Identify the choice that best completes the statement or answers the question.
16. Which of the following involve a trade-off?
a. Taking a nap
b. All of these answers involve trade-offs.
c. Watching a football game on Saturday afternoon
d. Going to university
e. Buying a new car
ANSWER: B
POINTS: 0 / 1
17. Trade-offs are required because wants are unlimited and resources are
a. economical.
b. unlimited.
c. efficient.
d. marginal.
e. scarce.
ANSWER: E
POINTS: 0 / 1
18. Economics is the study of how
a. society manages its unlimited resources.
b. to reduce our wants until we are satisfied.
c. society manages its scarce resources.
d. to fully satisfy our unlimited wants.
e. to avoid having to make trade-offs.
ANSWER: C
POINTS: 0 / 1
19. A rational person does not act unless
a. the action is ethical.
b. the action produces marginal costs that exceed marginal benefits.
c. the action produces marginal benefits that exceed marginal costs.
d. the action makes money for the person.
e. none of these answers.
ANSWER: C
POINTS: 0 / 1
20. Raising taxes and increasing welfare payments
a. reduces market power.
b. proves that there is such a thing as a free lunch.
c. improves efficiency at the expense of equity.
d. none of these answers
e. improves equity at the expense of efficiency.
ANSWER: E
POINTS: 0 / 1
1
21. Suppose you find €20. If you choose to use the €20 to go to a football match, your opportunity cost
of going to the game is
a. nothing, because you found the money.
b. €20 (because you could have used the €20 to buy other things) plus the value of your time
spent at the game.
c. €20 (because you could have used the €20 to buy other things) plus the value of your time
spent at the game, plus the cost of the dinner you purchased at the game.
d. €20 (because you could have used the €20 to buy other things).
e. none of these answers
ANSWER: B
POINTS: 0 / 1
22. Foreign trade:
a. increases the scarcity of resources.
b. makes a country more equitable.
c. allows a country to have a greater variety of products at a lower cost than if it tried to
produce everything at home.
d. allows a country to avoid trade-offs.
ANSWER: C
POINTS: 0 / 1
23. Since people respond to incentives, we would expect that, if the average salary of accountants
increases by 50% while the average salary of teachers increases by 20%, then
a. fewer students will take degree courses in accounting and more will take education
courses.
b. fewer students will take degree courses in education and more will take accounting
courses.
c. fewer students will attend university.
d. none of these answers.
ANSWER: B
POINTS: 0 / 1
24. Which of the following activities is most likely to produce an externality?
A student:
a. eats a hamburger in the student union.
b. reads a novel for pleasure.
c. sits at home and watches T.V.
d. has a party in her room in the student hall of residence.
ANSWER: D
POINTS: 0 / 1
25. Which of the following products would be least capable of producing an externality?
a. inoculations against disease
2
b.
c.
d.
e.
cigarettes
food
education
hi-fi equipment
ANSWER: C
POINTS: 0 / 1
26. Which of the following situations describes the greatest market power?
a. Subaru’s impact on the price of cars
b. a farmer's impact on the price of corn
c. Microsoft's impact on the price of desktop operating systems
d. a student's impact on college tuition
ANSWER: C
POINTS: 0 / 1
27. Which of the following statements is true about a market economy?
a. With a large enough computer, central planners could guide production more efficiently
than markets.
b. Market participants act as if guided by an invisible hand to produce outcomes that
maximize social welfare.
c. The strength of a market system is that it tends to distribute resources evenly across
consumers.
d. Taxes help prices communicate costs and benefits to producers and consumers.
ANSWER: B
POINTS: 0 / 1
28. Workers in Western Europe enjoy a high standard of living because
a. the countries of Western Europe have set high minimum wage rates.
b. unions in Western Europe keep the wage high.
c. none of these answers.
d. the countries of Western Europe have protected their industries from foreign competition.
e. workers in the United States are highly productive.
ANSWER: E
POINTS: 0 / 1
29. High and persistent inflation is caused by
a. unions increasing wages too much.
b. OPEC raising the price of oil too much.
c. governments increasing the quantity of money too much.
d. regulations raising the cost of production too much.
ANSWER: C
POINTS: 0 / 1
3
30. The Phillips curve shows that
a. the business cycle has been eliminated.
b. an increase in inflation temporarily increases unemployment.
c. inflation and unemployment are unrelated in the short run.
d. a decrease in inflation temporarily increases unemployment.
e. none of these answers.
ANSWER: D
POINTS: 0 / 1
31. An increase in the price of beef provides information which
a. provides no information because prices in a market system are managed by planning
boards.
b. tells consumers to buy less pork.
c. tells producers to produce more beef.
d. tells consumers to buy more beef.
ANSWER: C
POINTS: 0 / 1
32. You are planning to run a hot dog stand during a forthcoming fair. You originally estimated that
you will generate sales revenue of €2000 and you have already spent €1000 building the hot dog
stand. The hot dog stand is nearly completed but now you estimate total sales to be only €800
because the fair clashes with a major music festival in a nearby location. You can complete the hot
dog stand for another €300. Should you complete the hot dog stand? (Assume that there are no
other costs - the hot dogs are costless to you.)
a. There is not enough information to answer this question.
b. Yes.
c. No.
ANSWER: B
POINTS: 0 / 1
33. You are planning to run a hot dog stand during a forthcoming fair. You originally estimated that
you will generate sales revenue of €2000 and you have already spent €1000 building the hot dog
stand. The hot dog stand is nearly completed but now you estimate total sales to be only €800
because the fair clashes with a major music festival in a nearby location. You can complete the hot
dog stand for another €300. Your decision rule should be to complete the hot dog stand as long as
the cost to complete the stand is less than
a. €300
b. €100
c. €500
d. none of these answers.
e. €800
ANSWER: E
POINTS: 0 / 1
34. Which of the following is not part of the opportunity cost of going on holiday?
The money you:
4
a.
b.
c.
d.
spent on a theatre show
could have made if you had stayed at home and worked
spent on airline tickets
spent on another opportunity
ANSWER: D
POINTS: 0 / 1
35. Productivity can be increased by
a. improving the education of workers.
b. raising union wages.
c. raising minimum wages.
d. restricting trade with foreign countries.
ANSWER: A
Multiple Choice – chapter 2
Identify the choice that best completes the statement or answers the question.
1.
A scientific method requires that
a. the scientist be objective.
b. the scientist use precision equipment and technology.
c. only correct theories are tested.
d. only incorrect theories are tested.
e. the scientist use test tubes and have a clean lab.
ANSWER: A
2. Which of the following is most likely to produce scientific evidence about a theory?
a. A lawyer employed by Renault addressing the impact of air bags on passenger
safety.
b. An economist permanently employed at a leading university analysing the impact of
bank regulations on lending to small businesses.
c. An economist employed by the Trades Union Congress doing research on the
impact of trade policy on workers' wages.
d. A radio talk show host collecting data from listeners on how capital markets respond
to taxation.
ANSWER: B
3. Which of the following statements regarding the circular-flow diagram is true?
a. If Susan works for BAe Systems and receives a salary payment, the transaction
takes place in the market for goods and services.
b. If BAe Systems sells a military aircraft, the transaction takes place in the market for
factors of production.
c. None of these answers.
5
d. The factors of production are owned by households.
e. The factors of production are owned by firms.
ANSWER: D
4.
In which of the following cases is the assumption most reasonable?
a. To address the impact of taxes on income distribution, an economist assumes that
everyone earns the same income.
b. To address the impact of money growth on inflation, an economist assumes that
money is strictly coins.
c. To model the benefits of trade, an economist assumes that there are two people and
two goods.
d. To estimate the effect of tax changes on spending, economists assume that 50 per
cent of people are rational and 50 per cent are not.
ANSWER: C
5. Economic models are
a. usually made of wood and plastic.
b. built with assumptions.
c. useless if they are simple.
d. created to duplicate reality.
ANSWER: B
6. Which of the following is not a factor of production?
a. labour
b. land
c. money
d. capital
e. enterprise.
ANSWER: C
7. Points on the production possibilities frontier are
a. inefficient.
b. normative.
c. unattainable.
d. efficient.
e. equitable.
ANSWER: D
8. Which of the following will not shift a country's production possibilities frontier outward?
a. an advance in technology
c. an increase in the capital stock
b. an increase in the labour force
d. a reduction in unemployment
ANSWER: D
10.
9. Economic growth is depicted by a:
a. shift in the production possibilities frontier outward.
b. movement from inside the curve toward the curve.
c. shift in the production possibilities frontier inward.
6
d. movement along a production possibilities frontier toward capital goods.
ANSWER: A
10. Refer to Exhibit 6. If the economy were operating at point E,
a.
b.
c.
d.
the opportunity cost of 20 additional units of eggs is 10 units of bacon.
the opportunity cost of 20 additional units of eggs is 20 units of bacon.
the opportunity cost of 20 additional units of eggs is 30 units of bacon.
20 additional units of eggs can be produced with no impact on bacon production.
ANSWER: D
11. Refer to Exhibit 6. Point F represents a combination of production that:
a. is a more equitable output level of both bacon and eggs
b. can be reached if we reduce the production of eggs by 20 units.
7
c. can be reached if there is a sufficient advance in technology.
d. is inefficient because there are unemployed resources.
ANSWER: C
12. Refer to Exhibit 6. As we move from point A to point D,
a.
b.
c.
d.
e.
the opportunity cost of eggs in terms of bacon falls.
the opportunity cost of eggs in terms of bacon rises.
the opportunity cost of eggs in terms of bacon is constant.
the economy becomes less efficient.
the economy becomes more efficient.
ANSWER: B
13. Which of the following issues is related to microeconomics?
The impact of:
a. oil prices on car production
c. technology on economic growth
b. money on inflation
d. the deficit on saving
ANSWER: A
14. Which of the following statements about microeconomics and macroeconomics is not true?
a. The study of very large industries is a topic within macroeconomics.
b. Macroeconomics is concerned with economy-wide phenomena.
c. Microeconomics is a building block for macroeconomics.
d. Microeconomics and macroeconomics cannot be entirely separated.
ANSWER: A
15. Which of the following statements is normative?
a. Large government deficits cause an economy to grow more slowly.
b. People work harder if the wage is higher.
c. The unemployment rate should be lower.
d. Printing too much money causes inflation.
8
ANSWER: C
16. In making which of the following statements is an economist acting more like a scientist?
a. A reduction in unemployment benefits will reduce the unemployment rate.
b. The rate of inflation should be reduced because it robs the elderly of their savings.
c. The unemployment rate should be reduced because unemployment robs individuals
of their dignity.
d. The state should increase subsidies to universities because the future of our country
depends on education.
ANSWER: A
17. Positive statements are
a. macroeconomic.
b. microeconomic.
c. statements of description that can be tested.
d. statements of prescription that involve value judgments.
ANSWER: C
18. Suppose two economists are arguing about policies that deal with unemployment. One
economist says, "The government should fight unemployment because it is the greatest
social evil." The other economist responds, "Nonsense! Inflation is the greatest social evil."
These economists
a. really don't disagree at all. It just appears that they disagree.
b. disagree because they have different values.
c. none of these answers
d. disagree because they have different scientific judgments.
ANSWER: B
19. Suppose two economists are arguing about policies that deal with unemployment. One
economist says, "The government could lower unemployment by one percentage point if it
would just increase government spending by 50 billion euro." The other economist responds,
"Nonsense! If the government spent an additional 50 billion euro, it would reduce
unemployment by only one tenth of one percent, and that effect would only be temporary!"
These economists
a. represent different schools of thought
b. disagree because they have different scientific judgments.
c. really don't disagree at all. It just appears that they disagree.
d. disagree because they have different beliefs.
ANSWER: B
Multiple Choice – Chapter 4
Identify the choice that best completes the statement or answers the question.
9
16. A perfectly competitive market has
a. firms that set their own prices.
b. only one seller.
c. at least a few sellers.
d. many buyers and sellers.
e. a few dominant sellers
ANSWER: D
POINTS: 0 / 1
17. If an increase in the price of blue jeans leads to an increase in the demand for
board shorts, then blue jeans and board shorts are likely to be
a. complements.
b. inferior goods.
c. normal goods.
d. negatively related
e. substitutes.
ANSWER: E
POINTS: 0 / 1
18. The law of demand states that an increase in the price of a good
a. increases the supply of that good.
b. decreases the quantity demanded for that good.
c. decreases the demand for that good.
d. increases the quantity supplied of that good.
e. is caused by a shift in demand
ANSWER: B
POINTS: 0 / 1
19. The law of supply states that an increase in the price of a good
a. is negatively related to a shift in supply
b. decreases the quantity demanded for that good.
c. increases the supply of that good.
d. decreases the demand for that good.
e. increases the quantity supplied of that good.
ANSWER: D
POINTS: 0 / 1
20. If an increase in consumer incomes leads to a decrease in the demand for camping equipment,
then camping equipment is
a. a normal good.
b. a Giffen good
c. an inferior good.
d. a substitute good.
e. a complementary good.
ANSWER: C
10
POINTS: 0 / 1
21. A monopoly market has
a. many buyers and sellers.
b. one buyer and one seller
c. firms that are price takers.
d. only one seller.
e. at least a few sellers.
ANSWER: D
POINTS: 0 / 1
22. Which of the following shifts the demand for watches to the right?
a. an increase in the price of watches
b. a change in the cost of producing watches
c. a decrease in the price of watch batteries if watch batteries and watches are
complements
d. a decrease in consumer incomes if watches are a normal good
e. a decrease in the price of watches
ANSWER: C
POINTS: 0 / 1
23. All of the following shift the supply of watches to the right except
a. an advance in the technology used to manufacture watches.
b. an increase in the price of watches.
c. a fall in the cost of metals used in watch production
d. a decrease in the wage of workers employed to manufacture watches.
e. manufacturers' expectation of lower watch prices in the future.
ANSWER: B
POINTS: 0 / 1
24. If the price of a good is above the equilibrium price,
a. there is a surplus and the price will rise.
b. there is a shortage and the price will fall.
c. there is a shortage and the price will rise.
d. the quantity demanded is equal to the quantity supplied and the price remains
unchanged.
e. there is a surplus and the price will fall.
ANSWER: E
POINTS: 0 / 1
25. If the price of a good is below the equilibrium price,
a. there is a shortage and the price will rise.
b. the quantity demanded is equal to the quantity supplied and the price remains
unchanged.
c. there is a shortage and the price will fall.
d. there is a surplus and the price will rise.
e. there is a surplus and the price will fall.
11
ANSWER: A
POINTS: 0 / 1
26. If the price of a good is equal to the equilibrium price,
a. there is a shortage and the price will fall.
b. the quantity demanded is equal to the quantity supplied and the price remains
unchanged.
c. there is a surplus and the price will rise.
d. there is a shortage and the price will rise.
e. there is a surplus and the price will fall.
ANSWER: B
POINTS: 0 / 1
27. An increase (rightward shift) in the demand for a good will tend to cause
a. an increase in the equilibrium price and quantity.
b. a fall in quantity supplied
c. an increase in the equilibrium price and a decrease in the equilibrium quantity.
d. a decrease in the equilibrium price and an increase in the equilibrium quantity.
e. a decrease in the equilibrium price and quantity.
ANSWER: A
POINTS: 0 / 1
28. A decrease (leftward shift) in the supply for a good will tend to cause
a. an increase in the equilibrium price and quantity.
b. a decrease in the equilibrium price and an increase in the equilibrium quantity.
c. a shift in the demand curve to the left
d. a decrease in the equilibrium price and quantity.
e. an increase in the equilibrium price and a decrease in the equilibrium quantity.
ANSWER: E
POINTS: 0 / 1
29. Suppose there is an increase in both the supply and demand for personal computers. In the
market for personal computers, we would expect
a. the equilibrium quantity to rise and the equilibrium price to rise.
b. the equilibrium quantity to rise and the equilibrium price to fall.
c. the equilibrium quantity to rise and the equilibrium price to remain constant.
d. the change in the equilibrium quantity to be ambiguous and the equilibrium price to
rise.
e. the equilibrium quantity to rise and the change in the equilibrium price to be
ambiguous.
ANSWER: E
POINTS: 0 / 1
30. Suppose there is an increase in both the supply and demand for personal computers. Further,
suppose the supply of personal computers increases more than demand for personal
computers. In the market for personal computers, we would expect
12
a. the change in the equilibrium quantity to be ambiguous and the equilibrium price to
fall.
b. the equilibrium quantity to rise and the equilibrium price to rise.
c. the equilibrium quantity to rise and the change in the equilibrium price to be
ambiguous.
d. the equilibrium quantity to rise and the equilibrium price to fall.
e. the equilibrium quantity to rise and the equilibrium price to remain constant.
ANSWER: D
POINTS: 0 / 1
31. Which of the following statements is true about the impact of an increase in the price of
lettuce?
a. Both the demand for lettuce will decrease and the equilibrium price and quantity of
salad dressing will fall.
b. The supply of lettuce will decrease.
c. The demand for lettuce will decrease.
d. The equilibrium price and quantity of salad dressing will fall.
e. The equilibrium price and quantity of salad dressing will rise.
ANSWER: D
POINTS: 0 / 1
32. Suppose a frost destroys much of the Florida orange crop. At the same time, suppose
consumer tastes shift toward orange juice. What would we expect to happen to the equilibrium
price and quantity in the market for orange juice?
a. Price will decrease; quantity is ambiguous.
b. The impact on both price and quantity is ambiguous.
c. Price will increase; quantity will increase.
d. Price will increase; quantity will decrease.
e. Price will increase; quantity is ambiguous.
ANSWER: E
POINTS: 0 / 1
33. Suppose consumer tastes shift toward the consumption of apples. Which of the following
statements is an accurate description of the impact of this event on the market for apples?
a. There is an increase in the quantity demanded of apples and in the supply for apples.
b. There is an increase in the demand and supply of apples.
c. There is an increase in the demand for apples and a decrease in the supply of apples.
d. There is a decrease in the quantity demanded of apples and an increase in the supply
for apples.
e. There is an increase in the demand for apples and an increase in the quantity supplied
of apples.
ANSWER: E
POINTS: 0 / 1
34. Suppose both buyers and sellers of wheat expect the price of wheat to rise in the near future.
What would we expect to happen to the equilibrium price and quantity in the market for wheat
today?
13
a.
b.
c.
d.
e.
The impact on both price and quantity is ambiguous.
Price will decrease; quantity is ambiguous.
Price will increase; quantity will decrease.
Price will increase; quantity is ambiguous.
Price will increase; quantity will increase.
ANSWER: D
POINTS: 0 / 1
35. An inferior good is one for which an increase in income causes a(n)
a. decrease in supply.
c. increase in supply.
b. increase in demand.
d. decrease in demand.
ANSWER: D
POINTS: 0 / 1
Multiple Choice – Chapter 5
Identify the choice that best completes the statement or answers the question.
16. If a small percentage increase in the price of a good greatly reduces the quantity demanded for
that good, the demand for that good is
a. income inelastic.
b. price inelastic.
c. price elastic.
d. unit price elastic.
e. income elastic.
ANSWER: C
POINTS: 0 / 1
17. The price elasticity of demand is defined as
a. the percentage change in the quantity demanded divided by the percentage change in
income.
b. the percentage change in income divided by the percentage change in the quantity
demanded.
c. the percentage change in the quantity demanded of a good divided by the percentage
change in the price of that good.
d. the percentage change in the price of a good multiplied by the inverse of the
percentage change in demand
e. the percentage change in price of a good divided by the percentage change in the
quantity demanded of that good.
ANSWER: C
POINTS: 0 / 1
18. In general, a flatter demand curve is more likely to be
a. price elastic.
c. income elastic
14
b. unit price elastic.
d. price inelastic.
ANSWER: A
POINTS: 0 / 1
19. In general, a steeper supply curve is more likely to be
a. price elastic.
c. unit price elastic.
b. perfectly inelastic
d. price inelastic.
ANSWER: D
POINTS: 0 / 1
20. Which of the following would cause a demand curve for a good to be price inelastic?
a. The good is a luxury.
b. There are a great number of substitutes for the good.
c. The good is a necessity.
d. The good is an inferior good.
ANSWER: C
POINTS: 0 / 1
21. The demand for which of the following is likely to be the most price inelastic?
a. transportation
c. bus tickets
b. taxi rides
d. airline tickets
ANSWER: A
POINTS: 0 / 1
22. If the cross-price elasticity between two goods is negative, the two goods are likely to be
a. substitutes.
c. necessities.
b. complements.
d. luxuries.
ANSWER: B
POINTS: 0 / 1
23. If a supply curve for a good is price elastic, then
a. the quantity supplied is sensitive to changes in the price of that good.
b. the quantity demanded is insensitive to changes in the price of that good.
c. the quantity demanded is sensitive to changes in the price of that good.
d. the quantity supplied is insensitive to changes in the price of that good.
ANSWER: A
POINTS: 0 / 1
24. If a fisherman must sell all of his daily catch before it spoils for whatever price he is offered,
once the fish are caught the fisherman's price elasticity of supply for fresh fish is
a. zero.
b. infinite.
c. one.
d. unable to be determined from this information.
15
ANSWER: A
POINTS: 0 / 1
25. A decrease in supply (shift to the left) will increase total revenue in that market if
a. demand is price inelastic.
c. supply is price inelastic.
b. supply is price elastic.
d. demand is price elastic.
ANSWER: A
POINTS: 0 / 1
26. If an increase in the price of a good has no impact on the total revenue in that market, demand
must be
a. perfectly elastic
c. unit price elastic.
b. price inelastic.
d. price elastic.
ANSWER: C
POINTS: 0 / 1
27. If consumers always spend 15 percent of their income on food, then the income elasticity of
demand for food is
a. 1.50.
b. 1.15.
c. 15
d. 0.15.
e. 1.00.
ANSWER: E
POINTS: 0 / 1
28. Technological improvements in agriculture that shift the supply of agricultural commodities to
the right tend to
a. increase total revenue to farmers as a whole because the demand for food is elastic.
b. increase total revenue to farmers as a whole because the demand for food is inelastic.
c. reduce total revenue to farmers as a whole because the demand for food is elastic.
d. reduce total revenue to farmers as a whole because the demand for food is inelastic.
ANSWER: D
POINTS: 0 / 1
29. If supply is price inelastic, the value of the price elasticity of supply must be
a. infinite.
b. zero.
c. less than 1.
d. unity
e. greater than 1.
ANSWER: C
POINTS: 0 / 1
30. If there is excess capacity in a production facility, it is likely that the firm's supply curve is
a. price inelastic.
c. unit price elastic.
16
b. perfectly inelastic
d. price elastic.
ANSWER: D
POINTS: 0 / 1
31. Suppose that at a price of €30 per month, there are 30,000 subscribers to cable television in
Small Town. If Small Town Cablevision raises its price to €40 per month, the number of
subscribers will fall to 20,000. Using the midpoint method for calculating the elasticity, what
is the price elasticity of demand for cable TV in Small Town?
a. 1.4
b. 0.66
c. 0.75
d. 2.0
e. 1.0
ANSWER: A
POINTS: 0 / 1
32. Suppose that at a price of €30 per month, there are 30,000 subscribers to cable television in
Small Town. If Small Town Cablevision raises its price to €40 per month, the number of
subscribers will fall to 20,000. At which of the following prices does Small Town Cablevision
earn the greatest total revenue?
a. €0 per month
b. €30 per month
c. €40 per month
d. Either €30 or €40 per month because the price elasticity of demand is 1.0.
ANSWER: B
POINTS: 0 / 1
33. If demand is linear (a straight line), then price elasticity of demand is
a. elastic in the upper portion and inelastic in the lower portion.
b. inelastic in the upper portion and elastic in the lower portion.
c. inelastic throughout.
d. constant along the demand curve.
e. elastic throughout.
ANSWER: A
POINTS: 0 / 1
34. If the income elasticity of demand for a good is negative, it must be
a. an elastic good.
c. a normal good.
b. an inferior good.
d. a luxury good.
ANSWER: B
POINTS: 0 / 1
35. If consumers think that there are very few substitutes for a good, then
a. supply would tend to be price elastic.
b. none of these answers.
c. demand would tend to be price inelastic.
17
d. demand would tend to be price elastic.
e. supply would tend to be price inelastic.
ANSWER: C
POINTS: 0 / 1
Multiple Choice – Chapter 7
Identify the choice that best completes the statement or answers the question.
16. Consumer surplus is the area
a. below the demand curve and above the price.
b. above the supply curve and below the price.
c. above the demand curve and below the price.
d. below the supply curve and above the price.
e. below the demand curve and above the supply curve.
ANSWER: A
POINTS: 0 / 1
17. A buyer's willingness to pay is that buyer's
a. minimum amount they are willing to pay for a good.
b. producer surplus.
c. consumer surplus.
d. maximum amount they are willing to pay for a good.
e. estimation of the cost of production
ANSWER: D
POINTS: 0 / 1
18. If a buyer's willingness to pay for a new Honda is €20,000 and she is able to actually buy
it for €18,000, her consumer surplus is
a. €0.
b. €2,000.
c. €18,000.
d. €20,000.
e. €38,000.
ANSWER: B
POINTS: 0 / 1
19. An increase in the price of a good along a stationary demand curve
a. improves the material welfare of the buyers.
b. decreases consumer surplus.
c. improves market efficiency.
d. increases consumer surplus.
ANSWER: B
18
POINTS: 0 / 1
20. Suppose there are three identical vases available to be purchased. Buyer 1 is willing to
pay €30 for one, buyer 2 is willing to pay €25 for one, and buyer 3 is willing to pay €20
for one. If the price is €25, how many vases will be sold and what is the value of
consumer surplus in this market?
a. Three vases will be sold and consumer surplus is €80.
b. One vase will be sold and consumer surplus is €5.
c. One vase will be sold and consumer surplus is €30.
d. Three vases will be sold and consumer surplus is €0.
e. Two vases will be sold and consumer surplus is €5.
ANSWER: E
POINTS: 0 / 1
21. Producer surplus is the area
a. below the supply curve and above the price.
b. below the demand curve and above the supply curve.
c. below the demand curve and above the price.
d. above the demand curve and below the price.
e. above the supply curve and below the price.
ANSWER: E
POINTS: 0 / 1
22. If a benevolent social planner chooses to produce less than the equilibrium quantity of a
good, then
a. total surplus is maximized.
b. the value placed on the last unit of production by buyers exceeds the cost of
production.
c. producer surplus is maximized.
d. the cost of production on the last unit produced exceeds the value placed on it by
buyers.
e. consumer surplus is maximized.
ANSWER: B
POINTS: 0 / 1
23. If a benevolent social planner chooses to produce more than the equilibrium quantity of a
good, then
a. the value placed on the last unit of production by buyers exceeds the cost of
production.
b. the cost of production on the last unit produced exceeds the value placed on it by
buyers.
c. consumer surplus is maximized.
d. total surplus is maximized.
e. producer surplus is maximized.
ANSWER: B
POINTS: 0 / 1
19
24. The seller's cost of production is
a. the proportion of total cost allocated to profit
b. the minimum amount the seller is willing to accept for a good.
c. the seller's producer surplus.
d. the maximum amount the seller is willing to accept for a good.
e. the seller's consumer surplus.
ANSWER: B
POINTS: 0 / 1
25. Total surplus is the area
a. above the supply curve and below the price.
b. below the demand curve and above the price.
c. below the demand curve and above the supply curve.
d. below the supply curve and above the price.
e. above the demand curve and below the price.
ANSWER: C
POINTS: 0 / 1
26. An increase in the price of a good along a stationary supply curve
a. increases producer surplus.
b. does all of the things described in these answers.
c. decreases producer surplus.
d. improves market equity.
ANSWER: A
POINTS: 0 / 1
27. Adam Smith's "invisible hand" concept suggests that a competitive market outcome
a. maximizes total surplus.
b. generates equality among the members of society.
c. minimizes total surplus.
d. both maximizes total surplus and generates equality among the members of
society.
ANSWER: A
POINTS: 0 / 1
28. In general, if a benevolent social planner wanted to maximize the total benefits received
by buyers and sellers in a market, the planner should
a. choose a price below the market equilibrium price.
b. allow the market to seek equilibrium on its own.
c. choose any price the planner wants because the losses to the sellers (buyers) from
any change in price are exactly offset by the gains to the buyers (sellers).
d. choose a price above the market equilibrium price.
ANSWER: B
POINTS: 0 / 1
20
29. If buyers are rational and there is no market failure,
a. free market solutions are efficient.
b. free market solutions maximize total surplus.
c. all of these answers.
d. free market solutions are equitable.
e. free market solutions are efficient and free market solutions maximize total
surplus.
ANSWER: E
POINTS: 0 / 1
30. If a producer has market power (can influence the price of the product in the market) then
free market solutions
a. are equitable.
c. maximize consumer surplus.
b. are efficient.
d. are inefficient.
ANSWER: D
POINTS: 0 / 1
31. If a market is efficient, then
a. the market allocates buyers to the sellers who can produce the good at least cost.
b. all of these answers.
c. none of these answers.
d. the quantity produced in the market maximizes the sum of consumer and producer
surplus.
e. the market allocates output to the buyers that value it the most.
ANSWER: B
POINTS: 0 / 1
32. If a market generates a side effect or externality, then such market solutions
a. maximize producer surplus.
c. are inefficient.
b. are efficient.
d. are equitable.
ANSWER: C
POINTS: 0 / 1
33. Medical care clearly enhances people’s lives. Therefore, we should consume medical care
until
a. everyone has as much as they would like.
b. the benefit buyers place on medical care is equal to the cost of producing it.
c. buyers receive no benefit from another unit of medical care.
d. we are forced to cut back on the consumption of other goods.
ANSWER: B
34. Rainer has ten pairs of football boots and Helene has none. A pair of football boots costs
€50 to produce. If Rainer values an additional pair of boots at €100 and Helene values a
pair of boots at €40, then to maximize
a. efficiency Helene should receive the boots.
b. efficiency Rainer should receive the boots.
21
c. equity, Rainer should receive the boots.
d. consumer surplus both should receive a boots.
ANSWER: B
35. Suppose that the price of a new bicycle is €300. Natalie values a new bicycle at €400. It
costs €200 for the seller to produce the new bicycle. What is the value of total surplus if
Natalie buys a new bike?
a. €500
b. €300
c. €200
d. €400
e. €100
ANSWER: C
Multiple Choice – Chapter 8
Identify the choice that best completes the statement or answers the question.
16. Refer to Exhibit 4. If there is no tax placed on the product in this market, consumer
surplus is the
a.
b.
c.
d.
e.
Area C + D + F
Area A
Area A + B + E
Area D + C + B
Area A + B + C
ANSWER: C
17. Refer to Exhibit 4. If there is no tax placed on the product in this market, producer surplus
is the
22
a. Area A + B + E
b. Area D
c. Area C + F
d. Area A + B + C + D
e. Area C + D + F
ANSWER: E
E
18. Refer to Exhibit 4. If a tax is placed on the product in this market, consumer surplus is the
a.
b.
c.
d.
e.
Area D
Area A
Area A + B + E
Area A + B + C + D
Area A + B
ANSWER: B
19. Refer to Exhibit 4. If a tax is placed on the product in this market, producer surplus is the
23
a.
b.
c.
d.
e.
Area A + B + E
Area A + B + C + D
Area A
Area D
Area C + D + F
ANSWER: D
20. Refer to Exhibit 4. If a tax is placed on the product in this market, tax revenue paid by the
buyers is the
a.
b.
c.
d.
e.
Area B + C + E + F
Area B
Area B + C
Area A
Area C
ANSWER: B
21. Refer to Exhibit 4. If a tax is placed on the product in this market, tax revenue paid by the
sellers is the
24
a.
b.
c.
d.
e.
Area C + F
Area A
Area B
Area B + C + E + F
Area C
ANSWER: E
22. Refer to Exhibit 4. If there is no tax placed on the product in this market, total surplus is
the
a.
b.
c.
d.
e.
Area B + C + E + F
Area E + F
Area A + B + C + D
Area A + B + C + D + E + F
Area A + D + E + F
ANSWER: D
23. Refer to Exhibit 4. If a tax is placed on the product in this market, total surplus is the
25
a.
b.
c.
d.
e.
Area A + B + C + D + E + F
Area A + B + C + D
Area A + D
Area B + C + E + F
Area E + F
ANSWER: B
POINTS: 0 / 1
24. Refer to Exhibit 4. If a tax is placed on the product in this market, deadweight loss is the
a.
b.
c.
d.
e.
Area B + C + E + F
Area E + F
Area B + C
Area A + B + C + D
Area A + D
ANSWER: B
25. Refer to Exhibit 4. Which of the following is true with regard to the burden of the tax in
Exhibit 4?
26
a. The buyers pay a larger portion of the tax because demand is more inelastic than
supply.
b. The sellers pay a larger portion of the tax because supply is more elastic than
demand.
c. The buyers pay a larger portion of the tax because demand is more elastic than
supply.
d. The sellers pay a larger portion of the tax because supply is more inelastic than
demand.
ANSWER: D
26. Which of the following would likely cause the greatest deadweight loss?
a. a tax on salt
c. a tax on petrol
b. a tax on cigarettes
d. a tax on cruise line tickets
ANSWER: D
27. A tax on petrol is likely to
a. generate a deadweight loss that is unaffected by the time period over which it is
measured.
b. cause a greater deadweight loss in the long run when compared to the short run.
c. not generate any deadweight loss because petrol is a necessity
d. cause a greater deadweight loss in the short run when compared to the long run.
ANSWER: B
28. Deadweight loss is greatest when
a. supply is elastic and demand is perfectly inelastic.
b. demand is elastic and supply is perfectly inelastic.
c. both supply and demand are relatively inelastic.
d. both supply and demand are relatively elastic.
ANSWER: D
29. Since the supply of undeveloped land is relatively inelastic, a tax on undeveloped land
would generate
a. a small deadweight loss and the burden of the tax would fall on the renter.
b. a large deadweight loss and the burden of the tax would fall on the landlord.
27
c. a large deadweight loss and the burden of the tax would fall on the renter.
d. a small deadweight loss and the burden of the tax would fall on the landlord.
ANSWER: D
30. Which of the following is true with regard to a tax on labour income? Taxes on labour
income tend to encourage
a. the unscrupulous to enter the underground economy.
b. the elderly to retire early.
c. all of the things described in these answers.
d. second earners to stay home.
e. workers to work fewer hours.
ANSWER: C
31. When a tax on a good starts small and is gradually increased, tax revenue will
a. fall.
b. rise.
c. first rise and then fall.
d. first fall and then rise.
e. not change at all
ANSWER: C
32. The graph that shows the relationship between the size of a tax and the tax revenue
collected by the government is known as a
a. Friedman conjecture
b. Reagan curve.
c. Keynesian curve.
d. Laffer curve.
e. Chicago school curve.
ANSWER: D
33. If a tax on a good is doubled, the deadweight loss from the tax
a. doubles.
c. increases by a factor of four.
b. stays the same.
d. could rise or fall.
ANSWER: C
34. The reduction of a tax
a. will have no impact on tax revenue.
b. will always reduce tax revenue regardless of the prior size of the tax.
c. could increase tax revenue if the tax had been extremely high.
d. causes a market to become less efficient.
ANSWER: C
35. When a tax distorts incentives to buyers and sellers so that fewer goods are produced and
sold than otherwise, the tax has
a. caused a deadweight loss.
c. generated no tax revenue.
28
b. decreased equity.
d. increased efficiency.
ANSWER: A
Multiple Choice – Chapter 10
Identify the choice that best completes the statement or answers the question.
16. An externality is
a. the benefit that accrues to the buyer in a market.
b. the cost that accrues to the seller in a market.
c. the unanticipated effect on a business of a decision that it makes
d. the compensation paid to a firm's external consultants.
e. the uncompensated impact of one person's actions on the well-being of a bystander.
ANSWER: E
POINTS: 0 / 1
17. A negative externality generates
a. a social cost curve that is above the supply curve (private cost curve) for a good.
b. a value to a consumer that is less than the total consumer surplus
c. a social cost curve that is below the supply curve (private cost curve) for a good.
d. a social value curve that is above the demand curve (private value curve) for a good.
ANSWER: A
POINTS: 0 / 1
18. A positive externality generates
a. a social cost curve that is above the supply curve (private cost curve) for a good.
b. a benefit to suppliers that is greater than the value of producer surplus
c. a social value curve that is above the demand curve (private value curve) for a good.
d. a social value curve that is below the demand curve (private value curve) for a good.
ANSWER: C
POINTS: 0 / 1
19. A negative externality (that has not been internalized) causes the
a. optimal quantity to exceed the equilibrium quantity.
b. equilibrium quantity to be either above or below the optimal quantity.
c. equilibrium quantity to equal the optimal quantity.
d. equilibrium quantity to exceed the optimal quantity.
ANSWER: D
POINTS: 0 / 1
20. A positive externality (that has not been internalized) causes the
a. equilibrium quantity to exceed the optimal quantity.
b. equilibrium quantity to equal the optimal quantity.
c. optimal quantity to exceed the equilibrium quantity.
d. equilibrium quantity to be either above or below the optimal quantity.
29
ANSWER: C
POINTS: 0 / 1
21. To internalize a negative externality, an appropriate public policy response would be to
a. have the government take over the production of the good causing the externality.
b. ban the production of all goods creating negative externalities.
c. tax the good.
d. subsidize the good.
ANSWER: C
POINTS: 0 / 1
22. The government engages in a technology policy
a. by allocating tradable technology permits to high technology industry.
b. to internalize the positive externality associated with technology-enhancing
industries.
c. to help stimulate private solutions to the technology externality.
d. to internalize the negative externality associated with industrial pollution.
ANSWER: B
POINTS: 0 / 1
23. When an individual buys a car in a congested urban area, it generates
a. a positive externality.
c. an efficient market outcome.
b. a positive technology spillover.
d. a negative externality.
ANSWER: D
POINTS: 0 / 1
24. The most efficient pollution control system would ensure that
a. the regulators decide how much each polluter should reduce its pollution.
b. no pollution of the environment is tolerated.
c. each polluter reduce its pollution an equal amount.
d. the polluters with the lowest cost of reducing pollution reduce their pollution the
greatest amount.
ANSWER: D
POINTS: 0 / 1
25. According to the Coase theorem, private parties can solve the problem of externalities if
a. there are no transaction costs.
b. each affected party has equal power in the negotiations.
c. the party affected by the externality has the initial property right to be left alone.
d. there are a large number of affected parties.
e. the government requires them to negotiate with each other.
ANSWER: A
POINTS: 0 / 1
26. To internalize a positive externality, an appropriate public policy response would be to
a. ban the good creating the externality.
30
b. tax the good.
c. subsidize the good.
d. have the government produce the good until the value of an additional unit is zero.
ANSWER: C
POINTS: 0 / 1
27. Which of the following is not considered a transaction cost incurred by parties in the process
of contracting to eliminate a pollution externality?
a. costs incurred due to lawyers fees
b. costs incurred to reduce the pollution
c. costs incurred to enforce the agreement
d. costs incurred due to a large number of parties affected by the externality
e. All of these answers are considered transaction costs.
ANSWER: B
POINTS: 0 / 1
28. Roberto and Thomas live in a university hall of residence. Roberto values playing loud
music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the
following statements is true?
a. It is efficient for Roberto to stop playing loud music regardless of who has the
property right to the level of sound.
b. It is efficient for Roberto to continue to play loud music.
c. It is efficient for Roberto to stop playing loud music only if Thomas has the
property right to peace and quiet.
d. It is efficient for Roberto to stop playing loud music only if Roberto has the
property right to play loud music.
ANSWER: A
POINTS: 0 / 1
29. Roberto and Thomas live in a university hall of residence. Roberto values playing loud
music at a value of €100. Thomas values peace and quiet at a value of €150. Which of the
following statements is true about an efficient solution to this externality problem if Roberto
has the right to play loud music and if there are no transaction costs?
a. Thomas will pay Roberto between €100 and €150 and Roberto will continue to play
loud music.
b. Roberto will pay Thomas €150 and Roberto will continue to play loud music.
c. Thomas will pay Roberto between €100 and €150 and Roberto will stop playing
loud music.
d. Roberto will pay Thomas €100 and Roberto will stop playing loud music.
ANSWER: C
POINTS: 0 / 1
30. Which of the following is true regarding tradable pollution permits and Pigovian taxes?
a. Pigovian taxes shift the demand curve for the pollution to the left and so lead to a
more efficient market solution.
b. Pigovian taxes and tradable pollution permits create an efficient market for
pollution.
31
c. Tradable pollution permits efficiently reduce pollution only if they are initially
distributed to the firms that can reduce pollution at the lowest cost.
d. To set the quantity of pollution with tradable pollution permits, the regulator must
know everything about the demand for pollution rights.
e. Pigovian taxes are more likely to reduce pollution to a targeted amount than tradable
pollution permits.
ANSWER: B
31. The gas-guzzler tax that is placed on new vehicles that are very fuel inefficient is an
example of
a. a tradable pollution permit.
b. an attempt to internalize a positive externality.
c. an application of the Coase theorem.
d. an attempt to internalize a negative externality.
ANSWER: D
32. A Pigovian tax on pollution
a. sets the quantity of pollution.
b. reduces the incentive for technological innovations to further reduce pollution.
c. sets the price of pollution.
d. determines the demand for pollution rights.
ANSWER: C
33. Tradable pollution permits
a. reduce the incentive for technological innovations to further reduce pollution.
b. set the price of pollution.
c. determine the demand for pollution rights.
d. set the quantity of pollution.
ANSWER: D
34. When wealthy alumni provide charitable contributions to their universities to reduce the
tuition payments of current students, it is an example of
a. an attempt to internalize a positive externality.
b. an attempt to internalize a negative externality.
c. a Pigovian tax.
d. a command-and-control policy.
ANSWER: A
35. Suppose an industry emits a negative externality such as pollution and the possible methods
to internalize the externality are command-and-control policies, Pigovian taxes, and tradable
pollution permits. If economists were to rank these methods for internalizing a negative
externality based on efficiency, ease of implementation, and the incentive for the industry to
further reduce pollution in the future, they would probably rank them in the following order
(from most favoured to least favoured):
a. Pigovian taxes, command-and-control policies, tradable pollution permits.
b. tradable pollution permits, Pigovian taxes, command-and-control policies.
c. tradable pollution permits, command-and-control policies, Pigovian taxes.
32
d. command-and-control policies, tradable pollution permits, Pigovian taxes.
e. They would all rank equally high because the same result can be obtained from any
one of the policies.
ANSWER: B
Multiple Choice – Chapter 11
Identify the choice that best completes the statement or answers the question.
16. If one person's consumption of a good diminishes other people's use of the good, the good is
said to be
a. rival.
c. a common resource.
b. a good produced by a natural monopoly. d. excludable.
ANSWER: A
POINTS: 0 / 1
17. A public good is
a. neither rival nor excludable.
b. rival but not excludable.
c. both rival and excludable.
d. not rival but excludable.
ANSWER: A
POINTS: 0 / 1
18. A private good is
a. rival but not excludable.
b. not rival but excludable.
c. both rival and excludable.
d. neither rival nor excludable.
ANSWER: C
POINTS: 0 / 1
19. A good produced by a natural monopoly is
a. rival but not excludable.
c. not rival but excludable.
b. neither rival nor excludable.
d. both rival and excludable.
ANSWER: C
POINTS: 0 / 1
20. A common resource is
a. not rival but excludable.
b. both rival and excludable.
c. rival but not excludable.
d. neither rival nor excludable.
ANSWER: C
POINTS: 0 / 1
21. Public goods are difficult for a private market to provide due to
a. the rivalness problem.
c. the Tragedy of the Commons.
b. the public goods problem.
d. the free-rider problem.
33
ANSWER: D
POINTS: 0 / 1
22. Suppose each of 20 neighbours on a street values street repairs at €3,000. The cost of the street
repair is €40,000. Which of the following statements is true?
a. It is efficient for the government to tax the residents €2,000 each and repair the road.
b. It is efficient for each neighbour to pay €3,000 to repair the section of street in front of
his/her home.
c. None of these answers are true.
d. It is not efficient to have the street repaired.
ANSWER: A
POINTS: 0 / 1
23. A free rider is a person who
a. receives the benefit of a good but avoids paying for it.
b. pays for a good but fails to receive any benefit from the good.
c. fails to produce goods but is allowed to consume goods.
d. produces a good but fails to receive payment for the good.
ANSWER: A
POINTS: 0 / 1
24. Which of the following is an example of a public good?
a. hot dogs at a picnic
c. national defence
b. whales in the ocean
d. apples on a tree in a public park
ANSWER: C
POINTS: 0 / 1
25. A positive externality affects market efficiency in a manner similar to a
a. rival good.
c. private good.
b. public good.
d. common resource.
ANSWER: B
POINTS: 0 / 1
26. Suppose that requiring motorcycle riders to wear helmets reduces the probability of a
motorcycle fatality from 0.3 percent to 0.2 percent over the lifetime of a motorcycle rider and
that the cost of a lifetime supply of helmets is €500. It is efficient for the government to
require riders to wear helmets if human life is valued at
a. €100 or more.
b. €150 or more
c. €500 or more.
d. €50,000 or more.
e. €500,000 or more.
ANSWER: E
POINTS: 0 / 1
34
27. A negative externality affects market efficiency in a manner similar to
a. an excludable good.
c. a common resource.
b. a private good.
d. a public good.
ANSWER: C
POINTS: 0 / 1
28. When governments employ cost-benefit analysis to help them decide whether to provide a
public good, measuring benefits is difficult because
a. there are no benefits to the public since a public good is not excludable.
b. the benefits are infinite because a public good is not rival and an infinite amount of
people can consume it at the same time.
c. one can never place a value on human life or the environment.
d. respondents to questionnaires have little incentive to tell the truth.
ANSWER: D
POINTS: 0 / 1
29. Which of the following is an example of a common resource?
a. a fireworks display
c. iron ore
b. national defence
d. a national park
ANSWER: D
POINTS: 0 / 1
30. The Tragedy of the Commons is a parable that illustrates why
a. common resources are overconsumed. c. private goods are underconsumed.
b. public goods are underproduced.
d. natural monopolies overproduce goods.
ANSWER: A
POINTS: 0 / 1
31. Which of the following are potential solutions to the problem of air pollution?
a. Grant rights of the clean air to citizens so that firms must purchase the right to pollute.
b. Auction off pollution permits.
c. Regulate the amount of pollutants that firms can put in the air.
d. all of these answers
ANSWER: D
POINTS: 0 / 1
32. When markets fail to allocate resources efficiently, the ultimate source of the problem is
usually
a. government regulation.
b. that prices are not low enough so firms overproduce.
c. that prices are not high enough so people overconsume.
d. that property rights have not been well established.
ANSWER: D
POINTS: 0 / 1
35
33. If a person can be prevented from using a good, the good is said to be
a. excludable.
c. a public good.
b. a common resource.
d. rival.
ANSWER: A
POINTS: 0 / 1
34. A congested toll road is
a. a good produced by a natural monopoly. c. a public good.
b. a private good.
d. a common resource.
ANSWER: B
POINTS: 0 / 1
35. A person who regularly watches BBC television programmes in the UK but fails to pay their
TV licence fee is known as
a. excess baggage.
b. a free rider.
c. a costly rider.
d. a common resource.
e. an unwelcome rider.
ANSWER: B
Multiple Choice -13
Identify the choice that best completes the statement or answers the question.
16. Accounting profit is equal to total revenue minus
a. implicit costs.
b. variable costs.
c. the sum of implicit and explicit costs.
d. explicit costs.
e. marginal costs.
ANSWER: D
POINTS: 0 / 1
17. Economic profit is equal to total revenue minus
a. variable costs.
c. explicit costs.
b. implicit costs.
d. marginal costs.
ANSWER: B
POINTS: 0 / 1
18. Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell
them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces
of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings
and €50,000 borrowed at 10 per cent. (Assume that she could have loaned her money out at 10
per cent, too.) Nicole can work at a competing pottery factory for €40,000 per year. The
accounting profit at Nicole's pottery factory is
36
a.
b.
c.
d.
e.
€30,000.
€35,000.
€70,000.
€75,000.
€80,000.
ANSWER: D
POINTS: 0 / 1
19. Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell
them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces
of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings
and €50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10
percent, too). Nicole can work at a competing pottery factory for €40,000 per year. The
economic profit at Nicole's pottery factory is
a. €30,000.
b. €35,000.
c. €70,000.
d. €75,000.
e. €80,000.
ANSWER: A
POINTS: 0 / 1
20. If there are implicit costs of production,
a. accounting profit will exceed economic profit.
b. economic profit will always be zero.
c. economic profit will exceed accounting profit.
d. accounting profit will always be zero.
e. economic profit and accounting profit will be equal.
ANSWER: A
POINTS: 0 / 1
21. If a production function exhibits diminishing marginal product, its slope
a. is linear (a straight line).
b. becomes steeper as the quantity of the input increases.
c. could be any of these answers.
d. becomes flatter as the quantity of the input increases.
ANSWER: D
POINTS: 0 / 1
22. If a production function exhibits diminishing marginal product, the slope of the corresponding
total-cost curve
a. is linear (a straight line).
b. is negative throughout its length
c. becomes steeper as the quantity of output increases.
d. becomes flatter as the quantity of output increases.
ANSWER: C
37
POINTS: 0 / 1
23. Refer to Figure 13-1. The marginal product of labour as production moves from employing
one worker to employing two workers is
Figure 13-1
Number of Workers
0
0
1
23
2
40
3
50
a.
b.
c.
d.
e.
Output
0.
10.
17.
23
40.
ANSWER: C
POINTS: 0 / 1
24. Refer to Figure 13-1. The production process described above exhibits
a.
b.
c.
d.
e.
Figure 13-1
Number of Workers
Output
0
0
1
23
2
40
3
50
constant marginal product of labour.
diminishing marginal product of labour.
increasing returns to scale.
increasing marginal product of labour.
decreasing returns to scale.
ANSWER: B
POINTS: 0 / 1
25. Which of the following is a variable cost in the short run?
a. rent on the factory
b. wages paid to factory labour
c. interest payments on borrowed financial capital
d. payment on the lease for factory equipment
e. salaries paid to upper management
ANSWER: B
POINTS: 0 / 1
26. Refer to Figure 13-2. The average fixed cost of producing four units is
Figure 13-2
38
Quantity of
Output
0
Fixed Costs
€10
Variable
Costs
€0
1
10
5
2
10
11
3
10
18
4
10
26
10
36
a.
b.
c.
d.
e.
5
€2.50.
€5.
€9
€26.
€40.
Total Costs
Marginal Costs
ANSWER: A
POINTS: 0 / 1
27. Refer to Figure 13-2. The average total cost of producing three units is
Figure 13-2
Quantity of
Output
0
Fixed Costs
€10
Variable
Costs
€0
1
10
5
2
10
11
3
10
18
4
10
26
5
10
36
a.
b.
c.
d.
e.
Total Costs
Marginal Costs
€6.
€3.33.
€9.33.
€12.66
€28.
ANSWER: C
POINTS: 0 / 1
39
28. Refer to Figure 13-2. The marginal cost of changing production from three units to four units
is
Figure 13-2
Quantity of
Output
0
Fixed Costs
€10
Variable
Costs
€0
1
10
5
2
10
11
3
10
18
4
10
26
5
10
36
a.
b.
c.
d.
e.
Total Costs
Marginal Costs
€5.
€6.
€7.
€8.
€9.
ANSWER: D
POINTS: 0 / 1
29. Refer to Figure 13-2. The efficient scale of production is
Figure 13-2
Quantity of
Output
0
Fixed Costs
€10
Variable
Costs
€0
1
10
5
2
10
11
3
10
18
4
10
26
10
36
a.
b.
c.
d.
5
one unit.
two units.
three units.
four units.
Total Costs
Marginal Costs
40
e. five units.
ANSWER: D
POINTS: 0 / 1
30. When marginal costs are below average total costs,
a. average fixed costs are rising.
c. average total costs are rising.
b. average total costs are falling.
d. average total costs are minimized.
ANSWER: B
POINTS: 0 / 1
31. If marginal costs equal average total costs,
a. average total costs are falling.
b. average total costs are rising.
c. average total costs are maximized.
d. average total costs are minimized.
ANSWER: D
POINTS: 0 / 1
32. If, as the quantity produced increases, a production function first exhibits increasing marginal
product and later diminishing marginal product, the corresponding marginal-cost curve will
a. be flat (horizontal).
c. slope downward.
b. slope upward.
d. be U-shaped.
ANSWER: D
POINTS: 0 / 1
33. In the long run, if a very small factory were to expand its scale of operations, it is likely that it
would initially experience
a. an increase in average total costs.
c. economies of scale.
b. diseconomies of scale.
d. constant returns to scale.
ANSWER: C
POINTS: 0 / 1
34. The efficient scale of production is the quantity of output that minimizes
a. average fixed cost.
c. average variable cost.
b. average total cost.
d. marginal cost.
ANSWER: B
POINTS: 0 / 1
35. Which of the following statements is true?
a. All costs are fixed in the short run.
b. All costs are variable in the long run.
c. All costs are variable in the short run.
d. All costs are fixed in the long run.
ANSWER: B
POINTS: 0 / 1
41
Multiple Choice - 14
Identify the choice that best completes the statement or answers the question.
16. Which of the following is not a characteristic of a competitive market?
a. All of these answers are characteristics of a competitive market.
b. There are many buyers and sellers in the market.
c. The goods offered for sale are largely the same.
d. Firms generate small but positive economic profits in the long run.
e. Firms can freely enter or exit the market.
ANSWER: D
POINTS: 0 / 1
17. Which of the following markets would most closely satisfy the requirements for a competitive
market?
a. electricity
b. cable television
c. cola
d. milk
e. economics textbooks.
ANSWER: D
POINTS: 0 / 1
18. If a competitive firm doubles its output, its total revenue
a. doubles.
b. more than doubles.
c. less than doubles.
d. cannot be determined because the price of the good may rise or fall.
ANSWER: A
POINTS: 0 / 1
19. For a competitive firm, marginal revenue is
a. total revenue divided by the quantity sold.
b. equal to the quantity of the good sold.
c. average revenue divided by the quantity sold.
d. equal to the price of the good sold.
ANSWER: D
POINTS: 0 / 1
20. The competitive firm maximizes profit when it produces output up to the point where
a. price equals average variable cost.
b. marginal revenue equals average revenue.
c. marginal cost equals total revenue.
d. marginal cost equals marginal revenue.
ANSWER: D
42
POINTS: 0 / 1
21. If a competitive firm is producing a level of output where marginal revenue exceeds marginal
cost, the firm could increase profits if it
a. decreased production.
c. temporarily shut down.
b. maintained production at the current
d. increased production.
level.
ANSWER: D
POINTS: 0 / 1
22. In the short run, the competitive firm's supply curve is the
a. upward-sloping portion of the average total cost curve.
b. upward-sloping portion of the average variable cost curve.
c. portion of the marginal cost curve that lies above the average total cost curve.
d. entire marginal cost curve.
e. portion of the marginal-cost curve that lies above the average variable cost curve.
ANSWER: E
POINTS: 0 / 1
23. In the long run, the competitive firm's supply curve is the
a. entire marginal cost curve.
b. upward-sloping portion of the average total cost curve.
c. portion of the marginal cost curve that lies above the average total cost curve.
d. upward-sloping portion of the average variable cost curve.
e. portion of the marginal cost curve that lies above the average variable cost curve.
ANSWER: C
POINTS: 0 / 1
24. A grocery store should close at night if the
a. variable costs of staying open are less than the total revenue due to staying open.
b. total costs of staying open are less than the total revenue due to staying open.
c. variable costs of staying open are greater than the total revenue due to staying open.
d. total costs of staying open are greater than the total revenue due to staying open.
ANSWER: C
POINTS: 0 / 1
25. The long-run market supply curve
a. is always more elastic than the short-run market supply curve.
b. is always perfectly elastic.
c. has the same elasticity as the short-run market supply curve.
d. is always less elastic than the short-run market supply curve.
ANSWER: A
POINTS: 0 / 1
26. In the long-run, some firms will exit the market if the price of the good offered for sale is less
than
43
a. marginal revenue.
b. marginal cost.
c. average total cost.
d. average revenue.
ANSWER: C
POINTS: 0 / 1
27. If all firms in a market have identical cost structures and if inputs used in the production of the
good in that market are readily available, then the long-run market supply curve for that good
should be
a. downward sloping.
c. upward sloping.
b. perfectly inelastic.
d. perfectly elastic.
ANSWER: D
POINTS: 0 / 1
28. If an input necessary for production is in limited supply so that an expansion of the industry
raises costs for all existing firms in the market, then the long-run market supply curve for a
good could be
a. perfectly inelastic.
c. upward sloping.
b. perfectly elastic.
d. downward sloping.
ANSWER: C
POINTS: 0 / 1
29. If the long-run market supply curve for a good is perfectly elastic, an increase in the demand
for that good will, in the long run, cause
a. an increase in the number of firms in the market but no increase in the price of the
good.
b. an increase the price of the good and an increase in the number of firms in the market.
c. an increase the price of the good but no increase in the number of firms in the market.
d. no impact on either the price of the good or the number of firms in the market.
ANSWER: A
POINTS: 0 / 1
30. In long-run equilibrium in a competitive market, firms are operating at
a. the minimum of their average-total-cost curves.
b. all of these answers are correct.
c. their efficient scale.
d. zero economic profit.
e. the intersection of marginal cost and marginal revenue.
ANSWER: B
POINTS: 0 / 1
Multiple Choice
Identify the choice that best completes the statement or answers the question.
16. Which of the following is not a barrier to entry in a monopolized market?
a. A single firm is very large.
44
b. The government gives a single firm the exclusive right to produce some good.
c. The costs of production make a single producer more efficient than a large number
of producers.
d. A key resource is owned by a single firm.
ANSWER: A
POINTS: 0 / 1
17. A firm whose average total cost continually declines at least to the quantity that could
supply the entire market is known as a
a. regulated monopoly.
c. government monopoly.
b. perfect competitor.
d. natural monopoly.
ANSWER: D
POINTS: 0 / 1
18. When a monopolist produces an additional unit, the marginal revenue generated by that
unit must be
a. above the price because the output effect outweighs the price effect.
b. below the price because the price effect outweighs the output effect.
c. above the price because the price effect outweighs the output effect.
d. below the price because the output effect outweighs the price effect.
ANSWER: B
POINTS: 0 / 1
19. A monopolist maximizes profit by producing the quantity at which
a. marginal cost equals price.
b. marginal revenue equals price.
c. marginal revenue equals marginal cost.
d. marginal cost equals demand.
e. marginal cost is minimised.
ANSWER: C
POINTS: 0 / 1
20. Which of the following statements about price and marginal cost in competitive and
monopolized markets is true?
a. In competitive markets, price equals marginal cost; in monopolized markets, price
exceeds marginal cost.
b. In competitive markets, price equals marginal cost; in monopolized markets, price
equals marginal cost.
c. In competitive markets, price exceeds marginal cost; in monopolized markets,
price exceeds marginal cost.
d. In competitive markets, price exceeds marginal cost; in monopolized markets,
price equals marginal cost.
ANSWER: A
POINTS: 0 / 1
45
21. Cengage is a monopolist in the production of your textbook because Cengage:
a. is a very large company.
b. owns a key resource in the production of textbooks.
c. is a natural monopoly.
d. has a legally protected exclusive right to produce this textbook.
ANSWER: D
POINTS: 0 / 1
22. Refer to Exhibit 4. The profit-maximizing monopolist will choose the price and quantity
represented by point
a.
a. b.
b. c.
c. d.
d. e.
none of these answers
ANSWER: A
POINTS: 0 / 1
23. Refer to Exhibit 4. The efficient price and quantity are represented by point
46
a. A
b.
D
c.
B
b. C
c. none of these answers.
ANSWER: B
POINTS: 0 / 1
24. The inefficiency associated with monopoly is due to
a. the monopoly's profits.
c. the monopoly's losses.
b. underproduction of the good.
d. overproduction of the good.
ANSWER: B
POINTS: 0 / 1
25. Compared to a perfectly competitive market, a monopoly market will usually generate
a. lower prices and lower output.
c. higher prices and lower output.
b. higher prices and higher output.
d. lower prices and higher output.
ANSWER: C
POINTS: 0 / 1
26. The monopolist's supply curve
a. is the upward-sloping portion of the average variable cost.
b. is the marginal cost curve above average variable cost.
c. is the marginal cost curve above average total cost.
d. is the upward-sloping portion of the average total cost curve.
e. does not exist.
ANSWER: E
POINTS: 0 / 1
27. Using government regulations to force a natural monopoly to charge a price equal to its
47
marginal cost will
a. improve efficiency.
b. cause the monopolist to exit the market.
c. raise the price of good.
d. attract additional firms to enter the market.
ANSWER: B
POINTS: 0 / 1
28. The purpose of antitrust (also known as competition) laws is to
a. Ensure prices are the same for all consumers
b. regulate the prices charged by a monopoly.
c. increase merger activity to help generate synergies that reduce costs and raise
efficiency.
d. create public ownership of natural monopolies.
e. increase competition in an industry by preventing mergers and breaking up large
firms.
ANSWER: E
POINTS: 0 / 1
29. Public ownership of natural monopolies
a. creates synergies between the newly acquired firm and other government-owned
companies.
b. usually lowers the cost of production dramatically.
c. tends to be inefficient.
d. does none of the things described in these answers.
ANSWER: C
POINTS: 0 / 1
30. Which of the follow statements about price discrimination is not true?
a. Price discrimination increases a monopolist's profits.
b. Price discrimination can raise economic welfare.
c. Price discrimination requires that the seller be able to separate buyers according to
their willingness to pay.
d. Perfect price discrimination generates a deadweight loss.
e. For a monopolist to engage in price discrimination, buyers must be unable to
engage in arbitrage.
ANSWER: D
POINTS: 0 / 1
31. If regulators break up a natural monopoly into many smaller firms, the cost of production
a. will remain the same.
b. will fall.
c. will rise.
d. could either rise or fall depending on the elasticity of the monopolist's supply
curve.
ANSWER: C
48
POINTS: 0 / 1
32. A monopoly is able to continue to generate economic profits in the long run because
a. It can control both price and output in the market.
b. potential competitors sometimes don't notice the profits.
c. the monopolist is financially powerful.
d. antitrust laws eliminate competitors for a specified number of years.
e. there is some barrier to entry to that market.
ANSWER: E
POINTS: 0 / 1
33. If marginal revenue exceeds marginal cost, a monopolist should
a. raise the price.
b. decrease output.
c. keep output the same because profits are maximized when marginal revenue
exceeds marginal cost.
d. increase output.
ANSWER: D
POINTS: 0 / 1
49