to? Answer: Undercutting refers to the practice of charging a price slightly lower than that charged by rival firms. This usually occurs in an oligopoly with homogeneous products. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 38) How is a duopoly model with homogeneous products similar to the prisoners' dilemma game? Answer: The firms in a duopoly with homogeneous products would be better off if they both charge a price above marginal cost. However, firms continue to charge a price slightly below the rival's price in order to gain market share. This price cutting continues until both firms charge a price equal to marginal cost. This situation is similar to the prisoners' dilemma game. In the prisoners' dilemma game, both the prisoners would be better off if neither of them confesses the crime. However, both end up confessing because they have to make decisions simultaneously without communicating with each other. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits? 39) There are two firms competing à la Bertrand, and Firm A has a marginal cost strictly greater than that of Firm B. What will happen in this case? A) At the Nash equilibrium, both firms should make positive profits. B) Both firms will keep undercutting each other until neither firm makes positive profit in equilibrium. C) Firm A will keep undercutting Firm B until, in equilibrium, Firm A makes positive profit and Firm B makes no profit. D) Firm B will keep undercutting Firm A until, in equilibrium, Firm B makes positive profit and Firm A makes no profit. Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How Should You Price to Maximize Profits?

40) In an oligopoly with differentiated products, firms ________. A) earn positive economic profits B) incur losses C) earn zero economic profits D) do not face competition from their rivals Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products 41) The competition faced by firms in an oligopoly with differentiated products is higher than that faced by firms in ________. A) a duopoly with homogeneous products B) perfect competition C) monopolistic competition D) a monopoly Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Differentiated Products 42) Which of the following is TRUE of a duopoly with differentiated products? A) A firm loses all its customers when its rival lowers the price of its product. B) A firm does not lose all its customers when its rival lowers the price of its product. C) A firm faces a perfectly elastic demand curve. D) A firm faces a perfectly inelastic demand curve. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products 43) Crisps and Smith's are the only two bakeries that sell cookies in a small community. Crisps sells butter cookies, while Smith's sells chocolate cookies. Which of the following will happen if Smith's lowers its price for cookies slightly below Crisps's price? A) Crisps will lose all its customers to Smith's. B) Smith's will lose all its customers to Crisps. C) Crisps will face a lower demand for its cookies. D) Smith's will face a lower demand for its cookies. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Differentiated Products

44) Which of the following will happen if a new firm enters an oligopoly with differentiated products? A) The market price will fall. B) The market price will rise. C) The existing firms will gain market share. D) Each firm will have an equal market share. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products 45) Which of the following is a difference between an oligopoly with homogeneous products and an oligopoly with differentiated products? A) There are a large number of sellers in an oligopoly with homogeneous products, while there are only a few sellers in an oligopoly with differentiated products. B) Firms in an oligopoly with homogeneous products earn positive economic profits in equilibrium, while firms in an oligopoly with differentiated products earn zero economic profits in equilibrium. C) There are huge barriers to entry in an oligopoly with homogeneous products, while there are no barriers to entry in an oligopoly with differentiated products. D) Firms in an oligopoly with homogeneous products earn zero economic profits in equilibrium, while firms in an oligopoly with differentiated products earn positive economic profits in equilibrium. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products 46) As the number of firms in an oligopolistic market increases, ________. A) prices tend to decline toward marginal cost B) prices tend to rise above marginal cost C) the market demand for a good tends to fall D) the profits earned by firms tend to rise Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products

Scenario: Two firms, Firm 1 and Firm 2, make differentiated products and compete in a duopoly market. The firms do not have a fixed cost. Firm 1's cost is $30 per unit, while Firm 2's cost is $25 per unit. (So they are the marginal cost and the average total cost). There are 1,000 consumers in this market. The demand is divided between the two firm in the following way: • If Firm 1's price is less than twice Firm 2's price, then everyone buys from Firm 1. • If Firm 1's price is more than twice Firm 2's price, then everyone buys from Firm 2. • If Firm 1's price is equal to twice Firm 2's price, then half of the consumers buy from Firm 1 and the other half buy from Firm 2. 47) Refer to the scenario above. Suppose Firm 1 sets the price at $50. If Firm 2 sets its price above $25, then its profit is ________. If Firm 2 sets its price below $25, then its profit is ________. If Firm 2 sets its price at $25, then its profit is ________. A) $0; negative; positive B) $0; negative; $0 C) $0; positive; negative D) $0; $0; $0 Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products 48) Refer to the scenario above. Suppose Firm 1 sets the price at $50. What price should Firm 2 set in response? A) At $25 or above B) Below $25 C) Below $50 D) At $30 Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products 49) Refer to the scenario above. Suppose Firm 2 sets the price at $25. If Firm 1 sets its price above $50, then its profit is ________. If Firm 1 sets its price above $30 and below $50, then its profit is ________. If Firm 1 sets its price below $30, then its profit is ________. A) $0; positive; $0 B) $0; negative; $0 C) $0; positive; negative D) $0; $0; $0 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products

50) Refer to the scenario above. Suppose Firm 2 sets the price at $25. What price should Firm 1 set in response? A) $0 B) $25 C) $30 D) $50 Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products 51) Refer to the scenario above. Suppose Firm 1 sets its price at $50 and Firm 2 sets its price at $25. Is this a Nash equilibrium? Why? A) No, because if Firm 1's price is $50, then Firm 2 should set its price below $25. B) No, because if Firm 2's price is $25, then Firm 1 should set its price below $50. C) Yes, because (a) if Firm 1's price is $50, then setting price at $25 is Firm 2's best response, and (b) if Firm 2's price is $25, then setting price at $50 is Firm 1's best response. D) Yes, because (a) if Firm 1's price is $50, then setting price at $25 or below is Firm 2's best response, and (b) if Firm 2's price is $25, then setting price at least $50 is Firm 1's best response. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Oligopoly Model with Differentiated Products 52) OnWheels and Speedstar are the only two manufacturers of sports cars. The cars manufactured by these companies are considered to be close substitutes, but not identical. How should each firm determine its price in this case? Answer: Because the companies' products are considered to be similar, if either firm cuts its prices, it will gain market share from the other. However, the firms' products are not exact substitutes. Therefore, the price-cutting company will not be able to take the entire market just because it prices a bit lower than the other firm. Some people are still going to prefer its competitor's product, even at a higher price. In this case, each firm must put itself in the other's shoes to recognize how its prices will affect the prices of its competitor. The executives at OnWheels must estimate the demand for Speedstar cars given every possible price for their own cars. They can then construct their optimal price for every possible price of Speedstar cars. Speedstar should make the same calculations to figure out its best response to changes in prices charged by OnWheels. The equilibrium reached through this process is called the Nash equilibrium, because both firms in the industry maximize simultaneously so that their prices are best responses to each other. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Model with Differentiated Products

53) Suppose there are only two firms in an industry, and their products are perfect substitutes for each other. Each firm had a fixed marginal cost of $5, and zero fixed cost of operation. The highest the consumers of this product are willing to pay for it is $10, and there are 200 consumers in this market. The two firms agree to collude and come up with a pricing scheme that maximizes their joint profit. The agreed-on price of this collusion will be ________, and this collusion is ________. A) $10; unstable B) $10; stable C) $5; unstable D) $9.99; stable Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Collusion: Another Way to Keep Prices High 54) If firms in an oligopoly industry producing differentiated products collude, ________. A) they collectively produce the monopoly output level and divide the monopoly profits B) they produce the same output level as noncollusive oligopoly, but deter entry C) they increase output and decrease price to deter entry D) they collectively produce up until Price = Marginal cost Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Profits High 55) Which of the following is NOT a factor that enables collusion to work? A) Cheating on collusive agreements can easily be observed B) Threats of punishment toward cheating parties are credible C) Firms are patient (e.g., value future profits highly) D) Firms collude to set prices rather than output levels Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Profits High 56) Collusion occurs when firms ________. A) charge a price equal to their marginal cost of production B) conspire to set the quantity they produce or the prices they charge C) compete with one another by setting a price slightly lower than their rivals' prices D) compete with one another by differentiating their products Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High

57) The firms in the petroleum industry of Perylia have decided to cooperate with each other by setting their respective market shares. This is an example of ________ in the petroleum industry. A) cost cutting B) undercutting C) collusion D) free riding Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Collusion: Another Way to Keep Prices High 58) There are a few firms in the automobile industry in Zadmia. To prevent a price war, these firms have secretly agreed to charge a price 20 percent above the marginal cost of production. This is an example of ________. A) free riding B) undercutting C) collusion D) cost cutting Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Collusion: Another Way to Keep Prices High 59) Firms in an oligopoly often do NOT collude with one another because ________. A) collusion lowers profit B) collusion increases the cost of production C) collusion is illegal D) collusion increases competition Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High 60) A collusion breaks down if ________. A) a firm charges a higher price than the price set by the other colluding firms B) a firm charges a lower price than the price set by the other colluding firms C) the price set by the colluding firms equals the marginal cost of production D) the price set by the colluding firms exceeds the marginal cost of production Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High

61) In 1981, the DeBeers Diamond cartel member country Zaire broke free of the cartel's marketing arrangement, the Central Selling Organization, and began to market some of its country's industrial diamonds (called boart) outside the DeBeers cartel. Even though DeBeers was generally pursuing a practice of stockpiling diamonds to prop up world diamond prices, the cartel flooded the market with industrial diamonds, significantly lowering their price to levels at– or even below–marginal cost. Within 2 years, Zaire returned to the DeBeers marketing cartel and sold all the country's diamond production through the cartel. DeBeers' actions between 1981 and 1983 represent ________. A) a competitive strategy B) a grim strategy C) price-fixing D) none of the above Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Collusion: Another Way to Keep Profits High 62) A ________ is a plan by one firm to price a good at marginal cost forever if the other cheats on an agreement. A) pure strategy B) grim strategy C) price discrimination D) collusion Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High 63) Collusion can work if ________. A) a colluder can cheat without being detected B) a colluder values future monopoly profits more than current profits C) a colluder charges a price higher than its partners D) a colluder gives secret price discounts Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High 64) Collusion among oligopolistic firms leading to a higher market price ________. A) is an effective agreement because it is a legal contract B) results in market efficiency C) gives rise to cheating incentives D) maximizes social surplus Answer: A Difficulty: Easy AACSB: Analytical Thinking 25 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Collusion: Another Way to Keep Prices High Scenario: There are two firms in an industry, Firm A and Firm B, and they consider entering into a colluding agreement. If the two firms collude, then they agree that they would both produce less than what they would if they were competing against each other in an oligopolistic market. Since Firm A expects Firm B to produce a small quantity of output in the colluding agreement, Firm A is facing a demand curve with the same slope but with a higher intercept. The following figure depicts demands that face Firm A in both the colluding agreement and the oligopolistic market.

65) Refer to the scenario above. If the two firms agree that they both should produce 1 unit, what is the profit each firms gets? A) $2.50 B) $3.50 C) $7.50 D) $8.50 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High 66) Refer to the scenario above. What is the profit of Firm A without collusion? A) $4 B) $6 C) $9 D) $21 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High 26 Copyright © 2022 Pearson Education Ltd.

67) Refer to the figure above. What is the profit that Firm A can get by cheating on the collusive agreement? A) $4 B) $8.50 C) $9 D) $21 Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High 68) What are the possible benefits of collusion to a firm? Answer: Collusion occurs when firms conspire to set the quantity they produce or the prices they charge, rather than competing on these dimensions. Colluding firms act like a monopoly and then split the monopoly profit. Therefore, a firm entering into a collusive agreement can earn higher profits. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High 69) Under what situations will a colluding firm cheat? Answer: A colluding firm will cheat if it can cheat without being detected or punished. A colluding firm can also cheat if it is in danger of bankruptcy. In addition, if the government outlaws a product, then firms selling that product will know that no individual firm has an incentive to continue playing a cooperative strategy on the last day of legal sales. Therefore, these firms are likely to cheat. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High 70) Why do some firms in an oligopoly refrain from colluding? Answer: There are two main reasons why firms may refrain from colluding. First, the nature of competition predicts that although the firms may have a verbal agreement that they will both set high prices, they may still engage in secret price cutting to capture more of the profits for themselves. Thus, although collusion is a great deal for oligopolists, it is difficult to sustain. Second, price fixing is illegal. The potential punishment for engaging in such actions has a strong discouraging effect. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High

71) What determines the success of a cartel? Answer: Two important considerations determine how successful a collusive arrangement is: the detection and punishment of cheaters and the long-term value of the market in which the colluding firms operate. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Collusion: Another Way to Keep Prices High 72) There are three leading manufacturers of smart phones in Argonesia. Their products are considered to be perfect substitutes. a) Will these firms earn zero economic profits in the long run? Explain your answer. b) What can the firms do to earn maximum profit? Answer: a) The market for smart phones in Argonesia is an example of an oligopoly with homogeneous products. Firms in an oligopoly with homogeneous products often enter into a price war to increase their market share. Each firm cuts its price slightly below its rival's price to capture a larger market share. Because their goods are perfect substitutes, the price-cutting firm faces the entire market demand. This continues as long as the rival's price exceeds marginal cost. In equilibrium, all firms charge a price equal to marginal cost and earn zero economic profits. b) The firms can enter into a collusive agreement and decide to set prices jointly. They can coordinate and act like a monopoly. In this case, each firm will charge a price equal to that charged by a monopolist. At this price, each firm will face one-third of the market demand and earn one-third of the total profit earned by a monopolist. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Collusion: Another Way to Keep Prices High 73) An oligopoly model in which sellers compete on quantities rather than prices is called the ________ model. A) Bertrand B) Cournot C) Pareto D) Pigouvian Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: To Cheat or Not to Cheat: That Is the Question 74) A ________ is a formal organization of producers who agree on anticompetitive actions. A) duopoly B) cartel C) monopoly D) partnership Answer: B Difficulty: Easy AACSB: Analytical Thinking 28 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Letting the Data Speak: To Cheat or Not to Cheat: That Is the Question 75) The Organization of the Petroleum Exporting Countries (OPEC) is an example of a ________. A) duopoly that produces differentiated products B) monopoly C) duopoly that produces homogeneous products D) cartel Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: To Cheat or Not to Cheat: That Is the Question 76) OPEC acts as a cartel in the oil market. When the COVID-19 pandemic began, demand for oil dropped precipitously causing a drop in oil prices. OPEC tried to limit production, but Russia refused the production cuts. In response, Saudi Arabia, decided to increase production unless Russia agreed to the cuts. Which of the following statements is FALSE? A) Saudi Arabia's action caused the demand for oil to increase. B) Saudi Arabia's action combined with the pandemic pushed the price of oil to historically low levels. C) Saudi Arabia's action is similar to a grim strategy. D) Each country that is a part of OPEC has an incentive to behave like Russia. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly Suppose Russia and Saudi Arabia are the only two countries that produce oil. Each country can decide whether to keep output low or produce a high quantity of oil. If both countries produce a low quantity of oil, Saudi Arabia will receive profits of $100 million and Russia will receive profits of $80 million. If both countries restrict output, they will each receive zero profits. If Saudi Arabia keeps production low and russia produces a high amount of oil, then Saudi Arabia's profits will be -$10 million while Russia's profits will be $100 million. If Russia keeps production low while Saudi Arabia increases production, Russia will get profits of -$20 million while Saudi Arabia will have profits of $120 million. 77) What is the Nash Equilibrium outcome? (Hint: draw the payoff matrix for Russia and Saudi Arabia) A) Saudi Arabia will produce a high quantity and Russia will produce a high quantity. B) Saudi Arabia will produce a high quantity and Russia will produce a low quantity. C) Saudi Arabia will produce a low quantity and Russia will produce a high quantity. D) Saudi Arabia will produce a low quantity and Russia will produce a low quantity. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly 29 Copyright © 2022 Pearson Education Ltd.

78) What will be the outcome if Russia and Saudi Arabia collude and operate as a cartel? (Hint: draw the payoff matrix for Russia and Saudi Arabia) A) Saudi Arabia will produce a high quantity and Russia will produce a high quantity. B) Saudi Arabia will produce a high quantity and Russia will produce a low quantity. C) Saudi Arabia will produce a low quantity and Russia will produce a high quantity. D) Saudi Arabia will produce a low quantity and Russia will produce a low quantity. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly 79) Which of the following statements is FALSE? (Hint: draw the payoff matrix for Russia and Saudi Arabia) A) There is no way to support collusion in the long term for these countries. B) If the countries collude, each will have an incentive to cheat and produce more. C) Both countries have a dominant strategy to produce a high quantity. D) This is an example of the standard prisoner's dilemma. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly 80) Which of the following pieces of information is NOT relevant when duopolists with differentiated products set their prices? A) Their fixed costs B) The substitutability of their products C) Consumer preferences D) The behavior of the other firm Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Oligopoly Suppose the demand for cable internet in the small city-state of Genovia is 5,000 as long as the price is below $60 per month and 0 otherwise. There are only two internet providers in Genovia: PearNet and RoyalWeb, and both provide identical service. It costs $20 to provide cable internet to each additional household. 81) What will be the equilibrium price of cable internet in Genovia? A) $20 B) $60 C) $40 D) $19.99 Answer: A Difficulty: Medium AACSB: Analytical Thinking 31 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Oligopoly 82) If PearNet knew that RoyalWeb was planning to charge $40 for cable internet, what is PearNet's best response? A) charge $39.99 B) charge $40 C) charge $20 D) charge $20.01 Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Oligopoly 14.3 Monopolistic Competition 1) The residual demand curve facing a firm in a monopolistically competitive industry is ________. A) identical to the market demand curve B) identical to the demand curve facing a perfectly competitive firm C) the firm's marginal revenue schedule D) the demand that is not satisfied by other producers Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Monopolistic Competition 2) Which of the following is TRUE of monopolistic competition? A) There is only one seller in this market structure. B) The product sold by each seller in this market structure is identical. C) The firms in this market structure earn huge economic profits in the long run. D) There are a large number of sellers, each selling a differentiated product. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Monopolistic Competition 3) There are several jewelry manufacturers in Petrovia. However, the jewelry produced by different manufacturers has different designs and the products are never identical. The jewelry market in Petrovia is an example of a ________. A) duopoly B) monopoly C) perfectly competitive market D) monopolistically competitive market Answer: D Difficulty: Easy AACSB: Application of Knowledge 32 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Monopolistic Competition 4) A monopolistically competitive firm always faces a(n) ________. A) horizontal demand curve B) vertical demand curve C) upward-sloping demand curve D) downward-sloping demand curve Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Monopolistic Competitor's Problem 5) A monopolistically competitive firm ________. A) can increase price without losing all of its business B) loses all of its business if it increases price slightly C) faces a perfectly elastic demand curve D) faces a perfectly inelastic demand curve Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Monopolistic Competitor's Problem 6) For a monopolistically competitive firm, ________. A) Marginal revenue = constant B) Marginal revenue = Price C) Marginal revenue < Price D) Marginal revenue < Marginal cost Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Monopolistic Competitor's Problem 7) The marginal revenue curve of a monopolistic competitor ________. A) lies above the demand curve B) lies below the demand curve C) is the same as the demand curve D) is the same as the supply curve Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Monopolistic Competitor's Problem

8) The following table shows a firm's total cost of producing different quantities of output and the price that consumers are willing to pay for those quantities of the good.

a) If the firm is monopolistically competitive, what is the equilibrium output for the firm? b) What is the equilibrium price charged by the firm? c) Calculate the profit earned or the loss incurred by the firm in the short run. Answer: a) A monopolistically competitive firm maximizes profit by producing the level of output that makes marginal revenue equal to marginal cost. The following table shows the marginal revenue and marginal cost for each level of output.

From the table, it can be seen that the marginal cost of production equals the marginal revenue when 300 units are produced. b) From the table, it can be observed that the firm sells 300 units of the good at a price of $60. Therefore, the equilibrium price is $60. c) In this case, he total revenue earned by the firm is $60 × 300 = $18,000, and the total cost incurred by the firm for the production of 300 units is $20,000. Because total cost exceeds total revenue, the firm will incur a loss in the short run, and the loss incurred by the firm is $20,000 − $18,000 = $2,000. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Monopolistic Competitor's Problem 9) A profit-maximizing monopolistic competitor continues production until ________. A) marginal revenue exceeds marginal cost B) marginal revenue equals marginal cost C) marginal revenue exceeds average revenue D) marginal revenue equals average revenue Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 34 Copyright © 2022 Pearson Education Ltd.

10) The price charged by a monopolistic competitor is ________. A) lower than the marginal cost of production B) higher than the marginal cost of production C) higher than the price charged by a monopolist D) lower than the price charged by a perfect competitor Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits The following table shows the total costs incurred by a firm to produce different levels of output. It also shows the price that consumers are willing to pay for each level of output. Quantity 1 2 3 4 5 6

Price 80 77 72 65 57 48

Total Cost 55 100 140 184 235 290

11) Refer to the table above. If the firm is a monopolistic competitor, what is its profitmaximizing output? A) 2 units B) 4 units C) 5 units D) 6 units Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 12) Refer to the table above. If the firm is a monopolistic competitor, what is the equilibrium price charged by the firm? A) $77 B) $80 C) $65 D) $57 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits

13) Refer to the table above. The firm ________ in the short run. A) earns a profit of $22 B) incurs a loss of $22 C) earns a profit of $76 D) incurs a loss of $76 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 14) In the short run, a monopolistically competitive firm ________. A) will always earn positive economic profits B) may earn positive or negative profits C) will always earn zero economic profits D) does none of the above Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits

The following figure shows the demand and cost curves faced by a monopolistic competitor.

15) Refer to the figure above. The optimal price charged by the monopolistic competitor is ________. A) P1 B) P2 C) P3 D) P4 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 16) Refer to the figure above. The optimal quantity produced by the monopolistic competitor is ________. A) Q1 B) Q2 C) Q3 D) Q4 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 37 Copyright © 2022 Pearson Education Ltd.

The table below summarizes the information possessed by a firm in a monopolistically competitive market. Quantity demanded is in thousands of units.

17) Refer to the table above. The optimal quantity produced by the monopolistic competitor is ________. A) 3,000 units B) 4,000 units C) 6,000 units D) 8,000 units Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 18) Refer to the table above. The maximum profit earned by the firm is ________. A) $6,450 B) $7,800 C) $8,160 D) $10,240 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits

19) Refer to the table above. The optimal price charged by the monopolistic competitor is ________. A) $4.00 B) $3.60 C) $5.20 D) $2.80 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 20) Refer to the table above. The maximum profit earned by the firm is ________. A) $2,860 B) $1,420 C) $0 D) -$960 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 21) Suppose that a firm in a monopolistically competitive market has a constant marginal cost and it is making a positive profit in the short run. What will happen in the long-run equilibrium? A) The firm will keep producing the same quantity but earn zero profit. B) The firm will produce zero units and earn zero profit. C) The firm will produce more but earn zero profit. D) The firm will produce less but earn a positive profit. Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits

The following figure shows the cost curves (ATC, average total cost; MC, marginal cost) of a firm that operates in a monopolistic competition market, as well as the demand (D) facing the firm and the marginal revenue (MR) of this firm.

22) Refer to the figure above. What is the profit-maximizing price that this firm should charge in the short run? A) $3 B) $4.50 C) $6.50 D) $4 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 23) Refer to the figure above. What is the profit-maximizing level of output that this firm should supply in the short run? A) 9 units B) 13 units C) 6 units D) 11 units Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits

24) Refer to the figure above. What is the profit-maximizing price that this firm should charge in the short run? A) $3 B) $4.50 C) $6.50 D) $4 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 25) Refer to the figure above. What is the profit-maximizing level of output that this firm should supply in the short run? A) 9 units B) 13 units C) 6 units D) 11 units Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits

26) The formula used for calculating the total profit of a monopolistic competitor is ________. A) (Price ‒ Average Total Cost) × Quantity B) (Price ‒ Marginal Cost) C) (Price ‒ Average Total Cost)/Quantity D) (Price ‒ Average variable cost) Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 27) The price charged by a monopolistic competitor for each unit of a good is $7. If it produces 5,000 units of the good at a total cost of $25,000, what is its profit? A) $8,000 B) $10,000 C) $7,000 D) $35,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 28) A monopolistic competitor produces 1,200 units of a good at an average cost of $120 per unit. If the price charged per unit is $135, calculate its total profit. A) $13,500 B) $1,100 C) $18,000 D) $2,000 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 29) A monopolistic competitor produces 100 units of a good at a cost of $22 per unit. If it charges a price of $19 per unit of the good, it will ________. A) earn zero economic profits in the short run B) incur a loss of $300 in the short run C) earn a profit of $1,900 in the short run D) incur a loss of $100 in the short run Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits

The figure below depicts a monopolistically competitive firm in the short run.

30) Refer to the figure above. In the short-run, the firm will product at output level ________ and charge price ________. A) Q0; P0 B) Q1; P1 C) Q2; P2 D) none of the above Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits 31) Refer to the figure above. At the profit-maximizing level of output, the monopolistically competitive firm earns profits equal to ________ in the short run. A) Areas A + B + C B) Areas A + B C) Areas B + C D) Area B Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits

32) Refer to the figure above. In the short run, the profit-maximizing monopolistically competitive firm produces a level of output that results in a deadweight loss equal to ________. A) zero B) Area D C) Areas B + C D) Areas B + C + D Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits 33) A monopolistically competitive firm makes positive economic profits if ________. A) price is less than average total cost B) price is higher than average total cost C) price equals marginal cost D) price equals average fixed cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits 34) A monopolistic competitor earns zero economic profits if it charges a price that is ________. A) higher than the average total cost of production B) lower than the marginal cost of production C) equal to the marginal cost of production D) equal to the average total cost of production Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits 35) A monopolistic competitor incurs losses if ________. A) price is higher than average total cost B) price is lower than marginal cost C) price is equal to marginal cost D) price is lower than average total cost Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits

36) The cost of producing each bottle of a certain brand of shampoo is $0.25. If the market for shampoo is monopolistically competitive and the demand for shampoo is inelastic, a manufacturer who charges $0.35 for each bottle will ________. A) shut down production in the short run B) exit the industry in the long run C) earn an economic profit of $0.10 per bottle D) earn a total revenue of $0.10 per bottle Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 37) The cost of producing a tube of tooth paste is $0.05. If the market for tooth paste is monopolistically competitive, a manufacturer who charges $0.05 for each bottle will ________. A) shut down production in the short run B) exit the industry in the long run C) incur a loss in the short run D) earn zero economic profits in the short run Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 38) Firm A charges $8.50 for each unit of Good X. If the average total cost of producing 1,000 units of Good X is $12 and the market for Good X is monopolistically competitive, Firm A ________ by producing 1,000 units of Good X. A) earns a profit of $3,500 B) earns a profit of $1,000 C) incurs a loss of $1,000 D) incurs a loss of $3,500 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits

The following figure shows the demand curve (DD), the marginal revenue curve (MR), and the cost curves of a monopolistic competitor.

39) Refer to the figure above. What does the region ABDC denote? A) An economic profit B) A loss incurred by the producer C) Consumer surplus D) Deadweight loss Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 40) Suppose a monopolistic competitor produces 2,000 units of the good in equilibrium and charges a price of $10 for each unit. If the average total cost of producing 2,000 units of the good is $6, what is the total profit earned by the producer? A) $8,000 B) $4,000 C) $2,000 D) $20,000 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits

The following figure shows the demand curve (DD), the marginal revenue curve (MR), and the cost curves of a monopolistic competitor.

41) Refer to the figure above. What does the region ABCPe denote? A) An economic profit B) A loss incurred by the producer C) Consumer surplus D) Deadweight loss Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 42) Suppose a monopolistic competitor produces 1,250 units of a good in equilibrium and charges a price of $7.50 for each unit. If the average total cost of producing 1,250 units of the good is $8, what is the total loss incurred by the producer? A) $0.50 B) $500 C) $625 D) $1.50 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 47 Copyright © 2022 Pearson Education Ltd.

43) Which of the following is TRUE? A) A monopolistic competitor cannot earn economic profits in the short run. B) A monopolistic competitor cannot incur losses in the short run. C) A monopolistic competitor earns huge economic profits in the long run. D) A monopolistic competitor can incur losses in the short run. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits 44) A monopolistic competitor shuts down production in the short run if ________. A) marginal revenue equals marginal cost B) marginal cost equals average cost C) total revenues do not cover variable costs D) total revenues do not cover fixed costs Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits 45) A monopolistically competitive firm shuts down in the short run if ________. A) marginal revenue equals marginal cost B) total revenues do not cover variable costs C) marginal revenue covers average fixed costs D) average total cost exceeds price Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits Scenario: The fixed cost of producing 500 units of Good Y is $25,000, while the variable cost of producing 500 units of Good Y is $60,000. 46) Refer to the scenario above. If the market for Good Y is monopolistically competitive, a firm producing Good Y will shut down production in the short run if price falls below ________. A) $60 B) $200 C) $120 D) $50 Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits

47) Refer to the scenario above. Which of the following will happen if the equilibrium price charged by a firm producing Good Y in the short run is $130? A) The firm will earn positive economic profits and continue production. B) The firm will incur a loss but continue production. C) New firms will enter the industry in the long run. D) All firms will incur losses in the long run. Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 48) Refer to the scenario above. If the equilibrium price charged by a firm producing Good Y in the short run is $170, the firm will earn ________. A) a profit of $10 per unit B) a profit of $25 per unit C) a profit of $0 per unit D) a profit of $30 per unit Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 49) Refer to the scenario above. A firm producing Good Y will ________. A) earn economic profits if it charges a price of $120 B) incur losses if it charges a price of $200 C) earn zero economic profits if it charges a price of $170 D) shut down production if price falls below $200 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 50) Refer to the scenario above. A firm producing Good Y will continue production in the short run if total revenue exceeds ________. A) $25,000 B) $60,000 C) $85,000 D) $35,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits

51) When does a monopolistic competitor earn positive economic profits in the short run? Answer: A monopolistic competitor earns positive economic profits in the short run if the shortrun equilibrium price is higher than the average total cost of production. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: How a Monopolistic Competitor Calculates Profits

52) The market for household appliances in Petrovia is monopolistically competitive. Some firms in this market are incurring losses. However, they have not stopped production. What is the reason behind such behavior? Explain your answer with the help of a suitable diagram. Answer: A monopolistically competitive firm maximizes its profit by producing the level of output at which the marginal cost of production equals the marginal revenue. Price is then determined by finding the consumers' willingness to pay for that quantity from the demand curve faced by each firm. If the price thus set is higher than the average total cost of production, the firm earns positive economic profits. If the price is equal to the average total cost, the firm earns zero economic profits. If the price lies below the average total cost, the firm incurs losses, as shown in the following figure.

Qe is the equilibrium quantity, and Pe is the equilibrium price. Because the average total cost (ATC) curve lies above the price at Qe level of output, the average total cost of producing Qe units of output is higher than its price. Therefore the firm incurs a loss, which is given by the area of the rectangular region PeABC. However, such a loss-making firm will continue to produce in the short run if total revenue covers the fixed costs of and a part of the variable costs of production. This will be the case as long as price is higher than average variable costs at the profit-maximizing level of output, as shown in the graph above. This explains why firms in the household appliances market in Petrovia continue to produce in the short run even when they are suffering losses. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits

53) The following figure shows the cost curves (ATC, average total cost; MC, marginal cost) of firm that operates in a monopolistic competition market, as well as the demand (D) facing the firm and its marginal revenue (MR). How much profit does this firm make in the short run?

A) $10 B) $18 C) $27 D) $0 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits

The following figure shows the cost curves of firm that operates in a monopolistic competition market, as well as the demand (D) facing this firm and its marginal revenue (MR).

54) Refer to the figure above. How much profit does this firm make in the short run? A) $5 B) $8 C) $4.50 D) $0 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: How a Monopolistic Competitor Calculates Profits 55) Refer to the figure above. In the long run, this firm's MR curve is likely to ________. A) shift right B) shift left C) remain unchanged D) become more elastic Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry

56) Refer to the figure above. In the long run, ________. A) the D and MR curves shift right, but MC and ATC curves will remain the same B) the D curve shifts right, but MR, MC and ATC curves will remain the same C) the D and MR curves shift right, but MC and ATC curves shift up D) the MC and ATC curves shift down, but D and MR remain the same Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 57) The following figure shows the cost curves (average total cost, ATC; marginal cost, MC) of a firm that operates in a monopolistic competition market, as well as the demand (D) facing the firm and its marginal revenue (MR). In the long-run, this firm's MR curve will ________.

A) shift right B) shift left C) remain unchanged D) become more inelastic Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry

58) Which of the following will happen if some firms in a monopolistically competitive market incur losses in the short run and the market conditions are NOT expected to change? A) The existing firms will continue production in the long run. B) The demand for the goods produced by the firms will decrease. C) New firms will enter the industry in the long run. D) Some firms will exit the industry in the long run. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 59) The figure below depicts a monopolistically competitive firm in long-run equilibrium. In this equilibrium, the profit-maximizing monopolistically competitive firm ________.

A) earns positive economic profits B) may earn positive or negative economic profits C) earns zero economic profit D) earns negative economic profits Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 60) A monopolistic competitor exits the industry in the long run if ________. A) total revenue exceeds total cost B) total costs exceed total revenue C) marginal revenue exceeds marginal cost D) marginal revenue equals marginal cost Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 55 Copyright © 2022 Pearson Education Ltd.

61) New firms enter a monopolistically competitive market structure in the long run if the price charged by the existing firms in the short run ________. A) exceeds the average total cost of production B) equals the average fixed cost of production C) equals the average variable cost of production D) equals the price charged in a perfectly competitive market Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 62) If new firms enter a monopolistically competitive market structure in the long run, ________. A) the demand curves faced by the existing firms shift to the right B) the demand curves faced by the existing firms become perfectly inelastic C) the demand curves faced by the existing firms become more elastic D) the supply curves of the existing firms become relatively more elastic Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry Scenario: There are several pen manufacturers in Corinthia. However, the pens sold by each manufacturer have a unique design. 63) Refer to the scenario above. How will the demand for pens faced by the existing pen manufacturers in Corinthia be affected if new firms enter the industry in the long run? A) The demand curve faced by the existing firms will become perfectly inelastic. B) The demand curve faced by the existing firms will become perfectly elastic. C) The demand faced by the existing firms will increase. D) The demand faced by the existing firms will decrease. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 64) Refer to the scenario above. How will the demand for pens faced by the existing pen manufacturers in Corinthia be affected if several firms exit the industry in the long run? A) The demand curve faced by existing firms will become perfectly inelastic. B) The demand curve faced by existing firms will become perfectly elastic. C) The demand faced by existing firms will increase. D) The demand faced by existing firms will decrease. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 56 Copyright © 2022 Pearson Education Ltd.

65) Which of the following happens when new firms enter a monopolistically competitive market structure? A) The existing firms face higher demand. B) The existing firms face relatively inelastic demand curves. C) The existing firms earn higher profits. D) The existing firms earn lower profits. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 66) A monopolistically competitive firm ________ in the long run. A) earns low but positive economic profits B) earns high economic profits C) earns zero economic profits D) incurs losses Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 67) The exit of firms from a monopolistically competitive market structure causes the demand curves facing the existing sellers to shift ________ and to become ________. A) leftward; flatter B) rightward; flatter C) leftward; steeper D) rightward; steeper Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 68) Which of the following is TRUE of the long-run equilibrium price in a monopolistically competitive market? A) It is equal to the average total cost of production. B) It is less than the average total cost of production. C) It is higher than the average total cost of production. D) It is lower than the marginal cost of production. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry

69) Which of the following is a difference between a monopolistically competitive market and a perfectly competitive market in the long run? A) Firms in a monopolistically competitive market earn zero economic profits in the long run, while firms in a perfectly competitive market earn positive economic profits in the long run. B) Firms in a monopolistically competitive market earn zero economic profits in the long run, while firms in a perfectly competitive market incur losses in the long run. C) Firms in a monopolistically competitive market charge a price higher than marginal cost in the long run, while firms in a perfectly competitive market charge a price equal to marginal cost in the long run. D) Firms in a monopolistically competitive market charge a price lower than marginal cost in the long run, while firms in a perfectly competitive market charge a price equal to marginal cost in the long run. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 70) Long-run equilibrium in a monopolistically competitive industry requires the representative firm to earn zero economic profits, because ________. A) the government regulates the price B) the lack of barriers to entry means entry will drive the profit-maximizing level of output to a point where Price = Average total cost C) the lack of barriers to entry means entry will drive the profit-maximizing level of output to a point where Price = Marginal cost D) Marginal revenue > Average total cost at the profit-maximizing level of output Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 71) Which of the following is TRUE? A) The price charged by a monopolistically competitive firm is equal to the price charged by a perfectly competitive firm in the long run. B) The price charged by each firm in a monopolistically competitive market is identical in the long run. C) The profit earned by a firm in a monopolistically competitive market is equal to the profit earned by a firm in a perfectly competitive market in the long run. D) The profit earned by a firm in a monopolistically competitive market is equal to the profit earned by a monopolist in the long run. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry

72) Which of the following is a difference between a monopolistically competitive market and a monopoly in the long run? A) Firms in a monopolistically competitive market earn zero economic profits in the long run, while a monopolist usually earns positive economic profits in the long run. B) Firms in a monopolistically competitive market earn zero economic profits in the long run, while a monopolist incurs losses in the long run. C) Firms in a monopolistically competitive market charge a price higher than marginal cost in the long run, while a monopolist charges a price equal to marginal cost in the long run. D) Firms in a monopolistically competitive market charge a price lower than marginal cost in the long run, while a monopolist charges a price equal to marginal cost in the long run. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 73) The equilibrium output produced by a monopolistic competitor in the long run after the entry of new firms is ________. A) higher than the equilibrium output produced by the firm before the entry of new firms B) lower than the equilibrium output produced by the firm before the entry of new firms C) higher than the equilibrium output produced by a perfectly competitive firm in the long run D) equal to the equilibrium output produced by the firm before the entry of new firms Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 74) The equilibrium price charged by a monopolistic competitor in the long run after the entry of new firms is ________. A) higher than the equilibrium price charged by the firm before the entry of new firms B) lower than the equilibrium price charged by the firm before the entry of new firms C) lower than the equilibrium price charged by a perfectly competitive firm in the long run D) equal to the equilibrium price charged by the firm before the entry of new firms Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 75) The profit earned by a monopolistic competitor in the long run after the entry of new firms is ________. A) higher than the profit earned by the firm before the entry of new firms B) lower than the profit earned by the firm before the entry of new firms C) equal to the profit earned by a monopolist in the long run D) higher than the profit earned by a perfect competitor in the long run Answer: B Difficulty: Medium AACSB: Application of Knowledge 59 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry The following figure shows the revenue and cost curves for a monopolistic competitor before and after several new firms enter the industry. Dold shows the demand curve before the entry of new firms, and Dnew shows the demand curve after the entry of new firms.

76) Refer to the figure above. Which of the following is TRUE? A) The firm was incurring losses before the entry of new firms. B) The firm was earning zero economic profits before the entry of new firms. C) The firm is earning positive economic profits after the entry of new firms. D) The firm is earning zero economic profits after the entry of new firms. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry

The following figure depicts four different market situations.

77) Refer to the figure above. Which of the four market situations depicts a monopolistically competitive firm in the long run? A) 1 B) 2 C) 3 D) 4 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry

78) Refer to the figure above. Which of the four market situations depicts a monopolistically competitive firm making positive profits? A) 1 B) 2 C) 3 D) 4 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 79) Refer to the figure above. Which of the four market situations depicts a monopolistically competitive firm making negative profits? A) 1 B) 2 C) 3 D) 4 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 80) Refer to the figure above. Which of the four market situations does NOT depict a monopolistically competitive firm? A) 1 B) 2 C) 3 D) 4 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 81) Refer to the figure above. Which of the four market situations depicts a monopolistically competitive market in which there is likely to be more firms entering in the long run? A) 1 B) 2 C) 3 D) 4 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry

82) With differentiated products, advertising can play a big role in monopolistically competitive markets. Which of the following statements most accurately captures a stance on advertising that is supported by empirical evidence? A) Advertising should be allowed because it can lead to lower prices and higher quality service/products for consumers B) Advertising should not be allowed because it does not give valuable information to consumers C) Advertising should be allowed because it lowers firm profits D) Advertising should not be allowed because the costs of advertising get passed on to consumers and raise the prices of goods and services. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: Why Do Some Firms Advertise and Some Don't? Tatiana'a Toy Mice operates in the monopolistically competitive cat toy industry. The demand curve for her toy mice can be represented as P = 10 - 0.1*Q. Tatiana has marginal costs of MC = 0.3*Q and average total costs of ATC = 0.15*Q + (80/Q). 83) If Tatiana is a profit maximizing firm, what price will she charge for one of her toy mice? A) $8 B) $6 C) $7 D) $7.5 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Monopolistic Competition 84) Which of the following statements is TRUE about Tatiana's toy mice? A) In the long run, firms will enter the cat toy industry B) Tatiana will produce 25 toy mice C) Tatiana will have losses of $20 in the short run D) Tatiana will earn profits of $40 in the short run Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Monopolistic Competition

85) Which of the following is a potential demand curve that Tatiana could face as firms enter or exit this industry? A) P = 8 - 0.05*Q B) P = 8 - 0.2*Q C) P = 12 - 0.05*Q D) P = 12 - 0.2*Q Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Monopolistic Competition Paunch Burger operates in the monopolistically competitive fast food industry. The demand curve for Paunch Burger's hamburgers can be represented as P = 8 - (Q/10). Paunch Burger has marginal costs of MC = (Q /5) and average total costs of ATC = (Q/10) + (100/Q). 86) What price will Paunch Burger charge for a hamburger? A) $6 B) $4 C) $5.33 D) $7 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Monopolistic Competition 87) Which of the following statements is FALSE about Paunch Burger? A) In the long-run the demand curve will get flatter. B) In the long run, firms will exit the fast food industry. C) Paunch Burger will not produce the socially optimal quantity of hamburgers. D) in the long-run the demand curve will shift right. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Monopolistic Competition 88) Which of the following is a potential demand curve that Paunch Burger could face as firms enter or exit this industry? A) P = 10 - (Q/5) B) P = 10 - (Q/20) C) P = 6 - (Q/5) D) P = 6 - (Q/20) Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Monopolistic Competition 64 Copyright © 2022 Pearson Education Ltd.

89) What causes new firms to enter a monopolistically competitive market structure? Answer: The positive economic profits earned by the existing firms in the short run attract new firms to a monopolistically competitive market. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 90) What happens to the demand curves of the existing firms when new firms enter into a monopolistic competitive market? Answer: The demand curves faced by the existing firms in a monopolistic competition shift to the left and become flatter when new firms enter the industry. This is because new firms take a portion of the market. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 91) Why does a monopolistic competitor earn zero economic profits in the long run? Answer: If the existing firms in a monopolistically competitive market earn positive economic profits in the short run, new firms are attracted to the industry. The entry of new firms increases competition and lowers the profits earned by the existing firms. Entry continues until each firm in the market earns zero economic profits. If the existing firms in a monopolistic competition incur losses in the short run, they exit from the industry in the long run. The exit of firms reduces competition and increases the profits earned by all the remaining firms. The process continues until each firm in the market earns zero economic profits. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 92) How does the exit of firms from a monopolistically competitive market affect the demand curves faced by the existing firms? Answer: When firms exit a monopolistically competitive market, the demand curves faced by the existing firms shift to the right and become steeper. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 93) Distinguish between a perfectly competitive firm and a monopolistically competitive firm on the basis of the long-run equilibrium price. Answer: A perfectly competitive firm charges a price equal to marginal cost in the long run, while a monopolistically competitive firm charges a price higher than marginal cost in the long run. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 65 Copyright © 2022 Pearson Education Ltd.

94) Is there any similarity between a perfectly competitive firm and a monopolistically competitive firm in the long run? Explain your answer. Answer: Both a perfectly competitive firm and a monopolistically competitive firm earn zero economic profits in the long run. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 95) Is there any similarity between a monopoly and a monopolistically competitive firm in the long run? Explain your answer. Answer: Both a monopoly and a monopolistically competitive firm charge a price higher than marginal cost in the long run. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry 96) The industry for personal care products in Petrovia is monopolistically competitive in nature. The firms in this industry earn positive economic profits in the short run. Do the firms continue to earn positive profits in the long run? Explain your answer. Answer: If firms in a monopolistically competitive market earn positive economic profits, new firms enter the industry in the long run. As new firms enter the industry, the demand curves faced by the existing firms become flatter. This is because the demand for a good becomes more elastic when there are more substitutes. The demand curve faced by existing firms also shifts to the left, because market demand is now split among more firms. As a result, the firms optimize at a lower quantity and charge a lower price for their respective products. This in turn reduces the profits earned by the firms in the industry. The entry of new firms continues until the existing firms earn zero economic profits. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry

97) Firm X is a monopolistic competitor that produces Good X. If the market for Good X were perfectly competitive, would it have charged the same price and earned the same amount of profit that it does now? Explain your answer with the help of relevant diagrams. Answer: Firms in both a perfectly competitive market and a monopolistically competitive market earn zero economic profits in the long run because of the free entry and exit of firms in the long run. However, firms in a perfectly competitive market charge a price equal to marginal cost, while firms in a monopolistically competitive market charge a price higher than marginal cost. Therefore, the price charged by a monopolistically competitive firm in the long run is higher than the price charged by a perfectly competitive firm in the long run. This is because firms in a monopolistically competitive market produce differentiated products and face a downward-sloping demand curve, whereas firms in a perfectly competitive market produce homogeneous products and face a perfectly elastic demand curve. The left diagram in the following figure shows long-run equilibrium for a firm in a perfectly competitive industry, while the right diagram shows long-run equilibrium for a firm in a monopolistically competitive industry.

Thus, Firm X would have charged a lower price and produced a larger quantity of Good X in equilibrium if the market for Good X was perfectly competitive. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Long-Run Equilibrium in a Monopolistically Competitive Industry

14.4 The "Broken" Invisible Hand 1) Why does a monopolistically competitive industry result in a lower level of output than does perfect competition? A) Because the government regulates prices to ensure a fair rate of return B) Because marginal costs are increasing C) Because there are high barriers to entry D) Because firms face downward-sloping demand, the output level at which Price = Average total cost is less than the output level at which Price = Marginal cost. Answer: D Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 2) In a long-run equilibrium in a monopolistically competitive market, do firms produce at the level of output that minimizes average total cost over all levels of output? A) Yes, since firms produce at Price = Average total cost B) Yes, because average total cost exceeds marginal cost C) No, because firms are not producing at the minimum of average total cost D) Yes, because firms are producing at the point where Marginal revenue = Marginal cost Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 3) Total surplus is maximized in a(n) ________. A) monopolistically competitive market B) perfectly competitive market C) oligopoly D) monopoly Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 4) A firm is said to have market power if it charges a price ________ of production. A) higher than the marginal cost B) lower than the marginal cost C) equal to the marginal cost D) equal to the average fixed cost Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand

5) Which of the following firms is likely to have the highest market power? A) A perfectly competitive firm B) A monopolistic competitor C) A monopolistic firm D) An oligopolistic firm with homogeneous products Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand 6) The quantity produced in a monopolistically competitive market is ________ than the quantity produced in a perfectly competitive market, and the price charged in a monopolistically competitive market is ________ than the price charged in a perfectly competitive market. A) higher; higher B) lower; higher C) higher; lower D) lower; lower Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 7) The long-run equilibrium for a perfectly competitive firm occurs at the minimum point of the ________. A) total fixed cost curve B) average fixed cost curve C) average total cost curve D) marginal cost curve Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 8) Firms in a(n) ________ produce an efficient scale of output. A) monopolistically competitive market B) monopoly market C) oligopoly market with differentiated products D) perfectly competitive market Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand

9) The long-run equilibrium for a monopolistically competitive firm occurs ________. A) at the minimum point of its marginal cost curve B) at the minimum point of its average cost curve C) along the downward-sloping portion of its average total cost curve D) along the upward-sloping portion of its average total cost curve Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 10) The flatter (more relatively elastic) is the residual demand curve is, ________. A) the greater the deadweight loss in monopolistically competitive markets B) the lower the deadweight loss in monopolistically competitive markets C) the greater the markup of price over marginal cost in monopolistically competitive markets D) none of the above Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand

The table below summarizes the information possessed by a firm in a monopolistically competitive market. Quantity demanded is in thousands of units.

11) Refer to the table above. This market is ________. A) in the long-run equilibrium, because the firm earns a maximum profit of zero B) in the long-run equilibrium, because the marginal revenue equals the marginal cost at the optimal quantity for the firm C) not in the long-run equilibrium, because the firm earns a maximum profit that is negative D) not in the long-run equilibrium, because the marginal revenue and the marginal cost are not equal Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand 12) Refer to the table above. If this market were perfectly competitive, the long-run equilibrium price would be ________. A) $3.20 B) $2.70 C) $4.00 D) $2.80 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand

13) Refer to the table above. If this market were perfectly competitive, the long-run equilibrium price would be ________. A) $2.00 higher B) $1.45 higher C) $1.10 lower D) $1.30 lower Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand The following excerpt is from "Sotheby's Agree to Pay $512 Million Collusion Settlement," Wall Street Journal, September 25, 2000. Sotheby's Holdings Inc. and rival Christie's International agreed to pay $512 million to settle claims by art buyers and sellers that the auction houses colluded on prices and cheated them, with nearly one-third of the tab to be paid by Sotheby's former chairman, A. Alfred Taubman. The proposed civil settlement comes as Justice Department prosecutors are reaching a critical stage in their three-year criminal probe of the world's largest auction houses. They are close to reaching agreements with Sotheby's and its former chief executive, Diane "Dede" Brooks, that would secure their testimony against Mr. Taubman in exchange for leniency and lighter penalties, according to people familiar with the matter. 14) Refer to the excerpt above. The story illustrates a government use of so-called whistleblower protection to ________. A) regulate market power B) regulate the merger of dominant firms C) regulate price D) regulate quantity Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand 15) Refer to the excerpt above. The story illustrates a government use of ________ to regulate market power. A) coercion B) free speech C) price control D) incentive Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand

16) The market for tea in Petrovia is perfectly competitive, while the market for candy bars is monopolistically competitive. Which market is likely to have excess capacity and why? Explain your answer with the help of suitable diagrams. Answer: The market for candy bars has excess capacity. This is because firms in a monopolistically competitive market do not produce at the minimum point on their average total cost curve, unlike firms in a perfectly competitive market. The monopolistically competitive firms produce at a level below the efficient scale of production, as can be seen in the following figure.

The firm in the figure above does not increase production up to the level associated with the minimum point on the ATC curve, QMin, because it would then need to cut the price it charges for its goods, resulting in lower profits. Firms in a perfectly competitive market charge a price equal to the marginal cost of production and produce at the minimum point on the average total cost curve, as shown in the figure below.

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The "Broken" Invisible Hand The following figure shows a firm that operates in a monopolistic competition market.

17) Refer to the figure above. This firm is ________. A) at its long-run equilibrium and makes positive profit B) at its long-run equilibrium and makes zero profit C) not at its long-run equilibrium and makes positive profit D) not at its long-run equilibrium and makes negative profit Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 75 Copyright © 2022 Pearson Education Ltd.

18) Refer to the figure above. This 's profit maximizing choice happens when it ________. A) charges a price above its marginal cost B) charges a price equal to its marginal cost C) charges a price below its marginal cost D) decides to exit this market Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 19) Refer to the figure above. If the government efficiently regulates the price for this monopolistically competitive firm, the firm will ________. A) make a positive profit B) make zero profit C) decrease its marginal cost D) make a negative profit Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Regulating Market Power 20) The firms in a monopolistic competition market produce and charge a price that is ________. A) not socially efficient and needs to be regulated by the government B) not socially efficient but does not need to be regulated by the government C) socially efficient and does not need to be regulated by the government D) socially efficient but needs to be regulated by the government Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Regulating Market Power 21) Suppose there are only two firms in an industry and their products are perfect substitutes for each other. Each firm has 50 percent of the market share, and they have the same marginal cost. The Herfindahl Hirschman Index (HHI) in this market is ________, and the government should ________. A) 5,000; regulate this market because the HHI is rather high B) 2,500; not regulate this market because HHI is rather low C) 5,000; not regulate this market because the price will become equal to the marginal cost D) 2,500, regulate this market because HHI is rather high Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Regulating Market Power

22) Which of the following helps prevent firms in the United States from forming collusive agreements? A) The low demand faced by colluding firms B) The antitrust policy of the government C) The high rate of corporate income taxes D) The low profit earned by firms after colluding Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 23) Why do firms enter into a collusive agreement? A) To increase profits B) To reduce prices C) To reduce market concentration D) To increase market supply Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 24) Oligopolists merge to ________. A) increase market supply B) increase market demand C) increase market power D) reduce prices Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 25) Suppose a monopolistically competitive market has 10 firms. The largest firm has a 90 percent share of the market and the other nine firms each have 1 percent of the market. The Herfindahl-Hirschman Index for this industry is ________. A) 99 B) 909 C) 8,100 D) 8,109 Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Regulating Market Power

26) Suppose a monopolistically competitive industry has five firms; the two largest each have a 30 percent share of the market and the remaining three firms each have a 20 percent share of the market. If the two largest firms merge, the Herfindahl-Hirschman Index increases by ________ points to ________. A) 0; 100 B) 0; 3,000 C) 1,800; 4,800 D) none of the above Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Regulating Market Power 27) A fellow student claims that the federal government should block all mergers in monopolistically competitive industries that raise the Herfindahl-Hirschman Index above 1,800. Which of the following is the best response to this claim? A) Yes, because industries in which the Herfindahl-Hirschman Index is above 1,800 are concentrated. B) Yes, because mergers never increase economic efficiency. C) No, because the Herfindahl-Hirschman Index only addresses market structure, not the conduct or performance of market participants. D) No, because the Herfindahl-Hirschman Index is meaningless. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Regulating Market Power 28) An industry is deemed concentrated when ________. A) each firm in that industry has a small market share B) all the firms in that industry charge a price lower than the average cost of production C) most of the firms in that industry earn zero economic profits in the long run D) a few firms account for a large fraction of the total sales in that industry Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 29) The Herfindahl-Hirschman Index is used to ________. A) measure the price elasticity of demand faced by a firm B) estimate the degree of competition in an industry C) measure the price elasticity of market supply in an industry D) estimate the profit earned by firms in an industry Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 78 Copyright © 2022 Pearson Education Ltd.

30) The Herfindahl-Hirschman Index is calculated by ________. A) adding the market share of each firm in the market and squaring the resulting number B) squaring the market share of each firm competing in the market and then summing the resulting numbers C) adding the number of firms in the market and squaring the resulting number D) adding the profit earned by each firm in the market Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 31) The Herfindahl-Hirschman Index approaches ________ when a market consists of a large number of firms of relatively equal size. A) one B) zero C) 100 D) 500 Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 32) There are four firms in the cement industry in Petrovia. Firm A has a market share of 30 percent, Firm B has a market share of 20 percent, Firm C has a market share of 25 percent, and Firm D has a market share of 25 percent. The Herfindahl-Hirschman Index for the cement industry is ________. A) 50 B) 100 C) 2,550 D) 4,000 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Regulating Market Power 33) There are two major Internet service providers in Corinthia. One company has a market share of 60 percent, and the other firm has a market share of 40 percent. The Herfindahl-Hirschman Index for this industry is ________. A) 100,000 B) 1,200 C) 5,200 D) 100 Answer: C Difficulty: Easy AACSB: Application of Knowledge 79 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Regulating Market Power 34) The ________ the Herfindahl-Hirschman Index, the ________ is. A) lower; more concentrated an industry B) higher; more concentrated an industry C) higher; less concentrated an industry D) lower; higher the profits earned in an industry Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 35) Markets in which the Herfindahl-Hirschman Index ________ are considered not concentrated. A) is less than 1,000 B) is between 1,800 and 2,000 C) is between 1,000 and 1,800 D) is above 2,000 Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 36) Markets in which the Herfindahl-Hirschman Index ________ are considered moderately concentrated. A) is less than 1,000 B) is zero C) is between 1,000 and 1,800 D) is above 1,800 Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power 37) Markets in which the Herfindahl-Hirschman Index ________ are considered highly concentrated. A) is 1,000 B) is zero C) is between 1,000 and 1,800 D) is above 1,800 Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power

38) The automobile industry in Petrovia has a Herfindahl-Hirschman Index of 5,600. This implies that the automobile industry in Petrovia is ________. A) dominated by a few buyers B) moderately concentrated C) highly concentrated D) perfectly competitive Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Regulating Market Power 39) The floral industry in Rose Valley has a Herfindahl-Hirschman Index of 900. This implies that the flower market in Rose Valley is ________. A) not concentrated B) moderately concentrated C) highly concentrated D) dominated by a few large buyers Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Regulating Market Power 40) The IT industry in Argonesia has a Herfindahl-Hirschman Index of 1,320. This implies that the IT industry in Argonesia is ________. A) not concentrated B) moderately concentrated C) highly concentrated D) dominated by a few large buyers Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Regulating Market Power 41) An industry composed of four identical firms is likely to have a Herfindahl-Hirschman Index of ________. A) 3,000 B) 3,750 C) 2,800 D) 2,500 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Regulating Market Power

42) An industry composed of two identical firms and one twice as large as each of the two others is likely to have a Herfindahl-Hirschman Index of ________. A) 3,000 B) 3,750 C) 2,800 D) 2,500 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Regulating Market Power 43) An industry is composed of four firms: Firms A, B, C, and D. Firm D is twice as large as C. Firm C is twice as large as B. Firm B is twice as large as A. This industry is likely to have a Herfindahl-Hirschman Index of ________. A) 3,000 B) 3,750 C) 2,800 D) 2,500 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Regulating Market Power 44) Which of the following market structures has the highest market concentration? A) A monopoly B) An oligopoly with differentiated products C) Perfect competition D) Monopolistic competition Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Regulating Market Power 45) Which of the following would NOT influence the competitiveness of a particular industry? A) The marginal cost of production B) The Herfindahl-Hirschman Index C) The level of substitutability of products in the industry D) the number of firms Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand

46) Which of the following statements is FALSE? A) The DOJ should prevent mergers between any firms that would lead to an HHI of greater than 1,800. B) The HHI will fall between 0 and 10,000, with higher HHIs indicating more concentration. C) Monopolistic competition reduces social surplus but come with the added benefit of a variety of products for consumers to choose from. D) A firm in a monopolistically competitive firm will never set price equal to the minimum ATC. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 47) Assume there are 4 firms in an industry. Firm A and Firm B have the same market share. Firm C is twice as big as firm A or Firm B. Firm D is twice as big as Firm C. Which of the following statements is FALSE? A) If firms B and D merge, the Herfindahl-Hirschman Index will be 4000. B) If firms C and D merge, the Herfindahl-Hirschman Index will be 5938. C) If firms A and B merge, the Herfindahl-Hirschman Index will be 3750. D) The Herfindahl-Hirschman Index is 3438. Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: The "Broken" Invisible Hand 48) When is the Department of Justice less likely to allow a merger? Answer: The Department of Justice (DOJ) reviews merger cases and decides whether the main objective is to increase market power or whether there are important efficiency gains from such a merger. One of the main approaches the DOJ adopts in its analysis of mergers is to calculate how concentrated an industry is. An industry is deemed concentrated when a few firms account for a large fraction of total sales in that industry. When a merger stands to increase concentration significantly, the DOJ is less likely to allow the merger. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Regulating Market Power

49) The following figure depicts one among ten identical firms in a monopolistically competitive market. Let the social surplus be valued in dollars. For the government, the benefit of regulating a market is the value of the total social surplus gained from regulation. It costs the government $100 to force all firms to produce at the socially optimal quantity of output.

a) What is the gain to the government of implementing such a regulation? b) Should the government implement such a regulation? Answer: a) All firms will produce at Q = 8 instead of Q = 5. Prior to the regulation, the social surplus was (5 ) + (5 2) + (5 ) = 17.5. The surplus after the regulation is (8 ) + (8 ) = 20. The gain per firm is 20 - 17.5 = 2.5. The total gain is 10 2.5 = 25. b) No, the cost of such a regulation is $100 while the benefit is only $25. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Regulating Market Power 14.5 Summing Up: Four Market Structures 1) Consider the following table. Which option correctly fills the blanks in the table?

Residual Demand Curve

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

A) 1 = horizontal; 2 = downward-sloping; 3 = downward-sloping; 4 = downward-sloping B) 1 = horizontal; 2 = horizontal; 3 = downward-sloping; 4 = downward-sloping C) 1 = horizontal; 2 = horizontal; 3 = horizontal; 4 = downward-sloping D) 1 = downward-sloping; 2 = downward-sloping; 3 = downward-sloping; 4 = downwardsloping Answer: A Difficulty: Easy AACSB: Analytical Thinking 84 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Summing Up: Four Market Structures 2) Consider the following table. Which option correctly fills the blanks in the table?

Social Surplus

Perfect Competition 1

Monopolistic Competition 2

Oligopoly

Monopoly

A) 1 = maximized; 2 = maximized; 3 = not maximized; 4 = not maximized B) 1 = maximized; 2 = not maximized; 3 = not maximized; 4 = not maximized C) 1 = maximized; 2 = maximized; 3 = maximized; 4 = not maximized D) 1 = maximized; 2 = not maximized; 3 = maximized; 4 = not maximized Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 3) Consider the following table. Which option correctly fills the blanks in the table?

Example of Product

Perfect Competition 1

Monopolistic Competition 2

Oligopoly

Monopoly

A) 1 = wheat; 2 = clothing; 3 = cars; 4 = patented drugs B) 1 = tomatoes; 2 = wireless providers; 3 = breakfast cereal; 4 = electricity C) 1 = bread; 2 = bottled water; 3 = chocolate bars; 4 = tap water D) 1 = soft drinks; 2 = wine; 3 = laptop computers; 4 = aircraft Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 4) Consider the following table. Which option correctly fills the blanks in the table?

Price

Perfect Competition 1

Monopolistic Competition 2

Oligopoly

Monopoly

A) 1 = equal to MC; 2 = equal to MC; 3 = equal to MC; 4 = equal to MC B) 1 = equal to MC; 2 = above MC; 3 = above MC; 4 = below MC C) 1 = above MC; 2 = above MC; 3 = equal or above MC; 4 = above MC D) 1 = equal to MC; 2 = above MC; 3 = equal or above MC; 4 = above MC Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 85 Copyright © 2022 Pearson Education Ltd.

5) Which of the following is a difference between a perfectly competitive market and a monopoly? A) There are huge barriers to entry in a perfectly competitive market, while there are no barriers to entry in a monopoly. B) Sellers in a perfectly competitive market are price-makers, while a seller in a monopoly market is a price-taker. C) The equilibrium price in a perfectly competitive market exceeds marginal revenue, while the equilibrium price in a monopoly equals marginal revenue. D) The market demand curve faced by a perfectly competitive firm is horizontal, while the market demand curve in a monopoly is downward-sloping. Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 6) Which of the following markets has a single firm? A) Perfect competition B) Monopolistic competition C) Monopoly D) Oligopoly Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 7) Which of the following markets is likely to be a monopoly? A) The market for patented nuclear medicines B) The market for wheat C) The market for smart phones D) The market for shower gel Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures 8) Which of the following markets is likely to be perfectly competitive? A) The market for patented nuclear medicines B) The market for wheat C) The market for smart phones D) The market for shower gel Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures

9) The market for apples is an example of a(n) ________. A) perfectly competitive market B) monopolistically competitive market C) monopoly D) oligopoly Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures 10) In which of the following market structures do firms produce the level of output where Marginal revenue = Marginal cost? A) Perfect competition B) Monopoly C) Monopolistic competition D) All of the above Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 11) In which of the following market structures is social surplus maximized? A) Perfect competition B) Oligopoly C) Monopolistic competition D) Both perfect competition and monopolistic competition Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 12) In which of the following market structures is there at least the possibility of earning profits in the long-run equilibrium? A) Perfect competition and monopolistic competition B) Monopoly and oligopoly C) Monopoly only D) Monopolistic competition, monopoly, and oligopoly Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures

13) A wholesale flower market is an example of a(n) ________. A) perfectly competitive market B) monopolistically competitive market C) monopoly D) oligopoly Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures 14) There are a few ship manufacturers in Polonia, and each firm faces a downward-sloping demand curve. The ship-building industry in Polonia will fall under a(n) ________ market structure. A) perfectly competitive B) monopolistically competitive C) monopoly D) oligopoly Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures 15) A large number of firms in Petrovia sell energy drinks. However, each firm faces a downward-sloping demand curve. The market for energy drinks in Petrovia is an example of a(n) ________. A) perfectly competitive market B) monopolistically competitive market C) monopoly D) oligopoly Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures 16) The market for high-end cars is likely to be ________. A) perfectly competitive B) monopolistically competitive C) a monopoly D) an oligopoly Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures

17) Social surplus is maximized in a(n) ________. A) perfectly competitive market B) monopolistically competitive market C) monopoly market D) oligopoly market Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 18) In which of the four market structures do sellers act as price-takers? A) Perfect competition B) Monopolistic competition C) Monopoly D) Oligopoly Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 19) Which of the following is a similarity between a monopoly and an oligopoly with differentiated products? A) There are no barriers to entry in both markets. B) The long-run equilibrium price in both markets exceeds marginal cost. C) There is a single seller in both markets. D) Firms in both the markets earn zero profit in the long run. Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 20) Which of the following is TRUE? A) Firms in all four market structures earn zero economic profits in the long run. B) Firms in perfectly competitive markets earn zero economic profits in the long run. C) Firms in monopolistically competitive markets earn positive economic profits in the long run. D) Firms in oligopoly markets earn equal profits in the long run. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures

21) Which of the following applies to both monopolistic competition and perfect competition? A) Firms produce a differentiated product. B) Absence of barriers to entry C) P = MR = MC D) Large number of firms Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures 22) Which of the following applies to both perfect competition and oligopoly without product differentiation? A) Firms produce a differentiated product. B) Absence of barriers to entry C) P = MR = MC D) Large number of firms Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures 23) Which of the following is TRUE? A) In an oligopoly market, the equilibrium price is higher than the competitive equilibrium price. B) In a monopoly market, the equilibrium price in the long run approaches the competitive equilibrium price. C) In a monopolistically competitive market, the long-run equilibrium price is higher than the competitive equilibrium price. D) In an oligopoly with differentiated products, the equilibrium prices of the firms are the same. Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures 24) Which of the following describes a feature of a monopolistically competitive market? A) Social surplus is maximized, and some products will be priced below the competitive level. B) Social surplus is maximized but at prices possibly above the competitive level. C) Social surplus is not maximized, but the prices will be lower than the competitive level. D) Social surplus is not maximized, but product diversity may add to consumer welfare. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures

25) Differentiate between the four market structures on the basis of the type of products sold. Answer: Perfect competitors sell homogeneous products, while monopolistic competitors sell slightly differentiated products. Firms in an oligopoly sell either homogeneous products or differentiated products. In contrast, a monopolist sells a unique product. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Summing Up: Four Market Structures 26) Which of the following is TRUE? A) Markets with four or more firms are nearly competitive. B) Markets with only two firms cannot be competitive. C) A monopoly market can be competitive. D) Number of firms is not a guarantee of the competitiveness of a market. Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Many Firms Are Necessary to Make a Market Competitive? 27) One way to test whether a market is competitive is to see if the price ________ when more firms enter the market. A) falls B) stays the same C) rises D) changes by the reciprocal of the total number of firms Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Many Firms Are Necessary to Make a Market Competitive? 28) Which of the following is a possible "contaminant" that was not accounted for in the study of the tire market reported in the Evidence-Based Economics segment? A) Towns in the study may be located near a large city. B) The quality of tires sold in different towns may be different. C) It may be harder to start a tire dealership in some towns than in others due to local business law. D) The number of tire dealers is different from one town to another. Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Many Firms Are Necessary to Make a Market Competitive?

29) The entry of new firms into a market will ________ if the market power of the existing firms is large. A) reduce the market price B) increase the market price C) not change the market price D) first reduce, and then increase the market price Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Many Firms Are Necessary to Make a Market Competitive? 30) The entry of new firms into a market will ________ if the market power of the existing firms is small. A) reduce the market price B) increase the market price C) not change the market price D) first reduce, and then increase the market price Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Many Firms Are Necessary to Make a Market Competitive? 31) Tire Rack.com is an online seller of tires that currently has a 14 percent share of the replacement passenger and light truck tire market in the United States and has a 25 percent share in Canada. Tire Rack not only sells tires but also sells wheels and offers mounting and balancing services. It does not offer installation services, but it partners with 8,100 installation providers in the United States, all of whom agree to charge standard installation fees based on tire size. The online presence of Tire Rack.com ________. A) lowers search costs for the best tire deal and makes local tire markets more competitive regardless of the number of brick-and-mortar tire dealers B) lowers search costs for the best tire deal but has no impact on local tire markets, because it does not provide tire installation services C) lowers search costs for the best tire deal but actually makes local tire markets less competitive, because it has partnerships with tire installers D) does none of the above Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Many Firms Are Necessary to Make a Market Competitive?

32) Market research finds that nearly 80 percent of vehicle owners purchase tires at the business that performs routine maintenance on their vehicles. Increasingly, new car dealers carry tires and sell to car owners who bring their vehicles to the dealer for maintenance. Many car manufacturers negotiate prices on replacement tires and sell through to their dealers. The growing incidence of new car dealers selling replacement tires spiked up in the aftermath of the Great Recession, as new car dealers looked for ways to boost franchise sales in the face of low levels of new car sales. Given that Bresnahan and Reiss's paper was published more than 25 years ago, local tire markets are ________. A) likely more competitive today B) likely equally competitive as 25 years ago C) less competitive today D) none of the above Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: How Many Firms Are Necessary to Make a Market Competitive? 33) Dufwenberg and Gneezy conducted economic experiments that tested the theory of Bertrand competition (oligopoly with homogeneous goods) in the case of duopoly. Theory predicts the stable market equilibrium is for each duopolist to price at marginal cost. The experimental tests of the duopoly model in Bertrand competition found ________. A) that the experimental duopolists usually charged a price equal to marginal cost B) that the experimental duopolists usually charged a price slightly above marginal cost C) that the experimental duopolists usually charged a price significantly above marginal cost D) none of the above Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Many Firms Are Necessary to Make a Market Competitive? 34) Which of the following statements is FALSE about the studies on how many firms make a market competitive? A) Based on the evidence presented it is clear that any market with at least four competitors will be competitive B) Dufwenberg and Gneezy presented experimental evidence that four competitors was enough to lead to the competitive outcome. C) Bresnahan and Reiss used data on tire prices and the number of tire dealers in many small towns to show that three to four competitors was enough to lead to the competitive outcome D) As new firms enter, if prices fall closer to marginal costs, the market is becoming more competitive. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: How Many Firms Are Necessary to Make a Market 94 Copyright © 2022 Pearson Education Ltd.

Competitive? 35) Which of the following statements is TRUE regarding the political duopoly in the US? A) The two main political parties have created a political infrastructure that creates high barriers to entry for new political parties. B) There are many political parties in the US besides the Democrats and the Republicans. C) People are better off with fewer choices along the political spectrum. D) Legislators could easily break up the duopoly, but there is no will to do so among voters. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Letting the Podcast Speak: A Surprising Duopoly: Democrats and Republicans 36) Which of the following statements is TRUE regarding different market structures? A) Market structures with free entry and free exit will have zero profits in the long-run. B) All firms face downward sloping demand curves. C) All market structures can sustain positive long-run profits except perfect competition. D) The only market structure in which price will equal marginal cost is perfect competition. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Summing Up: Four Market Structures

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 15 Trade-offs Involving Time and Risk 15.1 Modeling Time and Risk 1) To an economist, risky options ________. A) are always bad options B) are always good options C) have costs and benefits that are fixed in advance D) do not have costs and benefits that are fixed in advance Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Modeling Time and Risk 2) Which of the following statements is TRUE? A) Future rewards are worth less than current rewards of the same value. B) Current rewards are worth less than future rewards of the same value. C) Risky options are always preferred to riskless options. D) Riskless options always have higher expected payoffs than risky options. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Modeling Time and Risk 3) When economists value rewards that will be experienced in the future, they multiply the reward by a ________. A) positive factor greater than 1 B) positive factor less than 1 C) negative factor greater than ‒1 D) negative factor less than ‒1 Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Modeling Time and Risk 4) When economists expect that a reward might not occur, they incorporate the uncertainty by multiplying the reward by a ________. A) positive factor greater than 1 B) positive factor less than 1 C) negative factor greater than ‒1 D) negative factor less than ‒1 Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Modeling Time and Risk 1 Copyright © 2022 Pearson Education Ltd.

15.2 The Time Value of Money 1) The transfer of resources through time by economic agents is referred to as a ________ transformation. A) clockwise B) time-wise C) chronological D) intertemporal Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Time Value of Money 2) An individual deposits a certain amount of money in a bank. The amount deposited is referred to as ________. A) interest B) principal C) installment D) the time value of money Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Future Value and the Compounding of Interest 3) ________ is the payment received for temporarily giving up the use of money. A) A loan B) Principal C) Interest D) A collateral Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Future Value and the Compounding of Interest 4) The time value of money is also referred to as ________. A) a loan B) interest C) a collateral D) principal Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Future Value and the Compounding of Interest

5) The payment made by a bank to a depositor to use her money to make loans is referred to as ________. A) dividend B) interest C) principal D) stock Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Future Value and the Compounding of Interest Scenario: George deposits $1,000 in a bank for a period of 1 year. After 1 year, he receives $1,300. 6) Refer to the scenario above. The principal in this case is ________. A) $300 B) $1,000 C) $1,300 D) $2,300 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 7) Refer to the scenario above. The interest earned on the sum deposited is ________. A) $300 B) $1,000 C) $1,300 D) $2,300 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 8) Refer to the scenario above. The time value of the amount deposited is ________. A) $300 B) $1,000 C) $1,300 D) $2,300 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest

9) Refer to the scenario above. The future value of the initial deposit after 1 year is ________. A) $300 B) $1,000 C) $1,300 D) $2,300 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 10) John deposits $800 in a bank at an annual interest rate of 6 percent. The total amount in John's account after 1 year will be ________. A) $822 B) $848 C) $864 D) $950 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 11) Ryan deposits $900 in a bank at an annual interest rate of 9 percent. The total amount in Ryan's account after one year will be ________. A) $963 B) $975 C) $981 D) $999 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 12) The ________ is referred to as future value. A) product of interest payments and principal B) ratio of interest payments to principal C) ratio of principal to interest payments D) sum of interest payments and principal Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest

Scenario: Jenny deposits $3,000 in a bank for a period of 1 year at an annual rate of interest of 10 percent. 13) Refer to the scenario above. The principal in this case is ________. A) $10 B) $300 C) $3,000 D) $3,300 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 14) Refer to the scenario above. After a year, the bank will pay interest of ________. A) $10 B) $300 C) $3,000 D) $3,300 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 15) When economists say that an interest rate is compounding, they imply that ________. A) the rate of interest is decreasing every year B) the rate of interest is increasing every year C) interest is being earned on a deposit D) the interest payment is doubling every two years Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Future Value and the Compounding of Interest 16) Kevin deposits a certain sum in a bank at an annual compound rate of interest for 2 years. Interest in the second year will be calculated on ________. A) the principal amount only B) the amount in the account after 1 year C) the sum of the principal amount and the amount in the account after 1 year D) the difference between the principal amount and the amount in the account after 1 year Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest

17) The equation that calculates the future value of an investment with the interest rate and leaves all interest payments in the account until the final withdrawal is referred to as the ________ equation. A) simple interest B) present value C) compound interest D) exponential interest Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Future Value and the Compounding of Interest 18) If an individual deposits an amount at a compound interest rate of r percent per year for a time period of T years, then: ________. A) Future value = (1 − r)T × (Principal) B) Future value = (1 + r)/T × (Principal) C) Future value = (1 ‒ r)/T × (Principal) D) Future value = (1 + r)T × (Principal) Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Future Value and the Compounding of Interest 19) If an individual receives $10,000 after 2 years by investing $10,000 today, we can conclude that ________. A) the rate of inflation is zero B) the market rate of interest is zero C) the rate of inflation is negative D) the market rate of interest is negative Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 20) The future value of a sum of money deposited in a bank will be higher if ________. A) the rate of interest is low B) the rate of inflation is low C) the returns on other assets are low D) the money is kept in the bank for a longer period of time Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Future Value and the Compounding of Interest

Scenario: Trinity deposits $8,000 in a bank at an interest rate of 8 percent per year compounded annually. 21) Refer to the scenario above. What will be the future value of the deposit after 1 year? A) $8,420 B) $8,480 C) $8,640 D) $8,820 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 22) Refer to the scenario above. What will be the future value of the deposit after 2 years? A) $8,761.20 B) $8,990.40 C) $9,000 D) $9331.20 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 23) Refer to the scenario above. What will be the future value of the deposit after 3 years? A) $9,822.63 B) $9,964.21 C) $10,077.70 D) $10,220.98 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest Scenario: Suppose you deposit $520 in a bank for a period of 1 year. The interest rate offered by the bank is 10 percent per year. 24) Refer to the scenario above. The interest that you will earn after a year is equal to ________. A) $10 B) $30 C) $32.24 D) $52 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 7 Copyright © 2022 Pearson Education Ltd.

25) Refer to the scenario above. The total value in your account at the end of a year is equal to ________. A) $520 B) $525 C) $550.50 D) $572 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 26) Refer to the scenario above. Suppose the interest rate is 5 percent. In this case, you will have ________ in your account after 1 year. A) $533 B) $546 C) $550 D) $580 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest Scenario: Wendy and John each deposit $2,000 in a bank account at different rates of interest. Wendy receives interest on her deposit at an annual rate of 6 percent, while John receives interest at an annual rate of 9 percent. 27) Refer to the scenario above. What will be the future value of Wendy's deposit after 1 year? A) $2,110 B) $2,120 C) $2,360 D) $2,400 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 28) Refer to the scenario above. What will be the future value of John's deposit after 1 year? A) $2,120 B) $2,180 C) $2,320 D) $2,460 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 8 Copyright © 2022 Pearson Education Ltd.

29) Refer to the scenario above. What will be the difference between the future values of John's deposit and Wendy's deposit after 1 year? A) $10 B) $40 C) $60 D) $100 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 30) Refer to the scenario above. What will be the future value of Wendy's deposit after 3 years? A) $2,150.91 B) $2,278.64 C) $2,382.03 D) $2,764.12 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 31) Refer to the scenario above. What will be the future value of John's deposit after 3 years? A) $2,590.06 B) $2,660.32 C) $2,708.08 D) $2,990.54 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 32) Refer to the scenario above. What will be the difference between the future values of John's deposit and Wendy's deposit after 3 years? A) $56.04 B) $112.26 C) $208.03 D) $439.15 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest

Scenario: Consider the following two options. You can either invest $30,000 in a bank that offers you an interest rate of 6 percent compounded annually for 30 years, or you can lend $30,000 to your friend for 30 years at an interest rate of 10 percent compounded annually. 33) Refer to the scenario above. If you invest your money in the bank, you will receive ________ on maturity. A) $172,304.74 B) $898,797.66 C) $3,521,725.58 D) $4,020,025.01 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 34) Refer to the scenario above. If you lend $30,000 to your friend for 30 years, you will receive ________ when she repays the amount after 30 years. A) $552,604.62 B) $523,482.07 C) $1,521,725.58 D) $3,620,025.01 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 35) Refer to the scenario above. Which of the following is TRUE? A) Investing in the bank will provide you a return of $3,521,725. B) Investing in the bank is comparatively more profitable for you. C) Lending to your friend is comparatively more profitable for you. D) You will receive $563,987.92 from your friend after 30 years. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 36) Which of the following statements is TRUE? A) The lower the risk in an investment, the higher the expected return will be. B) The higher the risk in an investment, the higher the expected return will be. C) The higher the principal amount of an investment, the lower will be the rate of interest offered on the investment. D) The higher the principal amount of an investment, the higher will be the rate of interest offered on the investment. Answer: B Difficulty: Medium AACSB: Analytical Thinking 10 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Future Value and the Compounding of Interest 37) Jenna deposits $1,000 in a bank at an interest rate of 6 percent compounded annually. Calculate the future value of the sum deposited for the following periods. a) After 2 years b) After 4 years Answer: a) The future value after two years equals (1.06)2 × 1,000 = $1,123.60. b) The future value after four years equals (1.06)4 × 1,000 = $1,262.48. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 38) A sum of $10,000 is deposited in a bank. Consider two scenarios: the bank offering an annual rate of interest of 10 percent and the bank offering an annual rate of interest of 15 percent. Compare the time value of money generated in both cases for the following periods. a) After 1 year b) After 5 years Answer: a) At a rate of interest of 10 percent per year, the future value of $10,000 after a year will be $11,000. Hence, the time value of money is $11,000 ‒ $10,000, or $1,000. At a rate of interest of 15 percent per year, the future value of $10,000 after a year will be $11,500. Hence, the time value of money is $11,500 ‒ $10,000, or $1,500. b) At a rate of interest of 10 percent per year, the future value of $10,000 after 5 years will be $16,105.1. Hence, the time value of money is $16,105.10 ‒ $10,000, or $ 6,105.10. At a rate of interest of 15 percent per year, the future value of $10,000 after 5 years will be $20,113.57. Hence, the time value of money is $20,113.57 ‒ $10,000, or $10,113.57. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Future Value and the Compounding of Interest 39) Which of the following statements is TRUE? A) An individual's current spending increases when he lends money. B) An individual's current spending decreases when he borrows money. C) An economic agent lends to move his spending from the future to the present. D) An economic agent lends to earn a return. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Borrowing Versus Lending

40) Which of the following statements is TRUE? A) An individual's future spending decreases when she lends money. B) An individual's future spending increases when she borrows money. C) An economic agent borrows to move her spending from the future to the present. D) An economic agent borrows to move her spending from the present to the future. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Borrowing Versus Lending 41) Which of the following is most likely to increase an individual's future spending? A) Paying back a loan in the future B) Borrowing money today C) Depositing money in the future D) Withdrawing money in the future Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Borrowing Versus Lending 42) Which of the following is most likely to reduce an individual's current spending? A) Paying back a loan in the future B) Depositing money in a bank today C) Borrowing money today D) Withdrawing money in the future Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Borrowing Versus Lending 43) Which of the following is most likely to increase an individual's current spending? A) Paying back a loan today B) Borrowing money today C) Depositing money today D) Withdrawing money in the future Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Borrowing Versus Lending

44) Which of the following is most likely to reduce an individual's future spending? A) Withdrawing money today B) Lending money today C) Paying back a loan in the future D) Withdrawing money in the future Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Borrowing Versus Lending 45) Suppose the annual rate of interest is r percent. Which of the following statements is TRUE of the future value of $1,000 for a time of T years? A) Irrespective of whether the sum of $1,000 is borrowed or lent, the future value in both cases will equal (1 ‒ r)T × $1,000. B) Irrespective of whether the sum of $1,000 is borrowed or lent, the future value in both cases will equal (1 + r)T × $1,000. C) If $1,000 is borrowed, the future value will equal (1 + r)T × $1,000, but if it is lent out, the future value will equal (1 ‒ r)T × $1,000. D) If $1,000 is borrowed, the future value will equal (1 ‒ r)T × $1,000, but if it is lent out, the future value will equal (1 + r)T × $1,000. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Borrowing Versus Lending 46) If a sum of $15,000 is borrowed at 13 percent for 1 year, the interest paid by the borrower is ________. A) $750 B) $1,000 C) $1,950 D) $5,500 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Borrowing Versus Lending 47) The ________ of a future payment is the amount of money that needs to be invested today to produce the future payments. A) implicit value B) explicit value C) present value D) real value Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Present Value and Discounting 13 Copyright © 2022 Pearson Education Ltd.

48) The discounted value of a future payment is also referred to as ________ value. A) implicit B) explicit C) present D) temporal Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Present Value and Discounting 49) Which of the following represents the correct formula for present value? A) Present value = Payment T periods from now × (1 + interest rate)T B) Present value = Payment T periods from now ‒ (1 + interest rate)T C) Present value = Payment T periods from now + (1 + interest rate)T D) Present value = Payment T periods from now/(1 + interest rate)T Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Present Value and Discounting 50) The present value of a sum of money to be received in the future is high if the ________. A) money is invested for a long period of time B) market rate of interest is low C) rate of inflation is high D) future payment is low Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Present Value and Discounting 51) What is the present value of $10,000 to be received after 1 year if the current annual rate of interest is 6 percent? A) $8,644.26 B) $8,922.34 C) $9,433.96 D) $10,000 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting

52) What is the present value of $50,000 to be received after 1 year if the market rate of interest is 8 percent per year? A) $44,110.98 B) $44,322.87 C) $46,296.30 D) $48,376.21 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 53) What is the discounted value of $60,000 to be received after 6 years if the ongoing rate of interest is 6 percent per year? A) $41,212.84 B) $42,297.63 C) $44,666.95 D) $51,220.64 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Present Value and Discounting Scenario: A friend approaches you with four different investment plans that offer you the following returns on an investment of $10,000. Plan 1: promises a return of $20,000 in 5 years Plan 2: promises you a return of $5,000 in 2 years and $2,000 in 3 years Plan 3: promises you a return of $20,000 in 20 years Plan 4: promises you a return of $15,000 in 10 years The market rate of interest is 5 percent. 54) Refer to the scenario above. Which of the following will you choose in order to maximize returns? A) Plan 1 B) Plan 2 C) Plan 3 D) Plan 4 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting

55) Refer to the scenario above. The present value of the positive cash flows from the investment in Plan 2 is equal to ________. A) $9,209 B) $6,263 C) $15,670 D) $7,537 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 56) Refer to the scenario above. The net present value of the investment in Plan 4 is equal to ________. A) ‒$8,001 B) ‒$556 C) ‒$791 D) ‒$3,737 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting Scenario: Tom has two investment options. He can either invest $3,000 in a friend's project or he can deposit the same amount in a bank that offers him an annual rate of interest of 6 percent. If he invests in his friend's project, he will receive $3,400 after 5 years. 57) Refer to the scenario above. What is the present value of $3,400 to be received after 5 years? A) $2,300.78 B) $2,540.68 C) $3,200.22 D) $3,526.44 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 58) Refer to the scenario above. What will be the balance in Tom's account after 5 years if he deposits $3,000 in the bank? A) $3,222.64 B) $3,400 C) $4,014.68 D) $4,111.78 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 16 Copyright © 2022 Pearson Education Ltd.

59) Refer to the scenario above. What is the net present value of his friend's project? A) −$459.32 B) −$666.21 C) $534.66 D) $616.21 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 60) Refer to the scenario above. Which of the following statements is TRUE? A) The discounted value of $3,400 to be received after 5 years is $3,000. B) Tom's return from investing in his friend's project is higher than the amount he would receive from the bank after 5 years. C) Tom's return from investing in the bank is higher than the amount he would receive from his friend's project after 5 years. D) The returns on both investments are likely to be similar, and Tom should be indifferent about investing in either option. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 61) The ________ of a project is the sum of all the costs and benefits associated with the project, using present values to make the costs and benefits comparable. A) discounted value B) cumulative present value C) net present value D) gross present value Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Present Value and Discounting 62) The net present value of a project equals ________. A) Discounted benefit ‒ Discounted cost B) Discounted cost × Discounted benefit C) Discounted cost/Discounted benefit D) Discounted benefit/Discounted cost Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Present Value and Discounting

Scenario: An investor is considering three different investment options. Investing in Option A pays him $4,000 after 6 years, investing in Option B pays him $7,600 after 7 years, and investing in Option C pays him $9,000 after 8 years. If he deposits the amount with a bank, he would receive an annual interest rate of 9 percent. 63) Refer to the scenario above. What is the present value of Option A? A) $2,464.11 B) $2,385.07 C) $2,463.66 D) $4,898.46 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 64) Refer to the scenario above. What is the present value of Option B? A) $2,463.66 B) $3,267.99 C) $4,157.46 D) $5,800.79 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 65) Refer to the scenario above. What is the present value of Option C? A) $2,763.64 B) $3,662.44 C) $4,516.80 D) $5,800.79 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 66) Refer to the scenario above. Which of the following statements is TRUE? A) The present value of Option A > The present value of Option B. B) The present value of Option A > The present value of Option C. C) The present value of Option B > The present value of Option C. D) The present value of Option B > The present value of Option A. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting

67) Refer to the scenario above. If the investor plans to invest a sum of $4,000, the net present value of Option A is ________. A) ‒$1,535.89 B) ‒$1,614.93 C) $898.46 D) $1,535.89 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 68) Refer to the scenario above. If the investor plans to invest a sum of $4,000, the net present value of Option B is ________. A) ‒$1,536.34 B) ‒$2,322.12 C) $157.46 D) $1,800.79 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 69) Refer to the scenario above. If the investor plans to invest a sum of $4,000, the net present value of Option C is ________. A) ‒$1,236.36 B) ‒$337.56 C) $516.80 D) $1,800.79 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 70) Refer to the scenario above. If the investor plans to invest a sum of $4,000, which of the following statements is TRUE? A) All three investment options are equally profitable. B) Options A and B are profitable investment options, whereas Option C is not. C) Options A and C are profitable investment options, whereas Option B is not. D) Options B and C are profitable investment options, whereas Option A is not. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting

Scenario: An investment of $20,000 offers a return of $15,000 in 10 years and another return of $15,000 after 15 years. The market rate of interest is 6 percent per year. 71) Refer to the scenario above. What is the sum of the present values of the returns from this investment? A) $12,887.64 B) $14,634.90 C) $19,524.69 D) $29,524.19 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 72) Refer to the scenario above. What is the net present value of the investment? A) ‒$7,112.36 B) ‒$5,365.10 C) ‒$475.31 D) $9,524.19 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 73) An investment option is profitable if its ________. A) net present value is zero B) net present value is positive C) net present value is negative D) present value is negative Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Present Value and Discounting 74) Differentiate between principal and the time value of money. John invests $100 in a bank for a year. At the end of the year, he receives $125. What is the principal and the time value of money in this case? Answer: The amount of the original investment is referred to as principal, while the time value of money is the interest or payment received for temporarily giving up the use of money that has been invested. In this case, $100 is the principal, while ($125 ‒ $100) or $25 is the time value of money. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting

75) Define the discounted value of a future payment. Answer: The discounted value of a future payment is the amount of money that would be needed to be invested today to generate the future payment. It is also referred to as the present value of a future payment. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Present Value and Discounting 76) If the market rate of interest is 8 percent per year, what is the present value of $10,000 to be received for the following periods? a) After 5 years b) After 10 years Answer: a) The present value of $10,000 to be received after 5 years = $10,000/(1.08)5 = $6,805. 53. b) The present value of $10,000 to be received after 10 years = $10,000/(1.08)10 = $4,631.94. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 77) An investment of $10,000 promises a payment of $13,000 after 6 years. If the annual rate of interest is 8 percent, what is the net present value of the investment? Answer: The present value of the payment to be received after 6 years = $13,000/(1.08)6 = $8,192.21. The net present value of the investment = $8,192.21 ‒ $10,000 = ‒$1,807.80. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 78) George is offered an investment option by his friend. He asks George for $6,900 and offers to repay $12,990 to him after a period of 10 years. George considers investing his money in his friend's project; however, the bank in his community offers an annual rate of interest of 9 percent on every deposit. Which do you think is the better investment option for George? Answer: To compare two investments, it is necessary to calculate the required principal to be deposited in the bank at 9 percent interest for 10 years to generate $12,990. The present value of $12,990 at 9 percent interest is $12,990/(1.09)10 = $5,487.12. Hence, if the rate of interest is 9 percent, the sum of $12,990 can be earned by depositing approximately $5,488 in the bank for 10 years. Because George needs to invest a smaller amount of money to generate the same return from the bank, investing in the bank is a better option for him. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting

79) Sarah is considering lending an amount of $45,000 to her friend who promises to return $60,000 at the end of 10 years. What is the net present value of Sarah's investment? Is it worthwhile undertaking this investment? Assume that the market rate of interest is 6 percent. Answer: The cost of this investment to the investor is $45,000 and the benefit is $60,000. The present value of the amount received after ten years is $60,000/(1.06)10 = $33,504 approximately. Hence, the net present value of the project is $(33,504 ‒ 45,000) = ‒$11,496. Because the net present value is negative, it is not worthwhile undertaking this investment. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Present Value and Discounting 15.3 Time Preferences 1) Utility is a measure of ________. A) income B) savings C) satisfaction D) expenditure Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Time Discounting 2) A util is a single unit of the measure of ________. A) income B) savings C) satisfaction D) expenditure Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Time Discounting 3) A(n) ________ weight multiplies delayed utils to translate them into current utils. A) simple B) discount C) compound D) exponential Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Time Discounting

4) The value of the discount weight used to translate utils into current utils is ________. A) 1 B) less than 1 C) greater than 1 but less than 2 D) greater than 1 but less than 3 Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Time Discounting 5) If an individual discounts delayed utils with a weight of 1/4, the present value of 90 utils to be received after a year is ________ utils. A) 17.25 B) 22.5 C) 90 D) 460 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting 6) In present value, if 140 delayed utils are only worth 70 utils now, the discount weight must be equal to ________. A) B) C) 1 D) 2 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting

Scenario: Susan discounts delayed utility with a weight of , and Jim discounts delayed utility with a weight of 1/4. Both individuals win gift vouchers, which can be used after a year. Both Susan and Jim estimate the utility of the gift vouchers at 90 utils. 7) Refer to the scenario above. What is the present value of the gift voucher to Susan? A) 30 utils B) 45 utils C) 90 utils D) 180 utils Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting 8) Refer to the scenario above. What is the present value of the gift voucher to Jim? A) 12 utils B) 22.5 utils C) 90 utils D) 180 utils Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting 9) Refer to the scenario above. If both individuals are offered movie tickets worth 40 utils today instead of the gift voucher, then which of the following statements is TRUE? A) Both Susan and Jim will prefer to retain the gift voucher. B) Both Susan and Jim will prefer the movie tickets over the gift voucher. C) Susan will prefer the gift voucher, while Jim will prefer the movie ticket. D) Jim will prefer the gift voucher, while Susan will prefer the movie ticket. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting

Scenario: Frank has two options: hot dogs and ice cream. Frank derives a current utility of 8 utils from hot dogs and a current utility of 10 utils from ice cream. He also estimates the delayed costs in terms of health effects from both options. The delayed costs from hot dogs are estimated at 14 utils, and the delayed costs from ice cream are estimated at 12 utils. 10) Refer to the scenario above. If Frank discounts delayed utilities with a weight of , then which of the following statements is TRUE? A) He will consume both hot dogs and ice cream. B) He will avoid consuming both hot dogs and ice cream. C) He will consume ice cream but will avoid consuming hot dogs. D) He will consume hot dogs but will avoid consuming ice cream. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting 11) Refer to the scenario above. If Frank discounts delayed utilities with a weight of

, then

which of the following statements is TRUE? A) He will consume both hot dogs and ice cream. B) He will consume hot dogs but will avoid consuming ice cream. C) He will consume ice cream but will avoid consuming hot dogs. D) He will avoid consuming both hot dogs and ice cream. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting 12) Refer to the scenario above. If Frank discounts delayed utilities with a weight of which of the following statements is TRUE? A) He will eat both hot dogs and ice cream. B) He will eat hot dogs but avoid ice cream. C) He will eat ice cream but avoid hot dogs. D) He will avoid consuming both hot dogs and ice cream. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting

, then

Scenario: Suppose the government decides to levy a tax on the emission of greenhouse gases. The tax on the emission of greenhouse gases has been estimated to provide a future benefit of 1,000 utils, while the current cost of the tax imposed is 700 utils. 13) Refer to the scenario above. People will earn a net benefit of ________ if the discount weight of the future benefit is . A) 950 utils B) 930 utils C) ‒600 utils D) ‒950 utils Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting 14) Refer to the scenario above. Suppose the discount weight attached to the future benefit is . People will earn a net benefit equal to ________ utils. A) ‒500 B) ‒700 C) 860 D) 900 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting 15) Refer to the scenario above. Suppose that the decision to levy a tax on the emission of greenhouse gases costs 500 utils in present value and that the discount weight attached to the future benefit is . In this case, the net benefit earned by the people is ________ utils. A) ‒300 B) ‒441.18 C) 333.65 D) 420 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting 16) Define utility. What are individual units of utility called? Answer: Utility is the measure of satisfaction or well-being. Individual units of utility are referred to as utils. Difficulty: Medium AACSB: Analytical Thinking 26 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Time Discounting 17) The benefit that Jack receives from consuming a portion of French fries is 10 utils. He expects the future health cost of eating French fries to be 20 utils. If Jack discounts delayed utils with a weight of , should he consume French fries? Explain your answer. Answer: Benefit that Jack receives from consuming French fries = 10 utils. Cost that Jack expects to bear in the future if he consumes French fries = 20 utils. Present value of the future costs = × 20 = 5 utils. Net benefit = (10 ‒ 5) = 5 utils. Because the net benefit of consuming French fries is positive, Jack should consume French fries. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Time Discounting 18) Present bias implies that ________. A) a consumer gives much more weight to the future than to the present B) a consumer gives much more weight to the present than to the future C) discount weights for delayed consumptions will always equal 1 D) discount weights for delayed consumptions will always be greater than 1 Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Preference Reversals 19) Which of the following examples correctly identifies preference reversals? A) Alice using public transport when the price of gasoline increases B) Sarah increasing the consumption of coffee substantially when the price of tea increases C) Terry deciding on Monday to join music classes from Thursday, but refusing to do so on Thursday D) Tim deriving lower utility from additional units of ice cream Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Preference Reversals 20) Which of the following statements is FALSE? A) The more one cares about the present, the larger their discount rate will be. B) Someone who cares about the future almost as much as today will have a discount rate close to 1. C) Someone who cares about the future much less than today will have a discount rate closer to 0. D) Having a severe present bias can lead to a preference reversal. Answer: A Difficulty: Medium 27 Copyright © 2022 Pearson Education Ltd.

AACSB: Application of Knowledge TopicEntry: Time Discounting 21) Why do preference reversals occur? Answer: Preference reversals occur because of present bias. Present bias implies that an individual places a much higher weight on present consumption than on future consumption. So, if a consumer is not able to consume a good today, she may not want to consume it tomorrow, as the utility received from consumption is much smaller than what she would have received had she consumed the good today. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Preference Reversals 22) Consider two individuals, Kevin and Harris, who discount delayed utilities with a weight of and , respectively. a) Of the two individuals, who gives more weight to things that happen in the future? b) If consuming ice cream gives both Kevin and Harris benefits worth 8 utils instantly and it has delayed costs of 15 utils, then comment on whether both individuals will want to consume ice cream. c) If the nearby ice cream parlor is closed for a week, will Kevin and Harris prefer to eat ice cream after a week, given that they have to decide today? Answer: a) The greater the discount weight of an individual, the more importance he gives to things that happen in the future. In this case, Harris has a discount weight of , while Kevin has a discount weight of . Therefore, Harris gives more weight to things that happen in the future. b) The net benefit that Kevin will derive from consuming ice cream = 8 ‒ (15) = 8 ‒ 7.5 = 0.5. Because the net benefit is positive, Kevin will want to consume ice cream. The net benefit that Harris will derive from consuming ice cream = 8 ‒ (15) = ‒3.25. Because the net benefit is negative, Harris will not want to consume ice cream. c) If the consumption of ice cream is delayed by a week, the benefit the individuals receive from consumption will also have to be discounted. Kevin's net benefit from consuming ice cream after a week = (8 ‒ 15) = ‒3.5. Therefore, Kevin will decide not to consume ice cream after a week. Harris's net benefit from consuming ice cream after a week = (8 ‒ 15) = ‒5.25. Therefore, Harris will decide not to consume ice cream after a week. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Preference Reversals 28 Copyright © 2022 Pearson Education Ltd.

23) Consider two individuals, Wendy and Jenny, who discount delayed utilities with a weight of and , respectively. Consuming one hamburger gives both Wendy and Jenny benefits worth 16 utils instantly, and it has delayed costs of 20 utils. a) If the nearby hamburger shop is closed for a week, comment on whether both individuals will consume hamburgers after a week. b) If a new shop is opened nearby and hamburgers are available for consumption today, comment on whether both individuals will consume hamburgers. Answer: a) If the consumption of hamburgers is delayed by a week, both the benefit from and the cost of consumption will have to be discounted. Wendy's net benefit from consuming a hamburger after a week = (16 ‒ 20) = ‒1. Therefore, Wendy will not want to consumer a hamburger after a week. Jenny's net benefit from consuming a hamburger after a week = (16 ‒ 20) = ‒3.5. Therefore, Jenny will not want to consume a hamburger after a week. b) The net benefit that Wendy will derive by consuming a hamburger today = 16 ‒ [( ) × 20] = 11 utils. Because net benefit is positive, Wendy will want to consume a hamburger from the new shop today. The net benefit that Jenny will derive by consuming a hamburger today = 16 ‒ [( ) × 20] = ‒1.5 utils. Because net benefit is negative, Jenny will not want to consume a hamburger from the new shop today. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Preference Reversals 15.4 Probability and Risk 1) In economics, risk is said to exist when the ________. A) outcome of an activity is not known with certainty B) cost of producing a good exceeds its market price C) net present value of an outcome is positive D) the probability of an outcome is 1 Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Probability and Risk

2) Define the following terms. a) Risky outcome b) Probability Answer: a) An outcome is risky if it is not known with certainty in advance. b) Probability is the frequency with which an outcome occurs. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Probability and Risk Scenario: A roulette wheel has fifty pockets numbered from 1 to 50. An individual may bet on more than one pocket on the wheel. 3) Refer to the scenario above. If the individual places her bet on one pocket, her likelihood of winning is ________ percent. A) 0.50 B) 1 C) 2 D) 5 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Roulette Wheels and Probabilities 4) Refer to the scenario above. If the individual places his bet on four pockets, his likelihood of winning is ________ percent. A) 1 B) 4 C) 8 D) 10 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Roulette Wheels and Probabilities 5) Refer to the scenario above. If the individual places her bet on ten pockets, her likelihood of winning is ________ percent. A) 5 B) 10 C) 20 D) 25 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Roulette Wheels and Probabilities 30 Copyright © 2022 Pearson Education Ltd.

6) The probability of an event is the ________. A) time taken for the event to occur B) frequency at which the event occurs C) net benefit to society from the event D) total number of economic agents affected by the event Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Roulette Wheels and Probabilities Scenario: A box has three green balls, six blue balls, and nine red balls. 7) Refer to the scenario above. What is the probability of picking a green ball from the box? A) 12.83 percent B) 16.67 percent C) 24.75 percent D) 32.35 percent Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Roulette Wheels and Probabilities 8) Refer to the scenario above. What is the probability of picking a blue ball from the box? A) 16.66 percent B) 33.33 percent C) 49.99 percent D) 54.44 percent. Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Roulette Wheels and Probabilities 9) Refer to the scenario above. What is the probability of picking a red ball from the box? A) 24.65 percent B) 45 percent C) 50 percent D) 64 percent Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Roulette Wheels and Probabilities

Scenario: Your friend and you decide to bet on a baseball game. You offer to pay $200 if you lose the bet, and your friend has to pay $100 if you win the bet. The probability of your winning or losing the bet is . 10) Refer to the scenario above. The average payoff of the bet is ________. A) $50 B) $100 C) ‒$50 D) ‒$100 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Roulette Wheels and Probabilities 11) Refer to the scenario above. Suppose the amount that you receive on winning the bet is increased to $300. Which of the following statements is TRUE? A) There is no change in the outcome of the game. B) Your expected value of the bet will be positive. C) You will withdraw from the bet as the cost of betting increases. D) The probability of you winning the game increases to 2/100. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Roulette Wheels and Probabilities 12) A bag has ten green balls, six blue balls, and forty-four purple balls. A ball is picked randomly from the bag. What is the probability that it is a a) green ball. b) blue ball. c) purple ball. Answer: a) The probability that the ball picked is a green ball = = 0.167 = 16.7 percent. b) The probability that the ball picked is a blue ball = c) The probability that the ball picked is a purple ball =

= 0.1 = 10 percent. = 0.733 = 73.3 percent.

Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Roulette Wheels and Probabilities

13) If knowing about one outcome does NOT help to predict another outcome, the outcomes are said to be ________. A) exclusive B) inclusive C) dependent D) independent Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Independence and the Gambler's Fallacy 14) In the context of a roulette wheel, gambler's fallacy refers to the belief that ________. A) outcomes of a gamble are mostly repetitive B) winners in a gamble lose the next round C) outcomes of a gamble tend to avoid repeats D) winners in a gamble continue to win in streaks Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Independence and the Gambler's Fallacy 15) How does the idea of independent events help explain the gambler's fallacy in a roulette game? Answer: The gambler's fallacy refers to the assumption that random outcomes tend to avoid repeats. In a roulette game, outcomes are random and independent. Two random outcomes are said to be independent when knowing about one outcome does not help predict the other outcome. Hence, the outcome of one roulette game has nothing to do with the outcome of the next game, and the idea that the outcomes of a roulette game tend to avoid repeats is a fallacy. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Independence and the Gambler's Fallacy 16) A probability weighted value is referred to as a(n) ________ value. A) discount B) reduced C) expected D) future Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Expected Value

Scenario: An unbiased coin is tossed, and if the outcome is heads, an individual wins $50. If the outcome is tails, the individual has to pay $50. 17) Refer to the scenario above. What is the probability of getting heads? A) 25 percent B) 50 percent C) 75 percent D) 100 percent Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Expected Value 18) Refer to the scenario above. What is the probability of getting tails? A) 25 percent B) 50 percent C) 75 percent D) 100 percent Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Expected Value 19) Refer to the scenario above. What is the expected value of the gamble? A) $0 B) $50 C) $75 D) $100 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Expected Value 20) Refer to the scenario above. If the rules of the gamble are changed such that in the case of heads, the individual wins $100, and in the case of tails, the individual loses $50, the expected value of the gamble changes to ________. A) $0 B) $25 C) $50 D) $75 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Expected Value

21) Refer to the scenario above. If the rules of the gamble are changed such that in the case of heads, the individual wins $50, and in the case of tails, the individual loses $100, the expected value of the gamble changes to ________. A) $25 B) ‒$25 C) $50 D) ‒$50 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Expected Value Scenario: The rules of a roulette game with pockets numbered from 1 to 100 are such that if the ball ends in a pocket with an even number, the player wins $300. However, if the ball ends in a pocket with an odd number, he loses $200. 22) Refer to the scenario above. What is the probability of winning? A) 10 percent B) 20 percent C) 50 percent D) 80 percent Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Expected Value 23) Refer to the scenario above. What is the probability of losing? A) 20 percent B) 50 percent C) 75 percent D) 100 percent Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Expected Value 24) Refer to the scenario above. What is the expected value of the game? A) $20 B) $50 C) $100 D) $300 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Expected Value 35 Copyright © 2022 Pearson Education Ltd.

25) A die is rolled, and if the outcome is an even number, a gambler receives $10. If the outcome is an odd number, the gambler loses $10. What is the expected value of this game? Answer: Probability of getting an even number = = . Expected value of getting an even number =

× ($10) = $5.

Probability of getting an odd number = . Expected value of getting an odd number =

× (‒$10) = ‒$5.

Expected value of the game = $5 ‒ $5 = $0. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Expected Value Scenario: A bag contains ten green balls, five blue balls, and fifteen yellow balls. If an individual picks a green ball from the bag, she wins $200. If she picks either a blue ball or a yellow ball, she loses $300. 26) Refer to the scenario above. What is the probability of winning? A) 16.66 percent B) 33.33 percent C) 45.55 percent D) 66.66 percent Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Is Gambling Worthwhile? 27) Refer to the scenario above. What is the probability of losing? A) 16.66 percent B) 30 percent C) 50 percent D) 66.67 percent Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Is Gambling Worthwhile?

28) Refer to the scenario above. What is the expected value of the game? A) ‒$15.64 B) $27 C) ‒$33.33 D) $35.75 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Is Gambling Worthwhile? Scenario: John is planning to buy a cell phone. The market price of the cell phone is $200. While making the purchase, along with the regular replacement warranty for a year, he is also offered an extended warranty for 2 more years at a price of $50. The probability of the phone malfunctioning each year is 20 percent. It is also expected that a similar phone will cost $150 after the end of the first year and $100 after the end of the second year. The current market rate of interest is 10 percent. 29) Refer to the scenario above. What is the value of having the extended warranty during the second year of ownership? A) $16.52 B) $24.79 C) $40 D) $48.75 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Extended Warranties 30) Refer to the scenario above. What is the value of having the extended warranty during the third year of ownership? A) $15.03 B) $24.88 C) $44.66 D) $50.40 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Extended Warranties

31) Refer to the scenario above. What is the present value of the benefits of buying the extended warranty? A) $33.04 B) $39.82 C) $52.10 D) $60 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Extended Warranties 32) Refer to the scenario above. What is the net present value of buying the warranty? A) $3.75 B) ‒$10.18 C) $15.54 D) ‒$30 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Extended Warranties Scenario: An air-conditioner manufacturing company offers a warranty of 3 years on a new air conditioner at a cost of $150. The air conditioner costs $1,500 and has a 15/100 or 15 percent probability of a breakdown each year. A new air conditioner will cost $1,000, $650, and $350, respectively, in the following 3 years. The interest rate on your credit card is 12 percent. 33) Refer to the scenario above. The net present value of buying the warranty is ________. A) $99.02 B) $278 C) $135.65 D) $85 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extended Warranties 34) Refer to the scenario above. A change in the probability of breakdown to 10 percent will ________. A) increase the net present value to $135.65. B) lead to a negative net present value. C) decrease the net present value to $16.02. D) decrease the net present value to $10. Answer: C Difficulty: Medium AACSB: Application of Knowledge 38 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Extended Warranties 35) Suppose you have guaranteed medical expenses of $400 a year and a 1% chance of getting sick and having medical expenses of $10,000. What is the maximum amount you would be willing to pay annually for health insurance that would cover 90% of any medical expenses? A) $450 B) $500 C) $464 D) $400 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Probability and Risk 36) Suppose you are buying a TV on Amazon. The TV costs $350, but does not come with a warranty. Amazon offers a 3 year warranty for $49.99. Assume that there is a 5% chance that your TV will break in the first year, and that probability increases by 5 percentage points each subsequent year. Assume that the value of the replacement you will receive is $350 during the first year, but falls by $50 each year. Finally, assume the interest rate is 10%. What is the net present value of this extended warranty? A) $18.89 B) $68.88 C) $25.77 D) $75.76 Answer: A Explanation: NPV = (0.05*(350/1.1)) + (0.1*(300/(1.1*1.1))) + (0.15*(250/(1.1*1.1*1.1))) 49.99 Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Extended Warranties

37) Jerry is interested in purchasing a washing machine. The price of the machine is $500, and it comes with a 1-year warranty. The probability that the machine will break down is 20 percent every year. If the machine breaks down in the second year and Jerry holds a warranty, he receives a new washing machine worth $400 that year. If the machine breaks down after 3 years and he holds a warranty, he receives a new machine that is worth $300 after the third year. The price of a warranty for 3 years is $150. The market interest rate is 5 percent. Is buying the warranty a good investment for Jerry? Explain your answer. Show all the necessary calculations. Answer: If the washing machine breaks down in the second year, Jerry will receive a new machine worth $400. The value of this machine in the second year is 400/(1.05)2 = $363 approximately. If the machine breaks down in the third year, Jerry gets a new machine worth $300. The present value of such a machine is 300/(1.05)3 = $259 approximately. Hence the expected value of having the warranty is equal to (0.20 × $363) + (0.20 × $259) ‒ $150 = $72.60 + $51.80 ‒ $150 = ‒$25.60. In this case, since the expected value of an extended warranty is negative, it is a bad investment for Jerry. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Extended Warranties 15.5 Risk Preferences 1) Loss aversion refers to the idea that people ________. A) generally tend to avoid risky activities B) are more prone to making losses than gains in day-to-day transactions C) psychologically weight a loss more heavily than they psychologically weight a gain D) are unwilling to undertake expenditures that reduce the probability of future losses Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Risk Preferences Scenario: Three investment options are available in a market. All three options provide the same expected rate of return but have different levels of risk associated with them. Investing in Option A is the riskiest, while investing in Option C is the safest. Option B has a moderate level of risk associated with it. 2) Refer to the scenario above. Which investment option will a risk-averse individual choose? A) He will choose to invest in Option A. B) He will choose to invest in Option B. C) He will choose to invest in Option C. D) He will be indifferent to investing in any of the three options. Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Risk Preferences 40 Copyright © 2022 Pearson Education Ltd.

3) Refer to the scenario above. Which investment option will a risk-seeking individual choose? A) She will choose to invest in Option A. B) She will choose to invest in Option B. C) She will choose to invest in Option C. D) She will be indifferent to investing in any of the three options. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Risk Preferences 4) Refer to the scenario above. Which investment option will a risk-neutral individual choose? A) He will choose to invest in Option A. B) He will choose to invest in Option B. C) He will choose to invest in Option C. D) He will be indifferent to investing in any of the three options. Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Risk Preferences 5) Empirical studies have shown that in most situations, people are ________. A) risk averse B) risk neutral C) risk seeking D) either risk neutral or risk seeking but not risk averse Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Risk Preferences Assume you are in a class and you have three choices for how your grade will be determined. In option A you earn an 85 if you complete all of the work. In option B, there is an 80% chance you will earn an 85, but a 10% chance of receiving a 10 point bonus and a 10% chance of losing 10 points. In option C, there is only a 10% chance you will earn an 85, but a 45% chance of getting the 10 point bonus and a 45% chance of losing 10 points. 6) Which of these options would you prefer if you were risk seeking? A) Option A B) Option B C) Option C D) You would be indifferent between options B and C Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Risk Preferences 41 Copyright © 2022 Pearson Education Ltd.

7) Which of these options would you prefer if you were risk averse? A) Option A B) Option B C) Option C D) You would be indifferent between the options Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Risk Preferences 8) If you weight losses in points twice as heavily as gains in points, which of the following statements is TRUE? A) You would never choose any option where you might lose points regardless of the other options. B) Risk seeking individuals would have the highest expected value for option C. C) Regardless of your risk preferences, option A would have the highest expected value. D) You would be indifferent to all options. Answer: C Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Risk Preferences 9) An individual receives $100 if the outcome of a coin toss is heads. If the outcome of the coin toss is tails, he loses $50. If the individual weights future losses by a special factor of 2, what is the psychological value of this coin toss? Answer: The probability of getting heads is . The probability of getting tails is . The psychological value of this coin toss is ( × $100) + ( × ‒$50) × 2 = $50 ‒ $50 = $0. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Risk Preferences 10) What are the different categories of risk preferences? Explain. Answer: The three categories of risk preferences are: i) Risk averse: risk-averse people prefer to invest in options that have less risk. ii) Risk neutral: risk-neutral people do not care about the level of risk involved in investment options. iii) Risk seeking: risk-seeking people prefer to invest in options that have high risk. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Risk Preferences

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 16 The Economics of Information 16.1 Asymmetric Information 1) In a market with asymmetric information, ________. A) people tend to overuse a resource is such a way that it gets exhausted B) people with an informational disadvantage experience positive externalities C) buyers and sellers have different information about the good being traded D) sellers have very low bargaining power Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Asymmetric Information 2) In a market with ________, one side of the market has private information that is relevant for the other side. A) asymmetric information B) perfect competition C) monopolistic competition D) positive externalities Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Asymmetric Information 3) In a market with asymmetric information, a good is said to have hidden characteristics if ________. A) the consumption of the good imposes an additional cost on society B) the production of the good generates additional benefits to society C) the seller offers secret discounts to some buyers of the good D) the buyer or the seller observes something about the good that the other does not Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Asymmetric Information 4) In a market with asymmetric information, hidden actions exist if ________. A) the buyer or the seller takes actions that are relevant for, but not observed by, the other party B) the production or consumption of a good gives rise to positive externalities C) the production or consumption of a good gives rise to negative externalities D) the value of a good to a seller is greater than its value to a buyer Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Asymmetric Information 1 Copyright © 2022 Pearson Education Ltd.

5) You went to a craft show and paid an exorbitant price for an embroidered shawl that the seller said was hand embroidered and had been imported from India. Several months later, you found a similar shawl in another showroom at a much lower price and realized that the one you bought was not imported. This is an example of a market with ________. A) asymmetric information B) a positive externality C) a negative externality D) the free-rider problem Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Asymmetric Information 6) Claudia went to a department store to buy a few things for her new house. She found that several items in the store were on discount and decided to make the most of the deals offered. However, when she started using the things that she bought on discount, she realized that many of them were defective. This happened because of the presence of ________. A) positive externalities B) negative externalities C) asymmetric information D) the moral hazard problem Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Asymmetric Information 7) Mr. Smith put his laptop up for sale. He was aware of the fact that the laptop malfunctioned frequently. However, none of the potential customers who came to buy the laptop were able to discover the problem. One of them actually bought it at a remunerative price. This occurred because of the presence of ________. A) asymmetric information B) positive externalities C) negative externalities D) the moral hazard problem Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Asymmetric Information

8) Asymmetric information in a market can lead to ________. A) market failure B) the moral hazard problem C) the free-rider problem D) the tragedy of the commons Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Asymmetric Information 9) In a market with asymmetric information, gains from trade occur if ________. A) the value of a good to a seller is greater than its value to a buyer B) the value of a good to a buyer is greater than its value to a seller C) the variable cost of producing a good is zero D) the opportunity cost of consuming a good is zero Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Asymmetric Information 10) Distinguish between two kinds of asymmetric information. Answer: One type of information asymmetry occurs when one party in a transaction observes some characteristics of the good or service that the other does not. In this case, the good is said to have hidden characteristics. Another kind of information asymmetry occurs when one party in a transaction takes actions that are relevant for, but not observed by, the other party. Such actions are called hidden actions. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Asymmetric Information 11) Which of the following is TRUE of a used car market? A) The sellers have more information than the buyers. B) Gains from trade do not exist in the market. C) The cars sold are identical in quality. D) There is no consumer surplus in the market. Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market

12) Which of the following is an example of adverse selection? A) Overgrazing of a common piece of land B) A passenger traveling in a subway without a ticket C) A customer buying a defective appliance from a used goods market D) The generation of hazardous waste by the production of a good Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 13) Which of the following is likely to happen in a used car market if the buyers feel that the best they can do is buy a lemon? A) The sellers of high-quality used cars will reap high profits. B) Higher gains from trade will be realized. C) The entire market will shut down. D) The sellers of lemons will earn high profits. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market Scenario: You walk into a used car lot to buy your first car. However, you are not sure of the quality of the cars in the lot and expect one-third of them to be of poor quality. 14) Refer to the scenario above. Based on the given information, we can conclude that the market for used cars has ________. A) information asymmetry B) a perfectly competitive structure C) positive externalities D) negative externalities Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 15) Refer to the scenario above. Suppose you decide to buy a Toyota Corolla. You value the car at $10,000, but the car dealer values it at $8,500, which is not known to you. Which of the following is TRUE in this case? A) There are no gains from trade. B) There are gains from trade. C) The transaction will result in negative externalities. D) The transaction will result in positive externalities. Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 4 Copyright © 2022 Pearson Education Ltd.

16) Refer to the scenario above. You are eager to pay $10,000 for a good-quality car but $0 for a poor-quality car. Suppose you decide to buy a Toyota Corolla that the car dealer values at $8,500. What is the most that you would be willing to pay for the car? A) $3,000.50 B) $6,666.67 C) $10,000 D) $5,000 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 17) Refer to the scenario above. Suppose you decide to buy a Toyota Corolla. You value the car at $10,000, but the car dealer values it at $8,500, which is not known to you. What is the minimum price the seller will accept for the car? A) $8,500 B) $7,000 C) $10,000 D) $5,000 Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 18) Refer to the scenario above. Suppose you decide to buy a Toyota Corolla. You value the car at $10,000, but the car dealer values it at $8,500, which is not known to you. Which of the following is likely to be TRUE? A) You will end up buying a high-quality car. B) You will end up buying a poor-quality car. C) You will end up earning a positive consumer surplus. D) You will choose not to buy the car. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market

19) A fruit retailer buys 50 pounds of apples from the wholesale market every day. The retailer has observed that 20 percent of the apples bought each time are not good quality. Because it is not possible for the retailer to check each apple before buying them, how much should he pay for each pound if he values good apples at $1.40 per pound and bad apples at $0 per pound? A) $1.12 per pound B) $1.20 per pound C) $1.40 per pound D) $2 per pound Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market Scenario: Tom wants to buy a used iPhone from an online exchange Web site. He expects 50 percent of the used phones to have some defect. He is willing to pay up to $80 for a phone without any defect and $0 for a defective phone. An owner of a good-quality iPhone is likely to sell his phone if he gets a price of $70. 20) Refer to the scenario above. Which of the following problems is likely to occur in this market? A) The fallacy of composition B) Moral hazard C) Adverse selection D) The free-rider problem Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 21) Refer to the scenario above. In this case, how much should Tom pay for a used iPhone? A) $80 B) $40 C) $60 D) $0 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market

22) Refer to the scenario above. Tom is likely to get a defective phone if he is willing to pay an amount of ________. A) $80 B) $100 C) $40 D) $120 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market Scenario: Mike wants to buy an ancient painting from a curator. Mike values the original painting at $50,000, while he does not have any value for a fake one. However, he cannot differentiate between the original painting and a fake painting. 23) Refer to the scenario above. How much should he pay for the painting if he thinks that there is a 70 percent chance that the painting he is buying is original? A) $50,000 B) $35,000 C) $70,000 D) $15,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 24) Refer to the scenario above. If the curator values the painting at $45,000, which of the following problems is likely to arise? A) Adverse selection B) The free-rider problem C) The paradox of thrift D) The tragedy of the commons Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market

25) A factory urgently needs to hire some workers. The factory owner is willing to pay a wage of $15 per hour to responsible workers and is unwilling to hire workers who require constant monitoring. On average, he expects five out of the ten workers who have come for the interview to be sincere. How much should he offer to pay the workers he hires? A) $15 per hour B) $7.50 per hour C) $10 per hour D) $8 per hour Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market Scenario: The market for used cell phones is very popular in Barylia. However, several phones available in this market are of an inferior quality, and it is often impossible to differentiate between a good-quality phone and a poor-quality phone. 26) Refer to the scenario above. Based on the given information, we can conclude that the market for used cell phones in Barylia ________. A) has asymmetric information B) is perfectly competitive C) is monopolistically competitive D) has the free-rider problem Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 27) Refer to the scenario above. Which of the following problems is likely to arise in the market for used cell phones in Barylia? A) The tragedy of the commons B) The paradox of thrift C) Adverse selection D) Moral hazard Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 28) Why do the owners of good-quality used cars stay away from the market for used cars? Answer: Only the owners of used cars know about the true quality of their cars. Therefore, buyers are often not willing to pay a high price for used cars, thinking that the car they buy might be a lemon. As a result, it becomes unprofitable for the owners of good-quality cars to sell their cars. Difficulty: Medium AACSB: Analytical Thinking 8 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 29) Ted went to the market to buy Good X. He was willing to pay up to $2.50 per unit of the good. However, he expected some units of the good to be defective. Therefore, when the seller asked a price of $2.30 per unit, he refused to pay more than $2 for each unit. If the seller knows which units of the good are defective, what is most likely to happen in this case? Answer: Ted valued each unit of Good X at $2.50, while the seller valued it at $2.30. If Ted had perfect information about the quality of the good, the trade would have taken place at a price between $2.30 and $2.50. However, because Ted was unaware of the quality of the good and had a lower value for defective units of the good, he was willing to pay only $2 per unit. At $2, the seller would not be willing to give him non-defective units of Good X, because the seller had a higher value for those units. As a result, Ted would end up buying defective units of Good X. Such a phenomenon is commonly known as adverse selection. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 30) Sarah went to a store to buy a used camera. She was looking at different models when the store manager asked her about the maximum price that she would pay. Because it was impossible to know the quality of the cameras, Sarah lowered her willingness to pay to $200, although she valued a used camera of good quality at $300. If the seller values a camera of good quality at $250, what is most likely to happen in this case? Answer: Sarah values a used camera of good quality at $300, while the seller values it at $250. If Sarah had perfect information about the quality of each camera, a trade would have taken place at a price between $250 and $300. However, because Sarah is unaware of the quality of the cameras and has a lower value for a camera of poor quality, she is willing to pay only $200. At $200, the seller will not be willing to give her a good-quality camera, because he values it at $250. As a result, Sarah will end up buying a poor-quality camera. Such a phenomenon is commonly known as adverse selection. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 31) Paul is looking for a used washing machine. He has posted his requirement on an online exchange Web site and has also mentioned the maximum amount that he is willing to pay for it. If his willingness to pay is lower than the price of good-quality used washing machines, what is likely to happen? Answer: Paul's advertisement is likely to attract sellers of low-quality washing machines. This is because Paul's willingness to pay is well below the market price of high-quality used washing machines. Good-quality washing machines are valued at high prices, and therefore owners of these machines will not be willing to sell at the price quoted by Paul. This is an example of adverse selection. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Used Car Market 9 Copyright © 2022 Pearson Education Ltd.

32) ________ occurs when one agent in a transaction knows about a hidden characteristic of a good. A) The free-rider problem B) The tragedy of the commons C) Adverse selection D) The moral hazard problem Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market 33) In which of the following markets are buyers likely to have private information? A) The market for used cars B) The market for fresh fruits and vegetables C) The market for banking services D) The market for health insurance Answer: D Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market 34) Adverse selection arises in the health insurance market because ________. A) buyers have private information B) sellers have private information C) different firms provide different insurance schemes D) the number of buyers and sellers is large Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market 35) Which of the following is a problem that arises in a health insurance market? A) There are a large number of buyers of various insurance programs. B) A fierce competition exists between insurance providers. C) A disproportionate number of high-risk individuals tend to buy insurance. D) Only risk-averse individuals buy insurance. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market

36) Health insurance markets are likely to attract a disproportionate number of ________ individuals. A) high-risk B) risk-seeking C) low-risk D) risk-averse Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market 37) Health insurance companies often charge high premiums because they expect to attract ________. A) high-risk individuals B) risk-averse individuals C) low-income individuals D) risk-neutral individuals Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market 38) ________ discourage low-risk individuals from seeking health insurance. A) Low premiums B) High premiums C) High costs of medical treatment D) Low interest rates Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market 39) 80 percent of the total number of people in Genovia with health insurance are more than 40 years old. Which of the following economic concepts helps explain this fact? A) The concept of negative externalities B) The concept of adverse selection C) The concept of free riding D) The concept of positive externalities Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market

40) How can a buyer of car insurance help reduce the effects of adverse selection? Answer: Adverse selection occurs in the insurance market because of asymmetric information. A buyer of car insurance knows about her ability to drive a car and hence the likelihood of having an accident, while the insurer does not. A buyer can reduce this information asymmetry by signaling the insurer about her abilities as a driver, for example, by passing a driving competency test. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market 41) Why do insurance companies in many developing countries not offer full health insurance coverage to older applicants? Answer: Older applicants are more likely to fall ill than are younger applicants. Therefore, if the insurers were to offer full insurance coverage to these customers, they will require a higher premium. If the premium is high, low-risk individuals are less likely to buy the insurance, leading to the problem of adverse selection. Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market 42) Robert decided to purchase a health insurance plan but did not mention in the application form that his family has a history of heart ailments that are hereditary. What will happen if several customers like Robert purchase the insurance? Answer: A person like Robert with a family history of heart ailments is more likely to fall ill. Insurance companies require higher premiums to cover the health expenses of such high-risk individuals, but if premiums are high, a person with a lower chance of falling ill will not buy the insurance. If several customers like Robert buy the insurance, the premium will continue to rise, forcing all low-risk individuals to stay out of the market. This is an example of adverse selection in the health insurance market. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market

43) A study conducted by a research firm revealed that RiteCure Health Insurance charges higher premiums than most of its rivals. The study also revealed that unlike its rivals, 60 percent of RiteCure's customers have chronic illnesses. a) What is the link between these two findings? b) What is likely to happen if the premium continues to rise? Answer: a) Because 60 percent of RiteCure's customers have chronic diseases, they are more likely to fall ill. As a result, RiteCure needs larger amounts of money to cover the medical costs of its customers. It therefore charges a higher premium than its rivals do. b) If the premium continues to rise, low-risk individuals are less likely to buy insurance plans from RiteCure. This will cause the proportion of high-risk customers to increase, further pushing the premium up. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Characteristics: Adverse Selection in the Health Insurance Market 44) Which of the following is a market-based solution to the problem of adverse selection? A) Corrective taxes B) Signaling C) Hedging D) Corrective subsidies Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Adverse Selection: Signaling 45) Signaling takes place in markets with ________. A) asymmetric information B) positive externalities C) negative externalities D) a principal—agent problem Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Adverse Selection: Signaling 46) ________ refers to an action that an individual with private information takes to convince others about her information. A) Sniping B) Signaling C) Hedging D) Speculating Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Adverse Selection: Signaling 13 Copyright © 2022 Pearson Education Ltd.

47) Which of the following helps reduce the problem of adverse selection in health insurance markets? A) Signaling B) High premiums C) High rates of taxation D) Patents Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Adverse Selection: Signaling 48) A warranty is an example of ________. A) sniping B) signaling C) a price floor D) a price ceiling Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Market Solutions to Adverse Selection: Signaling 49) ________ are guarantees of quality issued directly by either the manufacturer or the seller of goods. A) Patents B) Trademarks C) Warranties D) Copyrights Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Adverse Selection: Signaling 50) Because warranties are potentially ________, low-quality goods are ________ to have warranties. A) very expensive; less likely B) inexpensive; less likely C) very expensive; more likely D) inexpensive; more likely Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Adverse Selection: Signaling

51) Which of the following is an example of signaling in a market with asymmetric information? A) The certification of used cars by third parties B) Rent controls imposed by government C) Discounts offered by sellers during the holiday season D) The taxation of alcoholic beverages Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Market Solutions to Adverse Selection: Signaling 52) Which of the following is a prominent solution to adverse selection in used car markets? A) Well-defined property rights of citizens B) The imposition of a price ceiling in the used car market C) The imposition of a price floor in the used car market D) Third-party certification of used cars Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Market Solutions to Adverse Selection: Signaling 53) You decide to carry a letter of recommendation from your college professor to your first interview. This is an example of ________. A) sniping B) signaling C) hedging D) speculating Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Market Solutions to Adverse Selection: Signaling 54) Why do health insurance companies ask their potential customers to submit their previous medical records? Answer: Customers of health insurance companies have better information about their health conditions than do the insurers. To reduce this information asymmetry, potential customers are often asked to submit their previous medical records. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Adverse Selection: Signaling 55) What is signaling? Answer: Signaling refers to an action that an individual with private information takes to convince others about his or her information. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Adverse Selection: Signaling 15 Copyright © 2022 Pearson Education Ltd.

56) To be useful as a signal in a market with asymmetric information, the signal must be ________. A) easily available B) inexpensive C) tax deductible D) costly to obtain Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Are You Sending a Signal Right Now? 57) Samsung provides a warranty for all goods it manufactures to indicate that these goods are of high quality. This is an example of ________. A) hedging B) signaling C) internalizing an externality D) sniping Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Are You Sending a Signal Right Now? 58) Which of the following is likely to be used as a signal in the job market? A) A job description B) The educational qualification of an applicant C) The letter of appointment D) Vacancy announcements Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Are You Sending a Signal Right Now? 59) The used car market has a significant amount of adverse selection because ________. A) the seller knows more about the car than the buyer B) the buyer can easily find out more about the car than the seller C) buyers and sellers rarely have enough information about the car D) the transaction costs of the used car market are prohibitively high Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Why Do New Cars Lose Considerable Value the Minute They Are Driven Off the Lot?

Assume that there are two types of workers, high-productivity and low productivity workers, and they each make up 50% of the population. The value a high-productivity worker generates for their employer is equivalent to $100,000 per year, while the value a low-productivity worker generates for their employer is equivalent to $40,000 per year. 60) If employers have no way to discern whether an applicant is a low-productivity worker or a high-productivity worker, what salary will they offer? A) $70,000 B) $40,000 C) $100,000 D) 50,000 Answer: A Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Asymmetric Information 61) If employers use a college degree as a signal of a worker's productivity level, which of the following statements is FALSE? A) The only costs we need to take into account are the monetary costs of college (e.g. tuition). B) Workers with a college degree will be paid $100,000. C) Workers without a college degree will be paid $40,000. D) College must be more costly for low-productivity workers than high-productivity workers. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Asymmetric Information 62) What, according to Akerlof, causes the price difference between a 1-year-old used car and an unsold car manufactured by the same company in the same year? Answer: According to Akerlof, the price difference between a 1-year-old used car and an unsold car manufactured by the same company in the same year is not entirely due to concerns about wear and tear or the fact that people do not like driving cars that others have previously owned. The buyers of used cars are worried about the hidden characteristics of the car known only to the seller. Therefore, they are not ready to pay a high price for such cars. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Why Do New Cars Lose Considerable Value the Minute They Are Driven Off the Lot?

63) Used cars in Corinthia sold for about 20 percent less than new cars of the same model manufactured in the same year. However, price differences were reduced when certified used car dealers entered the market for used cars in Corinthia. What explains this phenomenon? Answer: Used cars usually sell for less compared to new cars manufactured in the same year, because buyers are worried about the quality of used cars; only the sellers know about the true quality of a used car. Therefore the buyers are not willing to pay as much for a used car as for a new car. This is what happened in Corinthia before the entry of certified used car dealers in the market. However, when certified used car dealers entered the market, buyers had better information about the quality of the cars and therefore were willing to pay more for good-quality cars. This is an example of signaling. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Evidence-Based Economics: Why Do New Cars Lose Considerable Value the Minute They Are Driven Off the Lot? 16.2 Hidden Actions: Markets with Moral Hazard 1) ________ refers to actions taken by one party in a transaction that are relevant for, but not observed by, the other party. A) A negative externality B) Moral hazard C) A positive externality D) Bargaining Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Actions: Markets with Moral Hazard 2) The basic idea behind moral hazard is that ________. A) some economic transactions impose an additional cost on society B) some economic transactions give rise to an additional benefit to society C) people tend to take more risks if they do not have to bear the costs of their behavior D) people do not reveal their true preference for goods that are non-excludable in consumption Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Actions: Markets with Moral Hazard 3) Which of the following is likely to arise in a market with asymmetric information? A) The problem of moral hazard B) A pecuniary externality C) A positive externality D) A prisoners' dilemma Answer: A Difficulty: Easy AACSB: Analytical Thinking 18 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Hidden Actions: Markets with Moral Hazard 4) Sometimes banks tend to invest in risky stocks because the deposits of their customers are insured by the Federal Deposit Insurance Committee. This behavior is an example of ________. A) adverse selection B) moral hazard C) the paradox of thrift D) the free-rider problem Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard 5) Mark works as a business development officer for a leading electronics company. His main task is to meet potential clients at their offices and set up business deals with them. Mark earns a fixed salary every month irrespective of the number of clients approached and deals made. As his boss does not cross-check the number of clients he meets in a day, Mark often does not meet all the clients that he is supposed to. His behavior is an example of ________. A) adverse selection B) moral hazard C) a positive externality D) a pecuniary externality Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard 6) Linda noticed that ever since her brother bought theft insurance for his car, he has been forgetting to lock his car. Her brother's behavior is an example of ________. A) adverse selection B) moral hazard C) a positive externality D) a pecuniary externality Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard

7) More people started building houses in the earthquake-prone regions of Polonia after its government launched a compensation scheme for houses damaged in earthquakes in these regions. This is an example of ________. A) adverse selection B) a positive externality C) moral hazard D) herd behavior Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard 8) State provision of free healthcare may encourage individuals to engage in unhealthy behavior, such as excessive smoking or the consumption of alcohol. This is an example of ________. A) moral hazard B) a positive externality C) adverse selection D) anchoring Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard 9) Governments are often forced to bail out large banks to prevent entire economies from being affected adversely. This provision often encourages banks to invest in risky assets. This is an example of ________. A) moral hazard B) a positive externality C) adverse selection D) anchoring Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard 10) Sarah initially used her cell phone mostly to make important business calls. However, when she was informed that henceforth her phone bills would be reimbursed by her employer, she started using her cell phone to make frequent calls to her friends and relatives. This behavior is an example of ________. A) moral hazard B) a negative externality C) the prisoners' dilemma D) the free-rider problem Answer: A Difficulty: Easy AACSB: Application of Knowledge 20 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Hidden Actions: Markets with Moral Hazard 11) Employee theft is an example of ________. A) adverse selection B) moral hazard C) herd behavior D) the internalization of externalities Answer: B Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Hidden Actions: Markets with Moral Hazard 12) The government of Perinthia provided generous unemployment benefits to all unemployed workers in the country. However, the new government that came into power reduced the amount of unemployment insurance paid to each worker. This increased the average number of hours that unemployed workers spent daily looking for jobs. This suggests that ________ exists in the labor market in Perinthia. A) the problem of moral hazard B) the tragedy of the commons C) a pecuniary externality D) a positive externality Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard 13) Christine works as a receptionist in an office. While at work, she is not supposed to access social networking Web sites. However, as her browsing activities are not monitored, she often uses the office network to access these Web sites. This is an example of ________. A) adverse selection B) moral hazard C) a positive externality D) the free-rider problem Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard

14) Robert changed jobs and relocated to a new city. He initially decided to rent a small apartment close to his place of work. However, he decided to live in a much bigger and costlier apartment when he found that his employer would pay him a house rent allowance. This is an example of ________. A) adverse selection B) moral hazard C) the prisoners' dilemma D) the free-rider problem Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard 15) An employee in a department store often steals goods when other employees are not around. Because the store does not have a surveillance camera, the store manager is unable to monitor his activities. This behavior is an example of ________. A) adverse selection B) moral hazard C) the internalization of externalities D) the paradox of thrift Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard 16) Jane started eating more junk food and taking less care of her health after she bought a life insurance plan. Her behavior is an example of ________. A) moral hazard B) adverse selection C) the paradox of thrift D) the free-rider problem Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Hidden Actions: Markets with Moral Hazard 17) Economists refer to the general problem of ________ as a principal—agent relationship. A) moral hazard B) adverse selection C) negative externalities D) pecuniary externalities Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Actions: Markets with Moral Hazard 22 Copyright © 2022 Pearson Education Ltd.

18) Which of the following is likely to be an example of a principal—agent relationship? A) The relationship between two colleagues B) The relationship between a teacher and her student C) The relationship between an employer and a worker D) The relationship between two nations Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Hidden Actions: Markets with Moral Hazard 19) Explain principal—agent relationships. Answer: In principal—agent relationships, the principal designs a contract specifying the payments to the agent as a function of his or her performance, and the agent takes an action that influences the performance, and thus the payoff, of the principal. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Actions: Markets with Moral Hazard 20) Why do people often tend to take risks if they are insured? Answer: People often tend to take risks if they are insured because they do not have to bear the costs if anything goes wrong. Such behavior is called moral hazard. It happens when one party in a transaction takes actions based on his or her private information that is unavailable to the other party but affects its payoff. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Hidden Actions: Markets with Moral Hazard 21) Efficiency wages refer to wages ________. A) adjusted for inflation that help workers buy the necessary amounts of goods and services B) paid by employers that help workers purchase expensive health insurance plans for their families C) adjusted for exchange rate fluctuations D) paid by employers to increase the motivation and productivity of workers Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 22) A firm is likely to pay high efficiency wages when ________. A) it is easy to monitor workers B) it is not easy to monitor workers C) there is excess supply of labor in the labor market D) the minimum wages are set above the equilibrium wage rate Answer: B Difficulty: Easy AACSB: Analytical Thinking 23 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages Scenario: Pat works in a factory that produces jams, jellies, and marmalades. His job is to check whether each pack of marmalade is sealed before it is dispatched for sale. Several other workers in the factory do the same job. Therefore, it is not possible for the manager of the factory to keep track of the number of packs each worker actually inspects. 23) Refer to the scenario above. Which of the following problems is most likely to arise in this case? A) Adverse selection B) Moral hazard C) The tragedy of the commons D) The free-rider problem Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 24) Refer to the scenario above. In this case, the employer may prevent shirking by ________. A) paying an efficiency wage to each worker B) paying a wage less than the minimum wage C) reducing the nominal wage paid to workers D) reducing the real wage paid to workers Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages Scenario: Edward has inherited a house. As the house is far away from where he lives currently, it has been vacant for the past few years. A housekeeper is paid regularly to look after the house and keep it clean. However, because Edward seldom visits the house, the housekeeper does not clean the house regularly. 25) Refer to the scenario above. The housekeeper's behavior is an example of ________. A) the moral hazard problem B) a positive externality C) the prisoners' dilemma D) the tragedy of the commons Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages

26) Refer to the scenario above. The housekeeper behaves in this particular way because of the presence of ________. A) asymmetric information B) a positive externality C) the free-rider problem D) a negative externality Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 27) Refer to the scenario above. Identify the correct statement in this case. A) Edward is a rent seeker. B) The housekeeper is a free rider. C) The problem can be solved through government intervention. D) The relationship between Edward and the housekeeper is an example of a principal—agent relationship. Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 28) Refer to the scenario above. What can Edward do to induce the housekeeper to work regularly? A) Pay an efficient wage B) Pay a low wage C) Pay the wage that equals the marginal revenue product of the housekeeper D) Pay the minimum wage that the housekeeper would accept Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 29) Efficiency wages paid to workers ________. A) equal the lowest pay that workers would accept B) are wages above the lowest pay that workers would accept C) equal the marginal revenue product of the workers D) are wages adjusted for changes in the price level Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages

30) Which of the following is a solution to the problem of moral hazard in the labor market? A) The provision of equilibrium wages that clear the labor market B) The provision of wages adjusted for changes in the price level C) The provision of efficiency wages D) The provision of minimum wages Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 31) A textile manufacturing unit faces low productivity due to the workers shirking responsibilities. Which of the following is a possible solution that would increase the productivity of the workers? A) The provision of a low real wage B) The provision of a low nominal wage C) The provision of minimum wages D) The provision of efficiency wages Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 32) The function of the agent in a principal—agent relationship is to ________. A) ensure an efficient allocation of public goods and services in an economy B) perform tasks for the principal C) implement plans to mitigate the problem of moral hazard D) provide appropriate incentives to the principal Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 33) How can performance-based incentives help companies facing moral hazard? Answer: Moral hazard exists in a company when employees shirk their responsibilities. Performance-based incentives encourage workers to work harder, because they would lose money by shirking. Thus performance-based incentives help solve the problem of moral hazard. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages

34) A company facing the problem of moral hazard decided to lay off some workers during a recession instead of lowering wages. What is the possible reason for such a decision? Answer: Employers pay higher wages to their employees to ensure high productivity and good morale. If the company had lowered the wages of its workers, the workers might have started shirking because of the presence of moral hazard in the labor market. This would have resulted in lower productivity and lower income for the company. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 35) Why do workers exert more effort when they are paid higher salaries? Answer: The higher the wage rate is, the more effort an individual worker will exert. There are several potential reasons for this relationship. First, higher-paid workers might wish to work harder because a higher-paying job is more valuable to them, and the risk of not succeeding in this job—and thus having to quit or be fired—becomes potentially more costly. Second, higher wages might encourage workers to stay longer with the company, reducing turnover. The resulting longer employment relationships may increase worker experience and productivity and may also directly increase profits by reducing turnover costs. Third, higher pay might motivate the worker psychologically. For example, workers who perceive generosity from their employers may perceive this as a "gift" and reciprocate by working harder. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 36) Rachel usually takes long coffee breaks and works less when her boss is out of town on business. However, she started taking shorter breaks when the Human Resources manager at her company announced that each employee will henceforth be paid a performance-based incentive every month. What explains her behavior before and after the announcement of the new policy? Answer: Rachel usually works less when her boss goes out of town on business, because it is not possible for her boss to monitor her work on those days. This is an example of the problem of moral hazard. Moral hazard refers to actions individuals take based on their private information that is unavailable to the other party in the transaction. In this case, Rachel knows how much time she spends working, but her boss does not. This information asymmetry encourages her to take long breaks. However, when it was announced that each employee would be paid a performance-based incentive, Rachel started taking shorter breaks, as she now had an incentive to work harder. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages

37) Norah works as a content writer for an online magazine. Because her work is not evaluated daily, she often spends her time playing online games, which adversely affects the quality of her work. a) What is the term used to refer to such behavior? b) What is the solution to this problem? Explain your answer. Answer: a) The term used to refer to Norah's behavior is moral hazard. Moral hazard refers to actions that individuals take based on their private information, which is unavailable to the other party in the transaction but adversely affects their payoff. In this case, only Norah knows how much attention she pays to her work. This information is unavailable to her boss. b) Management can motivate workers like Norah to work harder by offering efficiency wages. Efficiency wages are wages above the lowest pay that workers would accept. Employers use such wages to increase workers' motivation and productivity. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 38) Employees at Xeta Inc. are divided into teams, and workers from each team are assigned jobs. However, management often finds it difficult to measure the effort of each worker, as the output is generated by the team as a whole. What can management do to prevent the workers from shirking? Answer: Employees often shirk their responsibilities when they cannot be individually held accountable for their behavior. This is the case at Xeta Inc. Such behavior is known as moral hazard. Moral hazard exists in the labor market when employees make decisions or take actions based on their private information that is unavailable to the employers. However, if the company provides efficiency wages to its employees, they are likely to exert more effort. Efficiency wages are wages above the lowest pay that workers would accept; employers use efficiency wages to increase workers' motivation and productivity. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 39) Employees at La Dola Inc. often engaged in hasty decision making that resulted in losses for the company. Because employees were not individually accountable for their decisions, this trend continued. However, when the company introduced a profit-sharing policy for its employees, they began scrutinizing their decisions carefully before implementing them. Explain the reason for the change in employees' behavior. Answer: Employees often do not put in their maximum efforts when they cannot be held accountable for their behavior. This was the case at La Dola Inc. before the introduction of the profit-sharing model. Such behavior is known as moral hazard. Moral hazard exists in the labor market when employees make decisions or take actions based on their private information that is unavailable to their employers. However, when the company introduced a profit-sharing policy for its employees, they began scrutinizing their decisions carefully, because the employees would lose money if the company incurred losses. Difficulty: Hard AACSB: Application of Knowledge 28 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Market Solutions to Moral Hazard in the Labor Market: Efficiency Wages 40) ________ are the portion of claims that policyholders must pay for out of their own pockets. A) Dividends B) Tokens C) Co-payments D) Deductibles Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Insurance Market: "Putting Your Skin in the Game" 41) ________ refer to the money that a policyholder pays when filing a claim. A) Dividends B) Deductibles C) Co-payments D) Coupons Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Insurance Market: "Putting Your Skin in the Game" 42) Which of the following is TRUE of coinsurance? A) The policyholders do not have to pay a premium. B) Each policyholder has to pay a certain fee while filing a claim. C) The responsibility of paying claims is split between the insurer and the policyholder. D) All policyholders pay the same premium irrespective of the scheme they choose. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Insurance Market: "Putting Your Skin in the Game" 43) A car insurance company pays 90 percent of the total damage in case of an accident. This is an example of ________. A) a coinsurance B) a dividend payment C) a brokerage fee D) a subsidy Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Market Solutions to Moral Hazard in the Insurance Market: "Putting Your Skin in the Game" 29 Copyright © 2022 Pearson Education Ltd.

44) Rick was charged $200 when claiming insurance for his damaged car. This is an example of ________. A) a subsidy B) a co-payment C) a brokerage fee D) a dividend payment Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Insurance Market: "Putting Your Skin in the Game" 45) Company A and Company B are two car insurance companies in a city. Company A pays 100 percent of the money required for repair in case of an accident, while Company B pays 70 percent of the total money required. A research agency has found that Company A's customers have more accidents. Which of the following explains this difference? A) Moral hazard B) Adverse selection C) The presence of positive externalities D) The presence of negative externalities Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Insurance Market: "Putting Your Skin in the Game" 46) Jack had an accident that caused $4,200 worth of damage to his car. He had to pay $500 for repairs, while his insurer paid the remaining amount. Why do insurance companies have such policies? Answer: Car insurance companies often do not pay the full cost of repairs when the policyholders have accidents. Such practices help reduce the problem of moral hazard that may otherwise arise. If the insurers paid the full amount required for repairs, drivers would be more likely to drive recklessly and have accidents, because they do not have to pay for the damage. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Insurance Market: "Putting Your Skin in the Game"

47) Some health insurance companies pay only 70 percent to 80 percent of the medical costs incurred by their customers. What is the reason for this? Answer: Medical insurance companies often do not pay all medical costs incurred by their customers. This is because if the insurers do not pay the entire amount of the medical costs incurred by them, the customers are more likely to take better care of themselves as they would have to bear a part of the medical costs in case of an illness. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Market Solutions to Moral Hazard in the Insurance Market: "Putting Your Skin in the Game" 48) The Chicago Heights school district study found that ________. A) the moral hazard problem was not present among teachers B) students performed better academically with a teacher who received merit pay C) adverse selection was not a problem among teachers D) students performed better academically with a teacher with no financial incentive Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: Designing Incentives for Teachers 49) Which of the following was the finding of the Cutler-Reber study of different insurance plans in the mid-1990s? A) Increased moral hazard among the insured B) Increased adverse selection among the insured C) A decrease in the percentage of unhealthy people with the most expensive health insurance plans D) A decrease in the average price of insurance plans Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Why Is Private Health Insurance So Expensive? 50) The Harvard experiment in the mid-1990s found that private health insurance was expensive because ________. A) healthier people opted out of expensive healthcare coverage B) poorer people wanted more free healthcare C) healthier people demanded more extensive healthcare coverage D) unhealthy people demanded less extensive healthcare coverage Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Why Is Private Health Insurance So Expensive?

51) Which of the following statements is FALSE regarding merit pay for teachers? A) Study results on the effectiveness of merit pay for teachers do not depend on the conditions of the tests used to measure effectiveness. B) Instituting merit pay for teachers is an effort to avoid moral hazard. C) The study by Fryer, Levitt, List, and Sadoff found that merit pay did increase performance of students. D) The study Levitt and Jacob found that teachers cheated more in response to merit pay based on student performance. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: Designing Incentives for Teachers 16.3 Government Policy in a World of Asymmetric Information 1) Under the Affordable Care Act (ACA) implemented by President Obama in 2010, ________. A) every U.S. firm was required to pay a substantial portion of their profit margins to Medicaid programs B) health insurance was made mandatory for every American C) new subsidies were introduced to promote healthy habits among Americans D) every employed worker was required to a pay a large proportion of their compensation as payroll taxes Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Policy in a World of Asymmetric Information 2) How can a health insurance mandate help reduce the problem of adverse selection in the health insurance market? Answer: The problem of adverse selection occurs in the health insurance market when low-risk individuals stay out of the market because of high premiums. A large number of high-risk individuals in the market further increases the premium, causing only high-risk individuals to remain in the market. A health insurance mandate, which requires everybody to purchase a basic insurance plan, implies that low-risk individuals cannot opt out of the market and thus prevents the chain of events triggered by adverse selection. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Policy in a World of Asymmetric Information

3) Which of the following is likely to be a potential problem of the Affordable Care Act (ACA) implemented by President Obama in 2010? A) An increase in the number of unhealthy people purchasing health insurance plans B) An increase in the prices of health insurance plans C) More U.S. citizens engaging in risky activities, such as smoking D) More U.S. citizens engaging in preventive activities, such as health checkups and screenings Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Intervention and Moral Hazard 4) Which of the following is likely to be a solution to the moral hazard problem arising from the implementation of the Affordable Care Act (ACA) in the United States? A) A decrease in co-payments required to be paid by policyholders when filing a claim B) A decrease in the deductibles required to be paid by people who have insurance C) A decrease in tax rates to curb risky behavior among Americans D) An increase in subsidies to promote healthy choices by Americans Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Government Intervention and Moral Hazard 5) Which of the following can solve the problem of moral hazard that arises because of the provision of unemployment benefits? A) An increase in the period covered B) Restrictions on the amount claimed C) An increase in the amount provided as benefit D) A high premium Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Equity-Efficiency Trade-off 6) Which of the following is likely to be observed among unemployed individuals if government offers generous unemployment benefits? A) Increased motivation to look for a job B) An increase in the acceptance of low-paying jobs C) A decrease in current consumption D) Decreased motivation to look for a job Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Equity-Efficiency Trade-off

7) If government decides to provide generous unemployment benefits, it is likely to ________. A) decrease the rate of unemployment in an economy B) decrease consumption expenditure in the current period C) increase the motivation to look for a job D) increase the duration of unemployment Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Equity-Efficiency Trade-off 8) The probability of being detected after committing a murder in Richland is 0.8, and if detected, the murderer is imprisoned for a minimum of 10 years. What is the expected punishment in this case? A) 2 years B) 8 years C) 12 years D) 10 years Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Crime and Punishment as a Principal-Agent Problem 9) The individual mandate of the Affordable Care Act was put in place to solve which of the following issues with insurance? A) Adverse Selection B) Moral Hazard C) Inefficiency D) Principal-Agent Problem Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Policy in a World of Asymmetric Information 10) Which of the following statements is FALSE regarding Becker and Stiglitz's analysis of crime as a principal-agent problem? A) One way to decrease crime is to decrease the probability of detection B) One way to decrease crime is to increase the punishment if detected C) Becker was a a proponent of decreasing the probability of detection and increasing the punishment D) Moral hazard exists because the state cannot always know with certainty that an individual has committed a crime. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Government Policy in a World of Asymmetric Information 35 Copyright © 2022 Pearson Education Ltd.

11) Hans is considering advocating for the overthrow of the government of Arendelle. If the rebellion is successful, Hans will not need to worry about getting caught, but if it is not successful, he would either spend 10 or 15 years in prison, depending on the judge he is assigned. There is a 5% chance that the overthrow will be successful, and a 95% chance that he will get caught if it is not successful. If the probability of him being assigned a lenient judge is 50%, what is his expected punishment? A) 11.28 years B) 11.88 years C) 12.5 years D) 9.5 years Answer: A Explanation: E(years in jail) = 0.95*(0.95*((0.5*15) + (0.5*10))) OR E(years in jail) = (0.95*0.95*0.5*15) + (0.95*0.95*0.5*10) Difficulty: Hard AACSB: Analytical Thinking TopicEntry: Government Policy in a World of Asymmetric Information

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 17 Auctions and Bargaining 17.1 Auctions 1) In general, it is common for goods with ________ to be auctioned. A) low prices B) relatively few buyers C) a large number of buyers D) a large number of sellers Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Auctions 2) In an auction, ________. A) buyers set the price of a good B) the seller sets the price of a good C) the government sets the price of a good below its market price D) the government sets the price of a good above its market price Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Auctions 3) What is the reason for the popularity of auctions among consumers? Answer: No one has quite been able to come up with any single reason as to why auctions have become so popular among consumers. Some possible explanations include the chance of getting a really good deal, the fact that buyers are able to set the price, the sheer thrill of winning, and the competitive challenge involved. If auctions in general lead to higher-than-average prices, sellers will also be interested in auctioning their products. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Auctions 4) Auctions can be differentiated on the basis of ________. A) the number of buyers B) the number of sellers C) the way in which people place their bids D) the degree of competition among buyers Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Types of Auctions

5) An open-outcry auction is an auction where ________. A) bids are placed privately B) public goods are sold C) bidders know about one another's bids D) free goods are distributed among the general public Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Types of Auctions 6) A sealed bid auction is one in which bidders ________. A) do not know one another's bid B) know one another's bid C) place their bids one after another D) cannot determine the price of the good Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Types of Auctions 7) What are the different types of auctions based on how people place their bids? Answer: There are two different types of auctions based on how people place their bids. These are open-outcry auctions and sealed bid auctions. In open-outcry auctions, bids are placed publicly and the bidders compete directly against each other. In sealed bid auctions, all bids are private and unknown to the other bidders. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Types of Auctions 8) What are the different types of auctions based on how the price of the item being auctioned is determined? Answer: Auctions can be divided into two types based on how price is determined. In some cases, people pay what they actually bid. In others, the next highest bid determines the price. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Types of Auctions 9) An English auction is usually a(n) ________ auction. A) first-price B) second-price C) penny D) open-outcry Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: English Auctions 2 Copyright © 2022 Pearson Education Ltd.

10) An English auction consists of ________. A) an auctioneer and several bidders B) one auctioneer and one bidder C) fewer auctioneers than bidders D) several auctioneers and one bidder Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: English Auctions 11) In an English auction, ________. A) the bidders begin the bidding process with a high starting bid B) the auctioneer begins the bidding process with a high starting bid C) the auctioneer begins the bidding process with a low starting bid D) the bidders decide the starting bid Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: English Auctions 12) An English auction ends when ________. A) no bidder is willing to bid any higher B) a bidder accepts the price announced by the auctioneer C) a bidder bids above the market price of the good D) a bidder bids below the starting bid Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: English Auctions 13) In an English auction, the ________ bidder wins. A) highest B) second-highest C) first D) second Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: English Auctions

14) In an English auction, ________ with each bid. A) the price of the good increases B) the price of the good decreases C) the quantity of the good being offered increases D) the quantity of the good being offered decreases Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: English Auctions 15) In an English auction, the winner pays a price equal to ________. A) the value of the highest bid B) the value of the lowest bid C) his value for the good D) the value of the second-highest bid Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: English Auctions 16) Kim is participating in an auction in which bids are placed publicly and the price of the good being auctioned increases until there is only one standing bid. This is an example of a(n) ________ auction. A) English B) Dutch C) first-price D) second-price Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 17) If Tom is participating in an English auction, he should ________. A) bid up to his maximum willingness to pay B) bid above his maximum willingness to pay C) bid below his value for the good being auctioned D) pay a fee to place a bid Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions

18) If you are participating in an English auction, you will win if ________. A) you place a bid before the other bidders B) you place the highest bid C) you pay a fee to place a bid D) you place the second-highest bid Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 19) Gary has won a laptop in an online auction. This implies that Gary's willingness to pay for the laptop was ________. A) higher than its market price B) lower than its market price C) higher than that of the other bidders D) lower than that of at least one bidder Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions Scenario: Four friends—Tom, Bill, Jeff, and Roger—are participating in an English auction. Tom values the good being auctioned at $500, Bill values it at $210, Jeff values it at $350, and Roger values it at $625. 20) Refer to the scenario above. If they are the only bidders in the auction and each of them uses his optimal strategy, who will win? A) Tom B) Bill C) Jeff D) Roger Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 21) Refer to the scenario above. If they are the only bidders in the auction, Bill will continue to bid as long as bidding is below ________. A) $420 B) $210 C) $500 D) $625 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 5 Copyright © 2022 Pearson Education Ltd.

22) Refer to the scenario above. If they are the only bidders in the auction, Tom will no longer bid when bidding reaches ________. A) $200 B) $210 C) $350 D) $500 Answer: D Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 23) Refer to the scenario above. Suppose there are several other bidders in the auction. Roger will win the auction only if ________. A) all the other bidders bid above $625 B) all the other bidders bid below $625 C) all the other bidders are risk lovers D) all the bidders are risk averse Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 24) Refer to the scenario above. If they are the only bidders in the auction, Jeff will win the auction if ________. A) Tom and Roger bid up to their value for the good while Bill and Jeff bid below their value for the good B) Tom and Jeff bid up to their value for the good while Roger and Bill bid below their value for the good C) Bill and Jeff bid up to their value for the good while Tom and Roger stop bidding at $100 and $200, respectively D) each of them bids up to his value for the good Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 25) Refer to the scenario above. If they are the only bidders in the auction and each bidder uses his optimal strategy, the maximum price the winner is likely to pay is ________. A) $210 B) $350 C) $500 D) $625 Answer: C Difficulty: Medium AACSB: Application of Knowledge 6 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Open Outcry: English Auctions 26) Refer to the scenario above. If they are the only bidders in the auction and each bidder bids up to his value for the good, the winner will earn a surplus of ________. A) $500 B) $625 C) $125 D) $150 Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 27) Refer to the scenario above. Which of the following is TRUE in this case? A) There is no Nash equilibrium. B) There is no dominant strategy equilibrium. C) The dominant strategy equilibrium is the Nash equilibrium. D) The dominant strategy equilibrium is not the Nash equilibrium. Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 28) Refer to the scenario above. In this case, a Nash equilibrium occurs if ________. A) each of them bids up to their value for the good B) Tom and Roger bid up to their value for the good while Bill and Jeff bid below their value for the good C) Tom and Jeff bid up to their value for the good while Roger and Bill bid below their value for the good D) Bill and Jeff bid up to their value for the good while Tom and Roger stop bidding at $100 and $200, respectively Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 29) Refer to the scenario above. If these four friends are the only bidders and each bidder uses his optimal strategy, the owner of the good will earn an expected revenue of ________. A) $210 B) $350 C) $500 D) $625 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 7 Copyright © 2022 Pearson Education Ltd.

Scenario: An ancient painting is being auctioned off in an English auction. The following table shows the maximum willingness to pay of each bidder. Bidder Rachel James David Joe Emily Bob

Value ($) 500 450 400 350 300 250

30) Refer to the scenario above. Which of the following statements will hold TRUE if the starting bid is $300? A) Everyone except Bob will take part in the auction. B) Everyone will take part in the auction. C) Only Bob will take part in the auction. D) Everyone except Joe will take part in the auction. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 31) Refer to the scenario above. The optimal strategy for Rachel is to bid a price ________. A) above her willingness to pay B) equal to half the amount she is willing to pay C) equal to 5/6 times her willingness to pay D) up to her willingness to pay Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 32) Refer to the scenario above. If the starting bid is $250, ________ will win the auction and will have to pay ________ for the painting. A) Bob; $250 B) James; $400 C) Rachel; $450 D) Joe; $400 Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions

33) Refer to the scenario above. The winner of this auction will earn a consumer surplus of ________. A) $450 B) $50 C) $150 D) $100 Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 34) Refer to the scenario above. Which of the following is TRUE if David's maximum willingness to pay falls to $380? A) James will win the auction. B) Rachel will not take part in the auction. C) The owner of the painting will earn the same average revenue. D) David will win the auction. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 35) Explain why the dominant strategy equilibrium in an English auction is also the Nash equilibrium. Answer: The dominant strategy equilibrium in an English auction occurs if each bidder bids up to his or her maximum willingness to pay for the item being auctioned. This is because a bidder is always better off continuing to bid until price exceeds his or her willingness to pay irrespective of the bids placed by the other bidders. This equilibrium is also the Nash equilibrium, because it is the best strategy that each bidder can use given the strategies of the other bidders. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: English Auctions

36) Mr. Smith won a laptop in an online auction in which bidders could one another's bids, and the price increased with every new bid. a) If Mr. Smith values the laptop at $400, determine his dominant strategy. b) Will there be a change in his optimal bidding strategy if there is an increase in the number of bidders? Answer: a) Mr. Smith is participating in an English auction. In an English auction, bidders can see one another's bid and the price increases with every new bid. The auctioneer starts bidding at a price below every bidder's willingness to pay and asks who would like to bid. Each bidder should continue to bid until the price reaches his maximum willingness to pay for the good, because he has to pay his bid if he wins. Therefore, Mr. Smith should continue bidding as long as the price is below $400. This is his dominant strategy. b) In an English auction, the optimal bidding strategy of a bidder does not depend on the number of bidders participating in the auction. Each bidder continues to bid as long as price lies below his willingness to pay. The highest-value bidder wins and pays an amount equal to the secondhighest bid (or slightly higher if second-highest bidder bids his highest value exactly). Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: English Auctions 37) Many online auctions end when a certain amount of time has gone by without a bid. This causes bidders to place several last-minute bids. This practice is known as ________. A) sniping B) trading C) bargaining D) signing off Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: To Snipe or Not to Snipe? 38) A Dutch auction is a(n) ________. A) first-price auction B) second-price auction C) penny auction D) open-outcry auction Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions

39) A(n) ________ is an auction in which bids are placed publicly and the price decreases until a bidder stops the auction. A) English auction B) Dutch auction C) silent auction D) penny auction Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 40) In a Dutch auction, ________. A) the bidders begin the bidding process with a low starting bid B) the auctioneer begins the bidding process with a low starting bid C) the auctioneer begins the bidding process with a high starting bid D) the bidders decide the starting bid Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 41) In a Dutch auction, the starting bid is ________. A) far above any bidder's value for the good being auctioned B) far below any bidder's value for the good being auctioned C) far below the market price of the good D) equal to the market price of the good Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 42) Bidding in a Dutch auction continues until ________. A) no bidder is willing to bid any higher B) a bidder accepts the price announced by the auctioneer C) a bidder bids above the market price of the good D) a bidder bids below the starting bid Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions

43) In a Dutch auction, the ________ wins the good. A) bidder who bids up to his value for the good B) bidder who stops the auction C) bidder with the lowest value for the good D) second bidder Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 44) In a Dutch auction, ________ with each bid. A) the price of the good increases B) the price of the good decreases C) the quantity of the good being offered increases D) the quantity of the good being offered decreases Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 45) In a Dutch auction, the winner pays a price equal to ________. A) the market price of the good B) the value of the lowest bid C) her value for the good D) her bid Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 46) One assumption that economists often make while determining the outcome of a Dutch auction is that the bidders are ________. A) risk neutral B) risk averse C) risk seekers D) rent seekers Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions

47) A ________ person is indifferent to a bet that has zero expected value. A) risk-neutral B) risk-loving C) risk-averse D) rent-seeking Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 48) In a Dutch auction, the higher the bid, the ________ the surplus and the ________ the chance of winning. A) higher; lower B) lower; higher C) higher; higher D) lower; lower Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions Scenario: Alice is participating in a Dutch auction for a painting. There are five other bidders, and Alice values the painting at $30,000. 49) Refer to the scenario above. What is Alice's optimal bidding price? A) $25,000 B) $30,000 C) $24,000 D) $36,000 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions 50) Refer to the scenario above. Alice will earn an expected surplus of ________ if she uses her optimal strategy to win the game. A) $5,000 B) $6,000 C) $30,000 D) $16,000 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions

51) Refer to the scenario above. Which of the following will be TRUE if Alice stops the auction at $30,000? A) She will earn zero consumer surplus. B) She will earn a consumer surplus of $5,000. C) She will earn a consumer surplus of $30,000. D) She will earn a consumer surplus of $16,000. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions 52) Refer to the scenario above. If Alice wins the auction, the seller earns an average revenue of ________. A) $30,000 B) $25,000 C) $24,000 D) $36,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions 53) Beth is participating in a Dutch auction. Bidding starts at $500, and her maximum willingness to pay is $400. The total number of bidders participating in the auction is four. Her optimal bid strategy is to buy when the price reaches ________. A) $320 B) $300 C) $375 D) $125 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions Scenario: Rebecca is participating in a Dutch auction for an antique necklace. The total number of bidders in this auction is ten. Rebecca values the necklace at $45,000, while all the other bidders value it below $45,000. 54) Refer to the scenario above. What is the optimal strategy of each bidder? A) Each bidder should bid up to his or her maximum willingness to pay for the necklace. B) Each bidder should bid above his or her maximum willingness to pay for the necklace. C) Each bidder should bid up to 9/10 of his or her valuation of the necklace. D) Each bidder should bid up to 4/5 of his or her valuation of the necklace. Answer: C Difficulty: Easy AACSB: Application of Knowledge 15 Copyright © 2022 Pearson Education Ltd.

TopicEntry: Open Outcry: Dutch Auctions 55) Refer to the scenario above. If the best response of one bidder is to place a bid of $9,000, what is her maximum willingness to pay for the necklace? A) $10,000 B) $9,000 C) $4,500 D) $18,000 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions 56) Refer to the scenario above. Rebecca should place a bid of ________. A) $40,500 B) $45,000 C) $50,000 D) $55,000 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions 57) Refer to the scenario above. The seller will earn a revenue of ________. A) $45,000 B) $40,500 C) $5,000 D) $4,500 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions 58) Refer to the scenario above. If the number of participants in the auction increases to twenty, Rebecca should place a bid of ________. A) $45,000 B) $42,750 C) $4,500 D) $40,500 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions

59) Refer to the scenario above. If Rebecca wins the auction, she will earn a surplus of ________. A) $1,000 B) $4,500 C) $5,000 D) $45,000 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions 60) The larger the number of bidders in a Dutch auction, ________. A) the lower is the maximum willingness to pay of each bidder B) the smaller is the consumer surplus earned by the winner C) the larger is the quantity offered by the auctioneer for auction D) the lower is the value of the starting bid Answer: B Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 61) Which of the following is a similarity between an English auction and a Dutch auction? A) The second-highest bidder wins the good. B) The bidder who values the good the most wins the good. C) The bidders submit their bids privately at the same time. D) The bidders submit their bids privately at different times during the bidding process. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 62) Which of the following is a difference between an English auction and a Dutch auction? A) Bids are placed publicly in an English auction, while bids are placed privately in a Dutch auction. B) The bidder who values the good the most wins in an English auction, while the bidder who values the good the least wins in a Dutch auction. C) An English auction is an ascending price auction, while a Dutch auction is a descending price auction. D) An English auction is a descending price auction, while a Dutch auction is an ascending price auction. Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions

63) What is the difference between the optimizing strategies used in an English auction and a Dutch auction? Answer: In an English auction, it is an optimal strategy to continue bidding as long as price is below the bidder's willingness to pay for the item being auctioned. In a Dutch auction, in contrast, the starting bid is much higher than any bidder's willingness to pay. The auctioneer lowers the price until one bidder accepts it and pays an amount equal to his bid. In a Dutch auction, a bidder should bid below his willingness to pay for the item. This is because if a bidder accepts the price when it reaches his willingness to pay for the item, he will earn zero consumer surplus. However, if he does not accept the offer and lets the price fall further, he has a higher chance of losing, because another bidder might accept it. This risk increases if there is a larger number of bidders. Therefore, in a Dutch auction, the optimal bid is determined by multiplying the bidder's willingness to pay by the number of other competitors and dividing it by the total number of bidders. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 64) What is the drawback of a bidder bidding up to his or her willingness to pay for a good in a Dutch auction? Answer: A Dutch auction is a descending price auction. In this auction, the starting bid is set much higher than any bidder's willingness to pay. The auctioneer lowers the price until one bidder accepts the offer. If a bidder accepts the offer when price reaches her willingness to pay, she will earn zero consumer surplus. If she does not accept the offer, her chance of losing the auction increases, as another bidder might accept the offer. However, not accepting the offer increases the chances of a positive consumer surplus. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Open Outcry: Dutch Auctions 65) Robert is participating in a Dutch auction. If he values the item being auctioned at $5,500 and there are five bidders in total, what should Robert's optimal bidding strategy be? Answer: A Dutch auction is an open-outcry auction in which the auctioneer starts bidding at a price far above any bidder's willingness to pay and lowers the price until one bidder accepts the offer. If a bidder accepts the offer when the price equals his value for the good being auctioned, he wins the auction but earns zero consumer surplus. However, if he does not accept the offer, there is a possibility that another bidder will accept the offer. A simple strategy to optimize in this case is to multiply willingness to pay by the number of other bidders divided by the total number of bidders. Robert should follow a similar strategy and place a bid when price reaches $5,500 × = $4,400. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions

66) Consider the following situation: five individuals are participating in an auction for an old bicycle used by a famous cyclist. The table below provides the bidders' valuations of the cycle. The auctioneer starts the bid at an offer price far above the bidders' values and lowers the price in increments until one of the bidders accepts the offer. Bidder Roberto Claudia Mario Bradley Michelle

Value ($) 750 700 650 600 550

a) What is the optimal strategy of each player in this case? b) Who will win the auction if each bidder places his or her optimal bid? c) If Claudia wins the auction, how much surplus will she earn? Answer: a) This is an example of a Dutch auction. In a Dutch auction, the auctioneer starts the bidding process at a price far above the bidders' value and lowers the price in increments until one bidder accepts the offer. The optimal bidding strategy for each player can be determined by multiplying his or her willingness to pay by the number of competitors divided by the total number of bidders. Roberto's optimal strategy is to place a bid of $750 × = $600. Claudia's optimal strategy is to place a bid of $700 ×

= $560. Mario's optimal strategy is to place a bid of $650 ×

= $520. Bradley's optimal bidding strategy is to place a bid of $600 × optimal bidding strategy is to place a bid of $550 ×

= $480. Michelle's

= $440.

b) The highest bidder wins in a Dutch auction and pays a price equal to his bid. The highest bidder, in this case, is Roberto. He will win the auction and pay a price of $600 for the bicycle. c) Claudia values the bicycle at $700. Her optimal strategy is to bid $700 × = $560. Therefore, she will earn a surplus of $700 − $560 = $140. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Open Outcry: Dutch Auctions 67) In which of the following types of auctions can bidders NOT see one another's bids? A) An English auction B) A Dutch auction C) A silent auction D) A sealed bid auction Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 19 Copyright © 2022 Pearson Education Ltd.

68) In a first-price auction, ________. A) bidders submit their bids privately B) bidders place their bids one after another publicly C) bidders know one another's bids D) bidders bid above their willingness to pay Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 69) Which of the following is TRUE of a first-price auction? A) Bidders directly compete with one another. B) Bidders place their bids simultaneously. C) Bidders know one another's bids. D) Bidders always bid below their willingness to pay. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 70) In a first-price auction, the ________ bidder wins the good being auctioned. A) lowest B) second-highest C) highest D) first Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 71) The winner in a first-price auction pays an amount equal to ________. A) his bid B) the second-highest bid C) half of his bid D) the lowest bid Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions

Scenario: John, Jacob, Alex, and Maria participate in a first-price auction for an iPod. John values the iPod at $400, Jacob values it at $300, Alex values it at $250, and Maria values it at $200. 72) Refer to the scenario above. If each bidder uses his or her dominant strategy, who will win the auction? A) John B) Jacob C) Alex D) Maria Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 73) Refer to the scenario above. John should submit a bid of ________. A) $400 B) $300 C) $100 D) $200 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 74) Refer to the scenario above. Jacob should submit a bid of ________. A) $500 B) $400 C) $300 D) $225 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 75) Refer to the scenario above. Alex should place a bid of ________. A) $187.50 B) $200.50 C) $225 D) $250 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions

76) Refer to the scenario above. Maria should submit a bid of ________. A) $300 B) $150 C) $200 D) $250 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 77) Refer to the scenario above. The winner of this auction will earn a surplus of ________ if he or she follows his or her dominant strategy. A) $100 B) $300 C) $400 D) $200 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 78) Refer to the scenario above. The seller will earn a revenue of ________. A) $100 B) $300 C) $200 D) $400 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions Scenario: Consider the following situation. Molly is one among the sixty-one bidders who take part in a first-price auction for vintage furniture. Molly places a value of $850, the highest value, for a vintage dressing table that comes up for auction. Joseph has the secondhighest willingness to pay of $750. 79) Refer to the scenario above. Which of the following is an optimal bid for Molly? A) $836 B) $750 C) $825.50 D) $700 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 22 Copyright © 2022 Pearson Education Ltd.

80) Refer to the scenario above. If Molly wins the auction by using her optimal bidding strategy, she will earn a surplus of ________. A) $0 B) $50 C) $14 D) $25 Answer: C Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 81) Refer to the scenario above. Which among the following is a possible outcome if the number of bidders falls to 45? A) There will be no change in the outcome of the auction. B) The optimal bid for Molly will now be $831.11. C) The optimal bid for Molly will now be $745. D) The optimal bid for Molly will now be $845. Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 82) Refer to the scenario above. If the number of bidders goes up to 65, Molly's optimal bid for the product would be ________, and her consumer surplus would be ________. A) $836.92; $13.08 B) $831.11; $18.89 C) $765.50; $25 D) $750; $28.50 Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 83) The higher the bid in a first-price auction, the ________ will be the chances of winning and the ________ the surplus earned. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions

84) The consumer surplus enjoyed by the winner of a first-price auction is equal to the difference between ________. A) her value for the item being auctioned and the value of the lowest bid B) her bid and the second-highest bid C) her maximum willingness to pay for the good and her bid D) her bid and the market price of the good Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 85) The optimal bidding strategy in a first-price auction is identical to the optimal bidding strategy in a(n) ________ auction. A) English B) Dutch C) second-price D) dollar Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 86) Which of the following is a difference between a first-price auction and a Dutch auction? A) The highest bidder wins in a first-price auction, while the second-highest bidder wins in a Dutch auction. B) The second-highest bidder wins in a first-price auction, while the highest bidder wins in a Dutch auction. C) Bids are placed privately in a first-price auction, while bids are placed publicly in a Dutch auction. D) Bids are placed one after another in a first-price auction, while bids are placed simultaneously in a Dutch auction. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 87) Which of the following is a similarity between a first-price auction and a Dutch auction? A) Bids are placed privately. B) Bids are placed publicly. C) Bidders place their bids simultaneously. D) The winner pays an amount equal to his bid. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 24 Copyright © 2022 Pearson Education Ltd.

88) A cruiser bike is being auctioned in a first-price auction. You always wanted to own a cruiser bike and therefore decide to participate in the auction. You value the bike at $4,000. On the day of the auction, you see that there are seventy other bidders. Your optimal bid in this case is ________. A) $3,500 B) $3,000 C) $4,000 D) $3,944 Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Sealed Bid: First-Price Auctions 89) What is the difference between the two types of sealed bid auctions? Answer: The two types of sealed bid auctions are first-price auctions and second-price auctions. In a first-price auction, each bidder submits his bid privately. The highest bidder wins and pays an amount equal to his bid. In a second-price auction, each bidder submits his bid privately. The highest bidder wins and pays an amount equal to the second-highest bid. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 90) Isabella is participating in a first-price auction for a house. If there are five other bidders and her maximum willingness to pay for the house is $60,000, what is her optimal bidding strategy? Answer: In a first-price auction, each bidder should place a bid below his or her maximum willingness to pay for the good. The exact value of the optimal bid depends on the number of bidders. In this case, the number of bidders is six. Therefore, Isabella should place a bid of × 60,000 = $50,000. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Sealed Bid: First-Price Auctions 91) In a second-price auction, ________. A) bidders submit their bids privately B) bidders place their bids one after another C) bidders know one another's bids D) bidders bid above their willingness to pay Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: Second-Price Auctions

92) Which of the following is TRUE of a second-price auction? A) Bidders directly compete with one another. B) Bidders submit their bids simultaneously. C) Bidders know one another's bid. D) Bidders always bid above their willingness to pay. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: Second-Price Auctions 93) In a second-price auction, the ________ bidder wins the item. A) second-highest B) highest C) first D) lowest Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: Second-Price Auctions 94) The winner of a second-price auction pays an amount equal to ________. A) half of his bid B) the lowest bid C) the second-highest bid D) his valuation of the good Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: Second-Price Auctions Scenario: Tom, Pat, Arthur, and Julie are participating in a second-price auction for a good. Tom values the good at $150, Pat values it at $180, Arthur values it at $250, and Julie values it at $200. 95) Refer to the scenario above. If each bidder uses his or her dominant strategy, who will get the good being auctioned? A) Tom B) Pat C) Arthur D) Julie Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: Second-Price Auctions

96) Refer to the scenario above. Tom should submit a bid of ________. A) $150 B) $250 C) $112.50 D) $200 Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: Second-Price Auctions 97) Refer to the scenario above. Pat should submit a bid of ________. A) $200 B) $180 C) $45 D) $135 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: Second-Price Auctions 98) Refer to the scenario above. Arthur should place a bid of ________. A) $187.50 B) $200 C) $225 D) $250 Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: Second-Price Auctions 99) Refer to the scenario above. Julie should place a bid of ________. A) $300 B) $150 C) $200 D) $250 Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: Second-Price Auctions

100) Refer to the scenario above. The winner of this auction will earn a surplus of ________ if he or she follows his or her dominant strategy. A) $100 B) $50 C) $400 D) $200 Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Sealed Bid: Second-Price Auctions 101) Overbidding in a second-price auction is likely to result in a ________. A) negative consumer surplus B) positive consumer surplus C) zero producer surplus D) negative producer surplus Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Sealed Bid: Second-Price Auctions 102) The optimal bidding strategy in a second-price auction is similar to that of a(n) ________ auction, because dominant strategies are at work in both of them. A) English B) Dutch C) first-price D) penny Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Sealed Bid: Second-Price Auctions 103) Which of the following is a difference between a second-price auction and an English auction? A) The highest bidder wins in a second-price auction, while the second-highest bidder wins in an English auction. B) The second-highest bidder wins in a second-price auction, while the highest bidder wins in an English auction. C) Bids are placed privately in a second-price auction, while bids are placed publicly in an English auction. D) Bids are placed one after another in a second-price auction, while bids are placed simultaneously in an English auction. Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: Second-Price Auctions 28 Copyright © 2022 Pearson Education Ltd.

104) Which of the following is a similarity between a second-price auction and an English auction? A) Bids are placed privately. B) Bids are placed publicly. C) Bidders place their bids simultaneously. D) The winner pays an amount equal to the second-highest bid. Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Sealed Bid: Second-Price Auctions 105) What does the revenue equivalence theorem state? Answer: The revenue equivalence theorem states that under certain assumptions, all four types of auctions are expected to raise the same revenues. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Revenue Equivalence Theorem 17.2 Bargaining 1) ________ is the process of determining the terms of exchange by individual negotiations between a buyer and a seller. A) Backward induction B) Bilateral bargaining C) Arbitration D) Collective bargaining Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Bargaining 2) Buyers and sellers in a flea market often determine the terms of exchange through a process of ________. A) collective bargaining B) bilateral bargaining C) sniping D) arbitration Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Bargaining

3) Esther wants to buy a used car from her neighbor, who quotes a price of $18,000. Esther negotiates with her neighbor and offers him $16,500 for the car. This is an example of ________. A) bilateral bargaining B) collective bargaining C) arbitration D) speculation Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Bargaining 4) In a goods market, sellers have a higher bargaining power if ________. A) the good being traded has close substitutes B) there are several firms in the industry C) there are just a few firms in the industry D) there are just a few buyers in the market Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Bargaining 5) Phillip is going for a job interview. He will have a higher bargaining power if ________. A) he is the only applicant B) there are several applicants C) no other company has a job opening D) he is a college freshman Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: What Determines Bargaining Outcomes? 6) Elly needs to get her leaking faucet repaired as soon as possible. She gets in touch with a plumber, who asks for an unreasonably high fee. If no other plumber is available for work, who has a higher bargaining power? Explain your answer. Answer: Bargaining power describes the relative power an individual has in negotiations with another individual. Two principles–the cost of failing to come to an agreement and the influence of one partner on the other–are generally used to describe the bargaining power of each partner engaged in bargaining. If the influence of one agent over the other agent increases, then the former's bargaining power increases, but if the cost of not coming to an agreement increases, then his bargaining power goes down. In this case, the cost of failing to come to an agreement is high for Elly, because no other plumber is available for work. Therefore, the plumber has a higher bargaining power. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: What Determines Bargaining Outcomes? 30 Copyright © 2022 Pearson Education Ltd.

Scenario: Neil and Claire are playing a game. Neil has been given five cookies and has been asked to decide how many he would like to give Claire. Claire has to decide whether to accept Neil's offer or reject it. 7) Refer to the scenario above. This is an example of a(n) ________. A) mixed strategy game B) ultimatum game C) symmetric game D) prisoners' dilemma game Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Bargaining in Action: The Ultimatum Game 8) Refer to the scenario above. In equilibrium, Neil will give ________ to Claire if no other factors such as fairness are at work. A) five cookies B) one cookie C) four cookies D) two cookies Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Bargaining in Action: The Ultimatum Game 9) Which of the following is TRUE in an ultimatum game if more money is considered to be better than less? A) The equilibrium outcome is equitable. B) The equilibrium outcome is socially efficient. C) The equilibrium is always a dominant strategy equilibrium. D) There is no unique equilibrium. Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Bargaining in Action: The Ultimatum Game 10) Mike goes to a shop to buy a pair of gloves. Who will have a higher bargaining power if the seller knows that Mike needs the gloves urgently? Answer: The seller will have a higher bargaining power if he knows that Mike needs the gloves urgently. This is because the seller knows he can get away with charging a higher price because Mike does not have time to check for other deals available in the market. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Bargaining in Action: The Ultimatum Game

11) Who has a higher bargaining power if the demand for the good being transacted is price elastic? Answer: The buyer of the good has a higher bargaining power if her demand for the good is price elastic. This is because the seller knows that if he charges a higher price for the good, the buyer will not purchase the good. The buyer would instead search for low-cost alternative goods in the market. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Bargaining in Action: The Ultimatum Game 12) Two players are playing a game. Player 1 is given $100 and is asked to offer a certain share of the money to Player 2. Player 2 can then choose to accept or reject the offer. If she accepts the offer, the money will be split between the two players in the ratio as decided by Player 1. If she rejects the offer, neither player will get anything. a) Assume that both players prefer more money to less. How would Player 1 choose her optimal strategy in this case? b) If Player 2 prefers fairness to money, how will her decision change? Answer: a) This is an example of an ultimatum game, and Player 1 should choose her optimal strategy using the process of backward induction, that is, by considering Player 2's decision first. If Player 1 offers a certain percentage of money to Player 2, Player 2 will definitely accept the offer, because she prefers more money to less. Therefore, Player 1's optimal strategy is to offer the minimum possible amount to Player 2. b) If Player 2 prefers fairness to money, she will not accept the offer if Player 1 offers the lowest possible amount. If Player 1 knows that Player 2 prefers fairness to money, she will figure out that Player 2 will not accept the offer if she offers the lowest possible amount, leaving each of them with $0. Therefore, Player 1 will choose to offer a fair deal. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Bargaining in Action: The Ultimatum Game 13) According to the ________, as long as property rights are clearly defined, two agents can always bargain to reach the efficient outcome. A) Coase theorem B) Ricardian theory on rent C) revenue equivalence theorem D) envelope theorem Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Bargaining and the Coase Theorem

14) Harry and his wife are looking for a new house. However, they cannot decide where to buy the house. Harry wants to live in Santa Cruz, while his wife wants to live in Ontario. If Harry values living in Santa Cruz at $10,000 and his wife values living in Ontario at $15,000, where are they likely to buy a house? Answer: Because Harry's wife values living in Ontario at $15,000 and Harry values living in Santa Cruz at $10,000, they can reach an efficient solution if Harry's wife offers an amount between $10,000 and $15,000 to convince Harry to buy a house in Ontario. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Bargaining and the Coase Theorem 15) Your friend has just received a new book he ordered, and you want to borrow it. Your friend values reading the book at $10, while you are willing to pay a maximum amount of $15 to read it. a) What is the equilibrium outcome in this case? b) Will the outcome be any different if you own a book that your friend wants to read? Assume that the value that each of you places on this book is the same as what you placed on the previous book. Answer: a) Because my friend owns the book and values reading it at $10, while I value reading it at $15, an efficient outcome can be reached if I decide to give an amount between $10 and $15 to my friend in exchange for the book. My friend will be better off as he will get an amount higher than his valuation for the book, and I will be better off as I will have to pay an amount lower than my maximum willingness to pay for the book. Therefore, this equilibrium is efficient. However, the exact amount that I will have to pay will depend on my bargaining power. b) In this case, an efficient outcome is possible if my friend has a higher value for the book than I do. If my friend assigns a higher value to reading the book than I do, he will pay me an amount higher than my value for the book and lower than the value he assigns to reading the book. Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Bargaining and the Coase Theorem 16) Rick and Kate want to go on a date. Rick wants to go to a rock concert, while Kate wants to watch a movie. Rick values going to the concert at $100, while Kate values watching a movie at $50. What is the equilibrium in this situation? Answer: Because Rick values going to the concert at $100 and Kate values watching a movie at $50, an efficient outcome can be reached if Rick decides to give an amount between $50 and $100 to Kate. Kate will be better off as she will get an amount higher than her valuation for the movie, and Rick will be better off as he will have to pay an amount lower than his value for the concert. Therefore, this equilibrium is efficient. However, the exact amount that Rick will have to pay will depend on his bargaining power. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Bargaining and the Coase Theorem

17) Kate and her sister share a room. The sister prefers sleeping with all windows closed, while Kate prefers sleeping with at least one window open to let in some fresh air. Since neither of them is willing to give up her own preferences, they end up fighting every night. Is there a possible solution to this problem if Kate values keeping the windows open at night at $100, while the sister values keeping the windows closed at night at $80? Answer: Because Kate values keeping the windows open at $100 and the sister values keeping the windows closed at $80, an efficient solution is possible if Kate decides to pay her sister an amount between $80 and $100 as compensation for keeping the windows open. The exact amount that Kate will have to pay her sister will depend on their respective bargaining powers. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Bargaining and the Coase Theorem 18) A ________ model of the household assumes that a family maximizes its happiness under a budget constraint that pools all of its income, wealth, and time. A) unitary B) secondary C) tertiary D) primary Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Who Determines How the Household Spends Its Money? 19) Which of the following results would NOT support the unitary model? A) When the Arendellian government changed the recipient of a pension program from men to women, there was no change in household consumption patterns. B) When the Genovian government changed the recipient of a cash transfer program from men to women, households spent more on food and women's and children's clothing and less on tobacco and men's clothing. C) When the Westerosi government increased welfare benefits, households consumed more food and children's clothing. D) When the government of Middle Earth raised taxes, effectively decreasing household incomes, consumption of Ramen noodles rose. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Evidence-Based Economics: Who Determines How the Household Spends Its Money?

20) Which of the following is NOT a sign of higher female bargaining power that was found in areas with higher sex ratios in the study by Bulte, List, and Tu on sex ratios and bargaining power in China? A) Women have more control over their fertility. B) Women report more decision-making power. C) Women are more likely to handle household finances. D) Household decisions are more likely to reflect women's private choices. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: Sex Ratios Change Bargaining Power Too 21) The table below shows the sex ratios in 5 US cities. City Sex Ratio (#men/#women * 100) Birmingham, AL 88.0 Greensboro, NC 88.7 Fort Lauderdale, FL 111.8 Everett, Wa 103.5 Washington, DC 90.8 In which of these cities would you expect women to have the most bargaining power? A) Birmingham, AL B) Washington, DC C) Fort Lauderdale, FL D) Everett, WA Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: Sex Ratios Change Bargaining Power Too

22) The table below shows the sex ratios in 5 US states. City Sex Ratio (#men/#women * 100) Alaska 109.2 Texas 98.7 North Carolina 94.7 New York 94.3 California 98.8 In which of these states would you expect men to have the most bargaining power? A) Alaska B) Texans C) New York D) North Carolina Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Letting the Data Speak: Sex Ratios Change Bargaining Power Too 23) Consider Morgan and Pat, a married couple. Morgan wants a divorce and values getting a divorce at $10,000. Pat does not want a divorce and values staying married at $8,000. Which of the following statements is FALSE? A) If Pat and Morgan live in a state where one partner can initiate a divorce, Pat will offer Morgan between $8,000 and $10,000 not to initiate the divorce and Morgan will accept. B) If Pat and Morgan live in a state where both partners need to agree to the divorce, Morgan can offer Pat between $8,000 and $10,000 to agree to the divorce, and Pat will accept. C) If Pat and Morgan live in a state where on partner can initiate a divorce, Morgan will initiate the divorce without needing to compensate Pat. D) The efficient outcome is that Pat and Morgan get divorced. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Bargaining and the Coase Theorem

24) Consider Sydney and Kris, a married couple. Kris wants a divorce and values getting a divorce at $20,000. Sydney does not want a divorce and values staying married at $28,000. Which of the following statements is TRUE? A) If Sydney and Kris live in a state where one partner can initiate a divorce, Sydney will offer Kris between $20,000 and $28,000 not to initiate the divorce, and they will stay married. B) If Sydney and Kris live in a state where both partners need to agree to the divorce, Kris can offer Sydney between $20,000 and $28,000 to agree to the divorce. C) If Sydney and Kris live in a state where one partner can initiate a divorce, Kris will initiate the divorce and Sydney will be unable to stop it. D) The efficient outcome is that Sydney and Kris get divorced. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Bargaining and the Coase Theorem

MicroEconomics, 3e, (Acemoglu/Laibson/List) Chapter 18 Social Economics 18.1 The Economics of Charity and Fairness 1) Which branch of economics takes into consideration that economic agents do NOT always act rationally? A) Microeconomics B) Macroeconomics C) Behavioral economics D) Econometrics Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Economics of Charity 2) Most charitable contributions in the United States are usually given to ________. A) environmental causes B) religious causes C) basic necessities D) educational causes Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Economics of Charity 3) People giving to charity because they value helping others is categorized as ________. A) pure altruism B) rationalism C) impure altruism D) consumerism Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Economics of Charity 4) Jane donates time and money to charity because she values helping others. This is an example of ________. A) pure altruism B) rationalism C) impure altruism D) liberalism Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Charity 1 Copyright © 2022 Pearson Education Ltd.

5) People giving to charity because of selfish reasons, such as the appearance of generosity, is categorized as ________. A) pure altruism B) impure altruism C) consumerism D) rationalism Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Economics of Charity 6) Jack refused to donate money for the building of a public park when he was contacted individually. However, he readily agreed to donate when he was asked to contribute for a similar cause in front of his neighbors. Such behavior is an example of ________. A) pure altruism B) consumerism C) rationalism D) impure altruism Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Charity 7) William was asked to contribute money for a retirement home. He agreed to contribute only if his name appeared on the list of donors in the newsletter published by the home every year. This is an example of ________. A) rationalism B) liberalism C) impure altruism D) pure altruism Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Charity 8) La Dila Corp. decided to sponsor an AIDS awareness campaign when it discovered that its rival had been sponsoring several fundraising events for AIDS-afflicted children. This is an example of ________. A) bounded rationality B) pure altruism C) impure altruism D) consumerism Answer: C Difficulty: Medium AACSB: Application of Knowledge 2 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Economics of Charity 9) George donates money to charity only when somebody he knows approaches him for such donations. This is an example of ________. A) rationalism B) impure altruism C) pure altruism D) liberalism Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Charity 10) Gary usually does not donate to charity. However, he donated money for an environmental awareness campaign launched by his friend. This is an example of ________. A) rationalism B) pure altruism C) impure altruism D) liberalism Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Charity 11) Your neighbor's 10-year-old son has come to your house to collect money for a relief fund for hurricane victims. You were initially unwilling to contribute but agreed to donate when you discovered that he had already collected money from all your neighbors. This is an example of ________. A) pure altruism B) impure altruism C) liberalism D) rationalism Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Charity 12) What are the two ways by which people can help charitable causes? Answer: People can help charitable causes by giving either time or money. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Charity

13) Differentiate between the two types of altruism. Answer: There are two types of altruism: pure and impure. People giving to charity because they value helping others is categorized as pure altruism. People giving to charity because of selfish reasons, such as the appearance of generosity, is categorized as impure altruism. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Charity 14) Why do people donate less when it is costlier to give? Answer: The act of donating can be viewed as an economic good, and like other economic goods, the quantity demanded of it decreases when the price increases. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Charity 15) All charitable donations in Resourcia are tax deductible. However, it was found that the volume of charitable contributions declined significantly when the income tax rate in Resourcia was lowered. What is the reason behind such an outcome? Explain with an example. Answer: People often donate less when it is costlier to give. The opportunity cost of charitable giving increases when the income tax rate falls, because the donor can enjoy a larger amount of money if she does not donate. For example, a person contributing $100 to charity and facing an income tax rate of 20 percent would have only $80 if she did not contribute. However, if the income tax rate falls to 15 percent, she would have $85 if she did not contribute. This portrays the situation in Resourcia. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: Do People Donate Less When It's Costlier to Give? 16) In economics, ________ refers to a preference for equal outcomes in a target population. A) randomness B) rationalism C) fairness D) liberalism Answer: C Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Economics of Fairness

17) The willingness of individuals to sacrifice their own well-being to either improve the wellbeing of others or to punish those whom they perceive as behaving unkindly is called ________. A) rationalism B) altruism C) indoctrination D) fairness Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Economics of Fairness Scenario: Catherine and Arthur are playing a game. They are put in two different rooms and asked to choose between two colors: black and white. If they both choose black, they will not get any money. If they both choose white, each of them will get $5. If one chooses white while the other chooses black, the one who chooses black will get $10 and the one who chooses white will get $0. 18) Refer to the scenario above. Which of the following is TRUE in equilibrium? A) Catherine will get $10, and Arthur will get $5. B) Catherine will get $5, and Arthur will get $10. C) Catherine and Arthur will each get $5. D) Catherine and Arthur will each get $0. Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 19) Refer to the scenario above. What will be the outcome of this game? A) Both players will choose black. B) Both players will choose white. C) Arthur will choose white, and Catherine will choose black. D) Catherine will choose white, and Arthur will choose black. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 20) Refer to the scenario above. If the players have to pay a fairness penalty of $6, ________. A) Catherine would choose white, and Arthur would choose black B) Catherine and Arthur would both choose white C) Catherine and Arthur would both choose black D) Catherine would choose black, and Arthur would choose white Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 5 Copyright © 2022 Pearson Education Ltd.

Scenario: Roger and Billy are two colleagues who were caught by their boss for forging an important document together and have been taken to separate rooms for interrogation. They are told that if both of them confess their crime, they will be charged a fine of $2,000. If neither of them confesses, they will be fined $1,000 each. However, if one of them confesses while the other does not, the one who confesses will be set free but the other will be fined $3,000. 21) Refer to the scenario above. Which of the following is TRUE in equilibrium? A) Roger and Billy will each pay a fine of $1,000. B) Roger and Billy will each pay a fine of $0. C) Roger and Billy will each pay a fine of $3,000. D) Roger and Billy will each pay a fine of $2,000. Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 22) Refer to the scenario above. In equilibrium, ________. A) both colleagues will confess B) both colleagues will deny the crime C) Roger will confess while Billy will deny the crime D) Billy will confess while Roger will deny the crime Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 23) Refer to the scenario above. If the colleagues had decided on a fairness penalty of $5,000 before committing the crime, ________. A) both of them will confess during interrogation B) both of them will deny the crime during interrogation C) Roger will confess while Billy will deny the crime during interrogation D) Billy will confess while Roger will deny the crime during interrogation Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Fairness

Scenario: Two colleagues—Mathew and Peter—have successfully completed a project, and their employer has decided to reward them in a unique way. Each of them is taken to a separate room and asked to choose whether the other colleague is a good teammate or a bad teammate. They are told that if both of them choose "bad," they will not get any reward. If both of them choose "good," they will get $5,000 each. If one chooses "good" while the other chooses "bad," the one who chooses "bad" will get $10,000 and the one who chooses "good" will not get anything. 24) Refer to the scenario above. Which of the following is TRUE? A) Mathew and Peter will each receive $10,000 in equilibrium. B) Neither Mathew nor Peter will receive any reward in equilibrium. C) Mathew will receive $10,000, and Peter will receive $5,000 in equilibrium. D) Mathew will receive $5,000 and Peter will receive $10,000 in equilibrium. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 25) Refer to the scenario above. In equilibrium, ________. A) Mathew will choose "good" and Peter will choose "bad" B) Peter will choose "good" and Mathew will choose "bad" C) both Mathew and Peter will choose "bad" D) both Mathew and Peter will choose "good" Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 26) Refer to the scenario above. If the players have to pay a fairness penalty of $7,000, ________. A) they will both choose "good" B) they will both choose "bad" C) Mathew will choose "bad," and Peter will choose "good" D) Mathew will choose "good" and Peter will choose "bad" Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness

Scenario: You are playing a game of "Friend or Foe?" You and your classmate are taken to two different rooms and asked to choose whether the other is a friend or foe. You are told that if both of you choose "friend," you will get $10 each. However, if both of you choose "foe," neither of you will get anything. If one of you chooses "friend" while the other chooses "foe," the one who chooses "foe" will get $20, while the one who chooses "friend" will get nothing. 27) Refer to the scenario above. Which of the following is TRUE for this game in equilibrium? A) You and your friend will both get $10 each. B) You and your friend will not get any payoff. C) You will get $20, while your friend will get $10. D) You will get $10, while your friend will get $20. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 28) Refer to the scenario above. In equilibrium, ________. A) you will choose "friend," and your classmate will choose "foe" B) you will choose "foe," and your classmate will choose "friend" C) both of you will choose "foe" D) both of you will choose "friend" Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 29) Refer to the scenario above. If there is fairness penalty of $12, ________. A) both you and your friend will choose "foe" B) both you and your friend will choose "friend" C) you will choose "friend," while your friend will choose "foe" D) you will choose "foe," while your friend will choose "friend" Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness

Scenario: Jack and Jill are siblings. Jack's father asked him how much money he would offer Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. 30) Refer to the scenario above. This is an example of ________. A) a zero-sum game B) a symmetric game C) an ultimatum game D) the prisoners' dilemma Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 31) Refer to the scenario above. A player should use ________ to play this game. A) forward induction B) backward induction C) mixed strategies D) her dominant strategy Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 32) Refer to the scenario above. If Jill values fairness, ________. A) she will not accept any offer made by Jack B) Jack should make the lowest possible offer to Jill C) she will accept the offer when Jack offers $25 D) Jack should not play the game Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness

Scenario: Robert and Alice are participating in a reality show on television. Robert is offered $500 and is told that he can keep the money as long as he shares some of it with Alice. Robert can offer Alice as much or as little as he likes, but if Alice rejects his offer, neither of them will get to keep any money. 33) Refer to the scenario above. This is an example of ________. A) a symmetric game B) an ultimatum game C) the prisoners' dilemma D) a zero-sum game Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 34) Refer to the scenario above. Robert should use ________ to play this game. A) forward induction B) backward induction C) mixed strategies D) his dominant strategy Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 35) Refer to the scenario above. If Alice values fairness, ________. A) she will not accept any offer made by Robert B) Robert should make the lowest possible offer to Alice C) she will accept the offer when Robert offers $250 D) Robert should not play the game Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness

Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. The winning amount was handed over by the organizers to their professor, who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. 36) Refer to the scenario above. If Joseph prefers more money to less, ________. A) he will not accept any offer made by Phillip B) he will always accept any offer made to him C) Phillip will offer the lowest possible amount to Joseph D) he will accept the offer only if Phillip pays him an equal share of the money Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 37) Refer to the scenario above. This is an example of ________. A) an ultimatum game B) the prisoners' dilemma C) a zero-sum game D) a symmetric game Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 38) Refer to the scenario above. Phillip should play this game using ________. A) backward induction B) forward induction C) mixed strategies D) his dominant strategy Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 39) Refer to the scenario above. If Joseph prefers fairness to money, ________. A) he will not accept any offer made by Phillip B) he will always accept any offer made to him C) he will accept the offer if offered an equal share of the money D) Phillip will offer the minimum amount of money to Joseph Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 11 Copyright © 2022 Pearson Education Ltd.

Scenario: Beth and Mary work as designers for a leading footwear manufacturer. Together, they came up with a new design that was successful from the day it was launched in the market. Impressed with their performance, their boss wants to reward them. He hands over $5,000 to Beth and asks her to offer Mary any amount she wants. If Mary accepts the offer, the money will be split in the decided proportion. However, if Mary rejects the offer, both of them will forgo the chance to be rewarded. 40) Refer to the scenario above. The situation here is similar to that in ________. A) the prisoners' dilemma B) a zero-sum game C) an ultimatum game D) a symmetric game Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 41) Refer to the scenario above. Beth should use ________ to play this game. A) forward induction B) backward induction C) mixed strategies D) her dominant strategy Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 42) Refer to the scenario above. If Mary prefers more money to less, ________. A) she will not accept any offer that Beth makes B) she will accept any offer that Beth makes C) she will accept the offer only if Beth offers her $2,500 D) she will accept the offer only if Beth offers her $5,000 Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 43) Refer to the scenario above. If Mary prefers fairness to money, ________. A) she will not accept any offer that Beth makes B) she will accept any offer that Beth makes C) she will accept the offer only if Beth offers her $2,500 D) she will accept the offer only if Beth offers her $5,000 Answer: C Difficulty: Hard AACSB: Application of Knowledge 12 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Economics of Fairness 44) Charitable donations are tax deductible on your federal income taxes if you itemize your deductions, but if you do not have enough deductions, you can simply take the standard deduction. The tax reform bill that passed in 2018 raised the standard deduction by about $5,500 to $12,000 and lowered the highest marginal tax rate from 39.6% to 37%. Which of the following statements is FALSE based on this information? A) This tax reform will encourage those who itemize their deductions to donate more money to charity than in previous years. B) The cost in 2018 of a $100 charitable contribution for someone in the top tax bracket who itemizes their deductions is $63. C) The cost in 2018 of a $100 charitable contribution for someone in the top tax bracket who does not itemize their deductions is $100. D) This tax reform will encourage those who do not itemize their deductions to donate less money to charity than in previous years. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Economics of Charity 45) Which of the following statements is FALSE? A) There seems to be a strong correlation between a country's income and the fraction of its population that volunteers. B) Sri Lanka had the highest reported fraction of the population who volunteered their time in 2019. C) In 2018, the majority of US charitable contributions went to religious organizations. D) In 2018, more charitable contributions in the US were directed to Education than Health. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Charity 46) Which of the following statements is FALSE about the study conducted by John List, Stefano DellaVigna, and Ulrike Malmendier about why people give to charity? A) The researchers found that most giving was due to pure altruism. B) Those who donate due to social pressure make less generous donations than those who donate for purely altruistic reasons. C) This study was a field experiment. D) The study involved comparing the rates and amounts of giving when subject were approached both with and without notice. Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Letting the Data Speak: Why Do People Give to Charity?

47) When does the second player in an ultimatum game reject the offer made by the first player? Answer: In an ultimatum game, the first player (or the proposer) is asked to offer a percentage of money to the second player (or responder). The responder can accept or reject the offer. If he accepts the offer, the money will be split in the agreed-on proportion, but if the responder rejects the offer, neither of them will get anything. The proposer usually makes the lowest possible offer to the responder, thinking that the responder will accept the offer, because some money is better than no money. However, if the responder values fairness over money, he will reject the proposer's offer, asking for an equal share. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Economics of Fairness 48) The responder in an ultimatum game is likely to reject an offer of 10 percent of $1 but is less likely to reject an offer of 10 percent of $100. What is the reason behind such inconsistent behavior? Answer: A responder in an ultimatum game rejects an offer made by the proposer if he prefers fairness over money. However, as the opportunity cost of exercising fairness increases, the responder is less likely to exercise fairness. Therefore, a responder who rejects an offer of 10 percent of $1 is less likely to reject an offer of 10 percent of $100. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 49) Sarah and Claire are sisters. Their aunt gave ten cookies to Sarah and asked her to share some with Claire. She could choose how many she would give her, but if Claire was not happy with her share, her aunt would take back all the cookies. a) How should Sarah decide how many cookies to give Claire if Claire prefers more cookies to fewer cookies? b) Will there be any change in her decision if she knows that Claire values fairness? Answer: a) Sarah should decide how many cookies to give Claire using backward induction. Because Claire prefers more cookies to fewer cookies, she will always accept Sarah's offer. Given that Claire will always accept her offer, Sarah should offer the lowest possible number of cookies to Claire. b) If Sarah knows that Claire values fairness, she will realize that Claire will not accept an unfair share of cookies. Because neither of them will get any cookies if Claire rejects the offer, Sarah should offer an equal share to Claire. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness

50) Neil and Derek are brothers who are very fond of watching television. They share a television but watch different shows. Every evening, after coming home from school, they argue over who will watch television and for how long. Irritated by their fighting, their parents asked Neil to decide how long each of them would watch television. They also told him that if the brothers failed to reach an agreement, they would not let either of them watch television. a) How should Neil make his decision? b) What will be the outcome if Derek prefers fairness over watching television? Answer: a) Neil should make his decision using backward induction. Because Derek is fond of watching television, he will prefer a few hours of watching to not watching it at all. Therefore, he will always accept Neil's offer. Given that Derek will always accept his offer, Neil should offer the lowest possible number of hours to Derek. b) If Derek prefers fairness over watching television, he will not accept an unfair allotment of hours. In this case, neither of them will get to watch television. If Neil knows that Derek prefers fairness, then Neil has an incentive to offer a more equal time split. If the brothers are allowed to watch television for a total of 2 hours, Neil will offer 1 hour to Derek for watching television, and he would himself watch it for 1 hour. Derek is likely to accept this offer, as it sounds fair and he prefers watching television over not watching it. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 51) An economics professor has devised an interesting game to test the understanding of his students. He randomly selects two students from his class and gives one of them a $50 bill. He then asks the student what percentage of the $50 she would give to her classmate. The first student can choose any percentage she wishes, while the second student can choose whether or not to accept the offer. If the second student does not accept the offer, the professor will take the bill back, but if he accepts the offer, the money will be divided in the ratio decided by the first student. a) What is the likely outcome of this game if both students value more money to less? b) What is the likely outcome of this game if the second student values fairness? Answer: a) The first student is likely to offer the lowest possible amount to the second student. This is because the second student will always accept any offer made by the first student if he prefers more money to less. Given that her classmate will always accept her offer, the first student is better off by offering the lowest possible amount. b) If the second student values fairness, he will not accept an unfair allotment of the money. If an unfair allotment is offered, neither of them will get any money. If the first student knows that the second student prefers fairness, then the first student has an incentive to offer a more equal allotment. If the first student offers to share the $50 bill in the ratio 1:1, the second student will consider it fair and accept the offer. Thus, the two students will receive $25 each in equilibrium. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Fairness

52) One Sunday afternoon, your mother tells you and your brother that you can make some money by helping her wash dishes. Both of you decide to help her. Once both of you are done with the work, your mother gives you a $20 bill. She also says that you can divide the money between yourself and your brother in any proportion you want, but if your brother does not accept the amount he is being given, she will take all the money back. a) How much money should you offer your brother if he prefers more money to less? b) How much money should you offer your brother if you know that your brother prefers fairness to money? Answer: a) You should allot a minimum amount of money to your brother if he prefers more money to less as he would always accept your offer and you would be able to make more money. b) You should make your decision using backward induction in this case. Because your brother values fairness to money, he will not accept the offer if he does not get an equal share of money. If he rejects the offer, neither of you would get any money because your mother will take the money back. Therefore, you should divide the money into two equal parts. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Fairness 18.2 The Economics of Trust and Revenge Scenario: Tom and Harry are participating in a game in which the participants are divided into groups of two. Tom and Harry have been put in the same group. In each round of the game, Tom will be given an item. Tom can either give it to Harry or pass it on to the next team. If he decides to pass it on to the next team, neither of them will get the prize. If he gives it to Harry, Harry can either pass it on to the next team or sell it himself. If he passes it on to the next team, each of them will get $100. However, if he decides to sell it, he will get an amount higher than $100 and Tom will get nothing. 1) Refer to the scenario above. Tom should use ________ to play this game. A) backward induction B) forward induction C) mixed strategies D) his dominant strategy Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Trust

2) Refer to the scenario above. Which of the following will happen in equilibrium if the game is played only once? A) Social surplus will be maximized. B) Tom will trust Harry, and Harry will defect. C) Tom will trust Harry, and Harry will cooperate. D) Neither of them will make any money. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 3) Refer to the scenario above. This is an example of ________. A) a zero-sum game B) a trust game C) an ultimatum game D) the prisoners' dilemma Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 4) Refer to the scenario above. Which of the following will happen in equilibrium if Harry is known to be trustworthy? A) Tom will trust Harry, and Harry will cooperate. B) Tom will trust Harry, and Harry will defect. C) Neither of them will make any money. D) Only Harry will make money. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 5) Refer to the scenario above. Which of the following will be TRUE if Harry is known to be trustworthy? A) Tom and Harry will each receive $100. B) The equilibrium outcome will be socially inefficient. C) A unique equilibrium will not occur. D) Tom and Harry will each receive $50. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust

Scenario: You walk onto a used car lot to buy a car. You are willing to pay up to $15,000 for a car of good quality, but you value a lemon at $0. You are now wondering whether you should trust the car dealer when it comes to the quality of his cars. If you choose to trust him, he can choose to cooperate or defect. If you do not trust him, he will not earn any money and you will not be able to buy a car. If you trust him and he cooperates, both of you will gain, because the dealer values a good-quality car at $13,000. However, if he defects, he will earn $15,000, while you will not derive any satisfaction. 6) Refer to the scenario above. You should use ________ to arrive at a decision. A) backward induction B) forward induction C) mixed strategies D) tit-for-tat strategy Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 7) Refer to the scenario above. Which of the following will happen in equilibrium? A) You will trust him, and he will defect. B) You will trust him, and he will cooperate. C) You will not trust him. D) You will not make any purchase. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 8) Refer to the scenario above. Which of the following is TRUE in equilibrium? A) The equilibrium outcome in this case is equitable. B) The equilibrium outcome in this case is socially inefficient. C) You will end up paying $10,000 for a good-quality car. D) You will end up paying $15,000 for a bad-quality car. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust

9) Refer to the scenario above. Which of the following will happen in equilibrium if the car dealer has a reputation for trustworthiness? A) You will trust him, and he will cooperate. B) You will trust him, and he will defect. C) You will not trust him. D) You will earn positive consumer surplus. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 10) Refer to the scenario above. Which of the following is TRUE if the car dealer has a reputation for trustworthiness? A) The equilibrium outcome is equitable. B) You will pay the car dealer $15,000 for a bad-quality car. C) You will pay the car dealer $13,000 for a good-quality car. D) The equilibrium outcome is socially inefficient. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are uncertain about whether to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than by cooperating with you. 11) Refer to the scenario above. You should use ________ to make your decision. A) backward induction B) forward induction C) mixed strategies D) your dominant strategy Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust

12) Refer to the scenario above. Which of the following will happen in equilibrium? A) You will trust him, and he will defect. B) You will trust him, and he will cooperate. C) Neither of you will gain from trade. D) Only the mechanic will gain. Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 13) Refer to the scenario above. Which of the following is TRUE? A) The equilibrium outcome in this case is equitable. B) The equilibrium outcome in this case is socially inefficient. C) The equilibrium outcome in this case is socially efficient but not equitable. D) The equilibrium outcome in this case is both equitable and socially efficient. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 14) Refer to the scenario above. Which of the following is likely to happen if the service center has a reputation for trustworthiness? A) You will trust the mechanic, and he will cooperate. B) You will trust the mechanic, but he will defect. C) Neither of you will gain from trade. D) Only the mechanic will gain. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 15) Refer to the scenario above. Which of the following will be TRUE if the service center has a reputation for trustworthiness? A) The equilibrium outcome will be equitable. B) A unique equilibrium will not occur. C) You will pay the mechanic $500, but he will defect. D) You will pay the mechanic $500, and he will cooperate. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust

16) Why is the equilibrium in a trust game socially inefficient? Answer: In a trust game, the first player has to decide whether to trust the second player. If she chooses to trust the second player, the second player can either cooperate or defect. If he cooperates, both the players will earn a higher payoff than they would have if the first player chooses not to trust. If the second player defects, he will earn a higher payoff than the first player. Therefore, the second player always has an incentive to defect. Given that the second player is likely to defect, the first player chooses not to trust. This results in a socially inefficient equilibrium, because both players could improve their payoffs by changing their respective strategies. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Economics of Trust 17) Under what circumstances will the equilibrium in a trust game be efficient? Answer: In a trust game, the first player has to decide whether she will trust the second player. If she chooses to trust the second player, the second player can either cooperate or defect. If he cooperates, both the players will earn a higher payoff than they would have if the first player chose not to trust. If the second player defects, he will earn a higher payoff than the first player. Therefore, the second player always has an incentive to defect. Given that the second player is likely to defect, the first player chooses not to trust. This results in a socially inefficient equilibrium. However, if the second player has a reputation for trustworthiness, the first player will choose to trust him, and both of them will earn a higher payoff, leading to an efficient outcome. Such an efficient outcome can also occur if the game is repeated several times, because the players will then realize that they can maximize their payoffs if the first player chooses to trust and the second player chooses to cooperate. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Economics of Trust

18) Two individuals are playing a trust game that has three rounds. In the first two rounds of the game, they have accumulated $1,000 as a team. In the third round, Player 1 is blindfolded and asked to decide whether he would let Player 2 guide him to a particular destination or opt out of the game. If he lets Player 2 guide him, Player 2 can either guide him to the correct destination or take him elsewhere. If she leads him to the correct destination, each of them will get half of the accumulated money. However, if Player 2 leads him astray, Player 2 will get 75 percent of the accumulated money and Player 1 will get 25 percent. If Player 1 opts out of the game, he will get 30 percent of the accumulated money and Player 2 will get 20 percent. a) What is the equilibrium outcome in this case? b) How will the equilibrium change if the players can impose a guilt penalty of 60 percent of the accumulated money on the defecting player? Answer: a) In equilibrium, Player 1 will choose to opt out of the game. He will make this decision using backward induction. If he lets Player 2 guide him to the destination, Player 2 is likely to lead him astray, because Player 2 would earn 75 percent of the accumulated money by doing so, instead of the 50 percent she would earn by leading Player 1 to the correct destination. Given this information, Player 1 will choose to opt out of the game, as he will earn 30 percent of the accumulated money by doing so, instead of the 25 percent he would earn if Player 2 led him astray. b) If the players can choose to impose a guilt penalty of 60 percent of the accumulated money, Player 1 will let Player 2 guide him, and Player 2 will guide him to the correct destination. In this case, Player 2 will get only 75 percent − 60 percent = 15 percent of the accumulated money if she leads Player 1 astray, while she will get 50 percent by guiding him to the correct destination. Therefore, she will always choose to guide him to the correct destination. Given this information, Player 1 will choose to be guided by Player 2, as he will get 50 percent of the accumulated money by doing so, instead of 30 percent if he opted out of the game. Difficulty: Medium AACSB: Analytical Thinking TopicEntry: The Economics of Trust 19) Mark and Anthony are participating in a trust game. Mark is given a locked box containing five $100 bills and a key. He can either unlock the box himself, or he can give it to Anthony. Anthony can either unlock the box himself, or return it to the moderator of the game. If Mark unlocks the box himself, he will get $200 and Anthony will get $100, while the rest will be taken back. If Anthony unlocks the box, they will receive $250 each. If Anthony returns the box to the moderator, he will receive $300, while Mark will not get any money. What will the equilibrium outcome of this game be? Answer: In equilibrium, Mark will choose to unlock the box himself. He will make this decision using backward induction. If he gives the box and the key to Anthony, the latter is likely to hand them over to the moderator, in which case Anthony will receive $300, but Mark will not get any money. Given this information, Mark will choose to unlock it himself as he will earn $200. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust

20) There are two players in a game. In each round of the game, one player has to trust the other for a particular task. In the first round, Player 1 has to decide whether she will trust Player 2. If she does not trust Player 2, she will get one-third of the prize money, while Player 2 will get the rest of the prize money. If she trusts Player 2, Player 2 can either cooperate with her or defect. If Player 2 defects, Player 1 will earn $0, while Player 2 will get the entire prize money. If Player 2 cooperates, each of them will get half the prize money. What will the equilibrium outcome of this game be if Player 1 can impose a guilt penalty of two-thirds of the prize money and is known to be a vengeful player? Answer: If there is no guilt penalty, in equilibrium, Player 1 will not trust Player 2. She will make this decision using backward induction. If she trusts Player 2, Player 2 is likely to defect, because he will earn the entire prize money in that case, while he will earn only half of the money by cooperating. Given this information, Player 1 will not trust him, as she will not earn any money if she trusts him, while she will earn one-third of the money if she does not trust him. However, if there is a guilt penalty of two-thirds of the prize money, Player 2 will choose to cooperate, because he will earn a lower payoff by defecting. Given this information, Player 1 will trust him, and each of them will get half of the money. Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust Scenario: Elly owns a small coffee shop. She has only one employee. One weekend, she decides to take a break from work. She is wondering whether she should trust her employee to run the shop in her absence. If she does not trust him, she would have to keep the shop closed, in which case neither she nor her employee will be able to make money. In contrast, if she trusts him, he can either cooperate and run the shop or he can defect and steal from the shop. If he cooperates, both of them will earn money. If he steals from the shop, he will make more money while she will lose. 21) Refer to the scenario above. Elly should use ________ to make her decision. A) mixed strategies B) backward induction C) forward induction D) her dominant strategy Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 22) Refer to the scenario above. This is an example of ________. A) an ultimatum game B) the prisoners' dilemma game C) a trust game D) a zero-sum game Answer: C Difficulty: Medium AACSB: Application of Knowledge 23 Copyright © 2022 Pearson Education Ltd.

TopicEntry: The Economics of Trust 23) Refer to the scenario above. Which of the following will happen in this case? A) Neither of them will make any money. B) Only Elly will make money. C) Elly will trust her employee, but her employee will defect. D) Elly will trust her employee, and her employee will cooperate. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Trust 24) Refer to the scenario above. Which of the following is likely to happen if Elly is known to be vengeful? A) Neither of them will make money. B) Only Elly will make money. C) Only Elly's employee will make money. D) Both Elly and her employee will earn money. Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Revenge 25) Refer to the scenario above. Which of the following will hold TRUE if Elly is known to be vengeful? A) A socially efficient outcome will occur. B) Multiple equilibria will occur. C) The outcome will be equitable. D) A socially inefficient equilibrium will occur. Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Revenge

Scenario: Pat and Joe are playing a game. The rules of the game are simple. Pat is given $100. He can either give it to Joe or keep it for himself. If he keeps it for himself, $50 will be taken back, and the remaining will be split between them. If he gives it to Joe, Joe can either divide it into two equal parts or keep it for himself. If he divides it into two equal parts, each of them will get $50. If he does not split the money, he will get the entire amount. 26) Refer to the scenario above. This is similar to ________. A) a tit-for-tat game B) a trust game C) a zero-sum game D) the prisoners' dilemma Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Revenge 27) Refer to the scenario above. Which of the following is likely to be TRUE in equilibrium if Joe is known to be trustworthy? A) Pat and Joe will each receive $25. B) Pat and Joe will each receive $50. C) Pat and Joe will each receive $0. D) Pat will receive $0, and Joe will receive $100. Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Revenge 28) Refer to the scenario above. Suppose Pat can impose a fine of $70 if Joe chooses to keep the money, and the cost to Pat of imposing such a fine is $10. Which of the following is likely to happen if Pat is known to be vengeful? A) Joe will choose to split the money into two parts if Pat gives it to him. B) Joe will choose to keep the entire money for himself if Pat gives it to him. C) Pat will not give the money to Joe. D) A unique equilibrium will not occur. Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: The Economics of Revenge

29) Which of the following is NOT a finding of the study by Halperin, Ho, List, and Muir regarding Uber's apologies for bad service? A) The monetary apologies were more effective the larger they were. B) Negative customer experiences cost Uber millions of dollars of foregone revenue. C) Giving customers with negative experiences money off their next trip was the most effective strategy at getting customers to return. D) Apologizing too often actually led to fewer return customers Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Letting the Podcast Speak: Sorry! I Should Apologize, but How? 18.3 How Others Influence Our Decisions 1) ________ is the process by which organizations imbue society with their ideology or opinion. A) Indoctrination B) Backward induction C) Anchoring D) Sniping Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Where Do Our Preferences Come From? 2) An organic food manufacturing company has launched a campaign against the consumption of inorganic food. This is an example of ________. A) backward induction B) indoctrination C) anchoring D) sniping Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Where Do Our Preferences Come From? 3) An environmental protection agency in Natura has launched a campaign against the use of plastic bags. This is an example of ________. A) backward induction B) indoctrination C) anchoring D) sniping Answer: B Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Where Do Our Preferences Come From? 26 Copyright © 2022 Pearson Education Ltd.

4) A manufacturer of a sugar substitute has launched a campaign against the consumption of sugar. This is an example of ________. A) indoctrination B) backward induction C) anchoring D) sniping Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Where Do Our Preferences Come From? 5) A not-for-profit organization conducts several workshops to prevent drug addiction among teenagers. This is an example of ________. A) indoctrination B) backward induction C) anchoring D) sniping Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Where Do Our Preferences Come From? 6) Economists call the influences of the decisions of others on our decisions ________. A) peer effects B) herd effects C) externalities D) cluster effects Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: The Economics of Peer Effects 7) Beth has moved into a new house. Most people living in her neighborhood go for a jog early in the morning. Although Beth had always been a late riser, she has started getting up early for a jog after moving into her new house. This is an example of ________. A) moral hazard B) adverse selection C) a peer effect D) a negative externality Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Peer Effects

8) John started going to soccer matches after moving in with a roommate who is a huge fan of soccer. This is an example of ________. A) moral hazard B) adverse selection C) a peer effect D) a pecuniary externality Answer: C Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Peer Effects 9) Mark started taking guitar lessons when all his cousins started playing guitar. This is an example of ________. A) a peer effect B) moral hazard C) adverse selection D) a pecuniary externality Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: The Economics of Peer Effects 10) Katie wanted to buy a new car. However, she could not select a model that both suited her needs and was affordable at the same time. She finally decided to buy a Porsche when she learned that two of her colleagues had bought them, despite its price exceeding the money she had saved for her car. Explain her behavior. Answer: In this case, Katie's behavior has been influenced by her peers. Economists call the influence of the decisions of others on our choices "peer effects." Our social surroundings have a significant effect on the decisions that we make daily. Our friends and acquaintances are a major force in shaping both our preferences and the choices we make in life. People tend to gather information from those around them and use this information to decide on their own behavior. Both the characteristics of our peers–their talents and skills–and their choices affect our lives. One possible reason Katie behaves in this manner is that she has learned from her peers that buying a Porsche is a good choice. Another possibility is that the buying decisions of her peers creates social pressure. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: The Economics of Peer Effects

11) ________ occurs when individuals conform to the decisions of others. A) Herding B) Anchoring C) Signaling D) Sniping Answer: A Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Following the Crowd: Herding 12) There are two grocery stores in the new neighborhood that you have moved into. Because you did not know which store is better, you decided to go to the one that is relatively crowded. Your behavior is an example of ________. A) herding B) anchoring C) signaling D) sniping Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding 13) Ron decided to sell a particular stock when he found out that many other people were selling it. This is an example of ________. A) anchoring B) signaling C) sniping D) herding Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding 14) We often choose the school we attend on the basis of how popular it seems to be. Such behavior is an example of ________. A) anchoring B) herding C) signaling D) sniping Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding

15) Voters are often influenced by opinion polls. They end up voting for the party that is likely to win according to the opinion poll. This occurs because of ________. A) anchoring B) herding C) sniping D) signaling Answer: B Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding 16) Hedge funds often buy the same stocks and track one another's investment strategies. This is an example of ________. A) herding B) anchoring C) hedging D) sniping Answer: A Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding 17) ________ creates an informational equilibrium in which people trust the wisdom of others and ignore their own information. A) Anchoring B) Hedging C) Sniping D) Herding Answer: D Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Following the Crowd: Herding 18) During the global financial crisis of 2008, as more people started selling their houses in fear of falling house prices, house prices fell further. This is an example of ________. A) a pecuniary externality B) a positive externality C) an information cascade D) moral hazard Answer: C Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding

19) As more people in a country started hoarding grain in fear of a shortage, a shortage actually occurred. This is an example of ________. A) a positive externality B) an information cascade C) moral hazard D) adverse selection Answer: B Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding 20) An information cascade occurs when ________. A) the buyer of a good has more information than the seller and takes hidden actions B) the seller of a good has more information about the hidden characteristics of the good than the buyer C) people make the same decisions as others without focusing on private information D) people have contradictory information about a good they want to consume Answer: C Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Following the Crowd: Herding 21) A teacher tells her students that she will give them a riddle that each student has to solve separately. Each student has to then announce his or her answer in the class. Those who get the correct answer will get a gift. Kate, a student in the class, decides to give the answer that most students give, although the answer she gets from solving the riddle is quite different. This is an example of ________. A) adverse selection B) moral hazard C) a pecuniary externality D) an information cascade Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding

22) You are on a vacation in a foreign country. Because it is your first visit to the country, you do not know much about the tourist spots. Therefore, you decide to ask the manager of the hotel about popular tourist places. He tells you that there is a waterfall and a beautiful park close to the hotel that you can visit. You are wondering which place to go to when you overhear some of the tourists planning a trek to one of the falls. You decide to join them. This is an example of ________. A) moral hazard B) adverse selection C) a pecuniary externality D) an information cascade Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding 23) John has been trying to find a job for the past 6 months. He went for an interview at Aqua Inc. Although his performance was better than that of all the other candidates, the interviewers rejected him. They thought that they must have missed something about him that other employers noticed, which made them not hire him. This is an example of ________. A) a positive externality B) a negative externality C) moral hazard D) an information cascade Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding 24) Why do individuals decide to herd? Answer: In general, individuals may decide to herd for two reasons. The first might simply be that they are afraid of being wrong–for this reason, they might not value their own instincts highly. The second reason is the assumption that if many people are making the same decision, they must be on to something. Herding creates an informational equilibrium in which people trust the wisdom of others and ignore their own information. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding

25) What role does information cascade play in job interviews? Answer: Information cascade plays an important role in job interviews. An employer may look at a candidate's resume and see that he has been unemployed for some time. Even if the interview goes well and the candidate seems well suited for the job, the employer may weigh the information that the candidate has so far been unsuccessful in finding work as a signal that everyone else thinks this worker is unqualified. The employer may then think that he is missing something important in his evaluation of the worker and may ignore his own positive signals in favor of the information contained in the candidate's unemployment history. He won't offer the interviewee a job, and neither will the next employer. This information cascade prolongs the interviewee's joblessness. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding 26) You are participating in a reality show in which you and several other competitors have been taken to an unknown place and asked to make your way to a destination using a map. You were doing a good job until you reached a crossroad. Confused as to which way to take, you decided to take the road that most of your competitors chose. a) What is the term that is used to refer to such behavior? b) Why do people often behave in this way? Answer: a) The term that is used to refer to such behavior is herding. Herding occurs when individuals conform to the decisions of others. In this case, you have chosen to follow your competitors and conform to their decisions. b) In general, individuals might decide to herd for two reasons. The first may simply be that they are afraid of being wrong, so they might not value their own instincts highly. The second reason is the assumption that if many people are making the same decision, they must be doing so for a good reason. Herding creates an informational equilibrium in which people trust the wisdom of others and ignore their own information. Difficulty: Easy AACSB: Application of Knowledge TopicEntry: Following the Crowd: Herding 27) ________ is a tendency to search for information that reaffirms individuals' own beliefs, thus entrenching them further in their own prejudices. A) Attenuation bias B) Confirmation bias C) Attentional bias D) Negativity bias Answer: B Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Are You an Internet Explorer?

28) Phillip owns some stocks of a pharmaceutical company. Lately he has been anticipating that the company will go bankrupt. He decides to find out more about the company's financial condition before selling the stocks. However, he tends to read only the blogs of investors who are expecting the company to go bankrupt. He soon makes up his mind and sells the stock just before its price reaches an all-time high. Phillips's behavior is an example of ________ bias. A) confirmation B) attentional C) attenuation D) distinction Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Are You an Internet Explorer? 29) Melanie is a reporter. She is writing an article on a certain issue. She, however, has interviewed only those people who have the same opinion as she does on that particular issue. This is an example of ________ bias. A) attenuation B) distinction C) attentional D) confirmation Answer: D Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Are You an Internet Explorer? 30) Stephanie wants to buy a laptop. She has chosen a particular model. However, before ordering it online, she decides to read some of the user reviews provided on the Web site. She overlooks negative feedback by some users and focuses only on positive feedback. This is an example of ________ bias. A) attenuation B) distinction C) attentional D) confirmation Answer: D Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Are You an Internet Explorer?

31) Mr. Smith wants to buy a house in a certain neighborhood that he thinks is ideal for an elderly, single man like himself. However, before buying the house, he consults a friend who lives in the same neighborhood. The information provided by his friend helps him conclude that the neighborhood is most ideal for him. This is an example of ________. A) confirmation bias B) attenuation bias C) attentional bias D) distinction bias Answer: A Difficulty: Hard AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Are You an Internet Explorer? 32) Robert is interviewing a candidate for employment in his company. He believes that the applicant is highly intelligent. Robert only pays attention to information that is consistent with his belief. This is an example of ________. A) confirmation bias B) attentional bias C) attenuation bias D) distinction bias Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Are You an Internet Explorer? 33) An economist is conducting a survey to evaluate a program launched by the government. She ends up collecting data from those households that were adversely affected by the program, reaffirming her own belief that the program has been largely unsuccessful. This is an example of ________. A) confirmation bias B) attentional bias C) attenuation bias D) distinction bias Answer: A Difficulty: Medium AACSB: Application of Knowledge TopicEntry: Choice and Consequence: Are You an Internet Explorer?

34) Since the study of the 2004 election that found that internet users were some of the most balanced media consumers, what has happened that almost certainly means this is no longer TRUE? A) Facebook and other social media sites have exploded in popularity making it easier to create echo chambers where we only consume media we agree with. B) The news media has become less trustworthy. C) More people have begun getting their news from newspapers' websites instead of in print. D) Many local newpapers have gone out of business making it hard for people to access the news. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Are You an Internet Explorer? 35) Which of the following is NOT an example of an information cascade? A) Stores sold out of the Playstation 5 the week it was released. B) People buy Bitcoin because they hear that crypto currency will be the next big thing. C) During the COVID-19 pandemic people were hoarding toilet paper and face masks. D) With a hurricane approaching, stores sell out of water and flashlights. Answer: A Difficulty: Medium AACSB: Analytical Thinking TopicEntry: Following the Crowd: Herding 36) What role do social networking Web sites play in creating confirmation bias among users? Answer: Social networking Web sites have made it easier for users to read about the opinions of like-minded individuals, which reaffirm their own misconceptions. This phenomenon is known as confirmation bias. Difficulty: Easy AACSB: Analytical Thinking TopicEntry: Choice and Consequence: Are You an Internet Explorer?

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