Download 1. The demand curve for physician office visits is

1. The demand curve for physician office visits is quite inelastic; therefore, a: *a. large increase in price causes quantity demanded to decrease by very little. b. large decrease in price causes quantity demanded to decrease by a lot. c. small increase in price causes quantity demanded to decrease by a lot. d. small decrease in price causes quantity demanded to decrease by very little. 2. The demand curve for Froot Loops breakfast cereal is very elastic because: a. most breakfast cereals are considered a luxury good. *b. there are many good substitutes for Froot Loops. c. the demand curve is negatively sloped. d. it is one of the most advertised cereals in the world. 3. (Figure: Demand Elasticities) Refer to the figure. Which of the following statements is TRUE? Figure: Demand Elasticities I. Demand curve B represents the more inelastic demand. II. If the price decreases, the increase in quantity demand will be larger along demand curve A. III. If the price increases, the decrease in quantity demand will be larger along demand curve B. IV. Demand curve A represents inelastic demand. a. II, III, and IV only b. I, II, and III only c. II and III only *d. I and II only 4. The elasticity of demand: a. equals the inverse of price to quantity demanded. b. measures how far the demand curve shifts from a change in price. *c. tells us how responsive consumer purchases are to price changes. d. estimates the relationship between quantity demand and production costs. 5. (Table: Elasticity Characteristics) The table lists the characteristics of three goods. Good ________ is the most inelastic, and Good ________ is the most elastic. Table: Elasticity Characteristics Good X Good Y Good Z Few Substitutes Many Substitutes Few Substitutes Luxury good Luxury good Necessity good Small part of budget Large part of budget Small part of budget a. X; Y *b. Z; Y c. X; Z d. Y; X 6. The price elasticity of demand is: a. the responsiveness of price to changes in the quantity demanded of the product. *b. the responsiveness of quantity demanded to changes in the price of the product. c. the change in the firm's total revenue when prices change. d. exactly the same as the slope of the demand curve. 7. (Figure: Price Elasticity of Demand) Refer to the figure. Which of the four demand curves has the greatest responsiveness to price changes? Figure: Price Elasticity of Demand *a. A b. B c. C d. D 8. Which of the following factors causes a demand curve to become more elastic over time? *a. New substitutes for the product are discovered. b. New and important uses for the product are discovered. c. More producers begin to produce the product. d. More consumers acquire a desire for the product. 9. Which good below might be expected to have the most inelastic demand curve? *a. salt b. women's blouses from Walmart c. potato chips d. Tylenol 10. Which of the following is a reason why the demand curve for an item would be more elastic? a. The item is a necessity. b. People's incomes are very high relative to the cost of the item. *c. The item has many very good substitutes. d. The cost of the item forms a very small part of the consumer's budgets. 11. Why is the demand curve for oil rather inelastic? *a. There are few widely available good substitutes for oil. b. To increase the production of oil requires a significant outlay of exploration and drilling costs. c. The world supply of oil is low relative to demand. d. The demand curve for oil is always perfectly inelastic. 12. The elasticity of demand measures how sensitive the: a. price is to a change in quantity demanded. *b. quantity demanded is to a change in price. c. price is to a change in the quantity supplied. d. demand is to a change in the number of suppliers. 13. Which one of the following products would tend to have inelastic demand? a. luxury sedans b. candy *c. crude oil d. Black Angus T-bone steak 14. Which of the following would NOT make elasticity of demand for a good more elastic? a. more substitutes b. luxuries c. large part of budget *d. less time 15. The elasticity of demand measures: a. the height of the demand curve. *b. how sensitive the quantity demanded is to a change in price. c. how sensitive the price is to a change in demand. d. the extent to which demand shifts in response to supply changes. 16. The demand curve for oil is inelastic, meaning that the quantity of oil demanded: a. rises by a lot even when the price of oil increases by only a little. b. rises by only a little even when the price of oil increases by a lot. c. falls by a lot even when the price of oil increases by only a little. *d. falls by only a little even when the price of oil increases by a lot. 17. The demand for oil is inelastic because there are: a. many complements for oil in its major use. b. few complements for oil in its major use. c. many substitutes for oil in its major use. *d. few substitutes for oil in its major use. 18. All of the following conditions would cause the demand curve for a good to be more elastic EXCEPT: a. a longer time horizon. b. the good is considered a luxury good. *c. the price of the good falls. d. the good has many substitutes. 19. (Figure: Elasticity and Quantity Demanded) Refer to the figure. An increase in price from $40 to $50 would cause the change in quantity demanded for D1 to be: Figure: Elasticity and Quantity Demanded *a. greater than the change in quantity demanded for D2 so D1 is more elastic than D2. b. greater than the change in quantity demanded for D2 so D2 is more elastic than D1. c. less than the change in quantity demanded for D2 so D1 is more inelastic than D2. d. less than the change in quantity demanded for D2 so D2 is more inelastic than D1. 20. The price of wheat increases, but few people cut back on their consumption of bread because: *a. the price of bread is a small portion of the budget, and thus the demand for bread is inelastic. b. the price of bread is a large portion of the budget, and thus the demand for bread is elastic. c. change in the price of wheat does not affect the price of bread. d. None of the answers is correct. 21. If the price of gasoline in this country were expected to rise due to a permanent increase in the tax on gasoline, which of the following would you expect to happen? *a. The demand for gasoline would become more elastic. b. The demand for gasoline would decrease as a result of the higher price. c. Producers will have less of an incentive to supply gasoline as a result of the higher taxes. d. The elasticity of demand will not change since gasoline is a necessity good. 22. If Major League Baseball ticket prices rise by 15 percent, the number of tickets sold falls by 5 percent. The elasticity of demand is: a. –3. *b. –1/3. c. –7.5. d. –0.75. 23. A 4 percent increase in the price of beer will cause a 1 percent decline in the quantity of beer demanded. The demand for beer is: a. elastic. b. unitary elastic. *c. inelastic. d. elastic at 4 (in absolute value). 24. The elasticity of demand for a good is –0.75. A 4 percent increase in price will cause a: *a. 3 percent decrease in quantity demanded. b. 5.33 percent increase in quantity demanded. c. 5.33 percent decrease in quantity demanded. d. 0.19 percent decrease in quantity demanded. 25. If the price of Good X rises from $4 to $5, and the quantity demanded of Good X falls from 200 units to 180 units, the price elasticity of demand is: a. 2.1. *b. 0.47. c. 1.4. d. 0.4. 26. If the price of Good Y falls from $10 to $8, and the quantity demand of Good Y rises from 1,000 units to 1,200 units, the price elasticity of demand is: a. 1.00. b. 0.20. *c. 0.81. d. 1.22. 27. If the price elasticity of demand is 2 in absolute value, then when the price of Good X rises by 25 percent: a. the quantity demanded of Good X rises by 50 percent. *b. the quantity demanded of Good X falls by 50 percent. c. the quantity demanded of Good X rises by 12.5 percent. d. the quantity demanded of Good X falls by 12.5 percent. 28. If the price elasticity of demand is 0.5, then when the price of Good X rises by 20 percent: a. the quantity demanded of Good X rises by 40 percent. b. the quantity demanded of Good X rises by 10 percent. *c. the quantity demanded of Good X falls by 10 percent. d. the quantity demanded of Good X falls by 40 percent. 29. If the price of ice cream changes by 30 percent and the quantity demanded changes by 75 percent, what is the absolute value of demand elasticity? a. 2.5, so demand is inelastic b. 0.4, so demand is inelastic c. 0.4, so demand is elastic *d. 2.5, so demand is elastic 30. The price of cigars is $10, with a quantity demanded of 1,000 per day. If the price increases to $12, the quantity demanded declines to 800 per day. What is the absolute value of elasticity of demand? a. 1.00 b. 0.82 *c. 1.22 d. 12.2 31. If an increase in the price of oil by 10 percent would cause the quantity demanded for oil to fall by 5 percent, the elasticity of demand for oil in absolute terms is: a. 10. b. 5. c. 2. *d. 0.5. 32. The demand curve is inelastic if the absolute value of the elasticity is: a. greater than 1. b. greater than 0. *c. less than 1. d. equal to 1. 33. Total revenue is: *a. price X quantity. b. quantity/price. c. the elasticity of demand X price. d. price + quantity. 34. Marge tutors English students—if she raises rates, her revenues increase. Brad tutors biology students—if he lowers rates, his revenues increase. Which of the following is TRUE? a. Marge's demand is elastic, and Brad's demand is inelastic. *b. Marge's demand is inelastic, and Brad's demand is elastic. c. Marge's demand is elastic, and Brad's demand is elastic. d. Marge's demand is inelastic, and Brad's demand is inelastic. 35. (Figure: Elasticity and Total Revenue) Refer to the figure. If price falls from $60 to $40, total revenue changes by ________, so demand is ________. Figure: Elasticity and Total Revenue a. $120; inelastic b. $480; elastic c. $360; inelastic *d. $120; elastic 36. When the demand curve for a good is unit elastic, raising the price of the good by 25 percent will raise the revenue of the firm by: a. 125 percent. b. 100 percent. *c. 25 percent. d. There is not enough information to answer the question. 37. (Figure: Elasticity and Revenue) Refer to the figure. When the price of the product rises from $4 to $6, the total revenue changes by the area(s) represented by: Figure: Elasticity and Revenue a. F. b. F – E. *c. F – (E + B). d. F + D + A. 38. At a price $4 for Good X, a firm is willing to supply 1,400 units of X. For a price of $5 for Good X, the firm is willing to supply 1,500 units X. The change in revenue for the firm when the price of the good rises from $4 to $5 is a: a. $100 increase in total revenue. b. $1,500 increase in total revenue. c. $7,500 increase in total revenue. *d. There is not enough information to answer the question. 39. If the price elasticity of demand for Good X is 1 in absolute value, which of the following is TRUE? I. When the price of the good changes, the total revenue for the product does not change. II. A percentage drop in price will lead to an equal percentage increase in quantity demanded. III. When the price of the product rises, total revenue also increases. a. I only *b. I and II only c. II and III only d. II only 40. Assume that the supply curve for a good is constantly fixed at 100 units. Now suppose that the demand curve for the good increases such that the equilibrium price rises from $20 to $30. How does total revenue for the sale of this product change? *a. Total revenue rises by $1,000. b. Total revenue does not change. c. Total revenue rises by $3,000. d. Total revenue rises by $10. 41. If the demand curve is inelastic a price ________ causes a(n) ________ in revenues. *a. decrease; decrease b. decrease; increase c. increase; decrease d. There is not enough information to answer. 42. If the demand curve is elastic a price ________ causes a(n) ________ in revenues. a. decrease; decrease b. increase; increase *c. decrease; increase d. There is not enough information to answer. 43. What happens to revenues when the demand curve is unit elastic and the price changes? a. Revenues increase when the price increases. *b. Revenues remain unchanged. c. Revenues decrease when the price increases. d. The change in revenues cannot be estimated. 44. In general, the flatter the demand curve the: a. less the demand elasticity. *b. greater the demand elasticity. c. greater the change in price needed to induce a change in quantity demanded. d. less the change in total revenue given a price change. 45. If the demand curve is inelastic then an increase in price would cause: *a. an increase in total revenue. b. a decrease in total revenue. c. an increase or decrease in total revenue. d. no change in total revenue. 46. If the demand for a good is elastic, then firms producing the good should ________ price in order to increase revenue. a. increase *b. decrease c. hold constant d. either increase or decrease 47. The manager of a company notices that the company's total revenue would increase if the manager raises the price of the company's product. Accordingly, the manager can assert that the demand for the company's product is: a. elastic. *b. inelastic. c. unit elastic. d. zero elastic. 48. (Figure: Price Increase and Elasticity) Refer to the figure. If price increases from $10 to $20, total revenue will: Figure: Price Increase and Elasticity *a. increase by $800 so the demand curve must be inelastic. b. increase by $100 so the demand curve must be inelastic. c. decrease by $800 so the demand curve must be elastic. d. decrease by $100 so the demand curve must be elastic. 49. (Figure: Price Decrease and Elasticity) Refer to the figure. If price decreases from $20 to $10, total revenue will: Figure: Price Decrease and Elasticity a. decrease by $1,500, so the demand curve is inelastic. b. decrease by $2,500, so the demand curve is inelastic. *c. increase by $1,500, so the demand curve is elastic. d. increase by $2,500, so the demand curve is elastic. 50. Increases in farm productivity have lowered the prices of many agricultural products. Farm revenues decreased, which implies the: *a. demand for many agricultural products is inelastic. b. costs of production increased. c. demand for many agricultural products is elastic. d. costs of production stayed the same. 51. Compared to the 1980s, the price of computer chips is much lower today but revenues from computer chips are ________ because demand is elastic. *a. higher b. lower c. approximately unchanged d. about $14 trillion higher 52. Which of the following statements is TRUE? I. The War on Drugs has increased revenues in the illegal drug industry. II. The War Drugs has increased the costs of selling drugs, causing a decrease in the supply of drugs. III. The War on Drugs has caused the price of drugs to increase. IV. The quantity demanded of illicit drugs is elastic. a. II, III and IV only b. II only *c. I, II, and III only d. I, II, III, and IV 53. Gary Becker suggested: a. raising the capital gains tax to help provide more government resources for the War on Drugs. *b. that the government should make drugs legal and then place a tax on drugs to control their usage. c. subsidizing the consumption of illegal drugs in an effort to avoid deadweight losses. d. All of the answers are correct. 54. Since roughly 1950 total revenues in the farming sector have ________, and since 1980 total revenues in computer chips have ________. a. increased; decreased b. decreased; decreased c. increased; increased *d. decreased; increased 55. Why is the war on drugs hard to win? a. It is not a conventional war. b. The government has not used adequate resources in the war. *c. Drug dealers get stronger following successful government prohibition efforts. d. The demand for illegal drugs is too elastic. 56. Farmers can produce more milk at lower cost, but Americans want to drink only so much milk. This suggests that the demand curve for milk is: a. elastic. *b. inelastic. c. unit elastic. d. unaffected by elasticity. 57. Since the demand curve for computer chips is elastic, a decrease in the price of computer chips caused by an increase in productivity will: *a. increase revenue for the computer chip industry and make computers a larger share of the American economy. b. increase revenue for the computer chip industry and make computers a smaller share of the American economy. c. decrease revenue for the computer chip industry and make computers a larger share of the American economy. d. decrease revenue for the computer chip industry and make computers a smaller share of the American economy. 58. Since the demand for illegal drugs is quite inelastic, an increase in the price of illegal drugs: *a. increases seller revenues. b. decreases seller revenues. c. does not affect seller revenues. d. The change in revenue depends on supply elasticity. 59. Nobel prize–winning economist Gary Becker suggests that a tax could be set so that it raised drug seller costs without prohibition, and in turn would: a. increase seller revenues. b. decrease seller revenues. *c. increase government revenues. d. decrease government revenues. 60. The per-unit cost of producing Tic Tac candy does not change with increases in production, which means the: a. demand for Tic Tac candy is elastic. b. demand for Tic Tac candy is inelastic. *c. supply of Tic Tac candy is elastic. d. supply of Tic Tac candy is inelastic. 61. If the supply of a product is inelastic, a large price increase will: a. not have an effect on the quantity supplied. *b. only bring about a small increase in quantity supplied. c. cause the supply curve to increase by a nontrivial amount. d. cause a modest decrease in supply. 62. Which of the following statements is FALSE? a. A perfectly inelastic supply curve is vertical. b. The supply curve is more elastic in the long run than in the short run. c. Products that take a long time to produce, such as decades-aged Scotch whiskey, have supply curves that are less responsive to price changes. *d. The supply curve of oil is more inelastic in Texas than it is globally. 63. If the supply of raw materials is ________, increasing their production leads to ________ per-unit costs. *a. inelastic; higher b. perfectly elastic; higher c. perfectly elastic; lower d. inelastic; lower 64. (Figure: Supply Elasticity) Refer to the figure. Which one of the four supply curves has the greatest responsiveness to price changes? Figure: Supply Elasticity a. Supply Curve A *b. Supply Curve B c. Supply Curve C d. Supply Curve D 65. Why is the supply curve for oil rather inelastic? a. There are not many widely available good substitutes for oil. *b. To increase the production of oil would require a very significant outlay in terms of costs of exploration and drilling. c. The world supply of oil is decreasing. d. The supply curve for oil is always perfectly inelastic. 66. Why do supply curves tend to be more elastic over time? *a. Sellers have time to adjust and increase production. b. Consumers have time to look for substitutes for the good. c. Consumers have time to reduce their consumption of the good. d. All of the answers are correct. 67. The supply curve for oil is ________ because ________. a. elastic; per unit costs do not increase when the quantity supplied increases b. elastic; oil exploration and drilling is not expensive relative to revenues earned *c. inelastic; per-unit costs rise quickly when the quantity supplied increases d. inelastic; oil exploration and drilling is not expensive relative to revenues earned 68. A perfectly elastic supply curve is: a. never feasible in reality. b. vertical. c. upward sloped. *d. horizontal. 69. Figure: Elasticity of Supply Reference: Ref 5-1 (Figure: Elasticity of Supply) Refer to the figure. Which supply curve is the most inelastic? *a. S1 b. S2 c. S3 d. S4 70. Figure: Elasticity of Supply Reference: Ref 5-1 (Figure: Elasticity of Supply) Refer to the figure. Which supply curve is the most elastic? a. S1 b. S2 c. S3 *d. S4 71. Which factor would tend NOT to increase elasticity of supply? a. the long run *b. global supply c. constant production costs d. local supply 72. (Figure: Price Elasticity of Supply) Refer to the figure. Compared to S1, S2 is more: Figure: Price Elasticity of Supply *a. elastic since quantity supplied increases more with an increase in price. b. elastic since quantity supplied increases less with an increase in price. c. inelastic since quantity supplied increases more with an increase in price. d. inelastic since quantity supplied increases less with an increase in price. 73. Because producing more oil requires a significant increase in exploration and drilling costs, the supply curve for oil is: a. relatively elastic. *b. relatively inelastic. c. either elastic or inelastic. d. unit elastic. 74. The supply curve for manufactured goods is usually more elastic because production can often be: a. increased at higher cost per unit by building more factories. b. increased at lower cost per unit by building more factories. c. decreased at the same cost per unit by building more factories. *d. increased at the same cost per unit by building more factories. 75. A perfectly inelastic supply curve is a: a. vertical line indicating that a very large increase in price will increase the quantity supplied. *b. vertical line indicating that even a very large increase in price won't increase the quantity supplied. c. horizontal line indicating that a very small increase in price will increase the quantity supplied. d. horizontal line indicating that even a very small increase in price won't increase the quantity supplied. 76. All of the following would cause the supply curve to be more elastic EXCEPT: a. production of the good requires only a small share of the market for inputs. b. the good is primarily for local supply. c. the good is a manufactured good. *d. there is potential difficulty to increasing the production of the good at constant unit cost. 77. When production of a good can be expanded without significantly increasing the overall demand for its inputs: a. supply for this good will tend to be more inelastic. *b. supply for this good will tend to be more elastic. c. price for the good will be constant. d. the elasticity of supply of the product will equal the elasticity of supply of the inputs. 78. Supply tends to be ________ in local markets, and ________ in global markets. *a. elastic; inelastic b. inelastic; elastic c. unit elastic; perfectly inelastic d. perfectly inelastic; unit elastic 79. Which of the following explains why local supply tends to be more elastic than global supply? a. As price increases in a certain locale, it is often costly to transport more goods to that particular area, and hence supply is more elastic. b. Local suppliers are small in relation to the global market. c. The statement is false, local supply tends to be less elastic than global supply. *d. As price increases in a certain locale, goods can be brought in from other areas, which is not possible on a global scale. 80. If the price of cocoa rises by 20 percent, the quantity supplied of cocoa rises by 4 percent. What is the elasticity of supply? a. 5 b. 2 *c. 0.2 d. 0.008 81. If the elasticity of supply is 2.0, what happens to quantity supplied following a 7 percent increase in price? Quantity supplied increases: a. 3.5 percent. b. 2.9 percent. *c. 14 percent. d. 9 percent. 82. If the price of Good Y falls from $10 to $8, and the quantity supplied of Good Y falls from 1,000 units to 600 units, the price elasticity of supply is: a. 2.67. b. –2.67. *c. 2.25. d. –2.25. 83. If the price elasticity of supply is 4, an increase in the price of Good X by 5 percent: *a. causes the quantity supplied of Good X to rise 20 percent. b. causes the quantity supplied of Good X to fall 20 percent. c. causes the quantity supplied of Good X to rise 1.25 percent. d. causes the quantity supplied of Good X to fall 1.25 percent. 84. If the price elasticity of supply is 0.75, then when the price of Good Y falls by 10 percent: a. the quantity supplied of Good X rises by 7.5 percent. b. the quantity supplied of Good X rises by 133 percent. *c. the quantity supplied of Good X falls by 7.5 percent. d. the quantity supplied of Good X falls by 133 percent. 85. If the price of cocoa rises by 10 percent and the elasticity of supply is 0.5, then the quantity supplied: *a. increases by 5 percent. b. increases by 20 percent. c. decreases by 5 percent. d. decreases by 20 percent. 86. If the price of coffee falls by 10 percent and the quantity supplied of coffee falls by 1.5 percent then the elasticity of supply of coffee is: a. 10. b. 1.5. *c. 0.15. d. 6.67. 87. Economic theory suggests that permanent gun buyback programs: a. succeed in reducing the number of guns in circulation. b. make guns less valuable. c. increase the quantity of low quality guns in circulation but decrease the quantity of high quality guns in circulation. *d. increase the number of guns in circulation. 88. Economic theory suggests that gun buyback programs: a. are effective in reducing the number of guns on city streets. *b. do not reduce the number of guns on city streets. c. are most effective if the supply curve of guns is perfectly elastic. d. reduce the demand for new and better functioning guns. 89. Gun buyback programs will be less effective if the: *a. supply of guns is more elastic. b. supply of guns is more inelastic. c. demand for guns is more elastic. d. demand for guns is more inelastic. 90. When the supply curve of slaves is perfectly ________, every slave bought by the redeemers results in/is ________ held in captivity. a. inelastic; more slaves *b. inelastic; one less slave c. inelastic; redeemed at a lower price than expected d. elastic; redeemed at a higher price than expected 91. Evidence from the Sudan indicates that the supply of slaves is likely: a. perfectly elastic. b. perfectly inelastic. *c. more elastic than inelastic. d. more inelastic than elastic. 92. Figure: Slave Redemption Reference: Ref 5-2 (Figure: Slave Redemption) Refer to the figure. When slave redeemers enter the market, the price of slaves: *a. increases to $40. b. decreases to $17. c. stays unchanged at $40. d. exceeds $40. 93. Figure: Slave Redemption Reference: Ref 5-2 (Figure: Slave Redemption) Refer to the figure. When slave redeemers enter the market, the total number of freed slaves is ________ and the net number of freed slaves is ________. a. 1,500; 500 b. 1,000; 400 *c. 1,100; 100 d. 500; 1,000 94. Figure: Slave Redemption Reference: Ref 5-2 (Figure: Slave Redemption) Refer to the figure. When slave redeemers enter the market, the number of slaves remaining in captivity is: a. 100. *b. 400. c. 500. d. 1,100 95. (Figure: Slave Redemption with Perfectly Elastic Supply) Refer to the figure. Suppose the supply curve is perfectly elastic as it is in the graph, a rise in the demand for slaves (from D1 to D2) causes: Figure: Slave Redemption with Perfectly Elastic Supply a. the number of people in slavery to remain at 500 after the redemption program. b. the price of slaves to remain unchanged. c. 400 additional people to enter slavery temporarily before they are released. *d. All of the answers are correct. 96. Figure: Slave Redemption and Elasticity Reference: Ref 5-3 (Figure: Slave Redemption and Elasticity) Refer to the figure. How many new slaves are captured after the redemption program is installed? a. 1,400 b. 800 *c. 400 d. 1,000 97. Figure: Slave Redemption and Elasticity Reference: Ref 5-3 (Figure: Slave Redemption and Elasticity) Refer to the figure. How many slaves are freed after the redemption program? a. 1,000 *b. 400 c. 600 d. 1,400 98. Which of the following statements about the price elasticity of supply for slaves is correct? a. When the supply curve is more elastic every slave bought by the redeemers is one fewer slave held in captivity. *b. When the supply curve is perfectly inelastic every slave bought by the redeemers is one fewer slave held in captivity. c. When the supply curve is less elastic every slave bought by the redeemers is one additional enslaved person. d. When the supply curve is more inelastic every slave bought by the redeemers is one additional enslaved person. 99. Suppose that large oil reserves are discovered off the coast of Cuba, and these reserves will increase the world's supply of oil by 2.5 percent. If the elasticity of demand and supply of oil are 0.50 and 0.40, respectively, what happens to the price of oil? a. It falls by 2.5 percent. b. It falls by 25 percent. *c. It falls by 2.78 percent. d. It falls by 36 percent. 100. If the price elasticity of demand for a product is 1 in absolute value, and the price elasticity of supply of the same product is 1, what is the predicted percent change in price from a 1 percent increase in demand? *a. a rise in price of 0.5 percent b. a rise in price of 2 percent c. a fall in price of 0.5 percent d. a fall in price of 2 percent 101. If the price elasticity of demand for a product is 2 in absolute value, and the price elasticity of supply for the same product is 1, what is the predicted percent change in price from a 5 percent fall in the supply? a. a 1.67 percent fall in price *b. a 1.67 percent rise in price c. a 0.6 percent fall in price d. a 0.6 percent rise in price 102. When a shift in demand or supply occurs, economists can make a quick prediction of the change in price. The denominator of the simple price-change formula is the: a. multiple of the elasticities of supply and demand. *b. sum of the elasticities of supply and demand. c. difference between the elasticities of supply and demand. d. percent change in either demand or supply. 103. The elasticity of demand for oil is about 0.5, and the elasticity of supply is about 0.3. If ANWR were drilled and the world supply of oil increased by 3 percent, what is the estimated percent change in the world price of oil? a. –1.25 percent b. –2.50 percent *c. –3.75 percent d. Unknown 104. The case for drilling oil in ANWR is strengthened when the: a. price of oil is lower. b. negative impact of drilling on the environment is greater. *c. price of oil is higher. d. elasticity of demand for oil increases. 105. If the elasticity of demand for oil is 0.5 and the elasticity of supply for oil is 0.3, then a 1 percent increase in the supply of oil would cause the price of oil to: a. increase by 1.25 percent. b. increase by 2.50 percent. *c. decrease by 1.25 percent. d. decrease by 2.50 percent. 106. If the elasticity of demand for cigarettes is 0.75 and the elasticity of supply for cigarettes is 1.25, then a 5 percent decrease in the demand for cigarettes would cause the price of cigarettes to: a. increase by 2.5 percent. b. increase by 5 percent. *c. decrease by 2.5 percent. d. decrease by 5 percent. 107. If the government raises the minimum wage by 6 percent, the number of people employed falls by 2%. What is the elasticity of employment with respect to the minimum wage? a. –3.0 *b. –0.33 c. –12 d. –0.0012 108. The price of Good B increases by 4 percent, causing the quantity demanded of Good A to decrease by 6 percent. The cross-price elasticity of demand is ________, and the goods are ________. a. 1.5; substitutes *b. –1.5; complements c. 0.67; complements d. –0.67; substitutes 109. The quantity demanded for cosmetic surgery increased by 12 percent following a period of strong economic growth that raised consumer income by 4 percent. What type of good is cosmetic surgery? *a. It is a luxury good since the income elasticity of demand exceeds 1. b. It is a normal good since the income elasticity is less than 1. c. It is a necessity since the income elasticity of demand is equal to 1. d. It is a super normal good since the income elasticity is greater than 2. 110. Good X and Good Y are related goods. When the price of good X rises by 20 percent, the quantity demanded for good Y falls by 40 percent. What is the cross-price elasticity? a. 2 b. 4 c. –0.5 *d. –2 111. Good X and Good Y are related goods. When the price of Good X rises by 5 percent, the quantity demanded for Good Y rises by 15 percent. Calculate the cross-price elasticity. *a. 3 b. –3 c. –0.3 d. 0.3 112. If the cross-price elasticity of demand of two goods is negative, we can conclude that the two goods are: a. substitutes. *b. complements. c. normal goods. d. inferior goods. 113. If the cross-price elasticity of demand of two goods is positive, we can conclude that the two goods are: a. normal goods. b. inferior goods. *c. substitutes. d. complements. 114. Tonya consumes 40 steaks a year when her yearly income is $40,000. After her income falls to $35,000 a year, she consumes only 35 steaks a year. Calculate her income elasticity of demand for steaks. a. –1 *b. 1 c. –12.5 d. 12.5 115. Tonya consumes 10 boxes of Ramen Noodles a year when her yearly income is $40,000. After her income falls to $30,000 a year, she consumes 40 boxes of Ramen Noodles a year. Calculate her income elasticity of demand for Ramen Noodles. a. 4.2 *b. –4.2 c. –2.25 d. 2.25 116. If the income elasticity of demand of a good is negative, we can conclude that the good is: a. a normal good. *b. an inferior good. c. a substitute. d. a complement. 117. If the income elasticity of demand of a good is positive, we can conclude that the good is: *a. a normal good. b. an inferior good. c. a substitute. d. a complement. 118. (Figure: Midpoint Formula) Refer to the figure. Based on the midpoint formula, what is the elasticity of demand between $40 and $60? Figure: Midpoint Formula a. 1.25. *b. 2.5. c. 0.75. d. 4/5. 119. An owner of an appliance store lowers the price of dishwashers from $400 to $350, which increases the number of dishwashers sold from 1,000 to 1,200. What is the elasticity of demand? a. 1.25 b. 1.4 *c. 1.36 d. 0.73 120. Figure: Calculating Elasticities Reference: Ref 5-5 (Figure: Calculating Elasticities) Refer to the figure. The elasticity of demand in the left panel is ________ the elasticity of demand in the right panel. a. greater than *b. less than c. equal to d. a long-run version of 121. Figure: Calculating Elasticities Reference: Ref 5-5 (Figure: Calculating Elasticities) Refer to the figure. The absolute value of the demand elasticity of the demand curve in the right panel is: a. less than 1. b. equal to 1. *c. greater than 1. d. Not enough information is provided. 122. The elasticity of demand for cigarettes is more inelastic in the long run than in the short run because it takes a long time for some people to quit smoking. a. True *b. False 123. Demand for necessities is inelastic, while demand for luxuries is elastic. *a. True b. False 124. When a good has fewer substitutes in consumption, is a small part of the consumer's budget, and a long time passes, demand for such a good is inelastic. a. True *b. False 125. Demand for necessities is elastic, while demand for luxuries is inelastic. a. True *b. False 126. The flatter the demand curve, the less is the elasticity of demand. a. True *b. False 127. The demand curve is elastic if an increase in price reduces the quantity demanded by only a little. a. True *b. False 128. The demand for oil would become less elastic if the price of oil increases by a significant amount for a long period of time. a. True *b. False 129. If a rising price leads to falling revenues, then demand is elastic. *a. True b. False 130. If a 3.67 percent increase in price causes a 1.97 percent decrease in quantity demanded, then total revenue must fall following an increase in price. a. True *b. False 131. Assume a product has an inelastic demand curve. If the producer of the good raises the price of the product, that producer's total revenue will decrease. a. True *b. False 132. Assume a product has a rather elastic demand curve. If the producer of the good raises the price of the product, that producer's total revenue will always decrease. *a. True b. False 133. When the demand curve is inelastic, total revenues go down in proportion to a price increase. a. True *b. False 134. Drug prohibition is likely to increase drug-industry revenue because the demand for drugs is inelastic. *a. True b. False 135. The demand curve for computer chips is inelastic so revenues for the computer chip industry have increased with a decrease in the price of computer chips. a. True *b. False 136. Suppose that it is extremely inexpensive to acquire additional acres of land to grow bananas. We would then expect that the elasticity of supply of bananas is elastic. *a. True b. False 137. The elasticity of supply measures how sensitive the supply curve is to a change in price. a. True *b. False 138. Similar to the elasticity of demand, the elasticity of supply tends to become more elastic in the long run. *a. True b. False 139. The fundamental determinant of the elasticity of supply is how quickly per-unit costs increase with an increase in production. *a. True b. False 140. If the price of music CDs increases by 10 percent and the quantity supplied increases by 20 percent, the elasticity of supply is equal to 2.0, perhaps indicating the ease of increased production at a relatively constant unit cost. *a. True b. False 141. With certain goods, such as high quality Scotch whiskey, it is nearly impossible to increase output easily, suggesting a supply elasticity value greater than 1. a. True *b. False 142. A cross-price elasticity value that is negative will always indicate goods that are substitutes. a. True *b. False 143. A cross-price elasticity value that is positive will always indicate goods that are substitutes. *a. True b. False 144. (Figure: Elasticity of Swim Trunks) The demand for swim trunks appears in the figure. What is the elasticity of demand for swim trunks? Suppose that your swimwear business is currently overstocked with swim trunks. If you want to sell 18 percent more swim trunks, how much should you cut your price? Figure: Elasticity of Swim Trunks Correct Answer: The elasticity of demand is 30/25 ÷ –10/15 = –1.8, or 1.8 in absolute value terms. Elasticity of Demand = percentage change in Q/Percentage change in P, or –1.8 = 18/Percentage change in P. Solving for the Percentage change in P, we get –10. So the price must be cut 10 percent to increase the number of swim trunks sold by 18 percent. 145. The demand curves for Good A and Good B are given by Qa = 100 – Pa and Qb = 50 – 0.2Pb, where Qa is the quantity demanded of Good A, Pa is the price of Good A, Qb is the quantity demanded of Good B, and Pb is the price of Good B. a. Graph the demand curve for both goods. b. Which demand curve is more elastic? c. If the price of both goods increases from $50 to $60, what happens to total revenue in each market? d. Use the midpoint formula to calculate the elasticity of demand for both goods resulting from the price change in part c. e. What do your elasticity of demand calculations in part d tell you about the elasticity of demand for Goods A and B? Correct Answer: a. b. The demand for Good A is more elastic. c. In Market A at a price of $50, quantity demanded is 50, and at a price of $60, quantity demanded is 40. The change in total revenue is 60 × 40 – 50 × 50 = –100. In Market B at a price of $50, quantity demanded is 40, and at a price of $60, quantity demanded is 38. The change in total revenue is 60 × 38 – 50 ÷ 40 = 280. d. The elasticity of demand for Good A is –10/45 ÷ 10/55 = –1.22, or 1.22 in absolute value terms. The elasticity of demand for Good B is –2/39 ÷ 10/55 = – 0.28, or 0.28 in absolute value terms. e. An elasticity of demand equal to –1.22 indicates that the demand for Good A is elastic in that range. An elasticity of demand equal to –0.28 indicates that the demand for Good A is inelastic in that range. 146. For each of the following goods would you expect the demand to be elastic or inelastic? Provide explanation for each of your rationales. a. oil b. Coca-Cola c. bread Correct Answer: a. The demand for oil is inelastic, at least in the short run, because there are few substitutes for oil in its major use, transportation. However if the price of oil increases by a significant amount for a long period of time then the demand for oil will become more elastic as substitutes are developed. b. Some people have an elastic demand for Coca-Cola because for them Pepsi or other soft drinks can be good substitutes for Coca-Cola, whereas other people may have a more inelastic demand for Coca-Cola if they will keep buying Coca-Cola when the price of Coca-Cola increases. c. The price of bread is too small a portion of the budgets to worry very much about its price so the consumption of bread is inelastic. 147. Consider a market that is described by the equations Qd = 10 – 0.5P, and Qs = –2 + 1.5P. What is the equilibrium price? What is the equilibrium quantity? If the supply curve shifts and the new supply equation is –4 + 1.5P, what are the new equilibrium price and the new equilibrium quantity? Calculate the price elasticity of demand. Is the demand curve rather inelastic or rather elastic? Correct Answer: 10 – 0.5P = –2 + 1.5P 12 = 2P P = $6 and Q = 7 When the supply curve shifts, new equilibrium is: 10 – 0.5P = –4 + 1.5P 14 = 2P P = 7, and Q = 6.5 Price elasticity of demand = [(6.5 – 7)/6.75] / [(7 – 6)/6.5] = –0.481, or 0.481 in absolute value terms. The demand curve is inelastic. 148. (Figure: iPod Consumers) A local electronics store sells iPods for $100 per unit. The manager who took a lesson from his economics course in college decides to offer a 20 percent discount to students who can present their current student ID at purchase. Given the demand curves for regular and student customers, answer the following questions. Figure: iPod Consumers a. What will be the total revenue for both groups of customers if the store offers the discount? b. For which group of customers is the demand more elastic? c. What is the elasticity of demand between the prices of $100 and $80 in the regular market? d. What is the elasticity of demand between the prices of $100 and $80 in the student market? e. If the manager increases the regular price of iPods to $120 and lowers the discount price to $70, how much could the store increase total revenues? Correct Answer: a. Total revenue from regular consumers is $7,000 and from students at the discount rate is $9,600. Total revenue from all sales would be $16,600. b. The demand for student customers is more elastic. c. The elasticity of demand for regular customers is –10/75 ÷ 20/90 = –0.60, or 0.60 in absolute value terms, which is inelastic. d. The elasticity of demand for student customers is –70/85 ÷ 20/90 = –3.7, or 3.7 in absolute value terms, which is elastic. e. If the price is increased to $120 for regular customers and decreased to $70 for student customers, total revenue would increase to $18,050, or an additional $1,450. 149. Explain the change in tactics Gary Becker suggests concerning the method of fighting the war on drugs. What is so attractive about this alternative? Correct Answer: Becker suggests that a tax could be set so that it raised seller costs exactly as much as does a prohibition. Since the tax raises costs by the same amount the quantity of drugs sold would be the same under the tax as under prohibition. The only difference would be that instead of increasing seller revenues a tax would increase government revenues. Many of the unfortunate spillovers of the war on drugs—things like gangs, guns, and corruption—could be greatly reduced under a “legal but taxed” system. 150. For each of the following goods would you expect the supply to be elastic or inelastic? Provide explanation for each of your rationales. a. oil b. toothpicks c. Picasso paintings. Correct Answer: a. The supply curve for oil is quite inelastic because to produce more requires a significant increase in the costs of exploration and drilling. b. The supply of toothpicks will be very elastic as toothpick manufacturers can increase the supply of toothpicks without an increase in their costs per toothpick by cutting down just a few more trees and running them through the mill. c. Picasso paintings will be very inelastic, perhaps perfectly inelastic, as Picasso won't be painting any more Guernica's no matter how high the price of his paintings rises. 151. Summarize the factors that cause goods to have a more inelastic supply. Correct Answer: [Note: Students will likely give varying answers, this table replicates examples shown in the text] Table 5.3 Primary Factors Determining the Elasticity of Supply Less Elastic More Elastic Difficult to increase production at Easy to increase production at constant constant unit cost (e.g., some raw materials) Large share of market for inputs Global supply Short run unit cost (e.g., some manufactured goods) Small share of market for inputs Local supply Long run 152. Consider a market that is described by the equations Qd = 10 – 0.5P, and Qs = –2 + 1.5P. What is the equilibrium price? What is the equilibrium quantity? If the demand curve shifts and the new demand equation is 8 – 0.5P, what are the new equilibrium price and the new equilibrium quantity? Calculate the price elasticity of supply. Is the supply curve rather inelastic or rather elastic? Correct Answer: 10 – 0.5P = –2+1.5P 12 = 2P P = $6 and Q = 7 When the demand curve shifts, new equilibrium is: 8 – 0.5P = –2+1.5P 10 = 2P P = 5, and Q = 5.5 Price elasticity of supply = [(5.5 – 7)/6.25] / [(5 – 6)/5.5] = 1.32 The supply curve is elastic. 153. Discuss the effectiveness of slave redemption programs when it is assumed that the elasticity of the supply of slaves is perfectly inelastic. Use a supply and demand diagram to help illustrate your response. Correct Answer: [Note: Students will likely use varying values in the diagram and discussion; this diagram replicates the example shown in the text.] Before the slave redemption program begins the price of a slave is $15 and there are 1,000 slaves bought and held in captivity every year (Point a). With the redemption program the demand for slaves increases (shifts outward) which pushes the price of slaves up to $50 (Point b). Now here is the key: at a price of $50 the quantity of slaves demanded by potential slave owners decreases to 200 (Point c). The remaining 800 slaves are bought and freed by the redeemers. Because there is no increase in the quantity supplied in this case, every slave purchased is a slave freed. 154. (Table: Price Elasticities) Refer to the table. Use the information provided to predict the following: Table: Price Elasticities Good X Good Y Price Elasticity of Demand 0.5 1 Price Elasticity of Supply 1 0.5 a. The percent change in price when there is a 2 percent rise in the quantity demanded for Good X. b. The percent change in price when there is a 5 percent fall in the quantity demanded for Good Y. c. The percent change in price when there is a 5 percent fall in the quantity supplied of Good X. Correct Answer: a. 2/(1.5) = 1.33% rise in P b. 5/(1.5) = 3.33% fall in P c. –5/(1.5) = 3.33% rise in P 155. (Table: Elasticities of Good X) Refer to the table. From the information in the table, what can you say about good X? In particular, is the demand for Good X rather elastic or inelastic? What does this imply about the number of substitutes that exist for Good X? Does Good Y appear to be a substitute for Good X? Does Good X appear to be a normal or inferior good? Finally, is the elasticity of supply for Good X relatively elastic or inelastic? Table: Elasticities of Good X Good X Price Elasticity of Demand 2.5 Income Elasticity of Demand 0.5 Cross-price Elasticity of Demand with Good 1.5 Y Price Elasticity of Supply 1 Correct Answer: Good X has a rather elastic demand curve (we know this because the elasticity of demand is 2.5 in absolute value). Thus it seems to have good substitutes. From looking at the cross-price elasticity value, we know that Good Y is a substitute good for good X (the cross-price elasticity value is positive). Good X is also a normal good as can be seen from the positive income elasticity of demand value. Finally it has a unit elastic supply curve. 156. Which of the following statements is TRUE? I. A $0.50 tax on each fishing lure sold raises the price per lure by $0.50. II. A tax on sellers is equivalent to a tax on buyers. III. A tax on buyers is analyzed by shifting the demand curve up by the amount of the tax. a. I and II only b. II and III only *c. II only d. I, II, and III 157. Without taxes, the market price per bag of apples is $5. With a $2 tax per bag of apples, buyers now pay $5.75 per bag. What is the final price per bag of apples received by sellers? a. $5.00 b. $7.75 c. $3.00 *d. $3.75 158. The question of who pays the greater amount of a commodity tax is determined by: a. Congress. b. the President of the United States. *c. the relative elasticities of demand and supply. d. the individual who writes the check for the tax. 159. Figure: Tax on Sellers Reference: Ref 6-1 (Figure: Tax on Sellers) Suppose the imposition of a per-unit tax on sellers shifts the supply curve from S0 to S1. Using the figure, calculate the amount of the tax. a. $1 b. $2 *c. $3 d. $4 160. Figure: Tax on Sellers Reference: Ref 6-1 (Figure: Tax on Sellers) Refer to the figure. Suppose the imposition of a per-unit tax on sellers shifts the supply curve from S0 to S1. The equilibrium quantity sold under the tax is: a. 4. *b. 12. c. 16. d. 10. 161. Figure: Tax on Sellers Reference: Ref 6-1 (Figure: Tax on Sellers) Refer to the figure. Suppose the imposition of a per-unit tax on sellers shifts the supply curve from S0 to S1. With the tax, buyers pay ________ and sellers receive ________. *a. $6; $3 b. $6; $6 c. $3; $6 d. $3; $4 162. Figure: Tax on Sellers Reference: Ref 6-1 (Figure: Tax on Sellers) If a $3 tax per unit purchased was placed on buyers instead of sellers, buyers would pay ________ and sellers would receive ________. a. $3; $6 *b. $6; $3 c. $4; $6 d. $4; $3 163. A tax on the seller of a product: a. causes the seller's take-home price to rise above that paid by the buyer. b. causes the demand curve for the product to shift to the right. *c. causes the supply curve for the product to shift to the left. d. always causes the equilibrium quantity traded in the market to increase. 164. Figure: Tax on Sellers of Gadgets Reference: Ref 6-2 (Figure: Tax on Sellers of Gadgets) According to the figure, what is the amount of the tax that has been imposed on the sale of gadgets? a. $0.50 *b. $1.00 c. $1.50 d. $5.50 165. Figure: Tax on Sellers of Gadgets Reference: Ref 6-2 (Figure: Tax on Sellers of Gadgets) According to the figure, what is the tax revenue that the government collects from the tax on gadgets? *a. $350 b. $450 c. $175 d. $550 166. Figure: Tax on Sellers of Gadgets Reference: Ref 6-2 (Figure: Tax on Sellers of Gadgets) According to the figure, what is the amount of the deadweight loss caused by the imposition of the tax on gadgets? a. $100 b. $1 c. $0.50 *d. $50 167. (Figure: Tax on Consumers of Gadgets) According to the figure, what is the amount of the tax that has been imposed on gadgets? Figure: Tax on Consumers of Gadgets *a. $ 4 b. $ 2 c. $ 8 d. $ 12 168. When a tax is imposed on consumers the demand curve will: *a. shift downward by the amount of the tax. b. shift upward by the amount of the tax. c. shift downward by less than the amount of the tax. d. not shift since sellers collect per unit taxes. 169. A tax on sellers of popcorn will: a. increase the size of the popcorn market. *b. reduce the size of the popcorn market. c. may increase, decrease, or have no effect on the size of the popcorn market. d. have no effect on the size of the popcorn market. 170. If a tax is imposed on sellers of a product the demand curve will: a. shift upward. b. shift downward. *c. not shift. d. shift upward or downward depending on elasticity of demand. 171. A tax on sellers of apples: *a. leads sellers to supply less apples at every price. b. leads sellers to supply more apples at every price. c. causes the supply curve to shift to the right. d. leads buyers to demand more apples at every price. 172. Suppose there is a tax of $50 on bicycles. The supply curve for bicycles slopes upward. The demand curve for bicycles slopes downward. Sellers are required by law to pay the tax. If the tax is reduced from $50 to $10 per bicycle, then the: *a. supply curve will shift downward by $40. b. demand curve will shift downward by $40. c. demand curve will shift upward by $40. d. supply curve will shift upward by $40. 173. Which of the following is correct concerning the burden of a tax imposed on coffee mugs? *a. Buyers and sellers share the burden of the tax. b. Buyers bear the entire burden of the tax. c. Sellers bear the entire burden of the tax. d. It depends on whether the buyers or the sellers are required to pay the tax. 174. Figure: Tax Imposed on Sellers Reference: Ref 6-3 (Figure: Tax Imposed on Sellers) According to the figure, the equilibrium price and quantity before the $1 tax is imposed are: a. $5 and 800. b. $4.40 and 900. *c. $4 and 1,000. d. $3.40 and 900 175. Figure: Tax Imposed on Sellers Reference: Ref 6-3 (Figure: Tax Imposed on Sellers) According to the figure, the price that buyers pay AFTER the tax is imposed is: a. $5. *b. $4.40. c. $4. d. $3.40. 176. Figure: Tax Imposed on Sellers Reference: Ref 6-3 (Figure: Tax Imposed on Sellers) According to the figure, the price that sellers receive AFTER the tax is imposed is: a. $5. b. $4.40. c. $4. *d. $3.40. 177. If buyers are required to pay a tax on top of the price, buyers' willingness to pay will: *a. decrease and the demand curve will shift down. b. decrease and the demand curve will shift up. c. increase and the demand curve will shift down. d. increase and the demand curve will shift up. 178. Figure: Tax on Supply and Demand Reference: Ref 6-4 (Figure: Tax on Supply and Demand) According to the figure, if the tax is placed on buyers, the equilibrium is at Point: a. B, and the equilibrium price and quantity are P3 and Q2. b. C, and the equilibrium price and quantity are P3 and Q2. *c. C, and the equilibrium price and quantity are P1 and Q2. d. D, and the equilibrium price and quantity are P2 and Q1. 179. Figure: Tax on Supply and Demand Reference: Ref 6-4 (Figure: Tax on Supply and Demand) According to the figure, if the tax is placed on sellers, the equilibrium is at Point: a. A, and the equilibrium price and quantity are P3 and Q2. b. A, and the equilibrium price and quantity are P4 and Q3. *c. B, and the equilibrium price and quantity are P3 and Q2. d. C, and the equilibrium price and quantity are P1 and Q2 180. Figure: Tax on Supply and Demand Reference: Ref 6-4 Suppose that there is a tax of $5 per unit, and the demand curve is more elastic than the supply curve. Which of the following statements could be true? a. Buyers pay $3 of the tax. *b. Buyers pay $1 of the tax. c. Sellers pay $1 of the tax. d. Sellers pay all of the tax. 181. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers? a. $0.60 *b. $0.40 c. $0.75 d. $0.67 182. (Figure: Elasticities of Supply and Demand) Which combination of demand and supply curves results in the greatest tax burden to buyers? Figure: Elasticities of Supply and Demand *a. D0 and S0 b. D1 and S1 c. D0 and S1 d. D1 and S0 183. Whether a buyer or a seller pays more of a commodity tax depends on: *a. their relative price elasticities. b. the decisions made by Congress. c. whether the demand curve is negatively or positively sloped. d. whether the supply curve is negatively or positively sloped. 184. Which of the following statements is TRUE? The buyer will pay more of the tax burden if: I. the good is a luxury good. II. the good is a necessity. III. the good has no substitutes. a. I only b. II only *c. II and III only d. I and III only 185. (Figure: Commodity Tax with Elastic Demand) According to the figure, who bears the greater burden of a commodity tax? Figure: Commodity Tax with Elastic Demand a. The buyer will bear the greater burden of the tax. *b. The seller will bear the greater burden of the tax. c. The buyer and the seller will split the tax burden equally. d. The government will bear the full burden of the tax. 186. In the market for Good X—a necessity good without any good substitutes—the workers and capital in the industry can easily find work producing other goods. The burden of the tax is likely to fall: *a. more heavily on buyers, given that demand is more inelastic than supply. b. evenly between buyers and sellers. c. more heavily on sellers, given that supply is more inelastic than demand. d. more heavily on buyers, given that demand is more elastic than supply. 187. (Figure: Commodity Tax with Elastic Supply) According to the figure, who bears the greater burden of the tax? Figure: Commodity Tax with Elastic Supply *a. The buyer will bear the greater burden of the tax. b. The seller will bear the greater burden of the tax. c. The buyer and the seller will split the tax burden equally. d. The government will bear the full burden of the tax. 188. With regard to tax burdens, what does the “elasticity = escape” idea tell you? *a. that the curve (between demand and supply) that is relatively more elastic will bear less of the tax burden b. that the curve (between demand and supply) that is relatively more inelastic will bear less of the tax burden c. that the curve (between demand and supply) that is relatively more elastic will escape the tax burden entirely d. that the ratio of the buyers' tax burden to the sellers' tax burden is always greater than 1 189. If the elasticity of demand is 2 in absolute value, and the elasticity of supply is 1 in absolute value, how much of a tax burden will the buyer bear relative to the seller? a. The buyer will bear more of the tax burden than will the seller. *b. The seller will bear more of the tax burden than will the buyer. c. The buyer and seller will share the tax burden equally. d. The buyer will not bear none of the tax burden since demand curve is twice as elastic as supply. 190. If the elasticity of demand is 1 in absolute value, and the elasticity of supply is 1 in absolute value, how much of a tax burden will the buyer bear relative to the seller? a. The buyer will bear more of the tax burden than will the seller. b. The seller will bear more of the tax burden than will the buyer. *c. The buyer and seller will share the tax burden equally. d. The buyer will not bear any of the tax burden since demand is unit elastic. 191. If a tax is imposed on a market with inelastic demand and elastic supply: *a. buyers will bear most of the burden of the tax. b. sellers will bear most of the burden of the tax. c. the burden of the tax will be shared equally between buyers and sellers. d. there is no way to determine how the burden of the tax will be shared. 192. If a tax is imposed on a market with elastic demand and inelastic supply: a. buyers will bear most of the burden of the tax. *b. sellers will bear most of the burden of the tax. c. the burden of the tax will be shared equally between buyers and sellers. d. there is no way to determine how the burden of the tax will be shared. 193. Buyers bear a greater share of a tax burden when a tax is imposed in a market where: a. demand is more elastic than supply. *b. supply is more elastic than demand. c. the tax is imposed on sellers. d. the tax is imposed on buyers. 194. Which of the following is a correct statement about tax burdens? a. A tax burden is distributed independently of relative elasticities of supply and demand. b. A tax burden falls most heavily on the side of the market that is closer to unit elastic. *c. A tax burden falls most heavily on the side of the market that is less elastic. d. A tax burden falls most heavily on the side of the market that is more elastic. 195. Which of the following statements is correct? a. When demand is more inelastic than supply, sellers pay more of the tax. *b. When demand is more elastic than supply, sellers pay more of the tax. c. When supply is more inelastic than demand, buyers pay more of the tax. d. When supply is more elastic than demand, sellers pay more of the tax. 196. If the elasticity of supply is 1, and the elasticity of demand is 3 (in absolute value), then for a tax of $1 buyers will pay: *a. an extra 25 cents and sellers will receive 75 cents less. b. an extra 75 cents and sellers will receive 25 cents less. c. an extra 50 cents and sellers will receive 50 cents less. d. nothing extra since this is the special case where demand is unit elastic. 197. Most labor economists believe that the supply of labor is ______ elastic than firms' demand for labor, and therefore ______ bear most of the burden of a payroll tax. a. more; workers *b. less; workers c. less; firms d. more; firms 198. When a payroll tax is enacted or a mandate requires firms to provide health insurance the wage paid to workers ______ and the wage paid by firms ______. a. rises; rises b. rises; falls c. falls; falls *d. falls; rises 199. Which of the following statements is NOT true for a case in which the demand for labor is more elastic than the supply of labor? a. Firms can substitute capital for labor if the health insurance on labor gets too costly. b. Most workers would continue to work even if their wages were lower because of the cost of health insurance. *c. Firms cannot escape the cost of health insurance for labor by employing fewer workers. d. Firms can move overseas if the tax on labor gets too high. 200. Suppose the demand for pizza is inelastic and the supply of pizza is elastic, and the demand for cigarettes is inelastic and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the burden of: a. the pizza tax would fall more heavily on sellers than on buyers, and the burden of the cigarette tax would fall more heavily on buyers than on sellers. b. the pizza tax would fall more heavily on buyers than on sellers, and the burden of the cigarette tax would fall more heavily on sellers than on buyers. *c. both the pizza and the cigarette taxes would fall more heavily on buyers than on sellers. d. both the pizza and the cigarette taxes would fall more heavily on sellers than on buyers. 201. Which of the following statements is TRUE regarding cigarette taxes? a. Cigarette manufacturers bear almost all of the cigarette taxes. b. Cigarette manufacturers tend to ship their product from low-tax states to high-tax states. c. The elasticity of cigarette supply in all states is very small so cigarette manufacturers receive higher after-tax prices in higher-tax states. *d. After-tax prices received by cigarette manufacturers are about the same in all states. 202. Which of the following is the correct answer to the question: Why do smokers pay almost all the taxes assessed on cigarettes? I. Because they are addictive, the demand for cigarettes is relatively elastic when compared to the supply curve of cigarettes. II. Because they are addictive, the demand for cigarettes is relatively inelastic when compared to the supply of cigarettes. III. Cigarette manufacturers can very easily escape a state tax by selling in a different state. a. I only b. II only c. I and III only *d. II and III only 203. Martin's maximum willingness to pay for an electric boat motor is $250. Because of a tax, the price of the motor increases from $230 to $280. The deadweight loss of the tax attributable to Martin is: *a. $20. b. $250. c. $50. d. $30. 204. Figure: Imposition of a Tax Reference: Ref 6-5 (Figure: Imposition of a Tax) Refer to the figure. After the imposition of a $4 tax, the government collects revenues of: a. $75. *b. $100. c. $210. d. $50. 205. Figure: Imposition of a Tax Reference: Ref 6-5 (Figure: Imposition of a Tax) Refer to the figure. Consumer surplus before the $4 tax is ________, and consumer surplus after the $4 tax is ________. *a. abc; a b. a; c c. ab; c d. f; bd 206. Figure: Imposition of a Tax Reference: Ref 6-5 (Figure: Imposition of a Tax) Refer to the figure. With a $4 tax, the deadweight loss is: a. $10. b. $35. *c. $20. d. $40. 207. Figure: Consumer and Producer Surplus Reference: Ref 6-6 (Figure: Consumer and Producer Surplus) According to the figure, what is the value of the deadweight loss? a. The deadweight loss cannot be calculated. b. $900 c. $100 *d. $50 208. Figure: Consumer and Producer Surplus Reference: Ref 6-6 (Figure: Consumer and Producer Surplus) According to the figure, what would happen to the deadweight loss if the tax increased to $2 per basket of apples? a. The new tax would minimize deadweight loss. b. Deadweight loss does not change due to a change in the tax. c. There is no way to tell what will happen to deadweight loss. *d. Deadweight loss will increase. 209. To be efficient, the revenue from taxation must provide goods that have benefits that ________ the deadweight loss caused by the taxation itself. a. maximize *b. exceed c. eliminate d. minimize 210. Figure: Commodity Tax on Suppliers Reference: Ref 6-7 (Figure: Commodity Tax on Suppliers) Refer to the figure. If a tax shifts the supply curve from S1 to S2, tax revenue is: a. $3,600. b. $2,700. *c. $1,800. d. $1,000. 211. Figure: Commodity Tax on Suppliers Reference: Ref 6-7 (Figure: Commodity Tax on Suppliers) Refer to the figure. If a tax shifts the supply curve from S1 to S2, the value of deadweight loss is: a. $200. *b. $100. c. $50. d. $25. 212. Figure: Tax on Consumers of Gadgets Reference: Ref 6-8 (Figure: Tax on Consumers of Gadgets) Refer to the figure. What is the amount of the deadweight loss caused by the imposition of the tax on gadgets? a. $800 b. $3,200 *c. $400 d. $200 213. Figure: Tax on Consumers of Gadgets Reference: Ref 6-8 (Figure: Tax on Consumers of Gadgets) Refer to the figure. What is the tax revenue that the government collects from the tax on gadgets? a. $800 *b. $3,200 c. $400 d. $200 214. A ________ creates a situation in which the price received by sellers ________ the price paid by buyers. a. tax; exceeds b. tax; equals c. subsidy; is less than *d. subsidy; exceeds 215. Which of the following statements is TRUE? A tax and subsidy are similar in that: I. they both create a deadweight loss. II. the burden of the tax and benefit of the subsidy depend on relative elasticities of demand and supply. III. they both change the equilibrium level of output. a. I only b. I and II only *c. I, II, and III d. I and III only 216. Figure: Supply and Demand with Subsidy Reference: Ref 6-9 (Figure: Supply and Demand with Subsidy) Refer to the figure. With a $2-per-unit subsidy, the price received by sellers is ________ and the price paid by consumers is ________. a. $3; $2 b. $2; $4 *c. $4; $2 d. $3; $4 217. Figure: Supply and Demand with Subsidy Reference: Ref 6-9 (Figure: Supply and Demand with Subsidy) Refer to the figure. The quantity traded with a $2 subsidy is: a. greater than 400. *b. 400. c. 200. d. less than 200. 218. Figure: Supply and Demand with Subsidy Reference: Ref 6-9 (Figure: Supply and Demand with Subsidy) Refer to the figure. The deadweight loss from a $2 subsidy is: *a. $100. b. $800. c. $50. d. $400. 219. Which one of the following statements about subsidies is NOT correct? a. Subsidies cause deadweight losses. b. Who actually receives the subsidy does not depend on who gets the check from the government. *c. Subsidies always increase the gains from trade for producers. d. Who benefits from the subsidy depends on the relative elasticities of demand and supply. 220. A subsidy is: a. similar to a reverse tax. b. calculated as the price received by sellers minus the price paid by buyers. c. paid for by taxpayers. *d. All of the answer choices are correct. 221. Figure: Demand and Supply with Subsidy Reference: Ref 6-10 (Figure: Supply and Demand with Subsidy) Refer to the figure. Suppose a subsidy allows sellers to receive their product at the price of $8 with a quantity of 400 units. What is the dollar amount of the subsidy per unit of the good? a. $1 b. $6 *c. $2 d. $100 222. Figure: Demand and Supply with Subsidy Reference: Ref 6-10 (Figure: Supply and Demand with Subsidy) Refer to the figure. What is the total cost of the subsidy for taxpayers? a. $400 *b. $800 c. $3,200 d. $2,400 223. Figure: Demand and Supply with Subsidy Reference: Ref 6-10 (Figure: Supply and Demand with Subsidy) Refer to the figure. What is the deadweight loss caused by the subsidy? *a. $100 b. $200 c. $3,200 d. $800 224. Which of the following statements is correct for a specific good or service? a. Whoever pays for a subsidy also pays the entire commodity tax on an item. *b. Whoever bears the burden of a tax also receives the benefit of the subsidy. c. Whoever bears the burden of a tax also bears the cost of the subsidy. d. Governments bear the burdens of both taxes and subsidies. 225. Which of the following statements is correct? *a. If the elasticity of demand is greater than the elasticity of supply, sellers will receive more of the subsidy. b. If the elasticity of demand is greater than the elasticity of supply, sellers will receive less of the subsidy. c. If the elasticity of demand is less than the elasticity of supply, sellers will receive more of the subsidy. d. If the elasticity of demand is greater than the elasticity of supply, buyers will receive more of the subsidy. 226. Unlike price floors, subsidies: a. cause surpluses. b. discourage firms from producing. *c. do not create surpluses. d. create shortages. 227. Which of the following statements is TRUE regarding subsidy? a. A subsidy causes the value of goods to exceed the cost of producing the goods. b. A subsidy reduces deadweight loss of non-beneficial trade. c. A subsidy means that the sellers receive less than buyers pay. *d. Suppliers receive more benefit of a subsidy if the elasticity of supply is less than the elasticity of demand. 228. Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts? a. Cotton growers in California don't pay payroll taxes. *b. The water used to grow California cotton is highly subsidized by the government. c. Cotton growers in California are mostly operated as nonprofit enterprises. d. The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield. 229. A wage subsidy will: a. reduce the wages received by workers. b. reduce the number of workers employed. *c. increase the number of workers employed. d. increase the unemployment rate, especially among low-skilled workers. 230. Not only do both wage subsidies and minimum wages increase wages, but: a. they also increase employment. b. they also reduce employment. *c. subsidies increase employment, whereas minimum wages reduce it. d. subsidies reduce employment, whereas minimum wages increase it. 231. Why has the Earned Income Tax Credit (EITC) increased employment among single mothers? a. It provides a certain amount of tax relief for single men. b. It provides a certain amount of tax relief for childless married couples. *c. It provides a certain amount of tax relief for families with children. d. It provides a certain amount of tax relief for all low income workers. 232. Figure: Wage Subsidy Reference: Ref 6-11 (Figure: Wage Subsidy) Refer to the figure. How many additional workers have been hired as a result of the wage subsidy? a. 150 b. 180 *c. 30 d. No additional workers have been hired as a result of the wage subsidy. 233. Figure: Wage Subsidy Reference: Ref 6-11 (Figure: Wage Subsidy) Refer to the figure. If a minimum wage of $8 had been implemented instead of a wage subsidy, how many workers would have been unemployed? *a. 60 b. 30 c. 180 d. 120 234. Figure: Wage Subsidy Reference: Ref 6-11 (Figure: Wage Subsidy) Consider the use of wage subsidies versus the minimum wage. Employment with a wage subsidy is: ________, versus employment with an $8 minimum wage is: ________. *a. 180; 120 b. 120; 180 c. 150; 150 d. 180; 180 235. In a market with a downward sloping demand curve and an upward sloping supply curve, a tax placed on sellers will cause sellers to receive a lower price and buyers to pay a higher price. *a. True b. False 236. If a tax is levied on the buyers of a product, the tax burden will fall entirely on the buyers. a. True *b. False 237. If the demand and supply curves have equal slopes in absolute value, the burden of a commodity tax will be split equally regardless of on whom the tax is placed. *a. True b. False 238. If the demand curve for a good is perfectly inelastic, any commodity tax that is imposed on that market will be entirely paid by the consumer. *a. True b. False 239. When demand is more elastic than supply, buyers bear more of the tax burden. a. True *b. False 240. If the elasticity of supply is 3 and the elasticity of demand is 1 (in absolute value), buyers will bear less of the tax than sellers. a. True *b. False 241. Suppose the government requires firms to buy insurance against hair loss for their employees. Workers will end up paying for this coverage in the form of lower wages. *a. True b. False 242. Taxes lead to a loss of beneficial trades. *a. True b. False 243. Subsidies lead to existence of non-beneficial trades. *a. True b. False 244. With a subsidy, the price paid by the buyers exceeds the price received by sellers. a. True *b. False 245. According to Nobel Laureate Edmund Phelps, minimum wages cause higher unemployment, but wage subsidies cause higher employment. *a. True b. False 246. (Figure: Commodity Tax) Use the figure to answer the following questions. Figure: Commodity Tax a. What is the size of the tax? b. What is the equilibrium quantity before the tax? c. What is the equilibrium quantity with the tax? d. What is the price consumers pay before taxes? e. What is the price consumers pay with the tax? f. What is the price sellers receive before taxes? g. What is the price sellers receive with the tax? h. What is the deadweight loss of the tax? i. What is the government tax revenue? j. What is consumer surplus before the tax? k. What is consumer surplus with the tax? l. What is producer surplus before the tax? m. What is producer surplus with the tax? Correct Answer: a. P2 – P0 b. Q1 c. Q0 d. P1 e. P2 f. P1 g. P0 h. ce i. bd j. abc k. a l. def m. f 247. (Figure: Supply and Demand with Tax on Suppliers) Using the graph shown, answer the following questions. Figure: Supply and Demand with Tax on Suppliers a. What was the equilibrium price in this market before the tax? b. What is the amount of the tax? c. How much of the tax will the buyers pay? d. How much of the tax will the sellers pay? e. How much will the buyer pay for the product after the tax is imposed? f. How much will the seller receive after the tax is imposed? g. As a result of the tax, what has happened to the level of market activity? Correct Answer: a. $10.00 b. $5.00 c. $2.50 d. $2.50 e. $12.50 f. $7.50 g. Market activity has declined from 100 units bought and sold to 80 units bought and sold. 248. Using demand and supply diagrams show the difference between a tax imposed on sellers and a tax imposed on buyers. In each diagram, identify the equilibrium price and quantity with no tax, equilibrium quantity with the tax, price paid by buyers, and price received by sellers. Correct Answer: Note in the following diagrams, equilibrium prices begin at the same level and that prices paid by the buyers are the same as are prices received by the sellers. Similarly, Qs with no tax are the same in both diagrams as are Qs with taxes. 249. A market is described by the equations Qd = 100 – P, and Qs = P. A tax of $10 is placed on the buyer of the product such that the new demand equation becomes Qd = 100 – (P + T), where T is the tax is dollars. Does the buyer pay the whole $10 of the tax burden? How much does the buyer pay? How much does the seller pay? Why do they split the burden in this way? Correct Answer: The original equilibrium is 100 – P = P. 100 = 2P. Therefore P = $50 and Q = 50. The buyer pays $50 and the seller receives $50. The equilibrium Q in this market is 50 units. After the imposition of the tax, the new demand equation is Qd = 100 – (P + T) where T = $10. So substituting in for the tax, Qd = 100 – (P + 10). Solving for new equilibrium: 100 – (P + 10) = P 100 – P – 10 = P 90 = 2P P = $45. But the buyer pays (P + T) = $(45 + 10) = $55. Thus the buyer pays $55 and the seller receives $45. The tax burden was split equally between the buyer and the seller, and this is because they have equal elasticities (in absolute value). Thus the buyer paid $5 of the tax and the seller paid $5 of the tax. 250. A market is described by the equations Qd = 100 – P, and Qs = P. A tax of $10 is placed on the seller of the product such that he will receive less to take home than the original equilibrium price. Therefore, the new supply equation becomes Qs = (P – T). Does the seller pay the whole $10 of the tax burden? How much does the seller pay? How much does the buyer pay? Why do they split the burden in this way? Correct Answer: The original equilibrium is 100 – P = P. 100 = 2P. Therefore P = $50 and Q = 50. The buyer pays $50 and the seller receives $50. The equilibrium Q in this market is 50 units. After the imposition of the tax, the new supply equation is Qs = (P – T) where T = $10. So substituting in for the tax, Qs = (P – 10). Solving for new equilibrium: 100 – P = P – 10 110 = 2P P = $55. But this is the price that the buyer pays. The seller gets less at (P – T) = $(55 – 10) = $45. The tax burden was split equally between the seller and the buyer, and this is because they have equal elasticities (in absolute value). Thus the seller paid $5 of the tax and the buyer paid $5 of the tax. 251. Explain in your own words why the imposition of a tax results in a deadweight loss. Given this, should we eliminate all taxes on goods/services because they result in deadweight losses? Explain why or why not. Correct Answer: Since imposing a tax increases the price that consumers must pay (and decreases the price that suppliers receive), some mutually beneficial trades do not occur. The value of these “lost” trades is the deadweight loss associated with the tax. Even though taxes create a deadweight loss they also pay for beneficial goods and services and hence we should not eliminate all taxes simply because they result in a positive deadweight loss. 252. A market is described by the equations Qd = 40 – 2P, and Qs = –20 + 4P. A tax of $3 is placed on the seller of the product such that the new supply equation becomes Qs = –20 + 4(P – T), where T is the tax in dollars. What is the new price paid by buyers and the new take-home price for the sellers? What is the total amount of the deadweight loss created in this market? Correct Answer: Original equilibrium = 40 – 2P = –20 + 4P 40 + 20 = 4P + 2P 60 = 6P P = $10 and the equilibrium Q = 20. Now with the imposition of the tax, the new supply equation becomes –20 + 4(P – T) Therefore the new equilibrium is: 40 – 2P = –20 + 4(P – 3) 40 – 2P = –20 + 4P – 12 40 + 20 + 12 = 4P + 2P 72 = 6P P = $12. But this is the price that the buyers pay. The sellers receive (P – T) = (12 – 3) = $9. Thus the seller bears only $1 of the burden and the buyer bears $2 of the burden. The new Q traded in the market can be found by substituting $12 into the D equation or $9 into the S equation. That new Q is 16. DWL = 0.5 × 3 × 4 = $6. 253. A market is described by the equations Qd = 100 – P, and Qs = P. A subsidy of $10 is awarded to the seller of the product such that the new supply equation becomes Qs = (P + S). What is the quantity of non-beneficial trades that take place in this market? What is the total cost of the subsidy for taxpayers? What is the total amount of the deadweight loss in this market as a result of the installation of the subsidy? Correct Answer: 100 – P = P + 10 90 = 2P P = $45. So the producers receive $(45 + 10) = $55. At $55, Qs = 65. So, 15 non-beneficial trades take place (65 – 50). 15 trades at a cost of $10 each costs taxpayers $150. DWL = 0.5 × 10 × 15 = $75. 254. Assume you are a critic of subsidies for water used in agriculture. Create an argument (using economic theory) that outlines WHY you believe these subsidies to be inefficient. Correct Answer: The critique is based on the premise that water in the California desert is more valuable than water in Georgia or Texas. Spending money to accumulate and transport water for agriculture in California is far more costly than in those states where water is more plentiful. Therefore, the water subsidy is a waste of resources, and the waste created by the water subsidy is compounded more with other agricultural subsides. 255. A labor market is described by two very simple equations Qd = 60 – 2W, and Qs = 3W. A subsidy of $10 is installed such that the new demand equation becomes Qd = 70 – 2W. What is the total number of new workers that are hired in this labor market? Correct Answer: 60 – 2W = 3W 60 = 5W W = $12 The labor market is at equilibrium at $12, and the equilibrium number of workers hired = 36. Now after the subsidy is installed, the new demand equation is 70 – 2W. New equilibrium: 70 – 2W = 3W 70 = 5W W = $14 The new equilibrium quantity of labor is 42. Thus six more workers are hired in this labor market. 256. Which of the following factors contribute to the increased speed of trade across countries? I. profit opportunities for sellers II. better transportation networks III. increased cooperation among countries a. I only b. II and III only c. I and III only *d. I, II, and III 257. It is Valentine's Day in the United States, and you give your lover one dozen roses that were freshly picked 72 hours ago from the fields of Kenya. What made this gift possible? a. the United Nations Director of Horticultural Operations, who oversees the planting and transportation of flowers around the world b. the Jennifer Flowers Act that helps coordinate the logistics of agricultural trade flows between the United States and Kenya *c. economic markets d. All of the answers are correct. 258. Collected by workers in Peru, cochineal bugs are used to dye certain U.S. food items red. Market activities, such as this one, can best be described as: *a. cooperative, voluntary, and undirected. b. chaotic and primitive. c. directed and uncooperative. d. orderly, involuntary, and centrally directed. 259. The wearing of costumes at Halloween is largely a Western custom. In China, the Halloween festivals are very different in that they involve more of the presentation of gifts and food to family members and others that have passed away. Which of the following is a reasonable explanation for why the Western market for Halloween costumes might be important for Chinese firms and factories? a. The costumes that the Chinese do not use during their festivals can be exported to the West. *b. Knowledge of the Western Halloween festival and demand for costumes can translate into profits for Chinese producers who can produce such costumes at low costs. c. The West can export costumes for the Chinese to wear during their Halloween Festivals. d. Chinese producers can try to market Chinese festivals to American consumers. 260. Hundreds of thousands of producers working across the world cooperate to ensure that millions of consumers can have the goods and services they desire. These producers do not know each other and are not coordinated by a central agency. Their actions are directed simply by: *a. self interest. b. robotic technology. c. their governments. d. computer technology. 261. Markets coordinate in a way that links buyers and sellers who rely primarily on: *a. voluntary cooperation and undirected actions. b. management direction of economic actions. c. governmental policies to direct the economic actions. d. the benevolence and good will of the market participants. 262. Which of the following is a reasonable analogy of the interconnectedness and coordination of markets? a. a large corporation *b. the World Wide Web c. a college dorm d. Nothing can approximate the market. 263. Rising oil prices during the 1970s shifted flower production from California to Kenya. Which of the following answers explains this shift? a. Markets are linked to one another. b. Rising oil prices increased greenhouse heating costs in California making it cheaper to grow flowers in warmer climates. c. The Kenyan flower industry is partially a result of rising oil prices. *d. All of the answers are correct. 264. A decrease in the demand for a good sold in Market A: a. will affect only Market A. *b. might affect other markets, even those halfway across the world. c. will not affect Market A, but it will affect nearby markets. d. might affect distant markets, but it will not affect Market A. 265. Newly formed trade unions raise wages for workers in Country X where cars are manufactured. The higher wages increase costs for the car manufacturers who relocate to Country Y where labor costs are lower. Car manufacturing begins to thrive in Country Y relative to Country X. Which answer best describes the concept highlighted by this scenario? *a. Changes in one market can affect markets and people in other regions of the world. b. Trade unions always cause industries to collapse. c. The links between markets are weakening over time. d. Manufacturing industries are the only industries where markets are linked well. 266. With large natural diamond deposits, South Africa is famous for its diamond exports. The international demand for diamonds for industrial and other purposes such as jewelry has led to the production of synthetic diamonds by other countries such as the United States. Which answer best describes the concept highlighted in this scenario? a. International cooperation has reduced over the years. b. Consumers prefer synthetic diamonds to natural ones. *c. Prices provide incentives for sellers. d. Markets are no longer linked together. 267. When oil prices increased in the 1970s, sellers began to grow roses in ________ countries and sell them in ________ countries. a. Middle Eastern; European b. wealthy; poor c. cold; warm *d. warm; cold 268. Markets are linked in unpredictable and creative ways by: a. treaties that govern trade. *b. entrepreneurs who look for methods of cutting costs. c. careful planning of bureaucrats. d. treaties, entrepreneurs, and bureaucratic planning. 269. Both ethanol and sugar are made from sugar cane and ethanol can be used as a substitute for oil. As the price of oil increases, Brazilians shift sugar cane from sugar production to ethanol production, thereby: a. increasing the price of ethanol. *b. increasing the price of sugar. c. increasing the price of both ethanol and sugar. d. decreasing the price of both ethanol and sugar. 270. If the production of two goods uses a common input, increases in production of one good will cause: *a. decreases in the supply and increases in the price of the other good. b. decreases in the supply and price of the other good. c. increases in the supply and price of the other good. d. increases in the supply and decreases in the price of the other good. 271. Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______. a. demand for; decrease; decrease b. supply of; increase; increase *c. supply of; decrease; increase d. demand for; increase; increase 272. Asphalt is the refined residue from crude oil. When gasoline prices are high, oil refiners pull every last drop of gasoline out of a barrel of crude. This would imply that higher gasoline prices mean a(n): a. increased supply of asphalt, causing lower asphalt prices. b. increased supply of asphalt, causing higher asphalt prices. c. reduced supply of asphalt, causing lower asphalt prices. *d. reduced supply of asphalt, causing higher asphalt prices. 273. When gasoline prices are high, oil refiners have an incentive to pull every last drop of gasoline out of a barrel of crude. This implies that an increase in the demand for gasoline will cause a(n) ______ quantity supplied of gasoline and ______ the supply of the remaining crude oil products. a. increased; increase *b. increased; reduce c. reduced; increase d. reduced; decrease 274. Brazil is the world's largest sugar cane producer and sugar cane can be used for producing sugar and fuel ethanol for automobiles. Which of the following sequence of events is correct? *a. Rising oil prices cause Brazilian producers to shift sugar cane production from sugar to fuel ethanol. The decrease in sugar supply raises the price of candy bars. b. Rising oil prices cause Brazilian producers to shift sugar cane production from fuel ethanol to sugar. The increase in sugar supply decreases the price of candy bars. c. Falling oil prices cause Brazilian producers to shift sugar cane production from sugar to fuel ethanol. The increase in sugar supply raises the price of candy bars. d. Falling oil prices cause Brazilian producers to shift sugar cane production from fuel ethanol to sugar. The increase in sugar supply raises the price of candy bars. 275. A barrel of oil can be used to produce both gasoline and asphalt. If the price of gasoline falls, the supply of asphalt ________ and asphalt prices ________. *a. increases; decrease b. increases; increase c. decreases; decrease d. decreases; increase 276. Sugar cane can be used to produce sugar as well as fuel ethanol for automobiles. Falling oil prices will cause a(n) ________ in the supply of sugar resulting in ______ candy prices. a. decrease; lower b. decrease; higher *c. increase; lower d. increase; higher 277. From the chapter discussion, why did increased ethanol production and consumption in Brazil result in higher sugar prices? a. Sugar is the primary ingredient in ethanol production and thus when the demand for ethanol increased the demand for sugar also increased. *b. Farmers reallocated sugar cane to ethanol production, decreasing the production of sugar, and leading to higher sugar prices. c. Brazil's demand for sugar increased. d. A disease attacked the sugar crop and caused a decrease in sugar production. 278. Higher oil prices represent higher energy costs in general across the economy leading to increased use of bicycles and public transportation. Which answer best describes the idea that changes in one market can cause effects in previously unseen markets? a. The rise in the demand for bicycles causes a rise in the price of bicycles. *b. Increased bicycle demand increases the demand for rubber to make bicycle tires. Farmers in South East Asia switch from rice to rubber production and the price of rice increases. c. The greater demand for public transportation offsets the demand for heating oil. d. The rise in the demand for oil causes a rise in the demand for bicycles. 279. Brazil is the largest producer and consumer of ________ in the world. *a. sugar and fuel ethanol b. candy bars c. oil d. asphalt and bricks 280. The market acts like a computer because: *a. prices are information processors. b. people “connect with” each other when they buy and sell. c. much of the Internet is used for buying and selling. d. computers were developed to create new markets. 281. Suppose that a war in the Middle East makes oil increasingly scarce. Oil usage should: a. increase in low-value uses. b. fall the most in high-value uses. *c. fall the most in low-value uses. d. fall equally across low- and high-value uses. 282. Which of the following statements is TRUE? I. China and the Soviet Union tried to centrally plan their entire economies. II. To many people's surprise, including economists, central planning proved successful in Eastern Europe. III. President Nixon ordered gas stations closed on Sunday, an example of central planning. a. II and III only b. I, II, and III c. II only *d. I and III only 283. The central planning approach proved ________ because ________. a. successful; central planners use state-of the-art military computers to efficiently allocate resources b. a failure; it was never given enough time to be successfully implemented in most countries c. successful; central planners, unlike CEOs, are not solely interested in maximizing profits and raising prices *d. a failure; central planners lack information and incentives to allocate resources efficiently 284. The Strike King Lure Co. ordered $100,000 worth of stainless steel to use in the production of fishing lures. The $100,000 expenditure represents the: a. value of the stainless steel in its lowest valued use. b. profits of selling fishing lures. *c. value of the stainless steel in its next highest valued use. d. revenues of producing fishing lures minus the costs. 285. The equilibrium price in the market represents the: *a. value of the good in its next highest valued use. b. value of the good in all its uses. c. price of the good in its lowest valued use. d. average cost of producing the good. 286. Figure: Demand Curve Reference: Ref 7-1 (Figure: Demand Curve) Refer to the figure. Which part of the demand curve represents the satisfied wants? a. Point B b. Segment AC *c. Segment AB d. Segment BC 287. Figure: Demand Curve Reference: Ref 7-1 (Figure: Demand Curve) Refer to the figure. Which point on the graph represents an unsatisfied want? a. Point B b. Point A and Point B c. Point A *d. Point C 288. Figure: Demand Curve Reference: Ref 7-1 (Figure: Demand Curve) Refer to the figure. Which point on the graph represents the value of the good in its next highest valued use? a. Point A *b. Point B c. Point C d. the origin 289. Central planning of resource allocation: a. was attempted by the United States during the 1973–1974 oil crisis. b. can only succeed if the central planners have perfect information on the best uses of resources. c. was the dominant economic planning method in both the former Soviet Union and China. *d. All of the answers are correct. 290. Which of the following can explain why many economists have often compared the functioning of worldwide markets to that of a computer? a. Worldwide markets can allocate resources randomly just as a computer can generate random data. b. Without the use of computers, markets cannot solve the information problem of resource use. c. Without the use of computers, markets cannot solve the allocation problem of resource use. *d. Worldwide markets can solve very large resource-allocation problems by simply using the price signal mechanism. 291. The text states: “The great economic problem is to arrange our limited resources to satisfy as many of our limited wants as possible.” How does a market achieve this goal? a. It chooses central planners who are experts at identifying the best uses of resources. *b. The forces of demand and supply use prices as a signaling device that direct resources to their highest value uses. c. It ensures that prices provide an even signal by making sure prices across all markets are equal. d. It offers resource-based futures contracts. 292. Suppose resources are directed through the actions of a central planner, who receives information on all the different uses of these resources. Why might sellers have an incentive to provide untruthful information to the central planner? a. They want to be able to charge the minimum price for their product *b. In order to continue producing their product, sellers may overstate the importance of their product. c. The information system is too complex to provide correct information. d. They want resources to be able to travel to the highest value uses possible 293. Markets are advantageous over central planning as methods of resource allocation because: *a. resources travel to their highest value uses. b. resources are allocated equally across all uses. c. resources are distributed to those goods that have a larger number of substitutes. d. central planners have never been shown to correctly identify high value uses of products. 294. Central planning usually fails because: a. of the scarcity of resources. b. of problems of inadequate demand and supply. c. central planners rely on market forces. *d. of information and incentive problems. 295. Large scale central planning has been abandoned throughout the world because of ______ problems. a. information and transactions cost b. incentives and asymmetry *c. information and incentives d. communication and complexity 296. In a free market, the price of a good is equal to the value of the good: a. in its next lowest valued use. *b. in its next highest valued use. c. to the highest bidder among those who have satisfied their wants for the good. d. given the resources used to produce the good. 297. An equilibrium price splits the uses of the good into ________ part(s). a. one and only one *b. two c. three d. four or more 298. When the price of oil rises, consumers economize by buying ________ and by ________. a. more oil; finding substitutes b. less oil; recycling *c. less oil; finding substitutes d. more oil; recycling 299. In a “successful” market, there will be: a. many successful firms. b. less bankruptcy. c. many unsuccessful firms. *d. both many successful and many unsuccessful firms. 300. The great economic problem is to: a. increase resources to satisfy as many of our limited wants as possible. b. equally allocate resources to satisfy as many of our limited wants as possible. c. create unlimited resources to satisfy as many of our infinite wants as possible. *d. arrange our limited resources to satisfy as many of our infinite wants as possible. 301. Suppose that war in the Middle East reduces the supply of oil forcing the country to economize on oil. How should the central planner optimize the economic problem under this situation? a. shift oil out of uses where good substitutes for oil exist b. supply oil for uses where few substitutes for oil exist *c. Both of the answers are correct. d. Neither of the answers is correct. 302. The central planning approach failed to optimally allocate oil during the 1973–1974 oil crisis because of problems of: a. demand and supply. b. markets and prices. c. resources and budgets. *d. information and incentives. 303. In a demand-and-supply diagram, the market price represents the value of the: a. first satisfied want. b. last unsatisfied want. c. good in its next lowest use. *d. good in its next highest use. 304. The market solves the information problem when allocating resources by: *a. collapsing all the relevant information about uses of the good into its price. b. collapsing all the relevant information about inputs of the good into the level of output. c. aggregating all the relevant information about the output of the good into the supply curve. d. aggregating all the relevant information about the output of the good into the demand curve. 305. The market solves the incentive problem when allocating resources because the: a. consumers will pay for the good only if its price is greater than the value of use. *b. consumers will pay for the good only if its value of use is greater than the price. c. suppliers will produce the good only if its cost is less than the value of use. d. suppliers will produce the good only if its value of use is less than the cost. 306. When a consumer compares the price of a good to the value of that good, he or she is really comparing: a. the price of other substitute goods. b. the value of the good to the costs associated with producing the good. *c. the value of the good to its opportunity cost. d. the price of the good to the value of other substitute goods. 307. When the price of pizza increases, consumers have an incentive to: a. decrease their demand for pizza. *b. purchase substitute goods such as Chinese food. c. increase their consumption of pizza as it is now more valuable. d. open another pizza restaurant in order to increase supply and drive prices down. 308. Which economist described the market as being driven by “an invisible hand”? a. Milton Friedman b. John Locke c. Friedrich Hayek *d. Adam Smith 309. The market is effectively able to allocate goods to their highest valued uses because: *a. consumers will only purchase the good if its value is greater than its price. b. government intervention keeps prices consistent with their market value. c. suppliers will only produce goods for which the cost of production is less than the price. d. consumers have a great incentive to conserve goods for future use. 310. Which of the following encompasses all the relevant information about the uses of a particular good? a. the cost of producing the good *b. the price of the good c. the value of the good to consumers d. There is no way for just one number to encompass all the relevant information about the uses of a good. 311. Markets work well because of the information delivered by: a. the government. b. the supply curve. c. the demand curve. *d. prices. 312. Figure: Demand Curve Sections Reference: Ref 7-2 (Figure: Demand Curve Sections) Refer to the figure. The section of the demand curve labeled A represents the: a. value of the good in its next highest use. *b. satisfied wants. c. unsatisfied wants. d. All of the answers are correct. 313. Figure: Demand Curve Sections Reference: Ref 7-2 (Figure: Demand Curve Sections) Refer to the figure. The section of the demand curve labeled B represents the: a. value of the good in its next highest use. b. satisfied wants. *c. unsatisfied wants. d. All of the answers are correct. 314. Which of the following statements are TRUE? I. A high price for a good encourages consumers to economize on its use, seeking out alternatives. II. Rising prices give firms the incentive to bring more goods to the market. III. Firms that experience rising input prices will seek out substitute inputs and develop production technologies to conserve on the costly input. a. I only b. I and II only c. II only *d. I, II, and III 315. In a successful economy, some firms should always be: a. making profits. b. breaking even. c. going bankrupt. *d. All of the answers are correct. 316. The bankruptcy of firms: a. should not occur in a well-functioning economy. *b. frees up resources to higher valued uses, a vital role in capitalism. c. is not possible in monopoly markets. d. is pro-cyclical with economic activity, as measured by gross domestic product. 317. After a hurricane knocks out power to thousands of households, the price of electric generators increases threefold. According to economists: a. this is a vivid example of market and class exploitation by capitalists. *b. this discourages the use of electric generators in low-value uses, making them more readily available for high-value uses. c. the rising price will give an incentive for firms to ship fewer electric generators to the disaster area. d. the increase in demand for electric generators should technically cause the price to fall after a hurricane. 318. In which of these instances does price function as a signal in the market? *a. Suppliers invest more in exploration when the price of oil increases. b. Consumers complain of price gouging as the price of oil skyrockets. c. Government imposes price controls on the skyrocketing price of oil. d. All of the answers are correct. 319. If the price of ice in a hurricane-devastated area suddenly skyrockets, then ice suppliers will: a. enjoy high profits at the expense of consumers. b. limit the supply of ice in the area to sustain the skyrocketing price. *c. ship more ice to the area and the price will fall. d. have an incentive to direct ice to its highest valued uses. 320. Failing to understand the signaling role of prices, consumers would complain of ________ and politicians would call for ________. a. price binding; regulation b. price gimmicks; antitrust action c. a price ceiling; a price floor *d. price gouging; price controls 321. Can speculators who expect prices to rise actually cause those prices to rise in the short run? *a. Yes, if they buy up enough of the good, they will increase demand and thus raise the price of the product. b. Yes, if they expect the price to rise, sellers will automatically raise prices for their products. c. No, because speculators do not have enough power to cause an increase in demand. d. No, because speculators' actions cannot influence a market equilibrium. 322. How do speculators mitigate shortfalls in the equilibrium quantities traded in markets? a. by buying up unsold inventories and then selling them when there is a shortage in the market b. by causing market quantities to rise and fall c. by buying up items when the prices have risen *d. by buying up items in advance of rising prices, and then selling them in the market when prices increase. 323. If speculators expect that the future price of corn will be higher, they will cause today's price of corn to ________ and the future price of corn to be ________ than it would have been without speculation. a. decrease; higher *b. increase; lower c. decrease; lower d. increase; higher 324. Speculators: a. serve no important economic function, except buying low and selling high. *b. move resources from periods of low-value use to periods of high-value use. c. move resources from poor countries to rich counties. d. are a key source of inflation. 325. A person who tries to profit by guessing changes in future prices is a: a. profiteer. b. marketer. *c. speculator. d. price raider. 326. A U.S. manufacturer arranges to purchase parts from a German supplier for 500,000 euros in six months. The U.S. manufacturer is concerned that the dollar will depreciate against the euro, meaning the dollar cost of the 500,000 euros will rise. What should the U.S. manufacturer do? a. lobby the Fed to lower interest rates on six-month T-bills *b. buy a futures contract that fixes the dollar cost of 500,000 euros in six months c. buy an exchange rate contract that pegs the interest rate to the discount rate on interbank loans d. sell a naked option to cover the output spread 327. You agree to buy 40,000 pounds of frozen pork bellies for delivery one year from now; upon delivery you will pay $32,400. This transaction is called a: a. prediction settlement. b. timing indenture. *c. futures contract. d. hog agreement. 328. Futures contracts reduce future uncertainty. Which of the following statements show how this is achieved? I. Futures contracts allow the parties involved to mitigate possible shortages in quantities of the good. II. Futures contracts allow the parties involved to mitigate unexpected changes in price that could hurt earnings. III. Futures contracts always allow the seller to receive a price that is higher than the market price for the product. *a. I and II only b. I only c. I and III only d. I, II, and III 329. John and Tom enter into a futures contract where John agrees to deliver 500 crates of coffee to Tom one year from now. Tom agrees to pay a price of $200 per crate. A year from now, John and Tom find that the market price of coffee is $210 per crate. How might they make a cash settlement on the contract? a. John will offer $5,000 to Tom and deliver the 500 crates of coffee. b. Tom will offer $5,000 to Tom and deliver the 500 crates of coffee. *c. John will offer $5,000 to Tom and not deliver any crates of coffee. d. Tom will offer $5,000 to John and not deliver any crates of coffee. 330. How can a futures contract mitigate exchange rate risk for an exporting firm? *a. Exporters can pin down the exact exchange rate they want to trade at and ensure a certain income stream. b. Exporters can avoid international trade and enter into contracts for domestic items only. c. The contract does so by allowing exporters to avoid political risks associated with exchange rate volatility. d. The contract does so by allowing exporters to trade in alternate stable currencies. 331. How can selling a futures contract mitigate agricultural risk for farmers? a. Farmers can grow crops that are not subject to weather inclemency. *b. Farmers can pin down a price for their produce even if there is volatility in market prices. c. Futures contracts allow farmers to store their grains in silos until the market prices rise. d. Futures contracts allow farmers to trade in crops whose prices will fall in the future. 332. Which of the following scenarios would cause a speculator to “buy low and sell high”? a. Farmers expect to have a bumper harvest of corn next year. b. Imports of corn begin to flood the country. *c. The government is expected to pass legislation making it mandatory for all vehicles to use corn-based fuels within one year. d. The government is expected to subsidize corn production for farmers. 333. Your retail outlet sells bottled water. Which of the following scenarios would cause you to use a “buy low and sell high” strategy with bottled water? *a. A hurricane is expected to arrive within one week. b. A new producer for bottled water is expected to enter the market within the next three months. c. Consumers are moving away from bottled water consumption to filtered tap water consumption. d. Imports of bottled water begin to arrive in town. 334. Futures markets in coal can signal which of the following kinds of information? a. when the coal seams may run out b. changes in the industrial demand for coal c. the effect of the projected arrival of coal substitutes *d. All of the answers are correct. 335. Which of the following scenarios would cause a speculator in chicken and beef futures to use a “buy low and sell high” strategy for chicken? a. A report emerges from the Surgeon General that eating red meat in moderate amounts allows for increased brain power. *b. Cows are found to be infected with “Mad Cow Disease” and must be destroyed. c. Households begin eating more meals at restaurants. d. Chickens are found to spread the Avian Flu disease among humans. 336. Speculators ________ prices today and ________ prices in the future. a. increase; increase *b. increase; decrease c. decrease; decrease d. decrease; do not change 337. Speculation is defined as: a. risk taking. *b. the attempt to profit from future price changes. c. the source of mutual interdependence in the modern world. d. risk aversion. 338. A future is a standardized contract to buy or sell specified quantities of a commodity or ________ at a specified ________. *a. financial instrument; price b. financial instrument; level of risk c. unspecified quantities; price d. unspecified quantities; level of risk 339. Futures markets are common in commodities, financial instruments, and: a. nowhere else. b. some barter markets in third world countries. *c. currencies. d. telecommunications. 340. Suppose speculators expect that the supply of oil will decrease next year and as a result, buy up oil today and put it into storage. This should cause the value of that oil to: *a. increase. b. decrease. c. either increase or decrease. d. remain unchanged. 341. Which of the following observations would be consistent with the effect of oil speculation? a. Society becomes worse off from speculation because speculators intend to drive up the price of oil. b. Society becomes worse off as speculators decrease the value of oil by moving it to a time when its value is lower. *c. Society becomes better off as speculators increase the value of oil by moving it to a time when its value is higher. d. Society is indifferent about the activities of speculators. 342. Suppose Chad believes that the price of oil will be higher in the future and buys an oil futures contract from Joe. The contract will give Chad the right to 1,000 barrels of oil at $50 per barrel to be delivered by Joe 30 months in the future. Which of the following statements is correct? a. Chad has to pay Joe $50,000 upon the purchase and waits for 30 months for delivery of 1,000 barrels of oil. *b. Chad will receive the cash difference from Joe if the per barrel oil price rises higher than $50 after 30 months. c. Joe will receive the cash difference from Chad if the per barrel oil price rises higher than $50 after 30 months. d. Joe will deliver the oil to Chad after 30 months and receive $50,000 from Chad. 343. A soybean farmer plants his crop today but he doesn't harvest it until next year when the soybean price could be quite different from today's spot price. To avoid the price risk the farmer can: *a. sell in the futures market. b. buy in the futures market. c. sell in the spot market. d. buy in the spot market. 344. If people suddenly expect that a severe drought will reduce the supply of grain, the price of grain futures will be: a. high and then bid lower. *b. bid higher. c. low and bid even lower. d. bid lower. 345. Which of the following scenarios shows a relatively noisy signal of a future outcome? a. Your current GPA is 3.94, and you are expected to graduate in two months. Although your current classes are not yet completed, your advisor has to make a forecast about your grades for this semester. She forecasts that you will get As in all your current courses and will graduate with honors. b. Your current credit rating is low. You have a history of late payments, and debts that have gone to collection agencies. You are denied new credit because the credit card company forecasts that you will become delinquent on the payments. *c. In February of 2009 you produce and release a movie about President Barack Obama that projects what two terms of his leadership and polices might look like in terms of foreign relations, and the economic path the United States will follow out of the recession. d. You are a speculator, and you decide to buy up corn futures because the government has mandated that all new vehicles must use corn-based fuels within one year. 346. Recently, economic engineers have begun to design ________ to increase the signal to noise ratio of ________. a. prices; markets *b. markets; prices c. incentives; behaviors d. opportunity costs; prices 347. Speculators who think that a war in the Middle East is likely will ______ oil futures, pushing ______ the futures price. *a. buy; up b. buy; down c. sell; up d. sell; down 348. The major factor determining the price of orange juice futures is the: a. demand for orange juice. b. cost of fertilizer. c. profits to orange growers. *d. weather. 349. If the futures price is much higher than the spot or current price, that is a sign that smart people with their own money on the line think that: a. there will be an excess supply in the near future. *b. supply disruptions may soon occur. c. demand will decrease rapidly in the future. d. supply will be stable in the near future. 350. Economist Paul Heyne looked in the newspaper and found that in December of 1991 the price of wheat was $4.05 a bushel. The futures price for March 1992 was $3.87, the May price $3.64, the July price $3.33, September was $3.31, and the futures price for the following December was $3.51. What is the implication of these price trends? a. Buying wheat futures was a pretty bad deal. b. Speculators were forecasting increased scarcity of wheat. *c. Speculators were not forecasting increased scarcity of wheat. d. Selling wheat futures was a pretty bad deal. 351. Speculators who think that a war in the Middle East is likely will: a. sell oil futures, pushing up the future price. b. buy oil futures, pushing down the future price. c. sell oil futures, pushing down the future price. *d. buy oil futures, pushing up the future price. 352. Factors other than war in the Middle East—e.g., OPEC decisions, oil discoveries, and the demand for oil—also impact oil futures, so the future price of oil is a: a. pure signal of war in the Middle East. b. mixed signal of war in the Middle East. *c. noisy signal of war in the Middle East. d. signal of war in the Middle East. 353. A market in which buyers and sellers trade shares of stock, where the share prices reflect the probability of some future event is called a: a. probability market. b. wizard exchange. *c. prediction market. d. rational expectations exchange. 354. Suppose that it is summer 2012 and President Obama is running for reelection. In the Iowa Electronic Markets, a share of Obama is selling for $0.54 and will give $1 if Obama wins the election. Market participants believe that Obama's probability of winning reelection is: a. 4.6 percent. b. 5.4 percent. *c. 54 percent. d. 46 percent. 355. The Hollywood Stock Exchange is useful for: a. predicting ratings (e.g., G, PG, PG-13, and R) of yet-to-be-released films. b. predicting movie spoilers of yet-to-be-released films. *c. estimating the future profits of films. d. estimating the future production costs of films. 356. If you worked for a Hollywood prediction market that forecasts opening-weekend film revenues, what factors should you consider, in your forecast? I. the number of screens at movie theaters in the country II. the popularity of the cast of the movie III. the movies special effects budget, and its director and producer a. I only b. I and III only *c. II and III only d. I, II, and III 357. Uni-Trax Publishers allows its sales team to buy and sell shares that pay out $1 only if the sales in the future fall within a certain range. Suppose that currently shares for sales between 1,000 books and 2,000 books are selling for 10 cents each. Shares for sales between 2,000 and 3,000 books are selling for 30 cents each. Shares for sales between 3,000 and 4,000 books are selling for 40 cents each. Based on this information, what is the probability of Uni-Trax Publishers selling between 2,000 and 4,000 textbooks? a. 10 percent b. 40 percent *c. 70 percent d. 30 percent 358. Based on economist Richard Roll's work, the best way to predict future weather may be: a. to listen to meteorologists. *b. to look at the difference between futures and spot prices of orange juice. c. to wait and see what the weather turns out to be. d. to look at past trends in orange production. 359. Modern Bytes Computers allows its sales team to buy and sell shares that pay out $1 only if the sales in the future fall in a certain range. Suppose that currently shares for sales between 15,000 and 20,000 computers are selling for 20 cents each. Shares for sales between 20,000 and 25,000 computers are selling for 30 cents each. Shares for sales between 25,000 and 30,000 computers are selling for 30 cents each. Based on this information, what is the probability of Modern Bytes Computers selling between 15,000 and 25,000 computers? a. 20 percent b. 60 percent c. 30 percent *d. 50 percent 360. The advantages of prediction markets include: a. the ability of predicted outcomes to always beat actual outcomes in markets. *b. the fact that such markets encourage sales teams and traders at firms to divulge the true information on expected outcomes. c. the fact that such markets are only useful at forecasting political outcomes. d. the ability for strong prediction markets to swing actual market outcomes towards the predicted outcome. 361. The best known prediction market is the: a. Hewlett Packard Market Index. b. Berkshire Hathaway Fund. c. Dow Jones Industrial Average. *d. Iowa Electronic Markets. 362. Figure: Hollywood Stock Exchange Reference: Ref 7-3 (Figure: Hollywood Stock Exchange) Refer to the figure and consider the data point referring to the movie The Adventures of Pluto Nash. These data indicate that this movie's actual opening revenues were ________ the opening revenues as predicted by the Hollywood Stock Exchange. a. more than *b. less than c. the same as d. an excellent estimate of 363. Figure: Hollywood Stock Exchange Reference: Ref 7-3 (Figure: Hollywood Stock Exchange) The data points in the figure represent the opening revenue for movies plotted against their predicted opening revenues according to the Hollywood Stock Exchange (HSX). Most of them fall along the 45-degree line. What does this suggest? a. The HSX does not do a good job predicting movie revenue. b. On average, most movies do worse than their HSX predictions. *c. On average, the HSX accurately predicts movie revenues. d. On average, most movies do better than their HSX predictions. 364. A prediction market is a: a. perfectly functioning futures market, so that futures output can be interpreted as probabilities and used to make predictions. b. perfectly functioning futures market, so that futures prices can be interpreted as probabilities and used to make predictions. c. speculative market carefully designed so that output can be interpreted as probabilities and used to make predictions. *d. speculative market carefully designed so that prices can be interpreted as probabilities and used to make predictions. 365. One advantage of prediction markets is that they create incentives for traders to relay: a. specific information. b. detailed information. c. advanced information. *d. accurate information. 366. Table: The HP Stock Exchange Sales (in unit) Price ($) 5,000–10,000 10,000–15,000 0.10 0.20 15,000–20,00 20,000–25,000 25,000–30,000 0 0.40 0.20 0.10 Reference: Ref 7-4 (Table: The HP Stock Exchange) The HP Stock Exchange lets members of HP's sales team buy and sell shares that pay off when sales fall within a certain range. A typical security would pay out $1, if and only if future sales fell within the specific range of that share. Accordingly, the trading price given in the table between 15,000 and 20,000 units implies that: a. price per unit of sales is $0.40 if the sales ranges between 15,000 and 25,000 units. b. price per unit of sales will increase at $0.40 per unit for sales between 15,000 and 20,000 units. *c. the probability of selling between 15,000 and 20,000 units is believed to be 40 percent. d. the probability of selling between 15,000 and 20,000 is believed to be at least 40 percent. 367. Table: The HP Stock Exchange Sales (in 15,000–20,00 5,000–10,000 10,000–15,000 20,000–25,000 25,000–30,000 unit) 0 Price ($) 0.10 0.20 0.40 0.20 0.10 Reference: Ref 7-4 (Table: The HP Stock Exchange) The HP Stock Exchange lets members of HP's sales team buy and sell shares that pay off when sales fall within a certain range. A typical security would pay out $1, if and only if future sales fell within the specific range of that share. Accordingly, the trading prices given in the table suggest that the probability of selling: a. less than 5,000 is 10 percent. b. more than 15,000 is 40 percent. c. between 10,000 and 15,000 units is at least 20 percent. *d. between 15,000 and 25,000 units is 60 percent. 368. Prices are the heart of the: a. political process. *b. market process. c. business cycle. d. theory of markets. 369. What happens in one particular market may have an effect on other markets. *a. True b. False 370. Prices are incentives for sellers. *a. True b. False 371. As the price of oil increases, Brazilians will shift sugar cane from sugar production to ethanol production, thereby holding down fuel costs and reducing the price of sugar. a. True *b. False 372. A rising price for gasoline may mean that new homebuilders switch from using asphalt driveways to brick driveways. *a. True b. False 373. In a free market, there are no unsatisfied wants at the equilibrium price. a. True *b. False 374. The information problem for a central planner refers to the fact that he/she may not always know how to allocate resources to their highest value use. *a. True b. False 375. Prices are incentives, prices are signals, and prices are predictions. *a. True b. False 376. The central planning approach failed because of problems of information and incentives. *a. True b. False 377. The great economic problem is to increase our limited resources to satisfy as many of our infinite wants as possible. a. True *b. False 378. The central planning approach fails to achieve an optimal resource allocation because of information and incentives problems. *a. True b. False 379. The true cost of a good is its money price rather than its opportunity cost. a. True *b. False 380. Prices provide little information about where resources should best be allocated in an economy. a. True *b. False 381. An increase in the price of oil is also a signal to oil suppliers to invest more in exploration, look for alternatives, and to increase recycling. *a. True b. False 382. When the prices of necessities such as gas and bottled water rise as a result of a natural disaster, it is efficient for the government to impose price controls to keep suppliers from “price gouging” consumers. a. True *b. False 383. Speculators reduce price swings for goods, increasing society's welfare. *a. True b. False 384. A futures contract can make a future price certain. *a. True b. False 385. A “buy low, sell high” strategy allows the speculator to make a profit from differences in market prices. *a. True b. False 386. Futures markets are used for speculation and rarely for reducing risk. a. True *b. False 387. Sales teams have little incentive to report low sales projections to their CEOs—predictions markets help to overcome this problem. *a. True b. False 388. Perhaps the biggest sign of the accuracy of the HSX market is the sale of its data to Hollywood studios eager to improve their predictions about future blockbusters. *a. True b. False 389. Ethanol is the active ingredient in alcoholic beverages, but it's also a good fuel that can be made from a variety of crops like corn or sugar cane. Show how each of the following events would affect the market demand and/or supply of ethanol, as well as the resulting effect on the price of ethanol. a. The price of oil skyrockets with sudden eruption of war in the Middle East. b. More parents are concerned about cavities in their children's teeth, resulting from eating candy bars. c. Alcoholic beverage consumption is declining over time due to increased health warnings. Correct Answer: a. As the price of oil increases, demand for fuel ethanol will increase. In the short run this will cause an increase in the price of ethanol, and in turn will increase the quantity supplied of ethanol. Over time, if oil prices remain high, corn and sugar cane production will be shifted to ethanol, increasing its supply and reducing the supply of other corn and sugar cane products, causing their prices to increase. b. Less demand for candy bars will cause less demand for sugar. This will cause the price of sugar cane to decrease, and shift sugar cane use to ethanol production thus increasing the supply of ethanol. As the supply of ethanol increases, the price of ethanol will decrease. c. Less consumption of alcoholic beverages will reduce the demand for ethanol for alcoholic beverage production. As demand for ethanol decreases, the price of ethanol will be lower. 390. Suppose that war in the Middle East disrupts oil production, reducing the supply of oil by 20 percent. The central planner of a government decides to economize on oil. a. What should a central planner do to economize on oil? b. What information does a central planner have to collect in order to economize on oil? c. What may cause a central planner to fail to economize on oil? Correct Answer: a. The central planner should shift oil out of low-valued uses, such as those in which good substitutes for oil exist, and keep supplying oil for high-valued uses, where oil has few good substitutes. One way to make this shift would be for the central planner to issue orders for more oil to be used in the high-valued uses and less oil to be used in the low-valued uses. b. To estimate the value of oil in different uses, the central planner would have to gather information about all the uses of oil and all of the substitutes for oil in each use. c. The central planner may fail because of information and incentives problems. It would be difficult for anyone to have an incentive to send truthful information to the central planner. Each user of oil would surely announce that his use is the high-valued use for which no substitute is possible, which would provide no incentive for the central planner to actually direct oil to its high-value uses. 391. What happens to the use of steel if there is a sudden decrease in its supply? In particular, explain how the new price of steel helps to ration its use. Correct Answer: The decrease in supply will result in an increase in the price of steel. As its price increases, the lower-valued uses of steel will instead turn to (now relatively cheaper) substitutes and allow the market to allocate the reduced supply to its highest valued uses. 392. Explain what Adam Smith meant when he said that the market operates as if “an invisible hand” is guiding the process. Correct Answer: He meant that through the information delivered by prices, markets are able to allocate resources without any central planning or control. No one can possibly understand ALL the links between various resource and product markets, yet the market still works even in the absence of our own understanding. It is as if it is guided by some “invisible hand.” 393. Explain why price controls may actually end up making consumers worse off in areas that have experienced natural disasters such as hurricanes. Correct Answer: High prices act as a signal to suppliers to increase the supply of goods and services in devastated areas. The resulting increase in supply then leads to relatively lower prices for these highly demanded goods/services. Without the initial increase in prices though, there would be no incentive for suppliers to increase supply; and hence shortages occur and prices will not fall. 394. During the 1973–1974 oil crisis, the U.S. government implemented price controls and other regulations in order to try and keep prices low. Were these policies were the best way to lower prices for consumers? What would have happened in the absence of these price controls? Correct Answer: These policies were not effective in terms of keeping prices low for consumers. The price controls led to large shortages of gasoline and other products closely linked to oil production. Without these price controls, the price of gasoline would have risen, leading to an increase in the supply of gasoline to U.S. markets, and also an increase in the exploration of substitute products. Higher prices would also have encouraged less consumption of gasoline, leading to its allocation to only its highest valued uses. 395. Many times in economic markets we see new firms drive old firms out of business with lower costs and better products. Are these “business failures” also “market failures”? Explain why or why not. Correct Answer: Business failures (e.g., bankruptcy, loss of profits, etc.) are NOT the same as a market failure. Entrepreneurs who fail to compete with lower costs and better products take losses and may even go bankrupt, but this is actually a market success! Lower costs and new innovations lead to increased innovation and economic growth. 396. War is expected to break out in the Middle East. Use two separate supply and demand diagrams to illustrate (1) the current price of oil and (2) the future price of oil. Using the same two supply and demand diagrams, show how speculators affect the current price of oil and future price of oil. Correct Answer: 397. A wheat farmer plans to retire at the end of the growing season, or about three months from now, and take up the leisure activity of fishing. The farmer would like to purchase a $20,000 fishing boat from selling his last crop of wheat. It's possible that when the wheat is harvested in three months that its price will be lower than it is today and the farmer would be unable to afford the boat. How can the farmer hedge his risk against a drop in wheat prices? Correct Answer: The farmer should sell a futures contract allowing him to sell his wheat to a buyer in three months at a price agreed upon today. The futures contract locks the farmer into a selling price today ensuring that, even if the price of wheat falls dramatically in three months, the farmer will be able to buy a fishing boat. 398. A market might have a small quantity traded at a high price in one year, and a larger quantity traded at a low price in another year. If one has data on the quantities traded each year in a market, one can compute the average quantity traded over time. Using appropriate demand and supply graphs, explain how speculators act as a sort of “averaging” effect on markets. Correct Answer: Speculators act as a sort of averaging effect on markets in the following way. Suppose the price of oil is expected to rise in the future due to a fall in supply. If the signal is reliable, speculators will react by buying up oil today. When supply eventually falls, and the price does rise, then the speculators will sell to the market and this will cause the market quantity traded to rise. Thus the speculators act to prevent extreme falls in quantity traded. Thus they act as a sort of “averaging” effect on the market. The student's demand curve should therefore show a supply and demand diagram where the supply curve for the product shifts to the left in the short run, however when the speculators sell to the market, supply shifts back to the right mitigating the decrease in quantity traded in the market. 399. If speculators expect the future price of a commodity to rise, they may decide to use the “buy low, sell high” strategy where they buy the commodity at a low price today in order that they may sell it later when prices rise. How might their actions actually cause a self-fulfilling prophecy in the short run? Use a demand and supply graph in your answer. Correct Answer: If speculators expect future prices of an item to rise, they would use the “buy low, sell high” strategy and buy up some of the product at the current point in time. However, if enough speculators behave in the same way, they will cause a significant increase in current demand that will cause the price of the item to rise in the short run. In this way, the speculators are contributing to the rise in prices, and are thus enabling a self-fulfilling prophecy. The student should show a supply and demand diagram where the demand curve for the product shifts to the right in the short run, leading to a rise in price. 400. Around 1730, Samurai (warriors) in Japan were paid in rice. There were bad harvests which, surprisingly, caused the price of rice to fall. Around this time, through the Dojima Rice Exchange in Japan, the Samurai were able to enter into futures contracts in rice. Rice and currency were both acceptable forms of payment in Japan at this time. Discuss a likely reason why the Samurai might have wanted to enter such contracts. Correct Answer: The Samurai needed a contract that would ensure their income stream. Since they were paid in rice, they would need to enter into a contract that would pin down the exchange rate of rice to currency, and thus have a definite income amount they could expect. The futures contracts allowed the Samurai to hedge against fluctuations in rice prices. 401. Explain how speculation tends to smooth prices over time and increase welfare. Use the model of demand and supply to illustrate your explanation. Correct Answer: The following figure is reproduced from the text, since it is the best example the student can use to explain the answer to this question. In addition, an ideal written explanation is: The bottom panel shows what happens with speculation. Speculators buy up oil today and they put it into storage—this reduces the quantity available for consumption today and pushes up today's price (Point c). Next year, however, when a war occurs, production is low but consumption is higher than it would have been without speculation; and prices are lower because the speculators sell oil from their inventories (Point d). Notice that with speculation, preparations are made for any disruption in oil production and oil prices are smoothed. Speculators raise prices today but lower prices in the future. 402. Suppose that speculators expect that a war in the Middle East is likely next year, which could cause a significant decrease in the supply of oil. a. What could the speculators do to profit from their expectation? b. What would be the possible impact of the war on the oil market without speculation? c. What would be the possible impact of the war on the oil market with the action taken by the speculators described in part a? d. How would the action taken by the speculators impact the society? Correct Answer: a. Speculators will buy oil today at a low price, hold the oil in storage, and then sell it next year after war breaks out, when the price is higher. b. Production today is high and the price is low. Future production, however, will be disrupted by the war, pushing up the future price. c. By buying oil today and holding it in storage, the speculators will raise the price of oil today. Next year, when the war occurs and the production is low, the speculators will sell oil from their inventories, which will smooth the price of oil. d. Overall, society is better off from speculation because the speculators move oil from when it has low value today and move it to when it has high value next year. 403. Oil futures prices are a noisy signal of war in the Middle East. Explain whether this statement is true or false. Correct Answer: A noisy signal is one where the signal is not clear—in economics this means that the direction the future price is expected to take depends on many different factors. It is true that oil futures are a noisy signal of war because many other factors could also raise the future price of oil, for example, supply decisions by OPEC (The Organization of Petroleum Exporting Countries), changes in the worldwide demand for oil, discoveries of new deposits, etc. 404. Recall from the text that weather is a very important determinant for futures prices of orange juice. Using a supply and demand graph, explain why an expectation of bad weather in the future might cause futures prices to rise today. Correct Answer: A prediction of bad weather translates to a poor orange crop. When the orange crop fails, the price of orange juice will rise. Forecasting this scenario, the speculators purchase OJ futures today so that they can make a profit when the prices do actually rise in the future. The student's graph should show a rise in the demand for OJ futures, leading to a rise in the price of futures in OJ. 405. Suppose you have been hired by the Hollywood Stock Exchange to make predictions on how much a movie will make during its first four weekends at the box office. What kind of information would you use to make your forecast? Correct Answer: The forecasted revenue from the film would be high if the actors and actresses are currently popular, if the story line (in the opinion of the forecaster, and in the general media) is one that might interest the public, if there are good special effects, if the marketing for the movie has been good, if the movie is produced by a famous producer and directed by a famous director, etc. 406. A price ceiling is a(n): a. legally established minimum price that can be charged for a good. b. illegally established minimum price that can be charged for a good. *c. legally established maximum price that can be charged for a good. d. illegally established maximum price that can be charged for a good. 407. Price ceilings create five important effects: *a. shortages, reductions in product quality, wasteful lineups, a loss from gains to trade, and a misallocation of resources. b. surpluses, increases in product quality, search costs, gains from trade, and resource attrition. c. excess demand, long lines, poor service, efficiency, and arbitrage. d. shortages, reduced time costs, low vacancy rates, blat, and deadweight loss. 408. A legal maximum price at which a good can be sold is a price: a. stabilization. *b. ceiling. c. support. d. floor. 409. A price ceiling creates a ________ when it is set ________. a. surplus; below the equilibrium price b. surplus; above the equilibrium price *c. shortage; below the equilibrium price d. shortage; above the equilibrium price 410. Figure: Price Ceiling Reference: Ref 8-1 (Figure: Price Ceiling) Refer to the figure. When a price ceiling of $10 is instituted by the government, consumers are able to buy how many units of the product? a. 290 units b. 310 units *c. 270 units d. 40 units 411. Figure: Price Ceiling Reference: Ref 8-1 (Figure: Price Ceiling) Refer to the figure. A price ceiling of $10 results in a: a. shortage of 270 units. *b. shortage of 40 units. c. surplus of 270 units. d. surplus of 40 units. 412. Figure: Price Ceiling Reference: Ref 8-1 (Figure: Price Ceiling) Refer to the figure. If a price ceiling were set at $12, there would be a: a. shortage of 50 units. b. surplus of 40 units. *c. shortage of 0 units. d. surplus of 20 units. 413. Which of the following is NOT an effect of a price ceiling? *a. surpluses b. misallocation of resources c. loss of gains from trade d. wasteful lineups 414. When the maximum legal price is below the market price we say that there is a price: a. floor. b. stabilization. c. support. *d. ceiling. 415. Economists call the maximum legal price a price ceiling because the price: a. cannot legally go lower than the ceiling. *b. cannot legally go higher than the ceiling. c. must match the legally established ceiling price. d. All of the answers are correct. 416. Price ceilings would create all of the following effects EXCEPT: a. shortages. b. reductions in product quality. c. a misallocation of resources. *d. maximum gains from trade. 417. Figure: Price Controls Reference: Ref 8-2 (Figure: Price Controls) Refer to the figure. Which of the following price controls would cause a shortage of 20 units of the good? a. a price ceiling of $10 b. a price floor of $10 *c. a price ceiling of $6 d. a price floor of $6 418. Figure: Price Controls Reference: Ref 8-2 (Figure: Price Controls) Refer to the figure. If the government imposes a price ceiling in this market at a price of $6, the result would be a: a. surplus of 20 units. b. surplus of 10 units. *c. shortage of 20 units. d. shortage of 10 units. 419. Figure: Government Price Controls Reference: Ref 8-3 (Figure: Government Price Controls) Refer to the figure. The government enacts a price control causing a shortage of 15 units of the good. Therefore, the ________ is set at ________. a. price floor; $31 b. price floor; $17 *c. price ceiling; $10 d. price ceiling; $17 420. Figure: Government Price Controls Reference: Ref 8-3 (Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be: a. a shortage of 15 units. b. a surplus of 15 units. c. a supply of 20 units. *d. no effect on the market. 421. At a price ceiling of $6 per sheet of drywall, quantity demanded is 100 and quantity supplied is 75. What will happen in the drywall market if there is an increased demand for drywall in the construction industry? a. Equilibrium will be restored. b. The shortage of drywall will fall below 25 units. *c. The shortage of drywall will increase above 25 units. d. The surplus of drywall will increase above 25 units. 422. The lower the price ceiling is relative to the market equilibrium price, the: a. larger the surplus. b. smaller the surplus. c. smaller the shortage. *d. larger the shortage. 423. A shortage results when: a. a price floor is imposed. *b. a price ceiling is imposed. c. there is excess supply without any price controls. d. a price floor is imposed but it is not binding. 424. Shortages occur when prices are held below the market price, causing the quantity demanded to exceed the quantity supplied. This is a result of price: a. floors. *b. ceilings. c. gouging. d. competition. 425. Because of government price controls, a business must now sell soft-serve ice cream at half its original price. This business might respond by: a. offering smaller servings of ice cream. b. skimping on toppings of nuts, fudge, and cherries. c. reducing hours of operation. *d. All of the answers are correct. 426. The price controls of the early 1970s caused: a. lead to be removed from gasoline. *b. the disappearance of the full-service gas station. c. gas stations to stay open for more hours. d. an excess supply of gasoline. 427. Why do you think full-service gas stations have largely disappeared across the United States? a. because the government has issued a ban on such gas stations *b. because of price controls on gasoline that were issued in 1973 c. because consumers demanded that they should be allowed to pump gas themselves d. None of the answers is correct. 428. If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, a likely result will be: a. an increase in the quantity supplied of the product. b. an increase in the price of the product. *c. a decrease in the quality of the product. d. a further decrease in the price of the product. 429. If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, the seller might: a. increase the quantity supplied of the product. b. decrease the price of the product. c. increase the quality of the product. *d. decrease the level of service for that product. 430. In situations of excess demand, sellers might lower quality when they are unable to raise prices because they wish to: a. reduce excess demand. *b. raise their profit levels. c. decrease surpluses. d. raise their sales. 431. In situations of excess demand, sellers might decrease service levels when they are unable to raise prices because they wish to: a. reduce excess demand. b. decrease surpluses. *c. raise their profit levels. d. raise their sales. 432. Price ceilings set by the government: a. are desirable because they make markets more efficient. b. can restore a market to equilibrium. *c. are generally believed to cause reductions in product quality. d. are imposed to assist the poor without having adverse effects. 433. Price ceilings reduce quality because: a. buyers are willing to accept lower quality of goods with lower prices. *b. facing excess demand sellers cannot raise prices to increase profit. c. the law would mandate the quality of goods to match the price of the goods. d. None of the answers is correct. 434. Which of the following observations would be consistent with the impact of price ceilings? a. Books are printed on higher quality paper. b. Full-service gasoline stations stay open for 24 hours. c. New automobiles are painted with more coats of paint. *d. Newspapers switch to a smaller font size in order to decrease bulk. 435. Figure: Effects of Price Ceilings Reference: Ref 8-4 (Figure: Effects of Price Ceilings) Refer to the figure. At a price ceiling of $2 per unit, consumers are willing to pay a maximum of: a. $2.00. b. $2.50. *c. $3.00. d. $4.00. 436. Figure: Effects of Price Ceilings Reference: Ref 8-4 (Figure: Effects of Price Ceilings) Refer to the figure. At a price ceiling of $2: *a. bribes of $1 per unit may be common. b. seller discounts of $1 may be common. c. bribes of $3 per unit may be common. d. seller discounts of $3 per unit may be common. 437. Figure: Effects of Price Ceilings Reference: Ref 8-4 (Figure: Effects of Price Ceilings) Refer to the figure. Suppose that the data represent the retail gasoline market. At a price ceiling of $2, the total value of wasted time from waiting in line is: a. $5. *b. $10. c. $15. d. $20. 438. (Table: Gasoline Market) Use the table. The total cost of purchasing 20 gallons of gas at the free market price and the price ceiling are ________ and ________, respectively. Table: Gasoline Market Free Market Price Ceiling Price per gallon of gas $4.00 $3.00 Value of time Waiting time to buy 20 gallons of gas $20/hour $20/hour 0 1.5 hours a. $100; $80 *b. $80; $90 c. $60; $75 d. $40; $60 439. Which of the following statements about price ceilings is TRUE? I. Price ceilings cause quantity demanded to exceed quantity supplied. II. When including time costs and bribes, consumers pay a total price in excess of the price ceiling. III. All else equal, it is more wasteful to allocate goods based on bribes than on waiting time costs. a. I only b. II and III only *c. I and II only d. I, II, and III 440. Figure: Costs of Price Ceilings Reference: Ref 8-5 (Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of the value of wasted time if a price ceiling of $4 is implemented? *a. $160 b. $180 c. $320 d. $220 441. Figure: Costs of Price Ceilings Reference: Ref 8-5 (Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of lost consumer surplus if a price ceiling of $4 is implemented? a. $20 *b. $10 c. $90 d. $80 442. Allocating products with long lines, using a first-come, first-served system, is: a. the only way scarce goods can be allocated. b. necessary when waiting is a costless exercise. c. efficient, since people who are willing to wait the longest get the products. *d. inefficient, because waiting wastes time. 443. Which of the following would be the least likely result of a price ceiling imposed in the market for gasoline? a. Buyers line up to buy gasoline. b. Buyers bribe station attendants to fill up their tanks. c. Some buyers will get less gasoline than they want. *d. Competition in the market will be eliminated. 444. Figure: Price Ceiling of Ps Reference: Ref 8-6 (Figure: Price Ceiling of Ps) Refer to the figure. Suppose a price ceiling of Ps is imposed. As a result: a. the quantity supplied in the market is Qs. b. buyers' willingness to pay for the good is Pd. c. the quantity demanded in the market is Qd. *d. All of the answers are correct. 445. Figure: Price Ceiling of Ps Reference: Ref 8-6 (Figure: Price Ceiling of Ps) Refer to the figure. Suppose a price ceiling of Ps is imposed. The shaded area may likely represent all of the following EXCEPT: a. value of wasted time. b. the amount that buyers bribe sellers. c. the amount of corruption. *d. consumer surplus. 446. If a price ceiling on gasoline is imposed, the total price of gasoline a buyer pays is likely to equal the legal price: a. minus the value of wasted time. b. minus the value of bribery. c. plus the value of consumer surplus. *d. plus the value of corruption. 447. Figure: Losses from Price Ceilings Reference: Ref 8-7 (Figure: Losses from Price Ceilings) Refer to the figure. A price ceiling of $1 causes lost consumer surplus equal to area ________ and lost producer surplus equal to area ________. *a. c; e b. bc; de c. a; f d. d; b 448. Figure: Losses from Price Ceilings Reference: Ref 8-7 (Figure: Losses from Price Ceilings) Refer to the figure. At a price ceiling of $1, the area representing the total value of wasted time is ________, and the area of the deadweight loss is ________. a. ab; de *b. bd; ce c. abdf; ce d. bc; de 449. At a price ceiling of $1 per loaf of bread, quantity supplied is 99 loaves, which is less than quantity demanded. What must be true for the 100th loaf of bread? a. Consumers do not value the 100th loaf of bread. b. The cost of producing the 100th loaf of bread is less than $1.00. c. Consumers value the 100th loaf of bread at less than $1.00. *d. Consumers value the 100th loaf of bread more than it costs producers to make it. 450. Figure: Costs of Price Ceilings Reference: Ref 8-8 (Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of lost producer surplus after the price ceiling of $4 has been implemented? a. $90 *b. $10 c. $160 d. $80 451. Figure: Costs of Price Ceilings Reference: Ref 8-8 (Figure: Costs of Price Ceilings) Refer to the figure. What is the dollar amount of the deadweight loss after the price ceiling of $4 has been implemented? a. $160 b. $180 *c. $20 d. $10 452. Which of these statements about price ceilings is correct? a. Whether a price ceiling is placed below or above the equilibrium price, it will always cause deadweight loss. b. A price ceiling will only cause deadweight loss if it is placed above the equilibrium price. *c. A price ceiling will only cause deadweight loss if it is placed below the equilibrium price. d. Whether a price ceiling is placed below or above the equilibrium price, it will always cause a shortage of the good. 453. In a market with a price ceiling which of the following is TRUE? *a. Buyers and sellers experience unexploited gains from trade. b. Resources are allocated to their most efficient uses. c. The supply of goods is sold by the sellers with the lowest costs. d. The supply of goods is bought by the buyers with the highest willingness to pay. 454. A deadweight loss is the total of: a. consumer and producer surplus when all mutually profitable gains from trade are exploited. b. consumer and producer surplus when all mutually profitable gains from trade are not exploited. c. lost consumer and producer surplus when all mutually profitable gains from trade are exploited. *d. lost consumer and producer surplus when all mutually profitable gains from trade are not exploited. 455. A market with price ceilings fails to maximize all of the following EXCEPT: a. the gains from trade. b. consumer surplus. *c. excess supply. d. producer surplus. 456. A free market maximizes the gains from trade, the sum of consumer and producer surplus, meeting all of the following conditions EXCEPT: *a. all buyers who are willing to pay positive prices are able to receive goods from trade. b. the supply of goods is bought by the buyers with the highest willingness to pay. c. the supply of goods is sold by the sellers with the lowest costs. d. there are no unexploited gains from trade between buyers and sellers. 457. Do price ceilings misallocate resources? *a. Yes, because people who value the good the most are unable to bid it away from low-valued uses. b. Yes, because people who value the good the least are unable to afford the good. c. No, because the good is still allocated based on willingness to pay. d. No, because the rich and poor alike stand an equal chance in getting the good. 458. In 1972–1973, the swimming pools in California were heated but homes in New Jersey were cold, is an example of a(n): *a. misallocation of resources caused by price controls. b. market failure caused by speculators. c. market inefficiency caused by monopoly oil companies. d. excess supply of oil caused by the business cycle. 459. When an effective price ceiling causes a shortage, some of the buyers who value the good the most may not be able to get the good. Why does this occur? *a. The highest value users cannot outbid the lower valued users and so the seller cannot distinguish between them. b. The highest value users are eliminated from the market due to the price ceiling. c. The price ceiling causes the price to rise so high that even the highest value users cannot afford the good. d. The government purchases most of the goods. 460. When a price ceiling is binding, the goods that are on sale are allocated to buyers using a method: *a. of random allocation. b. whereby the highest bidder wins. c. whereby the lowest bidder wins. d. whereby buyers purchase lottery tickets to see who will be able to buy the product. 461. Price controls cause resources to be ________ not just geographically, but also across different ________ of those resources. a. overutilized; types b. properly allocated; demands c. cheaper; uses *d. misallocated; uses 462. Price controls cause resources to be misallocated by: a. distorting the signals of suppliers' willingness to supply and eliminating the incentives for demanders to pay. *b. distorting the signals of demanders' willingness to pay and eliminating the incentives for suppliers to supply. c. distorting the incentives for suppliers to supply and eliminating the signals of demanders' willingness to pay. d. distorting the incentives for demanders to pay and eliminating the signals of suppliers' willingness to supply. 463. (Figure: Value of Uses) Refer to the figure. The sections labeled A, B, and C represent, respectively, the: Figure: Value of Uses *a. highest valued uses, lower valued uses, least valued uses. b. highest valued uses, least valued uses, lower valued uses. c. least valued uses, lower valued uses, highest value uses d. lower valued uses, highest valued uses, least valued uses. 464. Figure: Price Ceilings and Consumer Surplus Reference: Ref 8-9 (Figure: Price Ceilings and Consumer Surplus) Refer to the figure. There is a price ceiling of $20. What is the value of consumer surplus if all units of the good are allocated to the highest valued uses? a. $40 b. $120 *c. $200 d. $210 465. Figure: Price Ceilings and Consumer Surplus Reference: Ref 8-9 (Figure: Price Ceilings and Consumer Surplus) Refer to the figure. There is a price ceiling of $20. What is the value of consumer surplus if all the goods are allocated randomly? *a. $120 b. $180 c. $80 d. None of the answers is correct. 466. Figure: Price Ceilings and Valuation of Uses Reference: Ref 8-10 (Figure: Price Ceilings and Valuation of Uses) Refer to the figure. The single highest value user is willing to pay how many dollars for the product? a. $15 b. $25 *c. $45 d. $35 467. Figure: Price Ceilings and Valuation of Uses Reference: Ref 8-10 (Figure: Price Ceilings and Valuation of Uses) Refer to the figure. Suppose a price ceiling of $15 goes into effect. If the goods are allocated only to the highest value uses, the total consumer surplus in the market would be: a. $3,000. b. $500. *c. $2,500. d. $1,000. 468. Figure: Price Ceilings and Valuation of Uses Reference: Ref 8-10 (Figure: Price Ceilings and Valuation of Uses) Refer to the figure. Suppose a price ceiling of $15 goes into effect. If the highest value use and the lowest value use are equally likely to be satisfied, then the average value of the product is: a. $45. *b. $30. c. $25. d. $35. 469. Figure: Price Ceilings and Consumer Valuation Reference: Ref 8-11 (Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of $3 goes into effect. If the goods sold are allocated only to the highest value users, the total consumer surplus in the market would be: a. $180. b. $30. c. $120. *d. $150. 470. Figure: Price Ceilings and Consumer Valuation Reference: Ref 8-11 (Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of $3 goes into effect. If the goods sold are allocated to buyers randomly, what is the total consumer surplus in this market? *a. $90 b. $120 c. $30 d. $150 471. Figure: Price Ceilings and Consumer Valuation Reference: Ref 8-11 (Figure: Price Ceilings and Consumer Valuation) Refer to the figure. Suppose a price ceiling of $3 goes into effect. What is the loss of consumer surplus due to the random allocation of price controlled goods compared to the allocation only to the highest value users? a. $90 *b. $60 c. $150 d. $30 472. (Figure: Price Ceilings and Lost Consumer Surplus) Refer to the figure. The figure measures the consumer surplus associated with a price ceiling, assuming: Figure: Price Ceilings and Lost Consumer Surplus a. the worst-case scenario. *b. the best-case scenario. c. random allocation of the product between highest-valued and lowest-valued users. d. total consumer surplus is maximized in the market. 473. Figure: Price Ceilings and Random Allocation Reference: Ref 8-12 (Figure: Price Ceilings and Random Allocation) Refer to the figure. When a controlled price is imposed and the quantity of goods is allocated randomly between the highest valued uses and lowest valued uses, total consumer surplus under random allocation is represented by area: a. A. *b. B. c. C. d. D. 474. Figure: Price Ceilings and Random Allocation Reference: Ref 8-12 (Figure: Price Ceilings and Random Allocation) Refer to the figure. When a controlled price is imposed and the quantity of goods is allocated randomly between the highest valued uses and lowest valued uses, loss due to random allocation instead of allocation to the highest valued use is represented by area: *a. A. b. B. c. C. d. D. 475. The effects of price ceilings: a. are limited to the price controlled market. b. weaken over time. *c. extend beyond the price controlled market. d. encourage the entry of new firms. 476. During the energy crisis of the 1970s, President Nixon ordered gas stations to close between 9:00 PM Saturday and 12:01 AM Monday, in an attempt to prevent wasteful and unnecessary Sunday driving. This policy: a. proved effective in reducing the shortage of gasoline. *b. gave people the incentive to fill up their tanks earlier in the week. c. indirectly caused many churches to close on Sunday. d. All of the answers are correct. 477. Which of the following events occurred during the 1973–1974 oil crisis in the United States? a. Gas stations were ordered to be closed between 9 PM on Saturday and 12:01 AM on Monday. b. Daylight savings time was implemented. c. There were shortages of steel drilling equipment. *d. All of the answers are correct. 478. Which of the following events occurred during the 1973–1974 oil crisis in the United States? I. Gas stations were ordered to be closed between 9 PM on Saturday and 12:01 AM on Monday. II. The government decided to allocate oil by command. III. The 55 mph speed limit was repealed. IV. Daylight savings time was implemented. a. I and IV only b. I, II, and III only *c. I, II, and IV only d. I, III, and IV only 479. Economists blame the long lines at gasoline stations in the United States during the 1970s as well as the long delays in construction projects on: a. consumers who bought gas too frequently. b. the Organization of Petroleum Exporting Countries (OPEC). c. major oil companies operating in the U.S. *d. U.S. government regulation of gasoline prices. 480. Which President ended the price controls on oil? a. Nixon b. Ford c. Carter *d. Reagan 481. What happened as a result of the elimination of price controls on oil and gasoline in 1981? a. The supply of gas and oil declined. *b. The shortage of gasoline was eliminated nearly overnight. c. The price of oil increased dramatically, and stayed high until the early 1990s. d. The shortage of gasoline was eliminated, but it took several years. 482. After President Reagan repealed the price controls on gasoline: a. the supply of gasoline fell dramatically. b. the market experienced a period of vast surpluses as a result of the lack of regulation. *c. prices rose a little at first, but quickly supply began to increase and prices fell. d. prices rose dramatically as a result of the repealed legislation. 483. Ultimately repealing the price controls on gasoline and oil: a. led to permanently higher gasoline prices. *b. led to a higher supply of gasoline and lower prices. c. was disastrous as the market collapsed due to a lack of government regulation. d. was not able to eliminate the shortages of gasoline in the United States. 484. A rent control is a regulation that: a. ensures apartments being available for rent. b. controls rents at constant levels. c. upholds rents to above equilibrium levels. *d. prevents rents from rising to equilibrium levels. 485. Rent controls are: a. price floors on rental housing. *b. price ceilings on rental housing. c. quality freezes on rental housing. d. quantity freezes on rental housing. 486. Which of the following is the most correct statement about the impact of rent controls? a. The short-run supply curve for apartments is inelastic, so rent controls create larger shortages in the short run than in the long run. *b. The short-run supply curve for apartments is inelastic, so rent controls create smaller shortages in the short run than in the long run. c. The long-run supply curve for apartments is inelastic, so rent controls create larger shortages in the long run than in the short run. d. The long-run supply curve for apartments is inelastic, so rent controls create smaller shortages in the long run than in the short run. 487. Over time, housing shortages caused by rent control ______ because the supply of housing is ______ elastic in the long run. a. increase; less *b. increase; more c. decrease; less d. decrease; more 488. (Figure: Short and Long Run Shortages) Use the figure. At a rent controlled price of $800, the short-run shortage of apartments is ________ and the long-run shortage is ________. Figure: Short and Long Run Shortages a. 12,000; 4,000 *b. 4,000; 12,000 c. 8,000; 4,000 d. 8,000; 12,000 489. Why is the long-run supply curve of rent controlled apartments typically more elastic than the short-run supply curve? *a. In the long run, fewer new apartments are built, and older apartments are torn down or turned into condominiums. b. In the long run, many more new apartments are built and this increases the supply of rent controlled apartments. c. In the long run, rent controls are always removed. d. In the long run, the shortage of rent controlled apartments becomes significantly less. 490. How did economists try to prove that reductions in new apartment building in Ontario, Canada, during the 1970–1975 period were a result of debates on rent control? They: a. showed that the economy was declining during this period. b. pointed to the fact that the OPEC oil crisis occurred at this time. *c. contrasted the fact that apartment building was declining while new house building was rising, in the same state of economy. d. pointed to the fact that rent controls had not been implemented during the OPEC oil crisis. 491. Vietnam's foreign minister said, “The Americans couldn't destroy Hanoi, but we have destroyed our city by very low rents.” He was referring to the fact that: a. very low rents provided very little income for carrying out warfare. *b. very low rents turned portions of city housing into a state of disrepair and slum-like conditions. c. the Americans did not install proper city housing codes in Hanoi. d. bombing a city is always worse than rent control. 492. Under rent control tenants can expect: a. lower rent and higher quality housing. *b. lower rent and lower quality housing. c. higher rent and a shortage of housing. d. higher rent and a surplus of housing. 493. Which of the following is NOT a result of rent control? *a. higher quality housing b. bribery c. fewer new apartments offered for rent d. less maintenance provided by landlords 494. Which of the following would be the least likely result of a price ceiling imposed in the market for rental cars? a. slow replacement of old rental cars with new ones b. poor maintenance of the rental cars c. dirtier exteriors and interiors of rental cars *d. free gasoline given to people as an incentive to rent a car 495. Because rent controls on apartments reduce profits: a. developers build and rent more apartments to make up for lost profit. b. condominiums are converted into apartments. c. landlords are less likely to discriminate against minorities in renting out apartments. *d. apartment managers will give less consideration to renters' complaints. 496. Under rent control, bribery is used to: a. allocate housing to the most deserving tenants. b. make the total price of a rental property (including the bribe) less than the market price that would prevail without rent controls. *c. make the total price of a rental property (including the bribe) closer to the market price that would prevail without rent controls. d. allocate the housing to the poorest individuals in the market. 497. Rent control in New York City has resulted in: a. people living in luxury apartments and paying low rents. b. people having to bribe landlords to get apartments. c. people having difficulty finding apartments. *d. All of the answers are correct. 498. From an efficiency standpoint, rent controls: a. increase efficiency by allowing those households who could not afford high rents before to be able to purchase housing. b. increase efficiency by increasing consumer surplus. *c. decrease efficiency because both buyers and sellers would be better off if the price of rents were allowed to rise. d. decrease efficiency because they make it illegal to trade. 499. Under rent controls: *a. some mutually profitable trades are illegal and therefore the benefits are never realized. b. producer surplus is zero. c. the quantity demanded of apartments is typically less than the quantity supplied. d. buyers are better off at the expense of sellers. 500. Which of the following cases would be the least likely result of rent controls? a. Landlords are more selective with respect to the people they rent apartments to. b. Landlords provide less maintenance on the apartments. *c. More new apartments are available for rent. d. More people look for apartments for rent than the number of apartments available. 501. Which statement about price controls is most correct? *a. Price controls often hurt the people they are designed to help. b. Price controls always help the people they are designed to help. c. Price controls have minimal adverse effects. d. Price controls make economic sense even if they have adverse effects. 502. Rent controls are: a. an efficient and equitable way to help the poor. b. inefficient, but a pretty good way to solve a serious social problem. *c. an inefficient way to help the poor in raising their standard of living. d. an efficient way to allocate housing. 503. Which of the following statements is TRUE? I. Rent controls prevent apartments from being allocated to people who value them the most. II. With a system of rent controls, landlords are more likely to make needed repairs to their properties as a way of attracting renters. III. Although inefficient, rent controls are the best way to help the poor afford housing. *a. I only b. I and III only c. I, II, and III d. II and III only 504. An alternative to rent control that has been used in some cities since the 1990s is: a. confiscation of property from landlords. b. policies that prevent evictions. *c. rent regulation that limits the rate of increase in rent. d. higher taxes on rental income of landlords. 505. Which of the following statements is TRUE? I. Regulations that limit the rate of increase in rents are equally inefficient as rent controls. II. Rent regulations reduce the incentive for landlords to cut back on maintenance. III. Regulations that limit the rate of increase in rents allow the price of rental housing to respond to market forces. a. I only b. I and III only c. I, II, and III *d. II and III only 506. The best way to help the poor afford housing is by: a. using rent control. b. raising the minimum wage. *c. issuing housing vouchers. d. raising payroll taxes. 507. Why are housing vouchers a better option than rent controls when a government is attempting to make housing affordable for the poor? The housing voucher entitles the tenant to: a. live in a rent controlled apartment. b. free maintenance of their apartment. *c. a certain dollar amount off the rent of any apartment they choose. d. live in a luxury apartment of their choice. 508. An alternative to rent controls that increases the quantity of housing and targets consumers that need low-cost rental property is: a. tax credits. *b. vouchers. c. subsidies to landlords d. not available. 509. If affordable housing is a concern, then a better policy than rent controls may be for the government to provide: a. subsidized housing. b. additional jobs. *c. housing vouchers. d. mortgage discounts. 510. Which of the following statements is FALSE? *a. A frost that destroys half the orange crop will create a shortage of oranges. b. It is possible to have a shortage of a good even if its supplies are abundant. c. Politicians often blame speculators and profiteers for rising prices rather than changes in supply and demand. d. To eliminate a shortage, prices must rise. 511. If price controls are so harmful, why would a country ever impose them? a. No one really knows. b. Price controls are usually thought to be beneficial. *c. Politicians have strong incentives to respond to the public when prices increase sharply. d. People usually see the consequences of price controls but think they will be a good policy. 512. Price controls are usually imposed in response to an: a. expected increase in prices. b. expected decrease in prices. *c. unexpected increase in prices. d. unexpected decrease in prices. 513. The shortages that result from imposing price controls: *a. are rarely recognized by the public as a result of the price controls themselves. b. typically lead the public to lobby politicians to repeal the price controls. c. only last for a short while until markets can adjust to the new lower prices. d. create higher prices. 514. Dramatic price increases, such as those seen in the markets for gas and oil in the 1970s, are typically the result of: a. price gouging by big businesses. b. shortages. *c. reductions in supply. d. foreign intervention in markets. 515. Why do many consumers and politicians advocate for price controls? a. Price controls are the only way for the poor to obtain certain goods when prices rise. b. Most consumers and politicians do not advocate for price controls, as they understand their negative consequences. *c. Price controls appear to be a straightforward response to the problem of price increases. d. The gains in consumer surplus typically outweigh the loss in producer profits. 516. An economy with permanent, universal price controls is in essence a: a. market economy. b. social economy. c. free economy. *d. command economy. 517. The blat economy described in the text results when price controls are: *a. extensive and cause chronic shortages in the economy. b. extensive but the causes of shortages in the economy are only temporary. c. short-lasting but cause chronic shortages in the economy. d. short-lasting and cause only temporary shortages in the economy. 518. What does the Russian word blat refer to? a. a Russian brand of vodka *b. having connections that enable one to obtain favors c. There is no such word. d. the amount of time people spend waiting in lines to buy things 519. To what does the Russian concept of blat refer? a. to the barter system that developed in Russia as a result of the shortages of goods b. to the command economy system that was instituted in Russia c. to the act of standing in lines to buy goods *d. to having connections that one can use to get favors 520. Which of the following scenarios shows how the Russian concept of blat works during a beef shortage? *a. a politician acquires some steak through his friendship with the owner of the beef factory b. a beef factory owner hoards some steak at his own house c. a beef factory owner realizes that there is a surplus of plastic wrapping d. more people than usual stand in line to try to buy steak 521. The chronic shortages of goods in the Soviet Union were: a. caused by the CIA's manipulation of the Soviet currency. b. limited to luxury items, like yachts and airplanes. c. the result of too much defense spending that hoarded resources away from the production of consumer goods. *d. beneficial to the party elite who traded scarce goods for favors and other scarce goods. 522. What is blat? a. a long line b. the time costs associated with buying price controlled goods *c. the use of political connections to get favors d. a dilapidated rent-controlled apartment. 523. Impeding price signals by imposing price ceilings can have serious consequences. Which of the following is such a consequence? a. improved product quality b. gains from trade c. surpluses *d. misallocation of resources 524. (Figure: Price Ceiling in a Generic Market) Refer to the figure. If the government imposes a price ceiling at the price of $4.00, the result would be a: Figure: Price Ceiling in a Generic Market a. surplus of 40 units. *b. shortage of 40 units c. surplus of 20 units. d. shortage of 20 units. 525. Which of the following statements is TRUE? Price floors set above the equilibrium price cause: I. shortages. II. surpluses. III. deadweight losses. a. I and III only *b. II and III only c. III only d. I is true if demand is elastic, however II is true if demand is inelastic. 526. The presence of price floors in a market usually is an indication that: a. there is an insufficient quantity of a good or service being produced. b. the forces of supply and demand are unable to establish an equilibrium price. *c. sellers of the good or service outnumber the buyers. d. policy makers believe the price floor does not involve inequities. 527. A price floor is: a. a maximum price allowed by law. *b. a minimum price allowed by law. c. able to produce an efficient outcome. d. a tool used to increase government revenues. 528. The most common example of a price being controlled above market levels involves a good for which the: *a. sellers outnumber the buyers. b. buyers outnumber the sellers. c. market is controlled by a monopolist. d. market is controlled by the government. 529. When the minimum price that can be legally charged is above the market price, we say there is a price: a. support. b. stability. c. ceiling. *d. floor. 530. Price floors would create all of the following effects EXCEPT: a. surpluses. b. deadweight loss. *c. wasteful decreases in product quality. d. misallocation of resources. 531. Which of the following statements is NOT true? I. The increase in the minimum wage in Puerto Rico in 1938 did not affect Puerto Rico's unemployment rate. II. About 15 percent of all hourly workers in the United States earn the minimum wage. III. Raising the minimum wage is an effective method to combat poverty. IV. Raising the minimum wage decreases employment of low-skilled workers. a. I and II only b. II and III only c. I, II, and IV only *d. IV only 532. Figure: Minimum Wage Reference: Ref 8-13 (Figure: Minimum Wage) Refer to the figure. At a minimum wage of $8, firms are willing to hire ________ workers. a. 45 *b. 25 c. 35 d. more than 45 533. Figure: Minimum Wage Reference: Ref 8-13 (Figure: Minimum Wage) Refer to the figure. How many workers are unemployed at a minimum wage of $8? a. 10 *b. 20 c. 25 d. 35 534. (Figure: Unskilled Labor Market) Based on the figure, what is the number of unemployed workers if a minimum wage of $6 is set in this market for unskilled labor? Figure: Unskilled Labor Market *a. 40 b. 55 c. 20 d. 95 535. The Federal minimum wage causes unemployment mostly among: a. middle-class workers. *b. young unskilled workers. c. college graduates. d. highly skilled workers. 536. For a price floor to prevent market forces from finding the equilibrium price it must be set: a. above the equilibrium price, causing a market shortage. b. below the equilibrium price, causing a market shortage. c. below the equilibrium price, causing a market surplus. *d. above the equilibrium price, causing a market surplus. 537. A price floor causes: a. excess demand. b. a shortage. *c. a surplus. d. quantity demanded to exceed quantity supplied. 538. The minimum wage is an example of a(n): a. price ceiling. *b. price floor. c. wage subsidy. d. efficient policy. 539. (Figure: Labor Market) Refer to the figure. Which of the following statements is correct? Figure: Labor Market a. A price floor set at W1 would cause a labor surplus best labeled by A. b. A price floor set at W1 would cause a labor surplus best labeled by B. *c. A price floor set at W2 would cause a labor surplus best labeled by A. d. A price floor set at W2 would cause a labor surplus best labeled by B. 540. If a minimum wage is posted in the labor market: a. the demand for labor would increase. b. the supply of labor would decrease. *c. a surplus of labor would develop. d. All of the answers are correct. 541. An increase in the minimum wage would likely increase unemployment among which group of workers? a. An increase in the minimum wage does not lead to an increase in unemployment. *b. unskilled workers c. female workers d. older workers 542. (Figure: Minimum Wage for Country A) Refer to the figure. The deadweight loss from the $8 minimum wage is area: Figure: Minimum Wage for Country A a. bc. b. ad. *c. ce. d. bd. 543. Ben is willing to work for $4/hour and an employer is willing to hire Ben for $7/hour. Which of the following statements is TRUE? *a. A minimum wage of $7.50/hour would prevent this mutually beneficial exchange. b. Minimum wages do not prevent mutually beneficial exchanges. c. A minimum wage of $4.50/hour would prevent this mutually beneficial exchange. d. A minimum wage of $3.50/hour would prevent this mutually beneficial exchange. 544. Figure: Price Floor Reference: Ref 8-14 (Figure: Price Floor) Refer to the figure. How much unemployment results from the imposition of a price floor set at $10? *a. 100 units b. 310 units c. 50 units d. 210 units 545. Figure: Price Floor Reference: Ref 8-14 (Figure: Price Floor) Refer to the figure. What are the lost gains from trade as a result of the imposition of the price floor? a. Areas (B + C) b. Area D *c. Areas (C + F) d. Areas (B + E) 546. (Figure: Deadweight Loss) Refer to the figure. What areas represent the deadweight losses in the labor market as a result of the imposition of a minimum wage at $4? Figure: Deadweight Loss a. Areas (C + F) b. Areas (B + C) c. Area D *d. There is no deadweight loss in this market as a result of the $4 minimum wage. 547. The U.S. Congress first instituted the minimum wage in: a. 1914. b. 1974. *c. 1938. d. 1925. 548. If the minimum wage is lowered and closer to the market level, the: a. gains from trade would decrease, compared to a higher minimum wage. *b. gains from trade would increase, compared to a higher minimum wage. c. lost gains from trade would increase, compared to a higher minimum wage. d. deadweight loss would increase, compared to a higher minimum wage. 549. The influence of the minimum wage in the American economy is very small because most workers earn: *a. more than the minimum wage. b. less than the minimum wage. c. more or less than the minimum wage. d. near the minimum wage. 550. Which of these cases would likely result from an increase in minimum wage? a. an increase in the price of hamburgers b. an increase in unemployment among teenagers c. incomes increase for those who keep minimum wage jobs *d. All of the answers are correct. 551. Price floors encourage firms to provide ________ quality. a. too little *b. too much c. the right amount of d. no 552. The deregulation of the airline industry caused: *a. lower prices and more flights. b. higher prices and fewer flights. c. higher prices and more flights. d. lower prices and fewer flights. 553. The price floor regulation of the airline industry: a. was the leading factor in the development of low-cost airlines. *b. led to a misallocation of resources by preventing the entry of innovative airlines. c. allowed the middle class the opportunity to fly at reduced rates. d. was based on the principle of low prices and low quality. 554. Which of the following would be the LEAST likely result of a price floor in the market for airline travel? a. rapid replacement of old airliners with new aircraft *b. narrow seats and basic meals like peanuts or chips with a coffee or soda c. special incentives like airline mileage clubs to attract customers d. excellent engine maintenance 555. Deregulation of the airline markets reduced waste, increased efficiency, and: a. eliminated competition. *b. improved allocation of resources. c. raised prices. d. caused an increase in costs. 556. (Figure: Airline Industry) Suppose that airlines are regulated and prices are kept above the market level. According to the figure, the areas A and B represent, respectively, the: Figure: Airline Industry a. deadweight loss and quality waste. b. deadweight loss and consumer surplus. *c. quality waste and deadweight loss. d. quality waste and consumer surplus. 557. Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers: a. various options. b. more quantity. c. more discount. *d. higher quality. 558. In 1974, there were ________ airline firms operating in the United States. *a. 10 b. 79 c. 38 d. 16 559. Southwest Airlines was able to enter the national market in 1978 as a result of: a. winning a series of law suits. b. accumulating market share. *c. airline deregulation. d. establishment of new price controls. 560. Which of the following is not an effect of a price floor? a. misallocation of resources *b. deregulation c. surpluses d. wasteful increases in quality 561. One of the virtues of the market process is that it is open to new ideas, innovations, and ________. a. reallocation of property b. central planning by government c. profits *d. experiments 562. Deregulation of the airline industry has led to: a. an increase in the quality and safety of air travel. b. increases in costs of production in air travel. *c. more firms providing air travel services. d. fewer firms providing air travel services. 563. Which of the following statements is correct regarding the restrictions on entry into the airline industry? a. Resources were equally allocated because new airlines were kept out of the industry. *b. Resources were misallocated because low-cost airlines were kept out of the industry. c. Resources were efficiently allocated because high-cost airlines were kept out of the industry. d. Resources were reallocated because only low-cost airlines were allowed to enter the industry. 564. Deregulation improves the allocation of resources by: a. allocating more resources to the firms. b. decreasing the number of firms in the market. *c. allowing low-cost, innovative firms to enter the market. d. creating more market opportunities to the firms. 565. In a market the equilibrium price is $20. A price ceiling of $15 creates a bigger shortage than a price ceiling of $10. a. True *b. False 566. A price ceiling is a legal maximum on the price of the good or service. *a. True b. False 567. Most economists favor price controls as a way of allocating resources. a. True *b. False 568. A price ceiling is a minimum price below the market price that can be legally charged. a. True *b. False 569. Suppose that supply is fixed at 100 units and demand is Q = 500 – P. A price ceiling of $100 creates a shortage of 400 units. a. True *b. False 570. Price ceilings cause the quantity demanded to be less than the quantity supplied. a. True *b. False 571. Even though shortages typically result from the imposition of price ceilings, the overall gains in economic efficiency outweigh the costs. a. True *b. False 572. Once you account for time costs and bribes, it may be more expensive to make purchases at the government-controlled price than at the free-market price. *a. True b. False 573. Suppose a $3 per gallon price ceiling is imposed on gasoline and the equilibrium price of gasoline is $2 per gallon. Such a price ceiling would lead to long lines at gas stations. a. True *b. False 574. The quantity traded with a binding price ceiling is lower than the quantity traded without a price ceiling, which means that price ceilings create lost gains from trade. *a. True b. False 575. If price controls are imposed, gains from trade, including consumer and producer surplus, are likely to increase. a. True *b. False 576. Prices ceilings misallocate resources because with them resources are not necessarily allocated to their highest-valued use. *a. True b. False 577. When price ceilings are effective, gains from trade are usually lower than if the available goods are allocated to the highest value uses. *a. True b. False 578. Effective price ceilings cause misallocation of resources because scarce resources are usually not allocated to their highest value uses. *a. True b. False 579. Housing shortages caused by rent controls are larger in the long run because the supply of housing is more elastic in the long run. *a. True b. False 580. When a crisis in the Middle East reduces the supply of oil, the price system rationally responds by reallocating oil from highest value uses to lower valued uses. a. True *b. False 581. During the 1970s, the 11-tier oil production definitions came into play because of firms' attempts to bypass regulations and produce decontrolled oil. *a. True b. False 582. Rent controls create large shortages in the long run rather than the short run because the long-run supply curve for apartments is inelastic. a. True *b. False 583. The long-run supply curve for rent-controlled apartments is generally more inelastic than the short-run supply curve. a. True *b. False 584. The poor state of the economy was the dominant factor that caused the fall in the number of new apartments built in Ontario, Canada, during the first half of the 1970s. a. True *b. False 585. When the maximum price that can be legally charged is above the market price we say that there is a price floor. a. True *b. False 586. A price floor is a legal maximum on the price of a good or service. a. True *b. False 587. If a price floor is above the equilibrium price it will have no effect in the market. a. True *b. False 588. If a price floor is below the equilibrium price a shortage will result. a. True *b. False 589. The minimum wage is an example of a price floor in the labor market. *a. True b. False 590. A minimum wage mostly creates unemployment among older workers. a. True *b. False 591. Although a minimum wage increases unemployment, it doesn't create a deadweight loss. a. True *b. False 592. A price floor makes it illegal for firms to compete for more customers by lowering prices, causing firms to compete by offering customers higher quality. *a. True b. False 593. The Civil Aeronautics Board regulated airline fares above the free-market rates, which led airlines to compete by offering fancy meals, wide seats, and frequent flights. *a. True b. False 594. Briefly discuss the U.S. experience with price ceilings during the early 1970s. What effects of the price ceilings became apparent during this period, and how did the period of price ceilings eventually end? Correct Answer: In August 1971, President Nixon froze all wages and prices. Shortages began to appear soon after in industries like lumber, steel, aluminum, paper, clothing, etc. Since prices could not be raised, sellers began to lower the quality of products and service. For example, the full service gas station disappeared during this time. The most serious shortage was the shortage of oil. Goods are typically allocated randomly during a shortage and gas was no exception. In 1974, Business Week reported that while consumers waited three hours in line for gasoline in some states, consumers were getting easy access to gas in other states. When the shortages grew worse, President Nixon even ordered the closures of schools and factories. Daylight savings time was instituted and the 55 mph limit was instituted (this was repealed in the 90s). Price controls for most goods were lifted by 1974 but price controls on oil lingered to a certain extent. Eventually President Reagan lifted all controls on oil prices when he took office in 1981. 595. Assume that a market is defined by two equations: the demand equation is Qd = 60 – 5P, and the supply equation is Qs = 5P. Now suppose that a price ceiling is instituted at $3. Use this information to answer the questions below. a. What is the equilibrium price and quantity in this market? b. What is the amount of the shortage at the price ceiling? c. What is the total value of time wasted by consumers standing in line? Correct Answer: a. Equilibrium P = $6, and equilibrium Q = 30 units. b. Qd = 60 – 5(3) = 45. Qs = 5(3) = 15. Shortage = 30 units. c. The price associated with a Qd of 15 units can be found by substituting the quantity back into the demand equation. 15 = 60 – 5P. P = $9. Therefore the total value of time wasted standing in line is $6 × 15 = $90. 596. Illustrate on a supply and demand diagram how price ceilings may distort the market outcome and specify what secondary effects price ceilings can create. Correct Answer: When the maximum price that can be legally charged is below the market price we say that there is a price ceiling. Price ceilings create five important effects: shortages, reduction in product quality, wasteful lineups and other costs of search, a loss of gains from trade, and a misallocation of resources. 597. A market's demand and supply curves are given by Qd = 400 – 3P Qs = 100 + 2P where Qd is quantity demanded, Qs quantity supplied, and P is the price. a. Suppose the government enacts a price ceiling of $60. What is the quantity demanded and supplied? Is the market characterized by a shortage? b. Suppose that supply conditions in the market change to Qs = 80 + 2P. Given the price ceiling of $60, what happens to quantity demanded and quantity supplied? Is the market characterized by a shortage? How much are consumers willing to pay per unit for the quantity transacted? Correct Answer: a. Qd = 400 – 3(60) = 220; Qs = 100 + 2(60) = 220. The market is in equilibrium so there is no shortage. b. Qd = 400 – 3(60) = 220; Qs = 80 + 2(60) = 200. There is a shortage of 20 units. The quantity transacted is 200. Willingness to pay for 200 units: 200 = 400 – 3P; 3P= 200; P = 200/3 = $66.67. 598. When the price of gasoline rose to $4 per gallon in the summer of 2008, many people were outraged at how gas companies were “price gouging” individuals, and called for price controls on gasoline. If the government had agreed to legally cap the price of gasoline, would this have lowered the cost to consumers? Explain. Correct Answer: No, this would not have decreased the total cost to consumers. Since the price ceiling on gasoline would have caused a shortage of gasoline, consumers would have had to expend additional time waiting in line or possibly even additional money on bribes, etc. Price controls do not eliminate competition; they merely change the form of competition. Therefore in the end, these price controls would not have been successful in lowering costs to consumers. 599. Using a supply and demand diagram as a reference, discuss the way a price ceiling causes a reduction in gains from trade. Correct Answer: The diagram is a copy of Figure 8.3 in the text. The student should identify the price ceiling, the shortage, and the losses in consumer and producer surplus. The student should identify these areas on the diagram indicating the loss in gains from trade. 600. Many times after natural disasters such as hurricanes, prices are controlled so that it is illegal to charge any price greater than “pre-hurricane” levels. For consumers who value these goods very highly, is this a good policy? If prices were allowed to increase, what do you think would happen to supply of these highly valued goods? Explain. Correct Answer: For consumers who value these goods (like bottled water and generators) very highly, this is not a good policy. The price controls create large shortages of these goods, and many times these consumers are unable to (legally) obtain these goods since they are unable to signal their high value by offering to pay more. In addition, with prices fixed at artificially low levels, there is no incentive for suppliers of these goods to increase supply. If prices were allowed to rise, this would entice new (or existing) suppliers to enter this market and hence the supply of these goods would rise, however the price controls remove the incentive to respond rationally. 601. (Figure: Allocating Goods under Price Ceilings) Refer to the figure. Using the information provided in the graph, answer the following questions: Figure: Allocating Goods under Price Ceilings a. If the goods were allocated only to those users who had the highest value uses, find the total dollar amount of consumer surplus. b. If the goods are allocated randomly between the high-value uses and the low-value uses, then what is the average value of the good? c. If goods are allocated randomly, what is the total dollar amount of consumer surplus? Correct Answer: a. Consumer surplus if the goods were allocated to only the highest value uses would be the total area (A + B + C + D) = $1,560 b. $13 = (20 + 6)/2 c. Consumer surplus if the goods were allocated randomly would be the total area (C+D) = $840. Alternatively, consumer surplus is also (13 – 6)120 = $840 602. (Figure: Random Allocation under Price Ceilings) Refer to the figure. The government enacted a price ceiling of $6 per unit. Using the information provided in the graph, calculate the following: Figure: Random Allocation under Price Ceilings a. If the goods are allocated randomly between the high-value uses and the low-value uses, what is the total amount of consumer surplus in dollars? b. What is the lost amount of consumer surplus when goods are allocated randomly, when compared to a situation where the goods are allocated only to the highest value uses? Correct Answer: a. Consumer surplus if the goods are allocated randomly would be the total of areas C + D. This is $12,000. b. A + B are lost if the goods are allocated randomly. This is $8,400. 603. Rent controls are typically implemented as a means of helping low-income families afford housing. Is this a good way to help poor families in general? Explain why or why not. Correct Answer: No, in general rent controls create shortages that make it hard for poor families to even find suitable housing. In addition, it leads to decreases in the quality of housing, as owners attempt to offset losses from the lower prices by cutting their costs. With rent controls also come high search costs—these search costs can be especially costly for people that landlords think are not 'ideal renters' (unfortunately many minorities or low-income households fall into this category). In short, most of the time rent controls typically end up making poor families worse off. 604. Do shortages caused by rent controls tend to be larger in the short run or the long run? Use a supply and demand diagram to help illustrate your answer. Correct Answer: Rent control creates larger shortages in the long run than in the short run. The short-run shortage is small since the apartment units are already built. In the long run, fewer new units are built and old apartments are converted into condominiums or torn down so the shortage grows over time. 605. Rent controls have five important effects on the market for apartments. Please list and provide an example of each effect. Correct Answer: 1) Shortage: Since the rent-controlled price is below the equilibrium price, the quantity demanded of apartments will exceed the quantity supplied. The shortage will worsen over time as apartments are converted into office space, parking garages, and condominiums. Some apartments may even be abandoned or set on fire as a way to collect insurance money. 2) Reductions in Quality: Rent control reduces profits, so landlords cut back on routine maintenance. Tenant complaints can more easily be ignored when there is a long line of potential renters who are seeking apartments. 3) Wasteful Lineups and Search Costs: People may have to wait months to find a suitable apartment because of the shortage. When an apartment becomes available, landlords might require tenants to spend thousands of dollars purchasing worthless furniture. Some people may be discriminated against in trying to get an apartment. Landlords might prefer tenants without children or tenants without foreign accents. When resources are not allocated based on willingness to pay, they will frequently get allocated based on other criteria, such as skin color, nationality, etc. 4) Lost Gains from Trade: At the rent-controlled price, there are numerous people willing to pay more for an apartment than the minimum required by a landlord, but these trades will not take place because the price cannot be bid above the controlled price. 5) Misallocation of Resources: People living in rent-controlled apartments may prefer a bigger or smaller apartment but are reluctant to move because of difficulty in finding available apartments. People with the highest willingness to pay may not be those who are actually renting the apartments. 606. Specify the argument in favor of rent controls and the arguments against rent controls. Explain what other possible policies can create affordable housing. Correct Answer: Without rent controls some people may not be able to afford appropriate housing. If rent controls are the only way to help the poor, then this would be an argument in favor of price controls. However, rent controls create shortages and lower quality of apartments, which are rarely the best way to help the poor. A better policy than rent controls is for the government to provide housing vouchers, which would give qualifying consumers a voucher that can be applied to any unit of housing. Unlike rent controls, which create shortages, vouchers increase the supply of housing. Unlike rent controls, vouchers can also be targeted to consumers who need them. 607. Illustrate on a demand and supply diagram how the existence of a price floor would distort the market outcome, and specify what effect (i.e., shortage or surplus) the price floor may create. Correct Answer: When the minimum price that can be legally charged is above the market price we say that there is a price floor. Price floors create four important effects: surpluses, a loss of gains from trade, wasteful increases in quality, and a misallocation of resources. 608. The demand and supply of labor are given by Qd = 1,000 – 10W Qs = 800 + 40W where Qd is the quantity demanded of labor, Qs is the quantity supplied of labor, and W is the hourly wage. a. What is the equilibrium wage and level of employment? b. Suppose the government mandates a minimum wage of $7. How many workers will firms employ? c. How many workers are unemployed because of the minimum wage of $7? Correct Answer: a. Qd = Qs, 1,000 – 10W = 800 + 40W, W = $4. The level of employment is 1,000 – 10 × 4 = 960. b. Qd = 1,000 – 10 × 7 = 930. c. Unemployed = Qs – Qd = (800 + 40 × 7) – (1,000 – 10 × 7) = 150. 609. The benefits of trade include: I. greater productivity due to specialization. II. higher output due to specialization according to comparative advantage. III. increased welfare when preferences differ. a. I and II only b. II and III only c. I and III only *d. I, II, and III 610. In terms of economics, international trade is very similar to trade between two people in a small local neighborhood, except: a. for the impact of specialization that does not occur in local trade. *b. for political considerations such as country borders. c. that international trade is based on the concept of comparative advantage whereas local trade is not. d. for the impact of division of knowledge that does not exist in local trade. 611. Consider the following statements: I. Relative to a no-trade situation, if the United States exported wheat, the U.S. domestic wheat price would rise and domestic production of wheat would expand. II. Relative to a no-trade situation, international trade causes prices of all goods to rise. *a. I is true; II is false. b. I is false; II is true. c. Both I and II are true. d. Both I and II are false. 612. Figure: Foreign Trade Reference: Ref 9-1 (Figure: Foreign Trade) Refer to the figure. What quantity would be traded in a free-trade environment? a. 600 *b. 1,400 c. 1,000 d. 800 613. Figure: Foreign Trade Reference: Ref 9-1 (Figure: Foreign Trade) Refer to the figure. What quantity would be produced domestically? a. 600 b. 1,400 c. 1,000 *d. 800 614. Figure: Foreign Trade Reference: Ref 9-1 (Figure: Foreign Trade) Refer to the figure. What quantity would be imported? *a. 600 b. 1,400 c. 1,000 d. 800 615. Figure: Foreign Trade Reference: Ref 9-1 (Figure: Foreign Trade) Refer to the figure. What quantity would be traded in the absence of any international trade? a. 600 b. 1,400 *c. 1,000 d. 800 616. Which of the following is TRUE about the economic policy of “protectionism”? a. It raises prices of foreign goods in domestic markets. b. It restricts competitive forces in domestic markets. c. It can be achieved through quotas and tariffs. *d. All of these statements are correct. 617. Economic policies of protectionism include: I. reduced trade barriers. II. tariffs. III. quotas. a. I and II only *b. II and III only c. I and III only d. I, II, and III 618. Imposing a restrictive quota on the import of sugar will likely: *a. increase the price of sugar and decrease the quantity consumed. b. increase the price of sugar and increase the quantity consumed. c. leave the price of sugar unchanged and decrease the quantity consumed. d. leave the price of sugar unchanged and increase the quantity consumed. 619. Protectionism refers to government policies that: *a. restrict imports of foreign products. b. give foreign producers tax credits in an effort to increase their exports. c. stimulate trade between countries and increase domestic producers profit. d. restrict the output of domestic producers to keep their prices high. 620. The U.S. government restricting the quantity of sugar imports into the country is an example of a(n): *a. trade quota. b. embargo. c. trade settlement. d. market hanger. 621. A tariff is a: *a. tax on imports. b. subsidy on exports. c. restriction on the quantity of domestic goods consumed by foreigners. d. restriction on the quantity of imports from foreign producers. 622. A tariff is a: a. tax credit for domestic exports. *b. tax on imports. c. temporary grant of monopoly rights. d. renewable subsidy to the energy industry. 623. Figure: Foreign Trade with a Tariff Reference: Ref 9-2 (Figure: Foreign Trade with a Tariff) Refer to the figure. A $1 tariff results in: a. an increase in imports of 80 million units. *b. a decrease in imports of 80 million units. c. an increase in imports of 100 million units. d. a decrease in imports of 100 million units. 624. Figure: Foreign Trade with a Tariff Reference: Ref 9-2 (Figure: Foreign Trade with a Tariff) Refer to the figure. A $1 tariff generates government revenue of: *a. $100 million. b. $140 million. c. $180 million. d. $200 million. 625. Figure: Foreign Trade with a Tariff Reference: Ref 9-2 (Figure: Foreign Trade with a Tariff) Refer to the figure. A $1 tariff generates increased domestic production by: *a. $40 million units. b. $90 million units. c. $140 million units. d. $180 million units. 626. Figure: Foreign Trade Reference: Ref 9-3 (Figure: Foreign Trade) Refer to the figure. What is the dollar value of wasted resources as a result of prohibiting trade in this market? a. $30,000 b. $5,000 *c. $2,500 d. $22,500 627. Figure: Foreign Trade Reference: Ref 9-3 (Figure: Foreign Trade) Refer to the figure. What is the dollar value of the deadweight loss created as a result of prohibiting trade in this market? a. $2,500 b. $10,000 c. $7,500 *d. $5,000 628. Figure: Foreign Trade Reference: Ref 9-3 (Figure: Foreign Trade) Refer to the figure. What is the dollar value of the producer surplus gained as a result of prohibiting trade in this market? a. $15,000 b. $30,000 c. $12,500 *d. $22,500 629. Figure: Foreign Trade Reference: Ref 9-3 (Figure: Foreign Trade) Refer to the figure. What is the dollar value of the consumer surplus that consumers could gain if the trade restriction were removed? a. $35,000 b. $22,500 *c. $30,000 d. $25,000 630. Figure: Foreign Trade Market Reference: Ref 9-4 (Figure: Foreign Trade Market) Refer to the figure. What is the dollar value of wasted resources as a result of prohibiting trade in this market? a. $10,000 b. $4,000 c. $7,500 *d. $6,000 631. Figure: Foreign Trade Market Reference: Ref 9-4 (Figure: Foreign Trade Market) Refer to the figure. What is the dollar value of the deadweight loss created by the loss of foreign trade? a. $10,000 *b. $4,000 c. $36,000 d. $6,000 632. Figure: Foreign Trade Market Reference: Ref 9-4 (Figure: Foreign Trade Market) Refer to the figure. What is the dollar value of the lost consumer surplus as a result of prohibiting trade in this market? a. $26,000 b. $28,000 c. $32,000 *d. $36,000 633. If quotas on sugar were eliminated in the United States, domestic production of sugar would fall. Why is this a benefit in economic terms for the United States? I. because it frees up resources that could be used more efficiently elsewhere II. because it allows foreign producers of sugar to earn income and thus those countries are better off III. U.S. consumers are able to enjoy increased consumer surplus because of the lower prices of imported sugar. a. I and II only *b. I and III only c. II and III only d. I, II, and III 634. Which, if any, of the following conditions for efficient market functioning do tariffs and quotas violate? I. demanders with the highest willingness to pay purchase the supply of goods II. producers with the lowest costs produce and sell the supply of goods III. the sum of consumer and producer surplus is maximized a. I only *b. II and III only c. I, II, and III d. III only 635. Figure: A Tariff on Imports Reference: Ref 9-5 (Figure: A Tariff on Imports) Refer to the figure. Suppose the government intervenes with a $2 tariff; the total value of deadweight loss as a result of the tariff is: *a. $150 million. b. $200 million. c. $400 million. d. $550 million. 636. Figure: A Tariff on Imports Reference: Ref 9-5 (Figure: A Tariff on Imports) Refer to the figure. Suppose the government intervenes with a $2 tariff; the total cost of the tariff to the citizens in that country is: *a. $350 million. b. $400 million. c. $550 million. d. $700 million. 637. Economists consider tariffs to be: a. necessary. b. beneficial to domestic consumers. c. harmful to domestic producers. *d. obstacles that reduce gains from trade. 638. Which of the following decreases the volume of international trade? *a. increasing tariffs b. decreasing quotas c. lower transportation costs d. stable monetary conditions 639. One of the costs of protectionism is: a. increases in total national output. *b. a reduction in the variety of goods in domestic markets. c. greater competition. d. lower opportunity costs of domestic production. 640. Which of the following statements is TRUE? I. If the United States bans the importation of bananas, consumer surplus will decrease. II. If the United States bans the importation of bananas, producer surplus will decrease. III. If the United States bans the importation of bananas, it will produce bananas at a cost exceeding their world purchase price. a. I, II, and III b. I and II only *c. I and III only d. II and III only 641. Figure: World Imports Reference: Ref 9-6 (Figure: World Imports) Refer to the figure. The solution for a country without trade restrictions is where the equilibrium price and quantity are ________, respectively. a. $20 and 4 b. $40 and 11 c. $20 and 11 *d. $20 and 20 642. Figure: World Imports Reference: Ref 9-6 (Figure: World Imports) Refer to the figure. An imposition of extreme trade restrictions that eliminated all trade in that market, would generate wasted resources of: *a. $70. b. $530. c. $90. d. $160. 643. Figure: World Imports Reference: Ref 9-6 (Figure: World Imports) Refer to the figure. The imposition of a $20 tariff would generate a value of lost gains from trade of: a. $45. *b. $90. c. $70. d. $160. 644. Without trade restrictions the price of tennis shoes is $30, and with trade restrictions the price of tennis shoes is $45. The difference in the two prices reflects: a. per-unit profits. *b. the value of the extra resources for domestic production of an additional pair of tennis shoes. c. the gain in consumer surplus from free trade. d. All of the answers are correct. 645. A tariff results in a higher: I. consumer surplus. II. producer surplus. III. government revenue. a. I and II only *b. II and III only c. I and III only d. I, II, and III 646. A trade quota on imports: *a. benefits domestic producers and hurts domestic consumers. b. benefits domestic consumers and hurts domestic producers. c. benefits both domestic producers and domestic consumers. d. hurts both domestic producers and domestic consumers. 647. Which of the following statements describes reasons why free trade is beneficial for the United States? a. Free trade increases consumer surplus for imported goods that are cheaper than U.S. goods. b. Free trade directs U.S. resources to those goods and services for which the United States has a comparative advantage. c. Through specialization the U.S. and its trading partners can use the same overall amount of resources to produce and consume a larger amount of goods. *d. All of these statements are correct. 648. Restricting the importation of foreign automobiles will: a. raise the price of foreign automobiles but decrease the price of domestic automobiles. *b. raise the price of both foreign and domestic automobiles. c. cause domestic producers to sell their automobiles at lower prices because of reduced competition. d. lower the price of foreign automobiles but raise the price of domestic automobiles. 649. Which of the following arguments is valid in the economics of international trade? a. Trade restrictions are good ways to raise a country's employment. b. Protectionism increases the well-being of domestic consumers. c. Trade restrictions help to reduce child labor in poor countries. *d. Trade can result in a net job gain in the whole country. 650. In most cases, trade restrictions will: a. save jobs without any other costs. *b. save some jobs and destroy other jobs. c. benefit both producers and consumers. d. benefit only the government. 651. Why does economic growth require job destruction? a. Economic growth requires international trade, which has been proven to cause short-term job loss. *b. Economic growth comes from creating and producing goods that use resources more productively, causing job loss in industries that use out-dated technology. c. Excessive job creation can destroy economic growth. d. When economic growth occurs, there are not enough resources left over for worker retraining and re-education programs. 652. Suppose a government is facing accusations of allowing domestic jobs to be lost to foreign labor in other countries. How can the government address these concerns? I. Governments can ensure that unemployment insurance and strong education programs exist to help workers retrain for new jobs. II. Governments can stress the importance of job creation in those industries that benefit from international trade, and encourage job creation in those industries. III. Governments can set up extensive trade restrictions to limit the impact of foreign firms on domestic production. a. I only b. II and III only *c. I and II only d. I, II, and III 653. Which of the following statements is TRUE about the removal of trade barriers? a. Consumers are harmed while some suppliers benefit. *b. Consumers benefit while some suppliers are harmed. c. Everyone benefits. d. Everyone is harmed. 654. Economic growth requires: *a. job destruction. b. trade barriers. c. government intervention. d. job creation. 655. Taxes and quotas on imports can ______ jobs in the import industry and ________ jobs in export industries. a. decrease; increase b. increase; increase *c. increase; decrease d. decrease; decrease 656. Trade restrictions: a. help to save jobs in the protected industry, which causes these workers to spend more money in other industries, netting increased output and job opportunities throughout the economy. b. are a very inexpensive way of saving jobs, cheaper than job retraining programs. *c. may save jobs in one industry but at a cost of less job growth in other industries. d. often have little support by politicians, media, and the public. 657. In a typical month in the United States: a. almost 1.0 million jobs are lost because of unfair international trade. *b. several hundred thousand jobs are lost and several hundred thousand jobs are gained. c. the unemployment rate averages 8.7 percent. d. All of these observations are correct. 658. If the United States bans the importation of Japanese automobiles: a. U.S. consumers of cars will be better off as their consumer surplus increases. *b. there will likely be more U.S. auto workers but fewer Americans working in other industries. c. U.S. producers of cars will be worse off because their producer surplus shrinks. d. everyone in the United States will be much better off. 659. The paradox of trade restrictions on countries with child labor is that: *a. these restrictions aim to reduce child labor, but because they make the countries poorer, they actually cause more child labor. b. children from those countries are actually more efficient than the adults. c. children can be hired at lower wages than adults. d. restrictions on trade cause losses in consumer surplus. 660. History has shown that one of the most effective tools against child labor is: a. regulations. b. laws. *c. economic growth. d. quotas. 661. Studies show that more openness to trade __________ income and _______ child labor. a. increases; increases *b. increases; decreases c. decreases; decreases d. decreases; increases 662. Because of pressure from the United States, the garment industry in Bangladesh dismissed 30,000 to 50,000 child laborers. This action: a. was very beneficial, for most of the children returned to school full time. *b. resulted in many of the children turning to prostitution, street begging, or working in jobs with even worse working conditions. c. led to a civil uprising in Bangladesh, claiming the lives of almost 4,000 of these children. d. None of the answers is correct. 663. Which of the following statements is TRUE? a. Although inefficient, trade restrictions are effective at reducing child labor. b. Most child labor around the world takes place in factories that export products. *c. Rising real GDP per capita has been an important force in reducing child labor. d. About 50 percent of the world's children aged 10–14 work. 664. Consider the following two statements and select the best answer. I. The national security argument might be a valid argument for trade protection. II. Industries with spillover effects should be protected from foreign competition. a. I and II are both true. b. I and II are both false. *c. I is likely to be true, and II is likely to be false. d. I is likely to be false, and II is likely to be true. 665. Trade restrictions based on national security concerns: *a. might be beneficial in certain cases, like vaccinations. b. have never been granted in the United States. c. have no merit and are always unwise. d. give little incentive for industry lobbyists to declare their product vital for national security purposes. 666. Protectionism protects domestic industries from the competitive forces exerted by foreign firms. *a. True b. False 667. With free trade, the domestic price of a good must be equal to the world price of a good. *a. True b. False 668. If the United States imports teacups from other countries, then U.S. producers of teacups are better off, and U.S. consumers of teacups are worse off, as a result of trade. a. True *b. False 669. Economic benefits to tariffs and import quotas include: more jobs in the protected industry, lower prices to consumers, and increased gains from trade. a. True *b. False 670. Trade increases competition for domestic producers and results in lower prices of domestic goods. *a. True b. False 671. A quota is a stated quality standard that an imported good must reach before it can be allowed into the borders of the importing country. a. True *b. False 672. In a demand and supply diagram, the effects of a tariff and a quota on the supply and demand curves are identical. a. True *b. False 673. If the world price of a good is greater than the domestic price in a country that can engage in international trade, then that country becomes an importer of that good. a. True *b. False 674. Removing tariffs and quotas will ensure that goods are sold by the low-cost producers and increase the sum of consumer and producer surplus. *a. True b. False 675. A tariff benefits domestic producers but hurts domestic consumers. *a. True b. False 676. Economic theory supports the existence of specialized majors in college. *a. True b. False 677. There is strong evidence to support the idea that protectionism increases domestic job growth. a. True *b. False 678. Economic growth requires job destruction, since the destroyed jobs free up resources for more productive activities. *a. True b. False 679. Briefly describe a few activities that a typical student might do on any given day that reflect the effects of globalization. Correct Answer: This answer could of course be personalized, but an example answer might be as follows: Globalization allows us to enjoy goods from around the world, and expand the variety of goods we consume as well as interact more with people from other countries and regions. A student perhaps wakes up in the morning to the ring of an alarm clock made in China. That student then has breakfast that includes Colombian coffee, cereal that uses corn made in the United States, and bananas grown in Honduras. The student wears a shirt that has a “Made in Bangladesh” label. The student then picks up his or her textbooks made with paper that came from trees grown in Canada, and goes to class where the teacher is a visiting instructor from Turkey. In class the student sits between two other students from Iraq and Kenya. Later in the evening, the student unwinds by playing games on a Nintendo Wii made in Japan. Dinner might consist of Indian cuisine, and dessert might be Italian tiramisu. Finally, the student goes back to bed and sleeps under a blanket made in Korea. 680. What are the three major benefits of trade? Explain briefly. Correct Answer: Trade requires people or countries to specialize. The first benefit of trade comes when people with differing preferences are made better off from their voluntary trades. The second benefit of trade comes from increased productivity as a result of specialization and the division of knowledge. Specialization followed by trade greatly increases productivity. The third benefit of trade comes from taking advantage of differences in opportunity costs. According to the theory of comparative advantage, people or countries can specialize in producing goods that involve the lowest opportunity costs. As a result, everyone can benefit from trade. 681. With the aid of demand and supply curves, compare the amounts of imports and the prices of goods under (i) free trade, (ii) trade with a tariff, and (iii) a closed economy without trade. Correct Answer: The following diagram shows the domestic supply curve and domestic demand curve. In a closed economy without trade, the equilibrium price of the domestic market is P1 and the equilibrium quantity is Q1. There are no imports. In case of an open economy, if the world supply curve is the horizontal line at Ptrade, then the amount of imports equals (Q5 – Q4) under free trade, and the price of goods equals Ptrade. A tariff is a tax on imports so that the world supply curve shifts upward to the horizontal line at Ptariff. As a result of the tariff, the amount of imports reduces to (Q3 – Q2), and the price of goods with the tariff rises from Ptrade to Ptariff. 682. (Figure: Consumption with and without Trade) Refer to the figure. Suppose this diagram represents the market for sugar in the United States. Figure: Consumption with and without Trade a. What is the equilibrium price of sugar before trade? b. What is the equilibrium quantity of sugar before trade? c. What is the price of sugar after trade is allowed? d. What is the quantity of sugar imported after trade is allowed? e. What is the amount of consumer surplus before trade? f. By how much does consumer surplus increase after trade? g. What is the amount of producer surplus before trade? h. What is the amount of producer surplus after trade? Correct Answer: a. 29 cents per pound b. 20 billion pounds c. 9 cents per pound d. 23.6 billion pounds e. Unknown f. By ($.20 × 20 billion) + ($.20 × 3.6 × .50) = $4.36 billion g. ($.20 × 20 billion × .50) = $2 billion h. 0 683. (Figure: Market Activity with and without Trade) Use the diagram for market activity with and without trade to consider the effects of a trade restriction that eliminated foreign trade in an economy and answer the following questions. Figure: Market Activity with and without Trade a. What is the dollar amount of deadweight loss created as a result of the trade restriction? b. What is the dollar value of wasted resources as a result of the trade restriction? c. What is the dollar gain in domestic producer surplus as a result of the trade restriction? Correct Answer: a. $450 b. $450 c. $1,050 684. What are the gains and losses of a trade restriction versus free trade? Explain carefully. Correct Answer: There are two types of losses from a trade restriction, such as a tariff or quota. First, it involves a waste of resources that could be freed up to produce other goods and services under free trade. Second, a trade restriction creates a deadweight loss, which is the value of lost gains from trade. In the case of a tariff, the market price increases so that there is a loss in consumer surplus. On the other hand, a higher price raises producer surplus, which is the gain from domestic producers. In other words, domestic producers gain while domestic consumers lose with a trade restriction. 685. Briefly discuss any benefits of “protectionism”. Correct Answer: Protectionism can allow a new industry to gain some time in which to become competitive. Thus, a protected firm is able to sell its products at a price that is higher than the world price, and this provides it a window of opportunity in which to become more efficient. A government may also choose to protect a good if it is essential for national security—for example, the domestic vaccine industry. Import restrictions protect such industry from competition, and the government essentially helps the domestic firms to act as a cartel. 686. What are the arguments in favor of trade restrictions, and what are their counterarguments? According to most economists, do these arguments really justify trade restrictions? Explain. Correct Answer: Arguments mentioned in the text include the national security argument and the spillover effects argument. The national-security argument balances economic loss from trade restriction against the benefit of long-term national survival, and is probably the argument that economists would most likely accept if it were clear that the industry being protected was crucial to national security. Most economists would dismiss the spillover effects argument on strictly empirical grounds, as no one knows what industries produce spillover effects. 687. Which of the following is TRUE? a. private cost + average cost = social cost *b. social cost = private cost + external cost c. external cost = private cost d. private cost + social cost = external cost 688. Which of the following illustrates the concept of external cost? a. Margaret purchases all her food and clothing in the big city outside her residence. b. A small business owner frequently buys raw materials by using her bank's line of credit. *c. Raymond cannot open his windows at times because he lives downwind from a mushroom farm. d. Felicia, an economics major, asks the most insightful questions in class. 689. Antibiotics may be ________, since people consider only the ________. a. underused; private and not the social costs of consumption *b. overused; private and not the social costs of consumption c. underused; external and not the private costs of consumption d. overused; external and not the private costs of consumption 690. An external cost: a. causes markets to allocate resources efficiently. b. affects producers but not consumers. *c. is a cost paid by people other than the producer or consumer trading in the market. d. leads to economic efficiency only when private costs are greater than external costs. 691. A chemical bathroom cleaner has an ingredient X that allows the cleaner to lather well and remove stains. The cost of producing a bottle of this bathroom cleaner is $3.60, but the bottle retails for $5.50. When consumers use the bathroom cleaner, the lather that gets washed down the drain escapes into the environment and releases allergens that cause respiratory problems for people. What is the social cost of a bottle of this cleaner? a. $5.50 less the external cost of such a bottle of bathroom cleaner b. the cost paid by other people as a result of the use of such a bottle of bathroom cleaner *c. $5.50 plus the external cost of such a bottle of bathroom cleaner d. $3.60 692. Which of the following answers correctly identifies social cost? *a. market price + external cost = social cost b. external cost – market price = social cost c. market price + cost of production = social cost d. negative externality + positive externality = social cost 693. An external cost is a cost paid by: a. the consumers trading in the market. b. the producers trading in the market. c. the government regulating the market. *d. people other than the consumer and the producer trading in the market. 694. When patients or farmers choose whether to use more antibiotics, they compare: a. their private benefits with the social cost. *b. their private benefits with the market price. c. the social benefits with the social cost. d. the social benefits with the market price. 695. Since the price of antibiotics does not include all the costs of using antibiotics, the price is too: a. high, and so antibiotics are overused. b. high, and so antibiotics are underused. *c. low, and so antibiotics are overused. d. low, and so antibiotics are underused. 696. Suppose that the private cost of using antibiotics is less than its social cost—we would then expect people to ________ antibiotics, leading to an ________ market outcome. *a. overuse; inefficient b. underuse; inefficient c. overuse; efficient d. make efficient use of; equilibrium 697. Table: Costs of Antibiotics Quantity of Marginal Benefit Marginal Cost Antibiotics to Buyers to sellers 1 $25 $5 2 $20 $10 3 $15 $15 4 $10 $20 5 $5 $25 External Marginal Social Cost Cost $10 ? $10 ? $10 ? $10 ? $10 ? Reference: Ref 10-1 (Table: Costs of Antibiotics) Refer to the table. The marginal social cost of the fifth unit is: a. $15. b. $5. *c. $35. d. $30. 698. Table: Costs of Antibiotics Quantity of Marginal Benefit Marginal Cost Antibiotics to Buyers to sellers 1 $25 $5 2 $20 $10 3 $15 $15 4 $10 $20 External Marginal Social Cost Cost $10 ? $10 ? $10 ? $10 ? 5 $5 $25 $10 ? Reference: Ref 10-1 (Table: Costs of Antibiotics) Refer to the table. The market equilibrium quantity is ________ and the efficient equilibrium quantity is ________. a. 5; 1 b. 3; 4 *c. 3; 2 d. 2; 5 699. Table: Costs of Antibiotics Quantity of Marginal Benefit Marginal Cost Antibiotics to Buyers to sellers 1 $25 $5 2 $20 $10 3 $15 $15 4 $10 $20 5 $5 $25 External Marginal Social Cost Cost $10 ? $10 ? $10 ? $10 ? $10 ? Reference: Ref 10-1 (Table: Costs of Antibiotics) Refer to the table. The deadweight loss in the market could be eliminated if the government: a. outlawed the production of the good. *b. added a $10 tax per unit. c. equated marginal benefit with external cost. d. subsidized consumption by $5 per unit. 700. Which of the following statements is TRUE? I. If an activity creates an external cost of $15, the government should subsidize the activity by $15. II. Social surplus is maximized when the private marginal benefit equals the social cost. III. External costs result in markets producing too much output. IV. Someone pays external costs other than the producer or consumer. a. I and III only *b. II, III, and IV only c. III only d. II and IV only 701. Figure: Market with External Cost Reference: Ref 10-2 (Figure: Market with External Cost) The figure displays a market with external costs. The efficient level of output of ________ units would eliminate the deadweight loss area of ________. a. Q1; ce b. Q0; ce *c. Q0; gh d. Q1; de 702. Figure: Market with External Cost Reference: Ref 10-2 (Figure: Market with External Cost) Suppose that the figure displays the demand and supply curves for dry cleaning, a service that creates pollution. The external cost of dry cleaning is: a. P2. b. P1 – P0. c. P0. *d. P2 – P0. 703. If a steel manufacturer does NOT bear the entire cost of the sulfur dioxide it emits, it will: a. emit a lower level of sulfur dioxide than is socially efficient. *b. emit a higher level of sulfur dioxide than is socially efficient. c. emit an acceptable level of sulfur dioxide d. not emit any sulfur dioxide in an attempt to avoid paying the entire cost. 704. If an external cost is present in a market, economic efficiency may be enhanced by: a. increased competition. b. weakening property rights. c. better informed market participants. *d. government intervention. 705. When the government intervenes in markets with external costs, it does so in order to: *a. protect the interests of bystanders. b. ensure all the costs are born by producers. c. ensure all the costs are born by consumers. d. increase the welfare losses of producers. 706. Markets are often inefficient when external costs are present because: a. externalities cannot be corrected without government regulation. *b. social costs exceed private costs at the private market solution. c. private costs exceed social costs at the private market solution. d. production externalities lead to consumption externalities. 707. Ideally, a market should maximize: a. consumer surplus. b. producer surplus. c. consumer surplus plus producer surplus. *d. social surplus. 708. Which of these statements is TRUE in the case of externalities? I. In the case of externalities, prices do not reflect the true cost or benefit of the product. II. In the case of externalities, prices sometimes send the wrong signals about a market. III. Externalities discourage new producers from entering the industry since the price always remains about the efficient price. *a. I and II only b. I and III only c. II and III only d. I, II, and III 709. Social surplus is consumer surplus: a. minus producer surplus. b. plus producer surplus. c. plus producer surplus minus everyone else's surplus. *d. plus producer surplus plus everyone else's surplus. 710. Which of the following statements is correct under a market with externalities? a. Social surplus is maximized as long as consumer surplus is maximized. b. Social surplus is maximized as long as producer surplus is maximized. c. Social surplus is maximized as long as both consumer surplus and producer surplus are maximized. *d. None of these statements is correct. 711. External costs caused by the use of antibiotics are the costs to people who are: a. buying antibiotics. b. selling antibiotics. c. either buying or selling antibiotics. *d. neither buying nor selling antibiotics. 712. Figure: Efficient Market Outcome Reference: Ref 10-3 (Figure: Efficient Market Outcome) Refer to the figure. The efficient price and quantity are, respectively: a. P1 and Q1. b. P1 and Q2. *c. P2 and Q1. d. P3 and Q2. 713. Figure: Efficient Market Outcome Reference: Ref 10-3 (Figure: Efficient Market Outcome) Refer to the figure. Which point represents the efficient equilibrium? a. A b. B *c. C d. None of the answers is correct. 714. The market equilibrium is not efficient when the consumption of a good creates external costs, which cause social costs to be: a. less than the private cost. *b. greater than the private cost. c. less than the total cost. d. greater than the total cost. 715. If antibiotic users get all the benefits of antibiotics but do not bear all of the costs, the social marginal cost of antibiotic use at the market equilibrium will be: *a. higher than the marginal cost to antibiotic sellers. b. less than the marginal cost to antibiotic sellers. c. higher than the marginal benefit to the antibiotic buyers. d. less than the marginal benefit to the antibiotic buyers. 716. If antibiotic users are required to bear all the costs of antibiotic use, the supply curve would: a. shift left and would be above the social cost curve. *b. shift left and would be the same as the social cost curve. c. shift left but would still be under the social cost curve. d. remain unchanged. 717. Figure: Market for Bathroom Cleaner Reference: Ref 10-4 (Figure: Market for Bathroom Cleaner) The figure shows a market for cans of bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the efficient quantity in this market? a. 100 *b. 85 c. 15 d. 9 718. Figure: Market for Bathroom Cleaner Reference: Ref 10-4 (Figure: Market for Bathroom Cleaner) The figure shows a market for cans of bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. What is the external cost of the bathroom cleaner? *a. $6 b. $9 c. $12 d. $3 719. Figure: Market for Bathroom Cleaner Reference: Ref 10-4 (Figure: Market for Bathroom Cleaner) The figure shows a market for cans of bathroom cleaner that causes environmental damage, imposing costs on people other than the consumers and producers of the cleaner. If consumers were taxed such that they only purchased the efficient quantity of the product, how much deadweight loss would be removed from this market? a. $90 b. $180 *c. $45 d. $255 720. Which of the following is an example involving an external benefit? a. the pollution of a stream b. a person littering a public highway c. air pollution *d. a nice garden in front of someone's house 721. An external benefit in a market will cause the market to produce: a. more than the same market would produce in the presence of a negative externality. b. more than is socially desirable. *c. less than is socially desirable. d. the socially optimal equilibrium amount. 722. Private markets fail to reach a socially optimal equilibrium when external benefits are present because the: *a. social value exceeds the private value at the private market solution. b. private cost exceeds the social benefit at the private market solution. c. private benefit equals the social benefit at the private market solution. d. None of the answers is correct. Private markets DO achieve a socially optimal equilibrium when external benefits are present. 723. Because there are external benefits from higher education: a. private markets will over-supply college classes. b. government intervention cannot improve the market for college classes. c. the government should impose a tax on college students. *d. private markets will under-supply college classes. 724. The Centers for Disease Control and Prevention (CDC) wants at least 90 percent of the population vaccinated against preventable diseases, since the chance of a disease outbreak decreases as vaccine coverage increases. We can conclude that: *a. the external benefits of vaccination likely decrease as more and more people are vaccinated. b. the private benefits of vaccination increase with vaccine coverage. c. vaccines create a negative externality once the vaccine covers 90 percent of the population. d. vaccines create a positive externality once the vaccine covers 90 percent of the population. 725. The market price for Good X is $10.75, and every time Good X is consumed it creates an external benefit of $3.00. Therefore, which of the following is correct? *a. The social benefit of Good X is $13.75, a justification for the government to give buyers a $3.00 subsidy. b. The social benefit of Good X is $7.75, a justification for the government to give buyers a $3.00 subsidy. c. The social benefit of Good X is $7.75, a justification for the government to tax sellers $13.75 per unit. d. The social benefit of Good X is $13.75, a justification for the government to tax sellers $3.00 per unit. 726. Edgar's expected private benefit from the flu shot is $15, and it would cost him $20 to get vaccinated. Therefore, which of the following is correct? *a. It is socially optimal for Edgar to get the flu shot if the social benefits of the shot exceed $20. b. The external benefits of the flu shot equal $5 ($20 – $15). c. Even without a government subsidy, Edgar is certain to be vaccinated. d. The deadweight loss is eliminated if Edgar is vaccinated and the external benefits are $4. 727. Figure: Market for Vaccines Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The external ________ of vaccination is ________. a. cost; $15 b. cost; $10 c. benefit; $20 *d. benefit; $5 728. Figure: Market for Vaccines Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The efficient level of output is ________ vaccines, which is ________ than the market's output. a. 1,200; greater b. 1,800; less c. 2,400; greater *d. 1,800; greater 729. Figure: Market for Vaccines Reference: Ref 10-5 (Figure: Market for Vaccines) The figure represents the market for vaccines with external benefits. The market's outcome generates a(n): *a. deadweight loss of approximately $750. b. shortage of 1,800 vaccines. c. equilibrium price of $20. d. All of the answers are correct. 730. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by: a. a tax of $5 in Market X and a subsidy of $10 in Market Y. b. subsidizing both markets. *c. taxing Market Y and subsidizing Market X. d. taxing both markets. 731. Figure: ABC Company Reference: Ref 10-6 (Figure: ABC Company) The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. What is the efficient quantity in this market? a. 1,600 b. 400 *c. 2,000 d. 3,600 732. Figure: ABC Company Reference: Ref 10-6 (Figure: ABC Company) The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. If the users of the cleaner were given a subsidy to compensate them for the benefit they are creating for the ecological system, how much deadweight loss is removed from this market? a. $2,400 b. $3,000 c. $3,600 *d. $1,200 733. Figure: ABC Company Reference: Ref 10-6 (Figure: ABC Company) The figure depicts the market for a water cleaner for home aquariums. After use it gets washed down drains and enters into streams where it improves the mineral content of the water and thus leads to better water quality and better fish growth. What is the dollar amount of the external benefit created per can of the cleaner? a. $12 *b. $6 c. $3 d. $15 734. Figure: Softella Reference: Ref 10-7 (Figure: Softella) The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. What is the dollar amount of the external benefit (per box) that is created by the use of this product? a. $24 b. $12 *c. $8 d. $16 735. Figure: Softella Reference: Ref 10-7 (Figure: Softella) The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. If the government were to subsidize the users of these tissues, what would the efficient quantity in this market be? *a. 700 b. 500 c. 1,200 d. 200 736. Figure: Softella Reference: Ref 10-7 (Figure: Softella) The figure shows a market for medicated tissues. Assume that the only use for these tissues is to wipe and clean one's hands thus preventing germs from spreading to other people. If the government were to subsidize the users of these tissues, what is the dollar amount of deadweight loss that would be removed from this market? a. $1,600 b. $2,800 c. $5,600 *d. $800 737. Which of the following statements is INCORRECT? a. When external benefits exist in a market, Qmarket < Qefficient. *b. When external benefits exist in a market, social surplus is maximized when social benefits equal the marginal costs of production. c. When external costs exist in a market, Qmarket > Qefficient. d. Through taxation, government action can result in Qmarket = Qefficient. 738. Which of the following correctly describes what a Pigouvian subsidy is? a. Subsidies received by the producers are called Pigouvian subsidies. *b. Pigouvian subsidies are awarded to producers whose goods have external benefits. c. Taxes on producers creating negative externalities are called Pigouvian subsidies. d. Lower corporate tax rates are also known as Pigouvian subsidies. 739. Which of the following statements about vaccines is correct? a. Vaccines benefit only people who are vaccinated. b. Everyone should be vaccinated in order to prevent the spreading of disease-causing viruses. c. Vaccines benefit people who are vaccinated but cannot prevent disease on those people who are not vaccinated. *d. Vaccines not only benefit people who are vaccinated but also inhibit spreading disease-causing viruses. 740. An external benefit is a benefit received by: a. the consumers trading in the market. b. the producers trading in the market. c. both the consumers and producers trading in the market. *d. people other than the consumers or producers trading in the market. 741. Fewer people get flu shots than is efficient because: *a. people usually perceive that the private cost of getting flu shots is higher than their private benefit. b. people usually perceive that the private benefit of getting flu shots is higher than their private cost. c. the cost of producing flu shots is too high in relation to profits. d. there are always more people taking take flu shots than the amount of flu shots available. 742. (Figure: Social Benefit) Refer to the figure. Which price and quantity combination represents the efficient equilibrium? Figure: Social Benefit a. P1 and Q1 b. P2 and Q1 c. P3 and Q1 *d. P2 and Q2 743. When external benefits are significant: *a. market output is too low. b. market output is too high. c. market output is at the efficient level. d. social surplus is maximized. 744. If only people who get a flu shot receive all the benefits of the vaccination, then the: a. demand curve would shift downward. b. supply curve would shift upward. *c. market outcome will be efficient. d. deadweight loss will be higher than if the vaccinations benefited others as well. 745. If the government wanted to maximize the number of people receiving a flu vaccination, it should: a. impose a mandatory vaccination program. b. provide research grants to those firms engaging in increasing the supply of vaccine. *c. give a subsidy to people who are vaccinated. d. impose a tax on people who are unwilling to be vaccinated. 746. When external benefits are present in a market: a. the market is more efficient than if the externalities were not present. *b. the market outcome is inefficient. c. overall social surplus is maximized because others are gaining in addition to the market consumers. d. the external benefit must be offset by an external cost. 747. Externalities are: a. benefits received by people other than the producers and consumers exchanging in the market. b. costs paid by people other than the producers and consumers exchanging in the market. c. found either in the form of external benefits or external costs. *d. All of these statements are correct. 748. When significant externalities exist: I. the market equilibrium is no longer efficient. II. the market equilibrium is only efficient if the externality is an external benefit. III. social surplus is not maximized. IV. the government may increase efficiency by imposing a tax on the market. a. I only b. II and IV only *c. I and III only d. II, III, and IV only 749. The market for honey is: a. inefficient since beekeepers do not receive compensation for their bees pollinating fruits and vegetables. *b. efficient since farmers pay beekeepers to pollinate their crops, which internalizes the externality. c. a public goods market. d. in disequilibrium since the market quantity of honey is less than the socially optimal quantity of honey. 750. Private solutions to externalities are most likely to occur when there are: *a. well-defined property rights and low transaction costs. b. communal property rights and large numbers of sellers. c. private property rights and high transaction costs. d. communal property rights and large numbers of buyers and sellers with equal bargaining power. 751. Two parties fail to solve an externality problem because reaching an agreement requires high-priced lawyers to negotiate and write up contracts. This illustrates the problem of: a. Pigouvian legal fees. *b. transaction costs. c. legal inefficiency. d. punitive-cost agreements. 752. Which of the following statements is TRUE? a. The Coase theorem suggests that the efficient equilibrium quantity of flu shots will maximize the sum of producer and consumer surplus. b. It is easy to internalize the benefits of getting a flu shot because only two companies produce flu vaccines. *c. The market for flu shots could be efficient if the beneficiaries of the external benefits sufficiently compensated those receiving the shot. d. To internalize the costs of getting a flu shot, people who receive the vaccine should pay other people to be vaccinated. 753. A beekeeper's hives are located in an orchard where the bees gather nectar to produce honey and simultaneously pollinate the orchard, which increases the yield of fruit. This benefits: a. only the owner of the orchard. b. only the beekeeper. c. the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner. *d. both the beekeeper and the orchard owner. 754. The proposition that, private parties with clearly defined property rights and low transaction costs can resolve externalities problems on their own is called the: a. voluntary tax theorem. b. Bee theorem. *c. Coase theorem. d. transaction cost theorem. 755. Which of the following suggests that private markets can be effective in dealing with external costs and benefits? a. external technology policy *b. the Coase theorem c. the law of diminishing returns d. the “invisible hand” 756. Transaction costs: a. are incurred in the production process due to externalities. b. are eliminated when the government intervenes in a market with externalities. *c. can keep private parties from solving externality problems. d. increase when taxes are imposed to correct negative externalities. 757. Market solutions to externality problems work when: I. property rights are easily identifiable. II. transaction costs are relatively low. III. the market quantity is above the efficient quantity. a. I only *b. I and II only c. II and III only d. I, II, and III 758. The Coase theorem posits that externality problems can be solved without government intervention *a. when transaction costs are low and property rights are clearly defined. b. when trading in tradeable allowances occurs. c. if markets can reach the efficient quantity and if transaction costs exceed the deadweight loss caused in the market. d. only rarely, that in general markets cannot maximize social surplus. 759. The text discusses private solutions for resolving externalities using the honey market. Among the reasons why the market solution works well in the honey market is the fact that: *a. bees don't fly far and thus it is easy to identify which farmers are getting the benefits of their pollination activities. b. the owners of the bee-hives can clearly be identified. c. the market limits the beneficial activities of the bees to those farmers who have very small farms. d. All of the answers are correct. 760. Nobel Prize–winning economist James Meade argued that the market for honey was inefficient because pollination is a(n): *a. external benefit of honey production. b. external cost of honey production. c. private benefit of honey production. d. private cost of honey production. 761. The external benefit of honey production is internalized when: a. farmers receive tax breaks from the government. b. beekeepers receive tax breaks from the government. *c. farmers pay beekeepers to pollinate their crops. d. beekeepers pay farmers to pollinate farmers' crops. 762. The Coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if: a. the government does not involve itself in the process. b. the market is sufficiently competitive. c. the number of market participants is large. *d. transaction costs are low and property rights are clearly defined. 763. All of the following would be government solutions to externality problems EXCEPT: *a. public sector charities. b. taxes and subsidies. c. command and control. d. tradeable allowances 764. Which of the following statements about taxes is incorrect? *a. Taxes in markets always cause deadweight losses. b. If the good causes an external cost, taxes actually reduce deadweight loss. c. Both taxes and tradeable allowances in a market that has external costs can lead to the efficient quantity. d. Taxes on producers cause the supply curve for the product to shift to the left. 765. Government solutions to externality problems include: a. taxing the consumption of goods that cause externalities. b. subsidies. c. allowing firms to trade the rights to create pollutants. *d. All of the answers are correct. 766. Government solutions to externality problems include: I. Pigouvian taxes. II. tradeable allowances. III. command and control. a. I only b. I and III only c. II and III only *d. I, II, and III 767. If the government were to limit the release of air-pollution produced by a steel mill to 50 parts per million, the policy would be considered a: a. corrective tax. b. subsidy. *c. regulation. d. market-based policy. 768. When the government uses a command-and-control policy to solve an externality, it: a. usually involves taxing the consumption of a commodity. b. relies on the Coase theorem to structure the policy. *c. creates policies that directly regulate behavior. d. is usually the most effective policy option available. 769. ______ make(s) it is illegal for a manufacturer to release its waste into a nearby stream. a. Legislative transaction costs b. Tradable pollution permits *c. A command-and-control policy d. A market-based policy 770. Which method achieves the lowest per-gallon cost of reducing water consumption? a. low-flow toilets as mandated by the government b. lawn watering restrictions for odd or even days only c. shower heads with restricted water flow *d. a tax on water consumption 771. Command and control policies are best suited for: a. reducing electricity consumption. b. addressing the problem of acid rain. *c. the suppression of deadly infectious diseases. d. All of the answers are correct. 772. The command-and-control method to solving an external cost problem usually involves: a. the imposition of taxes on the consumption of the item that is causing the external cost. b. the institution of a subsidy on the consumption of the item that is causing the external cost. *c. the issuance of a regulation on the production, operation, or use of the item that is causing an external cost. d. a price ceiling on the item that is causing an external cost. 773. If you are a government official, under which of the following situations would you opt for a command-and-control solution to an externality problem? I. Lack of running water in part of the country is exacerbating the spread of cholera in the population. II. Foreign ships are dumping toxic wastes in the waters off your country's shores. III. A large number of banks fail due to excessive risk taking. *a. I only b. I and II only c. II and III only d. I, II, and III 774. The problem with using command-and-control policies to eliminate external costs is that there are typically many methods to achieve a goal and: a. consumers may be reluctant to follow. b. the situation may be difficult for the government to control. c. the goal itself may not necessarily be the socially optimal outcome. *d. the government may not have enough information to choose the least costly methods. 775. Which of the following best creates incentives to reduce the pollution generated by washing machines? a. regulating the capacity of washing machines b. requiring appropriate filtering mechanisms on washing machines *c. taxing the pollutants directly caused by washing machines d. allowing the Coase theorem to effectively reach an efficient market equilibrium. 776. Which of the following statements is TRUE? I. Taxes may reduce consumption by exactly the same amount as government regulations. II. Taxes typically cost more than government regulations because taxes raise prices whereas regulations simply limit quantity. III. Command-and-control policies effectively reduce consumption; but may not be the lowest cost method for doing so. a. I and II only *b. I and III only c. II only d. II and III only 777. Command and control may be the best approach to handling externalities if: a. flexibility is desired. b. the marginal social cost of the externality is greater than the social benefit. c. taxes and/or subsidies fail to reach the efficient outcome. *d. success requires strong compliance. 778. (Table: Costs of Reducing Sulfur Dioxide) Refer to the table. Which of the following statements is FALSE? Table: Costs of Reducing Sulfur Dioxide Cost of Reducing 1 Ton of Sulfur Industry Sulfur Dioxide Emissions (tons) Dioxide Industry X 20 $300 Industry Y 20 $400 a. Social costs increase if Industry Y emits 40 tons of sulfur dioxide and Industry X emits zero tons. *b. Industry Y would agree to reduce its emissions by 1 ton if Industry X paid it $301. c. If Industry X decreases emissions by 1 ton and Industry Y increases emissions by 1 ton, the cost of reducing pollution rises by $100. d. Industry X would be willing to reduce its emissions by 5 tons if Industry Y paid it at least $1,500. 779. The paper industry and brewery industry each emit 60 tons of particulates into the air. It costs the paper industry $1,000 to remove 1 ton of particulates and it costs the brewery industry $1,400 to remove 1 ton of particulates. In an effort to reduce particulate pollution, the government gives each industry tradeable allowances worth 50 tons of particulates. We would expect that: a. the paper industry will buy tradeable allowances from the brewery industry at a cost between $1,000 and $1,400 per allowance. b. the paper industry will buy tradeable allowances from the brewery industry at a cost greater than $1,400 per allowance. *c. the brewery industry will buy tradeable allowances from the paper industry at a cost between $1,000 and $1,400 per allowance. d. the brewery industry will buy tradeable allowances from the paper industry at a cost greater than $1,400 per allowance. 780. Which of the following statements is TRUE? a. Mandating that every firm emit no more than X amount of pollutants is the most efficient method of reducing pollution. b. A system of tradeable allowances increases pollution because firms can pay for the right to pollute. *c. To maximize social surplus, the burden of reducing pollution should be allowed to vary by industry. d. If the EPA cares about the sum of consumer and producer surplus, they should ignore the impact of pollution reduction on the profitability of firms. 781. Tradable pollution permits: a. have helped reduce sulfur dioxide emissions but not carbon emissions. *b. have helped reduce sulfur dioxide and carbon emissions. c. have not helped reduce any pollution emissions. d. are widely viewed as an ineffective way to reduce pollution. 782. Which of the following answers best explains how the market for tradeable allowances in pollution works? a. Firms are given a particular dollar subsidy value to clean up pollution, and they can trade these subsidies between themselves if they fall below or surpass the limits. b. Firms are taxed a particular percentage rate according to how much they pollute, and they can trade the pollutants to reduce the effective tax rates they pay. c. Firms are required to stick to particular production levels, and if they go beyond these production levels, they are charged a percentage of their profits. *d. Firms are given a particular allowance amount of pollutants and if they fall below or surpass these targets they can trade their available allowances with other firms. 783. If a market for tradeable allowances exists, a company that has used up its own allowances can: a. buy allowances from another firm that has surpassed its limit of pollution. b. purchase additional allowances from the EPA on a temporary basis. c. pay a fine to the EPA and purchase additional allowances from other firms. *d. buy allowances from another firm that will not reach its limit of pollution. 784. Suppose that the EPA limits the pollution level of two firms, firm High with high cost of reducing pollution and firm Low with low cost of reducing pollution. Which of the following statements is correct? a. The EPA should limit both firms' pollution to the same level. b. The EPA should limit High's pollution level to a lower level than Low's in an attempt to entice High to find more efficient ways to lower its costs. c. The EPA should allow Low to increase its pollution level and trade with High who would cut its pollution to lower than the required level. *d. The EPA should allow High to increase its pollution level and trade with Low who would cut its pollution to lower than the required level. 785. Which of the following explains the difference between command and control policies and tradeable allowances? a. Command-and-control policies are a government solution to externalities, whereas tradeable allowances are a type of private market solution. b. Tradeable allowances allow for less flexibility than command and control policies. *c. Command-and-control policies require all firms to reduce pollutants by a specific quantity, whereas tradeable allowances allow some firms to pollute more than others by trading for pollution rights. d. Tradeable allowances sometimes result in higher overall levels of pollutants because firms can simply purchase the rights to pollute more, whereas the quantity of pollution is fixed under command and control. 786. Tradeable allowances: a. are typically hard to pass through the Environmental Protection Agency (EPA) since they allow firms to legally pollute. *b. are an efficient way to reduce pollution at lower costs. c. decrease the profitability of firms since now they have to pay for the rights to pollute. d. are equal to the social surplus in the market. 787. What is the importance of the Clean Air Act of 1990? *a. Under this act, the EPA distributes pollution allowances to electricity producers. b. Under this act, the EPA sets the maximum amount of pollution that each firm may emit. c. The act lists the pollutants that are deemed harmful to the environment. d. The act delineates which firms are allowed to emit more than 1 ton of sulfur dioxide. 788. Which of the following statements is TRUE? I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions. II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances. III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels. *a. I only b. II and III only c. I, II, and III d. III only 789. The Clean Air Act of 1990: a. established a tradeable allowances program for sulfur dioxide. b. is an application of the Coase theorem. c. allows firms to profit by selling their unused pollution allowances. *d. All of the answers are correct. 790. Exhibit: EPA Regulations There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit—the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400. Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650. Reference: Ref 10-8 (Exhibit: EPA Regulations) Refer to the exhibit. What is the total amount of pollutants released into the environment after the two firms have traded allowances? a. 11 b. 9 *c. 20 d. 10 791. Exhibit: EPA Regulations There are two firms: Company A and Company B. The EPA enforces regulations saying that neither firm can release more than 10 units of pollutants. Company A currently releases 10 units and Company B releases 11 units. The EPA requires B to reduce its pollution by 1 unit—the company can do this, but at a cost of $1,000. Company A, however, can reduce pollution by 1 unit for a cost of $400. Company B wants to save money by trading allowances with Company A. After negotiations, Company A agrees to sell one unit of pollutant to Company B for $650. Reference: Ref 10-8 (Exhibit: EPA Regulations) Refer to the exhibit. How do both firms profit from trading allowances? a. A gains $650, and B saves $550. *b. A gains $250, and B saves $350. c. A gains $650, and B saves $1,100. d. A gains $1,050, and B saves $550. 792. Under the Clean Air Act of 1990, the EPA distributes pollution allowances to generators of electricity, and firms trade allowances as they see fit. The EPA's tradeable allowances program has resulted in: a. air quality that is neither improved nor worsened. *b. an improved air quality. c. a worsening in air quality. d. a less efficient market outcome. 793. In a market with external costs, suppose the efficient level of output is 1,000 units. Which of the following statements is TRUE? a. To achieve the efficient level of output, the government should set a subsidy equal to the external cost. *b. To achieve the efficient level of output the government could set a tax equal to the external cost or issue enough tradeable allowances to restrict the output to the efficient level. c. With external costs, the government can use only taxes to achieve the efficient level of output. d. With external costs, the government can use only tradeable allowances to achieve the efficient level of output. 794. Why are taxes on pollutants and tradeable allowances considered to have similar effects in solving externality problems? a. The companies who are taxed are also simultaneously subject to the allowances of pollutants. b. They both reduce pollution of exactly the same types of pollutants. *c. They both bring markets closer to the efficient quantity. d. Companies can trade the taxes on pollutants just as they trade the allowances on pollutant amounts. 795. Assume an EPA official observes the following situation in a small town on the banks of a river. The town depends heavily on fish for its food and is heavily dependent on coal for its power. A coal factory on the banks of the river empties pollutants into the river causing health problems among the residents and the fish to develop toxic residues in their livers and other organs. Which of the following solutions should the EPA choose to mitigate this negative externality problem (at least in the short run)? I. levy taxes on the coal factory's production of pollutants II. levy taxes on the consumers' consumption of fish III. create a market for tradeable allowances IV. subsidize firms that produce clean fish *a. I and III only b. II and IV only c. III and IV only d. I, III, and IV only 796. The main difference between tradable allowances and taxes is: a. only large firms may trade pollution allowances. b. tradeable allowances result in a more efficient outcome. c. taxes decrease firms' profits. *d. purely political. 797. When the number of tradeable allowances is set equal to the efficient market quantity: *a. it is equivalent to a tax set equal to the level of the external cost. b. the outcome will be more efficient than a tax on pollution. c. it is equivalent to a government regulation set equal to the efficient market quantity. d. the price of the allowances will equal the social cost of pollution. 798. Which of the following statements are TRUE? I. Market prices do not correctly signal the true costs and benefits to society when external costs are present. II. Market prices do not correctly signal the true costs and benefits to society when external benefits are present. III. Taxes and subsidies can adjust prices so that they do send the correct signals. a. I and III only b. II and III only c. I only *d. I, II, and III 799. When external benefits are present, the market price is ________, however when external costs are present, the market price is ________. a. too low; too high b. equal to the efficient price; too low *c. too high; too low d. equal to the efficient price; too high 800. The social cost of antibiotic consumption equals the private cost of producing antibiotics plus the cost of increased bacterial resistance to antibiotics. *a. True b. False 801. An external cost is built into the market price of a good and thus paid by the consumers. a. True *b. False 802. In a market, the presence of an external cost causes the market equilibrium output to exceed the efficient level of output. *a. True b. False 803. In an efficient market, the supply curve will decrease by the amount of the external cost. *a. True b. False 804. When a transaction between a buyer and seller directly affects a third party, the effect is called an externality. *a. True b. False 805. The social cost of pollution includes the private producer costs plus the costs to bystanders adversely affected by the pollution. *a. True b. False 806. Barking dogs cannot be considered an externality because externalities must be associated with some form of market exchange. a. True *b. False 807. External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable. a. True *b. False 808. Antibiotics tend to be overused, as the producers of antibiotics are required to bear all the costs of antibiotic use. a. True *b. False 809. External costs cause deadweight losses, whereas external benefits do not. a. True *b. False 810. If the government subsidizes activities with external benefits, the market price falls and people consume more. *a. True b. False 811. Vaccines benefit the person who is vaccinated but they also create an external cost for others. a. True *b. False 812. If the private benefit of getting a flu shot for a person is less than the social benefit, the market quantity will be greater than the efficient quantity. a. True *b. False 813. External benefits lead to inefficient market outcomes. *a. True b. False 814. According to the Coase theorem, the private market will need government intervention in order to reach an efficient outcome when externalities are present. a. True *b. False 815. While the Coase theorem is appealing, private actors often fail to resolve the problems caused by external costs and benefits. *a. True b. False 816. If transaction costs are low and property rights are clearly identifiable, an efficient market equilibrium can be achieved even when externalities exist. *a. True b. False 817. Markets are always able to find solutions to externality problems, and thus maximize social surplus. a. True *b. False 818. The Coase theorem says that if transaction costs are high and property rights are clearly defined, the private bargains will ensure that the market equilibrium is efficient even when there are externalities. a. True *b. False 819. Government intervention is necessary to correct all externalities. a. True *b. False 820. One advantage of regulation as a method for reducing pollution is that the government can determine the maximum quantity of pollution that is legally allowed. *a. True b. False 821. Government can be used to solve externality problems that are too costly for private parties to solve. *a. True b. False 822. The prime motivation for low-pollutant firms to enter into the market for tradeable allowances is profit. *a. True b. False 823. Explain in your own words: 1) What is an externality? and 2) What is the difference between a negative and positive externalities. Provide examples. Correct Answer: Externalities are side effects of a production process or its use. They are some sort of additional impact from a good or service that is not captured by the price of the product. This spillover or additional impact may be positive or negative. A positive externality is one where the consumption of the good or service by the purchaser causes additional benefits that are felt by others. Thus the price of the product that is equal to the private marginal benefit does not reflect the social benefit experienced by other parties. An example of a positive externality is reduced exposure to flu viruses for people who are not part of the flu vaccine market. A negative externality is one where the production or the consumption of the good or service causes additional costs that are not captured by the price of the product. For example, a negative externality derives from a product that causes environmental damage or health problems for people who are not part of the market transaction. 824. Make an argument that gun ownership creates external costs. How might the government address the external costs? Now make an argument that gun ownership creates external benefits. How might the government address the external benefits? Correct Answer: Gun ownership may lead to external costs if guns are misused and innocent people are injured—e.g., a gun stolen from a law-abiding citizen's home may be the weapon responsible for harming someone in an armed robbery. One government solution is to tax the purchase of guns to reduce their availability to their efficient level. Command-and-control methods may also be appropriate in putting limits on the lethality of guns, such as rate of fire. Gun ownership may create external benefits if the presence of guns in a community deters criminals from committing crimes. For instance, law-abiding citizens who carry concealed weapons may create external benefits. Since criminals cannot determine who is carrying a concealed weapon, all people, even those without guns, are less likely to be robbed. In this case, the government could subsidize the purchase of guns to increase gun ownership to its efficient level. 825. Using a demand and supply diagram demonstrate how the market equilibrium would differ from the efficient equilibrium when external costs are present. Shade in the area of deadweight loss, and be sure to label all axes and curves. Correct Answer: 826. (Figure: Negative Externality) The figure shows the market for a good that causes a negative externality when consumed. The government decides to begin taxing its producers. Using the information provided in the figure, answer the following questions. Figure: Negative Externality a. What is the market quantity in this market? b. What is the social cost of the product? c. When the product is taxed, what is the dollar amount of the deadweight loss that is removed from the market? d. What is the new efficient quantity in this market after the tax has been imposed? Correct Answer: a. 1,500 b. $4 c. $1,200 d. 900 827. The market for bathroom cleaners can be defined by this set of equations: Qd = 24 – 2P Qs = –4 + 2P where P is the price of bathroom cleaners in dollars, and Q is quantity in thousands. When bathroom cleaners are washed down the drain, they cause environmental poisoning. The government estimates that the external cost related to the use of each container of bathroom cleaner is $3 and is considering imposing a tax of $3 on the producers of the bathroom cleaner. Using this information answer the following questions. a. What are the market price and market quantity in the bathroom cleaner market? b. What is the social cost of this quantity of bathroom cleaner? c. If producers are charged a tax of $3, that would cause the supply curve to the shift to the left, and the new equation for the supply curve would be Qs = –4 + 2(P – 3). What is the efficient quantity traded in this market as a result of the tax? d. Draw a graph to illustrate the old and new equilibriums in this market (before and after the tax). e. What is the dollar amount of the deadweight loss that would be removed from this market as a result of the tax? Correct Answer: a. 24 – 2P = –4 + 2P 28 = 4P P = 7 or the Market price = $7 and market quantity = 10 units. b. $7 + $3 = $10 c. 24 – 2P = –4 + 2(P – 3) 34 = 4P P = 8.5 or the Efficient market price = $8.50 and Efficient quantity = 7 d. See the following figure. e. (3 × 3)/2 = $4.50 828. (Figure: Positive Externality) The figure shows the market for a good that, when consumed, causes an external benefit. Suppose the government decides to begin issuing a subsidy to the consumers of the good. Using the information provided in the figure, answer the following questions. Figure: Positive Externality a. What is the initial market quantity in this market? b. What is the social benefit of the product? c. When the consumers of the product are subsidized, what is the dollar amount of deadweight loss that is removed from the market? d. What is the new efficient quantity in this market after the subsidy has been allocated? Correct Answer: a. 1,200 b. $3 c. $375 d. 1,450 829. The market for aquarium cleaners can be defined by the following set of equations: Qd = 40 – 3P Qs = –20 + 3P P is the price of aquarium cleaners in dollars, and Q is quantity in thousands. After their use, aquarium cleaners get washed down the drain and increase the mineral content in streams and rivers increasing the fish population. The government estimates that the external benefit related to the use of each container of aquarium cleaner is $3 and is considering a subsidy of $3 per container of the aquarium cleaner. Using this information answer the following questions. a. What are the market price and market quantity in the aquarium cleaner market? b. What is the social benefit of each container of aquarium cleaner? c. If consumers are offered a subsidy of $3, that would cause the demand curve to shift to the right, and the new equation for the demand curve would be Qd = 40 – 3(P – 3). What is the efficient quantity traded in this market as a result of this subsidy? d. Draw a graph to illustrate the old and new equilibriums in this market (before and after the subsidy). e. What is the dollar amount of the deadweight loss that has been removed from this market as a result of the subsidy? Correct Answer: a. 40 – 3P = –20 + 3P 60 = 6P P = 10 for a market price = $10 and a market quantity = 10 units. b. $10 + $3 = $13 c. 40 – 3P = –20 + 3(P– 3) 69 = 6P P = 11.5 for a market price = $11.50 and an efficient market quantity = 14.5 units. d. See the following figure. e. (3 × 4.5)/2 = $6.75 830. Explain and graphically illustrate why underuse of vaccines is not efficient, and how the inefficiency may be improved. Correct Answer: Fewer people get flu shots than is efficient since the private cost of getting a flu shot is less than the private benefit. When one person gets a flu shot the expected number of people who get the flu falls by more than one, so getting a flu shot generates a social benefit that is greater than the private benefit. If people who got a flu shot did receive all the benefits of vaccination then their demand curve would shift upwards by the amount of external benefit, and therefore the market equilibrium will be consistent with the efficient equilibrium. Thus subsidizing flu shots should result in more vaccinations and greater social benefit. Subsidies should occur until the marginal social benefit equals the private marginal cost of production. 831. The Coase theorem suggests that efficient solutions to external costs and benefits can be determined through bargaining. Under what circumstances will private bargaining fail to produce a solution? Correct Answer: Private parties may fail to bargain to an efficient solution under varied circumstances. For example, the transaction costs of bargaining may be so high that one or both of the parties decides not to bargain. Second, the bargaining may not take place if one or both of the parties believes that the agreement cannot be enforced. Third, one or both of the parties may try to “hold out” for a better deal, in which case the bargaining process breaks down. Fourth, if there are a large number of parties taking part in the negotiations, the costs of coordination may be so great that the bargaining is not successful. 832. As bees make honey, they pollinate fruits and vegetables, which is an important benefit to farmers. Since pollination is an external benefit of honey production, what are the incentives for beekeepers to maintain efficient production of honey? Correct Answer: As farmers pay beekeepers to pollinate their crops the external benefits become internalized—the beekeepers earn money from the pollination of fruits and vegetables as well as from the production of honey and so expand production towards the efficient quantity that takes into account the benefits of bees for honey production and for fruit and vegetable production. 833. Briefly list some private and public solutions to the existence of externalities (negative or positive) in markets. Correct Answer: Private solutions include trade in externalities, or a market for tradeable allowances (where it exists without government mandate). Government solutions include the command-and-control-technique (used when external costs are severe and very significant; this technique is not always efficient), and taxes and subsidies. Markets for tradeable allowances can also be government mandated as is, for example, the market for carbon emissions. 834. (Table: Sulfur Dioxide) The table sets forth the sulfur dioxide emissions along with the costs of reducing sulfur dioxide emissions for two industries. Suppose the government gives each industry 100 tradeable allowances; each allowance allows for 1 ton of sulfur dioxide emissions. Explain how the industries will trade the allowances and the range of prices that the allowances will trade for. What is the final allocation of allowances between the industries? How many tons of sulfur dioxide are removed from the air and at what cost? Table: Sulfur Dioxide Cost of Reducing 1 Ton of Sulfur Industry Sulfur Dioxide Emissions (tons) Dioxide Industry X 100 $100 Industry Y 120 $300 Correct Answer: Industry Y will pay between $100 and $300 for 20 allowances from Industry X. Industry Y will now have 120 allowances and emit 120 tons of sulfur dioxide. Industry X traded away 20 allowances, leaving it with 80 allowances and emitting 80 tons of sulfur dioxide. Twenty tons of sulfur dioxide are removed (220 – total allowances). Since Industry X removed all the pollution, the total cost is 20 × 100 = $200. (Note: in calculating the cost, we ignore what Industry Y paid Industry X for the allowances, since this merely represents a transfer from one industry to another.) 835. Which of the following is NOT a key decision that a firm must make? a. what price to set b. what quantity to produce *c. where to produce d. when to enter and exit an industry 836. When there are many buyers and sellers of a good, and the product sold is identical across firms: *a. the demand curve for each firm's output is perfectly elastic. b. the industry demand curve is perfectly elastic. c. the demand curve for each firm's output is perfectly inelastic. d. the industry demand curve is perfectly inelastic. 837. An industry is said to be perfectly competitive when: a. demand in the industry is high. *b. each firm has virtually no influence over the price of its product. c. there are many buyers and sellers, and each is large relative to the total market. d. supply in the industry is highly elastic. 838. When there are many buyers and sellers of a good, and the product sold is identical across firms: *a. the demand curve for each firm's output is perfectly elastic. b. the industry demand curve is perfectly elastic. c. the demand curve for each firm's output is perfectly inelastic. d. the industry demand curve is perfectly inelastic 839. A perfectly competitive industry exists under which of the following conditions? I. The product sold is similar across firms. II. There are many sellers, each small relative to the total market. III. There are many sellers, each with total assets less than $2 million. IV. The threat of competition exists from potential sellers that have not yet entered the market. a. I and II only b. I, II, and III only c. I, III, and IV only *d. I, II, and IV only 840. In the small town of Wellsville, there is only one grocery store. Given that everyone needs food, we would expect that: a. this grocery store is a monopoly and hence highly profitable. b. this grocery store charges exorbitant prices. *c. this grocery store prices competitively. d. this grocery store faces a perfectly inelastic demand. 841. At a ski resort located over one hour from the nearest large town, there is only one grocery store and it charges prices more than 200 percent above the typical retail prices. In the long run, we would expect that: a. another store will open that will charge equally high prices since competition is low. b. the store will continue to earn high profits even in the long run since the size of the market is small. c. demand will decrease since people will not want to pay the high prices. *d. another store will open that will charge lower prices. 842. Firms in competitive industries: I. can only charge a price equal to the market price. II. cannot charge any more than the market price. III. will earn less profit if they charge less than the market price. a. I only b. I and III only c. II only *d. I, II, and III 843. Firms in a perfectly competitive industry maximize profits by: a. eliminating the competition. b. producing a higher quality good and setting a price higher than the competition. *c. setting a price equal to the market price. d. setting a price less than the market price and undercutting the competition. 844. When a firm expands output from 10 to 11 units and total revenue increases from $100 to $110, marginal revenue of the 11th unit is: a. $110. b. $11. *c. $10. d. $210. 845. Marginal cost is: *a. the change in total cost from producing one more unit of output. b. total cost divided by the change in total output. c. the change in total output divided by the change in total cost. d. average cost times output. 846. If Homer operates a small bakery and sells donuts for $4/dozen, he should: *a. sell an additional dozen donuts as long as the marginal cost of producing an additional dozen donuts is less than $4. b. sell an additional dozen donuts as long as the total cost of producing an additional dozen donuts is less than $4. c. only sell more donuts if his total revenue is greater than his total cost. d. sell an additional dozen donuts so long as the fixed cost of production is greater than $4. 847. The marginal revenue (MR) for a firm is a constant $45, and the firm's marginal cost (MC) is given by MC = 1.5Q (where Q is quantity of output). What is the firm's profit-maximizing level of output? a. 67.5 *b. 30 c. 45 d. 15 848. Table: Barrels of Oil Price of Oil = Barrels of Oil Marginal Revenue Marginal Cost 0 $0 $0 1 $100 $20 2 $100 $40 3 $100 $60 4 $100 $80 5 $100 $100 6 $100 $120 7 $100 Change in Profit –$40 Reference: Ref 11-1 (Table: Barrels of Oil) Refer to the table. The profit-maximizing level of output is ________ barrels of oil. a. 1 b. 3 *c. 5 d. 7 849. Table: Barrels of Oil Price of Oil = Barrels of Oil Marginal Revenue Marginal Cost 0 $0 $0 1 $100 $20 2 $100 $40 3 $100 $60 4 $100 $80 5 $100 $100 6 $100 $120 7 $100 Change in Profit –$40 Reference: Ref 11-1 (Table: Barrels of Oil) Refer to the table. The change in profit from producing the second barrel of oil is ________, and the marginal cost from producing the seventh barrel of oil is ________. a. $140; $140 b. $100; $20 *c. $60; $140 d. $140; $20 850. (Figure: Profit Maximizing Output) Use the figure. The profit-maximizing output for this firm is: Figure: Profit Maximizing Output a. 40. b. 3. *c. 6. d. 9. 851. Which of the following statements is TRUE? Economists normally assume that the goal of the firm is to: I. sell as much of their product as possible. II. set the price of their product as high as possible III. maximize profit. a. I and II only b. II and III only c. I and III only *d. III only 852. The total amount of money that a firm receives from sales of its output is called: a. gross profit. b. net profit. *c. total revenue. d. net revenue. 853. Profit is defined as: a. net revenue minus depreciation. b. average revenue minus average total cost. c. marginal revenue minus marginal cost. *d. total revenue minus total cost. 854. The amount of money that the firm pays for its inputs is called: a. marginal cost. b. total cost. *c. variable cost. d. fixed cost. 855. To maximize profit firms should keep producing as long as marginal revenue is: *a. greater than marginal cost. b. equal to marginal cost. c. less than marginal cost. d. greater than total cost. 856. To maximize profit a firm in a competitive market increases output until: a. P = TC. b. P = AR. *c. P = MC. d. P = AC. 857. Table: Barrels of Oil Barrel of Oil Produced Total Revenue 1 $50 2 100 3 150 Total Cost $4 10 21 Price $50 50 50 4 5 6 7 8 9 10 200 250 300 350 400 450 500 38 61 90 126 176 266 390 50 50 50 50 50 50 50 Reference: Ref 11-2 (Table: Barrels of Oil) Refer to the table. What is the marginal revenue of producing the fifth barrel of oil? a. 61 *b. 50 c. 200 d. 250 858. Table: Barrels of Oil Barrel of Oil Produced Total Revenue 1 $50 2 100 3 150 4 200 5 250 6 300 7 350 8 400 9 450 10 500 Total Cost $4 10 21 38 61 90 126 176 266 390 Price $50 50 50 50 50 50 50 50 50 50 Reference: Ref 11-2 (Table: Barrels of Oil) Refer to the table. What is the marginal cost of producing the seventh barrel of oil? *a. 36 b. 50 c. 90 d. 126 859. Table: Barrels of Oil Barrel of Oil Produced Total Revenue 1 $50 2 100 3 150 4 200 5 250 6 300 7 350 8 400 9 450 10 500 Total Cost $4 10 21 38 61 90 126 176 266 390 Price $50 50 50 50 50 50 50 50 50 50 Reference: Ref 11-2 (Table: Barrels of Oil) Refer to the table. How many barrels of oil should the company produce to maximize profit? a. 6 b. 7 *c. 8 d. 9 860. Table: Barrels of Oil Barrel of Oil Produced Total Revenue 1 $50 2 100 3 150 4 200 5 250 6 300 Total Cost $4 10 21 38 61 90 Price $50 50 50 50 50 50 7 8 9 10 350 400 450 500 126 176 266 390 50 50 50 50 Reference: Ref 11-2 (Table: Barrels of Oil) Refer to the table. The maximum profit available to the company is: a. $184. b. $210. *c. $224. d. $266. 861. As the price of a good fluctuates, a profit-maximizing firm will expand or contract production along its: a. average cost curve. b. average product curve. *c. marginal cost curve. d. marginal product curve. 862. Total profit for a given quantity of output can be calculated as: *a. Total Revenue – Total Costs. b. Marginal Revenue – Marginal Cost. c. Total Revenue – Marginal Revenue. d. Marginal Profit + Marginal Revenue. 863. For a small firm in an extremely competitive industry, marginal revenue is always equal to price because: *a. the firm has no ability to influence the market price. b. each firm has large economies of scale. c. each firm has large fixed costs. d. if consumers increase their demand for the product, producer surplus falls. 864. Damien produces 400 gallons of milk a day in a very competitive industry. The market price for a gallon of milk is $2. Damien's marginal revenue per gallon of milk is: a. $200. b. $800. *c. $2. d. There is not enough information to answer the question. 865. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 50 1 90 80 2 180 120 3 270 170 4 360 230 5 450 300 6 540 380 7 630 470 8 720 570 Reference: Ref 11-3 (Table: Competitive Firm) Refer to the table. The market price for the product is: *a. $90. b. $80. c. $100. d. A dollar amount, but it cannot be determined from the information in the table. 866. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 50 1 90 80 2 180 120 3 270 170 4 360 230 5 450 300 6 540 380 7 630 470 8 720 570 Reference: Ref 11-3 (Table: Competitive Firm) Refer to the table. The profit maximizing output for this firm is: a. 5. b. 6. *c. 7. d. 8. 867. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 50 1 90 80 2 180 120 3 270 170 4 360 230 5 450 300 6 540 380 7 630 470 8 720 570 Reference: Ref 11-3 (Table: Competitive Firm) Refer to the table. The fixed cost for this firm is: a. $80. b. $90. *c. $50. d. $100. 868. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 50 1 90 80 2 180 120 3 270 170 4 360 230 5 450 300 6 540 380 7 630 470 8 720 570 Reference: Ref 11-3 (Table: Competitive Firm) Refer to the table. For the seventh unit of output, total profit is: a. $630. b. $90. *c. $160. d. $470. 869. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 50 1 90 80 2 180 120 3 270 170 4 360 230 5 450 300 6 540 380 7 630 470 8 720 570 Reference: Ref 11-3 (Table: Competitive Firm) The marginal revenue for the fifth unit of output is: a. $70. *b. $90. c. $450. d. $20. 870. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 50 1 90 80 2 180 120 3 270 170 4 360 230 5 450 300 6 540 380 7 630 470 8 720 570 Reference: Ref 11-3 (Table: Competitive Firm) The marginal cost of the fifth unit of output is: *a. $70. b. $90. c. $450. d. $300. 871. In their calculation of profit, accountants typically do not take into account: a. variable costs. b. fixed costs. *c. opportunity costs. d. explicit costs. 872. Economic profit differs from accounting profits because of its inclusion of: a. explicit costs. b. incidental costs. c. potential costs. *d. implicit costs. 873. Which of the following statements is FALSE? a. AC = TC/Q b. A firm that produces 100 units at a total cost of $500, has an average cost of $5 per unit. c. Firms will earn positive profits if price exceeds average cost. *d. When marginal cost is below average cost, average cost is rising. 874. Profit can be shown graphically by depicting a firm's costs and revenues, and is determined mathematically by calculating the: a. distance from price to average cost. b. area of the box that is price times quantity. *c. area of the box that is (price minus average cost) times the quantity. d. area of the box that is average cost times quantity. 875. Which of the following is TRUE? a. Price times quantity equals profit. b. Profit equals marginal revenue minus marginal cost. c. Profit equals total revenue minus average cost. *d. Profit equals (price minus average cost) times quantity. 876. When the level of production is relatively low, the average cost per unit of output would ________ if output increased. a. increase *b. decrease c. either increase or decrease depending on marginal cost d. remain constant 877. Figure: Costs of Oil Production Reference: Ref 11-4 (Figure: Costs of Oil Production) Refer to the figure. Assuming that price equals marginal cost, the total cost of producing eight barrels of oil is: a. $60. *b. $240. c. $400. d. It cannot be determined from the information given. 878. Figure: Costs of Oil Production Reference: Ref 11-4 (Figure: Costs of Oil Production) Refer to the figure. Assuming that price equals marginal cost, the profit of producing eight barrels of oil is: *a. $160. b. $240. c. $400 d. It cannot be determined from the information given. 879. Table: Oil Production Barrel of Oil Marginal Produced Revenue 1 $50 Marginal Cost Average Costs $4 $34 2 3 4 5 6 7 8 9 10 50 50 50 50 50 50 50 50 50 6 11 17 23 29 36 50 90 124 40 17 17 18.20 20 22.29 25.75 32.89 42 Reference: Ref 11-5 (Table: Oil Production) Refer to the table. What is the total cost of producing eight barrels of oil? a. $50 *b. $206 c. $178 d. $336 880. Table: Oil Production Barrel of Oil Marginal Produced Revenue 1 $50 2 50 3 50 4 50 5 50 6 50 7 50 8 50 9 50 10 50 Marginal Cost $4 6 11 17 23 29 36 50 90 124 Average Costs $34 40 17 17 18.20 20 22.29 25.75 32.89 42 Reference: Ref 11-5 (Table: Oil Production) Refer to the table. What is the profit of producing ten barrels of oil? *a. $80 b. $154 c. $180 d. $194 881. Table: Oil Production Barrel of Oil Marginal Produced Revenue 1 $50 2 50 3 50 4 50 5 50 6 50 7 50 8 50 9 50 10 50 Marginal Cost $4 6 11 17 23 29 36 50 90 124 Average Costs $34 40 17 17 18.20 20 22.29 25.75 32.89 42 Reference: Ref 11-5 (Table: Oil Production) Refer to the table. What are the fixed costs of production for this firm? a. $34 b. $4 *c. $30 d. $50 882. Figure: Costs Reference: Ref 11-6 (Figure: Costs) Use the figure. At a price of $20, the firm earns profit of: *a. $75. b. $300. c. $225. d. $0, because P = MC at P = $20. 883. Figure: Costs Reference: Ref 11-6 (Figure: Costs) Use the figure. At a price of $20 which of the following statements is FALSE? a. AC = $15 b. Profit = (20 – 15)15 c. Average profit = $5 *d. MC < AC 884. Profit is positive whenever price is greater than: a. total cost. *b. average cost. c. fixed cost. d. marginal cost. 885. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 30 1 80 50 2 160 80 3 240 120 4 320 170 5 400 230 6 480 300 7 560 380 8 640 470 Reference: Ref 11-7 (Table: Competitive Firm) Refer to the table that shows the revenue and cost schedules for a competitive firm. What is the profit maximizing quantity? a. 5 b. 6 *c. 7 d. 8 886. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 30 1 80 50 2 160 80 3 240 120 4 320 170 5 400 230 6 480 300 7 560 380 8 640 470 Reference: Ref 11-7 (Table: Competitive Firm) Refer to the table that shows the revenue and cost schedules for a competitive firm. What is the marginal cost at the profit maximizing quantity? a. $50 *b. $80 c. $230 d. $300 887. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 30 1 2 3 4 5 6 7 8 80 160 240 320 400 480 560 640 50 80 120 170 230 300 380 470 Reference: Ref 11-7 (Table: Competitive Firm) Refer to the table that shows the revenue and cost schedules for a competitive firm. What is the average cost at the profit maximizing quantity? *a. $54.30 b. $58.75 c. $50 d. $80 888. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 30 1 80 50 2 160 80 3 240 120 4 320 170 5 400 230 6 480 300 7 560 380 8 640 470 Reference: Ref 11-7 (Table: Competitive Firm) Refer to the table that shows the revenue and cost schedules for a competitive firm. What is the average fixed cost at the profit maximizing quantity? a. $54.30 *b. $4.28 c. $50 d. $80 889. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 30 1 80 50 2 160 80 3 240 120 4 320 170 5 400 230 6 480 300 7 560 380 8 640 470 Reference: Ref 11-7 (Table: Competitive Firm) Refer to the table that shows the revenue and cost schedules for a competitive firm. How much profit will this firm earn? a. $0; this firm is making a loss b. $50 c. $170 *d. $180 890. Table: Competitive Firm Quantity (Units) Total Revenue ($) Total Cost ($) 0 0 30 1 80 50 2 160 80 3 240 120 4 320 170 5 400 230 6 480 300 7 560 380 8 640 470 Reference: Ref 11-7 (Table: Competitive Firm) Refer to the table that shows revenue and cost schedules for a competitive firm. At the profit-maximizing quantity, which of the following is TRUE? I. MR = MC II. Producer surplus is maximized. III. Profits are equal to $180. a. I only b. I and II only c. I and III only *d. I, II, and III 891. (Figure: AC) Refer to the set of four panels in the figure. Which of the panels shows the typical shape of the average cost curve in a competitive market? Figure: AC *a. Panel A b. Panel B c. Panel C d. Panel D 892. Stating that TR = TC is equivalent to stating that: a. MR = MC. *b. P = AC. c. P = Average fixed cost. d. MR = P. 893. (Figure: Profits) Refer to the figure. How much profit is the firm making at the profit maximizing quantity? Figure: Profits *a. a profit of $300 b. a profit of $70 c. The firm is not making a profit—it is making a loss of $300. d. The firm is not making a profit—it is making a loss of $70. 894. (Figure: Calculating Profits) Refer to the figure. How much profit is the firm making at the profit maximizing quantity? Figure: Calculating Profits a. a profit of $200 *b. The firm is not making a profit—it is making a loss of $220. c. The firm is not making a profit—it is making a loss of $200. d. The firm is not making a profit—it is making a loss of $320. 895. Which of the following statements is correct? *a. When the marginal cost curve is above the average cost curve, the average cost curve must be rising. b. When the marginal cost curve is below the average cost curve, the average cost curve must be rising. c. When MR = MC, the average cost curve is at its minimum point. d. When MR = P, the average cost curve is at its minimum point. 896. Figure: Profits and Competitive Firms Reference: Ref 11-8 (Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which of the panels shows a competitive firm making positive economic profits? a. Panel A b. Panel B *c. Panel C d. Panel D 897. Figure: Profits and Competitive Firms Reference: Ref 11-8 (Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which of the panels shows a competitive firm making zero economic profits? a. Panel A *b. Panel B c. Panel C d. Panel D 898. Figure: Profits and Competitive Firms Reference: Ref 11-8 (Figure: Profits and Competitive Firms) Refer to the four panels in the figure. Which of the panels shows a competitive firm making an economic loss? *a. Panel A b. Panel B c. Panel C d. Panel D 899. Which of the following statements about cost is correct? a. Marginal cost is constant. b. Marginal cost is always falling. *c. Average total cost is U-shaped. d. Average total cost always declines. 900. Whenever marginal cost is greater than the average total cost: a. marginal cost is falling. b. average cost is falling. c. average cost is constant. *d. average cost is rising. 901. When marginal cost is rising, the average total costs: *a. could be rising or falling. b. must be rising. c. must be falling. d. must be constant. 902. The typical average cost curve in a competitive market is: a. an upward sloping straight line because fixed costs are constant, and variable costs are increasing with the level of output. *b. U-shaped because the firm's fixed costs are first spread over greater quantities, but then increasingly greater quantities will create production capacity constraints. c. downward sloping until fixed costs are eliminated and then it becomes a horizontal line. d. U-shaped because increasing quantities of output cause a decrease in fixed costs but an offsetting increase in variable costs. 903. (Table: Decision to Enter) Use the table. A firm is considering whether to enter an industry, with the conditions upon entry set forth in the table. Entering the industry would require the firm to pay $800 per day in fixed costs. This firm should ________ the industry because its profits would be ________ per day. Table: Decision to Enter Quantity Marginal Revenue Marginal (per day) = Price Cost 1 $750 $150 2 $750 $400 3 4 $750 $750 $750 $1,250 a. not enter; –$1,350 b. not enter; –$800 c. enter; $700 *d. enter; $150 904. Which of the following statements is TRUE? a. Entry and exit from an industry depend on the firm's market share. b. Fixed costs fall as firms produce more output, the so-called “spreading of the costs.” *c. High profits in an industry give entrepreneurs an incentive to enter that industry. d. A firm should enter an industry if average costs are less than producer surplus. 905. A firm should exit an industry if: a. P < MC. b. P – AC > 0. *c. P – AC < 0. d. P – AC = 0. 906. Profit is positive whenever: a. P < AC. b. P < MC. c. P > MC. *d. P > AC. 907. (Table: Oil Production Costs) Refer to the table. If seven barrels of oil are produced, this firm is making: Table: Oil Production Costs Barrel of Oil Marginal Marginal Average Produced Revenue Cost Costs 1 $50 $4 $34 2 50 6 40 3 50 11 17 4 50 17 17 5 50 23 18.20 6 50 29 20 7 50 36 22.29 8 50 50 25.75 9 50 90 32.89 10 50 124 42 *a. a profit, because P >AC. b. a loss, because MC > AC. c. a profit, because MR > MC. d. a loss, because TR < TC. 908. Firms should exit the market if: a. sunk costs are a significant portion of the total cost. b. producer surplus is just equivalent to recoverable costs. *c. price falls below the average cost. d. marginal cost exceeds the average cost. 909. A firm pays a monthly lease of $10,000 and generates $8,000 of revenue a month. Which of the following is true? a. Firms will enter the industry. *b. This firm will exit the industry in the long run. c. The recoverable costs are less than the difference between revenues and variable costs. d. The recoverable costs are less than operating profit. 910. With fluctuating prices in an industry, firms are likely to: a. immediately exit any time profits are negative. b. enter any time profits are positive. *c. consider lifetime profits of entering or exiting the industry. d. act risk averse by producing only where (2 × MR) > MC. 911. Which of the following statements are TRUE? A firm's entry/exit decision is about: I. whether profits are positive or negative now. II. whether the stream of future profits is positive or negative. III. government regulations. a. I, II, and III b. I only *c. I and II only d. II and III only 912. Firms will enter an industry when the: a. price rises above the minimum of the marginal cost curve. *b. price rises above the minimum of the average total cost curve. c. marginal cost rises above the minimum of the average total cost curve. d. average cost rises above the minimum of the marginal cost curve. 913. A baker wants to establish a pie factory. The cost of leasing the factory is $1,000 per day. The profit maximizing quantity of pies is 1,000 pies a day. Each pie sells for $3 and costs only $2.10 to make. Which of the following is a correct conclusion based on this data? a. The baker will enjoy profits of $900 per day. *b. The baker should not enter the industry. c. At the profit maximizing quantity, the baker's producer surplus is –$200. d. The baker will enjoy profits of $3,000 per day. 914. A firm should exit the industry if which of the following conditions apply? a. TR > TC *b. P < AC c. Lifetime expected profit is positive. d. Prices are low now but expected to rise. 915. The decision to enter or exit an industry is based: a. only on the level of profits/losses today. b. only on the level of profits/losses in the future. *c. on lifetime expected profits. d. on the marginal cost of production. 916. In a constant cost industry, the market price and average cost are equal to $23. Therefore, which of the following is correct? a. An increase in demand will cause the short-run price to rise above $23 but, in the long run, the price will return to $23. b. An increase in demand will cause profits to rise and firms to enter the industry until profits return to normal. c. A decrease in demand will cause market price to fall below average cost and thus firms will earn negative profits. *d. All of the answers are correct. 917. Figure: Industry Firms Reference: Ref 11-9 (Figure: Industry Firms) Refer to the figures. The market is characterized by demand curve D2 and supply curve S1. The firms in the industry are earning ________, which will cause the: *a. profit; supply curve to shift to S2. b. losses; demand curve to shift to D1. c. profit; supply curve to shift to S2 and the demand curve to shift to D1. d. losses; supply curve to shift to S2 and the demand curve to shift to D1. 918. Figure: Industry Firms Reference: Ref 11-9 (Figure: Industry Firms) Refer to the figures. This industry is a(n): a. increasing cost industry. b. decreasing cost industry. *c. constant cost industry. d. quadratic cost industry. 919. Figure: Industry Firms Reference: Ref 11-9 (Figure: Industry Firms) Use the figures. The market for a normal good is characterized by demand curve D2 and supply curve S2. A decrease in income will cause: a. the demand curve to shift D1 causing firms to earn economic profits. The supply curve will not change, so price will rise and firms will earn normal profits. b. the supply curve to shift D1 causing firms to earn economic profits. The supply curve will decrease to S1 as firms exit the industry. Eventually the market price will rise and firms will earn above normal profits. *c. the demand curve to shift D1 causing firms to earn economic losses. The supply curve will decrease to S1 as firms exit the industry. Eventually the market price will rise and firms will earn normal profits. d. the supply curve to shift S1 causing firms to earn economic losses. The demand curve will decrease to D1 as firms enter the industry. Eventually the market price will fall and firms will earn normal profits. 920. What condition is necessary in a constant cost industry? *a. Prices of the industry's inputs do not change as the industry expands. b. Prices of the industry's inputs decline as the industry expands. c. Prices of the industry's inputs rise as the industry expands. d. There are barriers that prevent new firms from entering such an industry. 921. Suppose there is a large and permanent increase in the demand for a good produced in a competitive industry. We should expect that: a. existing firms will face lower sunk costs. b. competition in the industry will decrease. c. existing firms' average cost curves will shift upwards. *d. firms will enter the industry because the market price will rise. 922. In an increasing cost industry: *a. costs rise as industry output increases. b. costs rise as industry output decreases. c. the long-run supply curve is flat. d. all firms will earn normal profits in the long run. 923. The oil industry is an increasing-cost industry because: *a. expanding output requires firms to use more expensive production methods to find and extract oil from less desirable locations. b. people buy more oil at lower prices. c. because oil is a necessity good. d. All of these statements are correct. 924. Any industry that buys a large fraction of the output of an increasing cost industry: a. could be an increasing cost industry, but not necessarily. *b. must be an increasing cost industry. c. must be a constant cost industry. d. must be a decreasing cost industry. 925. In an increasing cost industry: a. above-normal profits are eliminated for all firms in the long run. *b. above-normal profits are eliminated for only some firms in the long run. c. costs rise as output decreases. d. profits rise as output decreases. 926. Figure: Two-Firm Industry Reference: Ref 11-10 (Figure: Two-Firm Industry) Refer to the figures. At a market price of $20, the total quantity supplied in the industry is: a. 32 units. b. 45 units. *c. 15 units. d. 25 units. 927. Figure: Two-Firm Industry Reference: Ref 11-10 (Figure: Two-Firm Industry) Refer to the figures. At a market price of $25, the total quantity supplied in the industry is: a. 32 units. *b. 45 units. c. 15 units. d. 25 units. 928. In a decreasing industry: a. cost rises as the industry expands. *b. cost falls as the industry expands. c. average costs rise as the industry expands. d. the price exceeds average cost, even in the long run. 929. Which of the following is NOT an example of a decreasing cost industry? a. movie production in Hollywood *b. the retail clothing industry c. computer technology in Silicon Valley d. the carpet industry in Dalton, Georgia 930. Economists study decreasing cost industries in order to explain: a. why profits may remain above normal in the long run for some firms. *b. the existence of industry clusters. c. economies of scale. d. why supply curves slope upward. 931. Firms in competitive industries should adhere to: 1) expanding output if MR > MC, and 2) reducing output if MC > MR. *a. True b. False 932. To maximize profit, a firm in a competitive industry increases output until price is greater than the average cost. a. True *b. False 933. Marginal cost is the change in total cost from producing an additional unit of output. *a. True b. False 934. Profit is defined as total revenue minus total cost. *a. True b. False 935. Average total cost is equal to total cost divided by profit. a. True *b. False 936. Marginal revenue is always equal to the price of the product for a competitive firm. *a. True b. False 937. A firm's short-run supply curve is its marginal cost curve. *a. True b. False 938. If marginal cost is less than average cost, average cost is rising. a. True *b. False 939. Average cost is equal to total cost divided by quantity. *a. True b. False 940. The marginal cost curve may intersect the average cost curve anywhere on the curve that is less than the minimum point. a. True *b. False 941. A competitive firm maximizes profits at the point where P = MC = AC. a. True *b. False 942. At the profit-maximizing output level P = MC, if P > AC then firms can earn above normal profit, causing entry into the industry. *a. True b. False 943. A firm should enter an industry if total revenue is equal to total cost. a. True *b. False 944. A firm should exit an industry if price is less than average cost. *a. True b. False 945. Profit = (P – MC) × Q. a. True *b. False 946. Firms should enter the industry if marginal revenue is greater than the total costs. a. True *b. False 947. Firms should exit the industry if average costs are greater than marginal costs. a. True *b. False 948. If firms in a competitive market are earning above normal profits, the elimination principle states that new firms will enter the market and drive profits to normal. *a. True b. False 949. In a constant cost industry, many firms can expand or contract without a change in costs. *a. True b. False 950. The supply curve for oil slopes upwards because additional quantities of oil can only be produced at higher cost. *a. True b. False 951. (Table: Cucumbers) Use the table. Suppose that the market price per cucumber is $0.80. What is the marginal revenue of producing 100 cucumbers? What happens to total cost if cucumber production rises from 500 to 600? What is the profit-maximizing quantity of cucumbers? Table: Cucumbers Cucumbers Total Costs of Production 0 $0 100 50 200 110 300 180 400 260 500 350 600 450 Correct Answer: The marginal revenue of producing 100 cucumbers is $80, or 100 0.80. Total costs rise by the amount of marginal costs. The marginal cost of increasing production from 500 to 600 cucumbers is given by the change in the total cost: $450 minus $350, or $100. The profit-maximizing quantity occurs where marginal revenue equals marginal cost. Marginal revenue is a constant $80 (for an additional 100 cucumbers) and the marginal cost of increasing cucumber production from 300 to 400 is $80. So the profit-maximizing quantity is 400 cucumbers. 952. Explain why a profit-maximizing firm in a competitive market would increase output until price is equal to marginal cost? Correct Answer: Wherever P > MC producing additional units means more profit and wherever MC > P producing fewer units means more profit. Therefore, the reason profit is maximized where P = MC is that P = MC is the just right point between too little and too much. 953. (Table: Cost Schedules) The table shows the TR and TC schedules for a competitive firm. Using your knowledge of cost and profit structures, fill in all the missing blanks. Table: Cost Schedules Change Q (Units) TR ($) TC ($) MR MC Profit in Profit AC 0 0 30 1 80 50 2 160 80 3 240 120 4 320 170 5 400 230 6 480 300 7 560 380 8 640 470 Correct Answer: See completed table here. Q (Units) TR ($) 0 0 1 80 2 160 3 240 TC ($) 30 50 80 120 MR MC 80 80 80 20 30 40 Change Profit in Profit –30 30 0 80 50 120 40 AC 50 40 40 4 5 6 7 8 320 400 480 560 640 170 230 300 380 470 80 80 80 80 80 50 60 70 80 90 150 170 180 180 170 30 20 10 0 –10 42.5 46 50 54.3 58.8 954. (Figure: Representative Firm) Refer to the figure that shows a representative firm in a perfectly competitive industry. Using the information provided in the figure answer the following questions. Figure: Representative Firm What is the total profit or loss that this firm is making? Show all your calculations. b. Will firms enter or exit the industry? a. Correct Answer: a. The firm is making a profit of $700 = ($5 × 700 – $4 × 700) or ($5 – $4) × 700 b. There will be entry of firms into the industry since at the profit-maximizing level of production of 700, $5 – $4 > 0 signaling other firms that entry is profitable. 955. (Figure: Representative Competitive Firm) Refer to the figure that shows a representative firm in a perfectly competitive industry. Using the information provided in the figure answer the following questions. Figure: Calculating Profits What is the total profit or loss that this firm is making? Show all your calculations. b. Will firms enter or exit the industry? a. Correct Answer: a. The firm is making a loss of $220 = ($10 × 80 – $12.75 × 80) b. There will be exit of firms from the industry. 956. Draw a competitive firm in each of the following situations. a. earning abnormal profits b. making losses Are either of the situations in (a) and (b) sustainable into the long run? If not, c. explain why and graphically demonstrate how the competitive firm is expected to behave in the long run. Correct Answer: a. See the following diagram. b. See the following diagram. c. Neither situation is sustainable in the long run because high-value industries attract new firms that will increase the market supply and drive the market price (and thus profit level) down for existing firms in the competitive industry. The invisible hand works to attract new productive resources into the industry. Similarly, losses in low-value industries signal the least productive firms to find alternative uses for their capital and they leave the industry. In the long run, competitive firms will behave as indicated in the following diagram. 957. Graphically illustrate the maximum profit of a firm in a competitive market, and on the same graph depict how the profit maximizing quantity would change as the price changes. Correct Answer: At P1, profit-maximizing firm would produce output at Q1 where P = MC, and the profit is the area of Profit1. As the price increases to P2, the firm would increase the output to Q2, which is the new profit-maximizing quantity, and the profit increases to the area of Profit2. 958. Based on the premise that dogs are carnivores and thus should not eat grains, Natura Pet Products introduced the first brand of grain-free dog food called EVO in 2005. There were over 12 different manufacturers of grain-free dog food by 2009. Was Natura's EVO a profitable line of dog food in 2005? Since 2005, what has happened to the profitability of producing grain-free dog food? Correct Answer: The self-interest of firms is to enter profitable industries and exit unprofitable industries. So Natura's EVO was likely a very profitable brand of dog food since a large number of firms entered the industry after EVO's launch. The increased number of grain-free dog food manufacture caused the industry supply curve to increase, putting downward pressure on price and hence lowering firm profits. 959. Graphically illustrate how a constant cost industry responds to an increase in demand in the short run and in the long run. Correct Answer: An increase in demand increases price. Each firm expands production along its MC curve, which creates above-normal profits. Above-normal profits attract entry, which shifts the short-run supply curve to the right driving down the price. Entry continues until price falls enough so that firm profits are zero once again. 960. Give two reasons why an industry might be an increasing cost industry and use examples to demonstrate your reasons. Correct Answer: Some resources used in production may be available only in limited quantities and firms may have different cost structures. As more people become farmers, the price of land is bid up since its supply is limited. As the price of farm land is bid up, the costs of all farmers in the market rise. Also, anyone can enter the market for landscaping, but not everyone has the same costs because some landscapers work faster than others. 961. The pursuit of profits in a competitive market: *a. minimizes total industry costs. b. minimizes total value of production. c. leads to higher prices. d. maximizes producer surplus at the expense of consumer surplus. 962. Which of the following statements is TRUE regarding profit maximization in competitive markets? I. When all firms pursue profits, none of them achieve profits. II. When all firms pursue profits, only the most innovative will achieve profits. III. Production is divided in such a way that total costs of production are minimized. a. I only b. II only *c. I and III only d. II and III only 963. A competitive firm maximizes profit when marginal cost: *a. equals the price. b. is less than the price. c. is greater than the price. d. is minimized. 964. In a competitive market with four firms (indicated as Firm 1, Firm 2, Firm 3, and Firm 4), which of the following is the condition that enables all sellers to maximize profit? a. P = ATC for all firms b. Profit = Total Revenue – Total Cost for all firms *c. P = MC1 = MC2 = MC3 = MC4 d. MC is minimized in all firms. 965. Suppose that you own two farms on which to grow corn. Farm 2 has a lower marginal cost of producing corn than Farm 1. To lower total cost of production, you should produce: a. all on Farm 1. b. all on Farm 2. *c. some on Farm 1 and some on Farm 2. d. neither on Farm 1 nor on Farm 2. 966. Suppose that you own two farms on which to grow corn. In order to lower the cost of production, you determine to increase production on Farm 1 and reduce it on Farm 2. This implies that the marginal cost of production on Farm 1 is: a. greater than the marginal cost of production on Farm 2. *b. less than the marginal cost of production on Farm 2. c. equal to the marginal cost of production on Farm 2. d. The difference of the marginal costs between the two farms cannot be determined. 967. Suppose that Sandy owns a farm in North Carolina and Pat owns a farm in Iowa, and Sandy's farm is generally more productive than Pat's. If both Sandy and Pat sell their corn in the same market, Sandy should produce the output at the marginal cost that is: a. less than the marginal cost of Pat's production. *b. equal to the marginal cost of Pat's production. c. greater than the marginal cost of Pat's production. d. equal to total revenue in the market. 968. A free market can naturally allocate production across firms in an industry to minimize total costs due to: a. market power. b. regulation. *c. the invisible hand. d. externality. 969. Table: Oil Pumps Oil Pump One Quantity Marginal (Barrels of Oil) Cost 1 5 2 10 3 15 4 20 5 25 6 30 7 35 Oil Pump Two Quantity Marginal (Barrels of Oil) Cost 1 10 2 12 3 14 4 16 5 18 6 20 7 22 Reference: Ref 12-1 (Table: Oil Pumps) Refer to the table. An oil producer owns two pumps: Oil Pump One and Oil Pump Two. If the market price of oil is $20 per barrel, how many barrels of oil get produced? a. 4 b. 14 *c. 10 d. 6 970. Table: Oil Pumps Oil Pump One Quantity Marginal Oil Pump Two Quantity Marginal (Barrels of Oil) 1 2 3 4 5 6 7 Cost 5 10 15 20 25 30 35 (Barrels of Oil) 1 2 3 4 5 6 7 Cost 10 12 14 16 18 20 22 Reference: Ref 12-1 (Table: Oil Pumps) Refer to the table. Suppose that we want to produce seven barrels of oil. To minimize costs, we should produce: a. all seven barrels of oil from Oil Pump Two. *b. three barrels of oil from Oil Pump One and four barrels of oil from Oil Pump Two. c. one barrel of oil from Oil Pump One and six barrels of oil from Oil Pump Two. d. all seven barrels of oil from Oil Pump One. 971. Table: Oil Pumps Oil Pump One Quantity Marginal (Barrels of Oil) Cost 1 5 2 10 3 15 4 20 5 25 6 30 7 35 Oil Pump Two Quantity Marginal (Barrels of Oil) Cost 1 10 2 12 3 14 4 16 5 18 6 20 7 22 Reference: Ref 12-1 (Table: Oil Pumps) Refer to the table. Suppose that this market is producing six barrels of oil from Oil Pump One and two barrels of oil from Oil Pump Two. What happens to the total costs of production if we produce one less barrel of oil from Oil Pump One and one more barrel of oil from Oil Pump Two? *a. The total costs of production fall by $16.00. b. The total costs of production rise by $7.00. c. The total costs of production fall by $30. d. The total costs of production rise by $14. 972. Which of the following statements is TRUE? I. A free market minimizes the total costs of producing output. II. In a free market, P = MC1 = MC2 = . . . MCN. III. Every firm faces the same price in a competitive market. a. I and II only b. III only c. I and III only *d. I, II, and III 973. For a competitive firm, which of the following conditions describes the profit maximization condition? I. P = MC II. MR = MC III. TR = TC a. II only *b. I and II only c. II and III only d. I, II, and III 974. Profit maximization occurs when: a. TR > TC. *b. MR = MC. c. MC = AC. d. P = AC. 975. Since a competitive firm sets MR = P to determine all quantities in the short run, we can conclude that: a. each firm in the industry faces very large fixed costs. *b. the demand curve faced by each individual competitive firm is perfectly elastic. c. the demand curve faced by each individual competitive firm is downward sloping. d. the industry demand curve is perfectly elastic. 976. In a competitive industry, entry and exit decisions: a. allow some firms to earn above-normal profits in the long run. *b. ensure that labor and capital move across industries to optimally balance production. c. rely on demand signals, not price signals. d. move capital and labor away from profitable industries in order to maximize the total value of production. 977. In a competitive industry: a. all firms will earn above-normal profits if demand is high. b. the opportunity cost of production is zero. c. profits are only attainable in the long run to those firms able to innovate at the lowest cost. *d. resources move across firms in such a way that the total value of production is maximized. 978. Consider industries X and Y. Industry X has total revenue of $100 million and total costs of $77 million. Industry Y has total revenue of $80 million and total costs of $40 million. We should expect that: a. prices are higher in Industry X. b. resources will move from Industry Y to Industry X. *c. labor and capital will move from Industry X to Industry Y. d. firms in both industries will shut down operations. 979. The elimination principle illustrates the idea that: a. above-normal profits will be eliminated by decreases in demand due to high prices. b. losses will be eliminated by the innovation of new products. *c. above-normal profits will be eliminated by the entry of new firms into the industry. d. losses will be eliminated by firms decreasing their costs. 980. Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that: I. all competitive firms produce at the same marginal cost level. II. all competitive firms produce the same quantity. III. all competitive firms make normal profit. *a. I only b. I and II only c. II and III only d. All of the answers are correct. 981. When the size of the production is the most efficient: a. total cost is at the minimum. *b. average cost is at the minimum. c. marginal cost is at the minimum. d. fixed cost is at the minimum. 982. The elimination principle, a general feature of competitive markets, tells us that: a. below-normal profits may be permanent. b. above-normal profits may be permanent. *c. above-normal profits are temporary. d. above-normal profits result in firms exiting the industry. 983. Since no one can be sure that profits are commonplace, to earn above-normal profits an entrepreneur must: a. be eloquent. *b. innovate. c. rely on government subsidies. d. know economics. 984. The elimination principle: a. holds in all places and in all times. b. says that below-normal profits may be eliminated by the entry of new firms. c. depends on government protection. *d. says that above-normal profits are eliminated by entry and below-normal profits are eliminated by exit. 985. According to the elimination principle: a. above-normal profits are eliminated by exit. b. below-normal profits are eliminated by entry. c. there is a uniform rate of profit above the normal level in all competitive industries. *d. resources are always moving toward an increase in consumer welfare. 986. Stating that marginal revenue equals price is equivalent to saying that marginal cost equals price for the profit maximizing quantity. *a. True b. False 987. Stating that marginal revenue equals price is equivalent to saying that marginal revenue equals marginal cost at all levels of output. a. True *b. False 988. Explain two ways in which the competitive industry displays the actions of the invisible hand. Correct Answer: (1) Since each firm faces the same price and each firm is a profit maximizer, they each produce where P = MC = MR. But since they are all facing the same price, they also produce where P = MC1 = MC2 =. . . MCN, just as if a central planner planned it out. (2) A central planner would want to move resources to high-value industries. Self-interested firms mimic the actions of central planners by entering and exiting industries based on profit potential. 989. Explain how market entry affects the profit level of a competitive firm. Correct Answer: The student may give an explanation along the lines of the following—market entry increases supply, which causes price to fall. This will cause the competitive firm to face a lower price and the profit-maximizing quantity to fall. 990. Which of the following is not a reason that monopolies arise? a. patents b. economies of scale *c. excess competition d. control of natural resources 991. Which of the following statements is TRUE? a. Market power is the ability to raise price and sell more units of a good. *b. Market power may result from government regulations and patent protection. c. A monopoly is a firm without market power. d. All of the answers are correct. 992. When a pharmaceutical company discovers a new drug, patent law gives it market power by guaranteeing: a. partial ownership of the right to sell the drug for an unlimited number of years. b. partial ownership of the right to sell the drug for a limited number of years. *c. sole ownership of the right to sell the drug for a limited number of years. d. sole ownership of the right to sell the drug for an unlimited number of years. 993. GlaxoSmithKline owns a government grant of temporary monopoly rights on Combivir, the AIDS drugs, due to: *a. patents. b. laws preventing entry of competitors. c. economies of scale. d. innovation. 994. Which of the following statements about monopoly power is correct? a. Monopoly power is the power attained solely by single firm monopolists. *b. Monopoly power is the power to raise price above average cost without facing new entry of firms. c. Monopoly power is granted by the government to monopolists. d. Firms attaining monopoly power always set the price at the maximum. 995. Which of the following is always TRUE for monopolies? a. MR > D *b. P > MR c. P > AC d. TR > TC 996. For a monopolist, MR is always less than P because: *a. when a monopolist lowers the price to sell more units, it must lower the prices of all units sold. b. MR is always less than P regardless of what type of firm we are discussing. c. marginal revenue is always lower for the next unit sold. d. when a monopolist needs to sell more units, it must lower marginal revenue in order to do so. 997. What is the profit maximization condition for a monopolist? a. MR > MC *b. MR = MC c. AR = MC d. AR = D 998. Figure: Maximum Willingness to Pay Reference: Ref 13-1 (Figure: Maximum Willingness to Pay) Refer to the figure. What is the maximum price that the consumer is willing to pay for 100 units? *a. $100 b. $80 c. $75 d. $90 999. Figure: Maximum Willingness to Pay Reference: Ref 13-1 (Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit-maximizing quantity? a. 125 *b. 110 c. 100 d. 75 1000. Figure: Maximum Willingness to Pay Reference: Ref 13-1 (Figure: Maximum Willingness to Pay) Refer to the figure. What is the profit that the monopolist is earning? a. $10,000 b. $5,500 c. $4,500 *d. There is not enough information to answer the question. 1001. A profit-maximizing monopolist's total profit can be found by calculating: a. MR – MC. *b. TR – TC. c. AR – AC. d. MC – MR. 1002. When comparing a monopoly with a competitive industry: a. monopoly quantity and monopoly price will be lower than that of a competitive firm. b. monopoly quantity will be higher, and monopoly price will be lower, than that of a competitive firm. *c. monopoly quantity will be lower, and monopoly price will be higher, than that of a competitive firm. d. monopoly quantity and monopoly price will be higher than that of a competitive firm. 1003. (Figure: Monopolist Profits) Refer to the figure. Which of the following answers correctly indicates the profit earned by this monopolist, at the profit-maximizing quantity? Figure: Monopolist Profits a. the area A + B b. the area A – B c. the area (A + B) – MC *d. area A 1004. Table: Profit-Maximizing Monopolist Quantity Total Average Average Marginal Marginal Price ($) (Units) Cost ($) Cost ($) Revenue ($) Cost ($) Revenue ($) 11 6 17 10 7 19 9 8 21 8 9 23 7 10 25 Reference: Ref 13-2 (Table: Profit-Maximizing Monopolist) Refer to the table. When this monopolist sells 8 units, its average cost and marginal cost levels are: *a. $2.63 and $2 respectively. b. $2.56 and $4 respectively. c. $2.56 and $2 respectively. d. $2.63 and $4 respectively. 1005. Table: Profit-Maximizing Monopolist Quantity Total Average Average Marginal Marginal Price ($) (Units) Cost ($) Cost ($) Revenue ($) Cost ($) Revenue ($) 11 6 17 10 7 19 9 8 21 8 9 23 7 10 25 Reference: Ref 13-2 (Table: Profit-Maximizing Monopolist) Refer to the table. When this monopolist is producing 9 units: a. its marginal cost is below the marginal revenue level. b. its average revenue is greater than the price it receives for the product. *c. it could increase its profit by raising the price and selling fewer units. d. it is producing at the socially optimal level. 1006. Table: Profit-Maximizing Monopolist Quantity Total Average Average Marginal Marginal Price ($) (Units) Cost ($) Cost ($) Revenue ($) Cost ($) Revenue ($) 11 6 17 10 7 19 9 8 21 8 9 23 7 10 25 Reference: Ref 13-2 (Table: Profit-Maximizing Monopolist) Refer to the table. The profit-maximizing quantity for this monopolist is ________ units a. 7 *b. 8 c. 9 d. 10 1007. Table: Profit-Maximizing Monopolist Quantity Total Average Average Marginal Marginal Price ($) (Units) Cost ($) Cost ($) Revenue ($) Cost ($) Revenue ($) 11 6 17 10 7 19 9 8 21 8 9 23 7 10 25 Reference: Ref 13-2 (Table: Profit-Maximizing Monopolist) Refer to the table. For the quantity of 6 units, this monopolist's average cost and average revenue levels are: a. $2.71 and $10 respectively. *b. $2.83 and $11 respectively. c. $2.71 and $2 respectively. d. $2.83 and $2 respectively. 1008. If the demand curve for a firm is a straight line with negative slope, which of the following is the shortcut to finding the MR? a. The demand curve starts below the marginal revenue curve and cuts the marginal revenue curve halfway down its length. *b. The marginal revenue curve starts at the same point as the demand curve, and has twice the slope of the demand curve. c. The marginal revenue curve is parallel to the demand curve with the same slope. d. The marginal revenue curve starts at the same point as the demand curve and has a slope of 0. 1009. Which of the following is TRUE for monopolists? a. They charge a price below average cost, which guarantees above normal profits. b. Their marginal revenue increases with output. c. They maximize profits by producing at the midpoint of their demand curve. *d. They produce all units of output for which marginal revenue is greater than or equal to marginal cost. 1010. Suppose that a monopolist can sell five units of output at a price of $5 or six units of output at a price of $4. What is the marginal revenue of the sixth unit? a. $24 b. $49 *c. –$1 d. $4 1011. Monopoly power is best described as: a. the ability to charge the profit-maximizing price. b. the ability to produce the profit-maximizing output level. *c. the ability to earn economic profits without causing new firms to enter the market. d. the ability to produce where marginal revenue intersects halfway between the origin and the demand curve. 1012. Figure: Monopoly Profits Reference: Ref 13-3 (Figure: Monopoly Profits) Refer to the figure. What is the monopolist's price and output level? a. P = $3.00; Q = 40 *b. P = $16.50; Q = 40 c. P = $6.00; Q = 40 d. P = $6.00; Q = 80 1013. Figure: Monopoly Profits Reference: Ref 13-3 (Figure: Monopoly Profits) Refer to the figure. The monopolist earns a profit of: a. $630. *b. $420. c. $540. d. $480. 1014. Assuming the same cost structure, a competitive market produces ________ output at ________ prices than a monopoly market. a. less; lower *b. more; lower c. less; higher d. more; higher 1015. (Table: Monopolist) Refer to the table. What is the monopolist's profit-maximizing level of output? Table: Monopolist Output Total Revenue Marginal Cost 1 $20 $10 2 50 10 3 70 10 4 80 10 5 85 10 6 88 10 7 90 10 a. 3 *b. 4 c. 5 d. 6 1016. When a monopolist decreases the price of its good, consumers: a. buy the same amount of the good as before. *b. buy more. c. buy less. d. may buy more or less, depending on the price elasticity of demand. 1017. To maximize profit, the monopolist increases output: a. until it is using full manufacturing capacity. *b. until marginal cost is equal to marginal revenue. c. to the same amount it would produce if the firm was competitive, but maximizes price. d. as long as the marginal revenue curve is higher than the demand curve. 1018. A firm with monopoly power is able to set a markup price that is: a. lower than prices on similar goods sold by competitive firms. b. the same as the prices on similar goods sold by competitive firms. *c. higher than prices on similar goods sold by competitive firms. d. the maximum price a market participant will pay for similar goods. 1019. Typical evidence for the existence of market power would be market prices: a. below production costs. b. equal to production costs. *c. above production costs. d. varying with market supply and demand conditions. 1020. In a graph showing a straight-line market demand curve, the marginal revenue curve is: *a. a straight line that begins at the same point as the demand curve on the y-axis but with twice the slope. b. a straight line that begins at the origin but with twice the slope of the demand curve. c. the same straight line as the demand curve. d. There is not enough information to complete the statement. 1021. Which of the following statements is TRUE? *a. If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling more units at a lower price per unit. b. If the monopolist's marginal revenue is greater than its marginal cost, the monopolist can increase profit by selling fewer units at a higher price per unit. c. When a monopolist produces where MR = MC it always earns a positive economic profit d. A monopolist is guaranteed monopoly profits. 1022. A monopolist can sell 300 units of output for $29.00 per unit. Alternatively, it can sell 301 units of output for $28.25 per unit. The marginal revenue of the 301st unit of output is: *a. –$196.75. b. –$0.75. c. $196.75. d. $28.25. 1023. To maximize profit a monopolist will produce the level of output where: a. marginal revenue is equal to average cost. b. average revenue is equal to marginal cost. *c. marginal revenue is equal to marginal cost. d. average revenue is equal to average cost. 1024. If the quantity demanded for a hand-carved pineapple is 2 at a price of $16, and the quantity demanded will increase to 3 if the seller lowers the price to $14, what is the seller's marginal revenue from selling 3 units of pineapple? a. 8 b. 24 *c. 10 d. 14 1025. If a monopolist faces a straight-line downward sloping demand curve, the price of the units it sells is always: a. greater than the average revenue. b. equal to marginal revenue. *c. greater than marginal revenue. d. less than the average revenue. 1026. The marginal revenue curve is a straight line beginning at the same point on the: a. horizontal axis as the demand curve but with half of the slope. b. vertical axis as the demand curve but with half of the slope. c. horizontal axis as the demand curve but with twice the slope. *d. vertical axis as the demand curve but with twice the slope. 1027. GlaxoSmithKline (GSK) maximizes profit by producing a quantity of 800 pills where marginal cost is $2 and average cost is $4. Consumers are willing to pay as much as $10 per pill when the quantity supplied is 800 pills. What is the maximum amount of profit that GSK can earn under these conditions? a. $3,200 *b. $4,800 c. $6,400 d. $8,000 1028. Figure: Maximize Monopoly Profits Reference: Ref 13-4 (Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by charging a price equal to: a. P1. *b. P2. c. P3. d. P4. 1029. Figure: Maximize Monopoly Profits Reference: Ref 13-4 (Figure: Maximize Monopoly Profits) Refer to the figure. The monopolist will maximize its profit by producing at output equal to: a. Q1. *b. Q2. c. Q3. d. Q4. 1030. (Figure: Monopoly Markup) Refer to the figure. The monopolist's markup is: Figure: Monopoly Markup a. a – b. *b. b – d. c. d. d. a – d. 1031. Which of the following statements is correct? a. A monopolist's marginal cost is greater than its price. *b. The more inelastic the demand curve, the greater the monopolist's markup. c. The monopolist's profit is equal to P(Q – MR). d. The position of the marginal revenue curve on the y-axis reflects consumer demand elasticity. 1032. A consumer is ________ likely to be sensitive to price if the purchase ________ covered by insurance. a. more; is *b. less; is c. less; is not d. None of the answers is correct. 1033. A firm would prefer that its product demand curve is: a. perfectly elastic. b. elastic. *c. inelastic. d. horizontal. 1034. A monopoly is able to mark up the price above marginal cost: a. when the demand is more price-elastic. *b. when the demand is less price-elastic. c. when there is more marginal revenue per unit sold. d. at will regardless of price-elasticity. 1035. The “You can't take it with you” effect potentially increases market power for pharmaceuticals if consumers who are dying of disease are also: *a. more inclined to spend their money on medicine than to save it. b. more inclined to bequeath their money than spend it on medicine. c. relatively sensitive to the price of life-saving pharmaceuticals. d. relatively sensitive to how they spend money. 1036. With health insurance, medical treatments are paid by someone other than the patient, which will make consumers with serious diseases relatively: *a. insensitive to the price of pharmaceuticals. b. sensitive to the price of pharmaceuticals. c. insensitive to the premium of health insurance. d. sensitive to the premium of health insurance. 1037. Which of the following effects would generally make demand curves more inelastic? a. “You can't take it with you” effect b. “Other people's money” effect *c. Both effects d. Neither effect 1038. A monopolist can raise its price further above marginal cost, the more ______ its ______ is. a. elastic; demand *b. inelastic; demand c. elastic; supply d. inelastic; supply 1039. When the demand curve for the profit-maximizing monopolist's product is relatively inelastic: a. it cannot raise the price of the product above the marginal cost of the product. b. raising the product's price will lower the total revenue for the product. *c. the product does not have good substitutes. d. All of these choices are correct. 1040. A monopolist sells in two different markets and charges the same price of $10 in both markets. In Market A, the demand curve is described by Qd = 50 – 2P. In Market B, the demand curve is described by Qd = 60 – P. If the monopolist lowers prices by $1 in the market with the more elastic demand and raises prices by $1 in the market with the more inelastic demand curve, how much does its total revenue change by? *a. –$33 b. $459 c. $767 d. $308 1041. When a good has relatively few substitutes: a. demand for the good is elastic. *b. monopolists will tend to increase their markup for the good. c. monopolists will tend to decrease their markup for the good. d. producers will be able to “steal” all of the consumer surplus from consumers. 1042. (Figure: Optimal Output) Refer to the figure. The socially optimal level of output is: Figure: Optimal Output a. 40. b. 65. *c. 80. d. 100. 1043. Figure: Monopoly Markup Reference: Ref 13-5 (Figure: Monopoly Markup) Refer to the figure. The deadweight loss attributable to monopoly is: a. triangle abc. *b. triangle cef. c. square bcde. d. triangle adf. 1044. Figure: Monopoly Markup Reference: Ref 13-5 (Figure: Monopoly Markup) Refer to the figure. Consumer surplus under monopoly is represented by: *a. triangle abc. b. triangle cef. c. square bcde. d. triangle adf. 1045. Figure: Monopoly Markup Reference: Ref 13-5 (Figure: Monopoly Markup) Refer to the figure. Consumer surplus under competition is represented by: a. triangle abc. b. triangle cef. c. square bcde. *d. triangle adf. 1046. A monopolist increased output by 100 units, but cut prices by $20 to sell this additional output at $1,000 per unit. What is TRUE about marginal revenue? a. MR totals $2,000 b. MR totals $100,000 c. MR totals –$2,000 *d. MR cannot be calculated with the information given. 1047. Under monopoly, the portion of the outgoing consumer surplus that is not transferred to the monopoly firm or still considered consumer surplus is: *a. known as deadweight loss. b. the key to making the moral case against monopoly. c. transferred to the government. d. available to third parties who benefit from sales of the monopolist's output. 1048. The economic inefficiency of a monopolist can be measured by the: a. excess profit generated by monopoly firms. b. poor quality of service offered by monopoly firms. c. number of consumers who are unable to purchase the product because of its high price. *d. deadweight loss involved relative to a competitive firm. 1049. Which of the following statements is TRUE? *a. Consumer surplus under competition is greater than consumer surplus under monopoly. b. Producer surplus under competition is greater than producer surplus under monopoly. c. Total surplus under monopoly is greater than total surplus under competition. d. Deadweight loss is greater in markets where monopoly power is less significant. 1050. High prices charged by monopolists will cause the monopolists': a. gains to exceed the consumer losses. *b. gains to be less than the consumer losses. c. losses to exceed the consumer gain. d. losses to be less than the consumer gain. 1051. (Figure: Deadweight Loss) Refer to the figure. Deadweight loss caused by monopoly pricing is represented by the area: Figure: Deadweight Loss a. abd. b. acdf. c. bcdf. *d. def. 1052. Which of the following statements is TRUE? I. Competitive markets channel the self-interest of business leaders toward social prosperity. II. Political structures often channel self-interest toward social destruction. III. Many monopolies are government-created. a. I and III b. I and II c. II and III *d. I, II, and III 1053. In a purely monopolized environment where each monopolist succeeds at raising its price, the result would be: a. demand is lower for all goods and profits fall. *b. higher prices spread throughout the economy resulting in increased poverty. c. higher prices lead to increased competition. d. wages increase as well, leading to higher incomes across the population. 1054. Which of the following statements is TRUE? *a. Monopolized economies lead to more poverty and less economic growth. b. Competitive market economies lead to higher prices for everyone. c. Social prosperity is typically the result of government-created monopolies. d. Business leaders in the United States are more self-interested than business leaders in lesser-developed nations. 1055. One of the great lessons of economics is that: a. higher prices lead to less demand and increased innovation by firms. b. monopolies may increase efficiency if properly constructed by the government. *c. good institutions channel self-interest toward social prosperity, whereas poor institutions channel self-interest towards social destruction. d. corruption may increase efficiency if it leads to increased innovation. 1056. Suppose that the government decided to reduce pharmaceutical patent protection by requiring companies to sell their drugs at marginal cost. What are the likely consequences of such a policy? a. There would be an increase in consumer surplus. b. The deadweight loss in the market would decline. c. The future supply of new drugs would decrease. *d. All of these statements are correct. 1057. In a monopoly market: a. the lack of competition causes the price of the product to equal average cost. b. a firm maximizes profits by producing the level of output that minimizes average cost. c. the additional revenue from selling one more unit of output usually is greater than the price. *d. the lure of above-normal profits may give a firm an incentive to develop new products and technologies. 1058. If a pharmaceutical company discovering a new drug is not granted a patent to retain its monopoly power on the drug: a. innovation in the pharmaceutical industry will increase. b. the number of new drugs is likely to increase. c. more pharmaceutical companies will engage in discovering new drugs. *d. research and development in discovering new drugs will decrease. 1059. Which of the following statements is correct? a. Patents are one way of preventing monopoly. b. If pharmaceutical patents are enforced, the number of new drugs will decrease. *c. Monopoly profit encourages firms to research and develop new drugs. d. Competition creates incentives for the invention of new drugs. 1060. Modern theories of economic growth emphasize that monopolies: a. are always detrimental to economic growth due to the deadweight loss they inflict on markets. b. may be beneficial to growth in less-developed countries, but only lead to higher prices in well-developed market economies. *c. may sometimes be necessary for economic growth. d. only exist because of corruption and government interference in markets. 1061. Many people argue that the U.S. government should control pharmaceutical prices. What would most likely happen as a result of this policy? *a. Lower prices would mean lower profits and hence less incentive for firms to engage in research and development of new drugs. b. Government price controls on pharmaceuticals would lead to an increased standard of living. c. The number of new drugs would increase as firms would compete for new markets. d. Demand for pharmaceuticals would increase as a result of the lower prices. 1062. Which of the following statements is correct? Once a patent expires: I. monopoly profits increase. II. deadweight loss is eliminated. III. generic equivalents appear quickly. a. I and III only b. III only *c. II and III only d. I and II only 1063. Nobel Prize–winning economic historian Douglass North argues that: a. monopolies have been the leading cause of slow growth in developing nations. *b. economic growth was slow until patent laws were created to protect innovation. c. economic growth would improve if the government created more natural monopolies. d. corruption may actually lead to increases in innovation and development of new products. 1064. One way that has been suggested to eliminate deadweight loss from monopoly power without reducing incentives to innovation is to: a. have government pay monopolists to reduce their output. *b. have government pay monopolists to acquire the patent rights. c. have government eliminate the patent system. d. require that the patent-owners allow competitors to use their innovations. 1065. Economist Michael Kremer offered a unique solution to the problem of deadweight loss created by monopolies that have control of an innovation. What solution did he propose that would leave the drive to innovate uncompromised? a. The government should buy out the innovation created by the monopoly. b. The government should sell a patent to the monopoly that creates the innovative technology. *c. The government should buy out the rights of the patent from the monopoly. d. The government should place a price control on the monopoly's product. 1066. Which of the following correctly defines a monopoly that has economies of scale? a. a single firm operating in a market *b. a single firm that can supply the market at a lower cost than two or more firms c. a single firm that controls the production of a natural resource d. a single firm that produces the efficient and socially optimal quantity in a market 1067. A monopolist's TC function and MC functions are as follows: TC = 20 + 4Q and MC = 4. This monopolist can be said to have which of the following characteristics? a. It must be producing at the socially optimal level of output. *b. It is a natural monopoly. c. The marginal cost curve rises at an increasing rate. d. It is one of two firms in the industry. 1068. When a regulated monopolist maximizes social surplus, it produces at an optimal Q where: *a. P = MC. b. MR = MC. c. D = AC. d. AR = AC. 1069. When a monopolist maximizes social surplus, it produces at an optimal Q where: *a. AR = MC. b. MR = MC. c. D = AC. d. AR = AC. 1070. Figure: Regulated vs Unregulated Monopolist Reference: Ref 13-6 (Figure: Regulated vs Unregulated Monopolist) Refer to the figure. Calculate consumer surplus when this monopoly is regulated. *a. $6,400 b. $2,800 c. $3,600 d. $400 1071. Figure: Regulated vs Unregulated Monopolist Reference: Ref 13-6 (Figure: Regulated vs Unregulated Monopolist) Refer to the figure. Calculate the change in consumer surplus from an unregulated monopoly to a regulated monopoly. a. $6,400 *b. $2,800 c. $400 d. $3,600 1072. Figure: Regulated vs Unregulated Monopolist Reference: Ref 13-6 (Figure: Regulated vs Unregulated Monopolist) Refer to the figure. Calculate the deadweight loss when this monopoly goes unregulated. a. $6,400 b. $2,800 c. $850 *d. $400 1073. Natural monopolies: a. produce the optimal quantity of output, unlike other monopolies. *b. exist when one firm can produce the market output at a lower cost than two or more firms. c. generally experience large diseconomies of scale, leading to production inefficiencies and work stoppages. d. face market demand curves that are perfectly elastic. 1074. Which of the following statements is TRUE? I. The deadweight loss from a monopoly refers to the loss in consumer surplus that is captured by the monopolist as profit. II. According to theory, if the government sets a natural monopolist's price equal to marginal cost, the socially optimum quantity of output will result. III. Deregulation of cable television caused higher prices and fewer programming choices for customers. a. I only *b. II only c. I and III only d. I, II, and III 1075. Which of the following statements is TRUE? I. To maximize profit, a monopolist produces where P = MC. II. Economies of scale are likely important for subways and cable TV. III. Since producer surplus includes large monopoly profits, total surplus is higher in monopoly markets. a. I only *b. II only c. II and III only d. I, II, and III 1076. Monopolies can arise naturally when: a. a monopoly firm requires the use of natural resources to produce its product. *b. a large firm can produce at lower cost than other small firms. c. the monopolist product is sold in its natural state, such as water or crude oil. d. the monopolist product is used to produce other goods. 1077. If the economies of scale are large enough, average cost for a natural monopoly can be: a. higher than the average cost under competition. *b. lower than the average cost under competition. c. higher than the price of the natural monopoly. d. higher than the price under competition. 1078. One way to take advantage of economies of scale and to avoid the market power of a natural monopoly is through: *a. price control. b. privatizing the monopoly. c. breaking up the monopoly into several smaller companies. d. penalty. 1079. Economic theory suggests that a natural monopoly should be: a. eliminated whenever it arises. *b. regulated to take advantage of economies of scale. c. left alone to operate with excess capacity. d. taken over by the government. 1080. A natural monopoly occurs when: a. the product is sold in its natural state (such as water or diamonds). *b. there are economies of scale over the relevant range of output. c. the firm is characterized by a rising marginal cost curve. d. production requires the use of free natural resources, such as water or air. 1081. The stated reason for resorting to regulation of public utilities rather than promoting competition through antitrust is that the industry in question is believed to be a: a. profit-maximizing monopoly. *b. natural monopoly. c. revenue-maximizing monopoly. d. producer of externalities. 1082. Deregulation of cable TV rates led to: *a. higher prices for cable TV. b. lower quality of programming. c. fewer stations offered to consumers. d. All of the answers are correct. 1083. Today anything beyond the most basic tier cable service is predominantly free of regulation, and cable companies are free to charge a market rate for their services. As a result: *a. prices have risen since deregulation, but so have the number of channels and the quality of programming. b. prices have risen since deregulation, and the number of channels and the quality of programming have declined. c. competition has eliminated many of the excess profits previously enjoyed by cable companies. d. fewer people now sign up for cable television service. 1084. Cable deregulation has ________, whereas deregulation of electricity has ________. a. resulted in more inefficiency; increased efficiency in the market b. resulted in lower prices; resulted in higher prices *c. worked well; not worked well d. resulted in less innovation; resulted in more innovation 1085. Without competition, there is a tendency for a government-run or regulated monopoly to: a. keep prices constant. *b. become inefficient by passing higher costs on to consumers. c. find ways to decrease costs so as to increase profits. d. become a natural monopoly. 1086. Which of the following statements is TRUE? I. Government ownership is a potential solution to the natural monopoly problem. II. Regulated monopolies have little incentive to reduce costs, as they simply pass the higher costs on to consumers III. Government ownership of utilities worked well for several decades. a. I only b. II only c. I and II only *d. I, II, and III. 1087. California's electricity problems were NOT caused by: a. government price floors that made the demand for electricity quite inelastic. b. electricity generating companies exercising market power (i.e., restricting output in an effort to raise price and profit). *c. the expiration of patent protection on special equipment used to produce hydro-generated electricity. d. All of the answers are correct. 1088. California's electricity crisis as illustrated in the chapter is partially explained by the fact that: *a. generators of electric power gain market power when demand increases. b. generators of electric power gain market power when supply increases. c. generators of electric power gain market power when demand decreases. d. generators of electric power lose market power when demand increases. 1089. California's “perfect storm,” following the deregulation of its electricity industry, eventually resulted in an incredible rise in electricity prices. Which of the following is NOT a reason why this occurred? *a. innovations in production, which led to lower average costs of producing electricity b. higher demand for electricity due to the hot summer c. inadequate production by California's outdated electricity system d. low snowfalls the previous winter, which led to compromised production of hydro-electric power in the West 1090. Monopolies may be created when one firm owns an input that is difficult to duplicate and the: a. demand for the product is elastic. *b. demand for the product is inelastic. c. supply of the product is elastic. d. supply of the product is inelastic. 1091. Apple enjoys an extensive monopoly power in the market for MP3 players since Apple's iPod: a. has many competitors. b. is more expensive. *c. is hard to duplicate. d. is protected from competition. 1092. Which of the following is NOT a source of monopoly power? a. laws preventing entry of competitors b. economies of scale c. innovation *d. inelastic demand for the product 1093. Saudi Arabia has market power in the world's oil markets because: a. it has innovated technologies in oil production that other oil producing countries do not possess. b. it is able to prevent entry of potential competitors in oil production. c. its oil output is known for its prestige and quality. *d. it controls a significant fraction of the world's oil supply. 1094. Which of the following is NOT a source of monopoly power? a. innovation b. patents c. economies of scale *d. marketing 1095. An example of a monopoly would be: a. a gasoline service station in Los Angeles. *b. a sole provider of electrical power in a city. c. a grocery store in Chicago. d. Walmart. 1096. There are three reasons why HIV drugs are priced above cost: (1) monopoly power, (2) the “people before profits” effect, and (3) the “use it or lose it” effect a. True *b. False 1097. A monopoly can be defined as a single firm in a given market. *a. True b. False 1098. The primary reason that AIDS drugs are priced well above cost is monopoly power. *a. True b. False 1099. A monopolistic industry will have lower output and higher prices than a competitive industry. *a. True b. False 1100. A monopoly that is unregulated always causes deadweight loss. *a. True b. False 1101. Monopolies and competitive firms pursuing profit maximization both choose to produce at the quantity where marginal revenue equals marginal cost. *a. True b. False 1102. When any firm charges a higher price, fewer of its goods are sold. *a. True b. False 1103. For a monopoly, marginal revenue is always greater than the price it charges for its good. a. True *b. False 1104. For a monopoly, marginal revenue is often less than the price it charges for its good. *a. True b. False 1105. A profit-maximizing monopolist chooses the output level where MR = MC and chooses the corresponding price from the marginal revenue curve. a. True *b. False 1106. A profit-maximizing monopolist always sets a price on the elastic segment of the demand curve. *a. True b. False 1107. Monopoly is the most common form of market organization. a. True *b. False 1108. One source of monopoly power is a patent granted by government. *a. True b. False 1109. To maximize profit a monopoly firm increases output until marginal revenue exceeds the marginal cost. a. True *b. False 1110. Monopolies are bad because they convert deadweight losses through additional sales and profit. a. True *b. False 1111. A firm will attain more monopoly power as demand for its product becomes more elastic. a. True *b. False 1112. The more inelastic the demand curve for the monopolist's product, the higher the price that can be charged for the good. *a. True b. False 1113. For a monopoly, consumer surpluses are transferred to the monopolist as profit. a. True *b. False 1114. Deadweight loss is present in both competitive and monopoly markets. a. True *b. False 1115. If pharmaceutical patents are not enforced, the number of new drugs will decrease. *a. True b. False 1116. Patents may be beneficial in that they encourage firms to innovate and develop new products. *a. True b. False 1117. Michael Kremer's patent buyout proposal is designed to lower drug prices without decreasing the incentive to innovate and produce new drugs. *a. True b. False 1118. The trade-off for natural monopolies weighs the benefits of economies of scale against the costs of deadweight loss. *a. True b. False 1119. The trade-off for natural monopolies weighs the benefits of economies of scale against the loss of consumer surplus. *a. True b. False 1120. Monopolies may arise from economies of scale, government regulation, patent protection, and control over key inputs that are difficult to duplicate. *a. True b. False 1121. Explain how a profit-maximizing monopolist chooses its level of output and the price of its goods. Correct Answer: The profit-maximizing monopolist chooses the level output where marginal cost is equal to marginal revenue; it then selects the price that corresponds to that output level given its demand curve. 1122. Explain how a firm can use its monopoly power to earn above-normal profits. Correct Answer: To maximize profit a firm should produce until marginal revenue is equal to marginal cost. Since a firm with monopoly power faces a demand curve that slopes downward, the firm's marginal revenue curve begins at the same point on the vertical axis as the demand curve but with twice the slope. Namely, marginal revenue is always less than the price. Accordingly, unlike a competitive firm, a monopolist is able to use the market power embodied in its downward sloping demand curve, i.e., relatively fewer substitutes for which people are willing pay higher prices, to increase price and earn above-normal profit. 1123. A monopolist has a demand function that is described by Qd = 100 – P. The monopolist's cost function is simply described by TC = 10 + 2Q. Therefore MC is constant at 2. The marginal revenue function for the monopolist is 100 – 2P. What is the profit-maximizing price and quantity for the monopolist? What is the profit that the monopolist earns at this output level? Correct Answer: The profit-maximizing price and quantity occur where MR = MC. Thus this occurs where 100 – 2P =2. Therefore 98 = 2P, and P = $49. When P = $49, we can recover the profit-maximizing quantity by substituting the P into the demand function. This yields a Q of 51. To figure out the profit associated with this price/quantity combination, we need to find TR and TC. TR = P × Q, and therefore this is $49 × 51 = $2,499. TC can be found by substituting in the profit-maximizing Q into the cost function as follows: TC = 10 + 2(51) = $112. Profit is therefore $2,499 – $112 = $2,387. 1124. A monopolist has a demand function that is described by Qd = 100 – 2P. The monopolist's cost function is simply described by TC = 30 + 2Q. Therefore MC is constant at 2. The marginal revenue function for the monopolist is 100 – 4P. What is the profit-maximizing price and quantity for the monopolist? What is the profit that the monopolist earns at this output level? Correct Answer: The profit-maximizing price and quantity occur where MR = MC. Thus this occurs where 100 – 4P =2. Therefore 98 = 4P, and P = $24.50. When P = $24.50, we can recover the profit-maximizing quantity by substituting the P into the demand function. This yields a Q of 51. To figure out the profit associated with this price/quantity combination, we need to find TR and TC. TR = P × Q, and therefore this is $24.50 × 51 = $1,249.50. TC can be found by substituting in the profit-maximizing Q into the cost function as follows: TC = 30 + 2(51) = $132. Profit is therefore $1,249.50 – $132 = $1,117.50. 1125. (Figure: Monopoly Revenue) Refer to the figure. A profit-maximizing monopolist faces the market environment described by the figure shown. What is the monopolist's revenue? Figure: Monopoly Revenue Correct Answer: The calculations are as follows. (The student would get the numbers from the diagram.) TR = P × Q. Q can be found where MR intersects MC—this occurs where Q = 117. TR = $28 × 117 = $3,276. 1126. A monopolist's demand curve is described by the equation Q = 50 – 0.5P. The marginal revenue curve is described by the equation MR = 50 – Q. Marginal cost per unit is constant at $5, and there are no fixed costs to be considered here. What is the monopolist's profit-maximizing quantity and profit level? Show all your calculations. Correct Answer: The profit-maximization condition holds where MR = MC Thus 50 – Q = 5 Thus the profit-maximizing Q = 45. At Q = 45, we can find the price the monopolist will charge by solving for P using the demand equation. 45 = 50 – 0.5 × P yields P = 10. TR = P × Q, and so total revenue for the monopolist is 45 × 10 = 450. The monopolist enjoys a profit as follows at this Q: Profit = TR – TC TR = P × Q = 45 × 10 = 450 Profit = TR – TC = 450 – (45 × 5) = 450 – 225 = 225 Thus the monopolist enjoys a profit level of $225. 1127. Graphically depict a monopolist enjoying abnormal profits. Correct Answer: The profit can be found by TR – TC. TR = P* × Q* TC = AC × Q* Profit is therefore the area of (B + A) – B. Profit is therefore area A. 1128. Graphically show that a monopolist facing a market with a relatively inelastic demand curve will impose a higher markup than it will in a market with a relatively elastic demand curve. Explain this behavior using the “You can't take it with you” effect. Correct Answer: Monopoly markup will be higher if the “You can't take it with you” effect is significant. If you are dying of disease, what better use of your money do you have than spending it on medicine that might save your life? If you are more willing to spend your money on pharmaceuticals, your demand for pharmaceuticals will be more inelastic, and therefore, monopoly markup will be higher. 1129. What is the deadweight loss due to profit-maximizing monopoly pricing under the following conditions: the price charged for goods produced is $30. The intersection of the marginal revenue and marginal cost curves occurs where output is 300 units and marginal revenue is $10. The socially efficient level of production is 400 units at a price of $20. The demand curve is linear and downward sloping and the marginal cost curve is linear and upward sloping. Correct Answer: See the following graph 1130. Using a well-labeled diagram, show: a. the profit-maximizing price and quantity of output for a monopolist. b. the area representing the deadweight loss. c. the price that the government regulators would set to achieve the socially optimal level of output. Correct Answer: a. The monopolist's profit-maximizing price and output level are where MR = MC at Q* and P*. b. The shaded triangle represents the deadweight loss. c. Government regulators would set the price equal to marginal cost, P**. 1131. From an economist's perspective, what are the good and bad things associated with monopoly? Since patents are a source of monopoly power, should the government eliminate or reduce patent protection? Correct Answer: Economists are not concerned about the high prices charged by monopolists or their high profits, since this just represents a transfer from consumers to sellers—and from a scientific standpoint it is not clear whether consumers or sellers are more deserving. However, economists are concerned about the social or deadweight loss associated with monopolies. The deadweight loss results because monopolies fail to produce all units of output where the marginal benefits to the consumers are greater than the marginal costs of production. Monopolies are not interested in producing the socially optimal level of output (MB = MC), only the output level that maximizes profit (MR = MC). The good thing about monopolies is that the lure of monopoly profit provides incentives for firms to innovate and develop better products. Monopolies bring about deadweight losses; but without monopolies, certain products may have never been produced. Monopoly profit may also be useful as a source of funds for further research and development. Reducing patent protection will lead to lower prices today, but the trade-off is fewer products in the future. Firms will be reluctant to spend hundreds of millions of dollars bringing a new drug to the market if they are forced, because of a lack of patent protection, to sell their drugs at the average cost of production. A lack of patent protection means that the firm would not be able to generate a positive return on its investment, a disincentive to the development of new drugs. Furthermore, there is evidence that protecting private property rights through patent protection increases economic growth. According to Douglass North, the failure to protect innovations was a major reason for the slow technological change of the past. 1132. (Figure: Monopoly Demand) Refer to the figure. The demand curve for a profit-maximizing monopolist can be described by the equation Q = 200 – P. The marginal revenue curve for the monopolist is described by the equation MR = 200 – 2Q. The marginal cost associated with producing this good is constant at $50. Calculate the consumer surplus that consumers enjoy in this market. Figure: Monopoly Demand Correct Answer: The calculations are as follows: The student needs to be able to find the quantity associated with Y to answer this question. The firm is a profit-maximizing monopolist, and so the Q of interest will occur where MR = MC, and this would be at Y. When MR = MC, 200 – 2Q = 50. Therefore 150 = 2Q and Q = 75. Therefore the Q at Y is 75. The price ($Z) associated with the profit-maximizing Q can be recovered by substituting Q = 75 into the demand equation: Q = 200 – P 75 = 200 – P Therefore, the P is $125. Consumer surplus will be the area of the triangle formed at Z, and this is 1/2 × ($200 – $125) = × $75 = 1/2 × $75 × $75 = $2,812.50. 1133. There have been a number of states in the United States deregulating the generation of electricity. Using your understanding of monopolies, discuss the likely effect of deregulation on prices in the industry. Correct Answer: If deregulation leads to increased competition then production and prices should move toward the competitive equilibrium. If deregulation does not lead to increased competition then the monopoly production and price outcome is likely. The success of deregulation movements hinges on their ability to use markets to promote competitive market outcomes. 1134. A museum in Russia has two entrances: one for locals (written in Russian) and one for tourists (written in English). People who enter through the entrance written in Russian will end up paying 81.93 Rubles ($3.00). English-speaking tourists will use the entrance written in English, but they will end up paying 409.67 Rubles ($15.00). This practice is an example of: a. price manipulation. b. price exploitation. c. international price mediation. *d. price discrimination. 1135. Price discrimination can be defined as: a. selling different products to the same consumers in the same market. b. selling the same product in two different markets. *c. selling the same product at two different prices in two different markets. d. exporting goods to foreign countries. 1136. The chapter opens with a story about GlaxoSmithKline (GSK) and Combivir, the anti-AIDS drug. What was one of the reasons that GSK was selling Combivir for such low prices in Africa as compared to Europe? a. It is much cheaper to produce the drug in Africa than in Europe. b. Government regulations in Europe forced it to charge higher prices. c. African governments imposed price ceilings. *d. Lower prices were charged for humanitarian reasons. 1137. After a severe hurricane in South Carolina, the price of electric generators quadrupled. People living outside of South Carolina purchased electric generators in their home states and drove them to South Carolina to sell at a much higher price. What is this an example of? *a. arbitrage b. perfect price discrimination c. price gouging d. marginal-price geography 1138. Pfizer sells Atgam in New Zealand for $14/pill and Brazil for $8/pill. This implies that the demand curve in New Zealand must be ________ than in Brazil. *a. more inelastic b. less inelastic c. more elastic d. closer to perfectly elastic 1139. Which of the following statements is FALSE? I. If the demand curves are different, it is more profitable to set a single price than different prices in markets. II. To maximize profit the firm should set a lower price in markets with more elastic demand. III. The presence of arbitrage makes it easy for a firm to price discriminate. a. I and II only b. II only c. III only *d. I and III only 1140. (Figure: Market for Lithotripters) Refer to the figure. Suppose that a German manufacturer can sell its kidney lithotripter in two markets: Country X and Country Y. If this firm is interested in maximizing profits, it should set a price of ________ in Country X and ________ in Country Y. Figure: Market for Lithotripters a. d; z b. b; d *c. b; z d. a; d 1141. Arbitrage is ________ in one market and ________ in another market. a. selling low; buying higher b. selling high; buying higher c. buying high; selling lower *d. buying low; selling higher 1142. An important lesson of price discrimination is that: a. price discrimination will always lead to lower profits in one of the two markets. b. firms can increase profits by differentiating their product attributes. c. all firms can perfectly price discriminate. *d. it only increases profits when the demand curves in two different markets are not the same. 1143. Figure: Monopolist Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—what price should the monopolist charge in Market A? a. $5 *b. $10 c. $7 d. any price higher than $10. 1144. Figure: Monopolist Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—what price should the monopolist charge in Market B? *a. $9 b. $5 c. $7 d. any price higher than $5. 1145. Figure: Monopolist Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—through the process of price discrimination, how much profit is the monopolist making in Market A? a. $270 *b. $450 c. $830 d. $627.50 1146. Figure: Monopolist Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—through the process of price discrimination, how much profit is the monopolist making in Market B? a. $260 b. $780 c. $1,040 *d. $520 1147. Figure: Monopolist Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—if the monopolist were to charge a uniform price PU between the two markets, that price would fall in what range? a. $5 < PU < $9 b. $5 < PU < $10 *c. $9 < PU < $10 d. $7 < PU < $10 1148. Figure: Monopolist Reference: Ref 14-1 (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—if the monopolist were to charge a uniform price of $10 in both markets, how much profit would the monopolist lose? a. $234.75 b. $146.25 *c. $48.75 d. $97.50 1149. Figure: Price Discriminating Monopolist Reference: Ref 14-2 (Figure: Price Discriminating Monopolist) Refer to the figure. In order to profit maximize, the monopolist should: *a. charge a price of $16 in Market A, and $10 in Market B. b. charge a uniform price of $6 in both markets. c. charge a price of $14 in Market A, and $9 in Market B. d. charge a price of $16 in Market A, and $6 in Market B. 1150. Figure: Price Discriminating Monopolist Reference: Ref 14-2 (Figure: Price Discriminating Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets—Market A and Market B—if the monopolist were to charge a uniform price PU between the two markets, that price would fall in what range? a. $6 < PU < $14 b. $6 < PU < $10 *c. $10 < PU < $16 d. $10 < PU < $14 1151. Price discrimination is used when a seller faces different demand curves in different markets because: a. no other pricing methods are feasible. b. the practice eliminated waste. *c. profits are greater than selling at a single price. d. profits are less than when selling at monopoly prices. 1152. Which of the following is NOT a principle of price discrimination? a. It is more profitable to set different prices in markets with different demand curves than a single price that covers all markets. *b. To maximize profit the firm should set a higher price in markets with more elastic demand. c. To maximize profit the firm should set a higher price in markets with more inelastic demand. d. Arbitrage makes it difficult for a firm to set different prices in different markets thereby reducing the profit from price discrimination. 1153. Price discrimination is defined as selling: a. the same products at the same prices to the same customers. b. different products at the different prices to the same customers. *c. the same product at different prices to different customers. d. different products at the same prices to different customers. 1154. To maximize profit the monopolist should set a: a. lower price in markets with less elastic demand. b. lower price in markets with more inelastic demand. c. higher price in markets with more elastic demand. *d. higher price in markets with more inelastic demand. 1155. To maximize profit GlaxoSmithKline sets a higher price for Combivir in Europe than in Africa because demand curve in Africa is: a. lower and more inelastic. *b. lower and more elastic. c. higher and more inelastic. d. higher and more elastic. 1156. Which of the following conditions would prevent a firm from setting different prices in different markets? *a. possibility of arbitrage for buyers between different markets b. law enforcement preventing smuggling from occurring c. government intervention forcing the firm to reduce the level of output d. government imposition of a price ceiling 1157. Which of the following is the fundamental condition that would allow a firm to practice price discrimination? a. All customers possess identical willingness to pay for the product. b. The good can be purchased at one market and resold at another market. *c. There are two or more different demand curves for the good. d. Demand for the good is high. 1158. Which of the following is the main principle behind price discrimination? a. If the demand curves are different, it is more profitable to set different prices in different markets than a single price that covers all markets. b. To maximize profit the firm should set a higher price in markets with more inelastic demand. c. Arbitrage makes it difficult for a firm to set different prices in different markets thereby reducing the profit from price discrimination. *d. All of the answers are correct. 1159. Which of the following statements is TRUE regarding arbitrage? *a. It is easier to prevent arbitrage for some products than for others. b. The U.S. Constitution prevents the government from engaging in arbitrage prevention. c. Arbitrage may increase the profits for firms, depending on the elasticity of demand in the market. d. Firms will still be able to price discriminate across markets even when arbitrage is present. 1160. Why is it important for firms practicing price discrimination to prevent arbitrage of their product? a. Arbitrage is unrelated to firms' profits since the products are still being sold. b. Smugglers alter product quality as they pass from market to market, hence harming the reputation and future profits of firms. *c. Arbitrage reduces the profits from price discrimination for firms, and increases profits for smugglers. d. Arbitrage increases deadweight loss in the market. 1161. Rohm and Haas were considering: *a. putting arsenic in its plastics to prevent it from being resold to dentists. b. dyeing all of its women's underwear pink so that fewer men would buy it. c. charging the Pentagon 500 times the going market price for Styrofoam cups. d. declaring bankruptcy to sell its granite countertops below the government mandated minimum price. 1162. Which of the following lists of products and services would be the most resistant to arbitrage? a. gasoline, movie tickets, consumer bleach *b. dental root canals, haircuts, and cosmetic surgery c. third party car stereos, full-service restaurant meals, and novels d. computer software, computer hardware, and tickets to sporting events 1163. One would expect more arbitrage to occur between two markets if: a. the products are differentiated in terms of their fundamental characteristics. b. the products have built in tracking mechanisms that enable the discovery of the distributors. c. the demand curves in the two markets are essentially the same. *d. products are non-differentiated and the different markets have good transportation networks between them. 1164. Arbitrage prevention is: a. always easy to achieve. b. not necessary to practice price discrimination. *c. easier in the case of selling services. d. easier in the case of selling goods. 1165. Which of the following would be an effective method for firms to ensure profit from price discrimination when the possibility of arbitrage exists? a. set a single price for all markets b. supply products only to one market *c. make products sold to each market have an exclusive feature d. request law enforcement to eliminate the possibility of arbitrage 1166. For price discrimination to work, the young should ________ than/to the old. a. be charged less for a product b. be charged more for a product *c. sometimes be charged more and sometimes charged less d. be charged a price equal to the marginal cost 1167. How did IBM price discriminate its laser printers? a. IBM provided special financing terms to different customers. *b. IBM offered two different printers: a fast printer and a slow printer. c. IBM offered printers in different colors. d. IBM charged seniors lower prices than businesses. 1168. Airlines try to differentiate their customers by willingness to pay based on: *a. how long in advance a person books their flight. b. a person's weight. c. the ethnicity of a person's last name. d. All of the answers are correct. 1169. Insurance companies charge men a higher price for automobile insurance than women. The costs of insuring men are higher because they get into more accidents than do women. Which of the following statements is TRUE? a. The insurance companies are practicing price discrimination. *b. The insurance companies are not practicing price discrimination. c. The insurance companies are practicing inter-temporal price discrimination. d. The insurance companies are using a bundling/tying strategy. 1170. Which of the following is an example of price discrimination? a. You pay less for a movie ticket if you show your student ID. b. Business travelers pay more for airline tickets. c. Faculty members pay less for computers they order on Apple's Web site. *d. All of the answers are correct. 1171. Which of the following is NOT an easy way to split markets in order to practice price discrimination? a. using age of customers b. releasing different versions of a product over time *c. relying on the self-reported marital status of customers d. using characteristics that are correlated with a consumer's willingness to pay 1172. Which of the following does not practice price discrimination on a regular basis? a. universities *b. farmers c. movie theaters d. airline companies 1173. In general, price discrimination exists because: a. higher prices are required when costs are higher. b. lower prices are possible when profits are not a goal of the entrepreneur. *c. higher prices are charged because some customers are willing to pay more. d. lower prices encourage arbitrage. 1174. To maximize profit using the practice of price discrimination, firms set different prices according to the characteristics that are correlated with buyers': a. age. b. purpose of consumption. c. income. *d. willingness to pay. 1175. Which of the following is a real example of price discrimination? a. Airlines set different prices for business people and vacationers. b. Publishers charge high prices on hardback and low price on paperback books. c. IBM's regular version of a printer that prints at 10 pages per minute is more expensive than the Series E that prints five pages per minute. *d. All of these examples are real. 1176. A subtle form of price discrimination is for firms to offer: a. the same version of a product for the purpose of separating customers into different markets. b. the same version of a product for the purpose of separating customers into the same market. *c. different versions of a product for the purpose of separating customers into different markets. d. different versions of a product for the purpose of separating customers into the same market. 1177. Which of the following is an example of price discrimination? a. value meals at fast-food restaurants *b. senior citizen discounts c. tax-exempt status for non-profit organizations d. holiday sales at retail stores 1178. Which of the following is NOT an example of price discrimination? a. children's menus in restaurants b. peak and non-peak rates for cell phone usage *c. product innovations leading to lower prices d. standby seats sold last minute by airlines 1179. A top-performing used-car salesman is able to sell his cars to each customer at their maximum willingness to pay, a practice known as: a. insightful pricing. b. pricing market-to-market. *c. perfect price discrimination. d. price tying. 1180. Figure: PPD Reference: Ref 14-3 (Figure: PPD) Refer to the figure. A firm that perfectly price discriminates will sell: a. a units of output. *b. b units of output. c. c units of output. d. d units of output. 1181. Figure: PPD Reference: Ref 14-3 (Figure: PPD) Refer to the figure. Which of the following statements best explains why a firm that perfectly price discriminates would sell additional units beyond a units of output? a. A firm will not sell beyond a units of output. The firm will only sell exactly a, as it is the profit-maximizing rate of output for this firm. *b. The marginal cost is less than consumers' willingness to pay for these units. c. The marginal cost is greater than consumers' willingness to pay for these units. d. A firm will not sell beyond a units of output, since the marginal cost is greater than the marginal revenue for these units. 1182. Figure: PPD Reference: Ref 14-3 (Figure: PPD) Refer to the figure. Which of the following statements best explains why a firm that perfectly price discriminates would sell additional units beyond c units of output? a. If the firm can perfectly price discriminate it can charge a price equal to the consumers' willingness to pay, which for all units beyond c is higher than the firm's marginal cost for those units. b. The firm will continue to increase profits as long as consumers' willingness to pay is greater than zero. *c. A firm will not sell beyond c units of output. The marginal cost is greater than consumers' willingness to pay for these units. d. A firm will not sell beyond c units of output. The marginal cost is greater than the firm's marginal revenue for these units. 1183. Which of the following statements is TRUE? I. Perfect price discrimination maximizes consumer surplus. II. Perfect price discrimination maximizes gains from trade. III. Under perfect price discrimination, the monopolist produces until price equals marginal cost. a. I only b. I and II only *c. II and III only d. I, II, and III 1184. Williams College used ________ as a means to ________. *a. student financial aid; price discriminate b. payroll deductions; lower tuition c. its nonexempt tax status; raise tuition d. government subsidies; increase profits 1185. (Figure: PPD Monopolist) Refer to the figure. A monopolist who cannot price discriminate earns profit equal to area(s) ________, and a monopolist practicing perfect price discrimination earns profit equal to areas ________. Figure: PPD Monopolist a. b; ab b. ab; abc *c. b; abc d. b; bc 1186. Suppose that Southwestern Airlines flight 171 will depart BWI for Detroit in 3 hours. The marginal cost and average cost of flying a customer are $35 and $68, respectively. Southwestern Airlines can increase its profits by selling a ticket for no less than: a. $68. b. $103. c. $34. *d. $35. 1187. Why is student financial aid a profit-maximizing decision for universities? a. because universities only give financial aid to a very small number of students *b. because as long as the students on financial aid pay some amount that is still greater than the marginal cost of attending the classes, the university still gains positive marginal profit c. because the university is able to charge no more than a dollar over the marginal cost of attending classes d. because the university gains goodwill by providing financial aid 1188. What is perfect price discrimination? *a. This occurs when a seller charges each separate consumer an amount that is exactly equal to his or her maximum willingness to pay. b. This occurs when a seller is able to charge two different prices in different markets. c. This occurs when consumer surplus is maximized in a given market. d. All of the answers are correct. 1189. Figure: Perfect Price Discrimination Reference: Ref 14-4 (Figure: Perfect Price Discrimination) Refer to the figure. For a firm practicing perfect price discrimination, calculate the dollar amount of consumer surplus in this market. a. $15,000 b. $20,000 *c. $0 d. $5,000 1190. Figure: Perfect Price Discrimination Reference: Ref 14-4 (Figure: Perfect Price Discrimination) Refer to the figure. Which curve represents the Marginal Revenue (MR) curve for the monopolist who practices perfect price discrimination? a. the marginal cost curve *b. the demand curve c. the average cost curve d. a downward sloping line that lies beneath the demand curve. 1191. Which of the following is a necessary condition for perfect price discrimination? *a. The firm must have very good information about its customers. b. The firm can only have one market. c. The demand curve for the product must be inelastic. d. The firm must have no competition. 1192. Perfect price discrimination results in: a. marginal revenue being in excess of the price charged for the good. *b. zero dollars of consumer surplus. c. maximization of consumer surplus. d. marginal revenue becoming equal to the marginal cost of the product for every unit sold. 1193. Which of the following conditions must be TRUE for perfect price discrimination? I. The seller must have very good information about the buyer's willingness to pay. II. Marginal revenue must equal demand. III. The marginal cost of production must be constant. a. I only *b. I and II only c. I and III only d. I, II, and III. 1194. Charging each customer his or her maximum willingness to pay is: a. unethical. *b. perfect price discrimination. c. not a profit-maximizing strategy. d. impossible in practice. 1195. A perfect price-discriminating seller: a. cannot prevent arbitrage. b. charges a single price. c. maximizes consumer surplus. *d. eliminates deadweight loss. 1196. Using a strategy of price discrimination, a firm can increase its profits by offering lower prices to its customers who are willing to pay above the firm's: a. average costs. *b. marginal costs. c. fixed costs. d. total costs. 1197. To perfectly price discriminate, a firm must have full information of: a. efficient level of output. b. market price. c. total cost of production. *d. every customer's willingness to pay. 1198. Corresponding to the practice of price discrimination, Williams College offers different levels of financial aid to students based on students': a. age. *b. family income. c. high school GPA. d. ACT/SAT scores. 1199. Which of the following regarding the outcome of perfect price discrimination is true? a. Consumer surplus increases. b. Deadweight loss increases. *c. Producer surplus increases. d. The economy becomes more efficient. 1200. A perfectly price discriminating monopolist produces until: *a. P = MC. b. MR = MC. c. P = MR. d. MR = AC. 1201. Perfectly price discriminating monopolists charge: *a. each consumer his or her maximum willingness to pay, so consumer surplus is zero. b. all consumers the average of their willingness to pay, so consumer surplus is maximized. c. each consumer his or her maximum willingness to pay, so consumer surplus is maximized. d. all consumers the average of their willingness to pay, so consumer surplus is zero. 1202. Consumers are ________ with price discrimination than with single-pricing. a. always better off *b. sometimes better off c. never better off d. neither better off nor worse off 1203. Price discrimination is considered bad when: a. total surplus increases. *b. total surplus decreases. c. deadweight loss is diminished. d. it is practiced by any firm. 1204. Price discrimination is: a. always better than single pricing. b. always worse than single pricing. *c. sometimes better and sometimes worse than single pricing. d. illegal in many countries. 1205. Total surplus increases with practice of price discrimination only if: a. consumer surplus increases. b. producer surplus increases. c. price increases. *d. output increases. 1206. A firm practices price discrimination by selling at a high price in its larger market, Market A, and a lower price in its smaller market, Market B. If this firm is forced to sell at a single-price in both markets and opts for the original price in Market A, the new single-pricing strategy makes: a. consumers in both Market A and Market B worse off. *b. consumers in Market A no worse off, but consumers in Market B worse off. c. consumers in Market B no worse off, but consumers in Market A worse off. d. consumers in both markets better off, as single pricing is always better for consumers than price discrimination. 1207. Which of the following statements is TRUE about price discrimination? a. Price discrimination makes consumers worse off due to higher prices. b. Price discrimination leads to deadweight loss and therefore makes the market less efficient. *c. Price-discriminating monopolists often produce more output than single-price monopolists and increase total surplus in the process. d. Price discrimination is illegal in the United States. 1208. Price discrimination is considered bad when ________, but good when ________. a. it increases output; it decreases output *b. it decreases output; it increases output c. it increases deadweight loss; it decreases deadweight loss d. it increases prices; it decreases prices 1209. Which of the following statements is TRUE? I. People with common diseases live longer than people with rarer diseases. II. Developing drugs for common diseases is a lot less expensive than developing drugs for rare diseases. III. It is more profitable to make drugs for common diseases because the market is bigger than it is for rare diseases. a. I and II only *b. I and III only c. II only d. III only 1210. Suppose that GSK sells one of its drugs for $25/pill in the United States and $13/pill in Canada. Which of the following statements is true? I. The price discrimination benefits the Canadians since they pay a lower price. II. The price discrimination benefits the Americans since GSK's larger profits means more research and development of new drugs for Americans. III. Price discrimination is beneficial in industries with large fixed costs, since price discrimination increases the size of the market, helping to spread large costs over a greater number of consumers. a. I only b. I and II only c. I and III only *d. I, II, and III 1211. Why are patients who suffer from rare terminal diseases more likely to die if the cost of new drug development is about the same for rare and more common terminal diseases? a. Federal regulations require that drugs for common diseases get developed before drugs for rare diseases. *b. The market is larger for more common diseases and so it is more likely drugs would be developed for the common diseases. c. Drug firms practice perfect price discrimination. d. Drugs for rare and common diseases can be sold as bundled goods. 1212. In industries with high fixed costs, price discrimination: a. is less common. *b. helps firms access more markets. c. cannot help firms cover fixed costs. d. is not practiced internationally. 1213. Pharmaceuticals with high fixed costs can benefit with the practice of price discrimination because: a. high fixed costs create incentive for pharmaceuticals to sell more. b. charging different prices to different customers generates different levels of fixed costs. c. profit from customers paying high prices allows pharmaceuticals to cover part of the fixed costs. *d. extra profit from customers paying low prices allows pharmaceuticals to cover part of the fixed costs. 1214. Price discrimination may be: *a. good in industries with high fixed costs. b. good in industries with high marginal costs. c. less efficient if the number of consumers in the market is low. d. less efficient if it leads to higher prices. 1215. Which of the following is TRUE about price discrimination in monopolistic markets? I. Price discrimination may be good if it leads to higher output. II. Price discrimination may help to offset high fixed costs, but leads to less research and innovation. III. Single-pricing tends to increase prices for at least a subset of the market. a. I only b. II and III only *c. I and III only d. I and II only 1216. The difference between tying and bundling in pricing strategies is that: a. they both are strategies that firms use to maximize profit. *b. tying does not require the purchase of both goods, but bundling does. c. tying involves the combination of goods that are complements, whereas bundling involves the combination of substitutes. d. tying does not lead to as much profit as bundling does. 1217. Tying is: *a. the practice of a firm selling one product that requires the consumer to purchase another of the firm's products. b. the practice of buying one unit at full price and the second unit at half off. c. the same thing as buy one get one free. d. the practice of a firm's paying the sales tax in exchange for a consumer's purchase of an extended warranty. 1218. Tying is: a. the practice of selling complement goods together. b. a way for firms to lower costs. *c. a type of price discrimination. d. typically easy to spot. 1219. Why would firms use the practice of tying? a. It allows firms to tie goods that are highly valued together with goods that are not highly valued, hence increasing profits for firms. b. It is a way to force consumers to buy more than what they would without tying. c. It is a subtle way to raise prices for those consumers who have a low willingness to pay. *d. It is a subtle way to charge higher prices to those consumers with a high willingness to pay, and a lower price to consumers with a low willingness to pay. 1220. Which of the following is an example of tying? *a. restrictions that prohibit patrons from bringing their own wine to restaurants b. set menus at a restaurant c. buy-one-get-one-free offers d. “value meals” at fast-food restaurants 1221. The Gillette Fusion razor sells for approximately $10.00, and a four-set of replacement blades sells for over $8. Which of the following statements is TRUE? I. Consumers with a high willingness to pay for being clean-shaven will buy many replacement blades. II. Consumers with a low willingness to pay for being clean-shaven will rarely buy replacement blades. III. Gillette's high price for the replacement blades is a method to extract consumer surplus from those consumers with a high desire to be clean shaven. a. I and II only b. II and III only c. III only *d. I, II, and III 1222. In order for a firm to successfully use tying: a. the firm must sell the base good for 50 percent more than the second good. b. the firm must sell the base good at a lower price than the second good. c. the firm must charge the same price for the base good and the second good. *d. it must be difficult for other firms to sell the second good. 1223. Tying is a form of price discrimination in which one good, called the ________ is tied to a second good called the ________. *a. base good; variable good b. physical; service good c. physical good; nonphysical good d. mother good; spawned good 1224. Which of the following is NOT an example of tying? a. game consoles and game cartridges b. cell phones and phone calls c. printers and print cartridges *d. automobiles and engines 1225. A firm that spends extra money to practice tying does so to: a. benefit customers. *b. prevent competition. c. advertise. d. increase quality. 1226. Hewlett Packard's pricing scheme is to sell printers at relatively low price and ink cartridges at relatively high price. This practice is known as: a. leverage. b. predation. c. retail maintenance. *d. tying. 1227. In order for the strategy of tying to work, Hewlett Packard (HP) must tie its printers to HP ink cartridges, and: *a. no firm can enter the market for HP ink. b. no firm can enter the market for HP printers. c. HP must sell its printers at relatively high price. d. HP must always sells its printers and ink cartridges in a package. 1228. Table: Myrtle Beach Golf Maximum Willingness to Pay for One-Night Stay and One Round of Golf David John One-Night 50 110 Stay Round of Golf 80 35 Reference: Ref 14-5 (Table: Myrtle Beach Golf) Refer to the table. Assume the firm has zero costs. If the resort sets prices for lodging and golf individually, it will charge ________ for one night's stay and ________ for one round of golf. a. $50; $110 *b. $110; $80 c. $50; $35 d. $80; $57.50 1229. Table: Myrtle Beach Golf Maximum Willingness to Pay for One-Night Stay and One Round of Golf David John One-Night 50 110 Stay Round of Golf 80 35 Reference: Ref 14-5 (Table: Myrtle Beach Golf) Refer to the table. Assume the firm has zero costs. If the resort bundles a one-night stay with a round of golf, it will charge: *a. $130. b. $145. c. $110. d. $190. 1230. Table: Myrtle Beach Golf Maximum Willingness to Pay for One-Night Stay and One Round of Golf David John One-Night 50 110 Stay Round of Golf 80 35 Reference: Ref 14-5 (Table: Myrtle Beach Golf) Refer to the table. Assume that marginal costs of production are zero. If the resort bundles a one-night stay with a round of golf, how much profit will it make on David and John? *a. $260 b. $380 c. $290 d. $275 1231. Table: Willingness to Pay Maximum Willingness to Pay for Good A and Good B John Mary Good A $90 $35 Good B $30 $70 Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. What is John's maximum willingness to pay for the bundled goods? a. $90 b. $30 *c. $120 d. $105 1232. Table: Willingness to Pay Maximum Willingness to Pay for Good A and Good B John Mary Good A $90 $35 Good B $30 $70 Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. What is Mary's maximum willingness to pay for the bundled goods? a. $70 b. $30 c. $120 *d. $105 1233. Table: Willingness to Pay Maximum Willingness to Pay for Good A and Good B John Mary Good A $90 $35 Good B $30 $70 Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. Assume the firm has zero costs. If the firm were to set individual prices for each of the two goods, how much total profit does it earn from Good A? *a. $90 b. $35 c. $120 d. $125 1234. Table: Willingness to Pay Maximum Willingness to Pay for Good A and Good B John Mary Good A $90 $35 Good B $30 $70 Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. Assume the firm has zero costs. If the firm were to set individual prices for each of the two goods, how much total profit does it earn from Good B? *a. $70 b. $30 c. $100 d. $120 1235. Table: Willingness to Pay Maximum Willingness to Pay for Good A and Good B John Mary Good A $90 $35 Good B $30 $70 Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. If the firm were to engage in bundling, its profits would increase by how much relative to setting individual prices for each good? a. $65 b. $225 *c. $50 d. $210 1236. Table: Willingness to Pay Maximum Willingness to Pay for Good A and Good B John Mary Good A $90 $35 Good B $30 $70 Reference: Ref 14-6 (Table: Willingness to Pay) Refer to the table. If the firm were to engage in bundling, total surplus is: a. $65. b. $50. c. $160. *d. $225. 1237. Bundling is expected to provide greater profits when the two bundled goods are: I. substitutes. II. goods that have high fixed costs and low marginal costs. III. very close complements. a. I only b. II only *c. II and III only d. I, II, and III 1238. Which of the following does NOT represent a benefit that can be achieved from bundling? a. spreading of fixed costs across greater number of units b. increased incentive to innovate c. increased profit *d. setting of bundle prices that are lower than individual unit prices 1239. Bundling and tying are: a. essentially the same practices. *b. different forms of price discrimination. c. often done at the same time. d. considered illegal in many countries. 1240. The more a firm knows about ________ the easier it is for the firm to ________. a. competitors; advertise b. costs; sell its goods c. supply; price discriminate *d. demand; price discriminate 1241. Bundling increases ________ and hence increases the incentives to ________. a. costs; innovate *b. profits; innovate c. revenue; price higher d. demand; enhance customer service 1242. The difference between tying and bundling is that: a. bundled goods are sold one to many, while tied goods are sold one to one. *b. bundled goods are sold one to one, while tied goods are sold one to many. c. bundling is more restrictive than tying. d. tying is more restrictive than bundling. 1243. Table: Maximum Willingness to Pay for Word and Excel Amanda Yvonne Word $110 $60 Excel $40 $100 Office (Word + $150 $160 Excel) Reference: Ref 14-7 (Table: Maximum Willingness to Pay for Word and Excel) Refer to the table. If Microsoft sells each product, Word and Excel, individually, what is the maximum profit Microsoft can make from selling the two products? (Assume the marginal costs of production are zero.) *a. $210 b. $100 c. $220 d. $160 1244. Table: Maximum Willingness to Pay for Word and Excel Amanda Yvonne Word $110 $60 Excel $40 $100 Office (Word + $150 $160 Excel) Reference: Ref 14-7 (Table: Maximum Willingness to Pay for Word and Excel) Refer to the table. If Microsoft bundles Word and Excel and sells them as Office, what is the maximum profit Microsoft can make from selling Office? (Assume the marginal costs of production are zero.) a. $160 *b. $300 c. $320 d. $210 1245. Bundling can increase efficiency especially when: a. both fixed costs and marginal costs are high. b. both fixed costs and marginal costs are low. *c. fixed costs are high and marginal costs are low. d. fixed costs are low and marginal costs are high. 1246. Bundling can increase efficiency when fixed costs are high because the fixed costs are: a. offset by increasing marginal costs. b. offset by increasing variable costs. c. lower when goods are bought in a package. *d. spread across more consumers. 1247. Suppose there are two types of cable TV viewers. The first type places a high value on sports channels (e.g., ESPN, Fox Sports, and The Golf Channel) and a low value on all other channels. The second type places a high value on music channels (VH1, MTV3, and CMT) and a low value on all other channels. In this case, we would expect cable operators to: *a. sell sports and music channels in one bundle to both types of viewers. b. sell only sports channels to the first type of viewers and sell only music channels to the second type of viewers. c. use “à la carte” pricing. d. use fixed-cost pricing. 1248. Bundling is likely to increase total surplus if: a. the costs of production are U-shaped. *b. fixed costs are high and marginal costs are low. c. most of the costs are associated with variable inputs. d. all consumers have the same willingness to pay. 1249. Which of the following is TRUE? a. Bundling in the cable industry is required by the government. b. There is little benefit in bundling varied TV channels, though there are added costs in doing so. *c. Bundling has come under attack in the cable TV industry, but not in other industries. d. Bundling is rarely practiced by firms in the cable TV industry. 1250. Which of the following is NOT an example of bundling? *a. cell phones and phone calls b. computer software c. automobiles and engines d. McDonald's value meals 1251. Bundle pricing makes sense for cable operators because: *a. customers have a high willingness to pay for some channels and a low willingness to pay for others. b. customers are more satisfied with more channels being offered. c. the cost of operation decreases with bundle pricing. d. the marginal costs of adding additional channels is high. 1252. Which of the following is NOT a case of bundling? a. Disneyland selling many attractions for a single entrance fee b. the buffet at China Garden c. cable TV offering multiple channels to its customers. *d. HP selling printers and ink cartridges 1253. To maximize profit, a monopolist should charge a lower price in the market with the steeper demand curve. a. True *b. False 1254. To maximize profit, a monopolist should charge a higher price in the market with the more inelastic demand curve. *a. True b. False 1255. In markets with different demand curves for the same good, different prices generate more profit than a single price. *a. True b. False 1256. In markets with different demand curves for the same good, different prices generate less profit than a single price. a. True *b. False 1257. GlaxoSmithKline attempts to prevent arbitrage of its drug Combivir by selling different colored pills in special bar-coded packages, to identify and track distributors in different markets. *a. True b. False 1258. Arbitrage makes it easier for a firm to set different prices in different markets. a. True *b. False 1259. Smuggling is an example of arbitrage. *a. True b. False 1260. To succeed at price discrimination the monopolist must prevent arbitrage. *a. True b. False 1261. In order to price discriminate, firms must identify a customer's or a group of customers' willingness to pay. *a. True b. False 1262. If a firm can practice perfect price discrimination, its profits will always rise. *a. True b. False 1263. Perfect price discrimination causes the demand curve to become the marginal revenue curve. *a. True b. False 1264. Perfect price discrimination results in zero dollars of consumer surplus. *a. True b. False 1265. A perfectly price discriminating monopolist charges consumers the average of their maximum willingness to pay. a. True *b. False 1266. Although price discrimination may increase the profits of drug companies, it reduces the incentive for drug companies to develop new drugs. a. True *b. False 1267. Perfect price discrimination is always bad, while imperfect price discrimination can be either good or bad. a. True *b. False 1268. Compared to a single price for all markets, price discrimination can make some consumers better off and others worse off. *a. True b. False 1269. Price discrimination is bad if total surplus increases with a decrease in output. a. True *b. False 1270. Tying is a legal strategy, but bundling is illegal in the United States. a. True *b. False 1271. The difference between tying and bundling is that tied goods are sold one to one while bundled goods are sold one to many. a. True *b. False 1272. Tying is a form of price discrimination in which one good, called the base good, is tied to a second good called the variable good. *a. True b. False 1273. Tying is uncommon. a. True *b. False 1274. Mark has a maximum willingness to pay for Word and Excel of $200 and $30, respectively. Beth has a maximum willingness to pay of $50 and $190, respectively. At a bundle price of $230, Mark and Beth receive total consumer surplus of $10. *a. True b. False 1275. Bundling is sometimes a form of price discrimination, but not necessarily always a form of price discrimination. a. True *b. False 1276. What conditions are necessary for a firm to practice price discrimination? Correct Answer: The firm must be able to distinguish customers by willingness to pay. For example, the demand for the firm's product might be more inelastic in one market (or market segment) than in another market, in which case the firm will find it more profitable to charge a higher price in the market with the more inelastic demand. Another condition to successfully price discriminate is that arbitrage must be difficult for the firm's product. With rampant arbitrage, the firm will lose most of its sales to their customers with high willingness to pay (who will instead buy the product from the arbitragers), reducing the firm's profits. 1277. (Figure: Monopolist's Profits under Price Discrimination) Refer to the figure. Using the principles of price discrimination, explain and calculate how much profit the monopolist serving these markets could make. Figure: Monopolist's Profits under Price Discrimination Correct Answer: If the monopolist price discriminates, it will charge a price of $14 in Market 1 and $16 in Market 2 (which has the more inelastic demand curve). Profit in Market 1 = TR – TC TR = $14 × 120 = $1,680 TC = $10 × 120 = $1,200 Therefore profit = $480 Profit in Market 2 = TR – TC TR = $16 × 150 = $2,400 TC = $10 × 150 =$1,500 Therefore profit = $900 Total profit = $(480 + 900) = $1,380 1278. (Figure: Monopoly Profits) Refer to the figures. Using the principles of price discrimination, explain and calculate how much profit the monopolist serving these markets could make. Figure: Monopoly Profits Correct Answer: If the firm price discriminates, it will charge a price of $12 in Market 1 and $16 in Market 2 (which has the more inelastic demand curve). Profit in Market 1 = TR – TC TR = $12 × 200 = $2,400 TC = $8 × 200 = $1,600 Therefore profit = $800 Profit in Market 2 = TR – TC TR = $16 × 200 = $3,200 TC = $8 × 200 =$1,600 Therefore profit = $1,600 Total profit = $800 + $1,600 = $2,400 1279. A firm has two markets—A and B. In Market A, demand is given by the equation P = 50 – 2Q, and marginal revenue (MR) is given by the equation MR = 50 – 4Q. In Market B, the demand equation is P = 82 – 4Q, and the marginal revenue equation is MR = 82 – 8Q. Marginal and average cost equal $2 in both markets. If the firm decides to price discriminate, what price would it charge in a. each market? b. What is the profit-maximizing quantity in each market? c. How much profit would it make in each market? Correct Answer: a. The price-discriminating monopolist sets quantity/prices in each market where MR = MC. Market A: MR = MC 50 – 4Q =2 4Q = 48 Q* = 12 At Q = 12, consumers' maximum willingness to pay in Market A is: P = 50 – (2 × 12) = 50 – 24 P* = 26 Market B: MR = MC 82 – 8Q = 2 8Q = 80 Q* = 10 At Q=10, consumers' maximum willingness to pay in Market B is: P = 82 – (4 × 10) = 82 – 40 P* = 42 If the monopolist price discriminates, it will charge a price of $26 in Market A and $42 in Market B (with the more inelastic demand curve). b. If the monopolist price discriminates, it will produce 12 units of the good for Market A and 10 units for Market B. (See the preceding solution.) c. Profit in Market A = TR – TC TR = $26 × 12 = $312 TC = $2 × 12 = $24 Therefore profit = $288 Profit in Market B = TR – TC TR = $42 × 10 =$420 TC = $2 × 10 =$20 Therefore profit = $400 Total profit = $(288+400) = $688 Note that this is equivalent to ($26 × 12) + ($42 × 10) – ($2 × 22). 1280. One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel, and later releases a cheaper paperback edition. Use this example to demonstrate both the benefits, as well as the potential pitfalls, of a price discrimination pricing strategy. Correct Answer: The answer should address the three basic lessons of price discrimination. First, price discrimination is a strategy that can lead to increased profits since a wider market can be accessed under the pricing scheme. Second, price discrimination requires an ability to separate customers according to their willingness to pay, along with prevention of arbitrage. Third, price discrimination can raise economic welfare. The students' answers may vary according to the details concerning the publishing industry, but these three lessons should be in the answer. 1281. Explain the two basic principles of successful price discrimination. Correct Answer: Principle 1: If the demand curves are different, it is more profitable to set different prices in different markets than a single price that covers all markets. And, to maximize profit the firm should set a higher price in markets with more inelastic demand. Principle 2: Arbitrage makes it difficult for a firm to set different prices in different markets thereby reducing the profit from price discrimination. This principle implies that to succeed at price discrimination the monopolist must prevent arbitrage. 1282. One example of price discrimination occurs in the airline industry as airlines typically set a high price for business people and a low price for vacationers. Use this example to demonstrate and graphically illustrate the rationale of airlines' price discrimination pricing strategy. Correct Answer: Airlines set different prices according to characteristics that are correlated with willingness to pay. Vacationers can easily plan their trips weeks or months in advance, while business people may discover that they need to fly tomorrow. Airlines know that business people are typically less sensitive to the price of an airline ticket than are vacationers, such that business people have a more inelastic demand curve. To increase profits, airlines charge business people more than vacationers. 1283. A monopolist faces a demand function given by P = 100 – Q and a corresponding marginal revenue function of MR = 100 – 2Q. The average and marginal costs of production are constant at $20. a. How many units of output does the monopolist produce if setting a single price? Suppose that the monopolist practices perfect price discrimination. How many b. units of output will the monopolist now produce? Correct Answer: a. MR = MC 100 – 2Q = 20 2Q = 80 Q = 40 b. Demand (or P) =MC 100 – Q = 20 Q = 80 1284. (Table: PPD Monopolist) The table that shows demand and cost data for a monopolist to answer the following questions. Assume the monopolist is able to practice perfect price discrimination. Table: PPD Monopolist P ($) Qd (Units) MC=AC ($) 9 1 3 7 5 3 2 3 4 3 3 3 a. What quantity does the monopolist produce? b. What is the dollar amount of consumer surplus in the market? How does this compare with the case of a firm in a competitive c. industry? Correct Answer: a. The perfect price discriminator will charge each individual consumer exactly what he or she is willing to pay, and so the MR curve is the same as the demand curve. The perfect price-discriminator monopolist will therefore produce at the point where MR = MC = D, which is four units, by charging each buyer exactly his or her maximum willingness to pay. b. There is no consumer surplus since all consumers pay exactly their maximum willingness to pay. c. For a competitive firm, P = MR = MC = $3. If this market were served by competitive firms they would collectively produce four units, charge $3 each and generate a consumer surplus of $12 for those four units. 1285. Explain how firms practice tying and bundling, and specify the difference between the two pricing schemes. Correct Answer: Tying is a form of price discrimination in which one good, called the base good, is tied to a second good called the variable good. On the other hand, goods that are bundled must be bought as a package deal. The difference between tying and bundling is that bundled goods are sold one to one. Every right shoe comes with a left shoe. Tied goods are sold one to many. Every HP printer is tied to a variable number of ink cartridges depending on consumer demand. 1286. (Table: Value Meals) The table shows James and Chris' willingness to pay at a local fast-food restaurant. Use this information to answer the following questions: Table: Value Meals James Cheeseburg $1.50 er French Fries $0.50 Soft Drink $1.20 Chris $1.00 $1.25 $0.50 If the fast-food restaurant is trying to maximize profits by pricing separately, what price will they charge for a cheeseburger? French fries? Soft drink? Assuming that it costs the restaurant only $0.10 to produce a cheeseburger, $0.15 to produce one order of french fries, and $0.05 to produce a soft b. drink, what will be their total profits if they price separately using the prices determined above? Suppose the restaurant is trying to decide whether or not to offer a value meal, which would include a cheeseburger, french fries, and a soft drink. c. What price should they charge for this value meal? Would profits be higher or lower than if the restaurant sets prices individually? Explain. a. Correct Answer: a. They should charge $1.00 for a cheeseburger, $1.25 for an order of french fries, and $1.20 for a soft drink. b. Total Revenue = 2 × $1.00 + 1 × 1.25 + 1 × 1.20 = $4.45 Total Cost = 2 × $0.10 + 1 × $0.15 + 1 × $0.05 = $0.40 Total Profits = $4.45 – $0.40 = $4.05 c. James' maximum willingness to pay for all three items is $3.20, but Chris' willingness to pay for all three items is only $2.75. Since the restaurant is better off selling two meals at $2.75 than one at $3.20, they should charge a price of $2.75 for the value meal. At this price they would have total revenues of $5.50, and total costs of $0.60 = (2 × $0.10 + 2 × $0.15 + 2 × $0.05). Profits from the value meal would be $5.50 – $0.60 = $4.90. Profits are higher with the value meal. Since James and Chris have different willingness to pay for the individual items, but a similar willingness to pay for the bundle, the firm is able to extract the consumer surplus by price discriminating. 1287. OPEC stands for: a. the Organization of Petroleum, Energy and Consumption. *b. the Organization of Petroleum Exporting Countries. c. the Outcome of Petroleum Energy Cooperation. d. the Organization of Petroleum and Energy Corporation. 1288. A cartel is characterized by firms that act together in order to: I. increase competition. II. raise prices. III. raise profit. a. I only b. I and II only c. III only *d. II and III only 1289. When producers engage in cartel-like behavior, they attempt to mimic the behavior of: a. a competitive firm. b. a small firm in a competitive industry. *c. a monopoly. d. buyers. 1290. Game theory studies: a. the choices made by agents when other agents engage in certain actions. b. interactive decision making. c. strategic reactions by firms. *d. All of the answers are correct. 1291. Game theory is the study of: a. random decision making. *b. strategic decision making. c. cartel decision making. d. decision making allowing for irrational behavior. 1292. A(n) ________ is a group of suppliers who try to act together to reduce supply. a. monopoly b. retailer c. oligopoly *d. cartel 1293. Which of the following industries would find it easier to establish a cartel? *a. automobile manufacturing b. retail clothing c. agricultural products d. book publishing 1294. Which of the following makes a cartel short-lived? a. stable market demand b. few firms in the cartel *c. cheating d. contracting 1295. Which of the following statements is TRUE? a. Cartels generally persist and are quite common. *b. Few cartels move an industry from competition to pure monopoly. c. Cartels work better when there are more firms involved. d. Cartels persist because the cartel members enforce their agreements. 1296. A group of suppliers who tries to act as if they are a monopoly is called a(n): a. network. b. oligopoly. *c. cartel. d. dominant strategy. 1297. OPEC is a(n) ________ of oil exporting countries. *a. cartel b. group c. monopoly d. oligopoly 1298. A cartel is a group of suppliers who act together in order to: a. increase demand, raise prices, and increase profits. b. increase supply, reduce prices, and increase profits. c. increase demand, reduce prices, and increase profits. *d. reduce supply, increase prices, and increase profits. 1299. Figure: Competitive Market Reference: Ref 15-1 (Figure: Competitive Market) Refer to the figure. If the market is competitive, price and output in the market would be: a. P1 and Q1. *b. P1 and Q2. c. P2 and Q1. d. P2 and Q2. 1300. Figure: Competitive Market Reference: Ref 15-1 (Figure: Competitive Market) Refer to the figure. If all firms in the market form a successful cartel, price and output in the market would be: a. P1 and Q1. b. P1 and Q2. *c. P2 and Q1. d. P2 and Q2. 1301. Which of the following is NOT a reason why cartels collapse? a. cheating by the cartel members b. new entrants and demand response c. government prosecution *d. increasing production costs 1302. Which of the following statements is TRUE? I. A cartel is a single firm with competitive market power. II. A cartel is a group of firms that practice price discrimination in competitive markets. III. A cartel is a group of firms that attempt to reduce market output. IV. A cartel acts as if it were a monopolist in that market. a. I only b. II, III, and IV only c. II only *d. III and IV only 1303. OPEC is a ________ that has been able to maintain high oil prices for ________ periods of time. a. cartel; long b. monopoly; long *c. cartel; not very long d. monopoly; not very long 1304. If anything, a cartel is likely to ________ and ________ power over time. a. strengthen; gain *b. collapse; lose c. go bankrupt; then reorganize under bankruptcy law and gain d. operate in competitive markets; price discriminate to gain 1305. Cartels are not always successful because: *a. their members have profit incentives to cheat on the agreement. b. nowhere in the world are cartel agreements considered legal. c. cartels face a lot of competition from monopolies. d. All of the answers are correct. 1306. In a competitive market, each firm earns ________ economic profits, whereas firms in a successful cartel will earn ________. a. positive; zero economic profits b. negative; positive economic profits c. positive; monopoly profits *d. zero; positive economic profits 1307. Compared to a competitive market, firms operating in a cartel will charge a price that is: *a. higher than the competitive price. b. lower than the competitive price. c. equal to their marginal cost of production. d. equal to their average cost of production. 1308. Cartels do not last because their members find them difficult to maintain since: a. each of the member firms can attain lower costs outside the cartel. *b. each firm in the cartel can gain from secret price cuts. c. all the firms prefer an expansion in industry supply. d. all the firms face less elastic demand curves when outside the cartel. 1309. Cheaters in cartels make ________ profit when the other cartel members ________ their promise. a. more; break b. less; keep c. zero; break *d. more; keep 1310. Cheating pays when other firms ________ their promise. a. either keep or break b. break *c. keep d. withhold 1311. The more successful a cartel is in raising the profits of the firms in the cartel, the: a. less likely there will be cheating. *b. more likely there will be cheating. c. more competitive the cartel. d. more likely there will be a price war. 1312. Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. World Price (per barrel) World Quantity (MBD) $36 100 37.50 98 47.50 82 50 80 Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and they each cut back production to 8 MBD. Each country's revenue would: a. increase by $72 million a day. *b. increase by $40 million a day. c. decrease by $72 million a day. d. decrease by $40 million a day. 1313. Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. World Price (per barrel) World Quantity (MBD) $36 100 37.50 98 47.50 82 50 80 Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and each country produces 8 MBD. If one of the cartel members cheats by secretly pushing its production back to 10 MBD rather than 8, total revenue for the cheating country would: a. increase from $360 million to $500 million a day. *b. increase from $400 million to $475 million a day. c. decrease from $380 million to $360 million a day. d. remain unchanged at $400 million a day. 1314. Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. World Price (per barrel) World Quantity (MBD) $36 100 37.50 98 47.50 82 50 80 Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and each country produces 8 MBD. If one of the cartel members cheats by secretly pushing its production back to 10 MBD rather than 8, total revenue for the non-cheating countries would: *a. decrease from $400 million to $380 million a day. b. decrease from $360 million to $288 million a day. c. increase from $400 million to $500 million a day. d. remain unchanged at $380 million a day. 1315. Table: Market for Oil Suppose that oil is produced by 10 countries, each of which produces 10 million barrels of oil a day (MBD) for a total 100 MBD. The world price of oil at this quantity is $36 per barrel so each country earns $360 million a day. World Price (per barrel) World Quantity (MBD) $36 100 37.50 98 47.50 82 50 80 Reference: Ref 15-2 (Table: Market for Oil) Refer to the table. Suppose that these countries form a cartel and each country produces 8 MBD. If 9 of the cartel members cheat and produce 10 MBD while one country keeps its promise and maintains production at 8 MBD each cheater would earn revenue of: *a. $375 million a day, while the non-cheating country would earn $300 million a day. b. $375 million a day, while the non-cheating country would earn $360 million a day. c. $400 million a day, while the non-cheating country would earn $300 million a day. d. $400 million a day, while the non-cheating country would earn $360 million a day. 1316. Which of the following statements is TRUE? a. When a cartel cheater increases quantity beyond the profit-maximizing quantity of a monopoly the cheater benefits other cartel members. b. When a cartel cheater increases quantity beyond the profit-maximizing quantity of a monopoly the cheater benefits itself and other cartel members. c. When a cartel cheater increases quantity beyond the profit-maximizing quantity of a monopoly the cheater hurts itself. *d. When a cartel cheater increases quantity beyond the profit-maximizing quantity of a monopoly the cheater hurts other cartel members. 1317. Which of the following describes how cartel members cheat? a. They use inferior inputs in production to save money. b. They steal production technologies from other firms. *c. They produce more output than they promised. d. They fail to declare profits earned in foreign countries to avoid paying taxes. 1318. A firm receives the largest profit from cheating on a cartel agreement when: a. all members of the cartel cheat. *b. none of the other cartel members cheats. c. all cartel members expand output. d. its demand curve is more inelastic than other cartel members. 1319. Suppose that an industry consists of a two-firm cartel: Firm A and Firm B. Each firm agrees to produce and sell only 100 units of output per week. This level of output maximizes total industry profit. Which of the following is true? a. Firm B could increase its profits by producing and selling only 90 units of output per week. b. Both firms could increase their profit by lowering their price and expanding output. *c. Firm A could increase its profit by producing and selling a little more than 100 units of output. d. Firm B could increase Firm A's profits by producing and selling 10 percent more output. 1320. Table: Three-Country Oil Production Total Market Output Market Price 600 90 800 80 1,000 70 1,200 60 1,400 50 1,600 40 1,800 30 Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. If the countries create a cartel and agree to mimic monopoly-like behavior, what level of output would each firm produce? a. 1,200 *b. 400 c. 200 d. 700 1321. Table: Three-Country Oil Production Total Market Output Market Price 600 90 800 80 1,000 70 1,200 60 1,400 50 1,600 40 1,800 30 Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the new quantity sold by Country A? a. 900 b. 400 c. 1,400 *d. 600 1322. Table: Three-Country Oil Production Total Market Output Market Price 600 90 800 80 1,000 70 1,200 60 1,400 50 1,600 40 1,800 30 Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the new market price when Country A cheats on the agreement? a. 60 *b. 50 c. 20 d. 40 1323. Table: Three-Country Oil Production Total Market Output Market Price 600 90 800 80 1,000 70 1,200 60 1,400 50 1,600 40 1,800 30 Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the resultant profit earned by Country A? a. 70,000 b. 6,000 c. 24,000 *d. 30,000 1324. Table: Three-Country Oil Production Total Market Output Market Price 600 90 800 80 1,000 70 1,200 60 1,400 50 1,600 40 1,800 30 Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Assume that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What is the resultant profit earned by each of the other two countries? *a. 20,000 b. 30,000 c. 70,000 d. 24,000 1325. Table: Three-Country Oil Production Total Market Output Market Price 600 90 800 80 1,000 70 1,200 60 1,400 50 1,600 40 1,800 30 Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Suppose that Country A cheats on the cartel agreement by producing 200 more barrels than the other two countries. What would Country B's reaction be? a. lower its own quantity to 200 units b. increase its own quantity to 1,600 units c. increase the market price to $60 *d. increase its own quantity to 600 units 1326. Table: Three-Country Oil Production Total Market Output Market Price 600 90 800 80 1,000 70 1,200 60 1,400 50 1,600 40 1,800 30 Reference: Ref 15-3 (Table: Three-Country Oil Production) Refer to the table. Suppose that three countries are engaged in oil production. For simplicity, assume zero costs so that revenue equals profit. Suppose that the three countries have a cartel agreement where they attempt to mimic monopoly behavior. If each country has the incentive to cheat, and does cheat, what will the final market outcome be? a. The market quantity will be 1,600 and the market price will be 40. b. The market quantity will be 1,200 and the market price will be 60. c. The market quantity will be 1,400 and the market price will be 50. *d. The market quantity will be 1,800 and the market price will be 30. 1327. A strategy that has a higher payoff than any other strategy no matter what the other player does is called a: a. cartel strategy. b. maximizing strategy. c. valuable strategy. *d. dominant strategy. 1328. Table: Payoff Matrix The following shows a payoff matrix with two players and two strategies. The payoffs are listed in the order of (Player 1's payoffs, Player 2's payoffs). Player 2 Cooperate Cheat Player 1 Cooperate (1,000, 1,000) (400, 2,000) Cheat (2,000, 400) (500, 500) Reference: Ref 15-4 (Table: Payoff Matrix) Refer to the table. What type of “game” does this payoff matrix represent? a. cartel game b. coordination game *c. prisoners' dilemma d. cheating game 1329. Table: Payoff Matrix The following shows a payoff matrix with two players and two strategies. The payoffs are listed in the order of (Player 1's payoffs, Player 2's payoffs). Player 2 Cooperate Cheat Player 1 Cooperate (1,000, 1,000) (400, 2,000) Cheat (2,000, 400) (500, 500) Reference: Ref 15-4 (Table: Payoff Matrix) Refer to the table. What is Player 1's strategy in this game? a. always cooperate *b. always cheat c. cooperate when Player 2 cooperates; cheat when Player 2 cheats d. cheat when Player 2 cooperates; cooperate when Player 2 cheats 1330. Table: Payoff Matrix The following shows a payoff matrix with two players and two strategies. The payoffs are listed in the order of (Player 1's payoffs, Player 2's payoffs). Player 2 Cooperate Cheat Player 1 Cooperate (1,000, 1,000) (400, 2,000) Cheat (2,000, 400) (500, 500) Reference: Ref 15-4 (Table: Payoff Matrix) Refer to the table. What is Player 2's strategy in this game? a. always cooperate *b. always cheat c. cooperate when Player 1 cooperates; cheat when Player 1 cheats d. cheat when Player 1 cooperates; cooperate when Player 1 cheats 1331. A dominant strategy is a strategy that: a. all players must follow. *b. has a higher payoff than any other strategy no matter what the other player does. c. leads to one player's interests dominating the interests of the other players. d. a player follows regardless of the strategies followed by other players. 1332. The prisoner's dilemma describes situations where the pursuit of: a. all interests lead to a group outcome that is in the interest of no one. b. all interests lead to a group outcome that is in the interest of everyone. *c. individual interest leads to a group outcome that is in the interest of no one. d. individual interest leads to a group outcome that is in the interest of everyone. 1333. Table: Russia, Saudi Payoff Table Suppose that the oil market is dominated by two large firms, Saudi Arabia and Russia. Both Saudi Arabia and Russia have two choices or strategies: cooperate by cutting back production or cheat by increasing production. The payoff table below shows the potential revenues associated with each firm's strategies. For instance, if Saudi Arabia cheats and Russia cooperates then the payoff to Saudi Arabia is $1,000 and the payoff to Russia is $400. Russia's Strategies Cooperate Cheat Saudi Arabia's Cooperate ($800, $800) ($400, $1,000) Strategies Cheat ($1,000, $400) ($600, $600) Reference: Ref 15-5 (Table: Russia, Saudi Payoff Table) Refer to the table. What is Saudi Arabia's best strategy and associated payoff if Russia cooperates? a. cooperate; $800 b. cheat; $600 c. cooperate; $1,000 *d. cheat; $1,000 1334. Table: Russia, Saudi Payoff Table Suppose that the oil market is dominated by two large firms, Saudi Arabia and Russia. Both Saudi Arabia and Russia have two choices or strategies: cooperate by cutting back production or cheat by increasing production. The payoff table below shows the potential revenues associated with each firm's strategies. For instance, if Saudi Arabia cheats and Russia cooperates then the payoff to Saudi Arabia is $1,000 and the payoff to Russia is $400. Russia's Strategies Cooperate Cheat Saudi Arabia's Cooperate ($800, $800) ($400, $1,000) Strategies Cheat ($1,000, $400) ($600, $600) Reference: Ref 15-5 (Table: Russia, Saudi Payoff Table) Refer to the table. What is Saudi Arabia's best strategy and associated payoff if Russia cheats? a. cooperate; $400 *b. cheat; $600 c. cooperate; $800 d. cheat; $800 1335. Table: Russia, Saudi Payoff Table Suppose that the oil market is dominated by two large firms, Saudi Arabia and Russia. Both Saudi Arabia and Russia have two choices or strategies: cooperate by cutting back production or cheat by increasing production. The payoff table below shows the potential revenues associated with each firm's strategies. For instance, if Saudi Arabia cheats and Russia cooperates then the payoff to Saudi Arabia is $1,000 and the payoff to Russia is $400. Russia's Strategies Cooperate Cheat Saudi Arabia's Cooperate ($800, $800) ($400, $1,000) Strategies Cheat ($1,000, $400) ($600, $600) Reference: Ref 15-5 (Table: Russia, Saudi Payoff Table) Refer to the table. The dominant strategies are: *a. cheat for both Russia and Saudi Arabia. b. cooperate for both Russia and Saudi Arabia. c. cheat for Russia and cooperate for Saudi Arabia. d. cooperate for Russia and cheat for Saudi Arabia. 1336. Table: Ozzie, Manny's Payoff Table Ozzie's Cement (profit in 1,000s) Low Price High Price Manny's Cement Low Price (profit in 1,000s) High Price $60, $60 $20, $130 $130, $20 $80, $80 Reference: Ref 15-6 (Table: Ozzie, Manny's Payoff Table) Refer to the table. Which of the following statements is true? a. Manny and Ozzie do not have dominant strategies. b. Manny's dominant strategy is low price, and Ozzie's dominant strategy is high price. c. Manny's dominant strategy is high price, and Ozzie's dominant strategy is high price. *d. Manny's dominant strategy is low price, and Ozzie's dominant strategy is low price. 1337. Table: Ozzie, Manny's Payoff Table Ozzie's Cement (profit in 1,000s) Low Price High Price Manny's Cement Low Price $60, $60 $130, $20 (profit in 1,000s) High Price $20, $130 $80, $80 Reference: Ref 15-6 (Table: Ozzie, Manny's Payoff Table) Refer to the table. The equilibrium outcome is: a. undefined in this game. b. $80, $80. *c. $60, $60. d. ($20, $130) or ($130, $20). 1338. Table: Oil Output Iran National Oil (profit in millions) Restrict Oil Output Expand Oil Output Iraq National Oil Restrict Oil Output $78, $78 $60, $89 (profit in millions) Expand Oil Output $89, $60 $65, $65 Reference: Ref 15-7 (Table: Oil Output) Refer to the table. If both countries abide by the cartel agreement (i.e., not cheat): *a. each country earns $78. b. each country earns $65. c. Iraq earns $89 and Iran earns $60. d. Iraq earns $60 and Iran earns $89. 1339. Table: Oil Output Iran National Oil (profit in millions) Restrict Oil Output Expand Oil Output Iraq National Oil Restrict Oil Output $78, $78 $60, $89 (profit in Expand Oil Output $89, $60 $65, $65 millions) Reference: Ref 15-7 (Table: Oil Output) Refer to the table. The situation between Iraq and Iran is similar to a: a. calibration cramp. *b. prisoner's dilemma. c. flippant switch. d. cooperative equilibrium. 1340. Table: Oil Output Iran National Oil (profit in millions) Restrict Oil Output Expand Oil Output Iraq National Oil Restrict Oil Output $78, $78 $60, $89 (profit in Expand Oil Output $89, $60 $65, $65 millions) Reference: Ref 15-7 (Table: Oil Output) Refer to the table. The equilibrium outcome is: a. $78, $78. *b. $65, $65. c. $89, $60. d. $60, $89. 1341. Table: Mary, Silvia Payoff Table Silvia Cooperate Cheat Mary Cooperate 20, 20 10, 40 Cheat 40, 10 15, 15 Reference: Ref 15-8 (Table: Mary, Silvia Payoff Table) Refer to the table. Mary and Silvia are producers. If Mary cheats, what is Silvia's dominant strategy? a. to cheat and earn 40 *b. to cheat and earn 15 c. to cooperate and earn 20 d. to cooperate and earn 40 1342. Table: Mary, Silvia Payoff Table Silvia Cooperate Cheat Mary Cooperate 20, 20 10, 40 Cheat 40, 10 15, 15 Reference: Ref 15-8 (Table: Mary, Silvia Payoff Table) Refer to the table. Mary and Silvia are producers. If Silvia cooperates, what is Mary's dominant strategy? *a. to cheat and earn 40 b. to cheat and earn 15 c. to cooperate and earn 20 d. to cooperate and earn 40 1343. The prisoner's dilemma: a. explains why cartels fail. b. describes how producers can lock themselves into a suboptimal outcome by pursuing their own self-interest. c. shows a dominant strategy for each of the players. *d. All of the answers are correct. 1344. Cartel agreements tend to fail: I. if they produce manufactured rather than natural goods. II. if they produce natural rather than manufactured goods. III. in the long run as demand curves become more elastic. a. I only *b. I and III only c. II and III only d. III only 1345. One reason cartels have limited power is that demand curves become: a. less elastic over time. *b. more elastic over time. c. fragmented over time. d. stable once the cartel is established. 1346. It is easier to maintain a cartel in a market for a(n) ________ than in a market for a(n) ________. a. intermediate good; final good b. final good; intermediate good *c. natural resource; manufactured good d. manufactured good; natural resource 1347. Which of the following is TRUE? a. The more substitutes a resource has, the more likely a cartel controlling such a resource will succeed. b. The more widespread a resource, the more likely a cartel controlling such a resource will succeed. *c. Oil and diamond cartels tend to be more successful than copper and plumbing cartels. d. Oil and diamond cartels have never been successful. 1348. Which of the following explains why it is typically easier to maintain a cartel in a natural resource than in a manufactured good? a. Natural resources are usually more valuable than manufacturing goods. *b. Natural resources are only found in certain places. c. Manufacturing goods are hard to replace. d. Supply of natural resources tends to be more elastic than supply of manufacturing goods. 1349. High prices maintained by a cartel usually make the cartel less successful because high price of the good: a. leads to more conservation. b. motivates demand to switch to substitutes of the goods c. encourages a search for new supplies. *d. All of the answers are correct. 1350. It is easier to maintain a cartel for ________ than for ________. a. services; natural resources *b. natural resources; manufactured goods c. products with lots of substitutes; products without substitutes d. copper; nutmeg 1351. The high prices charged by cartels: a. serve as a barrier to entry, allowing the cartel to earn above-normal profits. *b. give an incentive for new firms to enter the industry, causing an expansion of industry output and lower prices. c. reduce the incentive for increased conservation. d. All of the answers are correct. 1352. Major league basketball, the NBA, is cartelized to: a. maintain high ticket price of the games. *b. keep down players' salaries. c. reduce the competition of the teams. d. prevent teams from exploiting players. 1353. Which of the following explains why the NBA cartel is sustainable? a. Team owners make more money but players make less money. *b. Access to the NBA league is the good that the cartel controls to keep its members from cheating. c. NBA games compete against other professional and collegiate sports. d. Consumers benefit from the salary cap that prevents rich teams from buying up all the great players. 1354. The National Basketball Association is a: a. natural resource cartel. b. fixed-cost cartel. *c. buyer's cartel. d. player's cartel. 1355. The NBA is a like a cartel because: *a. the owners use the NBA league structure to collectively restrict the salaries of players. b. it is the most popular professional sport. c. ticket prices are high. d. teams use average cost pricing. 1356. In some cases cartels are successful because: a. the cartel produces a manufactured good with many substitutes. b. the marginal costs of production are high. c. the barriers to entry in the market are low. *d. the cartel controls access to a key input. 1357. In cases where a cartel controls access to a key production input, firms in the cartel: a. will always have an incentive to cheat on the agreement as cheating increases profits. *b. have less incentive to cheat for fear that they will be cut off from the key input. c. are typically good at finding ways to access the key input outside the cartel. d. will never cheat on the cartel agreement. 1358. The Sherman Antitrust Act of 1890: *a. limits cartel-like behavior in the United States. b. serves to limit anticompetitive behavior by foreign firms that the U.S. trades with. c. has illegalized all cartels in the United States. d. All of the answers are correct. 1359. Which federal law makes most cartels in the United States illegal? a. Interstate Commerce Act of 1901 b. Federal Reserve Act of 1914 c. Supreme Court case Johnson v. J. P. Morgan *d. Sherman Antitrust Act of 1890 1360. Which of the following laws makes cartel behavior illegal? a. Monopoly Act of 1897 *b. Sherman Antitrust Act of 1890 c. Sewon Act of 1955 d. Frame Act of 1910 1361. A government-supported cartel usually means: a. lower prices. b. higher quality of service. c. more innovation. *d. None of the answers is correct. 1362. The milk cartel in the United States: a. ended when the government prosecuted the owners of four major milk producers who conspired to raise prices. *b. is made legal and enforced by the government, and any firm that breaks the cartel is fined. c. frequently breaks down because of firm cheating. d. was put out of business because of new entrants. 1363. Which of the following statements is TRUE? a. Cartels are an important source of economic growth in developing countries. b. Economists are not opposed to government-created cartels since they usually provide high-quality products and service. *c. One cost of government-sponsored cartels is that people spend resources trying to obtain or maintain a cartel rather than produce better products. d. All of the answers are correct. 1364. Which of the following statements regarding cartels is FALSE? a. Cheating by cartel members is less profitable and easier to detect if there are fewer firms in the industry. b. New entrants can be prevented when the cartel-controlled good is limited in supply. *c. Cartels should control natural resources that are rare and more valuable. d. Cartels are more successful if they are backed by government and the power of the law. 1365. Which of the following statements is TRUE? I. It is easier to form a cartel for a product with few substitutes. II. Cartels that are backed and supported by the government tend to have less power. III. Cartels are more likely to collapse the more firms there are in an industry. a. I only b. II only *c. I and III only d. II and III only 1366. Which of the following is the best example of a firm operating in an oligopoly market? a. Walmart, a large retailer *b. ExxonMobil, one of the seven major refiners of oil c. McDonald's, a fast-food restaurant chain d. a corn farmer in Oklahoma 1367. A market dominated by a small number of firms is called a(n): *a. oligopoly. b. natural monopoly. c. monopoly. d. network market. 1368. Prices in an oligopolistic market are likely to be: a. equal to that of a monopoly market. *b. lower than that of a monopoly market. c. equal to that of a competitive market. d. lower than that of a competitive market. 1369. In an oligopolistic market, prices will tend to be closer to the competitive price: a. the more government regulation there is in the market. b. when the product is more distinguishable from its competitors. *c. the larger the size of the cartel. d. the greater the number of sales. 1370. Which of the following is the best example of a monopolistic competitive market? a. diamonds b. gas stations *c. restaurants d. milk 1371. Figure: Monopolistic Competition Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistically competitive market. In the long run you would expect: a. prices to increase. b. demand to become more inelastic. c. less quality and innovation. *d. more firms to enter the market. 1372. Figure: Monopolistic Competition Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In the long run you would expect price in this market to: a. stay the same. b. increase as unprofitable firms leave the industry. *c. decrease to the point that P = AC. d. decrease to the point that P = MC. 1373. Figure: Monopolistic Competition Reference: Ref 15-9 (Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In this market in the long run you would expect: a. both demand and price to stay the same. b. both demand and price to increase as unprofitable firms leave the industry. *c. demand to decrease and price to fall to the point that P = AC. d. demand to shift left and decrease price to the point that P = MC. 1374. Firms in monopolistic competitive industries: I. sell their products at a higher price than if their industry were strictly competitive. II. sell their products at the same price as if they were in a monopoly market. III. have a high incentive to innovate with new products and better quality. a. I and II only b. II and III only *c. I and III only d. I, II, and III 1375. Price advertising typically: a. raises prices for consumers, as the cost of advertising is simply passed on to consumers. b. raises prices and lowers output for consumers. c. is wasteful advertising. *d. lowers prices and increases consumer welfare. 1376. In 2010, which was the location of more advertisement for the iPad? a. Charlottesville, Virginia *b. Berlin, Germany c. Silicon Valley, California d. These markets were equally saturated with iPad ads. 1377. Firms that expect their products to be successful: *a. have more of an incentive to advertise. b. have less of an incentive to advertise. c. will only participate in price advertising. d. can better signal the quality of their product if they do not advertise. 1378. Persuasive advertising: a. is informative. b. is wasteful. *c. can create market power for firms through brand differentiation. d. has been shown to do little to increase sales. 1379. Consumers benefit from advertising: a. only when they gain information. b. if the advertising is not persuasive. *c. because it leads to lower prices for some products. d. when the advertising is being used as a signal. 1380. Which of the following is NOT subsidized through advertising? a. Google searches b. cable TV *c. Apple iPhones d. The Wall Street Journal 1381. Game theory can be used to study cartels and their behavior. *a. True b. False 1382. Cartels tend to lose their power due to the cheating by the cartel members. *a. True b. False 1383. A cartel can remain powerful even when all the members engage in secret price cuts. a. True *b. False 1384. A cartel is a group of consumers that tries to act together to increase their bargaining power. a. True *b. False 1385. A cartel is a group of firms that try to monopolize the market. *a. True b. False 1386. Cartels can be upheld because cheating is not profitable when other countries keep their promise to abide with the agreement. a. True *b. False 1387. OPEC nations cheat on their cartel agreement by producing more oil than they pledged to. *a. True b. False 1388. A dominant strategy is a strategy that a player should take only if the other player cheats. a. True *b. False 1389. A dominant strategy is a strategy that a player should take regardless of the strategy chosen by the other player. *a. True b. False 1390. A dominant strategy is a strategy that has a higher payoff than any other strategy no matter what the other player does. *a. True b. False 1391. The prisoner's dilemma describes situations where the pursuit of individual interest leads to a group outcome that is in the interest of everyone. a. True *b. False 1392. One way a cartel gets its power is by controlling a natural resource that is found in large quantities in a few places. *a. True b. False 1393. The copper cartel (the International Council of Copper Exporting Countries) has been very successful. a. True *b. False 1394. Cartels in manufactured goods are difficult to maintain because other firms can enter the market and easily produce substitute products. *a. True b. False 1395. Major league sports are illegal cartels. a. True *b. False 1396. One sign of the cartel power of the NBA is the use of salary caps. *a. True b. False 1397. The Sherman Antitrust Act prevents Microsoft from becoming too large. *a. True b. False 1398. All cartels and cartel-like behavior are illegal in the United States. a. True *b. False 1399. When cheating is less profitable or easier to detect, a cartel will be easier to sustain. *a. True b. False 1400. The more firms there are in an oligopolistic market, the closer prices will be to monopoly levels. a. True *b. False 1401. Monopolistic competition is similar to that of monopoly, but allows for free entry and exit of competing firms. *a. True b. False 1402. In the long run, monopolistic competitive firms will end up producing at a price equal to that of competitive markets. a. True *b. False 1403. Persuasive advertising is wasteful advertising and does nothing to impact overall demand for the product. a. True *b. False 1404. What are three reasons that cartels collapse? Provide an example of each. Correct Answer: There are three reasons cartels collapse. (1) Cheating by the cartel members; (2) new entrants and demand response; and (3) government prosecution. Answers may vary regarding particular examples, including (1) secret price cutting by an OPEC cartel member, seeking additional profits; (2) expanded exploration for oil resources and consumers switching to alternative sources of energy; and (3) legal proceedings against Microsoft for its use of market power in operating systems to expand its presence in Internet browser technologies. 1405. Cartels tend to collapse and lose their power for three reasons. List these reasons and briefly explain why each of them causes cartels to collapse. Correct Answer: a. Cheating by the cartel members: cheating is profitable when other firms keep their promise. b. New entrants and demand response: high price of cartel-controlled goods encourages a search for new supplies and leads consumers to more conservation and the search for other substitutes. c. Government prosecution: most cartels are illegal in the United States and the government holds the legal right to punish cartel-making businesses. 1406. What are some reasons why cartels could fail? Correct Answer(s): a. Cheating by the cartel members, new entrants and demand response, government prosecution. 1407. From the chapter on cartels: how does the market output under a cartel differ from the market output in a monopoly market? Explain. Correct Answer: Cartel members tend to cheat and so a cartel outcome would yield a higher market quantity and a lower market price, compared to a monopoly outcome. 1408. (Table: Market Outcomes) Refer to the table. Suppose two firms create a cartel that attempts to mimic the monopoly profit outcome. Assume zero costs and answer the following questions. Table: Market Outcomes Total Market Output Market Price 200 90 400 80 600 70 800 60 1,000 50 1,200 40 1,400 30 1,600 20 a. What quantity would each firm produce if together they were to achieve the monopoly market outcome? What would each producer's profit be? b. Is there any incentive for either of the producers to cheat and increase production by 200 units? c. If one of the producers cheats by increasing quantity by 200 units, will the other producer also retaliate and increase quantity? d. How far will market quantity increase if cheating ensues? Correct Answer: a. Each firm would produce 500 units and each firm would make a profit of $25,000 b. Yes, the incentive is that the profit for the cheater would increase to $28,000. c. Yes, the other producer will retaliate because the new profit will be $21,000 as opposed to $20,000 when only one party is cheating. d. Cheating will stop when each firm produces 700 units because going any further will cause lower profit than before. Thus the two producers are now locked in a suboptimal outcome. 1409. (Table: Dana, Marnee Payoff Table) Refer to the table. Using the information in the table, answer the following questions. Table: Dana, Marnee Payoff Table Marnee Milk Producer Cooperate Cheat Dana Milk Cooperate (60, 60) (20, 80) Producer Cheat (80, 20) (30, 30) a. What is Dana Milk Producer's dominant strategy? b. What is Marnee Milk Producer's dominant strategy? Correct Answer(s): a. Both firms have a dominant strategy to cheat. 1410. If two professional athletes take steroids, they each earn a lifetime income (net of health costs) of $3 million. If the two athletes abstain from steroids, they each earn a lifetime income of $4 million. If one athlete takes steroids, but the other does not, the steroid user gains a competitive advantage and earns a lifetime income of $6 million and the non-steroid user earns $1 million. a. Construct the payoff table for the two professional athletes. b. What is the dominant strategy for both athletes? Correct Answer: a. Athlete II (millions) Use Steroids Abstain from Steroids Athlete I Use Steroids $3, $3 $6, $1 (millions) Abstain from Steroids $1, $6 $4, $4 b. The dominant strategy is for both players to use steroids. 1411. (Table: Firms A, B) Refer to the table. What is the equilibrium outcome if firms A and B form a cartel and do not cheat? What is the equilibrium outcome if at least one firm decides to cheat? Table: Firms A, B Firm B (profits millions) Restrict Output Expand Output Firm A (profits Restrict output $15, $15 $6, $25 millions) Expand output $25, $6 $12, $12 Correct Answer: The cartel outcome is for both firms to restrict output and earn payoffs ($15, $15). The cheating outcome is for both firms to expand output and earn payoffs ($12, $12). 1412. Explain the impact of new entrants and consumer response on a cartel. Correct Answer: Cartel profits encourage new firms to enter the market and for consumers and other firms to conserve on the use of the cartel's product. Many firms will try to develop new technologies that rely less on the cartel's product. 1413. Most radio stations broadcast their programming at no cost to the listener. How can they do this? What role does advertising play? Would radio stations be more profitable if they could instead charge listeners a subscription fee for listening to their station? Correct Answer: Radio stations earn revenue from selling advertising. Specifically, radio stations charge firms a price to advertise products on their radio programs. This allows consumers to listen to radio at no charge. Radio stations would probably be worse off if they charged a subscription fee to listen to their stations, since offering programming at no charge allows them to charge higher fees to firms for their advertising since they currently reach a higher number of listeners. 1414. Which of the following would NOT be considered a network good? a. cell phones *b. quiet study rooms c. e-mail programs d. online player versus player games 1415. Which of the following statements is FALSE? a. Network goods are usually sold by monopolies or oligopolies. *b. When networks are important the “best” products usually win. c. Standard wars are common in establishing network goods. d. Competition in network goods is for the market, not in the market. 1416. A network good is a good whose value to one consumer: a. increases the network of the consumer. b. increases some, but to less value as other consumers use the good. c. also creates the same value to other consumers as they use the good. *d. increases the more that other consumers use the good. 1417. Which of the following goods represent network goods? a. Pepsi, toilet paper, headphones b. calculator, oven, couch *c. Twitter, Microsoft Excel, Facebook d. fireworks, lighthouse, swimming pool 1418. A network good is: a. a broadcast show on radio or television. b. a good that must be bought in large quantities in order to get discounted prices. c. a good supplied by a large network of competitive firms. *d. a good whose value increases to consumers as more consumers use the good. 1419. Which of the following statements about network goods is TRUE? a. They are goods that are usually sold by large firms with a great deal of market power. b. They are goods that tend to have a large number of users or consumers. c. They are goods whose value to one consumer increases the greater the total number of consumers. *d. All of the answers are correct. 1420. Which of the following is NOT a feature of markets for network goods? a. Network goods are usually sold by monopolies or oligopolies. b. Standard wars are common in establishing network goods. *c. Competition in the market for network goods is “in the market” instead of “for the market.” d. When networks are important the “best” product may not always win. 1421. Which of the following statements is TRUE? a. Network goods are sold mostly in price-taker markets. b. The network good is always the “best” good. *c. Monopolies may sell network goods. d. All of these statements are true. 1422. Firms that produce goods that are the dominant standard goods in the market typically sell these goods at: a. a loss. *b. a higher price than in a competitive market. c. a lower price than in a competitive market. d. marginal cost. 1423. Firms sometimes give away products for free in the hopes of: a. selling other goods they produce at a higher price. b. driving the competition out of business. *c. becoming the dominant standard. d. creating a loyal customer base. 1424. Which of the following best explains why monopolies or oligopolies tend to dominate the market for network goods? I. Their products are the most likely to be compatible with other products. II. They produce the “best” products in terms of quality and compatibility. III. The power of coordination is so strong that monopolists and oligopolists can dominate the market even when they charge prices higher than their competitors. a. I only b. I and II only *c. I and III only d. I, II, and III 1425. Which of the following conditions is required for a network good to succeed over a better good in the market? a. The network good should have a minimal number of consumers so that customers are not competing for the same network. *b. The network good should have a much larger number of consumers or users than the better good. c. The network good should be a free good. d. All of these conditions are required. 1426. The equilibrium in a market in which no participant has an incentive to change his or her strategy unilaterally is called a: a. market equilibrium. *b. Nash equilibrium. c. coordinating equilibrium. d. financial equilibrium. 1427. A Nash equilibrium in game theory is defined as a situation in which: a. no player has an incentive to change his or her strategy even when other players change. *b. no player has an incentive to change his or her strategy unilaterally. c. any player has an incentive to change his or her strategy until he or she reaches the optimum. d. any player has an incentive to change his or her strategy even when other players remain unchanged. 1428. When many people are involved and when they do not all agree about whether one good really is better than another, the best final equilibrium is usually determined by: a. consumers. b. the market. c. the government. *d. historical accidents. 1429. (Table: Homer, Marge Payoff Table) Refer to the table. The Nash equilibrium is (are): Table: Homer, Marge Payoff Table Marge (utility) Go to Ball Game Go to Opera Homer Go to Ball Game 50, 50 45, 45 (utility) Go to Opera 0, 45 48, 60 *a. (50, 50) and (48, 60) b. 0, 45. c. 45, 45. d. (48, 60) and (45, 45) 1430. A Nash equilibrium: *a. means that no players have an incentive to change their strategy. b. means that some players could be made better off by changing their strategy. c. is suboptimal compared to Raj's equilibrium. d. None of the answers is correct. 1431. (Table: Jim, Dan Payoff Table) Refer to the table. Which of the following outcomes is NOT a Nash equilibrium? Table: Jim, Dan Payoff Table Dan Good A Good B Jim Good A (12, 12) (4, 4) Good B (3, 3) (8, 8) I. (12, 12) II. (4, 4) III. (8, 8) IV. (3, 3) a. I and IV only *b. II and IV only c. III only d. I and III only 1432. What is meant by the concept of a Nash equilibrium? a. It is an outcome where the player has played his or her dominant strategy. b. It is an outcome where both players have the incentive to change their strategy. *c. It is the outcome where neither player wishes to change his or her strategy unilaterally. d. It is the same as a dominant strategy outcome. 1433. For two players in a game, a Nash equilibrium is different from a dominant strategy in that: a. the outcome in the Nash equilibrium may not be the best outcome for either of the players. b. the Nash equilibrium always has unequal outcomes whereas the dominant strategy always has even outcomes. c. there is always only one Nash equilibrium but there may be more than one dominant strategy. *d. None of the answers is correct. 1434. The Blu-ray standard war illustrates that: *a. once a product standard is established the rival product disappears from the market. b. government protection may lead to the demise of the superior product. c. bilateral monopolies sometimes price below average cost. d. complementary goods have high income elasticities. 1435. In a “standard war”: *a. there are two good equilibria, but the players differ over which equilibrium is the best. b. there is only one good equilibrium, but players get locked into the “bad” equilibrium. c. the Nash equilibrium always dominates. d. both players would prefer to have no standard. 1436. Firms that are competing to be the dominant standard: a. try to lower their prices so as to drive other firms out of business. b. work to get consumers to recognize both standards. *c. work to get content producers and distributors to sign on to one standard or the other. d. try to produce the cheapest technology so as to win the standard war. 1437. Which of the following statements is TRUE regarding network goods? *a. Network goods are usually sold by monopolies or oligopolies. b. Microsoft Word has always been the dominant word processing software. c. Microsoft Excel has always been the dominate spreadsheet software. d. All of the answers are correct. 1438. Competition for the market rather than in the market: a. is the reason why Friendster is no longer the leading social network. b. explains why Microsoft Word is the leading word processing network. c. means that Facebook may one day no longer be one of the leading social networks. *d. All of the answers are correct. 1439. Standard wars illustrate the idea that: a. the best product will typically become the dominant standard as consumers search to maximize benefits. b. network goods are usually produced in competitive markets. c. for network goods, competition occurs in the market. *d. for network goods, competition occurs for the market. 1440. The market for network goods: I. is dominated by a single monopolist. II. is dominated by a series of monopolies. III. ensures long-term profits for those companies that win the standard war. a. I only *b. II only c. I and III only d. II and III only 1441. Firms that operate in contestable markets: *a. still price competitively since they face the threat of competition from new entrants. b. are pure monopolies that set price equal to consumers' highest willingness to pay. c. earn zero economic profits. d. face more competition when fixed costs are high. 1442. When the market for a network good is contestable: a. there is little competition. b. many firms operate and compete for consumers in the industry. *c. it is hard for consumers to get locked into a “bad” outcome. d. monopoly firms always charge prices well above their average costs. 1443. Contestable markets tend to arise when: a. fixed costs are high. b. the threat of new firms entering the market is low. *c. the incumbent firm does not control access to an important resource. d. government regulations are in effect. 1444. Which of the following is NOT a good example of a contestable market? a. low-cost airlines *b. electricity providers c. a local Mexican restaurant d. bottled water manufacturers 1445. Markets tend to be more easily monopolized when: a. marginal costs are low. b. average costs are high. c. the good is a network good. *d. fixed costs are high. 1446. Which of the following explains why frequent flier programs reduce contestability in the airline industry? a. Frequent flier programs make demand for each airline more elastic and thus lead to more competition. *b. Frequent flier programs make demand for each airline more inelastic and thus lead to more monopoly power and higher prices. c. Frequent flier programs increase demand for each airline, ultimately leading to increased competition and lower prices. d. Frequent flier programs lead to lower switching costs and therefore less contestability in the market. 1447. Customer loyalty programs, such as frequent flier programs, tend to lead to: a. more competition and lower prices. b. more competition and higher prices. c. less competition and lower prices. *d. less competition and higher prices. 1448. The online photo-sharing Web site Shutterfly offers unlimited free uploads. Which of the following best explains why they offer this service at no charge? *a. Shutterfly is trying to increase switching costs for their consumers. b. Shutterfly is trying to decrease their average costs. c. Shutterfly is trying to increase competition. d. The marginal cost of uploading photos is near zero; setting price equal to marginal cost is simply an efficient pricing strategy. 1449. Antitrust authorities have a difficult time with network goods because: *a. they know that with network goods, only a few firms will always dominate the market. b. profits tend to be higher in network markets, and thus firms are willing to fight harder. c. when monopolies exist, there is no competition to help lower prices. d. increased competition can easily lead to corruption in network markets. 1450. An experiment by Duncan J. Watts, a sociologist at Columbia University, showed that when consumers knew a particular song had been downloaded by a lot of other people, more consumers wanted to download that song as well. If this is true, this suggests that music itself may be: a. a competitive good. *b. a network good. c. a system good. d. an association good. 1451. Duncan Watts' research suggested that: a. the best music is also the most popular music. *b. people base their musical preferences on what other people think. c. people are biased against free downloaded music. d. QWERTY was inferior to Dvorak. 1452. Music is an example of a ________ good. *a. network b. played c. reverse d. mirrored 1453. Music is a network good because: a. most people want to listen to music that is popular. b. music that is popular is a more valuable good. c. music that is popular offers more benefits to the listener than does music that is obscure. *d. All of the answers are correct. 1454. Which of the following is FALSE? a. Music is a network good. b. Some musicians get lucky and become popular quickly. *c. Popularity is less important than musicianship. d. A musician's current success is no guarantee of future success. 1455. A network good is a good whose value to one consumer increases the more that other consumers use the good. *a. True b. False 1456. When networks are important, the “best” product may not always win. *a. True b. False 1457. A fax machine is a network good because it becomes more useful when greater numbers of people have them. *a. True b. False 1458. The market for Internet dating is dominated by eHarmony, Match.com, and Yahoo. This market is an example of monopolistic competition. a. True *b. False 1459. An outcome where both players have played their dominant strategy is also a Nash equilibrium. *a. True b. False 1460. Most contestable markets have high fixed costs. a. True *b. False 1461. Describe the features of markets for network goods. Correct Answer: a. Network goods are usually sold by monopolies or oligopolies. b. When networks are important the “best” product may not always win. c. Standard wars are common in establishing network goods. d. Competition in the market for network goods is for the market instead of in the market. 1462. (Table: Cell Service) Refer to the table. Mr. Brooks and Ms. Gertrude are good friends who like to talk on the phone. Each is deciding on a cell phone service to sign on with, where each service offers free unlimited calls to other customers who subscribe to the same service. The payoff table shows the rewards to Mr. Brooks and Ms. Gertrude from choosing either cell service A or B. Table: Cell Service Mr. Brooks Cell Service A Cell Service B Ms. Gertrude Cell Service A 50, 50 5, 10 Cell Service B 10, 5 75, 75 a. What is(are) the Nash equilibrium(s) in this coordination game? Which equilibrium will Mr. Brooks and Ms. Gertrude end up at? Explain your b. answer. Does the coordination game get easier or harder if there are 100 friends c. instead of just 2? Explain. Correct Answer: a. There are two Nash equilibriums—(A, A) and (B, B) b. If Mr. Brooks and Ms. Gertrude are the only “players” in this game, they could probably talk to each other and coordinate on the best equilibrium (B, B). However in reality the coordination is between Mr. Brooks, Ms. Gertrude, and many other people, and so coordinating on the best equilibrium may be very costly or impossible. In this case, the final equilibrium may come down to other random factors such as which company is better at marketing its service, which company gives out free phones, etc. c. Harder. See answer to part b. 1463. What is the difference between competition “for the market” and competition “in the market”? Correct Answer: Competition “for the market” is one monopoly verses another in which the market for network goods is dominated by a handful of firms, and firms with the losing standard have to abandon the standard and often drop out of the market altogether. Competition “in the market” comes from a firm with some degree of monopoly power versus its competing firms for some share of the market for that good. These firms can coexist whereas the firm with a losing standard will be unable to continue competing in that market. 1464. Explain why network goods are typically sold by either monopolists or oligopolists. In your answer, address how standard wars play a role and whether or not the “best” product always wins. Correct Answer: Network goods are typically produced by either monopolists or oligopolists because most people want to use the same product as most other people. The pressures for coordination are so strong that typically only one firm will dominate the market (or just a few if other factors such as geography or niche services mean that more than one firm can compete in the market). Which product wins the standard war (the product that becomes the dominant standard) may however not be the best product in terms of quality or price. The competition however is “for” the market, and so once a firm wins the market, they will be able to price above marginal cost until another product topples their reign. 1465. A firm is willing to hire a worker when the marginal product of labor is: *a. greater than the wage. b. less than the wage. c. equal to or less than the wage. d. efficient. 1466. To maximize profit, a firm will hire workers when the ________ in revenue from hiring an additional worker ________ the worker's wage. a. decrease; is less than or equal to b. decrease; is greater than *c. increase; is greater than d. increase; is less than or equal to 1467. When wages decrease, firms will hire more workers who will be: a. assigned to the most important tasks. *b. assigned to the least important tasks. c. least likely to be laid off. d. paid wages that are higher than market wages. 1468. The market demand curve for labor is based on the: a. hiring preferences of firms. b. elasticity of supply of labor. c. elasticity of demand for labor. *d. marginal product of labor. 1469. The increase in a firm's revenues created by hiring an additional worker is called: a. marginal revenue. b. marginal revenue of labor. c. marginal product. *d. marginal product of labor. 1470. A firm will hire workers as long as the marginal product of labor is: *a. greater than the wage. b. equal to the wage. c. less than the wage. d. either greater or less than the wage. 1471. Marián Hossa was paid $7.4 million by the Detroit Red Wings for the 2008–2009 season. We can conclude that: a. Marián Hossa was overpaid. *b. the Red Wings expected Marián Hossa to increase the team's revenue by at least $7.4 million. c. the marginal product of labor of Marián Hossa must be less than $7.4 million. d. the marginal product of labor of Marián Hossa is 0.90 times the marginal cost. 1472. A firm will continue to hire workers as long as: *a. the marginal product of labor is greater than the wage. b. the marginal product of labor is less than the wage. c. the value of labor exceeds the firm's production costs. d. the value of labor exceeds the firm's fixed costs of labor. 1473. Table: All-Stars Number of All-Star Marginal Product of Labor Quality Pitchers (MPL per season, millions) 1 $20 2 15 3 7 4 3 5 1 6 0.50 Reference: Ref 17-1 (Table: All-Stars) Refer to the table. A Major League Baseball team is considering increasing the quality of its pitching staff by hiring all-star quality pitchers. If the going salary for an all-star pitcher is $12 million per season, this team will hire ________ pitchers. a. 4 b. 3 *c. 2 d. 5 1474. Table: All-Stars Number of All-Star Marginal Product of Labor Quality Pitchers (MPL per season, millions) 1 $20 2 15 3 7 4 3 5 1 6 0.50 Reference: Ref 17-1 (Table: All-Stars) Refer to the table. A Major League Baseball team is trying to increase the quality of its pitching staff by hiring all-star quality pitchers. If the team hires three all-star pitchers, what is the going salary for an all-star pitcher? a. more than $7 million per season *b. between $3 million and $7 million per season c. less than $3 million per season d. $42 million per season 1475. Which of the following statements is TRUE? I. The demand for labor is downward sloping. II. The marginal product of labor declines as a firm hires more labor. III. The marginal product of labor is the demand curve for labor. a. I only b. I and II only c. III only *d. I, II, and III 1476. (Figure: Cleaners' Wages) Refer to the figure. How many workers will this firm hire at a wage of $29? Figure: Cleaners' Wages a. 0 b. 1 *c. 2 d. 3 1477. The marginal product of labor is: a. the additional output produced by an extra worker. b. the increase in costs borne by the firm when one extra worker is hired. c. always greater than the wage earned by one additional worker. *d. the increase in firm revenue when an additional worker is employed. 1478. Table: Sunshine Flower Vase Co. Number Of Workers Daily Total Revenue ($) 3 1,350 4 1,580 5 1,760 6 1,885 7 1,965 8 2,015 Reference: Ref 17-2 (Table: Sunshine Flower Vase Co.) Refer to the table. What is the marginal product of labor for the fifth worker? a. $1,760 b. $135 *c. $180 d. $1,580 1479. Table: Sunshine Flower Vase Co. Number Of Workers Daily Total Revenue ($) 3 1,350 4 1,580 5 1,760 6 1,885 7 1,965 8 2,015 Reference: Ref 17-2 (Table: Sunshine Flower Vase Co.) Refer to the table. If the market wage for each worker is $100 per day, how many workers will the company hire? a. 4 b. 5 *c. 6 d. 7 1480. Table: Sunshine Flower Vase Co. Number Of Workers Daily Total Revenue ($) 3 1,350 4 1,580 5 1,760 6 1,885 7 1,965 8 2,015 Reference: Ref 17-2 (Table: Sunshine Flower Vase Co.) Refer to the table. If the market wage for each worker rose from $100 to $125 per day, how many workers would the firm hire? a. 4 b. 5 *c. 6 d. 7 1481. Table: Sunshine Flower Vase Co. Number Of Workers Daily Total Revenue ($) 3 1,350 4 1,580 5 1,760 6 1,885 7 1,965 8 2,015 Reference: Ref 17-2 (Table: Sunshine Flower Vase Co.) Refer to the table. If there is competition from new immigrants that lowers the market wage for each worker from $100 to $70 per day, how many workers would the firm hire? a. 5 b. 6 *c. 7 d. 8 1482. A firm will hire a worker as long as: *a. the marginal product of labor is greater than or equal to the wage earned by the worker. b. the wage earned is greater than the marginal product of labor. c. the worker is not unionized. d. the worker does not demand OSHA safety regulations. 1483. Table: Excellence Publishing Number Of Workers Per Year Number Of Books Edited Per Year 4 16,000 5 19,000 6 21,200 7 22,800 8 23,700 9 24,200 Reference: Ref 17-3 (Table: Excellence Publishing) Refer to the table. Each edited book sells for $50. What is the marginal product of labor for the sixth worker? a. $21,200 *b. $110,000 c. $45,000 d. $2,200 1484. Table: Excellence Publishing Number Of Workers Per Year Number Of Books Edited Per Year 4 16,000 5 19,000 6 21,200 7 22,800 8 23,700 9 24,200 Reference: Ref 17-3 (Table: Excellence Publishing) Refer to the table. Each edited book sells for $50. How many people will the company hire per year as editing staff if the annual salary is $47,000 per staff member? a. 5 b. 6 *c. 7 d. 8 1485. Table: Excellence Publishing Number Of Workers Per Year Number Of Books Edited Per Year 4 16,000 5 19,000 6 21,200 7 22,800 8 23,700 9 24,200 Reference: Ref 17-3 (Table: Excellence Publishing) Refer to the table. Initially each edited book sells for $50. Suppose that there is an increase in the demand for edited books, such that each edited book now sells for $70. How many people will the company hire per year as editing staff if the salary is $47,000 per staff member? a. 5 b. 6 c. 7 *d. 8 1486. The market wage for workers is: I. equal to the marginal product of labor. II. determined by the intersection of the firm's demand curve for labor and the individual's supply curve for labor. III. always greater than the minimum wage. *a. I only b. I and II only c. II and III only d. I, II, and III 1487. Which of the following statements is TRUE? *a. The market supply of labor is always upward sloping, but an individual's labor supply may not be upward sloping throughout its entire range. b. An individual's supply of labor is always upward sloping, but the market supply of labor may not be upward sloping throughout its entire range. c. Both the market supply of labor and the individual's labor supply will both be upward sloping. d. Both the market supply of labor and the individual's labor supply may not be upward sloping across their entire range. 1488. The market supply of labor is upward sloping because: a. an individual might work less when his wage increases. *b. higher wages would attract more workers into the industry. c. an additional worker hired tends to be more productive. d. None of the answers is correct. 1489. The market wage of computer programmers is determined by: a. the demand for labor. *b. an upward sloping supply curve of labor and a downward sloping demand curve for labor. c. a downward sloping demand and supply curve of labor. d. the marginal product of labor and demand curve for labor. 1490. An individual's labor supply curve: a. is always upward sloping. b. is always perfectly inelastic. *c. can be either positively or negatively sloped, or perfectly inelastic. d. is negatively sloped. 1491. The normal shape of the labor market supply curve is: a. perfectly inelastic. *b. positively sloped. c. backward bending. d. unknown. 1492. If the market wage for electrical engineers in the United States is $50 per hour, then we know that the marginal product of electrical engineers is: a. more than $50 an hour. b. around $50 an hour. c. less than $50 an hour. *d. at least $50 an hour. 1493. Why might an individual's labor supply curve bend backwards? a. As wages rise above a threshold level, the individual will decide to work harder. *b. As wages rise above a threshold level, the individual may opt for more leisure time. c. As wages rise above a threshold level, firms limit the amount of hours that a worker can work. d. When wages rise, firms hire fewer workers. 1494. In general, wages are determined: a. by the skills of the worker regardless of the country he or she works in. *b. by the skills of the worker and the productivity of the entire economy. c. based on the average wage for all individuals in a particular country. d. based on the average marginal product of labor of workers in similar countries. 1495. Office cleaners in India earn less than office cleaners in the United States because: a. American office cleaners work harder than Indian office cleaners. b. American office cleaners possess higher education levels than Indian office cleaners do. *c. the American economy is more productive than the Indian economy. d. All of the answers are correct. 1496. Workers in many foreign countries such as India are paid much less for work that is very similar to the work done by workers in the United States. One reason for this is that: a. India is a more productive economy. b. workers in the United States are greedy. *c. India is a less productive economy. d. workers in India are less materialistic. 1497. If all people had the same preferences and productivity, then the currently highest paying jobs would be the most: a. easily learned. b. prestigious. c. convenient. *d. undesirable. 1498. The wages of office cleaners in the United States are ________ than the wages of office cleaners in India because ________. a. less; few Americans want jobs as office cleaners generating a lower supply of office cleaners in the United States b. less; Indians work more hours *c. greater; American offices are more productive and hence more valuable to keep clean d. greater; more Indian cleaners are in a union 1499. Wages for low-skilled positions are typically higher in developed countries than wages for identical positions in less-developed countries. Which of the following explain why this is the case. I. There is a greater supply of low-skilled labor in less-developed countries. II. There is a greater demand for low-skilled labor in developed countries. III. There is a greater demand for low-skilled labor in less-developed countries. a. I only *b. I and II only c. I and III only d. II only 1500. Which of the following represents human capital? a. skills gained while working on the job b. a college education c. a government retraining program *d. All of the answers are correct. 1501. Workers earn higher wages: I. when the demand for labor rises in an industry. II. the greater the amount of human capital they possess. III. the more dangerous the job they perform. a. II only b. III only c. II and III only *d. I, II, and III 1502. A college education in the United States: *a. has been shown to earn a wage premium. b. is not counted as human capital. c. does not lead to any difference in wages as compared to a high school education. d. does not get the same high wages as it did in the past. 1503. Compared to a similar job that requires little human capital, a job that requires a large amount of human capital will likely pay: a. a lower wage rate. *b. a higher wage rate. c. the same wage rate. d. twice the wage rate. 1504. Economic theory suggests that college graduates receive higher wages than those with only a high school education because: a. college graduates tend to unionize. b. the supply of high school graduates is relatively small compared to the supply of college graduates. c. college graduates must be paid higher wages to help them pay off their college expenses. *d. college graduates are more productive. 1505. Which of the following is most likely to improve the productivity of workers? a. federal legislation mandating benefits b. an increase in unionization c. an increase in the minimum wage *d. investment in human capital 1506. Some workers have higher wages than others because: a. they have more human capital. b. they have more access to physical capital. c. they work harder than others. *d. All of the answers are correct. 1507. Which of the following is NOT a possible cause of the increasing return to college education since the 1980s? a. The ability to work with computers has made an education more valuable than in times past. b. The flow of new people into the ranks of the college-educated has been limited. *c. The cost of college education has been skyrocketing. d. None of the answers is correct. 1508. Human capital: a. refers to workers who do highly repetitive work, which requires little thought and creativity. b. is the equipment, tools, and computers that make workers more productive. *c. is the skills, knowledge, and experience that people obtain. d. refers to a worker in a capital intensive industry. 1509. Which of the following statements is TRUE? a. Because employers care so much about maximizing profits, they are likely to discriminate against minority workers. b. All else equal, there is no trade-off between risk of job injury and wages. c. The falling returns to human capital investment for women are due to employer discrimination. *d. The rising returns to human capital may be attributable to the growing importance of advanced technology. 1510. Which of the following statements is FALSE? a. The returns to college education have been increasing over time. b. College graduates earn about twice that of high school graduates. *c. There is almost no return to getting more education beyond a bachelor's degree. d. Grade school deficiencies may limit the number of people entering college, increasing the returns to education. 1511. Fishermen who go deep sea crab fishing (like those on The Deadliest Catch) earn: a. the same hourly wages as most other professions. *b. a compensating wage differential. c. a college wage premium. d. All of the answers are correct. 1512. Truck drivers who drive on the ice roads in Alaska and Canada (like those on Ice Road Truckers) earn: a. the same hourly wages as most other professions. b. a college wage premium. *c. a compensating wage differential. d. All of the answers are correct. 1513. Why do similar jobs have similar compensation packages? I. The law of demand and supply will ensure that the salaries will be similar over time. II. Wages and “fun” adjust between jobs until compensation packages are similar. III. Because exactly the same skills are being applied. a. I only *b. I and II only c. II and III only d. I, II, and III 1514. Why are jobs safer today than they were some decades ago? a. because workers are wealthier and less willing to take on risk b. because of the laws enforced by OSHA (Occupational Safety and Health Administration) c. Market competition has ensured that firms have installed safety procedures. *d. All of the answers are correct. 1515. A firefighter is likely to earn ________ than a receptionist because ________. a. more; the job is more fun. b. more; the job is more prestigious. *c. more; the job is more dangerous. d. less; the job has unattractive characteristics. 1516. Working conditions, prestige, location, freedom, variety, and employee safety are all examples of: *a. sources of wage differentials. b. tools of employment discrimination. c. trivial job characteristics. d. sociological features of labor markets. 1517. A compensating differential is mainly a cause of a difference in: *a. wages due to differences in working conditions. b. wages due to differences in human capital. c. wages due to differences in productivity. d. All of the answers are correct. 1518. Suppose that being an accountant and a musician require similar amounts of skills, education, training, and so forth. If accountants are paid higher wages than musicians: a. the supply of musicians would increase and the supply of accountants would decrease. *b. the supply of musicians would decrease and the supply of accountants would increase. c. the supply of both musicians and accountants would increase. d. the supply of both musicians and accountants would decrease. 1519. One of the most important reasons why job safety increases over time is: a. government regulation. b. changing labor market condition. *c. economic growth. d. labor unionization. 1520. Which of the following is NOT the main driver behind the process of improving the quality of American jobs? a. government regulation *b. labor unionization c. increasing wealth d. profit incentive 1521. Which of the following best describes the major factor in making jobs safer? a. Labor unions are aggressive in pursuing safety objectives. *b. Increased wealth created by economic growth makes workers less willing to take on excessive risk. c. OSHA oversees workplace safety and levies fines. d. All of the answers are correct. 1522. Compensating differentials give firms an incentive to increase safety only if: a. firms perceive enough potential profit to pay for workers' safety. *b. workers know that the job is risky. c. the premium of workers' compensation insurance is low. d. All of the answers are correct. 1523. Why are private security guards in Iraq paid more than private security guards in the United States? *a. The security guards in Iraq receive a compensating differential to offset the increased risk of death. b. Being a security guard in Iraq is more glamorous than in the United States. c. Being a security guard in Iraq is likely to lead to better jobs in the future. d. All of the answers are correct. 1524. Suppose that jobs A and B are equally attractive, requiring the same amount of skills, education, and training. It is suddenly learned that working at job B will lower your life expectancy by 4.5 years. What will happen in the labor markets for jobs A and B? a. The supply of labor in job B will increase to take advantage of the higher wages. *b. Labor supply in job B decreases causing the wages to rise for job B, and labor supply in job A increases causing wages to fall for job A. c. Labor demand in job A increases causing the wages to rise for job A, and labor supply in job A increases causing wages to fall for job A. Thus, the effect on wages in job A is ambiguous. d. Labor supply in job B increases causing the wages to rise for job B, and labor supply in job A decreases causing wages to fall for job A. 1525. Suppose that the market for window cleaners is in equilibrium at a wage of $16. If window cleaning becomes safer: a. the demand for window cleaners will increase causing the equilibrium wage to rise above $16. b. the demand for window cleaners will decrease causing the equilibrium wage to fall below $16. *c. the supply of window cleaners will increase causing the equilibrium wage to fall below $16. d. the supply of window cleaners will decrease causing the equilibrium wage to fall below $16. 1526. Which of the following is TRUE? a. The main reason why wages are high in some countries is the existence of unions in those countries. b. The wages in unionized jobs tend to be lower than the wages in nonunionized jobs. c. Unions increase the supply of labor and increase wages as a result. *d. Unions raise wages for some workers and lower wages for other workers. 1527. Which of the following is NOT the primary method that unions use to raise wages? a. restricting their membership b. threatening to strike unless employers hire union labor c. reducing the supply of labor to an industry *d. lobbying the government to increase the minimum wage 1528. (Figure: Unionized Jobs) Refer to the figure. Which of the following would represent the wage and number of workers of unionized jobs? Figure: Unionized Jobs a. W1; N1 b. W1; N2 *c. W2; N1 d. W2; N2 1529. Which of the following best describes the influence of labor unions on workers? a. The harm of labor unions to workers is both immediately evident and longer term. b. The benefit of labor unions to workers is both immediately evident and longer term. *c. The benefit of labor unions to workers is immediately evident while the harm is longer term and harder to see. d. Labor unions provide neither benefit nor harm to workers. 1530. Which of the following statements is NOT correct? a. Unions can raise the wages of particular classes of workers. *b. Unions are the fundamental reason why wages are high in the wealthy countries. c. High wages of physicians are due to the restriction of physician supply. d. Less unionized Britain has grown more rapidly than the more unionized France. 1531. Which of the following statements is TRUE? I. Union members earn higher wages because unions restrict the supply of labor. II. Unions are similar to cartels in that they restrict competition among workers. III. Countries with more union members earn more than countries with fewer union members. *a. I and II only b. I, II, and III c. II and III only d. III only 1532. If a union forms in a market that is currently in equilibrium: a. wages, employment, and working conditions will improve. b. wages, employment, and working conditions will decline. c. wages will increase and employment will remain the same. *d. the number of workers employed may decrease. 1533. Unions may ________ the wages of their members but they might ________ the wages of everyone else. a. increase; also increase *b. increase; decrease c. decrease; increase d. decrease; also decrease 1534. How might unions benefit workers? a. by limiting the number of people who can be hired by firms b. by striking and stalling production *c. by demanding improved labor/management relations and improving worker safety and work conditions d. All of the answers are correct. 1535. What negative impacts can unions have on industries and the economy? a. They can initiate worker strikes and sit-ins which stall production. b. By limiting the supply of labor in one industry they can cause an increased supply of labor in other industries, which causes lower wages in those industries. c. They can limit firms to hiring only unionized workers, which could stop firms from hiring the labor with the most appropriate skills. *d. All of the answers are correct. 1536. The two major types of discrimination are: *a. statistical discrimination and preference-based discrimination. b. racial discrimination and gender discrimination. c. age discrimination and disability discrimination. d. employment discrimination and compensation discrimination. 1537. Which of the following provides the clearest evidence of employment discrimination by firms against minority employees? a. Hours worked by minority employees are greater than hours worked by whites. b. The mean years of schooling of minorities is less than that of whites. *c. The average wage of minority workers is less than the average wage of whites with similar productive characteristics. d. The average wage of minority workers is less than the average wage of whites. 1538. Statistical discrimination is: a. statistical data of discrimination. b. applying statistical analysis in discrimination. c. collecting information to justify hiring individuals. *d. using information about group averages to make conclusions about individuals. 1539. Which of the following statements is TRUE? I. Statistical discrimination is based on ill will toward a group because of their race, sex, nationality, or religion. II. Statistical discrimination is judging people by the averages of the groups to which they belong. III. As better ways of judging people develop, the merit of using statistical discrimination rises. a. I and III only *b. II only c. I and II only d. I only 1540. In a world of perfect information: *a. statistical discrimination would not exist. b. employers, but not employees, would practice statistical discrimination. c. employees, but not employers, would practice statistical discrimination. d. statistical discrimination would be even more important. 1541. When employment discrimination stems from personal prejudices of employers, economic theory suggests that: a. discriminating employers will be more profitable. b. the wages of employees who are discriminated against will rise. c. it will be costless for employers to discriminate. *d. the employers who discriminate will face higher costs. 1542. Which of the following is the least likely explanation for an increase in wages needed to attract a given number of workers? a. The job is stressful. b. The job is dangerous. *c. The employer discriminates. d. The job is not very prestigious. 1543. If a firm refuses to hire minorities due to prejudice, its profits: a. tend to increase. b. tend not to be affected. *c. tend to decrease. d. will increase slightly. 1544. Which of the following is the most important source of differences in the wages paid to workers? a. whether workers are unionized or not b. the size of the labor force *c. productivity per hour d. discrimination against certain workers 1545. Which of the following is NOT a kind of preference-based discrimination? *a. discrimination using statistics b. discrimination by employers c. discrimination by customers d. discrimination by employees 1546. Suppose that firms can hire whites for $10 an hour or equally productive blacks for $8 an hour. Which of the following is the most likely hiring practice for most firms? a. All firms would follow the wage rates paid for respective white and black. b. Firms that want to minimize cost would prefer to hire whites. *c. Firms that want to maximize profit would prefer to hire blacks. d. All of the answers are correct. 1547. One factor lowering wages for women as a group is that: a. employers discriminate against women. b. men are more productive than women on average. c. women tend to have less job experience than men of the same age. *d. All of the answers are correct. 1548. Evidence suggests that a successful market economy would: a. succeed by maintaining informal segregation on a widespread basis. b. succeed by maintaining formal segregation on a limited basis. c. not succeed without maintaining formal segregation on a widespread basis. *d. not succeed by maintaining formal segregation on a widespread basis. 1549. When it is the customers who drive discrimination, owners: a. who seek to maximize profit are still inclined to hire undervalued, victimized workers. b. who seek to maximize profit are inclined to hire overvalued, victimized workers. *c. are not always so keen to hire undervalued, victimized workers. d. are always keen to hire undervalued, victimized workers. 1550. Suppose that there is discrimination against women by employees at a workplace. Which of the following would be the likely result(s)? a. Employers are less likely to hire women. b. Some men may leave for other jobs if a woman is hired. c. Fewer women would apply to the job. *d. All of the answers are correct. 1551. In a market economy discrimination by employers: a. causes the wages of the discriminated group to fall because of decreased demand for their services. b. reduces the firm's profits. c. tends to disappear over time because of the profit motive. *d. All of the answers are correct. 1552. Suppose that a firm needs 20 workers, and pays 10 male workers $100 per day and 10 female workers $60 a day. These wage differences are ________ caused by employer discrimination since ________. a. most likely; the employer could decrease profits by $1,000 per day by hiring all females b. most likely; the employer could increase profits by $400 per day by hiring all females *c. likely not; the employer could increase profits by $400 per day by hiring all females d. likely not; the employer could decrease profits by $1,000 per day by hiring all females 1553. Women earn less than men because: a. we live in a patriarchal society. *b. they often interrupt their careers to stay home and raise children and thus have less job experience than men. c. fewer and fewer women are graduating from college. d. women tend to work in more dangerous jobs with inflexible work schedules. 1554. If a white NBA basketball player generates more fan interest than an equally capable black basketball player we might expect the white player to be paid more, a form of ________ discrimination. *a. customer b. employer c. employee d. statistical 1555. Which of the following statements is TRUE? I. Customer-based discrimination weakens as more and more people trade and exchange with one another in market places. II. Economic growth causes production costs to fall, reducing the risks of business experimenting with integrated workplaces. III. Employer-based discrimination is negatively correlated with customer-based discrimination. a. I, II, and III b. III only *c. I and II only d. II only 1556. Discrimination by employees: a. may lead to segregated businesses or workplaces. b. may persist because the employer faces little profit incentive to hire the disfavored group. c. is a situation in which one group of workers doesn't want to work with another group of workers. *d. All of the answers are correct. 1557. Which of the following statements is FALSE? a. The system of apartheid in South Africa limited the ability of blacks to compete for jobs. b. In many cases, the source of discrimination has come from U.S. government policies. *c. Major League Baseball teams that were first to integrate lost more frequently due to low morale. d. The U.S. government had many laws that were pro-segregation. 1558. Why is it not completely accurate to say that women earn less than men? a. Because women systematically earn more than men. *b. Because this statistic compares the wages of all women with the wages of all men. c. Because statistics show that single women earn more than single men. d. Because no studies have been carried out on wage differentials between the sexes. 1559. Assume Xs earn $5 less per hour than Ys and a firm employs 200 workers. There are 8 working hours in the day, 5 working days a week, and 50 working weeks a year. If the firm discriminates and hires only Ys, how much profit will it lose in a year? (Assume Xs have the same work skills as Ys.) a. $10,000 b. $1,000 c. $400,000 *d. $2,000,000 1560. Assume Xs earn $3 less per hour than Ys and a firm employs 300 workers. There are 8 working hours in the day, 5 working days a week, and 50 working weeks a year. If the firm discriminates and hires only Ys, how much profit will it lose in a year? (Assume Xs have the same work skills as Ys.) *a. $1,800,000 b. $36,000 c. $7,200 d. $600,000 1561. Why might a completely fair and unbiased country club manager still exhibit status discrimination in deciding who can be a member and who cannot? a. because he or she does not care about customer preferences b. because country clubs can legally discriminate c. because he or she might still secretly be racist *d. because of customer-driven preferences 1562. Evidence suggests that résumés with names closely associated with African Americans received: a. more than average number of interview requests. *b. less than average number of interview requests. c. about the same as the average number of interview requests. d. sometimes more than, sometimes less than, the average number of interview requests. 1563. A study conducted by Steven Levitt and Roland Fryer on labor market discrimination suggests that black names get: a. fewer interviews and in the long run they end up with jobs of less quality. *b. fewer interviews but in the long run they end up with jobs of equal quality. c. more interviews and in the long run they end up with jobs of better quality. d. more interviews but in the long run they end up with jobs of less quality. 1564. Evidence from studies by some economists on professional basketball found there has been: a. statistical discrimination against black players. *b. statistical discrimination against white European players. c. preference-based discrimination against black players. d. preference-based discrimination against white European players. 1565. Which of the following statements is TRUE? *a. Compared to white-sounding names on résumés, black-sounding names received fewer interview callbacks. b. Stephen Levitt and Roland Fryer found that a black-sounding name has a large negative effect on a person's lifetime earnings. c. Shorter men earn more than taller men. d. Labor markets do not reward beautiful people with higher wages. 1566. Which of the following may explain why tall people tend to have higher wages than short people? a. Employer-discrimination against short people. b. Taller people might get more respect from their subordinates. c. Employers subconsciously think that taller is simply better. *d. All of the answers are correct. 1567. Two economists sent out résumés with names like “Lakisha Washington” and “Jamal Jones” versus other names like “Emily” and “Greg.” Their study found that: *a. résumés with names like “Lakisha” and “Jamal” got fewer interview requests. b. having an African-American name leads to lower earnings in the long run. c. once the neighborhood the person comes from is controlled for, there is still a significant difference in earnings. d. All of the answers are correct. 1568. A Levitt and Fryer study tested how much African-American names mattered in the long run for earnings. Their study found that: I. résumés with names like “Lakisha” and “Jamal” got many fewer interview requests. II. having an African-American name does not matter in the long run for earnings. III. once the neighborhood the person comes from is controlled for, there is not a significant difference in earnings. a. I only *b. I, II and III c. I and III only d. II and III only 1569. The marginal product of labor is the increase in a firm's revenues created by hiring an additional laborer. *a. True b. False 1570. The wage a firm pays and the marginal product of labor tend to very different. a. True *b. False 1571. The marginal product of labor tends to fall because the first workers hired do the most important tasks and as more workers are hired they are assigned to less important tasks. *a. True b. False 1572. The marginal product of labor generally increases as more labor is hired. a. True *b. False 1573. If the marginal product of labor is $10 an hour, the firm should hire the worker so long as the wage (including fringe benefits) exceeds $10 an hour. a. True *b. False 1574. A person may decide to work fewer hours as his or her wage increases (i.e., the labor supply need not always slope upwards). *a. True b. False 1575. An upward sloping labor supply curve in the market is the normal situation. *a. True b. False 1576. An individual's labor supply curve might be backward bending. *a. True b. False 1577. Workers tend to earn more in more productive economies because there is a larger labor force in such economies. a. True *b. False 1578. The college wage premium is the ratio of the wages of college graduates to that of high school graduates. *a. True b. False 1579. Human capital refers to tools like computers and telecommunication. a. True *b. False 1580. The return to human capital can be easily observed in the productivity of workers. a. True *b. False 1581. A compensating differential is the difference in working conditions faced by workers in different professions. a. True *b. False 1582. The danger of a job reduces the supply of labor for that job, increasing wages. *a. True b. False 1583. The main factor improving job safety in the United States has been government regulation. a. True *b. False 1584. A compensating differential is the difference in wages that are offered to different workers sometimes working the same job. a. True *b. False 1585. Economic growth will lead to safer workplaces, as workers use their increased wealth to buy more safety. *a. True b. False 1586. Firms have an incentive to provide safer workplaces, because increased safety can save employers money in the form of lower wages. *a. True b. False 1587. Unions, which are similar to cartels, restrict the hiring of workers to keep their wages high. *a. True b. False 1588. The main way that unions raise wages is through increasing the demand for labor. a. True *b. False 1589. Statistical discrimination uses group stereotypes to make conclusions about individuals. *a. True b. False 1590. Preference-based discrimination involves the use of personal biases to judge individuals. *a. True b. False 1591. The apartheid system in South Africa was an active segregation system endorsed by the government of South Africa. *a. True b. False 1592. Employer discrimination is expensive to employees who are discriminated against and it leaves the labor market open to being more competitive. a. True *b. False 1593. There is an Italian soccer player who earns more than $10 million per year. Why would his team pay him so much? Correct Answer: The owners of the team must believe he adds more than $10 million a year to their revenues, otherwise they would be unwilling to pay this price. Athletes who increase fan interest, ticket sales, and television revenue can command high salaries. 1594. (Table: Excellence Publishing) Refer to the table. Each edited book sells for $70. How many people will the company hire each year as editing staff if the salary is $47,000 per staff member? Table: Excellence Publishing Number Of Workers Number Of Books Edited 4 16,000 5 19,000 6 21,200 7 22,800 8 23,700 9 24,200 Correct Answer: 8 workers Marginal Product of the 8th worker = 900 × $70 = $63,000 > $47,000 so hire. Marginal Product of the 9th worker = 500 × $70 = $35,000 < $47,000 so don't hire. 1595. Table: Abracadabra Processor Limited Number Of Computer Chips Number Of Workers Produced 3 4 5 6 7 8 9 900 1,250 1,550 1,800 2,000 2,150 2,250 Reference: Ref 17-4 (Table: Abracadabra Processors Ltd.) Refer to the table. Each computer chip produced sells for $350. How many people will the company hire to make the computer chips if the salary is $45,000 per worker per year? Correct Answer: 8 workers Marginal Product of the 8th worker = 150 × $350 = $52,500 > $45,000 so hire. Marginal Product of the 9th worker = 100 × $350 = $35,000 < $45,000 so don't hire. 1596. Table: Abracadabra Processor Limited Number Of Computer Chips Number Of Workers Produced 3 900 4 1,250 5 1,550 6 1,800 7 2,000 8 2,150 9 2,250 Reference: Ref 17-4 (Table: Abracadabra Processors Ltd.) Refer to the table. Each computer chip produced sells for $350. Suppose that unions enter into the industry and workers become unionized and wages rise from $45,000 to $60,000 per year. How many workers will Abracadabra hire? Correct Answer: 7 workers Marginal Product of the 7th worker = 200 × $350 = $70,000 > $60,000 so hire. Marginal Product of the 8th worker = 150 × $350 = $52,500 < $60,000 so don't hire. 1597. Explain why workers in developed countries, like the United States, earn more for the same type of work than workers in less-developed countries, such as India. Correct Answer: The productivity of companies in developed countries in general raises the marginal product and therefore the wages of all workers in those countries. Despite performing the same types of work and probably working harder, workers in less-developed countries are working for companies that are less productive, with lower marginal product. As such, workers working in these countries have lower wages. 1598. With the aid of a labor market graph, explain why wages for similar jobs are much higher in developed economies than in developing countries. Correct Answer: The answer is explained in Figure 17.4 of the text. Since the United States is more productive as an economy, the demand for janitors is higher in the United States. Also, India has a much greater supply of lower skilled workers. 1599. Explain why tractor-trailer truck drivers earn almost twice that of limousine drivers. What would happen if the government mandated that limousine drivers earn the same hourly wage as truck drivers? Correct Answer: At first, we might expect that both occupations would have roughly equal wages, since they both require similar skills and neither requires a college degree. However, driving a tractor-trailer is one of the most dangerous occupations. Furthermore, driving a tractor-trailer generally requires spending many days away from home and is likely more unpleasant than driving a limousine. These features combine to decrease the supply of truck drivers, pushing up their wages and creating a compensating wage differential. If the government set the wages of limousine drivers equal to truck drivers, many truck drivers would want to become limousine drivers. Trucking companies would find it difficult to hire truck drivers; there would be a shortage of drivers. Because of the higher wages, limousine companies would reduce the number of limousine drivers hired, which coupled with all the truck drivers wanting to work as limousine drivers would create a surplus of limousine drivers. 1600. Explain how market shifts in demand and/or supply can lead to higher wages for workers. Correct Answer: If a certain industry has a low supply of workers compared to other industries, wages will rise in that industry. On the other hand, if an industry expands or requires more workers for some other reason, the demand for labor will rise and increase the equilibrium wage in that industry. 1601. Consider reality shows like Ice Road Truckers and The Deadliest Catch and Axe-Men. They feature very dangerous jobs and the people who are willing to take them. What concepts have you studied that explain why people do these jobs? Correct Answer: They respond to the higher wages earned by these jobs. These wages are higher because the supply of workers for these professions is low and because they earn compensating differentials to reward them for the adverse working conditions. 1602. With the aid of a graph, explain how unions raise wages in unionized industries. Correct Answer: The answer is shown in Figure 17.8 of the text. By limiting membership in unions and threatening to strike unless employers hire unionized labor, unions effectively reduce the supply of labor to those jobs thus raising wages. 1603. With the aid of a graph, explain how unions act like cartels. Correct Answer: The answer is shown in Figure 17.8 of the text. By limiting membership in unions and threatening to strike unless employers hire unionized labor, unions effectively reduce the supply of labor to those jobs thus raising wages. Union cartels, similar to the OPEC cartel, also limit supply to increase prices. 1604. Consider the impact that price floors have in a market. In what way is union behavior similar to implementing a price floor? Correct Answer: By limiting membership in unions and threatening to strike unless employers hire unionized labor, unions effectively reduce the supply of labor to those jobs, thus raising wages. Thus the firm cannot pay workers a wage that is less than the union-influenced wage. This acts like a minimum wage law in the market, which is basically a price floor. It also encourages additional workers to try and join a unionized occupation further distorting conditions in that market. 1605. It is often said that women earn about 80 cents per dollar earned by men. Explain how this may have contributed to the perception that employers discriminate against women, and describe what other factors may have contributed to differences between the average wages of men and women. Correct Answer: The trouble with this widely reported statistic is that it compares the wages of all women with those of all men. The statistic does not mean that a woman with the same qualifications earns less than a man for doing the same job. One factor lowering wages for women as a group is that women tend to have less job experience than men of the same age because they sometimes leave the job force, typically to take care of children. They may also decrease their supply of labor in hazardous occupations and increase it in other, more appealing, occupations further compounding wage gaps for reasons other than discrimination. 1606. Explain how the impact of discrimination driven by customers may be different from that driven by employers. Correct Answer: Employer discrimination is expensive to the employer and it leaves the bigot open to being out-competed. If an employer is inclined to hire whites at a higher wage rate than equally productive blacks, the employer will be giving up the profit he would have made if he had hired blacks by incurring higher costs. When it is the customers who drive discrimination, reduced sales rather than the owners' prejudice influence owners to hire fewer undervalued, victimized workers. If employing underpaid blacks upsets the customers and the employer loses sales, it is not a surefire way for an employer to earn more money. 1607. Explain why employer discrimination is not likely to persist in markets. Correct Answer: There are two reasons given for why employer discrimination breaks down. First, employer discrimination conflicts with the goal of profit maximization. A prejudiced employer sacrifices profits by not hiring lower-wage workers from the disfavored group. Second, even if prejudiced employers are willing to forego profits, non-prejudiced firms will take advantage of the profit opportunity of using low-cost inputs, thereby increasing the demand for the lower-wage, discriminated-against employees and driving their wages up to the value of their marginal product. 1608. Can economics overcome discrimination? Suppose an economy has two groups of individuals—Xs and the Ys—who have similar skills. Most employers, however, have a bias against Ys, so they hire only Xs. Thus Xs earn higher wages than Ys. Explain how economists predict that this discrimination will be overcome in the long run? Correct Answer: If a few employers begin to hire Ys, then they will be getting similarly skilled labor at lower costs and will be able to sell their products at a lower cost. This will allow them to increase their market share. When the discriminating firms see their profitability start to fall, they will also look for ways in which to compete effectively and will also begin to hire Ys. Market forces predict that wages will eventually equalize between Xs and Ys. 1609. Suppose that a firm plans to provide defense against asteroids striking the earth. Which of the following is TRUE? a. Most people will find it in their self-interest to pay the firm to protect the earth. b. Asteroid protection is a private good, so the firm will make a lot of profit. c. In case of an earth bound asteroid, the firm will not protect people who refused to pay for asteroid defense. *d. Most people will not pay a firm for asteroid defense. 1610. If you give a firm $1,000 to protect the earth from asteroids: *a. your contribution will not have an effect on whether the firm will be successful in protecting the earth. b. your contribution will be vital in determining whether the firm will have enough resources to combat asteroids. c. your family will now have adequate protection. d. you are considered a free-rider of public goods. 1611. Suppose that a private-sector firm produces two goods: Good 1 is a private good and Good 2 is a public good. Which of the following statements is true? *a. If a consumer spends more money on Good 1, she gets more Good 1. b. If a consumer spends more money on Good 2, she gets more Good 2. c. If a consumer spends less money on Good 1, she gets less Good 2. d. If a consumer spends less money on Good 2, she gets less Good 1. 1612. A person ________ be cheaply prevented from using national defense, a(n) ________ good. a. can; excludable *b. cannot; nonexcludable c. cannot; excludable d. can; nonexcludable 1613. Toilet paper is a rival good because: a. there is a lot of competition in the toilet paper market. b. it is a substitute good for a bidet. *c. one person's use of toilet paper reduces the ability of another person to use the same sheets. d. it is made from natural resources. 1614. A public good is: *a. nonrival and nonexcludable. b. rival and nonexcludable. c. rival and excludable. d. nonrival and excludable. 1615. Table: Types of Goods Nonexcludabl Excludable e Rival 1 2 Nonrival 3 4 Reference: Ref 18-1 (Table: Types of Goods) Refer to the table. Which of the following statements is true? a. Section 1 includes national defense. b. Section 2 includes a can of soda. *c. Section 3 includes wireless Internet. d. Section 4 includes an MP3 song. 1616. Table: Types of Goods Nonexcludabl Excludable e Rival 1 2 Nonrival 3 4 Reference: Ref 18-1 (Table: Types of Goods) Refer to the table. Which of the following statements is true? I. Section 1 may contain fruit, chicken, and underwear. II. Section 2 may contain fish in the ocean, public roads, and public hunting grounds. III. Section 3 may contain Wi-Fi, cable TV, and digital music. IV. Section 4 may contain asteroid deflection, national defense, and radio. a. I, II, and IV b. III and IV c. II only *d. I, II, III, and IV 1617. An excludable good is: a. one that is excluded from the common basket of goods consumed by households. b. one that producers will exclude from production. *c. one where people can be prevented from using the good. d. not necessary to consume, a luxury. 1618. A rival good is one where: a. one person's use does not impinge on another person's ability to enjoy the same good. *b. one person's use prevents another person's ability to use that good at the same time. c. two people can use the same good at the same time. d. the good is simultaneously nonexcludable and public. 1619. Table: Example Goods A Watermelon A Lighthouse Smog Reduction Online Video Games Cable Internet Service National Defense A Private Beach A Public Beach A Pencil Soup Kitchen Meals A Chair Toll Highways Public Roads Reference: Ref 18-2 (Table: Example Goods) Refer to the table. Which of the following contains only private goods from the table? a. a watermelon, toll highways, a private beach, a chair b. a watermelon, cable Internet service, a private beach, a pencil, a chair *c. a watermelon, a chair, a pencil d. online video games, a watermelon, a private beach, a pencil, a chair 1620. Table: Example Goods A Watermelon A Lighthouse Smog Reduction Online Video Games Cable Internet Service National Defense A Private Beach A Public Beach A Pencil Soup Kitchen Meals A Chair Toll Highways Public Roads Reference: Ref 18-2 (Table: Example Goods) Refer to the table. Which of the following contains only rival, excludable goods from the table? a. a watermelon, toll highways, a private beach, a chair b. a watermelon, cable Internet service, a private beach, a pencil, a chair *c. a watermelon, a chair, a pencil d. online video games, a watermelon, a private beach, a pencil, a chair 1621. Table: Example Goods A Watermelon A Lighthouse Smog Reduction Online Video Games Cable Internet Service National Defense A Private Beach A Public Beach A Pencil Soup Kitchen Meals A Chair Toll Highways Public Roads Reference: Ref 18-2 (Table: Example Goods) Refer to the table. Which of the following contains only public goods from the table? a. a public beach, soup kitchen meals, public roads b. online video games, a public beach, national defense, a lighthouse c. a public beach, a lighthouse, toll highways, public roads *d. national defense, a lighthouse, smog reduction 1622. Table: Example Goods A Watermelon A Lighthouse Smog Reduction Online Video Games Cable Internet Service National Defense A Private Beach A Public Beach A Pencil Soup Kitchen Meals A Chair Toll Highways Public Roads Reference: Ref 18-2 (Table: Example Goods) Refer to the table. Which of the following contains only nonexcludable, nonrival goods from the table? *a. national defense, a lighthouse, smog reduction b. a public beaches, soup kitchen meals, public roads c. online video games, a public beach, national defense, a lighthouse d. a public beach, a lighthouse, toll highways, public roads 1623. Table: Example Goods A Watermelon A Lighthouse Smog Reduction Online Video Games Cable Internet Service National Defense A Private Beach A Public Beach A Pencil Soup Kitchen Meals A Chair Toll Highways Public Roads Reference: Ref 18-2 (Table: Example Goods) Refer to the table. Which of the following contains only excludable and nonrival goods from the table? a. cable Internet service, toll highways, public roads, soup kitchen meals *b. online video games, a private beach, toll highways, cable Internet service c. public beaches, soup kitchen meals, public roads, smog reduction d. national defense, a lighthouse, smog reduction, cable Internet service 1624. Table: Example Goods A Watermelon A Lighthouse Smog Reduction Online Video Games Cable Internet Service National Defense A Private Beach A Public Beach A Pencil Soup Kitchen Meals A Chair Toll Highways Public Roads Reference: Ref 18-2 (Table: Example Goods) Refer to the table. Which of the following contains only nonrival private goods from the table? a. cable Internet service, toll highways, public roads, soup kitchen meals b. a public beach, soup kitchen meals, public roads, smog reduction *c. online video games, a private beach, toll highways, cable Internet service d. national defense, a lighthouse, smog reduction, cable Internet service 1625. Table: Example Goods A Watermelon A Lighthouse Smog Reduction Online Video Games Cable Internet Service National Defense A Private Beach A Public Beach A Pencil Soup Kitchen Meals A Chair Toll Highways Public Roads Reference: Ref 18-2 (Table: Example Goods) Refer to the table. Which of the following contains only nonexcludable and rival goods from the table? *a. a public beach, soup kitchen meals, public roads b. online video games, a private beach, toll highways, cable Internet service c. national defense, a lighthouse, smog reduction d. online video games, a public beach, soup kitchen meals, public roads 1626. Table: Example Goods A Watermelon A Lighthouse Smog Reduction Online Video Games Cable Internet Service National Defense A Private Beach A Public Beach A Pencil Soup Kitchen Meals A Chair Toll Highways Public Roads Reference: Ref 18-2 (Table: Example Goods) Refer to the table. Which of the following contains only common resources from the table? a. online video games, a private beach, toll highways, cable Internet service *b. a public beach, soup kitchen meals, public roads c. national defense, a lighthouse, smog reduction d. online video games, a public beach, soup kitchen meals, public roads 1627. When a good is excludable: a. one person's use of the good prevents another's ability to use it. b. everyone is excluded from using the good. *c. people can be prevented from using the good. d. no more than one person can use the good at one time. 1628. A good is excludable if: a. the government can regulate the availability of the good. b. it is a normal good. c. several people can enjoy the good simultaneously. *d. people can be prevented from using it. 1629. Goods that are excludable include both: a. public goods and common resources. b. natural monopolies and public goods. c. public and private goods. *d. rival and nonrival private goods. 1630. Goods that are not excludable include both: *a. common resources and public goods. b. private and public goods. c. natural monopolies and common resources. d. only public goods, since no other goods are not excludable. 1631. Both public goods and common resources are: a. rival in consumption. *b. nonexcludable. c. excludable. d. nonrival in consumption. 1632. When a good is rival in consumption: a. people can be excluded from using the good. *b. one person's use of the good prevents another's ability to use it. c. no more than one person can use the good at the same time. d. people can be prevented from using the good. 1633. If one person's use of a good prevents another person's ability to use it, then the good is: *a. rival in consumption. b. nonrival in consumption. c. normal. d. excludable. 1634. Goods that are rival in consumption include both: a. public goods and common resources. b. common resources and natural monopolies. *c. common resources and private goods. d. public goods and private goods. 1635. Which of the following goods is not rival and not excludable? a. a boat b. a public road c. an ice cream cone *d. a street light 1636. Which of the following is rival and not excludable? a. cable TV *b. lobsters in the ocean c. national defense d. clothing 1637. A good is nonexcludable if it is: a. easy to prevent people from using the good at low cost. b. easy to make people use the good at low cost. *c. difficult to prevent people from using the good at low cost. d. difficult to make people use the good at low cost. 1638. A good is nonrival if: a. the good does not cause rivalry between the people using the good. b. the good potentially creates rivalry between the people using the good. c. one person's use of the good reduces the ability of another person to use the same good. *d. one person's use of the good does not reduce the ability of another person to use the same good. 1639. Which of the following is a public good? a. city parking spots *b. protection of the ozone layer c. computers d. the Internet 1640. Which of the following is a private good? a. national defense b. cable TV *c. soft drinks d. the environment 1641. Which of the following is NOT considered a private good? a. pizza b. tennis rackets *c. cable TV d. French fries 1642. Private goods are both: a. rival and nonexcludable. b. nonrival and excludable. c. nonrival and nonexcludable. *d. rival and excludable. 1643. An example of a private good would be: a. a tornado siren. b. a fireworks display. *c. a piece of fruit. d. cable TV. 1644. Uncongested, non-toll roads are a good example of a: *a. public good. b. common resource. c. private good. d. natural monopoly. 1645. A free rider is a person who: a. avoids paying taxes by using tax code loopholes. b. produces goods at no cost. *c. receives the benefits of a good but avoids paying for it. d. will purchase products only when on sale. 1646. A tornado warning siren is an example of a: a. private good. *b. public good. c. common resource. d. rival public good. 1647. People have little incentive to produce a public good because: a. fixed costs are usually too high. b. production is impossible. *c. of the free rider problem. d. social benefits are typically less than total costs. 1648. Compared to private goods, the free market would ________ public goods. a. overproduce b. efficiently produce *c. underproduce d. sometimes overproduce but most often underproduce 1649. The problem of free riders is most apparent for: a. private goods. b. nonrival private goods. *c. public goods. d. textbooks. 1650. The city government taxes its residents to pay for mosquito control. Betty is not happy about paying the tax, for mosquitoes never bite her. Betty is a: a. free rider. *b. forced rider. c. taxed rider. d. lonesome rider. 1651. Which of the following statements is TRUE? I. In order for society to have a sufficient level of national defense, the government must tax the public to raise funds for a standing army. II. For every 100 people that use a public good, approximately 500 people are prevented from using it. III. People do not have an incentive to voluntarily pay for nonexcludable goods. a. I and II only b. III only *c. I and III only d. I, II, and III 1652. The sun has features of a: *a. public good. b. common resource—everyone in society can use it for warmth and light. c. rival good that can easily be made excludable. d. private good since solar energy can be marketed. 1653. Which of the following statements is FALSE? *a. The total benefit of a public good equals the sum of the benefits to each person. b. It is harder for society to produce optimal amounts of public goods than it is for private goods. c. The United States Postal Service is not a public good. d. People value public goods differently. 1654. Why is national defense a public good? I. because it is expensive to produce II. because people who don't pay for national defense still benefit from having it III. because one person's benefit from national defense doesn't reduce anyone else's benefit from it IV. because it is provided by the government a. I and IV only *b. II and III only c. II, III, and IV only d. I, II, and III only 1655. A major difference between a private good and a public good is that: a. private goods are excludable, public goods are not. b. private goods can be produced in efficient quantities while public goods generally are not. c. private goods are rival in consumption, public goods are not. *d. All of the answers are correct. 1656. Private goods: I. are excludable. II. can be priced. III. are rival in consumption. a. I only b. II only c. I and III only *d. I, II, and III 1657. Public goods are: I. excludable. II. nonrival. III. free to those who do not pay. a. I only b. II only c. I and II only *d. II and III only 1658. Free riders are people who: *a. enjoy public goods without paying for them. b. pay for public goods but do not end up enjoying them. c. pay for both private and public goods. d. ride public transportation without paying. 1659. In which of the cases can you identify the potential for a free-rider problem? a. half-off sales at department stores *b. voluntary payments for a smog reduction program c. group projects where all members have clearly assigned tasks and are responsible for presenting their work d. cable Internet service 1660. Suppose your city has had an increase in crime and the city government decides that more police are needed to patrol at night. Which of the following funding solutions avoids the free-rider problem involved with additional police officers? a. taxation of the city's top 50 percent of income earners b. donation-based police service c. voluntary police officers *d. an increase in the city's sales tax 1661. Private goods can be provided by competitive markets because they are: *a. excludable, providing an incentive to pay for and thus to produce these goods. b. excludable, since the market for buying and selling these goods is distinguishable. c. nonexcludable, providing an incentive to pay for and thus to produce these goods. d. nonexcludable, since the market for buying and selling these goods cannot be distinguished. 1662. Hamburgers are example of goods that are: *a. rival and excludable. b. rival and nonexcludable. c. nonrival and excludable. d. nonrival and nonexcludable. 1663. It is difficult to get people to pay for public goods voluntarily because these goods are: a. excludable, and therefore markets tend to overprovide them. b. excludable, and therefore markets tend to underprovide them. c. nonexcludable, and therefore markets tend to overprovide them. *d. nonexcludable, and therefore, markets tend to underprovide them. 1664. Asteroid deflection would be considered a: a. public good since it is rival and nonexcludable. *b. public good since it is nonrival and nonexcludable. c. private good since it is rival and excludable. d. private good since it is nonrival and excludable. 1665. Which of the following would NOT be considered as an example of public good? a. asteroid deflection b. national defense c. mosquito control *d. public roads 1666. Mosquito control must be provided by government because if: a. a lot of people free ride then mosquito control would be overprovided by the market. *b. a lot of people free ride then mosquito control would be underprovided by the market. c. only few people are benefited then mosquito control would be overprovided by the market. d. only few people are benefited then mosquito control would be underprovided by the market. 1667. The need to produce public goods provides a strong argument for: a. regulation and subsidy. b. regulation and government provision. c. taxation and subsidy. *d. taxation and government provision. 1668. A forced rider is someone who: *a. pays a share of the costs of public good but who does not enjoy the benefits. b. pays a share of the costs of public good and enjoys the benefits. c. does not pay a share of the costs of public good but who enjoys the benefits. d. does not pay a share of the costs of public good and does not enjoy the benefits. 1669. Which of the following statements is correct? a. It is paradoxical that people can be made better off by requiring them to do something that they would choose to do voluntarily. b. It is paradoxical that people cannot be made better off by requiring them to do something that they would choose to do voluntarily. *c. Even though none contribute voluntarily, all would agree to be taxed as long as everyone else is also taxed. d. Even though everyone contributes voluntarily, none would agree to be taxed if everyone else is not taxed. 1670. Which of the following conditions would turn some people into forced riders? a. People who must contribute to the public good because their benefit from the public good is high. *b. People who must contribute to the public good even though they will not benefit from the public good. c. People who are not required to contribute to the public good if they will not receive any benefit from it. d. None of the answers is correct. 1671. Which of the following explains why it is difficult to determine the optimal quantity of public goods that the government should produce? a. It is difficult to determine how much budget the government should have each year. *b. It is difficult to assess exactly how much each individual values a public good. c. It is difficult to identify how public goods really benefit the society. d. It is difficult to find out how demographics change over time. 1672. Which of the following methods would help to produce optimal amounts of public goods? a. antitrust law b. regulation c. privatization *d. taxation 1673. Which of the following statements is TRUE? I. Excludability leads to efficiency. II. The benefits of public goods provide an argument for government provision of these goods. III. Taxation turns some people into free riders. *a. I and II only b. II only c. II and III only d. I, II, and III 1674. The O'Reilly Factor is a popular cable television news show. To watch the show requires a paid subscription. Therefore, which of the following is TRUE? *a. This show is a nonrival private good because 1) nonpayers can be excluded and 2) when one person watches it does not diminish another person's ability to watch. b. This show is a public good because payers and nonpayers alike are watching a rival show. c. This show is a public good because 1) no one can be excluded and 2) when one person watches it does not diminish another person's ability to watch. d. This show is a common good because 1) nonpayers can be excluded and 2) when one person watches it does not diminish another person's ability to watch. 1675. Nonrival private goods are likely to be: a. overprovided by the market. *b. underprovided by the market. c. nonrival and nonexclusive. d. rival and nonexclusive. 1676. Nonrival private goods are likely to have ________ fixed costs and ________ marginal costs. a. small; large b. no; small *c. large; small d. large; no 1677. A television show like The Sopranos, for example, is: a. rival and excludable. *b. nonrival but excludable. c. rival but nonexcludable. d. nonrival and nonexcludable. 1678. Though markets can provide goods which are excludable but nonrival, they do so at the price of: a. efficiency. *b. inefficiency. c. equity. d. inequity. 1679. Although the provision of nonrival private goods is ________, we typically consider it ________. a. efficient; an inefficient allocation due to its nonrival nature *b. inefficient; not that big a deal because we value diversity and creativity c. inefficient; a big deal because it leads to many forced riders d. efficient; a big deal because it leads to other types of market inefficiencies 1680. Google provides a(n) ________ good, but uses advertising to make its good ________. *a. excludable; nonexcludable b. common; more scarce c. nonexcludable; excludable d. public; private 1681. For some public goods, such as Internet search engines, which are nonrival but potentially excludable, it is more profitable for the providers to: a. exclude people who don't pay for its service. *b. sell advertising and provide its services for free. c. sell advertising and also charge people for using the services. d. offer the service to anyone for free. 1682. Which of the following solutions for public goods funding avoids both the problems of “forced riders” and “free riders”? a. widespread taxation *b. advertising c. donation based funding d. None of the answers is correct. 1683. Which of the following solutions allows for an efficient allocation of a public good? a. widespread taxation b. government command and control policies c. donation-based funding *d. advertising 1684. When entrepreneurs use advertising to pay for the provision of a public good, the outcome is typically: *a. efficient because the market price is zero and hence equal to the marginal cost of providing the public good. b. efficient because the market price is equal to the benefits received from the public good. c. inefficient because people are not paying for the benefits that they receive from the public good. d. inefficient because while advertising generates some revenue for the producers, it typically does not generate enough to equal the social benefits received from the public good. 1685. A common resource is: a. likely to be overutilized. b. a good that, when used by one person, leaves less for everyone else. c. rival but nonexcludable. *d. All of the answers are correct. 1686. An example of a common resource would be: a. a street light. *b. the environment. c. clothing. d. cable TV. 1687. During the Middle Ages, many villages had areas reserved for families to take their cows or sheep to graze. All families were welcome to use this land without charge. The land for grazing can be characterized as a: a. public good. b. private good. c. natural resource. *d. common resource. 1688. During the Middle Ages, many villages had areas reserved for families to take their cows or sheep to graze. All families were welcome to use this land without charge. This situation likely led to a(n): *a. tragedy of the commons. b. finite of proportions. c. marketable public good. d. exhaustive equilibrium. 1689. Tuna in the ocean is a common resource because: *a. it is difficult to prevent people from fishing in the ocean and every time someone catches tuna there is less tuna for someone else. b. all tuna are identical (i.e., a homogenous good) and sold in competitive markets. c. there is an abundance of tuna and no one fisherman can affect the market equilibrium output. d. None of the answers is correct. 1690. Overutilization and lack of conservation are more likely a problem for: a. private goods. b. material goods. *c. goods that are not owned. d. cows and chickens. 1691. Which of the following scenarios best describes a tragedy of the commons problem? *a. Neighborhood residents discover strawberry plants in the flower beds at the city park. b. Illegal immigrants who do not pay taxes benefit from tax-funded police patrols. c. Pacifists become forced riders in tax hikes to fund national defense plans. d. There is overcrowding on public beaches. 1692. Which of the following scenarios describes how a tragedy of the commons problem occurs? a. A radio station goes out of service because it cannot raise enough money from advertising. b. Illegal immigrants who do not pay taxes benefit from tax-funded school systems. *c. Farmers harvest deer out of season rather than pay the high price of beef. d. The establishment of tradable pollution allowances helps reduce pollution. 1693. Tuna fish are being driven to extinction because of overfishing. If all the fishermen know about this, why don't they fish less to slow down the extinction? a. The kind of fishing equipment that is used does not allow for smaller catches. *b. A lack of well-defined property rights over the stock of tuna fish in the sea. c. The fishermen do not realize that their way of life will also become extinct. d. Their governments have not considered tradable allowances as a solution. 1694. Which of the following is the explanation for why wild animals are often hunted to the point of extinction? a. cost-benefit analysis b. public goods *c. tragedy of the commons d. There is no known explanation. 1695. The tragedy of the commons occurs when a good is: a. rival in consumption and excludable. *b. rival in consumption and not excludable. c. not rival in consumption and excludable. d. neither rival in consumption nor excludable. 1696. The tragedy of the commons is the tendency for any good which is: a. rival and excludable to be underused and overmaintained. b. nonrival and nonexcludable to be underused and overmaintained. *c. rival and nonexcludable to be overused and undermaintained. d. nonrival and excludable to be overused and undermaintained. 1697. Common resources are goods that are: a. excludable and rival. b. excludable but nonrival. *c. nonexcludable but rival. d. nonexcludable and nonrival. 1698. The tragedy of the commons is often the result of: a. excludability and rivalry. b. excludability and nonrivalry. *c. nonexcludability and rivalry. d. nonexcludability and nonrivalry. 1699. Which of the following is an example of the tragedy of the commons? *a. Tuna in the ocean are being over harvested because it is difficult to prevent anyone from fishing for tuna. b. Personal computers have become a commonplace appliance in many homes, causing an expedited tragedy of technology. c. There is an increasing threat to wildlife due to habitat loss in national forests. d. Television's popularity has become a common tragedy in our society. 1700. Which of the following examples specifies the cause of the tragedy of the common? a. People like to eat chicken so demand for chicken has significantly increased. b. The supply of chicken is plentiful, causing the profit margin of selling chicken to decrease. *c. Tuna in the ocean are not privately owned so fishermen have an incentive to overfish. d. The supply of tuna is rare, creating high profit margins and incentives for fishermen to underfish tuna. 1701. The tragedy of the commons applies especially strongly to resources like fish, forests, and agricultural land because: a. these resources are highly demanded. *b. these resources must be carefully maintained to remain useful. c. these resources are more precious than others. d. these resources are scarce. 1702. Small tribes may be able to solve the tragedy of the commons by: a. subsidizing the activity that creates the tragedy. *b. using social norms to punish and ostracize those that overuse a common resource. c. setting price controls below the equilibrium price to clear the market. d. All of the answers are correct. 1703. Which country created property rights to catching fish in 1986? a. Mexico b. Puerto Rico c. Australia *d. New Zealand 1704. Individual transferable quotas (ITQs) are like a ________, allowing ________. a. subsidy; the internal benefit of fishing to be externalized b. corrective tax; fishermen a tax write-off for capital purchases *c. pollution permit; fishermen the right to catch a limited number of fish d. cartel; fisherman to raise market prices by limiting competition 1705. Creating property rights for southern bluefin tuna is: a. easy because southern bluefin tuna don't travel far from shore. b. easy because southern bluefin tuna is a common resource. *c. difficult because southern bluefin tuna travel throughout the Pacific ocean. d. difficult because only one country fishes for southern bluefin tuna. 1706. Solving a tragedy of the commons problem could be done through: I. societal expectations. II. tradable allowances. III. government command and control methods. a. II only b. I and II only c. II and III only *d. I, II, and III 1707. Solving a tragedy of the commons problem could be done through: I. establishment of property rights over the common resource. II. the invisible hand. III. government-armed protection. a. II only b. I and II only *c. I and III only d. I, II, and III 1708. New Zealand's individual transfer quotas: I. work by limiting the amount of fish that each individual fisherman can fish. II. resulted in reduced fish catches after they were established. III. work just like the tradable pollution allowances in the United States. a. I only *b. I and III only c. III only d. I, II, and III 1709. Why have systems similar to New Zealand's “individual transfer quota” system not been able to protect all animal life that is in danger of being overexploited? a. because at present the tuna fish is not the only fish in danger of being overfished b. because other countries do not have the backing of their governments the way that New Zealand does *c. because property rights are difficult to establish in animals that migrate over borders d. None of these answers is correct. 1710. Tragedy of the commons problems are harder to solve when: a. people who have access to the common good cannot be identified. b. people who have access to the common good are closely related. *c. a lot of unrelated people have access to the common good. d. only a few unrelated people have access to the common good. 1711. Which of the following has been a way typically used to solve tragedy of the commons problems? *a. government command and control solutions like limiting the number of fishing boats b. government command and constraint solutions like prohibiting any attempt to fish common areas c. tradeable allowances which make fish a tradable market d. tradeable allowances which result in “capital stuffing” 1712. Which of the following countries implements individual transferable quotas (ITQs) in which owners have the right to catch a certain tonnage of fish? a. Australia b. Canada c. Japan *d. New Zealand 1713. Which of the following does NOT make the tragedy of the tuna commons even worse? a. Multiple countries tag and track tuna throughout the Pacific. b. Many fishermen are involved in fishing tuna. c. Governments subsidize fishing extensively. *d. Demand for tuna has decreased significantly. 1714. Cable TV is nonrival and excludable. Contact lenses are rival and excludable. Public goods are nonrival and nonexcludable. Nonrival private goods are excludable. *a. True b. False 1715. A good cannot be private at the same time that it is nonexcludable. *a. True b. False 1716. Nonexcludability cannot exist at the same time as market efficiency in quantity. *a. True b. False 1717. Goods can be classified as private goods or public goods, depending on the circumstances. *a. True b. False 1718. When someone receives the benefits of cable TV service, the benefit others can receive from this service gets reduced. a. True *b. False 1719. A fireworks display is an example of a good that is excludable. a. True *b. False 1720. Asteroid deflection is a good that would be profitable for an insurance company to provide. a. True *b. False 1721. Cable TV is an example of a common resource. a. True *b. False 1722. A good is excludable if one person's use of the good reduces the ability of another person to use the same good. a. True *b. False 1723. A free rider is someone who receives the benefit of a good and avoids paying for it. *a. True b. False 1724. Since everyone can be made better off by taxation to provide a public good, everyone will be better off. a. True *b. False 1725. Since people get to consume public goods regardless of whether they paid for them, the market will likely not produce enough public goods. *a. True b. False 1726. Schooling is a public good. a. True *b. False 1727. The invisible hand guides the production of optimal quantities of public goods, just as it does for private goods. a. True *b. False 1728. A free rider enjoys the benefits of a private good without paying a share of the costs. a. True *b. False 1729. A public good is a good produced in the public sector. a. True *b. False 1730. When public goods are funded through advertising, the problems of both free and forced riders can be mitigated. *a. True b. False 1731. Thanks to advertising, the efficient price for public radio service is zero. *a. True b. False 1732. Advertising is an efficient solution to the problem of nonexcludability and nonrivalry. *a. True b. False 1733. A fisherman has an incentive to overfish because catching less fish today doesn't increase the number of fish he can catch in the future. *a. True b. False 1734. Some animals are going extinct because of a lack of property rights over these animals. *a. True b. False 1735. A solution to the tragedy of the commons is to convert common resources to public goods. a. True *b. False 1736. A solution to the tragedy of the commons is to convert common resources to private goods. *a. True b. False 1737. Tuna are not public goods since they are nonrival but excludable. a. True *b. False 1738. The tragedy of the commons problem is a type of negative externality. *a. True b. False 1739. Theoretically when property rights are difficult to establish, multi-country agreements could help to solve the tragedy of the commons, but it has not been possible to establish any such agreement to date. a. True *b. False 1740. Command and control methods are market-based methods to solving the problem of over-exploitation of common resources. a. True *b. False 1741. Tradeable allowances may effectively be used to solve the tragedy of the commons problem. *a. True b. False 1742. Why do large class sizes limit the classification of college courses as nonrival private goods? Correct Answer: If classes are very large, then it means that the instructor has less time to spend answering your questions as s/he is fielding questions from a very large number of people. It also means that s/he has less time to attend to your questions in office hours. When classes are too large, the professor's time becomes a rival good. 1743. Table: Goods Classification Shirt Rainfall Smog Reduction PlayStation Controller Cable TV National Defense Baltimore Aquarium Chewing Gum Your Economics Textbook Free Public Library Your Teacher's Open Office Hours Pen Free Public Bus Service Reference: Ref 18-3 (Table: Goods Classification) Refer to the table. Classify the goods in the table into the four classifications listed. a. rival, excludable goods b. nonrival, nonexcludable goods c. rival, nonexcludable goods d. excludable, nonrival goods Correct Answer: a. rival, excludable goods: your economics textbook, pen, Playstation controller, chewing gum, shirt b. nonrival, nonexcludable goods: rainfall, national defense, smog reduction c. rival, nonexcludable goods: free public library, free public bus service, your teacher's open office hours d. excludable, nonrival goods: cable TV, Baltimore Aquarium 1744. Table: Goods Classification Shirt Rainfall Smog Reduction PlayStation Controller Cable TV National Defense Baltimore Aquarium Chewing Gum Your Economics Textbook Free Public Library Your Teacher's Open Office Hours Pen Free Public Bus Service Reference: Ref 18-3 (Table: Goods Classification) Refer to the table. Classify the goods in the table into the four classifications provided. a. private goods b. public goods c. common resources d. nonrival private goods Correct Answer: a. private goods: your economics textbook, pen, Playstation controller, chewing gum, shirt b. public goods: Rainfall, National Defense, Smog Reduction c. common resources: free public library, free public bus service, your teacher's open office hours d. nonrival private goods: cable TV, Baltimore Aquarium 1745. (Table: Area Classification) Refer to the table. Place each of the following in the correct location according to the table. Table: Area Classification Excludable Nonexcludable Rival Private Goods Common Resources Nonrival Nonrival Public Goods Public Goods a. b. c. d. e. f. g. h. i. j. hamburgers fish in the ocean national defense cable TV clothing the environment cell phone service lighthouses ice cream cones a tornado warning siren Correct Answer: Excludable Rival Private Goods • Hamburgers • Clothing • Ice cream cones Nonrival Nonrival Public Goods • Cable TV • Cell phone service Nonexcludable Common Resources • Fish in the ocean • The environment Public Goods • National defense • A tornado warning siren • Lighthouses 1746. Describe the difference between each of the following three pairs of goods or services according to whether they are excludable or nonexcludable and rival or nonrival. a. a city police department and a commercial security system movies on HBO and movies on PBS (Public Broadcasting b. Service) c. fish in the ocean and fish in a fish farm Correct Answer: a. A city police department is nonexcludable and nonrival, whereas a commercial security system is excludable and rival. b. Movies on HBO are excludable but nonrival, whereas movies on PBS are nonexcludable and nonrival. c. Fish in the ocean are nonexcludable but rival, whereas fish in a fish farm are excludable and rival. 1747. (Table: Mosquito Spraying) Refer to the table. A small town consists of three families who live in an area with lots of mosquitoes. The town is considering a spraying program to control the mosquito population. The marginal benefits of the spraying program are provided for each family, along with the marginal costs of the spraying program. How many times should the town spray for mosquitoes? Table: Mosquito Spraying Family A Family B Family C Number of Marginal Marginal Marginal Marginal Cost Sprayings Benefit Benefit Benefit of spraying 1 $50 $80 $30 $80 2 40 60 10 100 3 20 40 5 135 4 10 20 1 147 Correct Answer: The town's marginal benefit for the first spraying is $160, the sum of each family's marginal benefit (50 + 80 + 30). Because the marginal cost of the first spraying is less than the marginal benefit, the town should spray at least once. For the second spraying, the town's marginal benefit ($110) exceeds the marginal cost ($100), so the town should spray twice. There should not be a third spraying, since the town's marginal benefit is less than the marginal cost. 1748. Explain whether there is a free-rider problem with mosquito control and town parks. If so, how can it be addressed? Correct Answer: Both mosquito control and a town park are goods that may create a free rider problem. Nonpayers can benefit from using both of these goods without being charged. To address the issue of nonpayers, a city can tax the residents to pay for these goods. A city may also attempt to limit access to a park by charging an entrance fee, or limiting access to city residents (the people that pay the taxes for the park). 1749. Does equal sharing in farm output lead to free riders? Explain. Correct Answer: If the farming is organized such that each person receives an equal share regardless of effort put in then yes, there will be a free-rider problem. When effort is divorced from output, free riders emerge. One could say the same for group projects in school, where all group members receive the same grade regardless of how much effort each one puts in. 1750. Explain how a free rider may arise on a public good and describe the consequences of the free rider problem. Correct Answer: Since public goods are nonexcludable, it is difficult to exclude people who do not pay for them from using them. And, since anyone can use public goods without paying for them, it is difficult to get people to pay for the public goods they use voluntarily. The result is that the costs of providing public goods are potentially higher than the voluntary payments for providing public goods. As a consequence, markets tend to underprovide public goods. Furthermore, public goods are also nonrival, which causes the losses from the failure to provide the public goods to become especially large. 1751. Radio stations (satellite stations excluded) provide their services free of charge to the listeners. Is this an efficient solution? How do providers make profits? Correct Answer: Yes, the efficient solution is to provide the service for free since radio service is a nonexcludable and nonrival good (a public good). Stations earn profits through advertising revenues from firms who advertise their products on the air. 1752. Explain what aspect of the tragedy of the commons problem is similar to that of a positive externality. Correct Answer: The tragedy of the commons problem stems from the fact that when resources are unowned, the users do not have a strong incentive to invest in maintenance, because maintenance mostly creates an external benefit to others, not a private benefit to themselves. Maintenance, therefore, will be underproduced. For example, the fisherman who throws the small fish back mostly just increases other people's future catch, not his own. Failure to care for and maintain the public resource in the tragedy of the commons problem is thus a type of positive externality. 1753. Explain what aspect of the tragedy of the commons problem is similar to that of a negative externality. Correct Answer: The tragedy of the commons problem stems from the fact that when resources are unowned, the users do not have a strong incentive to care for a resource since they incur additional costs. Therefore pollution and over harvesting practices lead to a degradation or depletion of the resource. For example, steel mills pollute the water in a river and destroy the fish population downstream or foresters clear cut a forest without replanting behind them. Failure to care for and overuse the public resources in the tragedy of the commons problem is thus a type of negative externality. 1754. Using a payoff table, illustrate how the tragedy of the commons problem could be likened to a prisoner's dilemma situation. Use a two-agent scenario and apply it to a fishing scenario where the two agents choose whether to overfish or practice restrained fishing. Correct Answer: Agent Two Restrained fishing Overfishing Agent One Restrained Overfishing fishing 20, 20 10, 40 40, 10 15, 15 1755. List at least two methods through which a country might solve a tragedy of the commons problem. Correct Answer: Some acceptable answers may be: 1. command and control methods, such as police protection or establishment of protected zones. 2. command and control methods, such as punitive punishment of violators. For example, poachers who kills elephants for their tusks are jailed. 3. tradable allowances such as the ITQ systems. 4. societal mechanisms such as societal norms, and practices, and expectations such as those in smaller villages. 1756. List and describe the three methods that are used to minimize the tragedy of the commons and achieve an efficient use of a common resource. Correct Answer: a. property rights: the tragedy of overfishing a lake or overgrazing a pasture can be avoided through the enforcement of norms if the ownerships of the lake or pasture are clearly defined. b. command and control: governments can limit the number of fishing boats when fishing stocks have neared depletion. c. quotas: the owners of a quota have the right to catch a certain tonnage of fish, and the sum of the individual quotas adds up to the total allowable catch, which is set by the government. 1757. Which of the following statements is FALSE? a. Economists support free and competitive markets. b. Economists are skeptical about price controls and tariffs. *c. Economists favor command and control regulation. d. Economists oppose super-high inflation rates. 1758. What are some reasons why markets are not free and unregulated? a. bad incentives b. some people ignore ethical values in making market decisions c. politicians' election agendas *d. All of the answers are correct. 1759. In which of the following decisions is a person likely to be rationally ignorant? a. deciding on which car to buy b. deciding on where to live *c. deciding on which mayoral candidate to vote for d. deciding on which television show to watch 1760. It is rational to be ignorant when: a. the benefits of the information outweigh the costs of acquiring the information. *b. the costs of becoming informed are greater than the benefits of being informed. c. you have limited mental capacity. d. dollars or profits do not matter. 1761. The government spends more on foreign aid than: a. health care. b. welfare. c. Social Security. *d. None of the answers is correct. 1762. The two largest sources of government spending are: a. defense and foreign aid. b. welfare and foreign aid. c. interest on debt and Social Security. *d. defense and Social Security. 1763. Rational ignorance can be seen in which of the following scenarios? a. A student has a final exam in exactly three hours. He knows from past experience that without at least some sleep he will be useless on the exam. In spite of the fact that he still has four chapters to read for the exam, he decides to sleep for 2.5 hours. b. You are a worker looking for work in a recessionary environment. You get a phone interview after which you are offered a job and have to start the next day. To secure a paycheck, you accept without doing any further research on the company. c. You have to fly urgently. You buy the first ticket available and it is expensive, but you pay anyway because you do not have time to research other flights. *d. All of these examples illustrate cases of rational ignorance. 1764. Which of the following best explains the term rational ignorance? a. It is the decision to search for and acquire information only if there is enough time. *b. It is the decision to stay uninformed on certain topics because of the prohibitive cost of gathering information. c. It is the decision to ignore free information that is vital in making the correct decision. d. It is the rational weighing of costs versus benefits. 1765. Why do you think voters choose to be rationally ignorant even when it is time to elect a new president? I. Voters are not presented with enough information to make a rational decision. II. Voters often believe that their vote does not make any difference in the political process. III. The process of understanding the electorate system, the candidates' platforms, and critically assessing the candidates' policies takes up more of the voter's time than it is worth. a. I only b. II only *c. II and III only d. I, II, and III 1766. Which of the following statements seems to be that of a rationally ignorant person? *a. I am not sure which of the soups are more nutritious and I'm in a hurry, so I will opt for the one with more vegetables in it. b. I always compare prices and buy the good at the store where it has been priced the cheapest. c. I don't know much about the candidates' views on defense, but he has better charisma than she does and so I will vote for him. d. The male candidate has a much softer defense strategy than the female candidate, therefore I have decided to vote for her. 1767. Let's check on whether you are rationally ignorant. Which of the following four items is the biggest expenditure in the federal government's budget? *a. Social Security b. welfare c. foreign aid d. health care 1768. Let's check on whether you are rationally ignorant. Which of the following four items is the smallest in terms of government expenditure? a. Social Security b. welfare *c. foreign aid d. health care 1769. Let's check on whether you are rationally ignorant. Which of the following four items is the biggest in terms of government expenditure? *a. defense b. welfare c. foreign aid d. health care 1770. Rational ignorance in voting comes from: a. externalities that lead to an excess supply of information. b. the limited incentive of the news media to cover political campaigns. *c. the expectation of individual voters that their vote will not be decisive. d. the lack of a college education on the part of most voters in the United States. 1771. Most voters will tend to be concerned with: a. most issues since most issues have some impact, however slight, on each citizen. b. most issues since information on most issues can be obtained at a low cost. *c. only a few special issues (those that have the most impact on the voters' personal welfare). d. the views of a particular political candidate on all issues. 1772. Rational ignorance refers to the: *a. lack of incentive voters have to become well informed about candidates and issues because their vote is unlikely to affect the outcome of an election. b. problem of not enough information being supplied to voters because politicians are not spending enough on campaign adds to inform voters of their positions on issues. c. fact that most people choose to become just as well informed when making choices as consumers as they do when making choices as voters. d. lack of rational analysis on the part of voters when they choose not to become informed about candidates and issues even though this knowledge would produce great personal benefit to them. 1773. People who spend more time and effort investigating the advantages and disadvantages of different flat-screen televisions when they go to purchase one than they do investigating the strengths and weaknesses of presidential candidates are saying, in effect, that: a. they do not think it matters who is elected president. b. they are irrational, because the choice of a president is obviously far more important than the choice of a TV. c. a good TV is more important to their well-being than a good president. *d. they expect to use the information on the merits of alternative TVs to greater personal advantage than they could information on the merits of alternative presidential candidates. 1774. Which of the following would be the most likely outcome if a college professor awards grades based on average test scores and assigns the same grade to everyone in the class? a. Students will collaborate to get a better grade and achieve higher payoff. b. Students will study more because studying has a higher payoff. *c. Students will study less because studying has a lower payoff. d. Students will study the same amount as they did before because their scores will still impact the average score. 1775. Ignorance is rational when the benefits of being informed are: a. greater than the costs of becoming informed. *b. less than the costs of becoming informed. c. equal to the costs of becoming informed. d. likely to be quite large but information is costless. 1776. Studying politics doesn't pay because the outcome: *a. of any election is mostly determined by what other people do, not by what you do. b. of any election is mostly determined by what you do, not by what other people do. c. is always inconsistent with the expectation. d. can be manipulated by politicians. 1777. Economists say that voters are rationally ignorant about politics because: a. the procedure of learning politics is too cumbersome. b. politics is too complicated. c. the opportunity cost of studying politics is too high. *d. the incentives to be fully informed are low. 1778. Which of the following programs are the two largest sources of the U.S. government budget? a. welfare and foreign aid b. defense and interest on the federal debt c. health care and Social Security *d. defense and Social Security 1779. Rational ignorance: a. makes it difficult for voters to make informed decisions regarding government intervention in the economy. b. may cause voters to give credit to or blame politicians for things not under their control. c. may allow special interest groups to take advantage of the uninformed. *d. All of these possibilities are correct. 1780. Why is rational ignorance important from an economic standpoint? I. Voters might not make informed choices. II. Voters will make decisions based on incorrect or incomplete information. III. Special interest groups may control economic outcomes if they are the only ones who are not rationally ignorant. a. I only b. I and II only c. II and III only *d. I, II, and III 1781. Which of the following is NOT the reason why ignorance about political matters is important? a. It is difficult for voters to make informed choices if they are not well informed. b. Voters who are rationally ignorant will often make decisions for irrational reasons. *c. Voters who are well informed would perceive politics as entertainment. d. Rational ignorance matters because not everyone is rationally ignorant. 1782. Why are special interest groups so powerful? a. Because voters are rationally ignorant about how laws designed to help special interest groups are harmful to everyone else. b. Because special interest groups have a self-interest in passing favorable legislation—they stand to gain millions of dollars, while each taxpayer loses only several dollars. c. Neither of these explanations is correct. *d. Both of these explanations are correct. 1783. Sugar quotas: a. are not an issue in the United States despite rationally ignorant voters. b. harm U.S. sugar farmers at the benefit of the candy and soda industry. *c. cost the typical family about $6 per year but provide millions of dollars of benefits to Florida sugar producers. d. lead to lower prices and increased output, and thus are opposed by the sugar industry. 1784. The Fanjuls are: *a. sugar barons who give considerable money to politicians who make decisions on sugar quotas. b. a consumer advocacy group attempting to ban special interest groups. c. a new political party based on the opposition to special interest politics. d. free traders who propose doing away with all tariffs. 1785. An issue that generates substantial benefits to a small group of individuals while imposing a small cost on many others is called a: a. nonissue. *b. special-interest issue. c. popular issue. d. minority issue. 1786. Which of the following statements is NOT true about the sugar quota imposed by the U.S. government? a. Although sugar consumers are harmed by the quota, few of them even know of the quota's existence. b. Sugar consumers wouldn't spend much time or effort to oppose the sugar quota even if they know about the quota. c. Sugar producers are rationally informed and would seek to sustain the quota. *d. The quota is imposed to protect both sugar consumers and producers. 1787. Special interest groups have a large incentive to be ________ about legislation that benefits them directly, whereas voters tend to be ________ regarding these issues. a. rationally informed; irrationally informed. b. rationally ignorant; irrationally ignorant. *c. rationally informed; rationally ignorant. d. irrationally informed; rationally ignorant. 1788. Which of the following best explains why special interest groups maintain so much power in the U.S. political process? a. Special interest groups typically represent the largest U.S. companies, and hence get a lot of media attention. *b. Special interest groups stand to gain millions if particular laws are passed and lobby very hard for them; whereas voters stand to lose only a little and don't find opposing them worth their effort. c. Both special interest groups as well as voters lobby politicians hard regarding certain legislation, however special interest groups typically win out because they have more money. d. Special interest groups have been powerful in the past because of their ties to wealth; however, their power has been dwindling in recent years. 1789. One way to achieve political success is to: a. concentrate costs and diffuse benefits. b. concentrate benefits and costs. *c. concentrate benefits and diffuse costs. d. diffuse costs and benefits. 1790. Policy A adversely affects 50 million people at a cost of $1 per person. But Policy A also benefits 1,000 people at $30,000 per person. Which of the following statements is true? a. Policy A will not become law because it hurts more people than it helps. b. Policy A concentrates all the costs among a small group of people and all the benefits among a large group of people. *c. Policy A is likely to be supported by politicians even though it makes society worse off. d. Since Policy A negatively affects many people, and so rational ignorance will not be a problem. 1791. The political power of farmers ________ as the share of farmers in the population decreased, because the benefits from farm subsidies became ________ concentrated. a. increased; less *b. increased; more c. decreased; less d. decreased; more 1792. The costs of many government projects (such as bridges, roads, and museums) create: *a. external costs because taxpayers around the country pay for the construction. b. internal costs because taxpayers around the country pay for the construction. c. internal benefits because all taxpayers benefit from the construction. d. external benefits because taxpayers around the country benefit from the construction. 1793. The “Bridge to Nowhere”: a. cost the local community about $35,000 per person. b. is a special case in which special interests can maximize society's well-being. *c. would have created large external costs, an example of the inefficient projects proposed by self-interested politicians. d. connects Cuba to Key West, Florida. 1794. The diffusion of costs and concentration of benefits: I. leads to rational ignorance on the part of voters. II. is the formula to which the sugar quota owes its existence. III. is a formula for reelection to political office. a. I only b. I and II only c. II and III only *d. I, II, and III 1795. In the public sector, politicians: a. pursue primarily the general public interest since competition is less intense in the public sector. b. pursue primarily the general public interest since they are concerned mostly with the collective good. *c. act in the narrow self-interest of their constituents and contributors to remain in office. d. respond to the broader active political interests even though they choose to be rationally ignorant. 1796. Which of the following provides the most reasonable explanation for why agricultural interests lobby for higher farm subsidies and price supports? *a. Agricultural interests seek a redistribution of income favoring themselves. b. Price support programs reduce food costs, which helps the poor. c. Subsidies promote the efficient use of agricultural resources. d. Without the farm subsidies, food shortages would result. 1797. The key formula for political success behind the sugar quota is: *a. diffused costs and concentrated benefits. b. diffused benefits and concentrated costs. c. diffused costs and benefits. d. concentrated costs and benefits. 1798. Which of the following explains why the sugar quota is a winning policy for politicians? a. The people who are harmed by the quota are rationally informed. b. The people who are harmed by the quota have strong incentive to oppose the policy. c. The people who benefit from the quota are rationally ignorant. *d. The people who benefit from the quota have strong incentive to support the policy. 1799. Which of the following explains why the sugar quota is a winning policy for politicians? *a. The people who are harmed by the quota are rationally ignorant. b. The people who are harmed by the quota have strong incentive to oppose the policy. c. The people who benefit from the quota are rationally ignorant. d. The people who benefit from the quota are too small in number to influence the outcome of elections. 1800. Which of the following public policies does NOT fit the diffused costs and concentrated benefits story? a. agricultural subsidies *b. minimum wage c. price supports d. trade quota and tariffs 1801. When government makes it possible to externalize the cost of a good: a. there will be an optimal quantity of the good. b. there will be an insufficient quantity of the good. *c. there will be too much of the good. d. the good will not be produced at all. 1802. When benefits are concentrated and costs are diffused: a. resources get devoted to projects with high benefits and low costs. *b. resources get wasted on projects with low benefits and high costs. c. more projects with high benefits and low costs get developed. d. fewer projects with low benefits and high costs get developed. 1803. Which three variables have been shown to have strong predictive power for election results? a. whether the country is at war, productivity, and the divorce rate b. education status, life expectancy, corporate profits *c. disposable income, the inflation rate, and years in office for the party in power d. the savings rate, the trade deficit, and the unemployment rate of single mothers 1804. Voter decisions seem to depend greatly on: *a. economic conditions in the year of an election. b. the beauty of the candidates. c. the weather. d. the amount of campaign contributions. 1805. Just before the 1972 election, ________ sent a letter to 24 million Social Security recipients informing them of increased payment benefits. *a. Richard Nixon b. Jimmy Carter c. Ronald Reagan d. John F. Kennedy 1806. During election years personal disposable income ________ more than at other times, while inflation tends to ________. a. falls; rise. b. grows; rise. *c. grows; fall. d. falls; fall 1807. Presidents have an easier time changing ________ than ________ during an election year. a. GDP; taxes and transfer payments b. the overall economy; GDP *c. taxes and transfer payments; GDP d. GDP; overall economy 1808. Data for the United States show that the incumbent party tends to win the election if: I. personal disposable income is growing. II. the inflation rate is low. III. the political party has not been in power for too many continuous terms. a. I only b. I and II only c. I and III only *d. I, II, and III 1809. Why are voters generally considered myopic? a. They vote based only on the economic policies of the candidates and not on their normative political policies. *b. They focus on economic conditions in the year of the election not over the entire term of the presidency. c. They educate themselves thoroughly on the economic policies of the candidates in the election, but not on the political agendas. d. They educate themselves on issues that influence them personally, but not on issues that influence the larger society. 1810. President Nixon increased his popularity just before the 1972 election by: a. lowering income taxes before the election. b. lowering taxes after the election. *c. increasing Social Security benefits. d. removing all price controls from the markets. 1811. Over the past one hundred years the American voter has voted for the party of the ________ when the economy is doing ________. *a. incumbent; well b. incumbent; poorly c. left; well d. right; poorly 1812. Which of the following variables is the least helpful in predicting presidential elections? a. growth in personal income in the year of the election b. inflation in the year of the election *c. the popularity level of the presidential personality d. the length of time the incumbent party has been in power 1813. Voter myopia refers to the fact that voters: a. are rationally ignorant. b. respond to incentives. *c. primarily consider economic conditions in the year of the election. d. look at economic conditions over a president's term. 1814. What does the evidence from 60 years of U.S. data show regarding the growth rate in personal income in each quarter of a president's term in office? a. The growth rate holds steady at approximately 1.8 percent. b. The growth rate increases in the quarters just after election. c. The growth rate decreases in the quarters just before election. *d. The growth rate increases in the quarters just before election. 1815. Evidence suggests that voters will vote for a political party based on the economic conditions that prevail in the year of the election. This behavior is known as: a. economic dependence. b. political response. c. rational ignorance. *d. voter myopia. 1816. When the battle of presidential elections is done, historians mark one personality and set of issues as having won the day and reflected the will of the: a. incumbent candidate. b. challenging candidate. *c. voters. d. government. 1817. A simple logic underlying the apparent chaos of seemingly unique and momentous elections is that: a. voters are so unresponsive to economic conditions that the winner of a presidential election cannot be predicted with any accuracy. *b. voters are so responsive to economic conditions that the winner of a presidential election can be predicted with considerable accuracy. c. pundits scrutinize the daily chronicle of events to divine how the candidates advance and retreat in public opinion. d. personalities and leadership of the candidates loom large and are reckoned to swing voters one way or another. 1818. Which of the following conditions best predicts when the incumbent party will NOT win the presidential election? a. personal disposable income is growing b. the inflation rate is low c. the unemployment rate is low *d. the incumbent party has been in power for too many terms in a row 1819. Evidence suggests that voters are myopic, meaning they are responsive to economic conditions: a. before the year of an election. *b. in the year of an election. c. after the year of an election. d. over the president's entire term. 1820. If voters are myopic, which of the following would we expect to see? *a. Government benefits increase before an election while taxes increase only after an election. b. Government benefits increase after an election while taxes hardly ever do. c. Government benefits decrease after an election while taxes increase only before an election. d. Government benefits decrease before an election while taxes decrease only after an election. 1821. When a policy is highly visible, appears often in the newspapers, and has a major effect on the lives of millions of Americans, very often: a. special interests get their way. *b. voters get their way. c. politicians get their way. d. government gets its way. 1822. When a policy is specialized in its impact, difficult to understand, and affects a small part of the country, it is more likely that: *a. special interests get their way. b. voters get their way. c. politicians get their way. d. government gets its way. 1823. Politicians have a greater interest in serving the voters' will when: a. voters are well-informed. b. special interest groups are nonexistent. c. the media does not get involved. *d. the policy is highly visible. 1824. Which of the following theories works to explain which voters will get their way in a democratic election? a. the theory on rational ignorance *b. the median voter theorem c. the special interests theory d. the political business cycle theory 1825. Figure: Kidney Trade Ban Policy Spectrum Reference: Ref 19-1 (Figure: Kidney Trade Ban Policy Spectrum) Refer to the figure. If there are only two candidates, A and B, and an open market for kidney trading is the only issue being debated in this election, which one of the voters is the median voter? a. Mariska *b. Tuppence c. Tommy d. Agatha 1826. Figure: Kidney Trade Ban Policy Spectrum Reference: Ref 19-1 (Figure: Kidney Trade Ban Policy Spectrum) Refer to the figure. If there are only two candidates, A and B, and an open market for kidney trading is the only issue being debated in this election, which candidate will win the election? *a. A b. B c. Neither A nor B will win this election. d. Both A and B will receive an equal number of votes. 1827. Figure: Kidney Trade Ban Policy Spectrum Reference: Ref 19-1 (Figure: Kidney Trade Ban Policy Spectrum) Refer to figure. If A, B, and C are all candidates in the election, and an open market for kidney trading is the only issue being debated, based on the median voter theorem, which candidate will win the election? a. A b. B *c. C d. A, B, and C will each receive an equal number of votes. 1828. Figure: Smoking Ban Policy Spectrum Reference: Ref 19-2 (Figure: Smoking Ban Policy Spectrum) Refer to the figure. If there are only two candidates, A and B, and a smoking ban is the only issue being debated in this election, which one of the voters is the median voter? *a. Victoria b. Edward c. O'Rourke d. Abdul 1829. Figure: Smoking Ban Policy Spectrum Reference: Ref 19-2 (Figure: Smoking Ban Policy Spectrum) Refer to the figure. If there are only two candidates, A and B, and a smoking ban is the only issue being debated in this election, based on the median voter theorem, which candidate will win the election? a. A *b. B c. Neither A nor B will win this election. d. Both A and B will receive an equal number of votes. 1830. Figure: Smoking Ban Policy Spectrum Reference: Ref 19-2 (Figure: Smoking Ban Policy Spectrum) Refer to the figure. If A, B, and C are all candidates in the election, and a smoking ban is the only issue being debated, based on the median voter theorem which candidate will win the election? a. A b. B *c. C d. A, B, and C will each receive an equal number of votes. 1831. The basic concept behind the median voter theorem is that: I. the median voter is defined as the voter for which half of the other voters want a policy to the left and half of the voters want a policy to the right. II. when voters vote, regardless of whether they vote closest to their preferences or not, the preference of the median voter is sure to win in a majority win election. III. if voters vote closest to their preferences, then the preference of the median voter is sure to win in a majority win election. a. I only b. I and II only *c. I and III only d. III only 1832. The theory of the median voter may not work if: I. voters do not vote. II. voters do not vote for the policy closest to their own positions. III. there is only a single dimension over which the voting occurs. a. I only b. II only *c. I and II only d. I, II, and III 1833. The theory of the median voter may not work if: I. voters do not vote. II. voters do not vote for the policy closest to their own positions. III. there are multiple dimensions over which the voting occurs. a. I only b. II only c. I and II only *d. I, II, and III 1834. According to the median voter theorem, when do political outcomes change? a. when the consensus changes b. as a result of a compromise *c. when the median voter changes his/her preferences d. when there is new technology to account for proper voting 1835. If voters care about two issues such as taxes and war, then politicians: a. will form a stable policy on these issues. b. can pose a policy that will never lose against another policy. c. must assume that there is no median voter. *d. may never converge on a stable outcome. 1836. The median voter theorem holds that the: *a. policy that caters to the median voter will beat any other policy in a majority rule election. b. policy that adjusts the left of the median voter will beat any policy further to the right. c. policy that adjusts to the right of the median voter will beat any policy further to the left. d. median voter's preferences cannot be met. 1837. The most important assumption of the median voter theorem is that: a. voters vote for the policy furthest from their ideal. *b. voters vote for the policy closest to their ideal. c. half the voters vote for their ideal, but the other half do not. d. there are several voting dimensions. 1838. How are democracy and wealth related? a. Once people's basic needs have been met, there is an increased demand for democracy and political participation. b. Democracy is associated with institutions (free press, private property rights, lower levels of corruption) that are favorable towards growth and wealth accumulation. c. Neither of these explanations is correct. *d. Both of these explanations are correct. 1839. Government ownership of the media: a. is uncommon in African countries. *b. causes an even greater degree of rational ignorance than private ownership. c. reduces rational ignorance because governments usually require a greater number of news broadcasts. d. decreases the effectiveness of special interest groups. 1840. Evidence from an important study of media ownership concludes that: a. private ownership of the press restricts information flows to the public, which reduces the quality of the government. b. public ownership of the press increases information flows to the public, which increases the quality of the government. *c. government ownership of the press restricts information flows to the public, which reduces the quality of the government. d. there is little correlation between media ownership and the efficiency of government. 1841. Democracy typically brings about more efficient outcomes because: a. democracies create a demand for wealth. b. democracies are common practice in developed countries. c. citizens in democracies are rationally ignorant. *d. citizens in democracies are better informed and have power to vote. 1842. There is a strong correlation between economic freedom and: a. personal freedom. b. religious freedom. *c. living standards. d. economic instability. 1843. Government ownership of the press and of radio: a. increases quality of government. *b. decreases quality of government. c. increases the degree of economic freedom. d. decreases social corruption. 1844. Figure: Economic Freedom and Living Standards Reference: Ref 19-3 (Figure: Economic Freedom and Living Standards) Refer to the figure. Based on the data in this chart, the country with the lowest level of economic freedom is: *a. Angola b. Venezuela c. Hong Kong d. Haiti 1845. Figure: Economic Freedom and Living Standards Reference: Ref 19-3 (Figure: Economic Freedom and Living Standards) Refer to the figure. Based on the data in this chart, two countries that have about the same level of economic freedom but very different standards of living are: *a. Venezuela and Niger b. Congo and Luxembourg c. Haiti and Niger d. Luxembourg and the United States 1846. Figure: Economic Freedom and Living Standards Reference: Ref 19-3 (Figure: Economic Freedom and Living Standards) Refer to the figure. Based on this chart, we can conclude that: a. greater economic freedom causes a higher standard of living. *b. there is a positive relationship between economic freedom and GNI per capita. c. higher GNI per capita raises the level of democracy. d. the wealthiest countries in the world are all democracies. 1847. Stalin: a. instituted democratic reforms, leading to widespread prosperity. *b. took government control of the farms in Ukraine, leading to the starvation of millions of people. c. increased the provision of public goods, which had a positive effect on lowering the unemployment rate. d. tried unsuccessfully to expand voting rights in 1924 Russia. 1848. Which of the following statements is FALSE? *a. The root cause of mass starvation is a lack of food. b. Most mass starvations have been intentional. c. Mass starvation is less likely in democracies. d. Greater political competition is associated with higher levels of food distribution. 1849. Governments are more responsive to food crises: I. when there is more widespread newspaper circulation. II. if they are democracies. III. when there is more political competition. a. I and II only b. II and III only c. II only *d. I, II, and III 1850. ________ argues that ________. *a. Amartya Sen; famines don't happen in democracies b. Rico Raines; starvation in many parts of the world could be avoided with adequate price controls c. Amartya Sen; famines are more likely to occur where there are unfettered newspapers and political competition d. David Ricardo; mass starvations are more likely in democracies 1851. Why do studies show that food distribution is better in economies with higher political competition? a. Higher political competition always ensures better food production in farming areas. *b. Increased competition between political parties leads voters to educate themselves on the availability of such distribution systems. c. The threat of failure to get reelected spurs government into providing better food distribution systems. d. All of these explanations are correct. 1852. Why is public food distribution better in election and pre-election years? a. Higher political competition always ensures better food production in farming areas. *b. The threat of failure to get reelected spurs government into providing better food distribution systems. c. There is a lag of about four years between refurbishment of most food production systems. d. Increased competition between political parties leads voters to educate themselves on the availability of such distribution systems. 1853. According to Amartya Sen, the most powerful way to reduce the likelihood of famine is: a. enhancement of food production. b. improvement of distribution. c. introduction of new technologies. *d. enhancement of democratic practices. 1854. Which of the following was the main cause of the 1974 famine in Bangladesh? a. floods b. lack of food *c. lack of economic and political freedoms d. high rice prices 1855. According to Nobel Prize–winning economist Amartya Sen, famine would never take place in a: a. non-democracy. *b. functioning democracy. c. socialist state. d. state in which the government has ultimate control of food distribution. 1856. Economists Besley and Burgess found that a government is more responsive to food crises when there is: a. more political competition. b. more newspapers. c. either more political competition or more newspapers. *d. both more political competition and more newspapers. 1857. Suppose that a special interest group makes up 0.5 percent of the population. If a policy transfers $600 to the special interest at a cost of $100,000 to society, will the special interest group lobby for this policy? *a. Yes, the benefits of $600 outweigh the costs of $500. b. No, the benefits of $30 are less than the costs of $100,000. c. No, the benefits of $30 are less than the costs of $50,000 d. They'll be indifferent since the benefits equal the costs. 1858. Suppose that a special interest group makes up 2 percent of the population. If a policy transfers $600 to the special interest at a cost of $100,000 to society, will the special interest group lobby for this policy? a. Yes, the benefits of $700 outweigh the costs of $42. *b. No, the benefits of $600 are less than the costs of $2,000. c. They'll be indifferent since the benefits equal the costs. d. No, the benefits of $600 are less than the costs of $100,000. 1859. Which of the following statements is FALSE? a. Democracies have a good record for economic growth. *b. Small nondemocratic elites are more likely to consider the welfare of larger groups. c. Democracies tend to uphold private property rights and rule of law. d. The incentives of small nondemocratic elites may help to keep their nations poor. 1860. ________ groups tend to favor more efficient policies. a. Small *b. Large c. Elite d. Oligarchical 1861. One reason for the good record of democracies on economic growth is that: a. people can become rich by gaining economic resources in their favor. b. people can become rich by competing for the limited economic resources. c. the public as a whole can become rich by equally dividing the economic resources. *d. the public as a whole can become rich by supporting efficient policies that generate economic growth. 1862. If a policy transfers $100 to a special interest group at a cost of $4,000 to society, the group would lobby: a. for the policy no matter how large the special interest group is. b. for the policy if the group made up more than 5 percent of the population. *c. for the policy if the group made up less than 1 percent of the population. d. against the policy if the group made up less than 2 percent of the population. 1863. The greater the share of the population that is brought into power, the: a. less likely that policies will offer something for everyone in the society. *b. more likely that policies will offer something for everyone in the society. c. less likely that policies will be efficient. d. more likely that policies will impede economic growth. 1864. Voters have a strong incentive to be well-informed about the positions of political candidates—after all, every vote counts. a. True *b. False 1865. Sometimes it is rational to be ignorant. *a. True b. False 1866. Saying that voters are rationally ignorant is the same as saying voters are irrational. a. True *b. False 1867. One of the largest federal spending programs is foreign aid. a. True *b. False 1868. Voters are rationally ignorant because the incentives to being informed are low. *a. True b. False 1869. Rational ignorance may cause voters to make irrational decisions, such as judging a politician based on the level of oil prices, even though markets set oil prices. *a. True b. False 1870. Rational ignorance may cause voters to make uninformed decisions; however, the outcomes tend to be the same as if voters had full information. a. True *b. False 1871. Sugar consumers are likely to oppose sugar quotas because the widespread costs, although small, fall on all households in the form of higher prices. a. True *b. False 1872. Sugar consumers likely won't do much to oppose a law that reduces the supply of sugar and raises prices. *a. True b. False 1873. Sugar producers likely won't do much to oppose a law that reduces the supply of sugar and raises prices. *a. True b. False 1874. Suppose that a special interest group comprises 1 percent of society, and a proposed law would give them $10,000 of benefits but cost society $900,000. The special interest group will oppose this policy because the costs exceed the benefits. a. True *b. False 1875. Politicians can often use the concept of rational ignorance on the part of voters to their advantage. *a. True b. False 1876. When benefits are concentrated and costs are diffused, resources often get wasted on projects with high benefits and low costs. a. True *b. False 1877. The incumbent party will most likely get reelected when economic conditions are worsening in an economy. a. True *b. False 1878. Voters are myopic so they most likely focus on the economic conditions over a president's entire term. a. True *b. False 1879. When a policy is highly visible, appears often in the newspapers, and has a major effect on the lives of millions of Americans, lobbies and special interests very often get their way. a. True *b. False 1880. The median voter is the person/voter who is exactly in the middle of the population, when one is counting the population in numbers. a. True *b. False 1881. The median voter is the voter such that half of the voters are on one side of the issue and the other half of the voters are on the other side of the issue. *a. True b. False 1882. If the median voter theory holds in the first election, come reelection time, the candidates will reposition themselves closer to the median voter. *a. True b. False 1883. If the theory of the median voter holds, then extremes in political or economic stance cannot be maintained. *a. True b. False 1884. As a predictive theory of politics the median voter theorem is applicable to almost all circumstances in politics. a. True *b. False 1885. According to the median voter theorem, the politician with a platform closest to the ideals of the median voter will win an election. *a. True b. False 1886. The association between democracy and wealth occurs because democracy creates a demand for wealth. a. True *b. False 1887. Rational public ignorance tends to be voluntary in democracies but public ignorance tends to be more involuntary in non-democracies. *a. True b. False 1888. The greater the share of the population that is brought into political power, the more likely it is that policies will favor economic growth. *a. True b. False 1889. The free flow of ideas helps both the market and government to function better. *a. True b. False 1890. Large special interest groups tend to favor less efficient policies because they make up a large fraction of society. a. True *b. False 1891. Many people are concerned about voter apathy. Use economics to explain why there is a lack of interest in voting and politics. Correct Answer: Voters have an incentive to be ignorant. When acquiring information about candidates, the benefits of the information may be less than the costs of its acquisition, which means it is rational to be ignorant. An informed voter is no more likely to change an election outcome than an uninformed voter. Furthermore, casting a vote is likely to have little effect on whether a particular candidate wins, so a voter may even choose not to vote. 1892. Why do people tend to be rationally ignorant about presidential candidates? Correct Answer: The process of understanding the electoral system, the candidates' platforms, and critically assessing the candidates' policies ends up being too costly for the voter, especially in terms of the time requirements. Moreover, voters may think that individual votes do not count. 1893. If policies like sugar quotas and tariffs have benefits that are concentrated among few people, why do taxpayers who pay for the costs of these policies remain rationally ignorant? Correct Answer: Because the costs are diffused among a very large number of taxpayers, and so the cost of opposing the policy becomes prohibitive for a single individual. Thus they remain rationally ignorant. 1894. Is saying that a voter is rationally ignorant the same thing as saying the voter is irrational? Correct Answer: No, rational ignorance and irrationality are not the same. To be irrational is to not act in your own self-interest. To be rationally ignorant implies that you are acting rationally by being uninformed. In this case, the costs of being informed exceed the benefits of becoming informed. 1895. Explain why economists say that voters are rationally ignorant about politics. Correct Answer: The incentives for voters to be informed are low because the payoff of being informed is low. That is, studying position papers, examining voting histories, and listening to political speeches is sometimes entertaining but it doesn't offer much concrete return. Even when studying changes your vote, your vote is very unlikely to change the outcome of the election. Accordingly, studying politics doesn't pay because the outcome of any election is mostly determined by what other people do, not by what you do. 1896. Briefly specify the three reasons why ignorance about political matters is important. Correct Answer: 1. If voters are not well informed, then it is difficult for them to make informed choices. 2. Voters who are rationally ignorant will often make decisions for irrational reasons. 3. Finally, rational ignorance matters because not everyone is rationally ignorant. 1897. Explain how politicians can use the concept of rational ignorance to their benefit. Correct Answer: Consider the example of the sugar quota given in the textbook. When politicians are aware that the cost of a policy such as a quota translates into a minimal cost per consumer, they can enact such a policy and get support from sugar producers in return. The textbook has ample evidence of the contributions made by sugar producers to various politicians. 1898. If consumers are hurt by quotas and tariffs such as the sugar quota, why do they remain rationally ignorant about these policies? Correct Answer: Although the sugar quota costs consumers over a billion dollars, these costs are spread over millions of consumers and thus each consumer bears only a small cost. The benefit to protesting against the quota does not outweigh the cost of such a protest (in terms of time, money, and effort) so many consumers are not aware that the quota exists. 1899. Why are incentives so important in the decision to remain rationally ignorant about something? Correct Answer: Consumers, or people in general, will engage in an activity if there is a benefit to them that outweighs the cost of engaging in that activity. A voter may not think his or her vote is particularly important, and so he or she may not bother to acquire the knowledge of the voting system or the agendas of the candidates. Similarly a taxpayer will not go into the effort of fighting against a sugar quota because the cost to him or her of the protest (in terms of time, money, and effort) will outweigh the benefit. Moreover, to topple the sugar quota would require the concerted efforts of not just one, but millions of taxpayers. 1900. Suppose you are in the middle of your senior year at school. An election comes up for the new student representatives to the school senate. The candidates are mostly sophomores. If elected these students will have powerful votes in the senate on matters that affect the student body. Do you have an incentive to be rationally informed? Correct Answer: Chances are that you will remain rationally ignorant about the candidates and their platforms, because you are graduating in a short time and the policies enacted by the new student representatives will not have any effect on you. 1901. How are rational ignorance, special interest groups, and economic inefficiency related? Correct Answer: If the benefits of a piece of proposed legislation are highly concentrated among a small number of people, they will likely lobby the government for the passage of the legislation. However, if the costs of the legislation are diffused over millions of people, many people will not find it worthwhile to get informed and oppose it, especially if the per person costs of the legislation are small. The potential opposition remains silent or rationally ignorant, which allows members of the special interest group to get their way with the politicians. Unfortunately, the benefits to the special interest group may be smaller than the social costs, creating inefficiency and making the economy worse off. 1902. How do special interests affect tax policy in the United States? Correct Answer: Politicians add special interest provisions that provide tax credits and deductions for various industries, for example manufacturing industries like oil and gas drilling as well as mining and timber. 1903. Explain the formula for political success. Provide an example. Correct Answer: Diffused costs and concentrated benefits is the key formula for political success. For instance, the costs of the sugar quota are diffused over millions of consumers, so no consumer has much of an incentive to oppose the quota. But the benefits of the quota are concentrated on a handful of producers; they have strong incentives to support the quota. So the sugar quota is a winning policy for politicians. 1904. How are elections correlated to economic business cycles in the United States? Correct Answer: In the United States political cycles correspond to business cycles. If the economy is doing well, voters tend to vote for the incumbent. If the economy is not doing well, they tend to vote for the opposing party. This formula seems to work regardless of the candidates' personalities and political agendas. 1905. Do “good politics” and “good economics” always coincide? Explain why or why not. Correct Answer: We know that voters respond to economic conditions; however, we also know that they are myopic in that they tend to vote based on current economic conditions, not past or future economic conditions. Therefore, politicians tend to focus on what is close at hand, namely economic conditions in the election year. Politicians who want to be reelected will do whatever they can to increase household income in the current year, many times at the expense of good economic policies for future time periods. 1906. Explain why candidates with extreme views do not tend to get elected. What economic theorem is this most closely tied to? Correct Answer: The median voter theorem says that voters tend to vote for candidates closest to their own preferences. Candidates with extreme views tend to be positioned at either end of the political spectrum, and hence positioned far away from the views of the median voter. 1907. Explain the assumptions behind the median voter theorem. In which cases will the median voter theorem NOT apply? Correct Answer: The median voter theorem is constructed under the assumptions that 1) voters will vote for the policy that is closest to their ideal preference and 2) there is just one major dimension over which voting takes place. In reality neither of these may hold, in which case the median voter theorem may not apply. 1908. Explain why there may be a bi-causal (causation in both directions) relationship between democracy and wealth. Correct Answer: Greater wealth means that people demand more than just the satisfaction of basic wants. They begin to desire more cerebral satisfaction (consider Maslow's Hierarchy of Needs) and thus they desire to participate in the voting process. This increase in GDP per capita thus leads to greater democracy. On other hand, greater democracy leads to the establishment of more freely functioning markets where producers can produce goods in a more competitive manner. This leads to higher GDP and thus higher GDP per capita. 1909. Nobel Prize–winning economist Amartya Sen indicated that hunger is caused by a lack of exchange entitlements. In other words, food may be plentiful but people starve because they are unable to access it. Can you explain how this is possible even if markets are well functioning? Correct Answer: A lack of economic power, especially if coupled with inflation can lead to such starvation. Recall the example of Bangladesh from the textbook, where poor farmers who could not work because their land was flooded, lost their incomes, and this coupled with inflation caused them to starve even when sufficient food to feed them was present in the country. In addition, a lack of political power meant that the elites then running Bangladesh were not compelled to avert the famine. 1910. Larry Summers argued that it makes economic sense for: a. poor people to pay higher taxes. *b. rich countries to export their pollution to poor countries. c. poor countries to pay higher taxes. d. unemployment to be lower in heavily unionized states. 1911. Which of these statements is an example of positive economics? *a. A free market in kidneys would end the shortage of kidneys. b. People should not sell organs for profit. c. The United States should not trade with countries with human rights abuses. d. All three of these statements are examples of positive economics. 1912. Which of these statements is an example of normative economics? a. The Americans with Disabilities Act reduced employment opportunities for the disabled. b. Rent controls reduce the housing stock. c. Workers pay the majority of corporate taxes in the form of lower wages. *d. The government should not have bailed out the domestic automobile market. 1913. In a now infamous leaked memo, Larry Summers argued for which of the following? a. keeping the price of kidneys at $0 b. encouraging the importation of kidneys from less-developed countries c. importing pollutants from less-developed countries *d. exporting pollutants to less-developed countries 1914. Gary Becker, a Nobel Prize–winning economist, argued for which of the following? a. keeping the price of kidneys at $0 *b. encouraging the importation of kidneys from less-developed countries c. importing pollutants from less-developed countries d. exporting pollutants to less-developed countries 1915. The difference between positive and normative economics is that: a. positive economics is what you are learning in school whereas normative economics is what you will learn in the real world. b. normative economics is based on proven fact whereas positive economics is based on what should be. *c. positive economics describes, explains and predicts economic events, whereas normative economics recommends what economic policies should look like. d. economists always use positive economics whereas politicians always use normative economics. 1916. Which of the following is a positive economic statement? a. Shortages in the kidney trade are a necessary phenomenon. b. Animal rights activists are to blame for the high prices of real furs. c. We should encourage the importation of kidneys from the less-developed countries. *d. A government-imposed price of zero for kidneys helps create a black market in kidneys. 1917. Which of the following is a positive economic statement? a. Raising the price of steak should be a priority for a government that wishes to protect animal rights. *b. An export market that transports pollutants to less-developed countries will increase their short-run GDP. c. The government should limit earnings for top management in corporations. d. The government should not provide bailouts to corporations in financial trouble. 1918. Which of the following is a normative economic statement? *a. Tests should always be hard to ensure that students are challenged. b. Quantity demanded for steak will fall if the price of steak rises. c. Hot dogs and hot dog buns are generally complementary goods. d. Each of these three statements uses normative economics. 1919. Which of the following is a normative economic statement? a. Raising the price of new textbooks will lead students to seek more used textbooks. b. Raising the price of new textbooks will lead students to buy fewer new textbooks. *c. Publishers should not raise the price of new textbooks. d. The price of new textbooks will rise if transportation costs and costs of paper rise. 1920. Presidential campaign speeches about economic policy are largely filled with: a. poor economics. *b. normative economics. c. positive economics. d. false promises. 1921. Positive economics is: a. about morals and values. b. the method used to assess justice. *c. description of facts. d. impossible to accomplish. 1922. Which of the following is a positive statement? a. The government should limit imports of sugar. *b. Import restrictions on sugar will increase sugar prices. c. Sugar is not good for you. d. Import quotas on sugar are unfair to foreign sugar sellers. 1923. Which of the following is NOT a normative statement? *a. Import restrictions on sugar will increase sugar prices. b. The government should limit imports of sugar. c. Schools need to limit their students' sugar intake. d. Import quotas on sugar are unfair to foreign sugar sellers. 1924. Positive economics is about: a. verifying and confirming economic policy. *b. describing, explaining, or predicting economic events. c. prescribing and making a claim on the economy. d. making recommendations about what economic policy should be. 1925. Normative economics is about: a. verifying and confirming economic policy. b. describing, explaining, or predicting economic events. c. prescribing and making a claim on the economy. *d. making recommendations about what economic policy should be. 1926. The case for exporting pollution from rich countries to poor countries is based on: a. the power of politics. b. the power of coercion. *c. the power of trade. d. monopoly power. 1927. Why would a poor country accept pollution from a rich country? *a. The money payment is more valuable than the costs of having the pollution. b. The poor country values health less than rich countries. c. Poor countries have better technologies for storing pollution. d. Poor countries have more space for storing pollution. 1928. Which is NOT a so-called problem of economic reasoning? a. meddlesome preferences b. fair and equal treatment c. exploitation *d. prices as information signals 1929. The problems of standard economic reasoning that need to be examined include all of the following EXCEPT: a. the problem of exploitation. b. meddlesome preferences. *c. unfair and unequal treatment. d. cultural goods and paternalism. 1930. The economic reasoning for exporting pollution from rich to poor countries is that: *a. the rich value health more than money and the poor value money more than health. b. the rich value money more than health and the poor value health more than money. c. pollution is a more severe problem in the rich countries than in the poor countries. d. the poor countries can use the money they make to resolve the problems of pollution. 1931. The economic reasoning for importing kidneys is that: I. trade may save many kidney-failure patients' lives. II. people who are allowed to sell their kidneys earn more income. III. buyers and sellers of kidneys can both be made better off by trade. a. II only b. II and III only c. I and III only *d. I, II, and III 1932. Opponents of kidney sales argue that: *a. paying someone to donate a kidney is exploitative. b. poor people would benefit from a market in kidneys. c. rich people would be exploited by paying large sums of money to the poor. d. Opponents of kidney sales make all three of these arguments. 1933. Many economists argue that kidney sales are ________ exploitative because ________. *a. not; they are market exchange that leaves both recipients and donors better off b. always; the rich on average benefit at the expense of the poor c. not; the government could set low prices d. always; you cannot put a price on life 1934. Someone who believes that the sale of kidneys by the poor is exploitative would find which of the following price tags for a kidney most exploitative? a. $0 b. $250 c. $10,000 *d. $50,000 1935. The question of whether selling kidneys is exploitative boils down to the question of whether: a. we could save more lives by allowing the sale of kidneys. *b. it is wrong to buy things from the poor just because they are poor. c. it is risky to sell kidneys. d. the poor would be better off with or without the additional income. 1936. It is sometimes difficult to see the difference between: a. inequality and the distribution of wealth. b. risk and fair treatment. *c. exploitation and exchange. d. fair treatment and equality. 1937. Some people believe that trade such as the buying and selling of human kidneys is exploitative because: a. poor people have less information than wealthy individuals. b. wealthy individuals choose to buy kidneys from poor people only because they are willing to sell them for less. *c. poor people have little choice but to sell things (such as their own kidneys) which they would really rather keep. d. these types of risky exchanges happen only in poor countries. 1938. Suppose the sale of human kidneys was legal. If the seller of kidneys is well informed of the risks of the exchange, then: *a. some people believe this is not exploitation, but instead simply a voluntary trade. b. the price of kidneys will be lower. c. wealthy individuals will be just as likely to sell their kidneys as poor individuals. d. these types of exchanges would happen only in poor countries. 1939. Which of the following statements is TRUE? a. It is illegal to sell horsemeat in European restaurants. b. It is illegal to sell horsemeat in Japanese restaurants. *c. It is illegal to sell horsemeat in California restaurants. d. All of these statements are correct. 1940. Which of the following hold to a meddlesome preference? a. people who are against interracial dating b. people who are against sodomy c. people who are against certain religious practices *d. All of the answers are correct. 1941. Meddlesome preferences are ________ with ________. a. consistent; liberty, rights, and religious freedom *b. inconsistent; liberty, rights, and religious freedom c. consistent; more fundamental rights like the pursuit of life, liberty, and happiness d. harmless; dictatorships 1942. A meddlesome preference is a(n): a. interpersonal opinion about one's self-discipline. b. interpersonal opinion about one's motivation. *c. preference about other people's behavior, even when it doesn't affect you. d. preference about how the government should reform tax law. 1943. In which of the following cases do meddlesome preferences interfere with standard economic reasoning? a. In a poor economy, the diet is very low in protein, and plenty of stray dogs abound. Sellers realize that dog meat would be profitable and deliver the protein needs of the people, but don't sell it because the animal rights society issued a ban against eating dogs. b. Thousands of people are on the wait list for kidneys. However, the government does not allow the sale of kidneys even though people can survive very well with one kidney. c. In poor countries, workers between the ages of 13 to 16 bring much-needed income to households. However, due to child labor laws in the richer countries, export industries in poor countries cannot hire these workers, leading to the poor getting poorer. *d. Each of these cases provides an example of meddlesome preferences. 1944. Preferences over what other people do, even when their actions don't interfere in any direct way with the rest of society, are called: a. interfering preferences. b. intervening preferences. *c. meddlesome preferences. d. officious preferences. 1945. It is often difficult to resolve meddlesome preferences with other values that are considered important such as: a. liberty. b. rights. c. religious freedom. *d. All of the answers are correct. 1946. Which of the following statements is TRUE? a. New York City buses do not accommodate the disabled. b. Taxpayers would have lost money if New York City had paid disabled people to use taxis rather than retrofitting city buses for wheelchair ramps. *c. New York City buses are capable of accepting passengers in wheelchairs. d. New York City would have saved money if buses were used to transport the disabled rather than taxicabs. 1947. A city-owned hospital sends morbidly obese patients to the zoo to get an MRI. The city, however, could purchase a newer model MRI machine (at a cost of $2.5 million) that is capable of accommodating morbidly obese patients. This example highlights the problem of: a. exploitation. b. meddlesome preferences. *c. fair and equal treatment. d. the distribution of wealth. 1948. A city-owned hospital sends morbidly obese patients to the zoo to get an MRI. The city, however, could purchase a newer model MRI machine (at a cost of $2.5 million) that is capable of accommodating morbidly obese patients. This type of problem: a. can usually be solved by economists. b. can always be solved by economists. *c. cannot be solved by economists. d. can be solved by economists who are trained in econometrics. 1949. Why does economic efficiency not always result in fair and equal treatment? a. Efficiency demands cost-minimization, which may cause the non-production of expensive items or adjustments designed to ensure that disadvantaged members of society are catered for. b. Market efficiency requires that only profitable goods be produced in order to maximize the return from using scarce resources and some goods for the disadvantaged may not always yield profits. c. Market efficiency does not always allow firms to hire disadvantaged members of society so labor and governments sometimes have to step in to demand hiring of some of these individuals. *d. All of these explanations are correct. 1950. What principle was the basis for equipping buses in New York City for wheelchair service? a. efficiency b. paternalism c. poverty reduction *d. fair and equal treatment 1951. The notion of fair and equal treatment can: a. match the value of trade and efficiency. b. be irrelevant to the value of trade and efficiency. c. enhance the value of trade and efficiency. *d. run up against the value of trade and efficiency. 1952. Which of the following assertions about the principle of fair and equal treatment is correct? a. Fair and equal treatment does not apply in New York City. *b. Mass transit is really about not making people feel different or disadvantaged. c. Handicapped should have easier and more luxurious transport options. d. Equipping buses to accept handicapped passengers increases the value of efficiency. 1953. Which of the following statements is TRUE? a. The French government mandates that 40 percent of the movies shown on TV must be French-language movies. b. The French government encourages rock-and-roll music from French bands instead of American and British rock bands. c. In general, the French government tries to support French culture. *d. Each of these statements is correct. 1954. An unintended consequence of the French government's support for French-language movies is that: *a. it lowers the quality of French movies. b. it increases the quality of French movies. c. it makes French movies more internationally competitive. d. it has no effect on the viewing habits of French movie fans. 1955. Most university officials believe students should exercise regularly, and thus charge them a mandatory gym fee so that they can regularly use university gym facilities. Many students do not use the gym facilities and would prefer to use the money for textbooks or food. Which one of the following arguments against standard economic reasoning can be applied to this scenario? a. fair and equal treatment *b. cultural goods and paternalism c. poverty, inequality, and the distribution of income d. exploitation 1956. The French government spends what percent of GDP per year subsidizing culture? a. 0.5 percent b. 1.0 percent *c. 1.5 percent d. 2.0 percent 1957. The pragmatic criticism argues that the French government's subsidy schemes tend to be: a. productive and effective. b. productive but unnecessary. c. counterproductive but necessary. *d. counterproductive and wasteful. 1958. The maximin principle, utilitarianism, and entitlement theory of justice are concerned with issues of: *a. income distribution. b. money supply and inflation. c. consumer sovereignty. d. economic forecasting. 1959. The problem with kidney sales and exporting pollution to poor countries is not trade per se but the: a. demand and supply making the trade happen. *b. poverty and inequality making the trade happen. c. surplus and shortage making the trade happen. d. market making the trade happen. 1960. The view that has proven especially influential on normative policy judgments is: a. John Rawls's maximin principle. b. utilitarianism. c. Robert Nozick's entitlement theory of justice. *d. All three of these views have been very influential on normative policies in the past. 1961. Rawls's maximin principle is based on: a. minimizing the income of the wealthiest in society. b. trade-offs between efficiency and equity. c. finding the Nash equilibrium for society. *d. maximizing the benefits to the most disadvantaged group in society. 1962. Table: Maximin Principle Society Ruth Bob George Average Income A 30 40 17 29 B 200 100 15 105 C 600 600 15 405 D 25 20 18 21 Reference: Ref 20-1 (Table: Maximin Principle) Refer to the table. If income is shown in thousands of dollars, which is the best society based on Rawls's principle? a. Society A b. Society B c. Society C *d. Society D 1963. Table: Maximin Principle Society Ruth Bob George Average Income A 30 40 17 29 B 200 100 15 105 C 600 600 15 405 D 25 20 18 21 Reference: Ref 20-1 (Table: Maximin Principle) Refer to the table. If income is shown in thousands of dollars, according to Rawls's maximin principle, Society ________ is preferred to Society ________. a. A; D b. B; C c. C; A *d. D; B 1964. The Rawls's maximin principle has had ________ among economists because it ________ trade-offs. a. great influence; emphasizes *b. little influence; ignores c. little influence; over emphasizes d. great influence; ignores 1965. Table: Rawls's Maximin Society Person X Person Y Person Z Average Income A 50 10 15 25 B 25 25 25 25 C 60 5 10 25 D 20 20 35 25 Reference: Ref 20-2 (Table: Rawls's Maximin) Refer to the table. According to the maximin principle, which of the societies is ranked highest? a. A *b. B c. D d. All societies are ranked equally. 1966. Table: Rawls's Maximin Society Person X Person Y Person Z Average Income A 50 10 15 25 B 25 25 25 25 C 60 5 10 25 D 20 20 35 25 Reference: Ref 20-2 (Table: Rawls's Maximin) Refer to the table. According to the maximin principle, which of the societies is ranked lowest? a. A *b. C c. D d. All societies are ranked equally. 1967. Table: Society A, B, C, D Society Person 1 Person 2 Person 3 Person 4 Average Income A 100 150 200 250 175 B 175 175 175 175 175 C 200 300 400 600 375 D 50 400 450 600 375 Reference: Ref 20-3 (Table: Society A, B, C, D) Refer to the table. According to the maximin principle, which of the societies is ranked highest? a. A b. B *c. C d. D 1968. Table: Society A, B, C, D Society Person 1 Person 2 Person 3 Person 4 Average Income A 100 150 200 250 175 B 175 175 175 175 175 C 200 300 400 600 375 D 50 400 450 600 375 Reference: Ref 20-3 (Table: Society A, B, C, D) Refer to the table. According to the maximin principle, which of the societies is ranked lowest? a. A b. B c. C *d. D 1969. What is the title of John Rawls's book about income and wealth distribution? a. Anarchy, State, and Utopia b. The Wealth of Nations *c. A Theory of Justice d. A Theory of Efficiency 1970. What is the maximin principle? a. that government should minimize benefits that the maximum income earners receive from society, allowing others to become better-off *b. that government should maximize benefits that the minimum income earners receive from society, making them as well-off as possible c. that the least well-off people in society should be made as well-off as anyone else in society d. that the most well-off people in society should have a maximum level of wealth 1971. John Rawls's A Theory of Justice, published in 1971, argued that ________ is/are key(s) for evaluating social policy. a. design of the tax system b. economic welfare c. interaction of suppliers and demanders *d. questions of income and wealth distribution 1972. The maximin principle is the idea that a government should: *a. maximize the benefits accruing to the most disadvantaged group in society. b. maximize the benefits accruing to the most advantaged group in society. c. minimize the benefits accruing to the most disadvantaged group in society. d. minimize the benefits accruing to the most advantaged group in society. 1973. Which of the following statements about the maximin principle is correct? a. Doing well by the better-off group is more important than improving the lot of worst-off groups. *b. Doing well by the worst-off group is more important than improving the lot of any other group. c. Doing well by both the better-off group and worst-off group is equally important. d. Doing well by neither the better-off group nor worst-off group is important. 1974. Table: Ray, Bruce, Grant Society Ray Bruce Grant Average Income A 100 100 100 100 B 150 100 50 100 C 600 600 99 433 D 1,096 102 101 433 Reference: Ref 20-4 (Table: Ray, Bruce, Grant) Refer to the table. Rawls's maximin principle implies that Society A: a. is worse or less just than Society B. *b. is better or more just than Society B. c. can be either better or worse than Society B. d. and Society B are equivalent. 1975. Table: Ray, Bruce, Grant Society Ray Bruce Grant Average Income A B C D 100 150 600 1,096 100 100 600 102 100 50 99 101 100 100 433 433 Reference: Ref 20-4 (Table: Ray, Bruce, Grant) Refer to the table. Rawls's maximin principle implies that Society C: *a. is worse or less just than Society D. b. is better or more just than Society D. c. can be either better or worse than Society D. d. and Society D are equal. 1976. The maximin principle is influential among philosophers but less so among economists because economists contend that: *a. a little bit less income for the worst-off might be acceptable if it comes with a big enough gain to others. b. lower average income might be acceptable if income is more equally divided. c. higher average income is always better. d. a larger income inequality may be acceptable if the worst-off are less productive. 1977. The goal of utilitarianism is to: a. ensure that everyone is equal. b. maximize the happiness of the poor. *c. create the greatest happiness for society. d. prevent recessions, high unemployment, and inflation. 1978. Consider the statement: Giving an extra dollar to a homeless person provides more additional utility than giving an extra dollar to a corporate CEO. Economic theory: *a. doesn't allow economists to directly test this statement. b. can test this proposition scientifically. c. leads economists to agree with this statement. d. can test this proposition by examining tax returns. 1979. Utilitarians are likely to suggest that taking a dollar from a rich person and giving it to a poor person: *a. increases society's total well-being because the loss in utility to the rich person is more than offset by the gain in utility to the poor person. b. decreases society's total well-being because the loss in utility to the rich person is more than offset by the gain in utility to the poor person. c. decreases society's total well-being because the gain in utility to the rich person exceeds the loss in utility to the poor person. d. increases society's total well-being because the gain in utility to the rich person exceeds the loss in utility to the poor person. 1980. Which of the following is NOT a limitation of utilitarianism? a. People have differing preferences. b. Happiness is difficult to measure. c. People respond differently to incentives. *d. Just acquisition of goods. 1981. Under utilitarianism, we try to implement the outcome that: a. makes equal allocation of utility to society. b. raises utility of the most productive workers in the society. c. increases utility to lower-income people in the society. *d. brings the greatest sum of utility to society. 1982. Taking into account the incentive effects of redistribution on the poor, utilitarianism suggests that: a. giving dollars to poor people is the best way to improve their welfare. *b. giving dollars to poor people is not always the best way to improve their welfare. c. poor people tend to be more responsive to incentives. d. poor people tend to be less responsive to incentives. 1983. Which of the following cases is likely a suggestion of the utilitarian? a. Some amount of money should be redistributed from less productive people to more productive people. b. Some amount of money should be redistributed from more productive people to less productive people. c. Some amount of money should be redistributed from poor people to rich people. *d. Some amount of money should be redistributed from rich people toward poor people. 1984. Which of the following might limit the amount of wealth a utilitarian would redistribute from rich to poor? *a. incentives b. perceptions c. price d. utility 1985. Utilitarians: a. are similar to animal activists, they represent those that would otherwise have no voice in government. *b. do not always try to make the poorest people as well-off as possible. c. believe we should make the distribution of income more equal across all individuals. d. believe those who earn income through productive activities should be allowed to keep it. 1986. Under which circumstances would utilitarians favor a redistribution of income from poor individuals to rich individuals? a. always *b. if the marginal utility lost by the poor individuals was less than the marginal utility gained by the rich individuals c. if the marginal utility gained by the poor individuals was less than the marginal utility lost by the rich individuals d. never 1987. Nozick's entitlement theory is also known as: a. the republican theory of justice. b. the democratic theory of justice. *c. the libertarian theory of justice. d. the democratic socialist theory of distribution. 1988. Who argued that income inequality is not a problem as long as income was justly acquired? a. Peter Singer *b. Robert Nozick c. John Craine d. John Rawls 1989. Entitlement theory argues that: a. capitalistic systems based on voluntary trade reduce income inequality. *b. market trades between consenting adults lead to income inequality. c. market trades between consenting adults lead to an equal distribution of income. d. the rich should compensate the poor. 1990. Nozick argued that the distribution of income is: a. important in assessing justice in society. *b. not relevant in understanding what is just. c. a stable and achievable ideal. d. the most important value in society. 1991. For Nozick, the relevant basis of the justice of wealth and income distribution is: a. the degree of equality of income. b. whether income differences can be eliminated. c. the natural limits of income. *d. whether income differences are justly acquired. 1992. Consider these two theories of justice. Who is/are the proponents of these theories? I. The justice of wealth distribution is determined by the income status of the least well-off in society. II. The justice of wealth distribution is determined by whether the acquisition of wealth was just. a. I is Nozick; II is Rawls *b. I is Rawls; II is Nozick c. Both are theories held by Nozick. d. Both are theories held by Rawls. 1993. Robert Nozick's entitlement theory of justice argues that the distribution of income is: a. relevant only if income is justly distributed. b. relevant regardless of how income is distributed. *c. irrelevant, what matters is whether income is justly acquired. d. irrelevant, what matters is that income be maximized. 1994. Robert Nozick's direct criticism of the importance of income equality is that: *a. peaceful trade should not be condemned even when it leads to large differences in wealth. b. trade performed on a cumulative basis would result in equal outcomes and opportunities for people. c. equality results only from freely chosen market transactions, devoid of coercive force or fraud. d. All of the answers are correct. 1995. Robert Nozick's entitlement theory of justice is also known as the: a. liberalism of justice. *b. libertarian theory of justice. c. principle of maximin. d. utilitarianism of justice. 1996. Which of the following principles would most likely be favored by J. K. Rowling, the author of the Harry Potter book series and one of the richest persons in the world? a. John Rawls's maximin principle b. utilitarianism *c. Robert Nozick's entitlement theory of justice d. efficiency theory 1997. Economists are: *a. more likely to take into account the preferences of foreigners when devising immigration policies than are politicians. b. less likely to take into account the preferences of foreigners when devising immigration policies than are politicians. c. opposed to foreign aid because it comprises a significant amount of the debt. d. opposed to foreign aid because there are still poor people in the United States that need help. 1998. Why are remittances like an “import” industry to Mexico? a. because the Mexicans who live in the United States export goods and services to Mexico, and these goods and services become Mexico's imports b. because the United States' largest trading partner is Mexico *c. because Mexican workers from outside Mexico send money back to all parts of Mexico and this becomes the largest inflow of capital into Mexico d. because the United States exports the largest number of goods and services to Mexico 1999. Foreign aid is: *a. grants and gifts of money and goods and services from the United States to other countries. b. imports of goods and services from other countries into the United States. c. the largest part of U.S. GDP. d. All of the answers are correct. 2000. Economics tends to put ________ weight on immigrants' preferences compared to citizens, while politics tends to put ________ weight on immigrants' preferences. a. more; less b. less; more *c. equal; less d. equal; more 2001. The amount of money the American government spends annually on foreign aid is: a. significant. b. over 3 percent of the federal budget. *c. under 1 percent of the federal budget. d. impossible to calculate. 2002. Suppose a U.S. presidential candidate announced that he or she would put equal weight on the preferences of immigrants and U.S. citizens. This candidate would likely: a. make immigration a hot issue in his or her campaign. b. win the election. c. put less weight on the immigrants who send their earnings home. *d. lose the election. 2003. Which of the following statements is NOT correct? a. When economists evaluate a public policy they tend to count the benefits and costs to all individuals equally regardless of where they live. b. National governments usually weight the preferences of their citizens more heavily than they do the preferences of foreigners. c. If the gains to foreigners are counted as much as the gains to nationals are counted, Mexican immigration into the United States will look especially beneficial. *d. Economists believe that if the United States is making decisions about its immigration policy, it should weight the benefits accruing solely to the U.S. citizens. 2004. Economics is an ethical subject in the sense that: I. economics is a normative science. II. the market produces goods and services based on what people want thus respecting choice and preferences. III. the market treats all demands equally no matter who they stem from. a. I only b. II only *c. II and III only d. I, II, and III 2005. Economics is an ethical subject in the sense that: a. the market only supports the production of goods that are considered ethically valuable. b. the market only produces goods that lead to a utilitarian outcome. c. government actions cause market outcomes to become ethical. *d. the market treats all demands equally, regardless of whom the demand stems from. 2006. Many economists argue that there are ethical ideas behind economic reasoning because: *a. economic reasoning does not second-guess people's preferences, and by extension respects people's choices. b. economic reasoning is normative in nature. c. economists include a value for welfare in all economic calculations. d. economic markets only support those exchanges that are considered fair and equal. 2007. Which of the following is NOT considered an ethical view held by most economists? a. respect for individual choice and preference *b. some voluntary trades are exploitative c. support for voluntary trade d. equality of treatment 2008. Not everyone approves of the core idea in economics called “gains from trade” mainly for: a. pragmatic reasons. *b. ethical reasons. c. political reasons. d. illogical reasons. 2009. Intuitions about fairness, equitable treatment, distribution, and other matters often clash with: a. policy making. *b. increasing the gains from trade. c. ethical analysis. d. eliminating gains from trade. 2010. Positive statements in economics: a. can be verified only through appeals to judgments and values. b. usually are not part of the ethical debates about economic activities. *c. provide information for people engaged in political and ethical discussions. d. typically cannot be empirically evaluated. 2011. Economists who approve of exporting pollution to, or importing kidneys from, poor countries emphasize ______ over ______. *a. gains from trade; ethical intuitions b. ethical intuitions; gains from trade c. justice; fairness d. equity; efficiency 2012. Positive economics explains economic events without making judgments. *a. True b. False 2013. If poor countries accept pollution from rich countries, both countries benefit. *a. True b. False 2014. Positive statements are based on opinion while normative statements are based on fact. a. True *b. False 2015. Positive statements are based on fact while normative statements are based on opinion. *a. True b. False 2016. Ethics has little to do with economics. a. True *b. False 2017. Positive economics involves making recommendations for what economic policy should be. a. True *b. False 2018. Positive economics involves describing, explaining, or predicting economic events. *a. True b. False 2019. Normative economics involves describing, explaining, or predicting economic events. a. True *b. False 2020. It is difficult to see the dividing line that separates exploitation from exchange. *a. True b. False 2021. Commercial fishing in Alaska is generally considered exploitative because of the high degree of risk involved for only one side of the transaction (the fishermen). a. True *b. False 2022. Preferences about what other people do are often called meddlesome preferences. *a. True b. False 2023. Preferences over what other people do, even when they don't interfere in any direct way with what anyone else does, are called meddlesome preferences. *a. True b. False 2024. Economics can safely ignore questions of fairness when examining trade-offs. a. True *b. False 2025. The notion of fair and equal treatment is always consistent with the value of trade and efficiency. a. True *b. False 2026. The French cultural policy once required all movies on television and all music on rock-and-roll radio to be “French.” a. True *b. False 2027. The maximin principle is concerned with the welfare of middle-class households in society. a. True *b. False 2028. The maximin principle is used regularly by economists to rank countries. a. True *b. False 2029. According to the maximin principle, societies should be ranked according to how well-off the poorest members of their society are. *a. True b. False 2030. Rawls relies on the economic idea of trade-offs to formulate the maximin principle. a. True *b. False 2031. John Rawls's A Theory of Justice argued that questions of income and wealth distribution are keys for evaluating trade policy. a. True *b. False 2032. Utilitarians are not concerned that transferring wealth to the poor reduces an economy's output. a. True *b. False 2033. The concept of utility could refer to “happiness” or “satisfaction.” *a. True b. False 2034. The practical limit of income redistribution is incentives that affect how much the wealthy earn. *a. True b. False 2035. When it comes to redistribution, a utilitarian approach tries to determine which people can generate the greatest income with additional utility. a. True *b. False 2036. Utilitarians favor redistribution schemes that maximize total utility in society. *a. True b. False 2037. Income inequality is not a problem if it results from voluntary transactions in the marketplace, according to Nozick's entitlement theory. *a. True b. False 2038. Robert Nozick advocated the importance of assessing the distribution of income in a country in order to decide whether an economic system is just or not. a. True *b. False 2039. Robert Nozick's entitlement theory is a pro-free-trade theory. *a. True b. False 2040. Nozick argues that voluntary, peaceful trades that lead to income inequality are to be condemned as unjust actions. a. True *b. False 2041. In economics, there is a concept called Pareto optimality. This is the concept whereby parties trade until neither one can be made better-off without making the other worse-off. At that point, both parties are said to have reached a state that is Pareto optimal. Do you think the market for kidneys enjoys Pareto optimality? Why or why not? Correct Answer: No, because there are both willing buyers and sellers who are only prevented from trading because of legal constraints. Both parties, buyers and sellers, would be made better-off if trade were allowed, thus more closely approaching Pareto optimality. Buyers would gain kidneys and sellers would gain wealth. 2042. Consider the market for human kidneys. Using supply and demand, graphically illustrate how the price of $0 is affecting the legal market for kidneys. Assume that a small number of kidneys are donated for free each year. Correct Answer: Note that in the following diagram that quantity demanded is greater than quantity supplied causing a shortage of kidneys when the price is zero. 2043. Suppose you were advocating Larry Summers's view that pollution should be exported to less-developed countries. Explain how this could lead to increased economic growth in both sets of countries. Correct Answer: The country exporting the pollutants would benefit by reducing costs of production overall because firms would only pay the importing country if its charges were less than the cost of domestic disposal. Thus, if costs fell, domestic production would increase as would GDP in the exporting country. The less-developed importing country will gain money from the exchange increasing its GDP, but in order for this to lead to true growth the importing country would need to charge high enough prices to properly store or dispose of the pollutants. 2044. Based on your reading of the text, briefly list some of the objections that exist against standard economic reasoning. Correct Answer: Some of the arguments are arguments of exploitation, meddlesome preferences, fair and equal treatment, cultural goods and paternalism, poverty, inequality and the distribution of wealth, and immigration issues. 2045. List the six practical problems of economic reasoning that need to be examined. Correct Answer: 1) the problem of exploitation 2) meddlesome preferences 3) fair and equal treatment 4) cultural goods and paternalism 5) poverty, inequality, and the distribution of wealth 6) Who counts? Should some count for more? 2046. Discuss the role for government if markets fail to provide fair and equal treatment? Explain. Correct Answer: Markets are very fair in one aspect. They distribute the gains from trade to whichever parties engage in the trade, regardless of who they are. But there are parties whose value judgments disagree with this standard economic reasoning because, they argue, some individuals end up disadvantaged; for example, the disabled in wheelchairs if public transportation is not wheel-chair accessible. Such parties argue that the government should step in, identify rights, and provide services for the disadvantaged that place them on equal footing with others in society. 2047. Explain how economic reasoning may fail to address the issue of fair and equal treatment. Correct Answer: Markets are very fair in one aspect. They distribute the gains from trade to whichever parties engage in the trade, regardless of who they are. But there are parties whose value judgments disagree with this standard economic reasoning because, they argue, some individuals end up disadvantaged; for example, the disabled in wheelchairs if public transportation is not wheel-chair accessible. Such parties argue that the government should step in, identify rights, and provide services for the disadvantaged that place them on equal footing with others in society. 2048. Think of an example, other than the market for human kidneys, that is illegal because it is believed to be exploitative? Make two arguments—first, that this market is exploitative and should be illegal; second, from an economic point of view, that the market does not exploit and should be legal. Correct Answer: Student answers will vary depending on the examples they think of. In general however their arguments in favor of exploitation should include a discussion of how the market takes advantage of poor people by putting them in a position where they have to sell certain goods or services that they would otherwise (i.e., if they were not as poor) choose to keep or not sell. The argument in favor of legalizing the market should include a discussion of the need for both parties to be well-informed and free to make their own choices. Then when buyers and sellers decide to trade, it should explain how both parties are made better-off. This is an efficient trade from an economic perspective, and we should respect their rights and choices to trade in ways they believe are beneficial. 2049. Briefly describe the three views that have proven influential in judging the distribution of wealth in economies. Correct Answer: 1) John Rawls's maximin principle: according to the maximin principle, the government should maximize the benefits accruing to the most disadvantaged group in society. The notion of maximizing the minimum led to the phrase maximin. 2) Utilitarianism: When it comes to redistribution, a utilitarian approach tries to determine which people have the greatest need for additional income and implement strategies that bring the greatest total utility to society. 3) Robert Nozick's entitlement theory: Nozick argued that the distribution of income is irrelevant and what matters is whether income differences are justly acquired. 2050. Explain the central idea behind the Rawlsian maximin principle. Correct Answer: John Rawls rejected the idea that economics must have trade-offs. He advocated economics that deliberately concentrates its efforts on the disadvantaged in society. Societal welfare is seen as a measure of how well the most disadvantaged members of society are doing. Assuming people are risk averse, Rawls explained that if nobody knew what position they held in society they would all want the best for the most disadvantaged in case they ended up being the most disadvantaged themselves. According to Rawls, if societies are ranked, the highest ranked one should be the one where the poorest are best-off. Economists generally prefer to rank societies by average income instead. 2051. (Table: Distribution of Income) Refer to the table. Using the maximin principle, identify the societies that rank the highest and the lowest. Table: Distribution of Income Society Person X Person Y Person Z Average Income A 50 40 45 45 B 24 26 22 24 C 70 5 75 50 D 40 30 35 35 Correct Answer: Society C ranks lowest because the poorest person is worst-off in this society. Society A ranks highest since the poorest person has the most wealth out of all four societies. 2052. (Table: Society A, B, C, D) Refer to the table. Using the maximin principle, identify the societies that rank the highest and the lowest. Table: Society A, B, C, D Society Person 1 Person 2 Person 3 Person 4 Average Income A 100 150 200 250 175 B 175 175 175 175 175 C 200 300 400 600 375 D 50 400 450 600 375 Correct Answer: Society D ranks lowest since the poorest person, Person 1, has the least amount of income. Society C ranks highest because the poorest person is best off here. 2053. Discuss the problems of implementing utilitarianism? Correct Answer: Transferring income from the rich to the poor requires taxing the rich. Taxes create deadweight losses and reduce society's overall output. Transferring money to poor people may reduce their incentive to acquire human capital and seek market employment, thus reducing their lifetime income. The assumptions of utilitarianism are strong. Economists are not comfortable comparing marginal utilities across people. There is no way to know whether taking a dollar from a rich person and giving it to poor person increases society's overall utility; it's possible that the rich person values the dollar more than a poor person. 2054. To what extent was Robin Hood a utilitarian? Correct Answer: Utilitarians advocate the reallocation of some resources from the rich to the poor. Since Robin Hood robbed from the rich to give to the poor, it can be assumed that he was utilitarian to some extent. However, it is important to note that utilitarians are not always trying to make the poor as rich as possible. They only advocate the reallocation of resources to the point where society maximizes its total utility. We have no way of measuring how Robin Hood's actions affected total utility. Prince John may well have valued his losses more than the peasants valued their gains. 2055. In a society where the income distribution is skewed, and rich people have a very large chunk of the total income in the country, will utilitarians advocate reallocation of resources if the rich get more utility, i.e., more value from the amount of the transfer than the poor people do? Correct Answer: No, it is important to note that utilitarians are not always trying to make the poor as rich as possible. They only advocate the reallocation of resources to the point where society maximizes its total utility. Therefore if total overall utility will fall when wealth is relocated from the rich to the poor, the utilitarians will not advocate the reallocation of wealth. 2056. Which distributional theory is most consistent with the principles of individual liberty? Correct Answer: Robert Nozick's entitlement theory is most consistent with the principles of individual liberty. Indeed, it is referred to as the libertarian theory of justice. Nozick's theory suggests that market outcomes are optimal as long as the voluntary transactions do not infringe upon the rights of others. Whereas the other two theories, maximin and utilitarianism, both advocate transferring resources from the rich to the poor in an effort to make society better off, Nozick's entitlement theory does not. 2057. Assume that you write a wonderful novel that becomes very popular, and that it will profitably retail for $6.50. Everybody buys the book, even some of the poor, since the book is reasonably priced. Ultimately, everyone is more satisfied because they now have the enjoyment of the book rather than their cash, but of course everyone (even the poorest person among your purchasers) gave you $6.50 for their copy of the book. All this money has now been transferred to you since you are the author of the book and you are now millions richer. Assess the justness of this new income allocation from the following points of view: a. utilitarian b. Rawlsian c. Nozickian Correct Answer: a. From a utilitarian point of view, the new allocation is just because society's satisfaction went up overall. b. From a Rawlsian point of view, the new allocation may be unjust because the poor person's money balances went down. If everyone's income level remained the same except the author's (which increased), then there is a greater disparity, but the poor person's income didn't change so the society's rank on the basis of average income also remains unchanged. c. From Nozick's standpoint, the allocation is just because everyone participated in this trade willingly and no rights were infringed upon in arriving at this final allocation. 2058. What kind of positive pro-immigration statements would an economist make? (List at least two.) Correct Answer: Immigrants contribute to economic growth by providing labor for the production process, earning incomes that count towards GDP, and spending part of that income domestically. Their remittances also aid economic growth in their home countries. 2059. Provide at least three normative economic statements that politicians often make about immigration? Correct Answer: Immigrants cost us our jobs, we should make sure that every American that wants a job has one. Immigrants take away incomes that American citizens could have earned; we should care for our own citizens first. We need to erect stronger barriers (legal and otherwise) to keep immigration to a minimum, especially in these recessionary times. 2060. Explain why economists and politicians tend to evaluate a public policy like trade or immigration differently? Correct Answer: When economists evaluate a public policy, they tend to count the benefits and costs to all individuals equally regardless of where they live. On the other hand, national governments usually weight the preferences of their citizens more heavily, usually much more heavily, than they do the preferences of foreigners. For example, regarding the U.S. immigration policy, economists would hold the view that foreign immigration into the United States will look especially beneficial if the gains to foreigners are counted as much as the gains to nationals are counted. However, politicians are more concerned with the welfare of their constituents and care less about the foreign citizens. 2061. In what way is economics an ethical discipline? Correct Answer: Economics is very fair in one aspect. It models markets and distributes the gains from trade to whichever parties engage in the trade, regardless of who they are. Economics does not differentiate regarding who the demands stem from—it treats all demands equally regardless of who they come from. A free market will produce whatever consumers want and economists respect the choices that people make as long as they impose no external costs on nonmarket participants. To that extent economics is an ethical discipline respecting people's preferences and their trade behavior. 2062. Describe some of the ethical reasons that lead people to disapprove of gains from trade as a valid guideline for evaluating actions. Correct Answer: [The best answer is the “Takeaway” from the text, as this question is a summary-styled short answer that addresses the entire chapter.] “Economics stresses the core idea of gains from trade. Yet in many circumstances not everyone approves of gains from trade, mostly for ethical reasons. Not everyone thinks that kidneys should be bought and sold and not everyone thinks that pollution should be exported to poor countries. Intuitions about fairness, equitable treatment, distribution, and other matters often clash with the economic notion of increasing gains from trade.” 2063. It is true that incentives matter, and: a. getting incentives right is not a major issue. *b. the right incentives can be hard to figure out. c. the ideal would be to remove all incentives. d. wrong incentives are not important. 2064. Consider the two statements: I. The closer “what you pay for” is to “what you want,” then the more you can rely on strong incentives. II. If you can't bridge the gap between “what you pay for” and “what you want” then strong incentive schemes can be better than weak incentive schemes. *a. I is true; II is false b. I is false; II is true c. I and II are both true. d. I and II are both false. 2065. The stronger the incentives: a. the less it pays to invest in careful measurement and auditing. *b. the more it pays to invest in careful measurement and auditing. c. the less important the effects. d. the stronger the effects. 2066. Cheap cars are sometimes lemons. The lesson here is that: a. used car dealers must never be trusted. b. incentives must be tied to effort. *c. what you pay for is not always what you want. d. money is not everything. 2067. CEOs in the 1980s were given much stronger incentives to increase their firm's stock price by receiving: a. an extraordinary amount of salary. *b. stock options. c. a lucrative benefit package. d. an annual vacation package. 2068. Careful design of an incentive scheme can narrow the gap between: *a. what you pay for and what you want. b. what you want and what you do not want. c. what you pay for and what you do not pay for. d. what you want and what you do not pay for. 2069. What evidence was put forth for teachers cheating on standardized tests? a. groups of students who had the same exact right and wrong answers b. students who missed easy questions but got the hard questions right c. students with high test scores in one year but who earned low test scores the next year *d. All of these things were found to have occurred. 2070. Schools are rewarded for how well their students perform on standardized test scores but allowed to exclude test scores for learning disabled students when submitting results to the state. What incentive does this policy provide? a. work with low-performing students to increase their test scores *b. channel low-performing students into learning disability programs c. increase vigilance in testing for learning disabilities d. hire more special needs educators for the public school system 2071. The famous economist ________ studied teacher cheating in ________ public schools. *a. Steven Levitt; Chicago b. Carl Menger; Detroit c. Robert Barro; Boston d. Joseph Schumpeter; Philadelphia 2072. Tying executive compensation to stock prices may create incentives for: a. CEOs to work harder and increase the profitability of the firm. b. CEOs to overstate the firm's financial status. c. Enron-type scandals. *d. All of these possibilities are correct. 2073. Which of the following programs would NOT be favored by economists Hart, Shleifer, and Vishny (HSV) and why? a. Public prisons replace private prisons because tight budget constraints reduce the incentive to increase quality. b. Public prisons replace private prisons because the profit motive increases the incentive to increase quality. *c. Private prisons replace public prisons because the profit motive encourages cost-cutting at the expense of quality. d. Private prisons replace pubic prisons because slack budget constraints increase the incentive to increase quality. 2074. The usual argument against government bureaucracy is that: a. with budget constraints public bureaucracies won't have an incentive to maintain sufficient quality. b. with budget constraints public bureaucracies will have to cut costs at the expense of quality. c. without the profit incentive public bureaucracies will have to increase costs to maintain the quality. *d. without the profit incentive public bureaucracies won't have an incentive to cut costs. 2075. Suppose that a car dealer in California advertises that its sales staff is not paid on commission. Which of the following is correct with regards to the strategy of this advertising? *a. Car dealers who rely on repeat business prefer a low-pressure, informative sales staff. b. Car dealers who rely on selling cars to first-time buyers prefer a lower-pressure, informative sales staff. c. Car dealers who rely on repeat business prefer high-pressure sales tactics. d. Car dealers who rely on selling cars to first-time buyers prefer high-pressure sales tactics. 2076. Which of the following would be the LEAST likely result of efficient private prisons replacing inefficient public prisons? a. Strong profit motive gives private prisons stronger incentives than public prisons to cut costs. *b. Strong profit incentives would encourage private prisons to increase quality rather than cut costs. c. When quality and cost-cutting go together, private prisons have a strong incentive to increase quality. d. Lower costs result, but at the expense of quality since public prisons have no incentive to cut costs and only care about producing high quality. 2077. Paying car salespeople by commission may lead to: a. overly aggressive car salespeople and unethical sales pitches. b. salespeople willing to work unpleasant hours. c. fewer repeat customers for the car dealership. *d. All of these possibilities are correct. 2078. What is the concern with private prisons? *a. Private prisons may cut costs to increase profit at the expense of prisoner rehabilitation programs, civil rights, and safety. b. The increased efficiency of private prisons may put public prisons out of business. c. Private prisons will cost taxpayers too much money to operate because they will cut costs in the short run increasing recidivism rates. d. Private prisons are likely to overemphasize quality and cost taxpayers too much money in the long run. 2079. The incentive to cut costs is ________ for ________ prisons (as/than) it is for ________ prisons. a. about the same; private; public b. smaller; private; public *c. greater; private; public d. greater; public; private 2080. When IBM paid programmers by the line, IBM programmers produced: a. small amounts of low-quality code. b. small amounts of high-quality code. *c. large amounts of low-quality code. d. large amounts of high-quality code. 2081. Piece rate pay works better when: a. output is harder to measure. *b. output is easier to measure. c. quality matters a great deal. d. no monitoring is required. 2082. Piece rates do not work well when: a. workers use tools in production. b. quality is not important. c. quality control is important and simple to perform. *d. quality is important but quality control is expensive. 2083. The main advantage of piece rate pay is: a. decreased labor costs. b. increased quality. *c. increased productivity. d. easy implementation. 2084. The difference between a price rate and an hourly rate is: *a. a piece rate is a wage for each piece of work completed whereas an hourly rate is a rate for each hour of work completed. b. a piece rate is only offered for noncontractual workers whereas an hourly rate is only offered for contractual workers. c. a piece rate is not tied to effort whereas an hourly wage is tied to effort. d. None of the answers is correct. 2085. In order for a piece rate to result in high-quality output by workers, it requires: a. no environmental risk. b. the piece rate to be lower than the hourly wage. *c. good quality control. d. workers to have equal abilities. 2086. The establishment of a piece rate system can lead to increased productivity and higher quality work if: I. the piece rate is considerably higher than existing wages. II. the workers are held responsible for the jobs that they personally complete. III. there is a reliable measure of quality control. a. I only *b. II and III only c. III only d. I, II, and III 2087. Bjorn is a lazy worker with low productivity who works because he has to, not because he wants to. Amal is a very productive worker, enjoys what he does, and works quickly and accurately. Based on this information, which of the following is true? a. The piece rate incentive scheme would be equally appropriate for both these workers. *b. Bjorn should be offered an hourly wage, whereas Amal should be offered a piece rate. c. Amal should be offered an hourly wage, whereas Bjorn should be offered a piece rate. d. The hourly wage incentive scheme would be equally appropriate for both these workers. 2088. Figure: Piece Rates Reference: Ref 21-1 (Figure: Piece Rates) Refer to the figure. A piece rate is offered for every 10 bags of wheat that workers fill. Which of the three piece rates plotted in the figure above has the highest dollar value? a. P1 b. P2 *c. P3 d. All three piece rates are of equal value. 2089. Figure: Piece Rates Reference: Ref 21-1 (Figure: Piece Rates) Refer to the figure. A piece rate is offered for every 10 bags of wheat that workers fill. Which of the three piece rates plotted in the figure above has the lowest dollar value? *a. P1 b. P2 c. P3 d. All three piece rates are of equal value. 2090. Rajesh owns a pizza shop and pays his workers per pizza made. His ingredients are fresh and the recipe is good but he has few repeat customers and his pizzas are not tasty. He wants to redesign his incentive scheme. What would you suggest that Rajesh do? *a. pay his workers by the hour with a bonus tied to increased sales and customer satisfaction b. threaten to fire them if they do not improve the quality of the pizza c. continue paying the workers per pizza made d. provide an extra bonus based on worker productivity 2091. A piece rate is: a. any payment system that pays workers directly for their input. *b. any payment system that pays workers directly for their output. c. any payment paid in pieces to workers. d. the percentage of a payment paid weekly to workers. 2092. Piece rates do not work well when: *a. quality is important but quality control is expensive. b. quality is important and quality control is not costly. c. quality is not important and quality control is not costly. d. quality is not important but quality control is expensive. 2093. Which of the following is the most correct statement about piece rates? a. A piece rate firm would attract less productive workers because piece rates reduce the incentive to work hard. b. A piece rate firm would attract more productive workers because piece rates usually require some form of quality control. c. A piece rate firm would attract less productive workers because piece rates do not work well when quality is important. *d. A piece rate firm would attract more productive workers because piece rates give productive workers a chance to earn more money. 2094. As performance pay is becoming more common in an economy: a. wage rates would increase more than productivity in the economy. b. the number of unemployed workers in the economy would also increase. *c. the inequality of earnings in the economy would also increase. d. All of the answers are correct. 2095. Even though firms and workers can both benefit from piece rates, piece rates are sometimes not implemented because of: a. government regulation. b. a shortage of workers. *c. issues of distrust. d. All of the answers are correct. 2096. A piece rate is: a. the discounted present value of a day's worth of production output. b. an hourly rate paid to mid-level managers. *c. a method to compensate workers for the number of units of output they produce. d. the interest rate paid to finance a firm's output costs. 2097. IBM paid programmers by the number of lines of code written, which resulted in: *a. too many lines of poor-quality code. b. primarily high-quality code. c. increased profits. d. increased sales revenue. 2098. When using a piece rate system: *a. it is important to measure and observe worker quality. b. a firm may attract more unproductive workers. c. a firm will experience a decrease in output. d. All of the answers are correct. 2099. A piece rate system ________ earnings inequality. a. has no effect on *b. increases c. decreases d. first increases then decreases 2100. Which of the following statements is TRUE? I. Piece rate systems will attract more productive workers than hourly-wage plans. II. Workers may fear that the piece rate could be lowered in the future. III. Factory managers who increased productivity in the Soviet Union were accused of previous laziness. a. I and II only b. III only c. I and III only *d. I, II, and III 2101. The riskier the payments are to workers, the: *a. more a firm must pay on average. b. less a firm must pay on average. c. more a firm must rely on piece rate pay. d. fewer the workers who will take on work. 2102. If a firm's owner is better able than the sales staff to bear the risk of a recession, weak incentives: a. are worse than strong incentives. *b. may be mutually profitable. c. should not be used. d. would not be profitable. 2103. Two students are given a project to work on together. Each student could either work or shirk. There is no individual accountability, each student receives the same grade regardless of how much work he or she contributes. One student is a weak student who prefers partying and the other is a serious student who prefers working hard. What is the most likely outcome in this scenario? *a. The serious student will end up completing most of the project alone. b. The weak student will end up completing most of the project alone. c. Both students will work equally hard on the project. d. Neither student will complete the project. 2104. Two students are given a project to work on together. Each student could either work or shirk. There is no individual accountability, each student receives the same grade regardless of how much work he or she contributes. One student is a weak student who prefers partying and the other is a serious student who prefers working hard. How can the teacher adjust the incentive scheme to ensure equal effort by both students? *a. Ask each student to evaluate the other and use that assessment in grading the project. b. Ask the more serious student to put in as much effort as possible. c. Ask the weaker student to put in as much effort as possible. d. Leave the incentive scheme as is—the students will automatically put in equal effort. 2105. A very motivated and skilled salesperson may not have good sales if which of the following factors occurs? I. The product is of a low quality. II. The economy is in a recession. III. The price of the product is too high compared to competing products. a. II only b. I and II only c. I and III only *d. I, II, and III 2106. Which of the following may make weak incentives mutually profitable for both owner and sales staff of an auto dealer? a. If the sales staff is better able than the owner to bear the risk of a recession. *b. If the owner is better able than the sales staff to bear the risk of a recession. c. If the owner and sales staff can equally bear the risk of a recession. d. If neither the owner nor the sales staff has to bear the risk of a recession. 2107. When sales depend heavily on outside factors such as the state of the economy, strong incentives may: *a. be more expensive than they are worth. b. be less expensive than they are worth. c. equal what they are worth. d. be worthless. 2108. Job X pays a yearly salary of $55,000, regardless of the state of the economy. Job Y pays a yearly salary of $10,000 in a bad economy and $70,000 in a good economy. The probability of a bad economy is 0.30. Which job would most people prefer? a. Job Y because the expected payoff of $80,000 is greater than $55,000. *b. Job X because $55,000 exceeds the expected payoff of Job Y of $52,000. c. Job X because $55,000 exceeds the expected payoff of Job Y by $6,000. d. Job Y because the expected payoff of $70,000 is greater than $55,000. 2109. Job X pays a yearly salary of $52,000, regardless of the state of the economy. Job Y pays a yearly salary of $10,000 in a bad economy and $70,000 in a good economy. The probability of a bad economy is 0.30. Which job would most people prefer? a. Job Y because the expected payoff is $70,000 seventy percent of the time. *b. Job X because it is more certain than the $52,000 expected payoff of Job Y. c. Job X because $52,000 exceeds the expected payoff of Job Y by $3,000. d. Job Y because the expected payoff of $70,000 is greater than $55,000. 2110. In situations where worker productivity largely depends on factors outside the worker's control (e.g., the state of the economy): a. piece rate systems are generally preferred to fixed salary. *b. workers may prefer stable pay to larger bonuses. c. workers are more willing to trade-off stable pay for larger sales bonuses. d. workers will see their salary increase during recessions. 2111. When the owner of a firm sells “recession insurance” to her employees, it means that the: *a. employees sacrifice larger bonuses during good economic times in return for higher salaries during bad economic times. b. owner of the firm earns higher profits during bad economic times by skimming off the workers' salaries. c. employees are not allowed to quit the firm for higher pay during good economic times. d. employees are not allowed to quit the firm during bad economic times. 2112. Economists call a compensation scheme in which pay is based on relative performance a: a. profit sharing plan. b. bonus plan. c. salary. *d. tournament. 2113. One way a manager can reduce an agent's risk is to tie: a. penalties more closely to the agent's effort. b. bonuses more closely to the agent's sales. *c. rewards more closely to the actions that the agent can control. d. pay directly to past performance. 2114. Tournaments can tie rewards more closely to actions that an agent controls thereby: a. increasing effort and risk. b. reducing shirk and slack. *c. improving productivity and pay. d. All of the answers are correct. 2115. Which of the following is an example of tournament pay? *a. giving a bonus to the sales agent with the highest sales b. giving a bonus to sales agents based on the gross amount of their sales c. giving a bonus to the sales agent with the most hours of working d. giving a bonus to sales agents based on the hours of overtime work 2116. Paying sales staff bonuses based on the agents with the highest, secondand third-highest sales is called a: a. strict ranking game. b. players event. *c. tournament. d. horse race scheme. 2117. Tournaments are useful for rewarding worker effort whenever: a. external factors, such as the quality of the good and the state of the economy, have little effect on workers' success. b. workers are myopic and unaware that external factors play a significant role on sales. c. workers are utility maximizers primarily concerned about their reputation in the community. *d. external factors, such as the quality of the good and the state of the economy, do affect workers success. 2118. In ideal circumstances, tournaments ________ risk and ________ worker effort with rewards. a. enhance; link *b. reduce; align c. reduce; enhance d. enhance; decrease 2119. Suppose the economy is in a recession. Which of the following is the best incentive scheme for the manager of a large auto sales center? a. Threat of termination if one sale is not made each day. b. Equal salary for all sales agents regardless of sales. c. Bonuses for the sales agents with the highest gross level of sales. *d. Bonuses for the sales agents with the highest sales relative to other sales agents. 2120. If a college professor implements a grading scale based on tournament theory: a. students' grades cannot fall below a certain point. *b. students' grades will depend on how they perform relative to others in the class. c. an absolute grading scale is used. d. studying extra will not improve your overall grade. 2121. A good compensation scheme: a. ties rewards to actions that an agent does not control. *b. ties rewards to actions that an agent controls. c. will not increase performance in a poor economy. d. is based on luck. 2122. Today, a large fraction of executives' pay is tied to: a. the level of sales of their firm. b. bonuses of other executives. c. the effort and work ethic of the executive. *d. the stock price of their firm. 2123. The problem with tying executive pay to stock prices is that: *a. many factors other than executive effort and ability affect stock prices. b. executives can manipulate stock prices. c. it is a complicated evaluation to make, riddled with strong assumptions. d. executives prefer more straightforward compensation schemes that reduce their risk. 2124. If executives were paid based on relative performance: a. compensation would largely be based on luck. *b. there would be less volatility in executive pay. c. stockholders would find it more difficult to monitor how much the executives are being paid. d. executives would have less incentive to work hard since ability risk is now high. 2125. Executive pay based on relative performance: a. makes little sense, but has still been widely adopted. b. makes little sense and has not been widely adopted. c. makes a lot of sense and has been widely adopted. *d. makes a lot of sense, but has not been widely adopted. 2126. You and Bill Gates are junior executives of a software company. If both of you are in a tournament vying for promotion to CEO, there is likely to be substantial: a. ability risk. b. effort on your part to get promoted. c. effort on Bill Gates's part to get promoted. *d. All the answers are correct. 2127. How can tournaments be structured to eliminate ability risk? a. The weakest players/workers can be eliminated in the early rounds. b. Different tournament classes can be created: beginner, intermediate, and advanced. c. Tournaments for junior and senior positions for each class of employee can be created. *d. All of these solutions would serve to eliminate ability risk. 2128. A tournament removes risks from outside factors but adds another type of risk called: a. internal risk. *b. ability risk. c. personal risk. d. competition risk. 2129. Which of the following would reduce ability risk in tournaments? a. excluding players with low ability from contesting in tournaments b. creating strong incentive for effort in tournaments c. enhancing the rewards for players in tournaments *d. structuring tournaments so that rewards are closely tied to effort 2130. Tournaments work best when the risk from the outside environment is ________ the ability risk. *a. greater than b. less than c. equal to d. unrelated to 2131. What proportion of U.S. corporations evaluate employees based upon relative performance? a. over half b. almost all *c. about a third d. less than a quarter 2132. Grading on a curve ________ environmental risk but ________ ability risk. a. increases; decreases *b. reduces; increases c. eliminates; increases d. reduces; eliminates 2133. Environment risk in sales can be described as: *a. the risk that an external factor such as customer preferences, recessionary pressures, or the quality of the product will depress sales. b. the risk that certain members of the sales force will have better sales tactics than other members of the same sales force. c. the risk that certain products will affect the availability of natural resources and the environment. d. None of these answers describes environment risk. 2134. Ability risk can be described as the risk that: a. external factors such as customer preferences, the economy, or product quality will affect sales. *b. some members of a sales force will have a higher ability than others. c. agents may appear to be high ability when they are actually low ability. d. tournament pay may hide the true ability of some agents. 2135. On American Idol, the winner of the competition gets a recording contract. An average person is randomly picked as a surprise entrant in the final round. Which of the following risks is most likely to occur in this tournament? a. environment risk b. sales risk c. risk of recession *d. ability risk 2136. Suppose an average student gets mistakenly enrolled in an honors class in high school. In the context of a tournament, which of the following risks is most likely to occur? a. environment risk b. registrar risk c. school board risk *d. ability risk 2137. In schools, ability risk can be mitigated in tournaments by: a. using an absolute grading scale. b. grading students relative to each other. *c. grouping students with similar abilities together. d. standardizing test scores. 2138. Premed students (who compete for a limited number of slots in medical schools) sometimes sabotage the experiments of other premed students. This is an example of: a. system risk. b. ability risk. *c. tournaments discouraging cooperation. d. environmental risk. 2139. Well-structured tournaments not only encourage competition but also: a. encourage cooperation. *b. discourage cooperation. c. encourage shirking. d. discourage participation. 2140. When a teacher grades on a curve, it increases the incentive to study, particularly when: a. students are of very different abilities. b. students are of similar abilities. *c. the teacher is bad. d. the teacher is good. 2141. Which of the following risks increases when a bad teacher grades on an absolute scale? a. ability risk *b. environment risk c. incentive risk d. competition risk 2142. Which of the following risks increases when a bad teacher is grading on a curve? *a. ability risk b. environmental risk c. incentive risk d. competition risk 2143. It is better for a ________ teacher to grade on a curve than a ________ teacher. a. good; bad *b. bad; good c. English; calculus d. calculus; English 2144. Grading on a curve reduces ________ but increases ________. *a. environment risk; ability risk b. cooperation among students; environment risk c. ability risk; cooperation among students d. ability risk; environment risk 2145. When a teacher grades on a curve, it will increase the incentive to study when: a. ability risk equals environment risk. b. ability risk is high. c. environment risks are low. *d. environment risks are high. 2146. In order to encourage students who are concerned about their GPAs to take harder classes, professors of these classes should: *a. grade on a curve because it increases students' incentive to study even when the material may be hard. b. grade on a curve because it increases students' incentive to study even when some students in the class may be smarter than others. c. not grade on a curve because grading on a curve will only serve to reduce students' incentive to study, particularly if the material is hard. d. not grade on a curve because grading on a curve will only serve to attract lower-level students who are less likely to study. 2147. Monetary rewards are most effective when they are supported by: I. intrinsic motivation. II. social status. III. promotions. a. I and III only b. II and III only c. I, II, and III *d. I and II only 2148. Which of the following would most likely be an ineffective incentive? *a. paying a daughter to do the dishes b. enabling an employee to identify with a firm's culture c. a promotion to a job that increases status in society d. compensating employees with company stock 2149. Corporate culture is the: a. natural interactions of employees and managers. *b. shared collection of values and norms that govern how people interact in an organization or firm. c. easiest aspect of the firm to manage. d. typical extrinsic reward mechanism used in corporations. 2150. According to the text, how many American workers currently own stock in the companies they work for? a. about 10 million *b. about 20 million c. about 50 million d. No one knows. 2151. Ideally, what types of rewards form the best incentives? a. extrinsic b. intrinsic *c. intrinsic coupled with extrinsic d. No one knows. 2152. Corporate culture helps firms ________ what is ________ to measure. a. incentivize; easy b. establish; easy *c. incentivize; difficult d. monetize; difficult 2153. Corporate culture: a. describes the diverse attitudes, experiences, and beliefs within an organization. b. is the beliefs and ideas about what kinds of goals members of a corporation should pursue. *c. is the shared collection of values and norms that govern how people interact in an organization of firm. d. is the workplace environment formulated from the interaction of the employees in the workplace. 2154. Which of the following statements is correct? a. Monetary rewards are most effective when they are supported by extrinsic motivation and measures of social status. b. Monetary rewards are most effective when they are supported by intrinsic motivation and measures of personal achievement. c. Monetary rewards are most effective when they are supported by extrinsic motivation and measures of personal achievement. *d. Monetary rewards are most effective when they are supported by intrinsic motivation and measures of social status. 2155. Which of the following would create an incentive to keep business meetings short? *a. Make everyone stand up at the meeting. b. Make all the attendees bring their own lunch. c. Make everyone wear a watch. d. Allow only half the attendees to talk. 2156. Giving employees shares of the company's stock is a form of: a. monetary motivation. *b. intrinsic motivation. c. deferred compensation. d. piece rates. 2157. Paying children money to do family chores: *a. may reduce the child's intrinsic motivation for helping out around the house. b. may increase the child's intrinsic motivation for helping out around the house. c. can create environmental risk. d. can create ability risk. 2158. Monetary rewards are most successful when: *a. they are supported by intrinsic motivation and social status. b. they are supported by social status. c. they are supported by external rewards. d. they are rewarded by intrinsic rewards. 2159. “Employee of the month” plaques in fast-food restaurants recognize the lesson that when designing incentive schemes: a. you get what you pay for. *b. money isn't everything. c. fast-food places always pay the minimum wage. d. pay does not need to be tied to performance. 2160. Which of the following is NOT a lesson about incentives? a. You get what you pay for. *b. Incentives interfere with tournaments. c. Tie pay to performance to reduce risk. d. Money isn't everything. 2161. The closer “what you pay for” is to “what you want,” then the more you can rely on strong incentives. *a. True b. False 2162. There is evidence that wrong incentives in education have led to cheating by teachers. *a. True b. False 2163. The closer “what you pay for” is to “what you want,” then the more you can rely on weak incentives. a. True *b. False 2164. Careful design of an incentive scheme can narrow the gap between “what you want” and “what you pay for.” *a. True b. False 2165. Enron and other similar scandals were in part the result of a strong incentive scheme. *a. True b. False 2166. A weak incentive scheme that incentivizes the wrong thing can be worse than a strong incentive scheme. a. True *b. False 2167. For-profit prisons should be less costly to operate than public prisons, but these cost savings may come at the expense of lower quality. *a. True b. False 2168. The minimum wage is a type of piece rate. a. True *b. False 2169. Piece rates attract more productive workers. *a. True b. False 2170. Piece rates between workers of different productivity levels will lead to more income inequality. *a. True b. False 2171. An hourly wage pays workers for their output, whereas a piece rate pays workers directly for their input. a. True *b. False 2172. Piece rates benefit productive workers by giving them an opportunity to use their skills to make more money and benefit firms by increasing productivity more than wages. *a. True b. False 2173. Paying pizza makers for how many pizzas they make is an example of a piece rate system. *a. True b. False 2174. Compared to a piece rate system, hourly-wage plans are more likely to attract workers who are less capable or even lazy. *a. True b. False 2175. When sales vary for reasons having little to do with hard work, strong incentives may be more appropriate rewards for productivity. a. True *b. False 2176. If rewards are mostly based on luck the incentive to exert effort will be low. *a. True b. False 2177. Economists call a compensation scheme in which pay is based on relative performance a tournament. *a. True b. False 2178. Tournaments tie rewards more closely to actions that an agent controls, thereby improving productivity and pay. *a. True b. False 2179. A tournament increases the amount of risk from the external environment. a. True *b. False 2180. When factors that an agent doesn't control influence rewards, then factors that an agent does control become more important determinants of rewards. a. True *b. False 2181. A tournament system rewards workers based on absolute not relative performance. a. True *b. False 2182. Tournaments work best when it is hard to determine worker effort and there are random external forces that affect worker performance. *a. True b. False 2183. Most executives are compensated on the concepts of tournament theory. a. True *b. False 2184. Executive pay based on relative performance ties compensation more closely to the effort and ability of the executive than pay schemes that are tied to the firm's stock price. *a. True b. False 2185. Corporate culture is in part responsible for the ascendancy of Wal-Mart, starting in the 1970s. *a. True b. False 2186. Monetary rewards are not effective when they are supported by intrinsic motivation and measures of social status. a. True *b. False 2187. Corporate culture helps firms incentivize what is easy to measure. a. True *b. False 2188. An example of an intrinsic reward is a cash bonus. a. True *b. False 2189. An example of an extrinsic reward is a plaque that recognizes employee of the month. a. True *b. False 2190. Corporate culture is the system of pay incentives that is used in an organization. a. True *b. False 2191. Explain what is meant by the term incentives, and why it is important to get incentives right. Correct Answer: Incentives are costs and benefits that induce changes in human behavior. When aligned with the social interest, incentives can be powerful forces for good but misaligned incentives can be equally powerful forces for bad. One of the goals of economics is to understand which institutions generate good incentives. Getting the incentives right is an important goal of managers who want to motivate employees, stockholders who want to motivate managers, parents who want to motivate children, and consumers who want to motivate real estate agents, physicians, or lawyers, among many others. 2192. Use an example to describe how strong incentive schemes may lead to undesirable outcomes when the gap between “what you pay for” and “what you want” is significant. Correct Answer: If public schools are paid for higher test scores, they will get higher test scores. But test scores are an imperfect measure of the purposes of the pay, which are more productive teachers and more knowledgeable students. Similarly, what corporations pay for is higher stock prices, but what they really want is a more profitable firm. 2193. “You get what you pay for, but what you pay for is not always what you get.” What does this mean in terms of an incentive scheme? Correct Answer: It means that sometimes an incentive scheme, if badly designed, will cause the agents involved in the scheme to engineer their activities to appear to yield good results, even if those results are not actually true. 2194. An advertising company designs a bonus system for its managers such that the faster they spread their advertisements around the world, the greater the bonuses they get. What are some of the pitfalls of such an incentive scheme? Correct Answer: Advertisements in different countries have to be translated into the local language. Hurriedly translating the advertisements into local languages may cause some incorrect translations. For example, look up the famous international blunders made by Pepsi and KFC when translating their slogans into Chinese. Thus a pitfall of this incentive scheme is that advertising managers will seek to maximize output without enough regard for quality. 2195. Hart, Shleifer, and Vishny (HSV) argue that private prisons have strong incentive to cut costs at the expense of quality, and therefore, weak incentive public prisons are better than strong incentive private prisons. Is there a problem with HSV's argument? If so, explain. Correct Answer: HSV assume that cutting quality is the way to cut cost. But sometimes higher quality is also a path to lower costs. When quality and cost-cutting go together, a private firm has a strong incentive to increase quality. Though weak incentives reduce the incentive for public prisons to cut costs, they don't increase the incentive to produce high quality. 2196. What are the advantages and likely results of paying workers piece rates rather than hourly wages? Correct Answer: A piece rate system attracts more productive workers because piece rates give productive workers a chance to earn more money. The hourly-wage plan will attract workers who are relatively less productive. When some workers are more productive than other workers, piece rates will tend to increase inequality in earnings. 2197. What are the benefits and some of the problems of piece rate systems? Correct Answer: Piece rate systems reward worker effort directly by compensating the worker for the number of pieces of output produced. This payment system gives an incentive for productive workers to increase their effort and produce more output for the firm. Firms that offer piece rates will attract more productive workers than those firms offering hourly wage rates. Piece rates may cause workers to overemphasize the quantity of output at the expense of quality, since more output means more pay. Firms may need to monitor or set standards for quality. Another problem is that workers may fear the ratchet effect: a situation in which the firm reduces the piece rate, thereby causing the worker to produce even more output to maintain the same level of pay. Piece rates are difficult to implement in team production settings, since it is hard to determine any one worker's contribution to output. 2198. When designing an incentive scheme for workers, how can management insure that the incentive scheme actually results in workers working harder? Correct Answer: By tying output quality to their incomes, and compensating them relative to the profit outcome for the firm. If workers earn more when the firm is more profitable, they have an incentive to better their own company. 2199. In Bangladesh, Professor Mohamed Yunus started the Grameen Bank where poor borrowers (mostly women) who do not have collateral are given small loans as seed money for businesses or other projects. Loans are provided to groups of five women, who receive the loans sequentially. Once the first borrower has established a repayment schedule, the second borrower receives her money and so on. How do you think an organization such as the Grameen Bank might ensure that the borrowers are indeed creditworthy? Remember that the bank does not have any information about the borrowers' creditworthiness. Correct Answer: By asking the borrowers to self-select themselves into groups of five. The women thus have an incentive to select only those who they know are reliable and apt to pay back the loans, since the loans are given in sequential order in the groups. 2200. Companies sometimes doctor their earnings statements to appear more profitable than they are. What incentive might a CEO who engineers this be responding to? Correct Answer: When CEOs are paid in stock options that become more profitable to exercise when stock prices rise significantly. 2201. Explain tournament theory and include an example of the theory in practice. Correct Answer: A tournament is a compensation scheme in which pay is based on relative performance. When they are used effectively, tournaments can tie rewards more closely to actions that an agent controls, thereby improving productivity and pay. [Answers here will vary; this example is from the text.] Imagine a golf game in which players are paid based on the total number of strokes to finish the course (by the nature of golf, fewer strokes mean better play and thus higher payments). If the weather is bad, scores will be high and agents won't earn very much even if they work hard. If the weather is good (clear day, no wind) scores will be low and agents will earn a lot even if they don't work very hard. Either way, when players are paid based on their absolute scores, random forces—such as the weather—will influence how much the players earn. By ranking the golfers relative to each other, the external random forces do not matter, since all golfers are affected by the random factors. 2202. What compensation scheme might improve the performance of the highly paid CEOs? Correct Answer: Tournament theory could be used to improve CEO performance. The winner of a tournament is based on relative performance, not absolute performance. For example, if CEOs are paid according to stock prices there are a number of things besides CEO ability that can cause stock prices to rise and fall. If tournaments were used it would require CEOs performance to be evaluated on the basis of relative achievement rather than something that may not be under their control. 2203. What is the difference between intrinsic and extrinsic motivation? Correct Answer: Intrinsic motivation has to do with morale boosting and status, while extrinsic motivation involves primarily monetary rewards. 2204. What is meant by the term corporate culture? Correct Answer: The system of values and norms that people use to interact with each other within an organization or firm. 2205. Describe some of the lessons economists have learned that are important to keep in mind when designing an incentive scheme. Correct Answer: You get what you pay for, but what you pay for is not always what you get. Tie pay to performance to reduce risk. Money is not everything. 2206. There are three big lessons when designing incentive schemes. Which of the lessons applies to each of the following cases? a. In the Philippines, Cebu Provincial Detention and Rehabilitation Centre, a prison, tries to instill camaraderie and comradeship, and establish physical fitness among its prisoners by teaching them dance routines, such as Michael Jackson routines, as part of their daily exercise. b. The manager of a transportation garage for the school district bus system is told to reduce the maintenance costs for the district's bus fleet over the next three months or risk losing his job. He therefore repairs only the worst problems knowing that performing minor repairs now will save money six months down the road. c. In Bangladesh, the Grameen Bank offers small loans to borrowers who have no collateral. The loans are offered in sequential order to small groups of borrowers. Once the first borrower has established a repayment schedule, the second borrower gets the loan and so on. It is in the group's best interest to maintain a good loan repayment schedule so that they are eligible for bigger loans as time progresses. Correct Answer: a. Money isn't everything. b. You get what you pay for. c. Tie pay to performance to reduce risk. 2207. John Stossel's dart-throwing experiment showed that: *a. picking stocks at random can outperform the stock picks of major Wall Street experts. b. Wall Street experts have inside information, which makes beating their stock picks difficult. c. Companies with longer names are likely to outperform market averages. d. Economic theory regarding the stock market is flawed. 2208. John Stossel picked Wall Street stocks at random, and his portfolio outperformed what proportion of expert stockbrokers and fund managers? a. 50 percent b. 60 percent c. 80 percent *d. 90 percent 2209. Which of the following is TRUE of mutual funds? I. Active funds generally give higher returns than passive funds. II. Most mutual funds generally give higher returns than broad stock indexes. a. I only b. II only c. both I and II *d. neither I nor II 2210. Which of the following refers to a mutual fund for which its manager buys and sells stocks regularly in order to maximize the fund's returns? a. liquid fund b. efficient market fund *c. active fund d. passive fund 2211. The text argues that which of the following is TRUE about Warren Buffett? a. His past performance has been purely a result of luck. b. He has not been able to beat the market at any time. c. He always beats the market using inside information. *d. It has become harder for him to beat the market over time. 2212. Which of the following are advantages of saving your money in a mutual fund? I. You have professional fund management. II. Mutual funds have always outperformed the S&P 500. III. People with smaller amounts of money can diversify risk. a. I only b. I and II only *c. I and III only d. I, II, and III 2213. (Figure: Mutual Funds) Refer to the figure. From this Mutual Funds figure, John Stossel dart-throwing experiment we can say that: Figure: Mutual Funds a. mutual funds typically outperform the S&P 500. b. mutual fund managers are no smarter than monkeys. *c. knowledge of stock market behavior does not guarantee its predictability. d. mutual funds can never outperform the stock market. 2214. The major difference between active and passive mutual funds is that: a. active funds are classed as mutual funds, but passive funds are not. b. active funds involve stock picks by managers, while passive funds involve stock picks by the investors themselves. c. active funds are more risky than passive funds. *d. active funds involve stock picks by managers, while passive funds match the movements of a broad market index. 2215. In a market of 2,000 investors who each year flip a coin to predict market success or failure, how many investors will have been consistently right after five years? Assume the coin tosses yield heads exactly 50 percent of the time. a. 31 *b. 62 c. 500 d. 1,000 2216. Which of the following are helpful in stock investment strategies? a. buying undervalued stocks b. holding stocks for a long period of time c. lucky picks *d. All of the answers are correct. 2217. Which of the following statements is TRUE? I. A mutual fund pools money from many different investors and uses that money to invest in many different firms. II. Mutual funds that are run by managers who try to pick the best performing stocks usually outperform the S&P 500. III. Passive mutual funds do not try to select winning stocks; they mimic broader markets like the S&P 500. a. I only b. I and II only *c. I and III only d. II and III only 2218. Over a long period of time which investment strategy is typically more profitable? a. active *b. passive c. introversive d. subversive 2219. If each of the approximately 320,000 securities and financial service agents in the United States bet on whether the market would go up or down for each of the next 10 years by flipping a coin, we would expect that approximately 312 agents would have been right 10 years in a row. This example suggests that: a. it is easy to beat the market averages. *b. famous investors like Warren Buffett may have merely been lucky. c. there are above-normal profit opportunities in the stock market. d. All of the answers are correct. 2220. A mutual fund pools money from many customers and invests the money in many firms. The fees charged by fund managers are: a. lower in bond funds. b. higher in passive funds. *c. lower in passive funds. d. higher in bond funds. 2221. Some skeptical economists say that successful brokers like Warren Buffett are: a. able to see the future. *b. just lucky. c. incredibly smart at picking winning stocks. d. likely to remain successful. 2222. Suppose 1,000 experts flip a coin once each year and half say the market will go up, while the other half say the market will go down. After six years how many experts would have been correct every year? *a. 15 b. 62 c. 8 d. 31 2223. The fact that the majority of stock mutual funds cannot outperform the stock market averages is consistent with: a. the no free lunch principle. b. the risk-return trade-off principle. *c. the efficient markets hypothesis. d. the active trading hypothesis. 2224. According to the efficient markets hypothesis, stock prices: *a. reflect all publicly available information about the stock market. b. reflect all private company information that is known only to company insiders. c. contain both public and private information that is helpful for some investors to outperform other investors. d. contain no useful information. 2225. The efficient markets hypothesis implies that in the stock market: a. everyone can earn more than everyone else some of the time. *b. no one can systematically earn more than the average market return. c. people with more funds earn higher returns. d. people can use technical analysis to systematically earn high returns. 2226. According to the efficient markets hypothesis, the person who most likely earns the highest return for holding the stock of Company ABC on a single day is: a. a person who follows a buy-and-hold strategy. b. an active trader who knows the historical prices of ABC. *c. ABC's CEO who has inside information about the company's new projects. d. None of the answers is correct: No one can outperform anyone else at any time. 2227. One of the problems with investment advice that claims you should buy stock in a certain company or sector of the economy is that: a. no one else knows such advice. *b. asset prices likely reflect that information already. c. investment advice is not regulated. d. sellers know less than buyers in the financial markets. 2228. The efficient markets hypothesis implies that an investor: *a. cannot systematically outperform the market as a whole over time. b. should rely on publicly available information to outperform the market. c. should buy and sell lower volumes of shares. d. can manage a portfolio and regularly outperform the whole market. 2229. Which of the following individuals is using information outside the efficient markets hypothesis? Someone who: a. has information about the aging U.S. population and expects stock for companies that cater to senior citizens to increase in value. b. reads in the newspaper about a merger between two profitable firms and expects the stock prices for these companies to rise. *c. while auditing a dishonest company realizes that its profit estimates are greatly inflated and immediately sells her stock in the company. d. hears a rumor that a top bank may be in trouble, and decides to sell his stock in that company. 2230. About the only way to beat a well-functioning market and make money in the short run is: I. through the efficient markets hypothesis. II. if one has insider information. III. through extreme speed and foresight. a. I only *b. II and III only c. II only d. I, II, and III 2231. Stocks are a good investment if: I. one is prepared to hold them for a while through market fluctuations. II. one can buy them immediately after prices have fallen. III. one is not averse to risk. a. I only b. I and II only *c. I and III only d. I, II, and III 2232. Consider the market for ABC Company's stock. What should happen in this market after an announcement that the company is having financial difficulties? *a. The demand for the stock would shift to the left. b. The demand for the stock would shift to the right. c. The supply of the stock would shift to the left. d. The supply of the stock would shift to the right. 2233. Consider the market for ABC Company's stock. What should happen to the stock for this company if there is a rumor that the company is set to merge with another very profitable company? a. The demand for the stock would shift to the left. *b. The demand for the stock would shift to the right. c. The supply of the stock would shift to the left. d. The supply of the stock would shift to the right. 2234. Consider the market for ABC Company's stock. What should happen to the stock for ABC Company after a merger with a highly successful supply firm is announced? a. The demand for the stock would shift to the left. *b. The demand for the stock would shift to the right. c. The supply of the stock would shift to the left. d. The supply of the stock would shift to the right. 2235. Which of the following statements is TRUE? I. For every transaction in the stock market there is a buyer and a seller. II. At any point in time, the price of a stock tends to reflect all available public information about the company's future prospects. III. A revolutionary cancer treatment pill will be released next year. An investor will get rich by buying stock in that company now. *a. I and II only b. III only c. II and III only d. I, II, and III 2236. An efficient stock market means that: *a. it is difficult to outperform the market, since stock prices convey all relevant public information about a company. b. traders with inside information cannot even outperform market averages. c. new information is slowly reflected in stock prices. d. All of the answers are correct. 2237. Technical analysis: *a. looks for patterns in stock prices. b. can systematically beat market averages, according to research economists. c. is useful for predicting when stocks will stay above certain price thresholds. d. All of the answers are correct. 2238. When Chernobyl melted down in the Soviet Union, the: a. price of U.S. basketballs increased. b. prices of assets reacted slowly to the information. *c. price of U.S. potatoes increased. d. stock prices of U.S. nuclear plants increased. 2239. If the efficient markets hypothesis is valid, then a person should: I. buy mutual funds. II. diversify. III. follow a buy-and-hold strategy. a. I and II only b. I and III only c. II and III only *d. I, II, and III 2240. Which of the following statements is TRUE? I. The riskiest stocks tend to move in sync with the economy. II. A relatively safe stock is one that does not vary much with the state of the economy. III. Health care stocks are some of the riskiest stocks. a. III only *b. I and II only c. II and III only d. I only 2241. If a person diversifies her stock portfolio, then: a. the expected return of her portfolio will increase. *b. the risk of her portfolio will decrease. c. both the risk and expected return of her portfolio will increase. d. neither the risk nor the expected return of her portfolio will change. 2242. If a person follows a buy-and-hold strategy, she will initially hold stocks: a. until the stock prices rise. b. until the stock prices fall. c. until the stock prices stabilize. *d. whether or not stock prices rise or fall. 2243. Popular U.S. stock indexes include: I. FDIC II. Dow Jones Industrial Average III. NASDAQ a. I and II only b. I and III only *c. II and III only d. I, II, and III 2244. In a stock market, a riskier stock typically has: *a. a higher covariance with the market as a whole. b. a lower covariance with the market as a whole. c. a higher correlation with some stocks and a lower correlation with other stocks. d. a lower correlation with the market as a whole. 2245. Which of the following tends to be least risky in its stock value when the economy is in a deep recession? a. an automobile manufacturer b. a homebuilder c. a high-end department store *d. a utility company that supplies water to government buildings 2246. To diversify, a person who already holds stocks that move in the opposite direction of the stock market as a whole should: a. always buy more of the same stocks. *b. buy stocks that move in the same direction of the stock market as a whole. c. buy stocks that have about the same expected returns as the stocks she already holds. d. sell all her stocks immediately. 2247. Which of the following individuals seems to have followed a diversification strategy? Someone who has purchased stock in: a. lumber, paper, and furniture companies. *b. oil, telecommunications, and clothing companies. c. silicon chips, computer, and cell phone companies. d. cat food, dog food, and dog bone companies. 2248. Which of the following individuals has a poor diversification strategy? Someone who buys: *a. stock in gun manufacturing, ammunitions, and rifle companies. b. stock in textbook publishing, tea and coffee production, and the technology sector. c. T-bills, corporate bonds, and technology stocks. d. government bonds, technology stocks, and agricultural stocks. 2249. A risky portfolio is one that: I. is poorly diversified. II. has a volatile stock in a basket of 200 stocks. III. has a positive correlation between most of its stock prices. a. I only b. II and III only *c. I and III only d. I, II, and III 2250. The Dow Jones Industrial Average: a. weights larger companies' stocks more than small companies' stocks. b. has stocks from thousands of companies. c. has stocks from 500 companies. *d. has stocks from 30 companies. 2251. When a stock index rises, it means that: a. all stocks on the index have risen in value. *b. the weighted average of all stock prices in the index has risen. c. all stocks on that index are equally weighted. d. All of the answers are correct. 2252. The NASDAQ: a. weights individual stocks equally. b. gives greater weight to low-tech stocks than does the Dow. *c. gives greater weight to small stocks than does the Dow. d. has 500 stocks. 2253. The NASDAQ: a. weights individual stocks equally. b. gives greater weight to larger stocks than does the Dow. *c. gives greater weight to high-tech stocks than does the Dow. d. has 30 stocks. 2254. A stock that has a high covariance with market conditions is considered risky because: a. the stock belongs to a small company. b. the stock does not fluctuate in value. c. the stock moves against the market. *d. when the market is declining, that stock will decline too. 2255. Why would stock for a high-end store with expensive clothing be considered risky in a recession? *a. Consumers demand cheaper clothes in times of recession, and that company would be expected to make lower profits. b. Consumers do not buy stock when recessions occur. c. High-end clothing store stocks have low covariance with the market. d. Stocks from such companies depend heavily on oil prices. 2256. A risk-averse individual would choose which of the following investment instruments? *a. stocks that are negatively correlated with the rest of one's portfolio b. agricultural stocks in a foreign agricultural economy c. oil stocks d. technology stocks 2257. A risk-loving individual would choose which of the following investment instruments? a. government bonds b. stocks from a company listed on the Dow Jones Industrial Average *c. stock from a very new company that has high growth potential d. a low-risk mutual fund 2258. A buy-and-hold strategy would work best for which of the following people? Someone who a. will retire in three years *b. is 25 years old and just started a good job c. lives hand-to-mouth d. lives on Social Security checks 2259. Which of the following stock portfolios offers the greatest diversification? a. 3M and Raytheon b. Adobe Systems and Sara Lee c. Nucor and Wyeth *d. Ashland, Baker Hughes, Bemis, BMC Software, CA Inc., Century Telephone, Dean Foods, Dover Corp., Eastman Kodak, EQT Corp., Exxon Mobil, Ford Motor, General Dynamics, Genworth Financial, Google, Hasbro, Home Depot, Intuit, Johnson Controls, Kohl's, Legg Mason, Netapp, Pall Corp., Pfizer, QLogic, Ryder System, SLM Corp., Target, UPS, Viacom, Waters Corp., XL Capital, Yahoo, Zimmer Holdings 2260. If your investment money is evenly divided among stocks in your investment portfolio, which of these four stock portfolios would suffer the most from an Adobe Systems bankruptcy? *a. Adobe Systems b. Adobe Systems and Best Buy c. Adobe Systems, Nucor, and Wyeth d. Adobe Systems, Ashland, Baker Hughes, Bemis, BMC Software, CA Inc., Century Telephone, Dean Foods, Dover Corp., Eastman Kodak, EQT Corp., and Exxon Mobil 2261. The best trading strategy is to: a. buy low and sell high. b. buy high and sell low. c. buy a couple of stocks and hold them for the long run. *d. buy a large bundle of stocks and hold them for the long run. 2262. Which of the following is NOT a major stock index? *a. The Heathrow 2,000 b. The Dow Jones Industrial Average c. The Standard and Poor's 500 d. The NASDAQ Composite Index 2263. Diversification: a. increases risk and return. b. decreases risk and return. c. increases risk. *d. decreases risk. 2264. Which of the following is NOT a typical index used to practice a buy-and-hold strategy? a. The Dow Jones Industrial Average *b. The Moody Index Scorecard c. The Standard and Poor's 500 d. The NASDAQ Composite Index 2265. (Table: Mutual Funds) Refer to the table. Which mutual fund would be best for a retirement savings plan? Table: Mutual Funds Mutual Fund Name Expense Ratio A 2.9% B 1.5 C 0.5 D 4 a. Mutual Fund A b. Mutual Fund B *c. Mutual Fund C d. Mutual Fund D 2266. (Table: Index Funds) Refer to the table. Which index fund would be best to include in a retirement savings plan? Table: Index Funds Expense S&P Index Funds Annual Cost Ratio Vanguard 500 Index mutual fund Admiral Shares (VFIAX) 0.09% Vantagepoint 500 Stock Index mutual fund Class II Shares 0.25 (VPSKX) T. Rowe Price Equity Index 500 mutual fund (PREIX) 0.35 California Investment S&P 500 Index mutual fund (SPFIX) 0.36 *a. Vanguard 500 b. California Investment c. Vantagepoint 500 d. All of these funds provide equal real returns. 2267. Stockbrokers make _____ commissions the _____ their clients buy and sell stocks. a. lower; more frequently *b. higher; more frequently c. higher; less frequently d. zero; more frequently 2268. For a mutual fund, a load is: a. the expected return of the fund. b. the risk of the fund. *c. the fee for managing the fund. d. the charge for insuring the fund. 2269. The textbook recommends buying mutual funds that: a. charge high commissions. b. charge large management fees. c. have high loads. *d. have the lowest fees. 2270. Why does it make sense to avoid paying high fees when investing with mutual funds or stock brokers? a. The funds with high fees are too expensive. b. The funds with high fees likely hire managers who are not experts. *c. The funds with high fees do not perform any better than other funds. d. It does make sense, since you should pay high fees to get access to experts. 2271. Stocks are better than bonds: a. in the short run. b. because stocks have guaranteed returns. *c. in the long run. d. because bonds are issued only by companies in financial distress. 2272. Historically, stocks offer __________ returns than bonds in the long run. *a. higher b. lower c. the same d. None of these is correct: It depends on the types of stocks or bonds. 2273. Which of the following refers to the ability of an asset to generate returns, which are then reinvested in order to generate their own returns? a. buy and hold *b. compounding c. simple returns d. extrapolation 2274. Suppose you invest $1,000 in a mutual fund. If the annual return of that fund is 5 percent, how many years will it take before your fund is worth $2,000? a. 10 years *b. 14 years c. 20 years d. never 2275. A person purchases stocks of two companies in 2009. One has an annual return of 2.5 percent and the other's return is 3 percent. The difference between the dollar returns on the two company stocks would be the greatest in: a. 2010. b. 2012. *c. 2013. d. None of these is correct: The difference in dollar returns is always the same. 2276. A real return of 10 percent per year means that a $10,000 investment will grow to $20,000 in: a. 10 years. *b. 7 years. c. 15 years. d. 20 years. 2277. Which of the following statements is TRUE? *a. In the long run, stock returns are higher than bond returns. b. Passive investments underperform active investments. c. One can earn higher returns by investing in funds with high loading costs. d. The efficient markets hypothesis only holds in the short run. 2278. Which of the following statements is TRUE? a. One should avoid investing in bonds because they give lower returns than do stocks. *b. If you need your money for something in two years, avoid putting it in stocks. c. Retirees should allocate more of their investments to stocks. d. Recent college graduates should allocate more of their money to bonds than to stocks. 2279. How fast will a $10,000 portfolio double if it is earning 10 percent annual returns? a. every 10 years *b. every 7 years c. every 5 years d. every 14 years 2280. In financial investment, a riskier asset typically has: *a. a higher expected return. b. a lower expected return. c. the same expected return as a less risky asset. d. a higher or lower expected return, depending on the industry. 2281. A financial investor faces the lowest risk by investing in: a. a corporate bond. *b. a three-month U.S. Treasury bill. c. the stocks of a new company. d. a mutual fund of small company stocks. 2282. The textbook uses the “no free lunch principle” in financial investment to indicate that: *a. investment opportunities with high expected returns come with higher risk. b. investment opportunities with high expected returns come with lower risk. c. there is no relationship between risk and expected returns. d. there is always risk in holding any investment opportunity. 2283. Which of the following choices correctly describes the relationship between risk and return? a. Risk and return have no relationship. *b. Risk and return have a positive relationship. c. Zero risk instruments have the highest returns. d. The lower the risk is, the higher the return. 2284. What is the risk-return trade-off? a. Assets with the least risk tend to outperform the market. b. To invest in less risky assets, means higher returns. c. Bonds earn higher returns than stocks because bonds are riskier. *d. To earn higher rates of return, a person must accept higher risk. 2285. (Table: Investment) Refer to the table. Rank the investments in order from the least risky to the most risky. Table: Investment Investment Rate of Return A 10% B C D 4.5% 47.36% 18% a. A, B, C, D b. C, B, A, D *c. B, A, D, C d. C, D, A, B 2286. Compared to stocks, art investments have _____ monetary returns because they offer ______ nonpecuniary returns. a. lower; lower b. higher; higher *c. lower; higher d. higher; lower 2287. The risk-return trade-off is an example of: a. the sunk cost principle. *b. the no free lunch principle. c. the capitalist principle. d. the inelastic principle. 2288. Financial returns on houses are _______ over long periods of time because part of the return on housing is from ________. *a. close to zero; the joys of ownership b. about 7 percent per year; home owner improvements c. about 12 percent per year; paying low property taxes d. negative; depreciation 2289. Investing in antique guitars: a. is likely to bring high returns because many people enjoy playing guitar. *b. will not bring high returns because fun activities yield lower financial returns. c. is a good idea because they “ain't making any more.” d. None of the answers is correct. 2290. The risk-return trade-off refers to the fact that: a. low risk means high potential returns. b. high risk means low potential returns. *c. high risk means high potential returns. d. low risk can be eliminated by high returns. 2291. The expected returns of different assets, adjusted for risk, should be: *a. equal. b. different. c. sometimes equal but often different. d. unknown in most cases. 2292. On average, returns on investments in art ____________ returns in the stock market. a. exceed *b. underperform c. equal d. cannot compare to 2293. Suppose the benefit of owning a painting, in terms of your personal enjoyment, is worth 5 percent of the value of the painting. If the expected rate of return on stocks is 7 percent, then the painting should grow in value by _________ per year. a. 5 percent b. 12 percent c. 7 percent *d. 2 percent 2294. How do stock prices act as a signal for the future value of the firm? a. If firms merge, stock prices could rise indicating that the merger can result in greater profitability. b. If stock prices rise, they could be indicating future profitability for the firm. c. If stock prices fall, they could be indicating declining economic conditions. *d. All of these possibilities are correct. 2295. Which of the following statements is TRUE? a. The lure of stock market riches gives entrepreneurs an incentive to develop new products. b. Stock markets allow incompetent managers to be replaced by more competent managers. c. Stock prices provide information on whether the firm is making good decisions. *d. All of these statements are true. 2296. The benefits of stock markets for the economy include: I. serving as an intermediary between savers and investors. II. revealing information about firm performance. III. increasing the efficiency of resource allocation among firms. a. I and II only b. I and III only c. II and III only *d. I, II, and III 2297. Investing in the U.S. stock market offers ________ odds than gambling in Vegas or with a local bookie. a. worse *b. better c. the same d. impossible 2298. To say that a stock price is a signal means that: *a. society can determine the value of a firm. b. people transfer firm ownership via the signals. c. lower stock prices imply better value. d. speculative bubbles can be avoided. 2299. A speculative bubble is: *a. a situation in which high stock prices cannot be explained by companies' prospects and profits. b. easy to identify with technical analysis. c. not based on psychological factors. d. All of the answers are correct. 2300. Around the year 2000, there was a ______ in _______. *a. boom and bust; tech stocks b. boom and bust; housing prices c. speculative bubble; crayons d. speculative bubble; oysters 2301. If a stock market bubble bursts: *a. aggregate demand in the economy decreases. b. aggregate demand in the economy increases. c. aggregate supply in the economy decreases. d. aggregate supply and demand in the economy decrease. 2302. Which of the following is TRUE of speculative bubbles in stock prices? a. They are easy to detect by simply looking at the trends in stock prices. b. They can never be detected even after they occur. *c. They are difficult to detect until after they burst. d. They never exist in stock markets. 2303. A speculative bubble: a. explains the rise of Microsoft's stock price over the last 30 years. b. can help the macroeconomy. c. can be easily identified, leading to higher than normal returns. *d. arises when stock prices rise more rapidly than they should. 2304. During the price rise associated with a speculative bubble, capital is invested: a. efficiently. *b. in areas where it is not valuable. c. with less risk than usual. d. to prepare for another wave of price rises. 2305. Asset price bubbles are: a. avoidable. *b. possibly solved through greater transparency in assessing company values. c. inevitable. d. a recent phenomenon. 2306. If stock prices rise at a very fast rate, this may be indicative of: *a. a speculative bubble. b. low covariance with the market. c. moderate profitability forecasts. d. All of the answers are correct. 2307. Stock market bubbles have real effects in the economy because: a. overvalued stocks cause inflationary effects in the economy. b. overvalued stocks violate the efficient markets hypothesis. *c. overvalued stocks divert capital to less-productive uses. d. when these bubbles burst, they raise the value of capital in those industries. 2308. Bursting stock market bubbles have which of the following effects? I. decreased wealth II. decreased production in those industries whose stocks have collapsed III. unemployment in those industries whose stocks have collapsed a. I only b. I and II only c. II and III only *d. I, II, and III 2309. Which statement is NOT true? a. Portfolio managers should diversify investments. b. The promise of higher returns is accompanied by higher risk. *c. A single investor can consistently beat the market over the long term. d. Active stock markets are an important part of the economy. 2310. Paying an expert to help pick stocks will likely yield better returns than most alternative strategies for stock selection. a. True *b. False 2311. According to the evidence, very few mutual fund managers can beat the market averages. *a. True b. False 2312. Warren Buffett will likely continue to beat the market, as he has done for the past few decades. a. True *b. False 2313. Active mutual funds historically outperform passive mutual funds. a. True *b. False 2314. According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns. a. True *b. False 2315. If the efficient markets hypothesis holds, then only investors with inside information can earn a return higher than the stock market average return. *a. True b. False 2316. Since for every buyer of a stock there is a seller of that stock, someone can likely become very rich acting on public information. a. True *b. False 2317. The only way someone can take advantage of information that other people don't have is to start buying or selling large numbers of shares. *a. True b. False 2318. According to the efficient markets hypothesis, the prices of traded assets, such as stocks and bonds, reflect all publicly traded information. *a. True b. False 2319. One of the exceptions to the efficient markets hypothesis is that experts can get better returns than others. a. True *b. False 2320. The number of senior citizens will double by 2020, so investing in medical care and retirement homes is likely to generate above-normal market returns. a. True *b. False 2321. The efficient markets hypothesis suggests that reading the Wall Street Journal will help you pick top-performing stocks. a. True *b. False 2322. A buy-and-hold strategy only works for stocks that are very volatile. a. True *b. False 2323. Diversification means buying a stock at a low price and then selling it later at a higher price. a. True *b. False 2324. Mutual funds primarily offer the service of diversification of investments. *a. True b. False 2325. The proper study of the risk of a stock considers how the stock price varies with the rest of the market. *a. True b. False 2326. Diversification is the only strategy that leads to a higher-than-market-average return. a. True *b. False 2327. A diversified portfolio reduces risk. *a. True b. False 2328. For a person holding a mutual fund, compounding the returns on the fund leads to a higher total return in the future than without compounding. *a. True b. False 2329. The risk-return trade-off says that higher risk is associated with lower expected returns. a. True *b. False 2330. High returns reward savers for bearing high risks. *a. True b. False 2331. If the expected return on stocks is 10 percent, the monetary return from investing in art will be less than 10 percent because there is a fun return to art. *a. True b. False 2332. The benefit of a stock market to the economy is that it makes some people rich without making other people poor. a. True *b. False 2333. A stock market bubble is a rise in stock prices that is not reflective of the underlying fundamentals of the company. *a. True b. False 2334. Bursting stock market bubbles create labor adjustment costs. *a. True b. False 2335. Suppose that the stock market for any given year can be characterized as being one of the following: 1) poor, 2) average, 3) good, or 4) excellent. If there are 1,800 people who randomly predict stock market performance for this and each of the next three years, how many people will have been right four years in a row? Correct Answer: After each year, 25 percent of the people will have made a correct prediction. To make a correct prediction for all four years, the probability is 0.254 = 0.0039. The number of people who make the right prediction for each year is 1,800 × 0.0039 = 7. 2336. A friend argues that we should select mutual funds whose managers actively trade stocks. Is this correct? Explain your answer. Correct Answer: Mutual funds whose managers actively trade stocks, or active funds, earn no higher returns than stock market indexes or “passive funds” that use those indexes as benchmarks. Also, the higher management fees for active funds further lower their net returns for mutual fund holders. For this reason, the best advice is to select passive funds and to avoid high fees. 2337. Discuss the main reason why it is “hard to beat the market” in financial investment? Correct Answer: According to the efficient markets hypothesis, the prices of traded assets reflect all publicly available information. Because this hypothesis generally holds for stock markets, no investor can systematically earn a return higher than the market average unless that investor has inside information that is not publicly available. 2338. What most likely happened to the stock for Apple because of the iPhone and iPad? Explain using a demand and supply graph. Correct Answer: The demand for the Apple stock rose as did its price. The graph should show an increased demand and higher price. 2339. Briefly list several important lessons that economics offers for investing wisely. Correct Answer: 1. Passively managed funds outperform the majority of actively managed funds. 2. Markets are efficient, so all relevant public information is already reflected in stock prices, making it difficult for the investor to beat market averages. 3. Investors should diversify their investments. 4. Funds with high fees and loading costs should be avoided. 5. Stocks offer superior performance to bonds over the long run. 6. Higher returns mean higher risk. 7. Investments that have a fun factor, such as art or housing, trade off financial returns for fun returns. 2340. Briefly discuss the four pieces of advice on financial investment given in the text. Correct Answer: The four pieces of advice on financial investment are: (1) diversification, which means buying a large number of stocks in different industries or buying a mutual fund that holds a large number of stocks; (2) avoiding high fees in investments and mutual funds, because many investment vehicles with high fees do not necessarily outperform those with lower fees; (3) understand the implications for investment growth that derive from rates of return on the assets held; and (4) understanding the trade-off between risk and returns, meaning that an asset with a higher expected return only comes with higher risk of losing. 2341. While luck is certainly useful in picking stocks, there are some strategies for good investing. List these strategies. Correct Answer(s): a. These strategies are to diversify, buy and hold, and avoid high fees. 2342. Discuss the different ways that a person can diversify. Correct Answer: A person can diversify in many ways. For example, diversification can occur in stock selections. In this case, one should hold a large number of different stocks in different industries and in different countries. Some of those stocks should move in the opposite direction of other stocks in the portfolio over time. Instead of investing in stocks, one could also buy mutual funds that are diversified in their stock selections. One can also diversify in different investment vehicles other than stocks, such as bonds, art, housing, and human capital. 2343. Suppose that someone has decided to follow a buy-and-hold strategy in technology stock purchases and buys these stocks eight years before retirement. The stocks grow in value and this person's retirement wealth increases. Critically evaluate this investment decision. Was it smart? Could it have been improved? Correct Answer: The person should not have put all of his eggs in one basket. Lack of diversification in a stock portfolio causes a covariance problem when the market weakens. Recent behavior of the stock indexes in the United States, points out the riskiness of such a strategy. This person could lose a lot of the money that was counted on for retirement. It would have been better to have held a diversified portfolio with stocks from different sectors, and other instruments such as government and corporate bonds, and other assets. 2344. Suppose you have two individuals: one of whom is very risk-averse and the other loves risk. What kind of financial instruments would you advise these individuals to purchase based solely on their risk tolerance levels? Correct Answer: A risk-averse person should go for T-bills and long-term government bonds. Any corporate bonds for this portfolio should be from corporations that are very stable, and if stocks are included they should be stocks that have a very low covariance with the market. A risk-lover should go for a portfolio with a higher composition of stock while still diversifying. Stock picks could include Internet, technology, and oil. Bonds could be riskier holdings such as junk bonds, or corporate bonds with lower credit ratings. 2345. Suppose there is a rumor that Company X is about to merge with another very profitable company. Now suppose that a major broker spreads this rumor, and people take that broker seriously. Could this broker cause the company to “appear” to be a profitable stock to hold? Correct Answer: Yes, if enough people react to a prediction, it can act as a self-fulfilling prophecy. When people believe the rumor and start to buy the stock, they cause the price of the stock to rise. This may cause the company to appear profitable even though it has not engaged in its merger yet. 2346. Someone offers you a hot tip that promises to offer a large payoff in the stock market. How would you respond to this person, based on the simple and practical guidance found in this chapter? Correct Answer: Answers will vary. The best answer is the chapter Takeaway, as follows: It is very hard for any single investor to consistently beat the market over longer periods of time. You are well-advised to diversify your investments. Avoid fees and try to generate a high compound return over time. Understand that the promise of higher returns is often accompanied by higher risk. 2347. By assuming diminishing marginal utility, we mean that: a. consumers get less overall value from goods as their income rises. b. consumers value some goods more than others. c. the cost of producing goods declines as output increases. *d. consumers value additional units of a good less than the previous unit. 2348. Which of the following best illustrates the concept of diminishing marginal utility? *a. Gladys is hungry and the first piece of pizza she eats tastes wonderful! The second tastes great, the third good, the fourth okay, and the fifth piece of pizza she eats makes her sick. b. Thomas likes tomatoes more than Janice, and thus gets more utility from tomatoes than Janice does. c. High Fly is a new low-cost airline. Initially it is very expensive for High Fly to offer flights to customers because of the high start-up costs, but after fixed costs are covered the additional cost of adding one more consumer falls significantly. d. Sarah likes hamburgers, but the price she is willing to pay for them is low as compared to another good. 2349. Figure: Water vs. Soda Reference: Ref 23-1 (Figure: Water vs. Soda) Refer to the figure. The figure represents the marginal utility Janet receives when she consumes bottled water and soda. The prices of bottled water and sodas are both $1 each. Janet has $2 to spend and consumes two bottles of water and no soda. a. She would be better off if she consumed one bottle of water and one soda. b. She would be better off if she consumed two sodas instead of two bottles of water. *c. She is maximizing her utility. d. The marginal utility of soda will be higher than the marginal utility of bottled water. 2350. Figure: Water vs. Soda Reference: Ref 23-1 (Figure: Water vs. Soda) Refer to the figure. The figure represents the marginal utility Janet receives when she consumes bottled water and soda. The prices of bottled water and sodas are both $1 each. Janet has $5 to spend. What mix of bottled water and soda will maximize Janet's utility? a. five bottles of water b. four bottles of water and one soda *c. three bottles of water and two sodas d. 2.5 bottles of water and 2.5 sodas 2351. Consumers maximize their utility when: a. the total benefits are greater than total costs. *b. the marginal utility per dollar is equal across all goods consumed and all income is spent. c. they consume the good on which they place the highest overall value. d. they diversify their consumption across goods. 2352. Figure: Coffee and Comic Books Reference: Ref 23-2 (Figure: Coffee and Comic Books) Refer to the figure. The price of comic books is $0.50. Using the diagram, the marginal utility per dollar for the third comic book is: a. 11. b. 5.5. *c. 22. d. 11.5. 2353. Figure: Coffee and Comic Books Reference: Ref 23-2 (Figure: Coffee and Comic Books) Refer to the figure. A consumer has $5 to spend on comic books (priced at $1 per comic book) and coffee (priced at $1 per cup). Using the figure, how many comic books and cups of coffee will this consumer purchase? a. three comic books and two cups of coffee *b. two comic books and three cups of coffee c. 2.5 comic books and 2.5 cups of coffee d. one comic book and four cups of coffee 2354. Figure: Coffee and Comic Books Reference: Ref 23-2 (Figure: Coffee and Comic Books) Refer to the figure. A consumer has $2 to spend on comic books (priced at $1 per comic book) and coffee (priced at $1 per cup). To maximize utility, should this consumer buy two cups of coffee? a. Yes, buying two cups of coffee maximizes the consumer's total utility. b. Yes, because the marginal utility of the second comic book is less than the marginal utility of the second cup of coffee. *c. No, the consumer should put back one cup of coffee (losing 16 utils) and replace it with a comic book (gaining 18 utils). d. No, the consumer should buy two comic books to maximize utility. 2355. Amy purchased four cantaloupes at $2 each and three watermelons at $4 each. If Amy is following the optimal consumption rule, the marginal utility of the fourth cantaloupe and third watermelon are: *a. 12 and 24, respectively. b. four and three, respectively. c. 40 and 10, respectively. d. six and eight, respectively. 2356. An increase in the price of a good leads to a(n) ______ in the marginal utility per dollar of that good, and thus a(n) ______ in the quantity purchased. a. increase; increase b. increase; decrease c. decrease; increase *d. decrease; decrease 2357. Figure: Budget Constraint Reference: Ref 23-3 (Figure: Budget Constraint) Refer to the figure. If the price of sneakers rises, then the budget constraint in the figure will: a. not change. b. become steeper. *c. become flatter. d. shift to the left. 2358. Figure: Budget Constraint Reference: Ref 23-3 (Figure: Budget Constraint) Refer to the figure. The slope of the budget constraint in the figure above is equal to: a. the price of sneakers divided by the price of flip-flops. *b. the price of flip-flops divided by the price of gas. c. the quantity of flip-flops divided by the quantity of sneakers. d. the quantity of sneakers divided by the quantity of flip-flops. 2359. Figure: Budget Constraint Reference: Ref 23-4 (Figure: Budget Constraint) Refer to the figure. A consumer has $45 to spend on movie and music downloads per month. What is the price per movie and music download? a. $15 per movie download and $0.45 per music download *b. $3 per movie download and $1 per music download c. $2.50 per movie download and $1.50 per music download d. $10 per movie download and $0.80 per music download 2360. Figure: Budget Constraint Reference: Ref 23-4 (Figure: Budget Constraint) Refer to the figure. What is the relative price of music downloads to movie downloads? a. 3 *b. 1/3 c. 5 d. 4 2361. (Figure: Budget Constraints) Refer to the figure. What could have caused the shift in the budget constraint? Figure: Budget Constraints a. The price of music downloads decreased. b. The price of movie downloads increased. c. This consumer's income increased. *d. This consumer's income decreased. 2362. Figure: Indifference Curve Reference: Ref 23-5 (Figure: Indifference Curve) Refer to the figure. Which of the following points generates the highest level of utility for the consumer? a. A *b. B c. C d. D 2363. Figure: Indifference Curve Reference: Ref 23-5 (Figure: Indifference Curve) Refer to the figure. Which of the following statements is true? a. This consumer prefers Bundle C to Bundle A. b. This consumer is indifferent between Bundle B and Bundle A. c. Only Bundles A, C, and D are relevant. *d. Bundle B generates the highest utility out of all the points shown. 2364. (Figure: Preferences and Indifference Curves) Refer to the figure. According to the indifference curves for Kiwis and Nuts, which of the following statements is TRUE? Figure: Preferences and Indifference Curves a. Indifference curve U1 provides higher utility than indifference curve U2. b. Bundle A is preferred to Bundle B. *c. Bundle C is preferred to Bundle D. d. Bundle C is preferred to Bundle B. 2365. (Figure: Marginal Rate of Substitution) Refer to the figure. What is the marginal rate of substitution (MRS) between Bundle A and Bundle B? Figure: Marginal Rate of Substitution a. 4.5; the consumer is willing to trade 4.5 movie downloads for one music download. *b. three; the consumer is willing to give up three movie downloads for an additional music download. c. 1.5; the consumer will buy 1.5 times as many music downloads as movie downloads. d. one; the consumer faces a one-to-one trade-off. 2366. Figure: Optimal Choice Reference: Ref 23-6 (Figure: Optimal Choice) Refer to the figure. If the dotted line in the figure represents this consumer's budget constraint, then the utility maximizing bundle for this consumer is: a. A. b. B. c. C. *d. E. 2367. Figure: Optimal Choice Reference: Ref 23-6 (Figure: Optimal Choice) Refer to the figure. Suppose the figure represents indifference curves of a consumer who purchases flip-flops and sneakers. If the dotted line represents this consumer's budget constraint, then Bundle D on the graph: a. results in a lower level of overall utility than Bundle E. *b. is preferred to Point E but unattainable. c. has a higher marginal rate of substitution than Bundle E. d. maximizes total utility. 2368. The consumption bundle that maximizes utility for a consumer is the bundle that: *a. equates the slope of the budget constraint with the slope of the indifference curve. b. maximizes marginal utility across all goods. c. minimizes the costs of production. d. maximizes the marginal rate of substitution. 2369. At the consumer's optimal consumption bundle, the MRSXY is 4, and the marginal utility of Good X is 8. What is the marginal utility of Good Y? a. 1/2 *b. 2 c. 24 d. 16 2370. (Figure: Consumption Bundle) Refer to the figure. Which of the following statements is FALSE? Figure: Consumption Bundle a. The optimal consumption bundle contains five movie downloads and 10 music downloads. b. The MRS is 0.50 at the optimal consumption bundle. c. The price per music download is half as expensive as the price per movie download. *d. In the optimum consumption bundle, the marginal utility of movie downloads equals half the marginal utility of music downloads. 2371. If there are only two goods in the economy, chocolate and peanut butter, and the price of chocolate falls, the new utility maximizing bundle for a typical consumer would entail consuming ______ peanut butter and ______ chocolate. a. less; more b. more; less *c. more; more d. less; less 2372. Figure: Income and Substitution Effects Reference: Ref 23-7 (Figure: Income and Substitution Effects) Refer to the figure. What caused this consumer to switch optimal consumption bundles from Bundle A to Bundle B? a. a decrease in consumer income available for music downloads b. a decrease in the price of music downloads *c. an increase in the price of music downloads d. an increase in the price of movie downloads 2373. Figure: Income and Substitution Effects Reference: Ref 23-7 (Figure: Income and Substitution Effects) Refer to the figure. The consumer is initially in equilibrium at Point A than moves to Point B. What is the substitution effect from the price change? *a. the reduction of the number of music downloads by three b. the reduction of the number of music downloads by four c. the increase of the number of music downloads by one d. the increase of the number of music downloads by three 2374. Figure: Income and Substitution Effects Reference: Ref 23-7 (Figure: Income and Substitution Effects) Refer to the figure. The consumer is initially in equilibrium at Point A than moves to Point B. What is the income effect from the price change? a. the increase of the number of music downloads by three b. the increase of the number of music downloads by four *c. the reduction of the number of music downloads by one d. the reduction of the number of music downloads by three 2375. The income effect is: a. represented by a pivot in the budget constraint from a change in price. *b. the change in consumption caused by a change in purchasing power from a price change. c. an increase in price caused by a change in market demand from an increase in income. d. the increase in the price of leisure caused by higher wages. 2376. After purchasing and then losing a ticket to a concert, a rational consumer would: a. not repurchase the ticket since the lost ticket is a sunk cost. b. always repurchase the ticket as long as the price hasn't changed. c. repurchase the ticket as long as the price hasn't changed and the income effect is high. *d. repurchase the ticket as long as the price hasn't changed and the income effect is low. 2377. A partner at a major law firm spent $90 for a ticket to the Rockstar Energy Mayhem Festival, featuring Disturbed, Godsmack, and Megadeth and then lost it. Should he buy another $90 ticket? *a. Yes, there is no substitution effect and the income effect is trivial given his wealth. b. Yes, there is a positive substitution effect and the income effect is large given his wealth. c. No, there is some substitution effect and the income effect is trivial given his wealth. d. No, there is a positive substitution effect and the income effect is large given his wealth. 2378. (Figure: Sam's Club) Refer to the figure. How much should Sam's Club charge for membership? Figure: Sam's Club a. $60 b. $100 *c. $40 d. $10 2379. If an individual's labor supply curve is downward sloping, this indicates that: a. the individual has become wealthier. *b. the income effect dominates the substitution effect. c. the substitution effect dominates the income effect. d. the individual faces a diminishing marginal utility for leisure. 2380. (Figure: Labor Supply) Refer to the figure. The figure represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. For this worker: Figure: Labor Supply a. the income effect will dominate and the consumer will work more. b. the substitution effect will dominate and the consumer will work more. c. the income effect will dominate and the consumer will work less. *d. the substitution effect will dominate and the consumer will work less. 2381. Barry's wage increased and he responded by working more hours. Which of the following must be true? a. Leisure is an inferior good. *b. The substitution effect of the wage increase dominated the income effect. c. The income effect of the wage increase dominated the substitution effect. d. The substitution and income effect both increased hours of work. 2382. Which of the following statements is TRUE? a. The income effect of a wage increase is to consume less leisure. b. The substitution effect of a wage decrease is to consume less leisure. *c. The price of leisure decreases with a decrease in wages. d. The price of leisure increases with an increase in income. 2383. (Figure: Labor Leisure) Refer to the figure. Which of the following statements is TRUE? Figure: Labor Leisure a. The labor supply curve is downward sloping. *b. The labor supply curve is upward sloping. c. The income effect denominates the substitution effect. d. The worker earns $6.00 an hour. 2384. (Figure: Work Leisure) Refer to the figure. Which of the following statements is FALSE? Figure: Work Leisure a. At 13 hours of leisure and income of $45.19, the worker earns a wage of $4.17 an hour. *b. The labor supply curve is downward sloping. c. The substitution effect dominates the income effect. d. This worker chooses to work more hours if paid higher wages. 2385. Figure: Labor Supply and Welfare Reference: Ref 23-8 (Figure: Labor Supply and Welfare) Refer to the figure. The budget constraint is: a. ABC. b. BD. c. ABDC. *d. ABD. 2386. Figure: Labor Supply and Welfare Reference: Ref 23-8 (Figure: Labor Supply and Welfare) Refer to the figure. The presence of the welfare program causes this person to: *a. reduce hours of work from 12 to 0. b. increase hours of work from 0 to 12. c. reduce hours of work from 12 to 9. d. reduce hours of work from 8 to 3. 2387. Countries in Western Europe tend to have more generous unemployment benefits for their workers than the United States. All else equal, you would expect workers in Western Europe to: a. work more hours on average. *b. work fewer hours on average. c. have higher wages. d. have lower wages. 2388. Which of the following methods have been used to reduce the disincentive effects of welfare on labor supply? I. The government reduces welfare benefits by $1 of every $1 of labor income earned. II. The government limits the amount of time that someone can collect welfare. III. The government provides an Earned Income Tax Credit that supplements the income of the working poor. a. I and III only *b. II and III only c. II only d. I, II, and III 2389. If the marginal utility per dollar for hamburgers is higher than the marginal utility per dollar for Tacos, then in order to maximize utility the consumer should only consume hamburgers. a. True *b. False 2390. If the marginal utility per dollar for hamburgers is 2, and the marginal utility per dollar for pizza is 1, then this consumer should consume more hamburgers. *a. True b. False 2391. If the marginal utility of apples is 4 and marginal utility of grapes is 4, the consumer is maximizing utility. a. True *b. False 2392. The demand curve is downward sloping due to diminishing marginal utility. *a. True b. False 2393. If the price of Good X is $10 and price of Good Y is $15, the slope of the budget constraint is –1.5. a. True *b. False 2394. The slope of the indifference curve is equal to the marginal rate of substitution. *a. True b. False 2395. Indifference curves can never cross. *a. True b. False 2396. Consumption Bundle A contains six donuts and 2 cups of coffee, and consumption Bundle B contains four donuts and 1.5 cups of coffee. Bundle A and Bundle B could lie on the same indifference curve. a. True *b. False 2397. If another unit of Good X gives a consumer 15 additional units of satisfaction, and another unit of Good Y gives 45 additional units of satisfaction, the MRS is equal to 1/3. *a. True b. False 2398. The utility maximizing consumption bundle for a consumer is the bundle that maximizes marginal utility across all goods. a. True *b. False 2399. Suppose the price of apples rises making oranges relatively less expensive. The increase in orange consumption as a result of the price change is an example of the income effect. a. True *b. False 2400. If the wage rate increases and the income effect exactly offsets the substitution effect, the labor supply curve is vertical. *a. True b. False 2401. The table given shows the marginal utility a consumer receives from purchasing take-out food and lattes each week. The price of a take-out meal is $15, and the price of a latte is $5. What is the utility-maximizing bundle of take-out and lattes for a consumer with a weekly income of $45 (all of which will be spent on take-out and lattes)? How does it change if income increases to $75? What is the bundle then? Table: Take-out and Coffee Take-out Marginal Utility of Marginal Utility of Meals Take-out Lattés Lattes 1 20 1 5 2 15 2 4.50 3 12 3 3.50 4 10.50 4 2 5 3.50 5 1 Correct Answer: If income were $45, the utility-maximizing bundle would be to consume two take-out meals and three lattes. If income were $75, the optimal consumption bundle would be four take-out meals and three lattes. 2402. As wages rise, will labor supply increase or decrease? Discuss and explain each possible scenario. Correct Answer: If wages rise, labor supply MAY increase as workers will want to work more hours now that wages are higher. This is the substitution effect (leisure is relatively more expensive when wages rise, so workers consume less of it and work more). As wages rise, however, it is also possible that labor supply may decrease since higher wages would mean that workers don't have to work as many hours to earn the same amount of income. This is the income effect. Whichever effect dominates will determine whether labor supply rises or falls with an increase in wages. 2403. A bar owner must decide how best to raise revenues. A cover charge will allow him to offer cheaper drink prices. If the owner does decide to require a cover charge and offer cheaper drinks, how much should it be to avoid losing customers? Explain. Correct Answer: A cover charge should be just high enough that consumers are indifferent between paying the cover and getting cheaper drinks, or paying no cover but having more expensive drinks. In other words, the ideal cover charge would reduce consumers' income by just enough to leave them on the same indifference curve that they were on when paying for more expensive drinks. 2404. In several cities around the country, schools are paying cash awards to students who do well on English and Math tests. This practice highlights the idea of: a. pedagogical economics—the continuous assessment of student performance in an effort to maximize student efficiency. b. hidden costs—the costs borne by taxpayers in the form of wasteful school spending. *c. incentives—the rewards and penalties that motivate behavior. d. screening theory—the identification of individuals or groups based on various performance measures. 2405. Suppose that there are three methods of financing the transportation of prisoners from Point A to Point B: I. The boat's captain is paid $100 by the government for every live prisoner that is loaded on board at Point A. II. The boat's captain is paid $100 by the government for every live prisoner that is unloaded at Point B. III. The boat's captain is paid $800 by the government for every live prisoner that is loaded on board at Point A. Which financing method will result in the greatest number of prisoners surviving the trip? a. I *b. II c. III d. All methods affect prisoner survival equally. 2406. Recall the chapter opening story about the British sea captains and the convicted felons. In what way did economics use the idea of incentives to solve the problem of the high mortality rate on board the ships? a. Payment (to ship captains) was to be offered for each prisoner that was taken aboard the ships. b. Payment (to ship captains) was made independent of the regulations passed for prisoner welfare. c. Regulations were passed so that prisoners could get better food, water, and medical care. *d. Payment (to ship captains) was made dependent on the survival rate of prisoners. 2407. The main incentive for business activity is: a. government subsidies. b. technological advancement. *c. profit. d. employment. 2408. Recall the chapter opening story about the British sea captains and the convicted felons. Instead of paying the sea captains for each prisoner placed on board the ships in Great Britain, an economist suggested: *a. paying for each prisoner who walked off the ship in Australia. b. paying for food and water to reduce costs of caring for prisoners during the transit. c. doing nothing, since the suggested change would not matter. d. that new regulations be passed to require prisoner safety and health. 2409. Every day we rely on the work of millions of other people to provide us with food, clothing, and shelter. People work for our benefit because: a. people think at the margin. b. trade-offs are everywhere. *c. they benefit by doing so. d. institutions require them to do so. 2410. Economists think that people are self-interested: a. only when monetary incentives are present. *b. because they respond to incentives in predictable ways. c. only rarely in response to incentives. d. unless they are being altruistic. 2411. The basic postulate of economics indicates that changes in incentives influence the: a. actions of producers but not consumers. b. actions of consumers but not producers. c. choices of individuals only when they buy and sell goods in the marketplace. *d. choices of individuals with regard to a wide range of activities, including those generally perceived as social or political. 2412. Suppose the U.S. government wants to encourage individuals to save more of their income. The easiest way for the government to realize this goal is to: a. pass a law requiring people to save a larger percentage of their income. b. decrease government spending in order to set an example for individuals. c. increase the tax rate on savings in order to encourage more savings. *d. develop incentives such as tax breaks on savings in order to encourage more savings. 2413. Which of the following statements reflects Adam Smith's important insight into marketplace behavior? *a. Society benefits when people and firms pursue their own self interests. b. Markets are usually an inefficient way of organizing economic activity. c. Greedy, self-interested behavior needs to be constrained to ensure strong economic growth. d. Trade restrictions on imported goods increase domestic employment. 2414. When it comes to getting the flu shot, most people consider _______, not _________. a. the social interest; their self-interest b. their public interest; their social interest c. their costs; their benefits *d. their self-interest; the social interest 2415. Which of the following choices best illustrates the concept of Adam Smith's “invisible hand”? *a. A Vietnamese farmer grows rice; an exporter ships it to the United States, and a grocer in New York sells it to a customer. b. A fishery's stock of fish becomes depleted due to overfishing as boats from around the world converge. c. A government regulates a firm to clean up the pollutants it has released as part of its production process. d. An apartment building is built, which provides much needed housing, on the site of the only playground for children in that town. 2416. Adam Smith's metaphor of the “invisible hand” refers to the notion that: a. greed is always good when externally motivated. *b. behavior based on self-interest can lead to an overall benefit to society. c. market incentive can lead to negative side effects. d. markets always align self-interest with social interest. 2417. The idea that markets work efficiently: *a. refers to the fact that self-interest can be aligned with social interest. b. means that trade-offs can be reduced through channeling greed toward good ends. c. suggests that there is never any need for government regulation, taxes, or subsidies. d. has been known for many centuries. 2418. Adam Smith sought to explain the concept of aligning self-interest with the promotion of society's overall interest by: a. using an analysis of wealth as productivity. *b. suggesting markets are led by an Invisible Hand. c. arguing that markets were ineffective institutions. d. admitting his own inability to explain how such alignment takes place. 2419. When it comes to the safety of pharmaceutical drugs: a. the government should spare no expense in determining whether drugs are safe. *b. the government's lengthy testing to ensure the safety of new drugs may cost lives. c. economic cost benefit analysis informs us that more safety is always better. d. profit-driven pharmaceutical companies have no incentive to produce safe drugs. 2420. In an effort to clean the air, many communities impose restrictions on the burning of garbage. This policy causes more garbage to be buried underground, potentially increasing groundwater contamination. What concept does this example represent? *a. trade-offs b. marginal pollution c. sunk costs d. public provision 2421. Susan quits her administrative job, which pays $40,000 a year, to finish her four-year college degree. Her annual college expenses are $8,000 for tuition, $900 for books, and $2,500 for food. The opportunity cost of attending college for the year is: a. $11,400. b. $8,900. *c. $48,700. d. $51,400. 2422. The opportunity cost of a choice is: *a. the value of the opportunities lost. b. the net value of the opportunities gained. c. the difference between the benefits and costs of the choice. d. sometimes positive or negative. 2423. The opportunity cost of winning a free ticket to the Super Bowl worth $950 and attending the game is: a. zero, since the ticket was free. b. priceless, if the person really loves football. *c. at least $950, the lost market value of selling the ticket and the time to go. d. zero, if the person would rather go to the game than do anything else. 2424. In the market for pharmaceuticals, the issue of “drug lag” illustrates which of the following ideas? a. The longer a drug is tested for safety, the lower the opportunity cost in terms of lives lost. b. If a drug is not tested for safety, it might kill more people. c. Because of the higher the cost of testing a drug, it takes longer to make it, and more lives are lost. *d. Lives are being lost because safe drugs that are still in the testing stage have not yet been approved. 2425. In the market for pharmaceuticals, the issue of “drug loss” illustrates which of the following ideas? a. The longer a drug is tested for safety, the lower is the opportunity cost in terms of lives lost. b. If a drug is not tested for safety, it might kill more people. *c. Because of the higher the cost of testing a drug, fewer drugs are made, and more lives are lost. d. Lives are being lost because safe drugs that are still in the testing stage have not been approved. 2426. You must decide whether to attend class tomorrow morning or take your friend to the airport. Your decision highlights the following “big idea” in economics. a. Institutions matter. b. Incentives matter. c. Economics is fun. *d. Trade-offs are everywhere. 2427. Why do you think researchers sometimes find a positive relationship between the unemployment rate and college enrollment rates? a. The opportunity cost of attending college rises during economic booms, leading to higher college enrollment rates. b. The opportunity cost of attending college rises during recessions, leading to higher college enrollment rates. *c. The opportunity cost of attending college falls during recessions, leading to higher college enrollment rates. d. The opportunity cost of attending college falls during economic booms, leading to higher college enrollment rates. 2428. Air travel from New York to Los Angeles costs $800 and takes four hours. A bus ticket between the cities costs $100 and takes 104 hours. Other things constant, the minimum value of one's time that would induce a rational individual to fly rather than drive would be: a. $1 per hour. *b. $7 per hour. c. $12 per hour. d. $120 per hour. 2429. You are given a ticket to a Bob Dylan concert with a face value of $50. You only value the ticket at $40, sell it to a friend for $40 and attend a U2 concert priced at $60. The opportunity cost of attending the U2 concert is: a. $20 worth of alternative goods and services. b. $40 worth of alternative goods and services. c. $50 worth of alternative goods and services. *d. $60 worth of alternative goods and services. 2430. The opportunity cost of attending college is: a. tuition and books. b. travel expenses, tuition, and books. c. psychic costs of missing your family and friends while in school. *d. lost wages from not working full time. 2431. What you give up to obtain an item is called your: *a. opportunity cost. b. explicit cost. c. true cost. d. direct cost. 2432. The average tax on a professor's income of $100,000 is 18 percent, and the marginal tax rate above $100,000 is 45 percent. If the professor teaches during the summer and earns an additional $10,000 (bringing her total earnings for the year to $110,000), how much of the summer income does she keep after paying taxes? a. $4,500 b. $1,800 c. $6,300 *d. $5,500 2433. Imposing the death penalty on rapists may increase the number of murders, because: a. the death penalty is not a deterrent to the behavior of a rapist. *b. once a victim is raped there is no additional penalty imposed for also killing the victim. c. rapists are irrational and place no value on the life of their victim. d. rapists do not think about the consequences of their actions. 2434. Deciding whether to study an additional hour for an exam by comparing the additional benefits to the additional costs of an extra hour of study is an example of: a. normative analysis. b. transformational thought. *c. marginal thinking. d. None of the answers is correct. 2435. Why do grocery stores offer “buy one, get one half off” specials? I. It's a way to offer an incentive to consumers (who might not ordinarily buy two units of the same item) to buy the extra item. II. They are thinking at the margin, and they stand to make additional profit even if they sell the second unit at a lower price than the first unit. III. Government regulations require them to hold such promotions from time to time. a. I only b. II only c. III only *d. I and II 2436. Why do you think goods are sometimes marked in prices that end in 9s, for example “$29.99” instead of $30, or “$9.99” instead of $10? I. Consumers respond to incentives—they view the products as cheaper and so they buy more. II. Businesses are sneaky and add the extra cent onto taxes on the product. III. It is a sales strategy that makes people think the product is on sale. a. I only b. II only c. III only *d. I and III 2437. What is meant by the term marginal revolution? a. the public disdain at the institution of marginal tax rates *b. the transformation in economic thought that occurred with the discovery of marginal thinking c. the institution of the death penalty for drug dealers d. the effect of policies on crime 2438. What is a plausible economic explanation as to why Braille “dots” are commonly found on drive-up automatic teller machines? a. Blind people must be able use such machines, due to government regulations requiring such dots on the keys under the Americans with Disabilities Act. *b. The marginal cost of making two different types of keypads is substantial, and the benefit of providing keypads without the Braille dots is a mere inconvenience to ATM users. c. The marginal cost of making the keys with the Braille dots is less than making the keys without the Braille dots. d. There is no economic concept that explains why the keypads have Braille dots. 2439. Joe runs a landscape business. He knows that providing landscaping services costs him $100 per hour on average, while the cost of providing such services is $150 per hour after 5 PM (due to overtime pay, reduced productivity, and the added wear and tear on his equipment). A potential client offers Joe $130 per hour to provide services but needs him to provide the services after 5PM due to circumstances at the property. a. Joe should take the job, since $130 exceeds his average cost of production. b. Joe should take the job, since he is making a $30 profit per hour. c. Joe should decline the job, since he would lose $150 per hour worked on the job. *d. Joe should decline the job, since he would lose $20 per hour worked. 2440. Suppose you have ordered a value meal at a local fast-food restaurant. The cashier asks if you would like to “super-size” your meal. In order to make an efficient decision, you should compare: a. the total cost of the larger, “super-sized” meal versus the total benefits received. *b. the additional cost of the larger meal versus the additional benefits received. c. the total cost of the larger meal versus the additional cost to the restaurant. d. the benefits of the smaller meal versus the additional benefits obtained from consuming the “super-sized” meal. 2441. When deciding whether or not to undertake an activity, economists compare: a. the total cost of the activity against the total benefit received. b. the total benefit of the activity against the total cost of production. *c. the additional cost of the activity against the additional benefits received. d. the average cost of the activity versus the total benefits received. 2442. Suppose your teacher finishes class 30 minutes early on the day before an exam. She indicates that you may leave, or stay on for an optional study period which will last for the remaining 30 minutes of the scheduled class time. You should: a. always choose to stay for the study period, since you have already paid for the class time. b. only choose to stay if you like the instructor, since the value obtained is higher than if you disliked the instructor. *c. only choose to stay if the benefits gained from the extra study session exceed the cost of another 30 minutes in class. d. only choose to stay for the study session if you do not plan to study on your own for the exam. 2443. Which of the following arise as benefits from trade? I. economies of scale II. cost reduction from mass production III. the division of knowledge a. I only b. II and III only c. I and III only *d. I, II, and III 2444. Two people benefit from trade: I. if they both live in the same country. II. regardless of where they live. III. if they can negotiate directly with each other. a. I only b. I and III c. II and III *d. II only 2445. Which of these groups can benefit from trade? I. firms II. consumers III. workers a. I and II only b. I and III only c. II and III only *d. I, II, and III 2446. The Theory of Comparative Advantage recognizes that: I. very productive people can do everything. II. people can make more by specializing than by doing everything. III. the division of knowledge helps increase productivity. a. I, II, and III *b. II and III only c. I and II only d. I and III only 2447. A person has a comparative advantage in activity X when that person's: a. opportunity cost of performing that activity is very high. b. ability to perform that activity exceeds that of all other people. c. government negotiates a favorable trade agreement. *d. opportunity cost is lower than other trading partners. 2448. The real power of trade lies in people's ability to: a. get things they can't produce. b. get the lowest price possible. c. increase their consumption. *d. specialize and increase production. 2449. What causes countries to become wealthier over time? a. government central planning *b. economic growth c. price controls on key natural resources d. restrictions on imported goods 2450. What factor is responsible for ending malaria in the United States? a. inflation *b. wealth c. the gold standard d. yardstick competition 2451. Why are more people unhealthy in developing countries than in developed countries? I. Wealthier people are not attacked by mosquitoes. II. Wealthier people can pay for better treatments. III. Wealthier people can pay for better prevention of disease. a. I only b. II only c. III only *d. II and III only 2452. The historical rise in living standards of American workers is primarily a result of: a. the influence of labor unions in America. b. tariff protection imposed by the American government. c. the enactment of minimum wage laws in America. *d. the rise in American productivity. 2453. What are the institutions that help foster the appropriate incentives for economic growth? a. regulated labor and credit markets; and unions b. communal property rights and absence of a profit-loss system *c. a dependable legal system, property rights, and competitive and open markets d. production and export quotas; and supply and demand 2454. Wealthy countries tend to have ______ physical capital per worker and _______ human capital per worker. a. little; a lot of b. a lot of; little *c. a lot of; a lot of d. no; a lot of 2455. An economy where entrepreneurs are free to experiment with new ideas and bring innovative products to the market will: a. help economic growth but not affect living standards. *b. lead to improved living standards and increased economic growth. c. lead to increased living standards but stagnate economic growth. d. help stagnate living standards but increase economic growth. 2456. How can “good institutions” foster growth? I. They provide incentives for entrepreneurs to create and innovate. II. They provide financial support for organizations to acquire human and physical capital. III. They establish property rights, functioning legal systems, and open markets. a. I and II only b. II and III only c. III only *d. I and III only 2457. How does self-interest relate to creativity by firms (in terms of production methods or product attributes)? a. Firms are interested in sharing their new ideas with the world. *b. Firms innovate because they are interested in making a profit. c. Ideas can be used by everyone at the same time. d. All of the answers are correct. 2458. Which of the following environments contains factors suitable for economic growth? a. well-functioning markets, specialization in one's comparative advantage, and good health care systems b. well-functioning competitive markets, property rights, and firm creativity c. development of physical and human capital per worker, and technological advancement *d. All of the answers are correct. 2459. If North Korea and South Korea were both equally poor in 1950, why did South Korea develop so much faster? a. The two countries have different language, cultural, and historical backgrounds. b. North Korea has an economic system that develops incentives. *c. South Korea has a more market-based economic system. d. South Korea began with a higher per capita GDP. 2460. Among the most powerful institutions for supporting good incentives are: I. property rights. II. political stability. III. honest government. a. I only b. I and II only c. II and III only *d. I, II, and III 2461. A dependable legal system and competitive, open markets help to: *a. shape incentives that induce economic growth. b. reduce liberty and varied freedoms. c. bring about honest government and political stability. d. increase inefficiencies. 2462. The Great Depression was: a. a natural manifestation of competitive markets. b. cut short because of well-thought-out monetary policy. *c. to date, the worst economic period in U.S. economic history. d. about as severe as the 2008–2009 recession. 2463. Booms and busts refer to the: *a. fluctuations in economic activity over time. b. theory of the second best. c. decreases in a nation's output growth over time. d. monetary inflation and deflation caused by the central bank. 2464. Recessions are marked by which of the following phenomena? a. falling wages b. falling national output c. rising unemployment *d. All of the answers are correct. 2465. Which of the following phenomena occurred during the Great Depression? a. National output fell by 30 percent. b. Unemployment rose by 20 percentage points. c. The stock market fell to less than a third of its original value. *d. All of the answers are correct. 2466. Monetary and fiscal policies: *a. can reduce the severity of economic busts. b. have always been well understood and ultimately led to the end of the Great Depression. c. when used properly, can end every recession. d. All of the answers are correct. 2467. Economists have discovered that economic booms and busts: a. are needless and can be eliminated. b. should be encouraged because they help make people better off. *c. can be moderated but not eliminated. d. cause people to specialize so they become more productive. 2468. The central bank of the United States is: a. the Senate. b. the Department of Treasury. *c. the Federal Reserve. d. Wall Street. 2469. In Zimbabwe, the government ______ the ______ money, which caused the country's severe inflation. a. decreased; demand for b. decreased; supply of *c. increased; supply of d. increased; demand for 2470. Inflation is primarily caused by: a. businesses raising their prices in response to increasing energy prices. *b. the government printing too much money. c. misguided fiscal policy. d. economic downturns in GDP. 2471. According to Milton Friedman, “Inflation is always and everywhere a _________.” a. capitalist problem b. communist problem *c. monetary phenomenon d. situation caused by haphazard technological growth 2472. Inflation can be defined as: a. the general rise in the level of output in an economy. b. the boom and bust cycles of an economy. c. the rise and fall of the general level of prices in an economy. *d. the increase in the general level of prices in an economy. 2473. The Central Bank of the United States can: a. minimize a recession. b. regulate the money supply in the United States. c. cause inflation if it increases the money supply too much and too fast. *d. All of the answers are correct. 2474. What is one cause of inflation? a. the persistent rise in prices in the economy *b. production's inability to keep up with spending in the economy c. increased spending by people and the government. d. economic growth without money growth 2475. A policymaker wants to reduce inflation. In order to make an intelligent decision about how to do so, the policymaker: a. should use a simple rule: once inflation is gone, it will always be gone. *b. needs to know the causes of inflation, such as the government's printing too much money. c. should find out if people are really better off as a result of the inflation. d. should realize that inflation can be reduced without any costs. 2476. Most economists believe that an increase in the supply of money results in: a. an increase in the demand for goods and services. b. higher unemployment in the short run. *c. higher inflation in the long run. d. no change for the economy. 2477. Which of the following statements is FALSE? I. The Federal Reserve can micromanage the economy with great precision. II. The Federal Reserve's decisions usually have an immediate effect on the economy's unemployment rate. III. Most economists believe that the Federal Reserve does more harm than good. *a. I and II only b. II only c. II and III only d. I, II, and III 2478. Which of the following choices explains why the Fed has a tough job? a. lags in the effects of monetary policy b. continuously changing economic conditions c. the inability to perfectly forecast the future *d. All of the choices are correct. 2479. Which of the following choices describes why the Fed might find it difficult to combat recessions? I. lags in the effects of monetary policy II. continuously changing economic conditions III. changes in the money supply, which do not always lead to expected changes in economic conditions. a. I and II only b. II and III only c. I and III only *d. I, II, and III 2480. The decisions made by the Federal Reserve Bank sometimes result in negative effects on the economy because: a. the economy is weakened when the government interferes using monetary policy. b. the government uses money inefficiently when it comes to fiscal policy. c. the Fed finds that forecasting economic conditions is easy but controlling the money supply is difficult. *d. too much money or too little money might induce inflation or unemployment due to bad timing of decisions. 2481. Economics: a. teaches us how to make the world a better place. b. increases our understanding of historical events. c. can help you better manage your finances. *d. All of the answers are correct. 2482. An example of Adam Smith's invisible hand is self-interested business people developing a better keyboard for the blind in hopes of making large profits. *a. True b. False 2483. The opportunity cost of attending college includes tuition, room and board, cost of meals, and the lost opportunity to make money at a job. a. True *b. False 2484. With careful planning, we can usually get something that we like without having to give up something else that we like. a. True *b. False 2485. A marginal change is a small incremental adjustment to an existing plan of action. *a. True b. False 2486. Marginal thinking was simultaneously discovered by three economists—Stanley Jevons, Carl Menger, and Adam Smith. a. True *b. False 2487. Greater emphasis on self-sufficiency and trading less with foreign countries would increase incomes and living standards in the United States. a. True *b. False 2488. For countries to be wealthy, they need lots of physical and human capital per worker—which, in turn, depends on a system of private property rights, political stability, a just legal system, honest government, and competitive and open markets. *a. True b. False 2489. If two countries are initially at the same level of development, the institution of well-functioning markets can allow one country to develop faster than the other. *a. True b. False 2490. Economies MUST experience both booms and busts. All economists can do is work to limit the extent of the economic fluctuations. *a. True b. False 2491. Monetary and fiscal policies are among a government's tools for mitigating economic fluctuations. *a. True b. False 2492. When the government decreases the supply of money, there is an increase in the general level of prices. a. True *b. False 2493. Central banks can cause inflation. *a. True b. False 2494. In the long run, excess money printing by the government always causes inflation and economic busts. *a. True b. False 2495. Inflation increases the value of money by increasing the purchasing power of money. a. True *b. False 2496. Economics increases your understanding of the distant past, present events, and future possibilities. *a. True b. False 2497. There are 10 Big Ideas in Chapter 1. List four of them. Correct Answer: A student could list any of the following four Big Ideas: Incentives Matter Good Institutions Align Self-Interest with the Social Interest Trade-offs Are Everywhere Thinking at the Margin The Power of Trade The Importance of Wealth and Economic Growth Institutions Matter Economic Booms and Busts Cannot Be Avoided but Can Be Moderated Prices Rise When the Government Prints Too Much Money Central Banking Is a Hard Job 2498. How do self-interested “greedy” businesses benefit society? Correct Answer: The goal of business is to maximize profits, a self-interested pursuit. To maximize profits, however, requires that businesses cater to their customers' tastes and preferences. Cowen/Tabarrok discuss how supermarkets keep their shelves stocked with products from all over the world and how millions of other people provide the public with food, clothing, and shelter. Paraphrasing Adam Smith: people do these things out of their own self-interest to earn money, not from their own innate kindness. Thus, behavior out of self-interest helps bring a variety of products to the market in sufficient quantity. 2499. Let's assume that your favorite musician (who sells platinum records and has sold-out concerts) is a great cook. He makes splendid cakes and pies. He could sell these pies and cakes for $30 each. Why doesn't he spend his whole day baking and cooking? Correct Answer: He does not spend the whole day baking and cooking because he can make a lot more money singing and signing record deals. The opportunity cost of baking pies would be too high. 2500. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today? Correct Answer: Opportunity cost is that which you must give up to obtain some item. The opportunity cost of a person attending college is the value of the best alternative use of that person's time and other resources used in the process. For most students this would be the income the student gives up by not working. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up, such as sleep, a Frisbee game, or being with a girlfriend/boyfriend. 2501. Why do airlines sometimes advertise last-minute air sales at low prices? What economic principle are they applying? Correct Answer: The airlines are engaging in marginal thinking. They weigh the costs versus benefits of selling a ticket at a sale price. The marginal cost of a last-minute passenger will be a little extra paperwork, some extra jet fuel, and some refreshments on the aircraft. The marginal benefit (the incentive for the airline to offer the sale) of having the last-minute passenger is the extra revenue from serving that customer. If the marginal revenue is greater than the marginal cost, the airline will benefit from selling the air ticket on sale. 2502. Using the “thinking at the margin” concept explain a student's decision to wake up and attend an 8 AM class in the winter (the student is already registered for the class). Correct Answer: On the one hand, the student will stand to gain extra knowledge from the single session of the class. If the subject is interesting, and the teacher is good, this is equivalent to an hour of enjoyment and learning. On the other hand, the student is sleepy, and it is cold and uncomfortable outside. If the class has no attendance policy, and there is no exam scheduled and no assignment due, the student may feel that she has nothing to lose by missing one class. Weighing the marginal costs versus the marginal benefits, the student may thus opt to sleep in! A penalty associated with nonattendance when there is an exam scheduled or no assignment due raises the marginal cost of nonattendance. 2503. Why do you think economists generally support increased trade? Correct Answer: People will be better off if they can exchange things they value less for things that they value more. Doing so will make everyone involved in such trading activity better off. 2504. Wherein lies the power of trade? Correct Answer: The power of trade comes from people specializing in the activity of their comparative advantage and trading for more things than they could produce on their own. 2505. Using the concepts of incentives and good institutions, explain how a country might achieve economic growth. Correct Answer: Economic growth stems from having well-functioning markets, consumers who are wealthy enough to purchase the goods and services produced, development of physical and human capital per worker, good institutions, and technological advancement. If consumers can afford goods and services, and wealth is increasing, firms will have markets. Wealthy consumers also save more, which allows firms to invest more. Firms' primary incentive is profit. If firms see the possibility of sales and profit, they will innovate and use and create new technologies in production and product attributes. They will increase efficiency, and reduce waste. As firms and consumers become wealthier, more incentives arise for investment and the development of physical and human capital. However, investment will not occur adequately or efficiently if good institutions do not exist. Good institutions include well-established property rights, an honest government, a dependable legal system, and well-functioning markets. 2506. Many industrialized nations have been pumping trillions of dollars into their economies in the form of stimulus packages, tax rebates, and bailouts, in order to stimulate additional consumer spending and business investment, and to ward off global recession. If a large portion of these funds are obtained through the printing of new money, explain whether or not this will help or hurt these economies in the long run. Correct Answer: If the stimulus packages and bailouts are able to increase both consumer spending and business investment, then it is more likely that these initiatives will be successful in warding off recession. However, if the funds for these stimulus packages are financed by the printing of new money, then this will most likely lead to increased inflation in the long run, hence dampening the expansionary effects of the stimulus. 2507. Explain why central banking is a hard job. Correct Answer: Too much money in the economy means that inflation will result. Not enough money in the economy is bad as well and can lead to a recession or a slowing of economic growth. The Fed is always trying to get it “just right” but some of the time it fails. Sometimes the failure is a mistake because forecasting where the economy is headed is very difficult. Central banking relies upon economic tools but in the final analysis it is as much an art as a science. 2508. Which of the following is NOT an outcome of trade? a. People with different preferences are made better off. b. Specialization and increased productivity develop. c. A division of knowledge among trading partners develops. *d. People in poor countries are made worse off. 2509. Which of the following is NOT a reason trade increases wealth? a. to take advantage of differences in productivity b. to take advantage of differences in preferences c. to take advantage of differences in knowledge *d. to take advantage of differences in security 2510. Which of the following is NOT a commonly recognized benefit of trade? a. Trade makes people better off when preferences differ. *b. Trade creates the need for institutions such as the World Trade Organization. c. Trade increases productivity through specialization and the division of knowledge. d. Trade increases productivity through comparative advantage. 2511. Which of the following is NOT true of trade? a. Trade makes people better off when preferences differ. b. Trade increases productivity through specialization and the division of knowledge. *c. Trade makes rich people richer and poor people poorer. d. Trade increases productivity through comparative advantage. 2512. The benefits of trade include: I. higher output due to specialization. II. higher output due to comparative advantage. III. increased welfare when preferences differ. a. I and II only b. II and III only c. I and III only *d. I, II, and III 2513. Which of the following statements is incorrect? a. Trade makes people better off when preferences differ. b. Trade increases productivity through specialization and the division of knowledge. *c. Non-fraudulent voluntary trade produces both winners and losers. d. Trade increases productivity through comparative advantage. 2514. Trade creates value because: a. people get what they want. b. raw materials are transformed into finished products. *c. people exchange things they do not want for things they do. d. idle resources are put to use. 2515. eBay creates value by: a. helping sellers trick buyers into purchasing broken items. *b. moving goods like broken laser pointers from people who don't want them to people who do. c. helping people with the same preferences find each other. d. moving toys from children who want them to children who don't. 2516. David sells his car, which he considers worthless, to Cameron for $200. Which of the following statements is true? *a. David and Cameron must have different preferences for the car. b. This trade did not create value because Cameron is buying a car that David considers worthless. c. Cameron is the only one made better off by the trade. d. David is made better off by the trade, but Cameron is made worse off. 2517. Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar. a. This trade makes Ella worse off by $200. b. This trade makes Mark better off by $200. c. Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800. *d. This trade creates value by moving the guitar and drum set to people who value them more. 2518. Which of the following is TRUE regarding trade? I. Trade creates value by moving goods from people that value them less to people that value them more. II. Trade makes everyone better off. III. The only potential losses from trade come when the seller values the good more than the buyer. a. I only *b. I and II only c. I and III only d. I, II, and III 2519. Facilitators of trade (such as Pierre Omidyar, the developer of eBay): *a. may become very rich since they are creating value for many individuals. b. find it very hard to profit from their services since they are not directly involved in the trades. c. typically only profit from their services if they are able to obtain government patent rights. d. are usually seen as taking advantage of consumers. 2520. Jim has an old (working) television that he would like to get rid of now that he has purchased a new high-definition, flat-screen television. The old television is no longer worth anything to him now that he has his new flat-screen TV. Veronica on the other hand has an even older television that has just broken down. She would pay up to $50 for any working TV. Which of the following statements is NOT true? a. If Jim trades Veronica his old television for $50, total value in society increases by $50. *b. If Jim trades Veronica his old television for $50, both are better off but total value in society does not increase. c. If a middleman facilitates the $50 trade between Jim and Veronica, but takes a $10 finders' fee, Jim and Veronica will still both be better off. d. If Jim and Veronica do not trade, both are worse off than if they did trade. 2521. Which statement best describes why people choose to specialize? a. Training is too expensive to specialize in multiple occupations. b. Trade creates value. c. Specialization increases productivity. *d. Specialization and trade allow them to consume more than they could produce individually. 2522. Division of knowledge, as discussed in the text, increases economic prosperity because: I. Each person can develop extensive knowledge about a single activity. II. The human brain's capacity to know everything about all productive activities is limited. III. Specialized knowledge increases productivity, which increases total output. a. I and II only b. I and III only c. II and III only *d. I, II, and III 2523. Which of the following is least likely a consequence of the division of knowledge? a. The development of the computer tablet. *b. A totally self-sufficient family farm. c. A new delivery method for cancer-fighting drugs. d. The provision of a new bike path in your community. 2524. A very small portion of people who use microwaves know how they work. This is an example of: a. a production possibility frontier. *b. specialization. c. absolute advantage. d. opportunity cost. 2525. If each of us had to grow our own food: *a. civilization as we know it would collapse and billions of people would have much less food to eat. b. we would have more time for other pursuits. c. people would be richer since they would no longer have to spend money on groceries. d. the total amount of knowledge in society would increase since everyone would have to learn about farming. 2526. If instead of specialized doctors (neurologists, cardiologists, gastroenterologists, etc.) we had doctors who each knew the same things about all aspects of medicine it would be: a. better because we could just go to one doctor who could handle all our needs. b. better because total medical knowledge in society would increase. c. worse because the human brain is unlimited. *d. worse because total medical knowledge in society would decrease. 2527. Which of the following statements is TRUE? I. Trade allows people to specialize in their area of expertise, increasing society's output of goods and services. II. Specialization and the division of knowledge decreased with the fall of the Berlin Wall and opening of China's economy to the world. III. Society's knowledge is limited if everybody produces the same thing. a. I only b. II and III only *c. I and III only d. II only 2528. Division of knowledge refers to: a. dividing tasks into different subtasks and having one person perform all these subtasks. *b. people learning different tasks for which they each have a comparative advantage. c. assigning one person to learn all the different ways to perform the same task. d. limiting what each person knows about another person. 2529. As trade becomes more widespread, specialization ______, which in turn ______ productivity. a. decreases; decreases *b. increases; increases c. decreases; increases d. increases; decreases 2530. Which of the following statements is true? I. Compared to a modern economy, the division of knowledge was greater in a primitive economy because every family grew its own food, made their own clothing, and constructed their own shelter. II. Nobody understands the entire process of producing even the simplest of products in a modern economy, like a lead pencil. III. The collapse of communism and the opening of the Chinese economy to the rest of the world have increased the division of knowledge, leading to increased world output. a. I only b. III only *c. II and III only d. I, II, and III 2531. Many universities employ graduate students to teach introductory undergraduate courses, even though full professors at these universities have more experience and could potentially teach these courses better. Which of the following best explains why universities choose to utilize graduate students instead of full professors to teach their introductory courses? a. Graduate students are cheaper. *b. The opportunity cost of teaching an introductory course is higher for full professors than for graduate students. c. The opportunity cost of teaching an introductory course is higher for graduate students than for full professors. d. Introductory classes are the best place for graduate students to build their teaching skills. 2532. Which of the following situations would lead to more starvation? *a. a world where everyone grows his or her own food and there is no trade b. a world with trade and lots of specialization c. a world with immense division of knowledge d. a world where only some people specialize in food and everyone else produces something else 2533. Which of the scenarios below best displays how international trade allows for specialization? a. You are better at mowing lawns than your neighbor who is better at gardening. b. Truck drivers stay awake on long routes by drinking Colombian coffee. *c. The United States and Canada can both produce lumber, but the U.S. buys lumber from Canada because it has a greater yield per acre. d. Cuba does not have a comparative advantage in producing antibiotics, but due to economic sanctions, relies on its own supply of medicines. 2534. The main reason why specialization can raise productivity is that: *a. knowledge in human brains is limited. b. some persons have more knowledge than others. c. it is always good to know less than more. d. it is impossible to learn anything well. 2535. Knowledge increases ____________ and specialization __________ total output. a. education; increases *b. productivity; increases c. perception; increases d. economies of scale; decreases 2536. Economic growth in the modern era is primarily due to the creation of new: a. inventions. b. money. c. nations. *d. knowledge. 2537. Specialization and trade: a. increase the costs of production because of decreased output. *b. decrease the per-unit costs of production because of economies of scale associated with large-scale production. c. create diseconomies of scale, raising the per-unit costs of production. d. only work within countries, not across countries. 2538. Why is specialization so advantageous to trade? I. Through specialization, people and firms can achieve economies of scale. II. Through specialization, people and firms can use specialized machinery and techniques. III. Trade exists only between people and firms that have complete specialization in the goods they are best at producing. a. I only b. I, II, and III c. I and III only *d. I and II only 2539. The United States and the European Union are groups of semi-independent states that have come together under an agreement whereby resources can travel freely across borders and a common currency is in use. Which of the following statements best explains how this allows for the achievement of economies of scale? a. Each state or country can now target larger markets and can thus earn more export revenue. b. States and countries no longer have to worry about borders impeding trade. *c. Each state or country can adopt large-scale production techniques that allow lower per unit costs of production. d. The removal of trade borders and a common currency enhances trade between member states. 2540. Why does specialization become more profitable on a larger scale? I. Large firms are more profitable than small firms. II. Cost efficiencies become possible when the production scale is significantly large relative to the cost of the machines being used. III. Large-scale production justifies the acquisition of more knowledge on a specific activity. a. I and II only b. I, II, and III c. I and III only *d. II and III only 2541. The benefits of economies of scale and increased competition to an economy include: I. lower unit costs. II. lower consumer prices. III. lower output levels. *a. I and II only b. II and III only c. I and III only d. I, II, and III 2542. Absolute advantage derives from which of the following? *a. the lowest cost production b. the most suitable climate c. the least expensive labor force d. the best educated labor force 2543. Utilizing comparative advantage can best be exemplified as: a. your lawyer word-processing her own legal briefs. b. the CEO of Microsoft programming his own computer. c. the president of your university teaching a class again. *d. a world-renowned chef hiring someone to cook meals for his family. 2544. Which of the following best describes the principle of comparative advantage? a. Some people can produce the same good better than other producers can. b. Someone has the ability to produce the same good using fewer inputs than another producer. *c. Someone has the ability to produce the same good for the lowest opportunity cost. d. To produce more of one good, people have to produce less of another good. 2545. Jesse is good at math and excellent at making friends and Addae is equally good at both. Mathematically and socially challenged Jordan wants to hire tutors to help in each area. Who should tutor Jordan in which area to maximize Jordan's college experience? a. Jesse and Addae should tutor Jordan in both math and social skills. b. Jesse should teach math and Addae should teach how to make friends. c. Jesse and Addae should both teach how to make friends. *d. Jesse should teach how to make friends and Addae should teach math. 2546. A country has an absolute advantage in production if: *a. it can produce the same good using fewer inputs than another country. b. it can produce a good using fewer inputs than it takes another country to produce a different good. c. other countries can produce the same good using fewer inputs. d. it has the lowest opportunity cost of producing a good. 2547. To benefit from trade, a person should: a. specialize in an activity for which she has an absolute advantage. *b. specialize in an activity for which she has a comparative advantage. c. do everything she possibly can. d. do nothing at all. 2548. The concept of comparative advantage implies that: a. there are winners and losers when people trade without specializing. b. people have to be self-sufficient. *c. people can benefit from specializing and trading with each other. d. only those people who are productive benefit from trade. 2549. According to the textbook, the reason why Martha Stewart does not do her own ironing is that: a. she has never learned how to iron. b. running her business enterprises just do not leave her enough time. c. she does not have any real interest in ironing. *d. it costs her more to do her own ironing than to pay someone to iron. 2550. Which of the following best explains the term specialization with respect to trade? *a. Specialization occurs when a people concentrate their productive resources on the goods and services they can produce most efficiently. b. Specialization occurs when one person can produce more of a particular good than another person. c. Specialization refers to the absolute advantage that a person enjoys in the production of goods and services. d. Specialization refers to the ability of a person to produce more of a good than his or her trading partners. 2551. Owen Wilson is an actor who has acted in many action comedy films. In contrast, Tom Cruise has acted in many serious action films. How might the theory of specialization be applied to them? a. Owen Wilson has fully specialized in action comedy movies while Tom Cruise has fully specialized in serious action movies. b. Due to filmography protectionism, Owen Wilson is unable to secure serious action roles, and Tom Cruise is unable to secure action comedy roles. *c. Casting directors see Owen Wilson as relatively better at action comedy roles and Tom Cruise as relatively better at serious action roles and cast them accordingly. d. All of these statements are correct. 2552. Who wrote, “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy”? a. Richard Nixon b. Dr. Spock *c. Adam Smith d. David Ricardo 2553. The ability of one producer to produce one good or service using fewer inputs than another producer is: a. comparative advantage. *b. absolute advantage. c. opportunity cost. d. competition. 2554. Suppose a famous baseball player, Alex Rodriguez, hires a high school student to paint his house. Which of the following is most likely TRUE? *a. The opportunity cost of painting a house is higher for Alex Rodriguez than for the high school student. b. The opportunity cost of painting a house is lower for Alex Rodriguez than for the high school student. c. The opportunity cost of painting a house is the same for Alex Rodriguez as for the high school student. d. The opportunity cost of painting a house is zero for Alex Rodriguez and is negative for the high school student. 2555. A producer has a comparative advantage over other producers if his production of the good involves: a. more inputs. b. fewer inputs. c. a higher opportunity cost. *d. a lower opportunity cost. 2556. Table: iPhone and iPod Production One iPhone One iPod Canadian labor units 3 4 United States labor 2 2 units Reference: Ref 2-1 (Table: iPhone and iPod Production) According to the table on iPhone and iPod Production, which of the following is TRUE? a. Canada has an absolute advantage in producing both iPhones and iPods. *b. The United States has an absolute advantage in producing both iPhones and iPods. c. Canada has an absolute advantage in producing iPhones, and the United States has an absolute advantage in producing iPods. d. The United States has an absolute advantage in producing iPhones, and Canada has an absolute advantage in producing iPods. 2557. Table: iPhone and iPod Production One iPhone One iPod Canadian labor units 3 4 United States labor 2 2 units Reference: Ref 2-1 (Table: iPhone and iPod Production) According to the table on iPhone and iPod Production, the opportunity cost of producing one iPhone is: a. 4/3 of one iPod for Canada, and two iPods for the United States. b. two iPods for Canada, and four iPods for the United States. *c. 3/4 of one iPod for Canada, and one iPod for the United States. d. one iPod for Canada, and 3/4 of one iPod for the United States. 2558. Table: iPhone and iPod Production One iPhone One iPod Canadian labor units 3 4 United States labor 2 2 units Reference: Ref 2-1 (Table: iPhone and iPod Production) According to the table on iPhone and iPod Production, which of the following is TRUE about Canadian and U.S. comparative advantages? a. Canada has a comparative advantage in producing both iPhones and iPods. b. The United States has a comparative advantage in producing both iPhones and iPods. *c. Canada has a comparative advantage in producing iPhones, and the United States has a comparative advantage in producing iPods. d. Canada has a comparative advantage in producing iPods, and the United States has a comparative advantage in producing iPhones. 2559. According to the theory of comparative advantage, a country should specialize in producing a good that involves: a. more inputs than those in other countries. b. fewer inputs than those in other countries. c. a higher opportunity cost than that of other countries. *d. a lower opportunity cost than that of other countries. 2560. Suppose France can produce four phones or three computers with one unit of labor, and Sweden can produce one phone or two computers with one unit of labor. If France can trade only with Sweden, then the theory of comparative advantage suggests that: *a. France should specialize in producing phones and import computers from Sweden. b. France should specialize in producing computers and import phones from Sweden. c. France should produce both phones and computers, and import nothing from Sweden. d. France should import both phones and computers from Sweden. 2561. According to the theory of comparative advantage: *a. every country can produce some good with a lower opportunity cost. b. every country should produce goods that involve high opportunity costs. c. some countries have a comparative advantage in producing every good. d. some countries should import every good from other countries. 2562. Which of the following statements shows how absolute advantage can be distinguished from comparative advantage? I. Absolute advantage refers to the ability to produce a good using fewer inputs, while comparative advantage is based on the monthly amount. II. Absolute advantage is based on the yearly production amount that a country can produce, while comparative advantage is based on the monthly production amount. III. Absolute advantage refers to the ability to produce a larger amount of goods with the same number of inputs, whereas comparative advantage refers to the ability to have the lowest opportunity cost of production. a. I and III only b. II and III only c. I, II, and III *d. III only 2563. The real cost of producing a good is: a. the dollar cost of inputs used to make the item. *b. the opportunity cost of producing the good. c. the resources that were used to make the good. d. the dollar amount it costs to sell the good. 2564. Comparative advantage is determined by which of the following? a. efficiency b. bargaining power *c. opportunity cost d. productivity 2565. The theory of comparative advantage is: a. rarely relevant for identifying whether gains from trade can be obtained. *b. always relevant for identifying whether gains from trade can be obtained. c. not true for nations, though it may be true for individuals. d. true for nations, but is not true for business or individuals. 2566. Figure: PPF Goods X & Y Reference: Ref 2-2 (Figure: PPF Goods X & Y) Refer to the figure. Which of the points representing various consumption possibilities for the country portrayed above is only attainable through foreign trade? a. Point A b. Point B *c. Point C 2567. Figure: PPF Goods X & Y Reference: Ref 2-2 (Figure: PPF Goods X & Y) Refer to the figure. Point A represents an allocation of resources that is: a. efficient. *b. inefficient. c. impossible. d. the result of trade. 2568. Suppose a country without any international trade opens its borders to international trade. How will its location on its production possibility frontier change? a. The country moves from inside the PPF to on the PPF. b. The country moves from on the PPF to beyond the PPF. *c. The country moves along the PPF toward its comparative advantage. d. The country moves along the PPF away from its comparative advantage. 2569. Figure: PPF Nickel & Textiles Reference: Ref 2-3 (Figure: PPF Nickel & Textiles) Refer to the figure. What is the maximum amount of nickel China can produce? a. 10 tons *b. 8 tons c. 6 tons d. 4 tons 2570. Figure: PPF Nickel & Textiles Reference: Ref 2-3 (Figure: PPF Nickel & Textiles) Refer to the figure. What is the maximum amount of textiles China can produce? a. 10 tons *b. 8 tons c. 6 tons d. 4 tons 2571. Figure: PPF Nickel & Textiles Reference: Ref 2-3 (Figure: PPF Nickel & Textiles) Refer to the figure. How many tons of textiles does Australia give up to produce one ton of nickel? *a. 1/3 b. 1/2 c. 2 d. 3 2572. The slope of the production possibilities frontier at a point indicates ________. a. the preferences of a country b. a country's total gains from trade *c. a country's opportunity cost of production d. a country's trade balance 2573. The production possibility frontier shows: a. how society can produce more of one good without giving up the production of another good. b. what people can consume given different combinations of goods produced. *c. the combinations of output that an economy can produce given its productivity and inputs. d. the types of goods and services that society should produce to satisfy social interest. 2574. On a production possibilities frontier a trade-off can be illustrated as: a. an outward shift. b. an inward shift. c. a movement from a point inside the frontier to one on the frontier. *d. a movement along the frontier itself. 2575. A fundamental idea behind the production possibilities frontier is: a. the idea of absolute advantage. *b. the presence of trade-offs in production. c. that economic growth is unlimited. d. that incentives matter. 2576. Which of the following is NOT true regarding the production possibilities frontier (PPF)? a. The PPF shows the combination of goods that a country can produce given its current productivity and supply of resources. b. The PPF illustrates the trade-offs that exist in the production of goods. *c. The PPF shows that gains from trade are maximized when countries produce those goods for which they have the absolute advantage in production. d. The PPF illustrates the fundamental ideas of scarcity and opportunity cost. 2577. The production possibilities frontier shows: *a. the combinations of outputs a country can produce given its resources and productivity. b. the combinations of inputs that a country has given its outputs and productivity. c. the combinations of outputs and resources that a country possesses given its productivity. d. the maximum level of a country's productivity given its resources and outputs. 2578. A country has a comparative advantage in a good if: a. it can produce more of that good than any other country. b. it does not have an absolute advantage in that good. *c. it has the lowest opportunity cost of producing that good. d. no other country is willing to buy that good from it. 2579. Traders should specialize in the good in which: *a. they have the lowest opportunity cost. b. they have an absolute advantage. c. their trading partner has the lowest opportunity cost. d. they do not have an absolute advantage. 2580. Suppose the United States is more productive than China at producing both T-shirts and cell phones. The theory of comparative advantage suggests that consumption in both countries will: a. increase if the United States produces both goods. *b. increase if each country produces the good for which it has the lowest opportunity cost. c. not change if China produces either T-shirts or cell phones. d. remain the same since nothing can be done to increase production in the two countries. 2581. The opportunity cost of producing a particular good refers to: *a. how much of something else must be given up to produce one additional unit of the good. b. how much of a good can be produced with the existing technology and resources. c. the total cost of production, including wages, for all units of the good. d. the marginal cost of production in order to produce one additional unit of the good. 2582. Anita is a wonderful baker and can bake 10 cakes in a day, but then has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John can make equally delicious cakes and cookies but can only make seven cakes or 100 cookies in a day. Based on this information, which of the following statements is true? a. Anita has the comparative advantage in the production of cakes. *b. John has the comparative advantage in the production of cakes. c. John has the absolute advantage in the production of cookies. d. Anita has the comparative advantage in the production of both cakes and cookies. 2583. Anita is a wonderful baker and can bake 10 cakes in a day, but then has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John can make equally delicious cakes and cookies but can only make seven cakes or 100 cookies in a day. Based on this information, which of the following statements is true? a. Anita should split her time between cakes and cookies. John should bake cakes. b. Anita should bake cakes and John should bake cookies. c. Anita and John should split their time equally between cakes and cookies. *d. Anita should bake cookies and John should bake cakes. 2584. Figure: PPF Mexico & U.S. Reference: Ref 2-4 (Figure: PPF Mexico & U.S.) Use the figure in which both Mexico and the United States each have 24 units of labor. The opportunity costs of producing one computer are: *a. six shirts for Mexico and one shirt for the United States. b. 1/6 of a shirt for both Mexico and the United States. c. one shirt for Mexico and 1/6 of a shirt for the United States. d. six shirts for both Mexico and the United States. 2585. Figure: PPF Mexico & U.S. Reference: Ref 2-4 (Figure: PPF Mexico & U.S.) Use the figure in which both Mexico and the United States each have 24 units of labor. The opportunity costs of producing one shirt are: a. one computer for Mexico and 1/6 of a computer for the United States. *b. 1/6 of a computer for Mexico and one computer for United States. c. one computer for both Mexico and the United States. d. 1/6 of computer for both Mexico and the United States. 2586. Figure: PPF Mexico & U.S. Reference: Ref 2-4 (Figure: PPF Mexico & U.S.) Use the above figure in which both Mexico and the United States each have 24 units of labor. Mexico has a comparative advantage in ______ and the United States has a comparative advantage in ______. a. computers; shirts *b. shirts; computers c. computers; computers d. shirts; shirts 2587. Table: Production Possibilities for the United States and Mexico Potatoes (millions of Corn (millions of tons) tons) United States 50 10 Mexico 40 5 Reference: Ref 2-5 (Table: Production Possibilities for the United States and Mexico) According to the table on Production Possibilities for the United States and Mexico, Mexico has an absolute advantage in ________ and a comparative advantage in _________. *a. neither good; corn b. corn; potatoes c. potatoes; corn d. neither good; potatoes 2588. Table: Production Possibilities for the United States and Mexico Potatoes (millions of Corn (millions of tons) tons) United States 50 10 Mexico 40 5 Reference: Ref 2-5 (Table: Production Possibilities for the United States and Mexico) According to the table on Production Possibilities for the United States and Mexico, the United States has an absolute advantage in ________ and a comparative advantage in _________. a. both goods; corn *b. both goods; potatoes c. potatoes; corn d. nothing; potatoes 2589. Table: Production Possibilities for the United States and Mexico Potatoes (millions of Corn (millions of tons) tons) United States 50 10 Mexico 40 5 Reference: Ref 2-5 (Table: Production Possibilities for the United States and Mexico) According to the table on Production Possibilities for the United States and Mexico, Mexico's opportunity cost of producing each ton of potatoes is ______, while the United States' opportunity cost of producing each ton of potatoes is ______. a. 0.125 tons of potatoes; 0.2 tons of potatoes b. eight tons of corn; 0.2 tons of potatoes *c. eight tons of corn; five tons of corn d. five tons of corn; 0.2 tons of corn 2590. Table: Production Possibilities for the United States and Mexico Potatoes (millions of Corn (millions of tons) tons) United States 50 10 Mexico 40 5 Reference: Ref 2-5 (Table: Production Possibilities for the United States and Mexico) Using the table on Production Possibilities for the United States and Mexico, assume each country specializes in the good for which it has a comparative advantage. Which of the following answers identifies a trade price that both countries would find acceptable? (Units are in tons.) a. 0.2 potato for one corn < Trade price < five corns for one potato b. 0.125 potato for one corn, < Trade price < eight potatoes for one corn *c. five corns for one potato < Trade price < eight corns for one potato d. 0.125 potato for one corn, < Trade price < five potatoes for one corn 2591. Table: Production Possibilities for Kenya and Sri Lanka Tea (millions of Beans (millions of tons) tons) Kenya 100 200 Sri Lanka 150 450 Reference: Ref 2-6 (Table: Production Possibilities for Kenya and Sri Lanka) According to the table on Production Possibilities for Kenya and Sri Lanka, Kenya's opportunity cost of producing beans is ________ while Sri Lanka's opportunity cost of producing beans is _________. a. 0.5 teas; 0.33 teas b. two teas; 0.33 teas c. 200 teas; 450 teas *d. two teas; three teas 2592. Table: Production Possibilities for Kenya and Sri Lanka Tea (millions of Beans (millions of tons) tons) Kenya 100 200 Sri Lanka 150 450 Reference: Ref 2-6 (Table: Production Possibilities for Kenya and Sri Lanka) According to the table on Production Possibilities for Kenya and Sri Lanka, Kenya should produce ________ and Sri Lanka should produce __________. *a. beans; tea b. tea; beans c. both goods; neither good d. neither good; both goods 2593. Table: Production Possibilities for Kenya and Sri Lanka Tea (millions of Beans (millions of tons) tons) Kenya 100 200 Sri Lanka 150 450 Reference: Ref 2-6 (Table: Production Possibilities for Kenya and Sri Lanka) According to the table on Production Possibilities for Kenya and Sri Lanka, which of the following answers identifies a trade price that both countries would find acceptable? (Units are in tons.) a. 0.5 bean for one tea < Trade price < two teas for one bean b. 0.5 bean for one tea < Trade price < three beans for one tea *c. two teas for one bean < Trade price < three teas for one bean d. 0.3 bean for one tea < Trade price < two beans for one tea 2594. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make One Pounds produced in 40 Pound of: hours: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 Reference: Ref 2-7 (Table: Production Possibilities for Italy and Belgium) According to the table on Production Possibilities for Italy and Belgium, the opportunity cost of 1 pound of linen for Italy is: a. 10 pounds of pasta. b. 1/4 pound of pasta c. 4 pounds of pasta *d. 2 1/2 pounds of pasta 2595. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make One Pounds produced in 40 Pound of: hours: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 Reference: Ref 2-7 (Table: Production Possibilities for Italy and Belgium) According to the table on Production Possibilities for Italy and Belgium, the opportunity cost of 1 pound of linen for Belgium is: a. 5 pounds of pasta. b. 4 pounds of pasta. *c. 1/4 pound of pasta. d. 20 pound of pasta. 2596. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make One Pounds produced in 40 Pound of: hours: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 Reference: Ref 2-7 (Table: Production Possibilities for Italy and Belgium) According to the table on Production Possibilities for Italy and Belgium, the opportunity cost of 1 pound of pasta for Italy is: *a. 2/5 pound of linen. b. 4 pounds of linen. c. 1/4 pound of linen. d. 2 hours of labor. 2597. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make One Pounds produced in 40 Pound of: hours: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 Reference: Ref 2-7 (Table: Production Possibilities for Italy and Belgium) According to the table on Production Possibilities for Italy and Belgium, the opportunity cost of 1 pound of pasta for Belgium is: a. 5 pounds of linen. b. 20 pounds of linen. c. 1/4 pound of linen. *d. 4 pounds of linen. 2598. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make One Pounds produced in 40 Pound of: hours: Linen Pasta Linen Pasta Italy Belgium 10 2 4 8 4 20 10 5 Reference: Ref 2-7 (Table: Production Possibilities for Italy and Belgium) According to the table on Production Possibilities for Italy and Belgium, Italy has comparative advantage in: a. both goods, while Belgium has comparative advantage in neither good. b. linen, while Belgium has comparative advantage in pasta. *c. pasta, while Belgium has comparative advantage in linen. d. neither good, while Belgium has comparative advantage in both goods. 2599. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make One Pounds produced in 40 Pound of: hours: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 Reference: Ref 2-7 (Table: Production Possibilities for Italy and Belgium) According to the table on Production Possibilities for Italy and Belgium, Italy and Belgium both could benefit if Italy were to specialize in: a. neither good, and Belgium were to specialize in both goods. b. both goods, and Belgium were to specialize in neither good. *c. pasta, and Belgium were to specialize in linen. d. linen, and Belgium were to specialize in pasta. 2600. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make One Pounds produced in 40 Pound of: hours: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 Reference: Ref 2-7 (Table: Production Possibilities for Italy and Belgium) According to the table on Production Possibilities for Italy and Belgium, Belgium should specialize in linen production because it: a. has an absolute advantage in producing linen and pasta. b. can do so at a greater opportunity cost. *c. has a comparative advantage in producing linen. d. already can produce enough pasta to meet demand. 2601. Table: Production in the United States and Germany Labor units required to produce: One Clock One Sofa United States 2 5 Germany 3 9 Reference: Ref 2-8 (Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______. a. two clocks; three clocks b. 10 clocks; 27 clocks c. 0.4 clocks; 0.33 clocks *d. 2.5 clocks; three clocks 2602. Table: Production in the United States and Germany Labor units required to produce: One Clock One Sofa United States 2 5 Germany 3 9 Reference: Ref 2-8 (Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one clock in the United States is _________, and the opportunity cost of producing one clock in Germany is _______. a. five sofas; nine sofas *b. 0.4 sofas; 0.33 sofa c. five clocks; nine clocks d. 2.5 clocks; three clocks 2603. Table: Production in the United States and Germany Labor units required to produce: One Clock One Sofa United States 2 5 Germany 3 9 Reference: Ref 2-8 (Table: Production in the United States and Germany) According to the table, which of the following statements is true? a. The United States has a comparative advantage in clocks. b. Germany has an absolute advantage in clocks and sofas. *c. The United States has a comparative advantage in sofas. d. The United States has a comparative advantage in clocks and sofas. 2604. (Table: Production in France and Italy) According to the table, France should specialize in producing ________, and Italy should specialize in producing _______. Table: Production in France and Italy Labor units required to produce: One Bag of Truffles One Pair of Wool Socks France 1 1 Italy 2 4 a. truffles; wool socks *b. wool socks; truffles c. truffles; truffles d. wool socks; wool socks 2605. In Colombia, it takes three workers to produce two pounds of coffee. In Mexico, it takes four workers to produce one pound of coffee. Therefore: a. Colombia has a comparative advantage in the production of coffee. b. Mexico has a comparative advantage in the production of coffee. c. in Colombia, the opportunity cost of producing one pound of coffee is two-thirds. *d. Colombia has an absolute advantage in the production of coffee. 2606. Which of the following statements is TRUE? I. It is virtually impossible for a country to be the low-cost producer of all goods and services. II. The benefits of trade depend on absolute advantage, not comparative advantage. III. A country could have a comparative advantage in producing everything. a. I and II only *b. I only c. II only d. III only 2607. Figure: Countries A & B Reference: Ref 2-9 (Figure: Countries A & B) Refer to the figure. According to the diagram about countries A & B, which of the following statements is correct? I. Country A has a comparative advantage in Good Y. II. Country B has an absolute advantage in both goods. III. Country B has a comparative advantage in Good X. a. I and II only b. I and III only c. II and III only *d. I, II, and III 2608. Figure: Countries A & B Reference: Ref 2-9 (Figure: Countries A & B) Refer to the figure regarding countries A & B. The opportunity cost of producing Good X in Country A is _____ and in Country B it is _____ meaning that Country _____ should specialize in producing Good X and Country _____ in Good Y. *a. 2Y; 1Y; B; A b. 1/2Y; 1Y; B; A c. 1/2Y; 1Y; A; B d. 2Y; 1Y; A; B 2609. Figure: Countries A & B Reference: Ref 2-9 (Figure: Countries A & B) Refer to the figure regarding countries A & B. If both countries depicted fully allocate all of their labor towards the good in which they have a comparative advantage, the combined production for the two countries would be _______ units of Good X, and _______ units of Good Y. *a. 100; 80 b. 70; 90 c. 40; 100 d. 100; 100 2610. Figure: Countries A & B Reference: Ref 2-9 (Figure: Countries A & B) Refer to the figure regarding countries A & B. Assume that each country begins by allocating half its labor force to the production of each good. Through trade with each other, each country could increase its consumption of both goods if Country A moved part of its labor force to the production of Good _____ and Country B moved part of its labor force to the production of Good _____. a. X; X b. X; Y c. Y; Y *d. Y; X 2611. Figure: Countries A & B Reference: Ref 2-9 (Figure: Countries A & B) Refer to the figure regarding countries A & B. If each country allocated half of its labor force to the production of each good before trade and were to then each specialize in their comparative advantage and allocate 75 percent of its labor force to the production of that good, world production of Good X would change by _____ and the production of Good Y by _____. a. 40; 50 b. 25; –5 *c. 15; –5 d. 50; 40 2612. Which of the following best characterizes the relationship between the parties to a trade and the gains from trade? *a. Gains from trade are fueled by differences in preferences and differences in opportunity costs of production. b. Gains from trade are fueled by differences in preferences only. c. Gains from trade are fueled by differences in opportunity costs of production only. d. Gains from trade are greatest when there are no differences between the two parties to trade. 2613. Two countries that specialize in their comparative advantage and trade with each other will increase: I. wages in both countries. II. total output in both countries. III. living standards in both countries. a. I and II only b. II and III only c. II only *d. I, II, and III 2614. With 24 units of labor and no trade Brazil produces and consumes eight units of sugar cane and two iPods. Sugar cane costs $50/unit, and iPods cost $200. After specialization and trade, Brazil consumes 8 units of sugar cane and four iPods. What are wages in Brazil? *a. $33 without trade and $50 with trade b. $50 without trade and $75 with trade c. $50 without trade and $33 with trade d. $33 without trade and $75 with trade 2615. With 24 units of labor and no trade Brazil produces and consumes eight units of sugar cane and two iPods. Sugar cane costs $50/unit, and iPods cost $200. After specialization and trade, Brazil consumes eight units of sugar cane and four iPods. What are wages in Brazil? *a. $33 without trade and $50 with trade b. $50 without trade and $75 with trade c. $50 without trade and $33 with trade d. $33 without trade and $75 with trade 2616. When a rich country that has absolute advantages in all products begins trading with a poor country the wages in: a. the rich country will go down and the wages in the poor country will go up. *b. both countries will go up. c. both countries will go down. d. the rich country will go up and the wages in the poor country will go down. 2617. Workers in high-productivity countries fear trade because they think they cannot compete with workers in low-productivity countries. Workers in low-productivity countries fear trade because they think they cannot compete with workers in high-productivity countries. Which set of fears is justified? a. The fears of workers in high-productivity countries are justified, but the fears of workers in low-productivity countries are not. b. The fears of workers in low-productivity countries are justified, but the fears of workers in high-productivity countries are not. c. Both sets of fears are justified. *d. Neither set of fears is justified. 2618. According to the theory of trade, if two countries trade with each other: a. consumption in one country will fall and wages will also fall. b. wage costs will remain low if both countries specialize in producing the goods for which they have a comparative advantage. *c. trade raises the labor productivity and wages of both countries. d. wages in the country with a comparative advantage will rise and wages in the country without a comparative advantage will fall. 2619. Trade tends to: a. increase wages in developed countries, but decrease wages in lesser-developed countries. b. decrease wages in developed countries, but increase wages in lesser-developed countries. c. decrease wages in all countries. *d. increase wages in all countries. 2620. Wage rates are primarily based on the: a. level of comparative advantage. b. extent to which the country is involved in trade with other countries. *c. productivity of labor. d. institutional factors present. 2621. Which of the following is TRUE regarding trade and wages? a. Trade can increase wages by increasing the productivity of labor. b. Trade helps to equalize wages between high- and low-productivity countries. *c. Low-productivity nations have lower wages than high-productivity nations whether they trade or not. d. Trade directly increases productivity, which in turn increases wages. 2622. Which of the following statements is TRUE? a. Trade makes workers in high productivity countries less productive. b. Trade causes workers in low-wage countries receive an even lower wage. *c. Specialization and trade raise wages in both countries party to the trade. d. Specialization and trade raise productivity but not wages. 2623. If labor in China is less productive than labor in the United States in all areas of production, then: *a. both the United States and China can benefit from trade. b. neither nation can benefit from trade. c. China can benefit from trade but not the United States. d. the United States can benefit from trade but not China 2624. According to the theory of comparative advantage, the reason wages are lower in China than in the United States is: a. the higher cost of living in the United States. *b. lower productivity in China. c. the lower opportunity cost to work in China. d. more trade restrictions in the United States. 2625. Angela and Ed are married. Angela can do $40 worth of household chores per hour, and Ed can do $15 worth of household chores per hour. In the labor market, Ed can earn $30/hour and Angela can earn $40/hour. The theory of comparative advantage suggests that: a. Ed should specialize in household production and Angela should specialize in market work. *b. Angela should specialize in household production and Ed should specialize in market work. c. Angela should specialize in both household production and market work. d. Ed should specialize in both household production and market work. 2626. Which of the following statements is TRUE? a. Only a high-wage country can benefit by trading with a low-wage country. b. A high-wage country cannot benefit by trading with a low-wage country. *c. Trade raises the wages of workers in low- and high-wage countries. d. There is an inverse relationship between productivity and wages. 2627. The principles of comparative advantage, specialization, and trade apply to: I. individuals. II. communities. III. regions. IV. nations. a. I and II only b. I, II, and III only c. II, III, and IV only *d. I, II, III, and IV 2628. According to Adam Smith: a. trade is a way for rich people to exploit poor people. b. trade within a nation benefits people but international trade does not. c. trade does not benefit anyone, either at home or abroad. *d. people buy goods for which they have higher opportunity costs than others. 2629. Adam Smith said, “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor.” Which of the following concepts best illustrates what Smith wanted to convey in this statement? *a. comparative advantage b. incentives matter c. scarcity d. production possibilities frontier 2630. Adam Smith advocated the benefits of: a. protectionism. b. trade tariffs over trade quotas. *c. international trade. d. comparative advantage. 2631. Which of the following has NOT played a significant role in recent developments leading to increased trade and globalization? a. lower transportations costs *b. theory of absolute advantage c. integration of world markets d. increased communication speed 2632. The development of shipping containers enabled companies to move freight quickly between ships, trucks, and trains by loading a single large container with many different goods and then moving the container. Before the container, freight had to be loaded and unloaded one palette, barrel, or box at a time. What impact did the shipping container have on globalization? Why? a. an increase, because it allowed faster spread of communication *b. an increase, because it decreased transportation costs c. a decrease, because it caused many dock workers to lose their job d. a decrease, because it caused the amount of human cooperation to fall 2633. Globalization is best described as: a. a new process that grows intermittently. b. an old process that has consistently grown. *c. an old process that has grown intermittently. d. an old process that has declined over time. 2634. Tutoring Web sites like GrowingStars.com: a. have been evaluated and endorsed by the textbook authors. b. are possible because Americans have a comparative advantage in tutoring. *c. illustrate how the Internet can increase globalization. d. were first developed during the Roman Empire. 2635. The trade networks of the Roman Empire: *a. fell apart in the Medieval era, leading to the Dark Ages. b. were not of great importance even before the Dark Ages. c. show that globalization is a new phenomenon. d. did not facilitate the transport of goods from different parts of the world. 2636. Increased trade has led to: *a. increased globalization of world economies. b. a more equal distribution of wealth across countries. c. a decline in human cooperation. d. more specialization and less globalization. 2637. Which of the following statements is TRUE? I. If a country does not trade, its knowledge is approximately equal to that used by one brain. II. The basic idea of trade is to buy the things that would cost you a lot to make, and sell the things that you can make at a low opportunity cost. III. Trade leads to specialization, which in turn increases in productivity. a. II and III only b. III only c. II only *d. I, II, and III 2638. If it was impossible to have a comparative advantage, there would be no gains from trade. a. True *b. False 2639. Trade refers to the exchange of goods or services between two parties. a. True *b. False 2640. Trade refers to the exchange of goods and services between at least two different nations. a. True *b. False 2641. Trade works best when it is between people who share similar preferences. a. True *b. False 2642. Trade makes people better off only when they all have the same preferences. a. True *b. False 2643. Trades are considered zero-sum transactions because if one person gains, the other must lose an equal amount. a. True *b. False 2644. Large cities should have more professional closet organizers than small cities. *a. True b. False 2645. The human brain has no limits, so the division of knowledge decreases the total knowledge in society. a. True *b. False 2646. Trade increases productivity because trade allows people to specialize. a. True *b. False 2647. Although trade increases productivity, it decreases society's collective knowledge because each person specializes in a very limited number of things. a. True *b. False 2648. Without trade, specialization is impossible. *a. True b. False 2649. In a world with trade, no one can afford to specialize. a. True *b. False 2650. If you have a comparative advantage in washing dishes, then you also have an absolute advantage in washing dishes. a. True *b. False 2651. When comparing two countries with two goods each, if one country has a comparative advantage in one good, the other country will have a comparative advantage in the other good. *a. True b. False 2652. Comparative advantage occurs when an individual's opportunity cost for producing the same good or service is lower than that of another individual. *a. True b. False 2653. Countries can benefit from trading with one another because trade allows each country to specialize in doing what it does best. *a. True b. False 2654. If a country's domestic price of a good is lower than the world price, then that country has a comparative advantage in producing that good. *a. True b. False 2655. Trading increases the amount a single country can produce. a. True *b. False 2656. The production possibilities frontier shows all the combinations of goods that a country can produce given its productivity and supply of inputs. a. True *b. False 2657. The production possibilities frontier has a negative slope and illustrates the notion of trade-offs: As more units of one good are produced, fewer resources are left to produce the other good. *a. True b. False 2658. A production possibilities frontier shows the cost of the different goods that a country can produce. a. True *b. False 2659. According to the theory of comparative advantage, a country specializes in producing what it can produce for a lower opportunity cost than another country. *a. True b. False 2660. Everyone, from the most to the least skilled to the most and least educated, can benefit from trade. *a. True b. False 2661. A country has a comparative advantage in producing one good if its labor cost is lower than that for other countries. a. True *b. False 2662. If a country has an absolute advantage in both items when compared to another country, there can never be any benefit for them to trade. a. True *b. False 2663. U.S. pharmaceutical companies sell drugs to Kenya, and Kenyan farmers sell flowers to the U.S. This pattern of trade suggests that the U.S. is the low-opportunity-cost producer of drugs and Kenya is the low-opportunity-cost producer of flowers. *a. True b. False 2664. In Spain it takes 10 workers to produce one barrel of wine and four workers to produce one yard of cloth. Thus, the opportunity cost of producing one barrel of wine is 2.5 yards of cloth. *a. True b. False 2665. Trade causes wages in countries with high productivity to increase and wages in countries with low productivity to decrease. a. True *b. False 2666. Specialization in its comparative advantage and trading with other nations benefits a country in terms of its total output, but not individuals when it comes to their wages. a. True *b. False 2667. Specializing in one's comparative advantage and trading with others will make individuals better off, but may not make countries better off. a. True *b. False 2668. Evidence from history shows that when the volume of trade expands, the result is prosperity. *a. True b. False 2669. Globalization is the advance of human cooperation across national boundaries. *a. True b. False 2670. Trade increases competition for domestic producers and results in lower prices of domestic goods. *a. True b. False 2671. What are the three major benefits of trade? Explain briefly. Correct Answer: Trade requires people or countries to specialize. The first benefit of trade comes when people with differing preferences are made better off from their voluntary trades. The second benefit of trade comes from increased productivity as a result of specialization and the division of knowledge. Specialization followed by trade greatly increases productivity. The third benefit of trade comes from taking advantage of differences in opportunity costs. According to the theory of comparative advantage, people or countries can specialize in producing goods that involve the lowest opportunity costs. As a result, everyone can benefit from trade. 2672. Your professor hires a teaching assistant to grade student assignments even though he may do the task faster and perhaps more accurately. How can you explain this behavior using the theory of comparative advantage? Correct Answer: According to the theory of comparative advantage, people specialize in what involves the lowest opportunity cost. The professor can grade student assignments faster so that he has an absolute advantage. However, the opportunity cost of grading student assignments may be higher for the professor than for the teaching assistant, so that the teaching assistant has a comparative advantage in grading assignments. On the other hand, the professor might have comparative advantages in other teaching activities, such as lecturing. So, the reason for the professor to hire a teaching assistant to grade assignments is consistent with the theory of comparative advantage. 2673. In a two-country world of Japan and Korea, suppose Japan can produce 600 radios or 300 TV sets in one day with all its available resources, while Korea can produce 100 radios or 200 TV sets in one day with all its available resources. According to the theory of comparative advantage, what would be the possible gain in this world if the two countries specialize and trade with each other? Correct Answer: For Japan, the opportunity cost of producing one radio is half of one TV set, and the opportunity cost of producing one TV set is two radios. For Korea, the opportunity cost of producing one radio is two TV sets, and the opportunity cost of producing one TV set is half of one radio. Suppose each of the two countries produces 100 TV sets and uses other available resources to produce radios: Japan can produce 400 radios and Korea can produce 50 radios. In this case, without trade the total world production is 450 radios and 200 TV sets. However, because the opportunity cost of producing radios is lower for Japan than for Korea, Japan has a comparative advantage in producing radios. Because the opportunity cost of producing TV sets is lower for Korea than for Japan, Korea has a comparative advantage in producing TV sets. According to the theory of comparative advantage, Japan should specialize in producing radios and import TV sets from Korea, while Korea should specialize in producing TV sets and import radios from Japan. As a result of specialization and trade, the total consumption in this two-country world is 600 radios and 200 TV sets. Compared to the case without trade, there is a gain of 150 radios. 2674. James and Linda must prepare a presentation for their marketing class. As part of their presentation, they must do a marketing plan and prepare 40 PowerPoint slides. It would take James 5 hours to do the required plan and 5 hours to prepare the slides. It would take Linda 6 hours to do the plan and 10 hours to prepare the slides. a. How much time would it take the two to complete the project if they divide the writing of the marketing plan equally and the development of the slides equally? b. How much time would it take the two to complete the project if they use comparative advantage and specialize in writing the marketing plan or preparing slides? c. If James and Linda have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize? Correct Answer: a. If both tasks are divided equally, it will take 5.5 hours to write the marketing plan and 7.5 hours to work on the slides. This is a total of 13 hours of work. b. If Linda specializes in writing the marketing plan and James specializes in preparing slides, it will take 11 hours to complete the project. c. If Linda specializes in working on the marketing plan, her opportunity cost will be $30; hence, Linda would be better off if she paid James any amount less than $30 to do the marketing plan. Since James's opportunity cost of doing the marketing plan is only $25, he would be better off if Linda paid him between $25 and $30 to do the marketing plan. In this case, the total time spent on the project would be 10 hours. 2675. In Narnia, one binky can be produced with two workers and one sippy cup can be produced with 0.25 workers. In Bedrock, one binky can be produced with one worker and one sippy cup can be produced with 0.50 workers. a. What is the opportunity cost of producing one sippy cup in Narnia and in Bedrock? b. Which country has the comparative advantage in sippy cups? c. Suppose that each country has 100 workers and completely specializes in its comparative advantage. How many units of output of sippy cups and binkys will each country produce? d. Before trade, Narnia produces 25 binkys and 200 sippy cups, and Bedrock produces 50 binkys and 100 sippy cups. Show how specialization and free trade can make each country better off than it was before the trade situation. Correct Answer: a. The opportunity cost in Narnia is 0.125 binkys, and the opportunity cost in Bedrock is 0.5 binkys. b. Narnia has the comparative advantage in sippy cups. c. Narnia will produce 400 sippy cups and 0 binkys, and Bedrock will produce 100 binkys and 0 sippy cups. d. If the countries agree to trade 150 sippy cups for 30 binkys, each country will be better off than when they didn't trade. Narnia will consume 250 (400 – 150) sippy cups and 30 binkys, and Bedrock will consume 70 binkys (100 – 30) and 150 sippy cups. 2676. Briefly describe a few activities that a typical student might do on any given day that reflect the effects of globalization. Correct Answer: This answer could of course be personalized, but an example answer might be as follows: Globalization allows us to enjoy goods from around the world, and expand the variety of goods we consume as well as interact more with people from other countries and regions. A student wakes up in the morning to the ring of an alarm clock made in China. That student may then have breakfast that includes Colombian coffee, cereal that uses corn made in the United States, and bananas grown in Honduras. The student wears a shirt that has a “Made in Bangladesh” label. The student then picks up his or her textbooks made with paper that came from trees grown in Canada, and goes to class where the teacher is a visiting instructor from Turkey. In class the student sits between two other students from Iraq and Kenya. Later in the evening, the student unwinds by playing games on a Nintendo Wii made in Japan. Dinner might consist of Indian cuisine, and dessert might be Italian tiramisu. Finally, the student goes back to bed and sleeps under a blanket made in Korea. 2677. (Figure: Demand Curve) Which of the following statements is TRUE regarding the figure? Figure: Demand Curve I. At a price of $6 per unit, consumers are willing and able to buy 10 units. II. The maximum price demanders are willing to pay for 15 units is $3.75 per unit. III. The higher the price, the greater the quantity demanded. IV. At a price of $3.75 per unit, consumers are indifferent between buying 10 and 15 units. a. I only *b. I and II only c. I, II, and III d. I, II, and IV 2678. The law of demand states that: *a. the lower the price, the greater the quantity demanded. b. the higher the price, the higher the quantity demanded. c. the demand curve is upward sloping. d. an increase in income increases the quantity demanded. 2679. Which of the following statements is TRUE? a. When the price of oil is high, consumers will use oil only for its most valuable uses. b. When the price of oil is low, consumers will use oil for both valuable and less valuable uses. c. When the price of oil rises, consumers tend to use oil for uses (for example, transportation) in which there are few substitutes for oil. *d. All of these statements are correct. 2680. Which of the following statements correctly defines a demand curve? a. A demand curve is a function that shows the relationship between prices and the quantity available for sale. b. A demand curve is a function that shows the relationship between prices and their associated quantities supplied. *c. A demand curve is a function that shows the relationship between prices and their associated quantities demanded. d. A demand curve is a function that shows the relationship between quantity demanded and quantity supplied. 2681. Which of the following is TRUE about demand curves? a. Demand curves are negatively sloped. b. Demand curves reflect the law of demand. c. Demand curves are plots of quantities demanded at various prices. *d. All of the answers are correct. 2682. Quantity demanded is: *a. the amount of a good or service that a buyer is able and willing to purchase at a given price. b. the amount of a good or service that a buyer is able and willing to sell at a given price. c. the amount of a good or service that a seller is able and willing to sell at a given price. d. the amount of a good or service that a buyer is able and willing to purchase at various given prices. 2683. (Figure: Demand Curve) Refer to the figure. What is the maximum price per book that buyers are willing to pay for 2,500 books? Figure: Demand Curve a. $60 *b. $45 c. $30 d. $15 2684. (Figure: Willingness to Pay) Refer to the figure. What is the maximum amount that buyers are willing to buy at a price of $45 per book? Figure: Willingness to Pay a. 300 books b. 450 books c. 0 books *d. 100 books 2685. What does the law of demand state? I. There is a negative relationship between price and quantity demanded. II. There is an inverse relationship between price and quantity that buyers are willing and able to purchase. III. There is an inverse relationship between price and demand. a. I and II only b. II and III only c. I and III only *d. I, II, and III 2686. Recall the discussion about the demand for oil in your textbook. Which of the following correctly explains why the demand curve for oil is negatively sloped? As the price of oil rises: a. consumers use oil for more and varied purposes. *b. consumers increasingly use oil only for those purposes without good substitutes. c. consumers have an incentive to use oil more freely. d. more producers are more willing and able to produce oil. 2687. What does the law of demand state? a. As incomes increase, people consume more of all goods. b. The demand for a good increases with the number of consumers in the market. *c. As the price of a good declines, consumers purchase more of that good. d. The supply of a good increases in proportion to the demand for it. 2688. The quantity demanded of a good or service is the amount that: *a. consumers are willing and able to buy at a given price. b. firms are willing to sell during a given time period at a given price. c. a consumer would like to buy but might not be able to afford. d. a consumer needs to consume during a given time period. 2689. Which of the following statements is TRUE? I. Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good or service and its market price. II. Mr. Bill is willing to pay $10 for two pounds of clay. If the market price per pound of clay is $2.50, his consumer surplus is $7.50. III. Total consumer surplus is represented graphically by the area beneath the demand curve and above the market price. a. I only b. II only *c. I and III only d. I, II, and III 2690. (Table: Maximum Willingness to Pay) The table shows four individuals' maximum willingness to pay for one pound of bananas. If the market price of bananas is $0.50/lb, what is the total consumer surplus in the market? Table: Maximum Willingness to Pay Willingness to pay Name for 1 lb of bananas Jill $2.00 Joe 1.25 Jane 0.75 James 0.25 a. $4.00 *b. $2.50 c. $2.75 d. $4.25 2691. Which of the following statements about consumer surplus is incorrect? a. Consumer surplus is the net benefit to consumers from the exchange that occurs in a market. b. Consumer surplus is the gains from trade on the part of the consumer that result from a market transaction. c. Total consumer surplus is the area beneath the demand curve and above the market price. *d. Consumer surplus is the difference between the minimum price the consumer is willing to pay and the market price. 2692. (Table: Excel Company) The table shows the results of Excel Company's market survey. If the market price of Excel computers is $1,200 each, how much total consumer surplus (in $) are the four consumers earning? Table: Excel Company Maximum willingness to pay Consumer for Excel Personal Computers ($) Adam 1,459 Sheera 1,320 Orko 1,201 Juliet 1,165 *a. $380 b. $415 c. $345 d. $5,145 2693. Table: Sweetbrand Consumer Maximum willingness to pay for “Sweetbrand” cheesecakes Frodo $11.65 Sam 17.99 Mary 12.99 Pippin 16.75 Reference: Ref 3-1 (Table: Sweetbrand) The table shows the maximum consumer willingness to pay for “Sweetbrand” cheesecakes. Which of the four consumers receives the most consumer surplus, if the market price of the cheesecakes is $12.50 each? a. Frodo *b. Sam c. Mary d. Pippin 2694. Table: Sweetbrand Consumer Maximum willingness to pay for “Sweetbrand” cheesecakes Frodo $11.65 Sam 17.99 Mary 12.99 Pippin 16.75 Reference: Ref 3-1 (Table: Sweetbrand) The table shows the maximum consumer willingness to pay for “Sweetbrand” cheesecakes. Which of the four consumers receives the smallest consumer surplus, if the market price of the cheesecakes is $12.50 each? a. Frodo b. Sam *c. Mary d. Pippin 2695. If Maria is willing to pay $50 for a sweatshirt, how much consumer surplus does she earn if the market price for sweatshirts is $27.50 each? a. $27.50 b. $50.00 c. $77.50 *d. $22.50 2696. (Figure: Consumer Surplus) Refer to the figure. Calculate the dollar amount of consumer surplus being earned in this market. Figure: Consumer Surplus *a. $4,500 b. $9,000 c. $18,000 d. $450 2697. (Figure: Earned Consumer Surplus) Refer to the figure. The market price of the product is $20 per unit. Calculate the dollar amount of consumer surplus being earned in this market. Figure: Earned Consumer Surplus a. $120,000 *b. $60,000 c. $100,000 d. $80,000 2698. If the university president valued a parking space close to the administration building at $500 and paid $30 for a parking permit, he would receive consumer surplus equal to: a. $30. *b. $470. c. $500. d. $530. 2699. Which of the following are factors that shift the demand curve? a. costs of production, price of the product, and subsidies b. income, population, tastes, and input prices c. expectations, opportunity costs, price of the product *d. price of substitutes, tastes, price of complements 2700. Which of the following does NOT shift the demand curve? *a. changes in the product's price b. changes in income c. changes in population d. changes in tastes and preferences 2701. Which of the following choices contains only factors that would cause a demand curve for a normal good to shift to the right? a. a rise in population, economic growth, a fall in the price of a substitute good b. a rise in preferences for the good, economic growth, and a rise in the price of a complementary good *c. positive expectations for the economy, economic growth, a fall in the price of a complementary good d. a fall in population, economic growth, a rise in tastes and preferences for the product 2702. Which one of the following choices would cause the demand curve for an inferior good to shift to the left? a. a fall in incomes b. a fall in the price of the inferior good *c. a rise in incomes d. a rise in the price of the inferior good 2703. A decrease in income causes demand for a normal good to ________, and an increase in income causes demand for an inferior good to ________. *a. decrease; decrease b. increase; increase c. decrease; increase d. increase; decrease 2704. (Figure: Demand Shift) Which of the following could explain the figure? Figure: Demand Shift *a. Consumer income increases in the market for a normal good. b. Consumer income falls in the market for a normal good. c. Consumer income rises in the market for an inferior good. d. Consumer income falls in the market for a luxury good. 2705. Mario buys eight units of good X when his income is $2,000 a month. When his income increases to $2,700 per month, he buys only six units of good X. For Mario, good X is: a. a normal good. b. an expensive good. *c. an inferior good. d. a useless good. 2706. Assume that spaghetti is an inferior good for most people. As their incomes increase, all other things held constant, the: *a. demand for spaghetti will decrease shifting the demand curve to the left. b. demand for spaghetti will decrease shifting the demand curve to the right. c. demand for spaghetti will increase shifting the demand curve to the left. d. demand for spaghetti will increase shifting the demand curve to the right. 2707. Michael graduates from college and his income increases by $40,000 a year. Other things held constant, he decreases the quantity of pizza he buys. For Michael, pizza is: *a. an inferior good. b. a complement. c. a substitute. d. a normal good. 2708. As the population of elderly in the United States increases: a. the supply and demand curves will both shift rightward. *b. the demand curve for certain products shifts rightward. c. the supply curve will become vertical. d. None of the answers is correct. 2709. Which of the following might happen as a result of an aging population? *a. An increase in the demand for healthcare. b. Advertisers target young people in order to offset the demands of the growing elderly. c. Prescription drug demand will become more horizontal. d. An aging population will move us along age sensitive demand curves. 2710. A local university decides to double its enrollment over the next five years in order to increase tuition revenue. Which of the following would most likely occur in the market for rental housing in the surrounding community? a. a decrease in the price of rental housing *b. an increase in the demand for rental housing c. a decrease in the supply of rental housing d. a population change leads to a change in quantity demanded, not demand 2711. The quantity of DVDs that people plan to buy this month depends on all of the following EXCEPT the: a. price of DVDs. b. price of movies for download. c. population. *d. quantity of DVDs the sellers have stocked. 2712. Coke and Pepsi are substitute soft drinks. Which of the following would cause the demand curve for Pepsi to shift to the left? a. A report emerges that shows that drinking Pepsi helps to promote weight loss. *b. The price of Coke decreases. c. The price of Pepsi rises. d. The cost of making Pepsi rises. 2713. (Figure: Demand Shift) Which of the following factors would cause the change in the figure? Figure: Demand Shift I. an increase in the price of a complement good II. an increase in production costs III. an increase in the price of a substitute good IV. an increase in income for an inferior good a. I and III only b. II and IV only *c. III only d. I, II, and III 2714. If Romaine lettuce and Iceberg lettuce are substitutes, an increase in the price of Romaine lettuce will ______ the demand for Iceberg lettuce. a. reduce *b. increase c. not shift d. decrease 2715. Which of the following are likely to be complements? a. hotdogs and hamburgers *b. books and book-lights c. coffee and tea d. cars and vans 2716. If the price of computers ______, the demand for printers will ______. a. increases; increase b. decreases; decrease c. decreases; not change *d. increases; decrease 2717. Which of the following would cause the demand for hot dog buns to increase? a. a fall in the price of hot dog buns *b. a fall in the price of hot dogs c. a rise in the price of hot dogs d. a rise in the price of hot dog buns 2718. (Figure: Demand Shift) Refer to the figure. Which of the following factors would cause the change in the figure? Figure: Demand Shift I. a decrease in the price of a complement good II. a decrease in the price of the product III. a decrease in the price of a substitute good IV. an increase in taxes *a. I only b. II only c. I, II, and III only d. I and IV only 2719. If the price of shotguns ______, the demand for shotgun shells will _______. *a. increases; decrease b. increases; increase c. decreases; decrease d. double; double 2720. Weather forecasters predict that a major winter storm will strike your town within the next few days. Which of the following would NOT occur based upon the expected storm? a. an increase in the demand for groceries *b. a decrease in the supply of winter clothing c. an increase in the demand for gasoline and tire chains d. an increase in the supply of electric generators to the area 2721. (Figure: Oil Market) Refer to the figure. Which of the following events could cause the change in the figure? Figure: Oil Market a. the expectation of an outbreak of war in the world's best oil producing regions b. the expectation of a reduction in the future supply of oil c. the expectation that next week's oil prices will be substantially higher *d. All of the answers are correct. 2722. Suppose it is widely believed that the price of flat-screen, high-definition televisions will be lower next year. What will happen as a result of such beliefs? a. The demand for flat-screen TVs will increase now. b. The demand for flat-screen TVs will increase next year when the prices fall. *c. The demand for flat-screen TVs will decrease now. d. The demand for flat-screen TVs will not change. 2723. Suppose that consumers begin to believe that the price of housing will be lower next period. What will happen in the market for housing as a result of these expectations? a. Nothing will happen yet. Consumers will wait for the price to actually decrease before changing their behavior. b. Demand for housing will increase, causing the price of housing to increase rather than fall. *c. Demand for housing will begin to fall, and the price of housing will decrease. d. Demand for housing will begin to rise as investors believe they are getting a “deal.” 2724. Which of the following could cause an increase in the demand for gasoline? a. the resolution of a civil war in one of the world's biggest oil producing nations b. the expectation that the price of gasoline will decrease in the future c. a new technology that makes the production of gasoline significantly less expensive *d. an approaching hurricane that threatens a major oil refinery in Texas 2725. The movie trilogy The Lord of the Rings was hugely successful, and, as a result, the demand for fantasy novels, action figures, and online role-playing games surged. The increase in demand can be explained by a(n): a. increase in population. b. change in expectations. *c. change in tastes. d. change in the price of substitutes. 2726. New research indicates that running marathons is actually bad for the heart (it increases inflammatory markers associated with heart attacks). This news will: *a. lead to a decrease in the demand for running shoes. b. have no effect on the demand or supply of running shoes. c. increase the supply of running shoes. d. lead to an increase in the demand for running shoes. 2727. The quantity supplied is the: a. amount of inputs that a firm earns profit on. b. change in the sellers' output multiplied by the change in price. c. incremental cost of producing one more unit of output, holding all other things constant. *d. amount of a good that firms are willing and able to sell at a particular price during a given period of time. 2728. (Figure: Supply Curve) Refer to the figure. A vertical reading of the figure indicates that: Figure: Supply Curve a. at a price higher than $40, the quantity supplied drops to zero. *b. to produce 500 units suppliers must be paid at least $40 per unit. c. at a price of $40 per unit, suppliers are willing and able to sell 500 units. d. at a price lower than $40, the quantity supplied drops to zero. 2729. Suppose that Country X is a high-cost producer of oil and Country Y is a low-cost producer of oil. The citizens of Country X use both oil produced in their own country as well as oil produced in Country Y. If the market price of oil decreases, oil production in Country X will _______, and the citizens of Country X will _________________. *a. decrease; purchase a larger fraction of their oil from Country Y b. increase; purchase a larger fraction of their oil from Country X c. decrease; not change their consumption mix between imported and domestic oil d. increase; purchase a smaller fraction of their oil from Country Y 2730. Recall the discussion in your textbook about the supply curve for oil. What explains why the supply curve for oil is positively sloped? a. As the price of oil rises, producers' costs of drilling oil also rise. b. As more and more producers enter the market, the price of oil rises. c. As the price of oil rises, consumers buy less and less oil. *d. As the price of oil rises, more producers enter the market. 2731. What does the law of supply state? *a. There is a positive relationship between price and quantity supplied. b. There is a negative relationship between price and quantity supplied. c. When prices rise, suppliers sell more. d. When prices rise, buyers buy less of the product. 2732. The supply curve illustrates: a. that limited resources are available for society to use. *b. the relationship between the quantity supplied and the price of a good. c. the total cost of producing a good. d. the willingness to produce a good if the technology to produce it becomes available. 2733. The quantity of cell phones that firms plan to sell this month depends on all of the following EXCEPT the: a. number of producers of cell phones. b. price of a cell phone. c. wages of workers in electronics factories. *d. All of these choices affect market conditions. 2734. The quantity supplied of oil is the amount that: *a. producers plan to sell during a given time period at a given price. b. is actually bought during a given time period at a given price. c. producers wish they could sell at a higher price. d. people are willing to buy during a given time period at a given price. 2735. Figure: Producer Surplus Reference: Ref 3-2 (Figure: Producer Surplus) Refer to the figure. What is the producer surplus at a price of $2 per unit? *a. $5 b. $6 c. $10 d. $20 2736. Figure: Producer Surplus Reference: Ref 3-2 (Figure: Producer Surplus) Refer to the figure. What is the change in producer surplus if the price rises from $2 to $3 per unit? a. $5 b. $10 *c. $15 d. $20 2737. Nigeria receives $53 of producer surplus from each barrel of oil sold at $60. At that level of production, Nigeria's cost to produce a barrel of oil is: a. $1.13. *b. $7. c. $53. d. $113. 2738. (Figure: Earned Producer Surplus) Refer to the figure. Calculate the total dollar amount of producer surplus earned in this market at a price of $100. Figure: Earned Producer Surplus *a. $5,000 b. $10,000 c. $100 d. $200 2739. (Figure: Generic Market Producer Surplus) Refer to the figure. Calculate the total dollar amount of producer surplus earned in this market if the market price is $60. Figure: Generic Market Producer Surplus *a. $800 b. $1,600 c. $2,400 d. $1,200 2740. Table: Willingness to Sell Minimum willingness to sell Country a single barrel of oil Country X $12.00 Country Y 5.99 Country Z 17.25 Country A 36.99 Reference: Ref 3-3 (Table: Willingness to Sell) Refer to the table. Which country is earning the most producer surplus at a market price of $35 per barrel of oil? a. Country X *b. Country Y c. Country Z d. Country A 2741. Table: Willingness to Sell Minimum willingness to sell Country a single barrel of oil Country X $12.00 Country Y 5.99 Country Z 17.25 Country A 36.99 Reference: Ref 3-3 (Table: Willingness to Sell) Refer to the table. Which country is earning the least amount of producer surplus at a market price of $52 per barrel of oil? a. Country X b. Country Y c. Country Z *d. Country A 2742. (Table: Barrels of Oil) Refer to the table. What is the total amount of producer surplus (per barrel of oil) earned by all four producers if the market price per barrel of oil is $51? Table: Barrels of Oil Minimum willingness to sell Country a single barrel of oil Country A $32.00 Country B 16.00 Country C 17.25 Country D 56.99 a. $65.25 b. $81.76 *c. $87.75 d. $93.74 2743. Which of the following factors does NOT result in a shift of the supply curve? a. a change in the number of sellers in the market *b. a change in the demand for the product c. a change in production technology d. a change in the costs of production 2744. Which of the following choices contains only factors that cause the supply curve to shift to the right? a. a fall in production costs, a rise in technology, an increase in taxes on output b. a fall in tastes and preferences for the product, economic growth, and a rise in technology c. a decrease in taxes on production, a fall in subsidies on production, a rise in costs of production *d. a rise in technology, a fall in the costs of production, a fall in taxes on output 2745. (Figure: Supply Shift) According to the figure, the: Figure: Supply Shift a. costs of producing output have decreased. b. technology for producing output have improved. *c. costs of producing output have increased. d. price of the product decreased. 2746. In the oil market, an increase in the wage of oil workers will: a. shift the supply curve of oil to the right. *b. shift the supply curve of oil to the left. c. shift the demand curve for oil to the left. d. shift the demand curve for oil to the right. 2747. New production technology in the manufacture of plasma television screens has reduced the number of defective screens. What effect will this have in the market for plasma televisions? a. The demand curve will increase. *b. The supply curve will increase. c. The demand and supply curve both increase. d. The demand curve will decrease. 2748. In the market for fertilizer, an: a. increase in the wage rate will increase the demand for fertilizer. *b. advance in technology will increase the supply of fertilizer. c. increase in the wage rate will increase the supply of fertilizer. d. increase in the cost of equipment will increase the supply of fertilizer. 2749. The price of coffee has increased, yet evidence suggests the demand for coffee has been stable. A possible explanation is that: a. there has been no change in the supply of coffee. b. there has been increased use of subsidies in coffee production. c. wages of workers in coffee production might have decreased. *d. wages of workers in coffee production might have increased. 2750. Which of the following factors causes a decrease in supply? a. a decrease in demand b. a decrease in the price of the product c. an increase in the price of the product *d. new taxes on output 2751. Firms are willing and able to sell 100 guitars per day at a price of $250 per guitar. What price will firms require to sell 100 guitars per day if there is a tax of $15 per guitar? a. $235 b. $250 c. between $235 and $250 *d. $265 2752. A government subsidy causes the: *a. supply of the product to increase. b. supply of the product to decrease. c. supply curve to change slope. d. supply curve to shift up and to the left. 2753. A subsidy is a: *a. reverse tax. b. means of shifting the supply curve left. c. form of tax benefit. d. movement along the supply curve. 2754. (Figure: Lobster Market) In the figure, a $10 tax is imposed on the market for lobsters. What is the market price that lobster producers would need to receive to induce them to produce 5,000 bushels of lobster per day? Figure: Lobster Market a. $50 b. $40 c. unknown *d. $60 2755. Potato chips and popcorn are substitutes. A subsidy for potato chips will ______the demand for popcorn and the quantity of popcorn sold will ______. a. increase; increase b. increase; decrease *c. decrease; decrease d. decrease; increase 2756. (Figure A: Supply Right Shift) (Figure B: Supply Left Shift) Refer to the two figures. Which of the following statements is TRUE? Figure A: Supply Right Shift Figure B: Supply Left Shift I. Figure A depicts the expectation that the future price will decrease. II. Figure A depicts the entry of foreign producers because of a reduction in trade barriers. III. Figure B depicts falling input prices. IV. Figure B depicts technological innovations. V. Figure B depicts a decrease in taxes. *a. I and II only b. II and IV only c. I, III, and V only d. II, IV, and V only 2757. If producers form expectations that copper prices will be higher in the future, then this will shift the: a. demand curve for copper to the left. b. supply curve of copper to the right. c. demand curve for copper to the right. *d. supply curve of copper to the left. 2758. Figure: Supply Shifts Reference: Ref 3-4 (Figure: Supply Shifts) In the figure, the initial supply curve is S1. If producers form expectations that the price will be lower in the near future, S1 will: a. shift to S2. *b. shift to S3. c. not shift. d. not shift, although the price of the good will decrease today. 2759. Figure: Supply Shifts Reference: Ref 3-4 (Figure: Supply Shifts) In the figure, the initial supply curve is S1. Producers engage in market speculation with the belief that the price of the good will increase in the near future. This would be represented in the figure by shifting the: *a. supply curve to S2, resulting in a lower quantity supplied at each price. b. supply curve to S2, resulting in a higher quantity supplied at each price. c. supply curve to S3, resulting in a lower quantity supplied at each price. d. supply curve to S3, resulting in a higher quantity supplied at each price. 2760. In the early 1980s, movie rentals averaged $5 a night; by the early 1990s that average was $1 per night. This is an example of a supply curve shifter based on: a. a change in tastes and preferences. b. a decrease in the wages of workers in the video rental stores. c. an increase in the number of VRCs owned by consumers. *d. the entry of new suppliers into the market. 2761. Recall your reading about NAFTA in the textbook. Why did the NAFTA agreement result in an increase in lumber supply in the United States? a. NAFTA decreed that the United States should produce more lumber. b. NAFTA stands for North American Furniture Trade Agreement. *c. NAFTA reduced barriers to trade, allowing Canadian lumber to enter the United States. d. The United States sold more lumber to Canada. 2762. One result of the North American Free Trade Agreement was a: a. rise in the price of lumber in the United States due to the entry of Canadian lumber companies into U.S. markets. *b. decrease in the price of lumber in the United States due to the entry of Canadian lumber companies into U.S. markets. c. rise in the price of lumber in the United States due to the exit of Canadian lumber companies from U.S. markets. d. decrease in the price of lumber in the United States due to the exit of Canadian lumber companies from U.S. markets. 2763. A firm produces volleyballs and soccer balls. What happens to the supply of soccer balls if the market price of volleyballs increases? a. The opportunity cost of producing soccer balls rises, so the supply curve of soccer balls increases. b. The opportunity cost of producing soccer balls falls, so the supply curve of soccer balls decreases. *c. The opportunity cost of producing soccer balls rises, so the supply curve of soccer balls decreases. d. The opportunity cost of producing soccer balls falls, so the supply curve of soccer balls increases. 2764. Which of the following choices correctly illustrates how changes in opportunity costs affect supply? *a. A farmer produces corn and wheat. The price of wheat rises; so he shifts his resources towards wheat and the supply of wheat rises. b. A fisherman fishes for lobsters and oysters. The price of lobsters rises; so he decides to spend more of his time fishing for oysters because he can make the same amount of money with fewer lobsters. c. A textbook for economics becomes cheaper; so more students opt to buy that particular textbook. d. Milk and cereal are complementary goods; so when the price of cereal falls, the quantity supplied of milk rises. 2765. Joe runs a landscape company and uses one of his home's bedrooms as a home office. This office could be used to earn rental income from college students. If average rental income in Joe's neighborhood were to rise: a. Joe's opportunity cost of using a bedroom as a home office would decrease. b. Joe's landscape company would experience a decrease in demand for services at all prices. c. Joe should expand his office space in his home. *d. Joe's opportunity cost of using a bedroom as a home office would increase. 2766. A change in price is reflected by a movement along the same demand curve while a change in demand refers to a shift of the entire demand curve. *a. True b. False 2767. If the price of ski lift tickets increases, the demand for ski lift tickets will decrease. a. True *b. False 2768. Consumer surplus can be defined as the net benefit to consumers from participating in a market. *a. True b. False 2769. The demand curve for an inferior good reacts inversely to changes in income, while the demand curve for a normal good has a positive relationship with changes in income. *a. True b. False 2770. An increase in income increases the demand for normal goods. *a. True b. False 2771. When the price of oil used for generating electricity increases, the demand for nuclear power will increase. *a. True b. False 2772. If the price to play golf decreases, the demand for golf balls will increase. *a. True b. False 2773. Advertising, fads, and fashion are examples of influences on demand that are generally referred to as altering expectations about products. a. True *b. False 2774. A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve. *a. True b. False 2775. Suppose that the market price for MP3 players is $90 and MP3 players can be produced by firm X for $40 each. Producer surplus for this firm is $50 per MP3 player. *a. True b. False 2776. Producer surplus can be defined as the revenue producers make from selling goods in a market. a. True *b. False 2777. Advances in technology such as personal computers and cellular telecommunications are indicated in the supply graph by a movement along the supply curve. a. True *b. False 2778. An increase in the use of labor-saving technologies will shift the supply curve to the right. *a. True b. False 2779. A tax of $4 shifts the supply curve down and to the right by $4. a. True *b. False 2780. NAFTA increased the supply curve of lumber in the United States. *a. True b. False 2781. The demand for a product is given by: Price Quantity Demanded $0 8 1 6 2 4 3 2 4 0 Graph the demand curve and calculate consumer surplus at price of $2. Correct Answer: Consumer surplus = 0.5(4 – 2)(4 – 0) = $4 The graph is as follows: 2782. A market has a demand equation as follows: Qd = 60 – 4P. The market price of the product is $5. Calculate the dollar amount of consumer surplus in this market, and illustrate your answer graphically. Correct Answer: The first step is to calculate the intercept of the demand equation on the Price axis, and then to calculate the Qd at the market price. The P intercept for the demand equation can be found as follows: 60 – 4P = 0 60 = 4P. Therefore, P = $15. Thus this is the price where the demand equation intercepts the price axis. At the market price of $5, Qd = 60 – 4(5) = 40. The graph is as follows: Total consumer surplus is therefore: 1/2 × 10 × 40 = $200. 2783. A market has a demand equation as follows: Qd = 100 – 2P. The market price for the product is $20. Calculate the dollar amount of consumer surplus in this market and illustrate your answer graphically. Correct Answer: The first step is to calculate the intercept of the demand equation on the Price axis, and then to calculate the Qd at the market price. The P intercept for the demand equation can be found as follows: 100 – 2P = 0 100 = 2P P = $50. Thus this is the price where the demand equation intercepts the price axis. At the market price of $20, Qd = 100 – 2(20) = 60. The graph is as follows: Total consumer surplus is therefore: 1/2 × 30 × 60 = $900. 2784. An increase in the population will lead to an increase in demand. Give three other examples that lead to an increase in demand. Correct Answer: An increase in the price of a substitute good leads to an increase in demand. A decrease in the price of a complement good leads to an increase in demand. An increase in tastes that are favorable towards a product leads to an increase in demand. An increase in income for a normal good leads to an increase in demand. A decrease in income for an inferior good leads to a decrease in demand. The expectation of higher future prices leads to an increase in demand. 2785. What is the difference between a change in quantity demanded (Qd) and a change in demand? Explain what causes a change in Qd and what causes a change in demand, and illustrate using graphs. Correct Answer: A change in quantity demanded (Qd) results ONLY from a change in price (P). Thus a change in Qd will result only in a movement along the SAME demand curve. Figure A below shows how Qd falls when P rises, resulting in a leftward movement along the same demand curve from Q0 to Q1. A change in demand is illustrated by a shift of the entire demand curve (holding the price of the good constant), and is caused by changes in other factors such as changes in income, changes in tastes and preferences, changes in the prices of related goods (substitutes and complements), changes in expectations and changes in population. Figure B shows a right shift of a demand curve, from D0 to D1, that resulted from an increase in population (which increased the size of the market for the product). 2786. Throughout 2005, average home prices in the United States soared to record highs. Clearly those individuals who were purchasing homes were paying more for them. But what about the people who were not buying homes? In particular, were people who did NOT own homes affected by this housing bubble? Explain. (Hint: What impact did this substantial increase in the price of owner-occupied housing have on the price of rental housing?) Correct Answer: This substantial increase in the price of owner-occupied housing also had a big impact in the market for rental housing. Given that owner-occupied and rental housing are substitute goods, an increase in the price of owner-occupied housing also led to an increase in the demand (and hence the price) of rental housing. It seems that those who were NOT buying homes were still paying more in rent as a result of this owner-occupied housing bubble. 2787. A market has a supply equation as follows: Qs = P. The market price for the product is $50. Calculate the dollar amount of producer surplus in this market and illustrate your answer graphically. Correct Answer: The first step is to calculate the intercept of the supply equation on the price axis, and then to calculate the Qs at the market price. The P intercept for the supply equation can be found by setting the supply equation equal to zero and solving for the price. P = $0 Thus this is the price where the supply equation intercepts the price axis. At the market price of $50, Qs = 50. The graph is as follows: Total producer surplus is therefore: 1/2 × 50 × 50 = $1,250. 2788. A market has a supply equation as follows: Qs = –20 + 2P. The market price for the product is $20. Calculate the dollar amount of producer surplus in this market and illustrate your answer graphically. Correct Answer: The first step is to calculate the intercept of the supply equation on the price axis, and then to calculate the Qs at the market price. The P intercept for the supply equation can be found by setting the supply equation equal to zero and solving for the price. –20 + 2P = 0 –20 = –2P P = $10 Thus this is the price where the supply equation intercepts the price axis. At the market price of $20, Qs = –20 + 2(20) = 20. The graph is as follows: Total producer surplus is therefore: 1/2 × 10 × 20= $100. 2789. For each of the following changes, determine whether there will be a change in supply (that is, a shift of the supply curve) or a change in quantity supplied (that is, no shift of the supply curve). I. a change in the resource cost II. a change in producer expectations III. a change in price IV. a change in technology V. the number of sellers Correct Answer: I, II, IV, and V are all supply shifters; the example in III is a price change that corresponds to a new quantity supplied on the same supply curve. 2790. What is the difference between a change in Quantity Supplied (Qs) and a change in Supply (S)? Explain what causes a change in Qs, and what causes a change in S, and illustrate using graphs. Correct Answer: A change in quantity supplied results ONLY from a change in price. Thus a change in Qs will result only in a movement along the SAME supply curve. Figure A below shows how Qs rises when P rises, resulting in a rightward movement along the same supply curve. A change in supply is illustrated by a shift of the entire supply curve (holding the price of the good constant), and is caused by changes in other factors such as changes in taxes and subsidies on production or output, changes in the technology of production, entry and exit of firms, expectations, and changes in opportunity costs. Figure B shows a rightward shift of a supply curve that resulted from the entry of new firms (which increased the number of sellers in the market). 2791. It is widely known that the rapidly expanding corn-ethanol industry is quickly increasing the price of corn on world markets. Given this, many farmers have begun to grow corn more intensively. For instance, some producers who currently pursue a corn-soybean rotation (planting corn one year and soybeans the next) might shift to a corn-corn-soybean rotation (planting corn two years in a row and then planting soybeans in the third). Continuous production of corn (planting corn every year on the same plot of land) is another possibility. Explain what impact this explosion in the market for corn may have on the market for soybeans. In particular, will those that produce soybeans exclusively be better off, worse off, or unaffected as a result of the increase in corn prices? Correct Answer: Given the now relatively high price of corn, the opportunity cost of growing soybeans is now higher and hence in general farmers will move to producing more corn and fewer soybeans. This decrease in the supply of soybeans, however, will lead to an increase in the price of soybeans, and therefore those that produce soybeans exclusively will see higher prices and hence higher profits as a result. 2792. (Table: Equilibrium Quantity) Based on the table, the equilibrium quantity is: Table: Equilibrium Quantity Quantity Price Quantity demanded supplied $10 100 400 8 150 350 6 200 300 4 250 250 2 300 200 a. 10. *b. 250. c. 100 and 400. d. 275.5. 2793. In a market, the equilibrium condition is given by the following: *a. quantity demanded = quantity supplied b. quantity demanded × quantity supplied c. quantity demanded/quantity supplied d. price × quantity demanded = quantity supplied 2794. The key condition for equilibrium to occur in a market is: a. the demand curve equals the supply curve. *b. quantity demanded equals quantity supplied. c. price equals quantity. d. demand for one good equals demand for all other goods. 2795. Which of the following statements is TRUE about equilibrium in markets? I. Demand always equals supply at equilibrium. II. Quantity demanded always equals quantity supplied at equilibrium. III. In a market diagram, demand and supply cross each other at the equilibrium point. a. I only b. I, II, and III *c. II and III only d. I and III only 2796. Figure: Equilibrium Reference: Ref 4-1 (Figure: Equilibrium) Refer to the figure. The equilibrium price (in $) is: *a. 8. b. 10. c. 16. d. 12. 2797. Figure: Equilibrium Reference: Ref 4-1 (Figure: Equilibrium) Refer to the figure. The equilibrium quantity (in units) is: a. 8. b. 10. *c. 16. d. 12. 2798. A market can be described by the equations Qd = 100 – P and Qs = P. What are the equilibrium price and quantity in this market? *a. The equilibrium price is $50 and the equilibrium quantity is 50 units. b. The equilibrium price is $100 and the equilibrium quantity is 100 units. c. The equilibrium price is $0 and the equilibrium quantity is 0 units. d. The equilibrium price is $0 and the equilibrium quantity is 100 units. 2799. A market can be described by the equations Qd = 50 – 3P and Qs = 2P. What are the equilibrium price and quantity in this market? a. The equilibrium price is $20 and the equilibrium quantity is 10 units. b. The equilibrium price is $50 and the equilibrium quantity is 100 units. c. The equilibrium price is $30 and the equilibrium quantity is 10 units. *d. The equilibrium price is $10 and the equilibrium quantity is 20 units. 2800. Figure: Market Equilibrium Reference: Ref 4-2 (Figure: Market Equilibrium) Refer to the figure. At a price of $3, quantity supplied is ______ and quantity demanded is ______, leading to a _______. *a. 6; 2; surplus of 4 units b. 2; 6; shortage of 8 units c. 2; 4; surplus of 2 units d. 4; 2; shortage of 2 units 2801. Figure: Market Equilibrium Reference: Ref 4-2 (Figure: Market Equilibrium) Refer to the figure. At a price of $1, the market is characterized by a(n): a. excess supply of 2 units. *b. excess demand of 4 units. c. surplus of 4 units. d. shortage of 6 units. 2802. Figure: Market Equilibrium Reference: Ref 4-2 (Figure: Market Equilibrium) According to the figure, the equilibrium price and quantity are: a. $1 and 4. b. $4 and 8. *c. $2 and 4. d. $3 and 6. 2803. Suppose that a market is characterized as follows: consumers are willing and able to purchase 100 units and sellers are willing and able to sell 70 units. Which of the following statements are true? a. There is a shortage of 30 units. b. The market is not in equilibrium. c. The price in the market will increase. *d. All of the answers are correct. 2804. If sellers want to sell more products than buyers are willing to purchase, we know that: a. the current price is less than the equilibrium price. b. quantity demanded exceeds quantity supplied. *c. the current price is greater than the equilibrium price. d. the demand curve will likely increase. 2805. Suppose that the equilibrium price in the market is $10. If the current market price is $7.50: a. the equilibrium price will fall to $7.50. *b. competition among buyers will increase the current price. c. the current price will fall below $7.50 as sellers compete for market share. d. There is not enough information provided to answer the question. 2806. Immediately after a hurricane, it is likely that the quantity demanded for tree cutting/removal services will ______ the quantity supplied, causing the price of tree cutting/removal services to ______. a. equal; remain unchanged b. be less than; rise *c. exceed; rise d. decrease; fall 2807. In free markets, shortages lead to: a. lower prices. *b. higher prices. c. surpluses. d. unexploited gains from trade. 2808. In free markets, surpluses lead to: *a. lower prices. b. higher prices. c. surpluses. d. unexploited gains from trade. 2809. (Figure: Price Adjustment) Refer to the figure. If the price of the product is $14, there is a: Figure: Price Adjustment a. shortage of 30 units of the product, and the price will rise to $16. b. surplus of 20 units of the product, and the price will rise to $16. *c. shortage of 50 units of the product, and the price will rise to $16. d. surplus of 40 units of the product, and the price will rise to $16. 2810. (Figure: Demand-Driven Price Change) Refer to the figure. When the demand curve shifts from D0 to D1, the equilibrium price rises to: Figure: Demand-Driven Price Change a. $9 and the equilibrium quantity rises to 120. b. $9 and the equilibrium quantity rises to 160. *c. $8 and the equilibrium quantity rises to 140. d. $8 and the equilibrium quantity rises to 160. 2811. (Figure: Supply-Driven Price Change) Refer to the figure. When the supply curve shifts from S0 to S1, the equilibrium price rises to: Figure: Supply-Driven Price Change *a. $12 and the equilibrium quantity falls to 70. b. $10 and the equilibrium quantity falls to 100. c. $12 and the equilibrium quantity falls to 40. d. $10 and the equilibrium quantity falls to 70. 2812. Table: Equilibrium Price, Quantity Qd Qs P $10 50 30 12 45 35 14 40 40 16 35 45 18 30 50 Reference: Ref 4-3 (Table: Equilibrium Price, Quantity) Refer to the table. The equilibrium P and Q are: a. $10 and 50. b. $12 and 35. c. $40 and 14. *d. $14 and 40. 2813. Table: Equilibrium Price, Quantity Qd Qs P $10 50 30 12 45 35 14 40 40 16 35 45 18 30 50 Reference: Ref 4-3 (Table: Equilibrium Price, Quantity) Refer to the table. If the price in the market was $16, there would be a: a. shortage of 10 units. b. shortage of 35 units. *c. surplus of 10 units. d. surplus of 45 units. 2814. Table: Equilibrium Price, Quantity Qd Qs P $10 50 30 12 45 35 14 40 40 16 35 45 18 30 50 Reference: Ref 4-3 (Table: Equilibrium Price, Quantity) Refer to the table. If the price in the market was $12, there would be a: *a. shortage of 10 units. b. shortage of 45 units. c. surplus of 10 units. d. surplus of 35 units. 2815. Table: Equilibrium Price, Quantity Qd Qs P $10 50 30 12 45 35 14 40 40 16 35 45 18 30 50 Reference: Ref 4-3 (Table: Equilibrium Price, Quantity) Refer to the table. If the demand curve for the product shifted to the right such that 10 more units of the good are demanded at every price, what is the new equilibrium price? a. $12 b. $14 *c. $16 d. $18 2816. Table: Equilibrium Price, Quantity Qd Qs P $10 50 30 12 45 35 14 40 40 16 35 45 18 30 50 Reference: Ref 4-3 (Table: Equilibrium Price, Quantity) Refer to the table. If the supply curve for the product shifted to the right such that 10 more units of the good are supplied at every price, what is the new equilibrium price? *a. $12 b. $14 c. $16 d. $18 2817. Table: Equilibrium Price, Quantity Qd Qs P $10 50 30 12 45 35 14 40 40 16 35 45 18 30 50 Reference: Ref 4-3 (Table: Equilibrium Price, Quantity) Refer to the table. If the supply curve for the product shifted to the right such that 20 more units of the good are supplied at every price, what is the new equilibrium price? *a. $10 b. $12 c. $14 d. $16 2818. Five new sellers enter a market (that previously had seven) and begin producing a good. Which of the following choices explains what happens to the equilibrium Q and P? a. The demand curve will shift to the right, and the equilibrium P and Q will both rise. *b. The supply curve will shift to the right, the equilibrium P will fall, and the equilibrium Q will rise. c. The supply curve will shift to the left, the equilibrium P will fall, and the equilibrium Q will rise. d. The supply curve will shift to the right, the equilibrium P will rise, and the equilibrium Q will fall. 2819. For each good produced in a free market economy, demand and supply determine: a. the price of the good, but not the quantity. b. the quantity of the good, but not the price. *c. both the price and the quantity of the good. d. neither price nor quantity, sellers determine the price. 2820. When there is a shortage of 1,000 units of a particular good: *a. the price of the good will rise. b. the price of the good will fall. c. the quantity demanded of the good will equal 1,000 units. d. there will be no change in the price of the good. 2821. When a surplus exists in a market, we know that the actual price is: *a. above equilibrium price and quantity supplied is greater than quantity demanded. b. above equilibrium price and quantity demanded is greater than quantity supplied. c. below equilibrium price and quantity demanded is greater than quantity supplied. d. below equilibrium price and quantity supplied is greater than quantity demanded. 2822. Table: Equilibrium Adjustment Price Quantity Demanded $10 8 6 4 2 100 120 130 140 150 Quantity Supplied 160 145 130 115 100 Reference: Ref 4-4 (Table: Equilibrium Adjustment) Refer to the table. If the price in the free market is $8, then a: *a. surplus of 25 units would exist and price would tend to fall. b. surplus of 25 units would exist and price would tend to rise. c. shortage of 25 units would exist and price would tend to rise. d. shortage of 25 units would exist and price would tend to fall. 2823. Table: Equilibrium Adjustment Price $10 8 Quantity Demanded 100 120 Quantity Supplied 160 145 6 4 2 130 140 150 130 115 100 Reference: Ref 4-4 (Table: Equilibrium Adjustment) Refer to the table. If the price in the free market is $2, then a: a. surplus of 50 units would exist and price would fall. b. surplus of 50 units would exist and price would rise. *c. shortage of 50 units would exist and price would rise. d. shortage of 50 units would exist and price would fall. 2824. Table: Equilibrium Adjustment Price Quantity Demanded $10 8 6 4 2 100 120 130 140 150 Quantity Supplied 160 145 130 115 100 Reference: Ref 4-4 (Table: Equilibrium Adjustment) Refer to the table. The equilibrium price is: a. $2. b. $4. *c. $6. d. $8. 2825. A free market achieves an equilibrium price and quantity due to: *a. the actions of buyers and sellers. b. increased competition among sellers. c. government regulations placed on market participants. d. buyers' ability to affect market outcomes. 2826. Figure: Demand and Supply Reference: Ref 4-5 (Figure: Demand and Supply) Refer to the figure. Which of the following statements is TRUE? I. Buyers are willing to pay $20 for the 16th unit of output and it costs sellers $60 to produce that unit. II. The gains from trade are maximized at 20 units of output. III. At four units of output, there are unexploited gains from trade. IV. A free market is likely to produce less than 12 units of output. a. II only b. I and II only *c. I and III only d. II, III, and IV only 2827. Figure: Demand and Supply Reference: Ref 4-5 (Figure: Demand and Supply) Refer to the figure. At the equilibrium quantity, total surplus is: a. $960. *b. $480. c. $320. d. $240 2828. Which of the following statements is TRUE regarding free markets? I. The sum of consumer surplus and producer surplus are maximized. II. The sellers with the highest costs of production sell the goods. III. The buyers with the highest willingness to pay purchase the goods. IV. The government must subsidize firms to ensure that there are no unexploited gains from trade. a. I only b. I, II, and III only c. II, III, and IV only *d. I and III only 2829. Gains from trade are maximized at the: *a. equilibrium price and quantity. b. midpoint on the demand curve. c. point where output is maximized. d. vertical intercept on the supply curve. 2830. At a free market equilibrium: a. quantity demanded equals quantity supplied. b. consumer surplus and producer surplus are maximized. c. there are no unexploited gains from trade. *d. All of the answers are correct. 2831. Figure: Gains from Trade Reference: Ref 4-6 (Figure: Gains from Trade) Refer to the figure. What are the unexploited gains from trade at the free market equilibrium? a. $1,000 b. $500 *c. $0 d. $1,500 2832. Figure: Gains from Trade Reference: Ref 4-6 (Figure: Gains from Trade) Refer to the figure. What are the total gains from trade at the free market equilibrium? *a. $1,000 b. $500 c. $0 d. $1,500 2833. Gains from trade are maximized when: a. the market price is higher than the equilibrium price. b. the market price is less than the equilibrium price. *c. the market price is equal to the equilibrium price. d. there are additional potential trades available that have not been completed. 2834. In a free market when there are unexploited gains from trade: a. the market is slow to adjust to this situation. b. there are sellers who are unwilling to sell at prices buyers are willing to pay. *c. there are buyers who are willing to pay more for goods than sellers are asking. d. an equilibrium price and quantity have been reached. 2835. In a free market in which an equilibrium price and quantity prevails: a. consumer surplus is less than producer surplus. b. consumer surplus is greater than producer surplus. c. consumer surplus is the same as producer surplus. *d. consumer surplus and producer surplus are maximized. 2836. Why did Vernon Smith win the Nobel Prize in Economics in 2002? a. He created the theory of supply and demand. *b. He used laboratory experiments as a tool to confirm the theory of supply and demand. c. He was able to disprove the theory of supply and demand. d. This is a trick question, because Vernon Smith did not win the Nobel Prize. 2837. The September 11 terrorist attacks turned many people away from flying. The demand and supply model would predict which of the following events in the airline travel market? a. The supply of airline travel would decrease, resulting in a higher equilibrium price and lower equilibrium quantity. b. The supply of airline travel would increase, resulting in a lower equilibrium price and higher equilibrium quantity. *c. The demand for airline travel would decrease, resulting in a lower equilibrium price and lower equilibrium quantity. d. The supply and demand for airline travel would decrease, resulting in a higher equilibrium price and higher equilibrium quantity. 2838. Lead, an input in the production of ammunition, has increased in price from $0.60/lb in 2006 to over $1.50/lb in 2007. What happened to the equilibrium price and quantity of ammunition over this period? *a. The equilibrium price increased and the equilibrium quantity decreased. b. The equilibrium price increased and the equilibrium quantity increased. c. The equilibrium price decreased and the equilibrium quantity decreased. d. The equilibrium price decreased and the equilibrium quantity increased. 2839. Brazilian rosewood is renowned for its tonal qualities and gorgeous figuring on acoustic guitars. However, Brazilian rosewood is now banned from use in the construction of new guitars. What will likely happen to the price of used Brazilian rosewood guitars over time? *a. The price for used Brazilian rosewood guitars will increase because there will be a smaller supply of Brazilian rosewood guitars on the used market. b. The price for used Brazilian rosewood guitars will decrease as fewer people decide to sell their guitars. c. The price of used Brazilian rosewood guitars will increase at first and then decrease, since an increase in demand raises prices causing people to buy less of the product. d. The price for used Brazilian rosewood guitars will increase as more people try to cash in by selling their increasingly rare guitars. 2840. Figure: Market Changes Reference: Ref 4-7 (Figure: Market Changes) Refer to the figures. If the figures represent the market for a popular soda, which figure shows the effect of an increase in the price of a competing energy drink? a. Figure A b. Figure B *c. Figure C d. Figure D 2841. Figure: Market Changes Reference: Ref 4-7 (Figure: Market Changes) Refer to the figures. If the figures represent the market for wool sweaters, which figure shows the effect of an unseasonably warm winter? a. Figure A b. Figure B c. Figure C *d. Figure D 2842. Figure: Market Changes Reference: Ref 4-7 (Figure: Market Changes) Refer to the figures. If these figures represent the market for blue jeans, which figure shows the effect of an increase in the price of denim, a raw material used to make jeans? *a. Figure A b. Figure B c. Figure C d. Figure D 2843. Figure: Market Changes Reference: Ref 4-7 (Figure: Market Changes) Refer to the figures. If these figures represent the market for asparagus, which figure shows the effect of a new disease-resistant asparagus seed? a. Figure A *b. Figure B c. Figure C d. Figure D 2844. Figure: Market Changes Reference: Ref 4-7 (Figure: Market Changes) Refer to the figures. If these figures represent the market for new cars, which figure shows the effect of an economic recession? a. Figure A b. Figure B c. Figure C *d. Figure D 2845. The U.S. government limits the importation of Chinese-made bras. What effect does this trade restriction have on the market for bras? *a. The equilibrium price will increase and the equilibrium quantity will decrease. b. The demand for bras will increase, leading to a lower equilibrium price. c. The equilibrium price will increase and the equilibrium quantity will increase. d. The equilibrium price will decrease, leading to a higher equilibrium quantity. 2846. Figure: Demand, Supply Shifts Reference: Ref 4-8 (Figure: Demand, Supply Shifts) In the figure, the initial demand curve is D1 and the initial supply curve is S1. If technological innovations lower the costs of production, what will happen? a. D1 will shift to D3 and equilibrium price and equilibrium quantity will increase. b. S1 will shift to S2 and equilibrium price will increase but equilibrium quantity will decrease. c. D1 will shift to D2 and equilibrium price and equilibrium quantity will decrease. *d. S1 will shift to S3 and equilibrium price will decrease but equilibrium quantity will increase. 2847. Figure: Demand, Supply Shifts Reference: Ref 4-8 (Figure: Demand, Supply Shifts) In the figure, the initial demand curve is D1 and the initial supply curve is S1. Suppose this depicts the market for corn. How does the market change when flooding in Iowa destroys a significant amount of the corn crop. *a. S1 will shift to S2. b. D1 will shift to D2. c. S1 will shift to S3. d. There will be no change in supply or demand in the market for corn. 2848. Figure: Demand, Supply Shifts Reference: Ref 4-8 (Figure: Demand, Supply Shifts) In the figure, the initial demand curve is D1 and the initial supply curve is S1. If this depicts the equilibrium in the market for computer printers, what will happen when the price of computers increases? a. There is not enough information to determine what will happen. *b. D1 will shift to D2. c. D1 will shift to D3. d. S1 will shift to S3. 2849. Figure: Demand, Supply Shifts Reference: Ref 4-8 (Figure: Demand, Supply Shifts) In the figure, the initial demand curve is D1 and the initial supply curve is S1. Resource prices in this market increase; at the same time, the consumer population declines as migration causes an outflow of population to other regions. What happens to the supply curve and/or demand curve? a. S1 shifts to S2 but then shifts back to S1. D1 remains at D1. b. S1 shifts to S3 and D1 shifts to D2. c. S1 shifts to S2 and D1 shifts to D3. *d. S1 shifts to S2 and D1 shifts to D2. 2850. Which of the following would increase the demand for beef? a. lower pork prices *b. higher consumer income c. higher prices of feed grains used to feed beef cattle d. an increase in the price of beef 2851. Suppose there is an increase in demand in a market and no change in the supply. What will happen to the market equilibrium price and quantity? *a. Equilibrium price will rise; equilibrium quantity will rise. b. Equilibrium price will rise; equilibrium quantity will fall. c. Equilibrium price will fall; equilibrium quantity will rise. d. Equilibrium price will fall; equilibrium quantity will fall. 2852. An increase in supply and a decrease in demand occur in a market. What happens to the equilibrium price and quantity? *a. The equilibrium price decreases; the change in the equilibrium quantity is ambiguous. b. The equilibrium price decreases; the equilibrium quantity increases. c. The equilibrium price increases; the change in the equilibrium quantity is ambiguous. d. The equilibrium price increases; the equilibrium quantity decreases. 2853. An increase in demand and a decrease in supply occur in a market. What happens to the equilibrium price and quantity? a. The equilibrium price decreases; the change in the equilibrium quantity is ambiguous. b. The equilibrium price decreases; the equilibrium quantity increases. *c. The equilibrium price increases; the change in the equilibrium quantity is ambiguous. d. The equilibrium price increases; the equilibrium quantity decreases. 2854. An early frost in the vineyards of Napa Valley would cause a(n): a. increase in the demand for wine, increasing price. b. increase in the supply of wine, decreasing price. c. decrease in the demand for wine, decreasing price. *d. decrease in the supply of wine, increasing price. 2855. After adjusting for inflation, a comparison of the price of leg warmers reveals that the price of leg warmers was significantly higher in the 1980s than it is today. Which of the following can explain this? *a. Jeans become preferable to leg warmers, decreasing the demand for leg warmers. b. Leg warmers were fashionable in the 1980s (fact), and hence the high demand drove prices up in the 1980s. c. An increase in the price of cotton used to make leg warmers has led to a decrease in the price of leg warmers today. d. The expected increase in the price of leg warmers has led to a decrease in the price of leg warmers today. 2856. Which of the following might explain why the price of DVD players has been falling? a. an increase in consumer income *b. a decrease in the price of high-definition Blu-ray players c. a decrease in the price of DVDs d. an increase in the price of gasoline 2857. Which of the following would cause the current supply of iPods to increase? a. an economic boom, which increases the amount that people are willing to spend on personal electronics b. a decrease in the price of songs on iTunes *c. the expectation that the future price of iPods will decrease d. an increase in the wages offered to manufacturers of iPods 2858. Which of the following would NOT lead to a decrease in the price of domestic automobiles? *a. an increase in the price of foreign-made automobiles b. an economic recession, which decreases consumer income c. a decrease in the wages paid to union auto workers d. an increase in the number of domestic automakers 2859. (Figure: Demand Shift) In the figure, the demand curve shifted from D0 to D1. To describe this movement, we would say that: Figure: Demand Shift a. demand increased, which caused an increase in supply. b. quantity demanded increased, which caused an increase in supply. *c. demand increased, which caused an increase in quantity supplied. d. quantity demanded increased, which caused an increase in quantity supplied. 2860. (Figure: Supply Shift) In the figure, the supply curve shifted from S0 to S1. To describe this movement, we would say that: Figure: Supply Shift a. demand decreased, which caused a decrease in supply. *b. supply decreased, which caused a decrease in quantity demanded. c. supply decreased, which caused a decrease in demand. d. supply increased, which caused a decrease in quantity demanded. 2861. Technological advances have increased the supply of digital cameras. As a result the: a. demand for digital cameras will increase, putting downward pressure on the price of digital cameras. *b. quantity demanded for digital cameras will increase. c. quantity supplied of digitals cameras will increase, putting downward pressure on the price of digital cameras. d. demand and supply of digital cameras will both increase. 2862. When you move along a demand curve: a. only price is held constant. b. income and the price of the good are held constant. *c. all non-price determinants of demand are held constant. d. all determinants of quantity demanded are held constant. 2863. A demand curve shows the relationship between: a. quantity demanded and quantity supplied, which are positively related. b. quantity demanded and quantity supplied, which are negatively related. c. price and quantity demanded, which are positively related. *d. price and quantity demanded, which are negatively related. 2864. When the price of a good decreases: *a. the quantity demanded increases. b. demand increases. c. the quantity supplied increases. d. supply increases. 2865. When the price of a good increases, demand for the good will: a. increase. b. decrease. *c. be unaffected. d. depend on the corresponding change in supply. 2866. Which choice explains how the OPEC crisis of 1973 affected oil prices? *a. The supply of oil was reduced, leading to a rise in oil prices. b. The supply of oil was increased, leading to a fall in oil prices. c. The demand for oil increased, leading to a rise in oil prices. d. The demand for oil decreased, leading to a fall in oil prices. 2867. The Arab Oil Embargo of 1973, the Iranian Revolution of 1979, and the growth of China and India all affected oil prices by: a. increasing the demand for oil. b. reducing the supply of oil. c. increasing the supply of oil. *d. None of the answers is correct. 2868. The Arab Oil Embargo of 1973, the Iranian Revolution of 1979, and the Gulf War of 1991 all affected oil prices by: a. increasing the demand for oil. *b. reducing the supply of oil. c. reducing the demand for oil. d. increasing the supply of oil. 2869. Economic growth in China has led to more Chinese people owning cars which: *a. increased demand for oil, causing oil prices to rise. b. decreased demand for oil, causing oil prices to rise. c. increased demand for oil but decreased supply, causing oil prices to increase rapidly. d. increased demand and supply of oil, causing oil prices to increase rapidly. 2870. When Asian countries went into a recession in 1997, the demand for oil _______ and the price of oil ________. a. increased; increased b. decreased; increased *c. decreased; decreased d. increased; decreased 2871. OPEC is able to raise oil prices by: a. increasing the demand for oil. *b. decreasing the supply of oil by cutting production. c. decreasing transportation costs, a complement to oil. d. subsidizing the oil production of developing countries. 2872. In 1980 when Iraq attacked Iran, the price of oil _______ because of a(n) ______. *a. increased; disruption in the supply of oil b. increased; decrease in the demand for oil c. fell; increased demand for oil d. fell; increased quantity of oil supplied 2873. In a free market equilibrium, demand equals supply at the equilibrium price. a. True *b. False 2874. The price of professional sports tickets is high; therefore, you should blame the owners for taking advantage of the fans, not the other buyers for outbidding you. a. True *b. False 2875. A market shortage can be defined as a situation where the number of units purchased in a market is greater than the number of units sold in that market. a. True *b. False 2876. A market surplus can be defined as a situation where the number of units sold in a market is greater than the number of units purchased in that market. a. True *b. False 2877. At the equilibrium price, quantity demanded is equal to quantity supplied. *a. True b. False 2878. Surpluses drive price up while shortages drive price down. a. True *b. False 2879. A shortage will occur at any price below equilibrium price and a surplus will occur at any price above equilibrium price. *a. True b. False 2880. The free market maximizes the gains from trade, producing the level of output that maximizes total surplus. *a. True b. False 2881. In a free market equilibrium, the gains from trade are always greater for consumers than for producers. a. True *b. False 2882. If a frost destroys half of the orange crop in Florida, the equilibrium price of oranges will rise. *a. True b. False 2883. The government plans to increase cigarette taxes in six months. Since consumers should expect the future price of cigarettes to increase, the current demand for cigarettes will increase, and the price of cigarettes will rise even before the tax is implemented. *a. True b. False 2884. There is no difference in saying that there is a change in supply and in saying there is a change in the quantity supplied. a. True *b. False 2885. A market can be described by the equations Qd = 100 – P and Qs = –20 + P. Calculate the equilibrium price and quantity in this market. Correct Answer(s): a. Equilibrium price is $60, and equilibrium quantity is 40. 2886. A market can be described by the equations Qd = 60 – 6P and Qs = 4P. Calculate the equilibrium price and quantity in this market. Correct Answer(s): a. Equilibrium price is $6, and equilibrium quantity is 24. 2887. The quantity demanded for wireless computer mouses is Qd = 500 – 1.75P, and the quantity supplied is Qs = 450 + 0.25P. a. Calculate the equilibrium price and quantity. b. Is total surplus maximized at 440 mouses? Explain. c. If the market price is currently $10, is there a shortage or surplus of mouses? How do you know? d. If the market price is $40, is there a shortage or surplus of mouses? How do you know? Correct Answer: a. Qd = Qs. 500 – 1.75P = 450 + 0.25P 50 = 2P P = $25 Q = 450 + 0.25(25) = 456.25. b. No. The quantity that maximizes total surplus is the equilibrium quantity. At 440 mouses, there are still gains from trades to be made. c. Qd = 500 – 1.75(10) = 482.5. Qs = 450 + 0.25(10) = 452.5. There is a shortage of 30 mouses, since Qd exceeds Qs. d. Qd = 500 – 1.75(40) = 430. Qs = 450 + 0.25(40) = 460. There is a surplus of 30 mouses, since Qs exceeds Qd. 2888. A market can be described by the equations Qd = 100 – P and Qs = –20 + P. At a price of $40, will this market experience a shortage or a surplus and what is the amount of this shortage or surplus? Correct Answer: Equilibrium price is $60, and equilibrium quantity is 40. At a price of $40, there is a shortage. Qd = 100 – (40) = 60. Qs = –20 + (40) = 20. Therefore there is a shortage (excess demand) of 40 units. 2889. A market can be described by the equations Qd = 200 – 3P and Qs = –50 + 2P. At a price of $40, will this market experience a shortage or a surplus and what is the amount of this shortage or surplus? Correct Answer: Equilibrium price is $50, and equilibrium quantity is 50. At a price of $40, there is a shortage. Qd = 200 – (40 × 3) = 80. Qs = –50 + 2(40) = 30. Therefore there is a shortage (excess demand) of 80 – 30 = 50 units. 2890. A market can be described by the equations Qd = 300 – 4P and Qs = 6P. At a price of $40, will this market experience a shortage or a surplus and what is the amount of this shortage or surplus? Will this market return to equilibrium? Why or why not? Correct Answer: Equilibrium price is $30, and equilibrium quantity is 180. At a price of $40, there is a surplus. Qd = 300 – 4(40) = 140. Qs= 6(40) = 240. Therefore, there is a surplus (excess supply) of 100 units. Yes, the market will return to the old equilibrium because sellers will lower prices in their attempts to sell their unsold stock. As the prices lower, quantities sold will increase until demand meets supply again. 2891. In the long run, will the market price for a good/service always equal the equilibrium price? Explain why or why not. Correct Answer: Yes, due to the invisible hand. If prices are too high (i.e., above the equilibrium price), excess supply drives the price down. If prices are too low (i.e., below the equilibrium price), excess demand drives price up. 2892. A free market can be described by the equations Qd = 100 – P and Qs = –20 + P. What are the equilibrium conditions in this market (that is, find equilibrium P and Q) and what are the maximum gains from trade in this market? Correct Answer(s): a. Price is $60, and equilibrium quantity is 40. Total gains from trade are $1,600. 2893. A free market can be described by the equations Qd = 180 – 3P and Qs = –50 + 2P. What are the equilibrium conditions in this market (that is, find equilibrium P and Q) and what are the maximum gains from trade in this market? Correct Answer(s): a. Equilibrium price is $46, and equilibrium quantity is 42. Total gains from trade are $735. 2894. Consider the market for electric guitars, a normal good. Use well-labeled supply and demand diagrams to illustrate the effects of the following events on the market for electric guitars. a. Consumer income increases b. The price of wood increases c. The price of electric amplifiers decreases d. A decrease in the price of bass guitars, a substitute for electric guitars e. The government eliminates taxes on the producers of electric guitars. f. Many new electric guitar companies are started from an influx of immigrants. Correct Answer: 2895. Suppose the price of oil is falling due to a drop-off in demand after the summer driving season. Explain what a group of oil-producing nations (like OPEC), that control a significant amount of the world's oil supplies, could do in order to keep prices (and hence profits) high. Correct Answer: OPEC nations would want to decrease the supply of oil on world markets, since a decrease in supply would lead to an increase in the price of oil. 2896. The following is an excerpt from an article published on January 22, 2009 in the USA Today newspaper. FLORIDA'S FREEZE CHILLS CROPS, TROPICAL FISH By Oren Dorell USA Today Several days of the coldest temperatures South Florida has seen in years are threatening to ruin orange groves, cucumber fields and tropical fish ponds across the state. “This is peak harvest season for many Florida crops, so damage at this time could have significant consequences stretching far outside Florida's borders,” Florida Agriculture Commissioner Charles Bronson said. What would you expect to happen to the price of oranges, cucumbers, and tropical fish as a result of this freezing weather? Is this price change a result of a change in supply or demand for these goods? Explain. Correct Answer: The early freeze will most likely result in a decrease in the supply of oranges, cucumbers, and tropical fish, leading to an increase in the price of each of these goods. 2897. Draw a market demand curve and market supply curve for automobiles and label these curves D1 and S1, respectively. (Be sure to label all axes!) On the same graph, show what would happen if the auto workers union required all manufacturers of automobiles to now provide health insurance for ALL workers and their dependents. (Note: Assume that prior to this change, manufacturers of automobiles do NOT provide health insurance coverage to 100 percent of their employees and/or dependents.) What do you expect to happen to the price of automobiles as a result of this change in union policy? Correct Answer: The supply curve for automobiles would shift to the left as a result of the increase in costs. As a result, we would expect that the price of automobiles will rise. 2898. What is the difference between a “change in demand” and a “change in quantity demanded”? Graph your answer. Correct Answer: A change in demand refers to a shift in the demand curve. A change in quantity demanded refers to a movement along a fixed demand curve. Graphically: Change (Decrease) in Demand: Change (Decrease) in Quantity Demanded: 2899. The potential rewards that a person receives for taking a particular action are called: a. altruism. b. opportunity costs. *c. incentives. d. trade-offs. 2900. Economists assume that people are motivated by: *a. incentives. b. social justice. c. benevolence. d. altruism. 2901. In Adam Smith’s book The Wealth of Nations, he observed that people often promote the social interest by their: a. benevolence. *b. own self-interest. c. trust in the government. d. lack of trust in other people. 2902. Adam Smith argued that if people pursue their own interests: a. their actions will have no impact on the economy. b. their actions will be in conflict with the social interest. *c. their actions will often end up promoting the social interest. d. they will always fail. 2903. Which of the following is TRUE about markets? a. Markets always align self-interest with the social interest. *b. Markets always produce outcomes in line with self-interest but not necessarily the social interest. c. Markets always produce outcomes in line with the social interest but not necessarily self-interest. d. None of the answers are correct. 2904. Opportunity cost is: *a. the value of the opportunities lost when a choice is made. b. the rewards of making a choice. c. the money cost that a person has to incur when making a choice. d. the incentive for a person to do anything. 2905. Which of the following is NOT an opportunity cost of going to college? a. the tuition cost b. the cost of textbooks *c. the costs of food and shelter d. the lost employment opportunities while in college 2906. People make decisions by comparing: *a. marginal benefits with marginal costs. b. total benefits with total costs. c. total benefits to them personally with the marginal cost to other people. d. marginal benefits to them personally with the total cost to other people. 2907. A new college graduate decides to go to graduate school instead of accepting a job offer. Which of the following would be a major factor for that decision? *a. The amount of additional income he or she will earn after completing the graduate degree as compared with the income from the job offer. b. Only the total income from getting the graduate degree. c. Only the total income from that job offer. d. None of the answers are correct. 2908. Which of the following is NOT a reason that specialization and trade are beneficial? *a. product variety b. division of knowledge c. economies of scale d. higher productivity 2909. Most economists believe that wealth generally: *a. leads to more fulfilled human lives. b. has nothing to do with human well-being. c. reduces human well-being. d. leads to conflicts among nations. 2910. According to the text, malaria ended in the United States because: *a. people could afford to pay for the prevention of the disease. b. of a government health care program. c. of technological advances in medical treatments. d. of the growth of other countries. 2911. According to the text, the main reason for the substantial income gap between South and North Korea is: a. the civil war in North Korea. *b. differences in institutions. c. interventions from foreign governments. d. differences in natural resources. 2912. All of the following are institutions that provide people with good incentives, EXCEPT: *a. government control of markets. b. property rights. c. political stability. d. a dependable legal system. 2913. Historically, the U.S. economy has: a. grown at a constant pace. *b. experienced both growth and contraction. c. experienced only rapid growth. d. remained at a constant level over time. 2914. Inflation refers to: *a. an increase in the general price level. b. an increase in the value of money. c. an increase in price of one good. d. an increase in the money supply. 2915. When the government prints too much money: a. some prices increase while other prices decrease. b. the general level of prices decreases. *c. the general level of prices increases. d. inflation becomes negative. 2916. Which of the following is TRUE about the tasks of a central bank? *a. It is difficult to supply the right amount of money without leading the economy to a recession or having too much inflation. b. The central bank can always supply a large amount of money to keep the economy expanding. c. The central bank can always supply more money to save the economy from having too much inflation. d. The central bank does nothing beneficial for the economy. 2917. According to the textbook, all of the following are Big Ideas in economics, EXCEPT: a. “prices rise when the government prints too much money.” b. “good institutions align self-interest with the social interest.” c. “trade-offs are everywhere.” *d. “economic booms and busts can always be avoided by the government.” 2918. Which of the following is TRUE of the economics discipline? *a. Economics helps us understand how the world functions. b. Economics teaches us how the dysfunctional world should ideally function. c. Economics is all about the theory of how people should behave. d. Economics is a science that explains the world only through math and equations. 2919. The benefits of specialization and trade include all of the following, EXCEPT: a. the division of knowledge that raises productivity. b. economies of scale. *c. the protection of domestic firms against foreign competition. d. allowing countries to produce at the lowest opportunity costs. 2920. Because the knowledge of each individual brain is limited, specialization leads to: a. lower labor productivity. *b. higher labor productivity. c. a higher absolute advantage. d. a lower absolute advantage. 2921. Trade can reduce per-unit production costs through: *a. economies of scale. b. raising tariff revenues. c. limiting competition. d. raising absolute advantages. 2922. The ability to produce a good at a lower opportunity cost than another producer is called: a. an opportunity advantage. b. economies of scale. c. an absolute advantage. *d. a comparative advantage. 2923. Suppose a farm hires two workers: Jason and Jose. In one hour, Jason can pick 30 apples or one pound of cherries. In one hour, Jose can pick 20 apples or one pound of cherries. Based on this information, the opportunity cost of picking one pound of cherries is: *a. higher for Jason than for Jose. b. higher for Jose than for Jason. c. the same for Jason and Jose. d. The opportunity cost cannot be determined. 2924. Suppose a farm hires two workers: Jason and Jose. In one hour, Jason can pick 30 apples or one pound of cherries. In one hour, Jose can pick 20 apples or one pound of cherries. Based on this information: a. Jason has an absolute advantage in picking cherries. b. Jose has an absolute advantage in picking cherries. *c. Jason has an absolute advantage in picking apples. d. Jose has an absolute advantage in picking apples. 2925. Suppose a farm hires two workers: Jason and Jose. In one hour, Jason can pick 30 apples or one pound of cherries. In one hour, Jose can pick 20 apples or one pound of cherries. According to the theory of trade, which of the following is TRUE about Jose? a. Jose should specialize in picking cherries because he has an absolute advantage in picking cherries. *b. Jose should specialize in picking cherries because he has a comparative advantage in picking cherries. c. Jose should pick both apples and cherries because he has an absolute advantage in doing both. d. Jose should be fired because he has no comparative advantage. 2926. A country should specialize in producing a good or service for which it has a: *a. lower opportunity cost. b. higher opportunity cost. c. lower absolute advantage. d. higher absolute advantage. 2927. The theory of comparative advantage implies that specialization and trade: a. increase production but decrease consumption. b. increase consumption but decrease production. *c. increase both production and consumption. d. decrease both production and consumption. 2928. Which of the following is a reason to trade with other countries? a. to take advantage of similarities *b. to take advantage of differences c. to exploit poor workers overseas d. to provide foreign aid to poor workers overseas 2929. Figure 2.1: The PPFs of the United States and Mexico. Refer to Figure 2.1. If it takes 15 units of labor to produce one computer in the United States, how many units of labor does the United States have available? a. 3.75 *b. 60 c. 26.67 d. 180 2930. Figure 2.1: The PPFs of the United States and Mexico. Refer to Figure 2.1. If it takes 15 units of labor to produce one computer in the United States, how many units of labor does it take to produce one shirt? a. 3 b. 0.33 *c. 5 d. 1.25 2931. Figure 2.1: The PPFs of the United States and Mexico. Refer to Figure 2.1. If the United States and Mexico have the same number of units of labor available, which of the following is definitely true? a. It takes fewer units of labor to make a shirt in the United States than it does in Mexico. *b. It takes fewer units of labor to make a computer in the United States than it does in Mexico. c. It takes more units of labor to make a shirt in the United States than it does in Mexico. d. It takes the same number of units of labor to make a computer in the United States as it does in Mexico. 2932. Figure 2.1: The PPFs of the United States and Mexico. Refer to Figure 2.1. The PPFs for the United States and Mexico are both downward-sloping because: a. they are trading partners. b. of the law of demand. c. increasing efficiency can lead to additional shirts and computers in both countries. *d. with fixed resources, both countries face a trade-off between shirts and computers. 2933. Figure 2.1: The PPFs of the United States and Mexico. Refer to Figure 2.1. What is the opportunity cost of one computer when it is produced in the United States? *a. 3 shirts b. 1/3 of a shirt c. 12 shirts d. 8 shirts 2934. Figure 2.1: The PPFs of the United States and Mexico. Refer to Figure 2.1. What is the opportunity cost of one shirt when it is produced in Mexico? a. 1 computer b. 4 computers c. 8 computers *d. 0.25 computers 2935. Figure 2.1: The PPFs of the United States and Mexico. Refer to Figure 2.1. Which country has a comparative advantage in the production of computers? *a. The United States b. Mexico c. Both countries have a comparative advantage in the production of computers. d. Neither country has a comparative advantage in the production of computers. 2936. Figure 2.1: The PPFs of the United States and Mexico. Refer to Figure 2.1. Which country has a comparative advantage in the production of shirts, and why? a. The United States, because it can produce more shirts than computers. b. The United States, because the opportunity cost of a shirt is lower in Mexico. *c. Mexico, because the opportunity cost of a shirt is lower in Mexico. d. Mexico, because the United States has the absolute advantage in the production of computers. 2937. Figure 2.1: The PPFs of the United States and Mexico. Refer to Figure 2.1. If the United States and Mexico each devote half of their resources to computers and half to shirts, total world production would be __________. If the United States and Mexico each completely specialize in the good for which they have a comparative advantage, total world production would be __________. *a. 3.5 computers and 12 shirts; 4 computers and 12 shirts b. 3.5 computers and 12 shirts; 7 computers and 24 shirts c. 7 computers and 24 shirts; 4 computers and 12 shirts d. 4 computers and 12 shirts; 7 computers and 24 shirts 2938. Differences in wages between countries reflect differences in: a. absolute advantage. b. exchange rates. *c. productivity. d. union density. 2939. A demand curve shows the relationship between: *a. the quantity demanded of a good and the good’s price. b. the quantity demanded of a good and consumer income. c. the quantity demanded of a good and the prices of other goods. d. the quantity that buyers are willing to buy and the quantity that sellers are willing to sell. 2940. According to the law of demand, if the price falls, then: a. the quantity demanded will fall. *b. the quantity demanded will rise. c. the quantity demanded will remain unchanged. d. the quantity demand will either rise or fall, depending on other factors. 2941. Consumer surplus is: a. the difference between the market price a consumer pays for a good and its production cost. b. the difference between the maximum price a consumer is willing to pay for a good and the price the consumer can afford to pay. *c. the difference between the maximum price a consumer is willing to pay for a good and its market price. d. the difference between the minimum price a consumer is willing to pay for a good and its market price. 2942. Graphically, total consumer surplus is the area: *a. beneath the demand curve and above the market price. b. beneath the market price and above the demand curve. c. beneath the equilibrium quantity and above the market price. d. above the equilibrium quantity and beneath the demand curve. 2943. Refer to the following graph of a linear demand curve. If the market price is $5, then total consumer surplus is: a. $250. *b. $350. c. $500. d. $600. 2944. All of the following are factors that shift the demand curve of ramen noodles, EXCEPT: *a. an increase in the price of ramen noodles. b. an increase in consumer income. c. a decrease in the price of pasta, which is a substitute for ramen noodles. d. a decrease in population. 2945. Suppose that ramen noodles are an inferior good. This means that an increase in: a. income will lead to an increase in the demand for ramen noodles. *b. income will lead to a decrease in the demand for ramen noodles. c. the price of ramen noodles will lead to an increase in the demand for ramen noodles. d. the price of ramen noodles will lead to a decrease in the demand for ramen noodles. 2946. Suppose the demand for X increases when the price of Y decreases. We can say that: a. X and Y are substitutes. *b. X and Y are complements. c. X and Y are unrelated. d. both X and Y are inferior goods. 2947. Natural gas is a substitute for oil. If the price of natural gas goes up, then: a. there will be an upward movement along the demand curve for oil. b. there will be a downward movement along the demand curve for oil. c. the demand curve for oil will shift to the left. *d. the demand curve for oil will shift to the right. 2948. The following graph shows the demand curve for peanut butter. Which of the following would most likely lead to a shift of the demand curve from D1 to D2? a. an increase in the price of peanut butter b. a decrease in the price of peanut butter c. a decrease in the price of bread, which is a complement to peanut butter *d. an increase in the price of bread, which is a complement to peanut butter 2949. If consumers expect the price of gasoline to rise tomorrow, then today’s demand curve for gasoline: *a. shifts to the right. b. shifts to the left. c. remains unchanged, but there is an upward movement along the demand curve. d. remains unchanged because nothing has actually changed yet. 2950. The supply curve indicates that: *a. the higher the price, the larger the quantity supplied. b. the higher the price, the smaller the quantity supplied. c. the higher the consumer demand, the larger the quantity supplied. d. the higher the input prices, the smaller the quantity supplied. 2951. A higher price leads to: a. an increase in the quantity demanded but a decrease in the quantity supplied. *b. a decrease in the quantity demanded but an increase in the quantity supplied. c. a shift of the demand curve to the left and a shift of the supply curve to the right. d. a shift of the demand curve to the right and a shift of the supply curve to the left. 2952. Producer surplus is: a. the difference between the market price and the price at which a seller sells the product. b. the difference between the maximum price at which a seller is willing to sell and the market price. *c. the difference between the market price and the minimum price at which a seller is willing to sell. d. the difference between the maximum price at which a buyer is willing to buy and the minimum price at which a seller is willing to sell. 2953. Graphically, total producer surplus is the area: *a. above the supply curve and below the market price. b. above the market price and below the supply curve. c. above the demand curve and below the supply curve. d. above the supply curve and below the demand curve. 2954. Refer to the following graph of a linear supply curve. If the market price is $5, then total producer surplus is: *a. $250. b. $350. c. $500. d. $600. 2955. All of the following lead to a shift of the supply curve to the right, EXCEPT: *a. an increase in the sales tax. b. entry of producers. c. a decrease in the price of inputs. d. a technological innovation that raises worker productivity. 2956. Refer to the following graph. Which of the following would most likely lead to a shift of the supply curve from S1 to S2? *a. an increase in the price of inputs b. an increase in the output price c. higher worker productivity in production d. an increase in the number of sellers 2957. Suppose a farmer can grow either oranges or apples with a given set of resources. If the price of oranges increases, then: a. the opportunity cost of growing apples decreases, so the farmer will grow more apples. b. the opportunity cost of growing apples decreases, so the farmer will grow fewer apples. c. the opportunity cost of growing apples increases, so the farmer will grow more apples. *d. the opportunity cost of growing apples increases, so the farmer will grow fewer apples. 2958. As sellers expect a decrease in the future price of iPhones: a. the supply curve of iPhones shifts to the left. *b. the supply curve of iPhones shifts to the right. c. there is an upward movement along the supply curve of iPhones. d. there is a downward movement along the supply curve of iPhones. 2959. Refer to the following diagram. When the price equals $4, there is a: a. surplus of 15 units. b. surplus of 30 units. c. shortage of 15 units. *d. shortage of 30 units. 2960. A surplus occurs when: a. the quantity supplied is less than the quantity demanded. *b. the quantity supplied is greater than the quantity demanded. c. the quantity supplied equals the quantity demanded. d. demand does not exist. 2961. If there is a shortage in the market for MP3 players: *a. the price of MP3 players will rise. b. the price of MP3 players will fall. c. the supply of MP3 players will rise. d. the demand for MP3 players will rise. 2962. Equilibrium in a market occurs when: a. the quantity demanded is greater than the quantity supplied. b. the quantity demanded is less than the quantity supplied. *c. the quantity demanded is equal to the quantity supplied. d. None of the other answers are sufficient to cause a market equilibrium. 2963. Refer to the following diagram. At market equilibrium: a. price equals $6 and quantity equals 55 units. *b. price equals $5 and quantity equals 55 units. c. price equals $5 and quantity equals 40 units. d. price equals $6 and quantity equals 40 units. 2964. Refer to the following diagram. If the price equals $4, market competition will: *a. push up the market price. b. push down the market price. c. keep the market price stable at that level. d. push the market price up and then back down to $4. 2965. Refer to the following diagram. If 55 units of the good are sold at $5: a. there are wasted resources. b. there are unsatisfied wants. c. there are unexploited gains from trade. *d. None of the other answers would be true. 2966. Refer to the following diagram. In a free market, the total amount of producer surplus and consumer surplus is the greatest when: a. 70 units are sold each at $6. *b. 55 units are sold each at $5. c. 40 units are sold each at $4. d. 0 units are sold each at $0. 2967. When a market is in equilibrium, all of the following necessarily occur, EXCEPT that: a. goods are bought by the buyers with the highest willingness to pay. b. goods are sold by the sellers with the lowest costs. c. there are no unexploited gains from trade nor any wasteful trades between buyers and sellers. *d. consumer surplus and producer surplus are equal to one another. 2968. A free market maximizes the gains from trade because: *a. buyers are willing to pay more for the good than nonbuyers. b. sellers are willing to sell the good at a higher price than nonsellers. c. there are mutual profitable deals between nonsellers and nonbuyers. d. there are no nonsellers or nonbuyers. 2969. According to the textbook, Vernon Smith’s laboratory experiment showed that: *a. market equilibrium was reached as predicted by economic theory. b. market equilibrium was reached much more slowly than predicted by economic theory. c. market supply always exceeded market demand. d. market demand always exceeded market supply. 2970. Refer to the following diagram for a normal good. The dashed line represents a new demand curve. Which of the following is a possible reason for the change in the diagram? *a. an increase in consumer income b. a decrease in input costs c. an increase in market price d. a decrease in market price 2971. As a result of an increase in demand: *a. both equilibrium price and equilibrium quantity increase. b. both equilibrium price and equilibrium quantity decrease. c. equilibrium price increases while equilibrium quantity decreases. d. equilibrium price decreases while equilibrium quantity increases. 2972. As a result of an increase in supply: a. both equilibrium price and equilibrium quantity increase. b. both equilibrium price and equilibrium quantity decrease. c. equilibrium price increases while equilibrium quantity decreases. *d. equilibrium price decreases while equilibrium quantity increases. 2973. If the world supply of oil increases, then: a. the market price will increase and the quantity demanded will increase. *b. the market price will decrease and the quantity demanded will increase. c. the market price will increase and demand will increase. d. the market price will decrease and demand will increase. 2974. The market price of milk has increased. Which of the following could be the reason? *a. an increase in the demand for milk b. a decrease in the demand for milk. c. an increase in the supply of milk d. a decrease in demand combined with an increase in supply 2975. Refer to the following diagram with four panels. A change in supply or demand is shown by a dashed line. Which panel shows an increase in the equilibrium quantity demanded caused by a change in supply? a. Panel A b. Panel B *c. Panel C d. Panel D 2976. Refer to the following diagram with four panels. A change in supply or demand is shown by a dashed line. Which panel shows an increase in the equilibrium quantity supplied caused by a change in demand? a. Panel A *b. Panel B c. Panel C d. Panel D 2977. Refer to the following diagram with four panels. A change in supply or demand is shown by a dashed line. Which panel shows an increase in the equilibrium price but a decrease in the equilibrium quantity? a. Panel A b. Panel B c. Panel C *d. Panel D 2978. The price of oil has increased. Each of the following could be the reason, EXCEPT: a. a war in the Middle East that reduced the world supply of oil. b. an increase in the world use of automobiles. c. a reduction in oil production by OPEC member countries. *d. a technological advance that reduced the cost of oil exploration. 2979. The elasticity of demand measures how sensitive the quantity demanded is to a change in: a. quantity supplied. *b. price. c. the price of other goods. d. income. 2980. When a decrease in price increases the quantity demanded by a large amount we say that demand is: *a. elastic. b. inelastic. c. perfectly elastic. d. perfectly inelastic. 2981. Demand will tend to be more inelastic if: a. there are more substitutes. b. more time goes by. c. the good is considered a luxury. *d. expenditures on the good are a small portion of consumers’ budgets. 2982. Over a longer period, the demand for a good will most likely: a. become less elastic. b. converge to a stable elasticity. *c. become more elastic. d. More information is needed to know what will happen to the demand. 2983. Sally considers a cell phone a luxury while Adam considers a cell phone a necessity. In comparing the elasticity of demand for cell phones for Sally and Adam, we would expect: *a. Sally's demand to be more elastic than Adam's demand. b. Sally's demand to be more inelastic than Adam's demand. c. Sally and Adam to have the same elasticity of demand, since the good is the same. d. More information about their incomes is needed to determine the elasticity of their demands. 2984. Since the introduction of the iPhone by Apple, many manufacturers have introduced phones that have relatively similar features and are considered by consumers as substitutes for the iPhone. As a result of the increase in the number of substitutes, we expect that the demand for the iPhone has: *a. become more elastic. b. finally become perfectly elastic. c. become more inelastic. d. More information is needed to determine what happens to the demand. 2985. The elasticity of demand is calculated by the formula: a. the change in the price divided by the change in quantity demanded. b. the change in the quantity demanded divided by the change in price. c. the percentage change in the price divided by the percentage change in quantity demanded. *d. the percentage change in the quantity demanded divided by the percentage change in price. 2986. If the price of gas increased by 20% and the quantity demanded decreased by 5%, then the elasticity of demand is: a. –1. b. –4. *c. –0.25. d. –0.2. 2987. If a business determines that the elasticity of the demand for its product is equal to –2, what will happen to quantity demanded if the business decreases its price by 4%? a. Quantity demanded will increase by 2%. *b. Quantity demanded will increase by 8%. c. Quantity demanded will decrease by .5%. d. Quantity demanded will decrease by 2%. 2988. Revenue is calculated as: a. price + quantity. b. price – quantity. c. price ÷ quantity. *d. price × quantity. 2989. When demand is inelastic: *a. when price increases, revenue also increases. b. when price increases, revenue decreases. c. when revenue increases, price decreases. d. when price decreases, quantity demanded also decreases. 2990. If a business increases its price and its revenue decrease, then we know that the elasticity of the demand its product is: a. perfectly inelastic. b. inelastic. c. unit elastic. *d. elastic. 2991. Elasticity of supply measures how sensitive: a. quantity demanded is to a change in quantity supplied. b. quantity demanded is to a change in price. c. quantity supplied is to a change in quantity demanded. *d. quantity supplied is to a change in price. 2992. A perfectly inelastic supply curve is a __________ line. a. horizontal *b. vertical c. upward-sloping line d. downward-sloping line 2993. Supply will be relatively more elastic: a. when it is difficult to increase production at constant unit cost. b. in the short run. c. for the global supply of any particular good. *d. for manufactured goods. 2994. When a good is manufactured using a large share of the market for inputs, the elasticity of supply will typically be: *a. more inelastic. b. more elastic. c. perfectly elastic. d. unit elastic. 2995. The formula for calculating the elasticity of supply is: a. the percentage change in the price divided by the percentage change in quantity supplied. *b. the percentage change in the quantity supplied divided by the percentage change in price. c. the change in the price divided by the change in quantity supplied. d. the change in the quantity supplied divided by the change in price. 2996. If the price of a good increases by $10 (which represents a 5% increase), and as a result the quantity supplied increases by 40 units (which represents a 15% change), the elasticity of supply is: a. 0.25. b. 0.33. *c. 3. d. 4. 2997. To calculate a prediction of the percent change in price from a shift in demand, divide the percent change in demand by: a. the absolute value of the elasticity of demand – elasticity of supply. *b. the absolute value of the elasticity of demand + elasticity of supply. c. the absolute value of the elasticity of demand ÷ elasticity of supply. d. the absolute value of the elasticity of demand × elasticity of supply. 2998. If the supply of a good increases by 5%, and the elasticities of demand and supply are –0.6 and 0.4, respectively, then the percent change in price will be approximately: a. 0.2. *b. –5. c. 8.33. d. –12.5. 2999. Figure 6.1 Refer to Figure 6.1. A $5 tax is placed on the good in Figure 6.1. If the tax is placed on the consumer (the consumer is responsible for writing the check), then the price the consumer pays will _______ it would if the seller is responsible for sending the check to the government. a. increase by more than b. increase by less than *c. increase by the same amount as d. increase or decrease, depending on other factors, just like 3000. Figure 6.1 Refer to Figure 6.1. A tax of $5 causes the price paid by buyers to be equal to: *a. $15. b. $12. c. $10. d. $7. 3001. Figure 6.1 Refer to Figure 6.1. A tax of $5 causes the price received by sellers to be equal to: a. $15. b. $12. *c. $10. d. $7. 3002. Figure 6.1 Refer to Figure 6.1. Based on the graph, the total amount of tax revenue collected after the addition of a $5 tax is: *a. $375. b. $500. c. $100. d. $75. 3003. Figure 6.1 Refer to Figure 6.1. The total amount of deadweight loss created by a $5 tax in this market is: a. $500. b. $125. *c. $62.50. d. $25. 3004. Figure 6.1 Refer to Figure 6.1. A $5 tax in this market causes lost gains from trade (deadweight loss) primarily because: a. the price for buyers rises above $15. b. the price for sellers decreases below $10. c. the government collects tax revenue of $500. *d. the quantity of output in the market falls from 100 to 75. 3005. Figure 6.1 Refer to Figure 6.1. Based on the division of the economic burden of the tax, we can conclude that, for this market: *a. supply is more elastic than demand. b. both supply and demand are inelastic. c. demand is more elastic than supply. d. both supply and demand are unit elastic. 3006. If a tax is placed on the buyer in a market, then: *a. the demand curve shifts down by the amount of the tax. b. the demand curve shifts up by the amount of the tax. c. the supply curve shifts down by the amount of the tax. d. the supply curve shifts up by the amount of the tax. 3007. If a tax is placed on the producer then the: a. demand curve shifts down. b. demand curve shifts up. c. supply curve shifts down. *d. supply curve shifts up. 3008. When the demand is less elastic than supply, sellers pay ____ of the tax. a. more *b. less c. all d. none 3009. If ES is the elasticity of supply and ED is elasticity of demand, then the relative burden of the tax (burden to buyers divided by the burden to sellers) is equal to: a. ES + |ED|. b. ES – |ED|. c. ES × |ED|. *d. ES ÷ |ED|. 3010. Figure 6.2 Refer to Figure 6.2. If the government places a tax of $5 per unit, the tax revenue collected by the government is represented by the area: a. AB. b. ABC. *c. BCD. d. CD. 3011. Figure 6.2 Refer to Figure 6.2. Without a tax in this market, consumer surplus equals area(s) ___________; with a $5 tax in the market, consumer surplus equals area(s) __________. a. ABC; ABFCG b. ABF; A *c. ABFCG; A d. ABF; ABC 3012. Figure 6.2 Refer to Figure 6.2. Without a tax in this market, producer surplus equals area(s) ___________; with a $5 tax in the market, producer surplus equals area(s) __________. a. D; DEH b. DEH; H *c. DEH; E d. DEH; DE 3013. Figure 6.2 Refer to Figure 6.2. Which of the following areas represents part of the pre-tax consumer surplus that becomes part of the lost gains from trade after the implementation of a $5 tax in this market? a. B b. D *c. F d. H 3014. Figure 6.2 Refer to Figure 6.2. If the government places a tax of $5 in this market, the tax will create a deadweight loss represented by area: a. BC. b. D. c. FG. *d. FGH. 3015. Figure 6.2 Refer to Figure 6.2. A subsidy of $5 per unit would result in ____ units of the good being bought and sold in the market. a. 0 b. 75 c. 100 *d. 125 3016. Figure 6.2 Refer to Figure 6.2. A subsidy of $5 per unit would result in a price received by sellers of: a. $7. b. $10. *c. $12. d. $15. 3017. Figure 6.2 Refer to Figure 6.2. A subsidy of $5 per unit would result in a price paid by buyers of: *a. $7. b. $10. c. $12. d. $15. 3018. Figure 6.2 Refer to Figure 6.2. The implementation of a subsidy of $5 per unit would ultimately cost the government: a. $250. b. $375. c. $500. *d. $625. 3019. The immense cooperation that links worldwide markets can best be described as: a. involuntary and undirected. b. involuntary and directed. *c. voluntary and undirected. d. voluntary and directed. 3020. Individual market participants are willing to play their role in the complex worldwide markets ________ in their own self-interest, and the full story of how any one product is produced is ________ to understand. a. because it is; easy *b. because it is; too complex c. even though it is not; easy d. even though it is not; too complex 3021. If the price for airplane tickets to Hawaii increases because of a decrease in supply, what is the likely impact on the market for hotel rooms in Hawaii? a. an increase in demand *b. a decrease in demand c. an increase in supply d. a decrease in supply 3022. One method of solving the great economic problem of arranging our limited resources to satisfy infinite wants is the central planning approach. Which of the following are primary problems with central planning? a. information b. incentives c. control *d. both incentives and information 3023. A free market solves the information problem because the market price reflects: a. the value of the good's next highest-value use. b. the opportunity cost of the good. *c. both the value of the good’s next highest-value use and the opportunity cost of the good. d. the amount of profit that producers desire to make. 3024. Prices in a free market solve the incentive problem because consumers: a. can get all they want of the good for free. *b. have an incentive to buy less of something when its prices rises. c. will all purchase the same amount of the good. d. will only purchase the good if its value is less than the price. 3025. An increase in the price of plywood (used to cover windows) just before a hurricane hits an area shows that: a. firms are greedy. b. the market does not always allocate resources efficiently. c. the market allocates goods to consumers with the lowest ability and willingness to pay. *d. the market allocates goods to consumers with the highest ability and willingness to pay. 3026. If the equilibrium price for corn is $4 per bushel in a free market then we know that the willingness to pay for everybody who purchased corn is: a. less than $4 per bushel. b. less than or equal to $4 per bushel. c. exactly equal to $4 per bushel. *d. equal to or greater than $4 per bushel. 3027. An increase in price will signal: a. consumers to purchase less. b. consumers to consider substitute goods. c. producers to invest in production. *d. consumers to purchase less, consumers to consider substitute goods, and producers to invest in production. 3028. In a successful economy: a. all firms will make profits. *b. there will be many unsuccessful firms. c. no firms go bankrupt. d. all firms will suffer losses. 3029. Speculation is defined as the attempt to profit from: *a. future price changes. b. future quantity changes. c. buying up all available supplies of a good. d. selling all available supplies good. 3030. If speculators expect a higher price of the good in the future, they will want to: *a. buy the good today and sell in the future. b. buy the good today and buy more in the future. c. sell the good today and buy in the future. d. sell the good today and sell more in the future. 3031. Speculators make society _________ because speculators move goods to the period when the goods have ________ value. a. worse off; lower b. worse off; higher c. better off; lower *d. better off; higher 3032. A standardized contract to buy or sell specified quantities of a commodity or financial instrument at a specified price with a delivery set at a specified date is called: a. a derivative. b. speculation. *c. a future. d. a prediction market. 3033. Futures markets are also used to reduce risk by: a. locking in future prices of inputs, such as jet fuel. b. locking in future prices of outputs, such as crops. *c. locking in future prices of both inputs and outputs. d. Futures markets do not reduce risk. 3034. Stock analysts love to go on cable news shows and predict future events, including future stock prices. You should be more confident in the opinions of _______ because they ______. a. analysts; are paid for their opinion b. analysts; are highly trained experts c. speculators; are highly trained experts *d. speculators; have money at stake 3035. If a futures market is used to predict an event that is not the specific purpose of the market then it is likely that it is a ______ signal. a. perfect b. completely useless *c. noisy d. speculative 3036. A speculative market carefully designed so that prices can be interpreted as probabilities and to make predictions is called: a. a future contract. b. a derivative. *c. a prediction market. d. a commodity market. 3037. If the price of a share in Barack Obama for the 2012 Presidential Election was trading for 65 cents, then market participants are predicting: *a. that Obama has a 65% chance of winning the election. b. that Obama has a 35% chance of losing the election. c. the other candidates have a 65% chance of winning the election. d. Additional information is needed to answer the question. 3038. Markets are linked in which of the following ways? a. geographically b. across time c. across goods *d. Markets are linked geographically, across time, and across goods. 3039. A shortage occurs when, at the current price, the: *a. quantity demanded exceeds quantity supplied. b. quantity demanded equals quantity supplied. c. quantity supplied exceeds quantity demanded. d. demand equals supply. 3040. All of the following are typical effects of price ceilings, EXCEPT: a. shortages. b. a loss of gains from trade. c. a misallocation of resources. *d. improvements in product quality. 3041. With price ceilings, sellers will typically have more customers than they have goods. As a result, sellers will have an incentive to: a. raise price and increase profits. b. reduce costs. *c. reduce quality. d. reduce price. 3042. Figure 8.1 In Figure 8.1, the shortage created by the price ceiling of price level B is represented by the different between: a. Q1 and Q0. b. Q2 and Q1. c. Q3 and Q2. *d. Q3 and Q1. 3043. Figure 8.1 In Figure 8.1, which of the price levels would be an effective price ceiling? a. A *b. B c. C d. A and B 3044. Figure 8.1 After a price ceiling of price B is imposed on the market in Figure 8.1, the vertical distance that represents the maximum time cost that consumers are willing to bear waiting in line is: a. price A. b. price B. c. the distance between price C and price B. *d. the distance between price A and price B. 3045. Figure 8.1 The areas in Figure 8.1 that represent the total maximum value of wasted time with the price ceiling of price B are: a. G and H. b. E and F. *c. F and G. d. I and J. 3046. Figure 8.1 In Figure 8.1, the area that represents the lost consumer surplus due to a price ceiling of price B is: *a. I. b. J. c. K. d. I plus J. 3047. Figure 8.1 In Figure 8.1, the area that represents the deadweight loss due to a price ceiling of price B is: a. I. b. J. c. K. *d. I plus J. 3048. Figure 8.1 In Figure 8.1, the consumer surplus with a free market is represented by area EFI. With a price ceiling of price B, the lost gains from trade plus the total value of the wasted time will reduce consumer surplus to area: *a. E. b. F. c. I. d. E and F. 3049. Price ceilings interfere with the ______ that prices provide in free markets. a. information b. incentives *c. information and incentives d. profits 3050. Rent control is an artificial reduction in the market price for apartments. The percentage change in quantity supplied will be _______ for a given percentage change in price. *a. smaller in the short run than in the long run b. smaller for wealthy renters than for poor renters c. larger in the short run than in the long run d. larger for wealthy renters than for poor renters 3051. Price controls could be a good idea: a. in all markets. b. when trying to help sellers of a good. *c. when a shortage of the particular good is a desired outcome by society. d. never. 3052. The shortage of gasoline in Iraq in 2003 was directly caused by: a. black marketers. b. refineries. c. the United States taking all the gasoline. *d. a price ceiling. 3053. Price controls exist despite the analysis of economists because: a. economists are wrong in their analysis. b. price controls really do benefit countries in most cases. *c. the public typically does not connect the negative outcomes of a price ceiling directly to the existence of a price ceiling. d. price controls never harm consumers because price ceilings result in lower prices. 3054. Figure 8.2 Refer to Figure 8.2. The price level that would represent an effective price floor is: a. P1. b. P2. c. P3. *d. P4. 3055. Figure 8.2 Refer to Figure 8.2. A price floor at the price level of ______ would result in a _______ of the quantity Q3 minus Q1. a. P2; surplus b. P2; shortage *c. P4; surplus d. P4; shortage 3056. Figure 8.2 Refer to Figure 8.2. A price floor of price level P2, would: *a. have no effect on the market equilibrium. b. increase the price paid by consumers. c. result in a shortage of Q3 – Q1. d. result in a surplus of Q3 – Q1. 3057. Figure 8.2 Refer to Figure 8.2. The lost gains from trade (deadweight loss) from a price floor of P4 are represented by the area: a. AB. *b. CD. c. BE. d. EF. 3058. Price floors create all of the following effects, EXCEPT: a. surpluses. b. a loss of gains from trade (deadweight loss). *c. decreases in quality. d. a misallocation of resources. 3059. A restriction on the quantity of goods that can be imported is: *a. a quota. b. a tariff. c. dumping. d. outsourcing. 3060. Compared with free trade, a tariff causes: a. an increase in exports. b. no change in exports or imports. c. an increase in imports. *d. a decrease in imports. 3061. Figure 9.1 Refer to Figure 9.1. If free trade is allowed, this country will: *a. import 700 units of this good. b. import 300 units of this good. c. export 300 units of this good. d. export 700 units of this good. 3062. Figure 9.1 Refer to Figure 9.1. If this country moves from a no-free-trade market equilibrium to free trade, the total amount of the good produced domestically: a. would not change. b. would increase from 400 to 700. c. would decrease from 700 to 400. *d. would decrease from 400 to 0. 3063. Figure 9.1 Refer to Figure 9.1. If this country moves from a no-free-trade market equilibrium to free trade, the total amount of the good consumed domestically: a. would not change. *b. would increase from 400 to 700. c. would decrease from 700 to 400. d. would decrease from 400 to 0. 3064. Figure 9.1 Refer to Figure 9.1. If this country moves from a no-free-trade market equilibrium to free trade, the price that domestic buyers pay for this good: a. would remain at $4. b. would rise from $4 to $6. *c. would fall from $6 to $4. d. would remain at $6. 3065. Figure 9.1 Refer to Figure 9.1. If this country moves from a no-free-trade market equilibrium to free trade, consumer surplus would increase by: *a. $1,100. b. $800. c. $1,400. d. $350. 3066. Figure 9.1 Refer to Figure 9.1. Suppose a tariff is imposed so that the equilibrium price with the tariff is $6. The total value of wasted resources as a result of the tariff is: *a. $400. b. $800. c. $1,600. d. $2,400. 3067. Figure 9.1 Refer to Figure 9.1. Suppose a tariff is imposed so that the equilibrium price with the tariff is $6. The total cost of the tariff to people in that country is: a. $400. *b. $700. c. $1,400. d. $2,800. 3068. In general, a tariff benefits: I. domestic consumers II. domestic producers III. the domestic government a. I only b. Both I and II *c. Both II and III d. I, II, and III are all correct. 3069. In general, an import quota hurts: I. domestic consumers II. domestic producers III. the domestic government *a. I only b. II only c. Both II and III d. I, II and III are all correct. 3070. According to the textbook, trade protectionism in the United States has: *a. saved some jobs and destroyed other jobs. b. only saved jobs without destroying any other jobs. c. only destroyed jobs without saving jobs. d. not saved or destroyed any jobs. 3071. When tariffs are reduced: *a. it is easy to see the jobs lost, but difficult to see the jobs gained. b. it is difficult to see the jobs lost, but easy to see the jobs gained. c. it is easy to see the jobs lost, and no jobs are gained. d. it is difficult to see the jobs gained, but no jobs are lost. 3072. Job destruction is __________ a growing economy. We __________ ignore the costs to workers of transitioning from one job to another. a. a healthy part of; can easily *b. a healthy part of; should not c. not necessary in; can easily d. not necessary in; should not 3073. According to the textbook, child labor can be reduced by: a. reducing the extent of trade. b. raising the poverty level. *c. reducing the opportunity cost of education. d. raising population growth. 3074. The statistics reveal that the percentage of children in the labor force: a. is unrelated to real GDP per capita. b. is a significant factor in determining real growth rates. c. rises with real GDP. *d. is negatively correlated with real GDP per capita. 3075. Which of the following goods has been protected from trade in the name of national security? a. beeswax b. mohair c. steel *d. Beeswax, mohair, and steel have all been protected from trade in the name of national security. 3076. One reason why U.S. labor unions are often the biggest lobbyists for bills to restrict trade on behalf of “oppressed foreign workers” might be: a. because these workers are willing to take lower wages in order to help oppressed workers. *b. because trade restrictions will insulate their industries from the effects of foreign competition. c. that products made by oppressed foreign workers are of substandard quality. d. that they themselves are oppressed. 3077. A possible rebuttal to the “key industry” argument in favor of protectionism is that: a. all industries are “key” for one reason or another. b. spillovers between industries don’t actually benefit the economy. *c. no one knows in advance which industries are the ones with the most important spillovers. d. trade barriers like import quotas and tariffs are not effective at protecting industries from foreign competition. 3078. Which of the following is a valid economic argument against international trade, according to the textbook? a. Trade reduces the number of domestic jobs. b. Trade protection helps to reduce child labor in poor countries. c. People can raise their living standards with strategic trade protectionism. *d. None of the answers are correct. 3079. A cost paid by the consumer or the producers is called a(n): *a. private cost. b. external cost. c. social cost. d. social surplus. 3080. A cost borne by people other than the consumer or the producer trading in the market is a(n): a. private cost. *b. external cost. c. social cost. d. social surplus. 3081. The social cost is: a. private cost. b. consumer cost. c. external cost. *d. the private cost plus the external cost. 3082. Social surplus is consumer surplus: a. minus producer surplus. b. plus producer surplus. c. minus producer surplus minus everyone else’s surplus. *d. plus producer surplus plus everyone else’s surplus. 3083. The efficient quantity is the quantity that maximizes: a. consumer surplus. b. producer surplus. c. deadweight loss. *d. social surplus. 3084. The social cost curve is: *a. higher than the supply curve by the amount of the external cost. b. lower than the supply curve by the amount of the external cost. c. higher than the demand curve by the amount of the external cost. d. lower than the demand curve by the amount of the external cost. 3085. Figure 10.1 Refer to Figure 10.1. At the market equilibrium, the deadweight loss caused by the external cost is represented by the area on graph labeled: a. A. *b. B. c. C. d. D. 3086. Figure 10.1 Refer to Figure 10.1. The efficient quantity occurs at quantity: a. 1. *b. 2. c. 3. d. 4. 3087. To achieve the efficient quantity in a market with external costs, the government should implement a tax equal to: a. marginal benefit. b. marginal private cost. *c. external cost. d. deadweight loss. 3088. The benefit received by people other than the consumers or producers trading in the market is called: a. consumer surplus. b. producer surplus. c. external cost. *d. external benefit. 3089. Figure 10.2 Refer to Figure 10.2. Assuming no external costs, the efficient quantity occurs at quantity: a. 1. b. 2. *c. 3. d. 4. 3090. Figure 10.2 Refer to Figure 10.2. The deadweight loss that occurs at the market equilibrium is represented by area: a. A. *b. B. c. C. d. D. 3091. If a subsidy is introduced in a market that is equal to the external benefit then the result is: a. overuse. b. underuse. c. too high of a market price. *d. the efficient quantity. 3092. The social benefit is equal to: *a. marginal benefit plus external benefit. b. marginal benefit minus external benefit. c. marginal cost plus external benefit. d. marginal cost minus external benefit. 3093. Transaction costs are defined as: *a. the costs necessary to reach an agreement. b. the costs of production. c. the external costs. d. the social costs. 3094. The Coase Theorem states that if transaction costs are _____ and property rights are _________ defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities. a. low; poorly b. high; poorly *c. low; clearly d. high; clearly 3095. When there are external costs, the market quantity is greater than the efficient quantity. With command and control, the government _____ have enough information to choose the ______ costly method of achieving the goal. a. does not need to; least *b. may not; least c. will always; most d. may not; most 3096. A tax will cost ______ than command and control because with a tax people reduce consumption in a way that is ______ costly to them. a. more; most b. more; least c. less; most *d. less; least 3097. Command and control can be used if the best approach to the problem is _______ and if success _______ very strong compliance. *a. well known; requires b. well known; does not require c. not well known; requires d. not well known; does not require 3098. Pollution allowances: a. must be given to firms freely by the government in order to work well. b. cannot achieve the same outcome as taxes. c. Both a and b are true. *d. Neither a nor b are true. 3099. Economists typically assume that a firm’s only goal is to maximize: a. revenue. b. sales. c. costs. *d. profit. 3100. To maximize profit, a firm in a competitive market will sell: a. above the market price. *b. at the market price. c. below the market price. d. at or above the market price. 3101. In a competitive market, a firm is competing against other firms whose product is a perfect substitute. Therefore, demand for the firm’s product is perfectly ________ and so the demand curve the firm faces is _________. *a. elastic; flat b. elastic; vertical c. inelastic; flat d. inelastic; vertical 3102. In perfect competition, the market demand curve is ________, and an individual firm’s demand curve is __________. a. flat; flat b. flat; downward-sloping c. downward-sloping; downward-sloping *d. downward-sloping; flat 3103. Which of the following conditions are necessary for a perfectly elastic demand curve for a firm’s output to be a reasonable approximation? a. The product being sold is similar across different firms. b. There are many buyers and sellers. c. Each buyer and seller represents a relatively small share of the market. *d. All of the answers are necessary conditions. 3104. Interest is a(n) _________ cost if someone borrows money from a bank to start a business. Interest is a(n) _________ cost if someone uses his or her personal savings to start a business. a. fixed; variable *b. explicit; implicit c. implicit; explicit d. variable; fixed 3105. Which of the following is TRUE about the relationship between economic profit and accounting profit? *a. For any given firm, its accounting profit is higher than its economic profit. b. For any given firm, its economic profit is higher than its accounting profit. c. For any given firm, its economic profit and its accounting profit are identical. d. For any given firm, its accounting profit and its economic profit may not be equal, though in theory they ought to be. 3106. Costs that do not vary with output are: a. variable costs. *b. fixed costs. c. average costs. d. marginal cost. 3107. The cost of producing a given quantity of output is: *a. total cost. b. fixed cost. c. variable cost. d. marginal cost. 3108. The firm will maximize profits by producing a quantity of output such that: a. total revenue equals total cost. *b. marginal revenue equals marginal cost. c. marginal revenue is less than marginal cost. d. marginal revenue is greater than marginal cost. 3109. Marginal revenue is equal to: a. total revenue divided by quantity. b. change in total revenue divided by quantity. c. total revenue divided by the change in quantity. *d. change in total revenue divided by the change in quantity. 3110. For a firm in a competitive market, the price is always equal to: a. total revenue. *b. marginal revenue. c. total cost. d. marginal cost. 3111. Total cost divided by quantity is equal to: a. fixed cost. b. variable cost. *c. average cost. d. marginal cost. 3112. Profit is equal to: a. (P – AC). *b. (P – AC) × Q. c. (P – MC). d. (P – MC) × Q. 3113. When a firm’s revenue is exactly enough to cover all of its costs (i.e., enough to pay labor and capital their ordinary opportunity costs), the firm is making: a. economic profits. *b. normal profits. c. an economic loss. d. an accounting loss. 3114. A firm should go out of business if it: a. is currently making a loss. b. is currently making zero profit. c. has a zero lifetime expected profit. *d. has a negative lifetime expected profit. 3115. A sunk cost is a cost that: *a. once incurred can never be recovered. b. increases as output increases. c. does not vary with output. d. affects all firms in an industry. 3116. If firms are making losses, then market will adjust as firms exit, causing the market supply to ______ and the market price to ________. a. increase; increase b. increase; decrease *c. decrease; increase d. decrease; decrease 3117. In a constant cost industry, the long-run supply curve is: a. upward-sloping. *b. flat. c. downward-sloping. d. vertical. 3118. An industry in which industry costs increase with greater output is called: a. a zero profit industry. b. a marginal cost industry. *c. an increasing cost industry. d. a perfectly competitive industry. 3119. If MC is equal for all of the firms in an industry, then we know that: a. total revenue is maximized. b. total revenue is minimized. c. total costs of production are maximized. *d. total costs of production are minimized. 3120. When perfectly competitive markets are in equilibrium, then for each firm: a. MR = MC. b. P = MR. c. P = MC. *d. All of the answers are true for each firm when perfectly competitive markets are in equilibrium. 3121. If the marginal cost of production at Firm 1 (MC1) is greater than the marginal cost of production of the same good at Firm 2 (MC2), then to reduce total costs of production: a. more output should be produced at Firm 1, and less output should be produced at Firm 2. b. more output should be produced at both Firm 1 and Firm 2. *c. less output should be produced at Firm 1, and more output should be produced at Firm 2. d. more output should be produced at Firm 2, and the amount of output produced at Firm 1 should not change. 3122. In a free market, total industry costs of production are minimized: *a. even though no actor in the market intends to do so. b. because all of the actors in the market have worked very hard to do so. c. despite the fact that all actors in the market have worked hard to avoid doing so. d. because government regulations usually require this to be true. 3123. It would be difficult for a central planner to minimize total costs of production in an industry with many diverse firms primarily because the central planner: a. would have a strong incentive to let costs rise in the industry. b. would respond to the signals sent by prices in the market. *c. would lack the necessary knowledge about marginal costs at all of the firms. d. would face at least some uncooperative producers in the industry. 3124. Entry and exit decisions not only work to ________ economic profits, they also work to move labor and capital to ________ industries. a. eliminate; low-profit *b. eliminate; high-profit c. increase; low-profit d. increase; high-profit 3125. Suppose that firms in Industry A are earning 5% real annual rates of return, while firms in Industry B are earning 8% real annual rates of return. All else equal, we would expect: *a. labor and capital to move from Industry A to Industry B. b. labor and capital to move from Industry B to Industry A. c. labor to move from Industry A to Industry B, and capital to move from Industry B to Industry A. d. labor to move from Industry B to Industry A, and capital to move from Industry A to Industry B. 3126. If two industries have the same costs, but prices in the first industry are higher than prices in the second industry, this means that: a. labor and capital in the second industry are not being put to their best use. b. the output produced in the first industry is more valuable than the output produced in the second industry. c. labor and capital will eventually move from the second industry to the first industry. *d. All of the answers are true. 3127. High profits in an industry encourage __________, which causes prices to __________, which causes high profits to __________. a. exit; rise; increase b. neither entry nor exit; remain stable; persist *c. entry; fall; disappear d. entry; rise; increase 3128. If the rate of profits in Industry Y is greater than the rate of profits in Industry Z, then total value would increase if: a. costs in Industry Z were reduced. *b. resources were moved from Industry Z to Industry Y. c. the rate of profit in Industry Y were reduced through taxation until it was equal to the rate of profit in Industry Z. d. prices in Industry Z were reduced. 3129. The great economic problem: a. has been completely solved, and all markets are currently in equilibrium. b. is not worth discussing, since it is unsolvable. *c. is never solved completely, since change is constant in the economy. d. is typically solved about once every 20 years. 3130. The elimination principle says that above-normal and below-normal profits are eliminated by: *a. entry and exit, respectively. b. exit and entry, respectively. c. taxes and subsidies, respectively. d. subsidies and taxes, respectively. 3131. Creative destruction is a phrase that was coined by: a. Adam Smith. b. F.A. Hayek. c. Alex Tabarrok and Tyler Cowen *d. Joseph Schumpeter 3132. In a dynamic economy, above-normal profits are constantly being __________, and new sources of profits are constantly being __________. a. created by competition; eliminated through innovation *b. eliminated by competition; created through innovation c. created through innovation; eliminated by competition d. eliminated through innovation; created by competition 3133. To earn consistent above-normal profits, entrepreneurs must: *a. innovate. b. cheat. c. copy what other profitable firms are doing. d. reduce costs. 3134. For the competitive process to work, it is important that: a. firms do not innovate. b. certain key industries are tightly regulated. c. firms never earn above-normal profits. *d. prices accurately signal costs and benefits. 3135. Prices may not send accurate signals in the presence of: *a. externalities. b. perfect competition. c. entrepreneurship. d. creative destruction. 3136. Output will __________ in a monopoly or oligopoly. a. be at the efficient level in the long run *b. be too low c. have a price that is equal to marginal cost d. send the wrong signals 3137. Self-interest and the social interest align: a. all the time, in the right direction. b. never. *c. sometimes. d. all the time, in the wrong direction. 3138. Good institutions align self-interest with the social interest, but: a. institutions can never actually be “good” in this sense. b. bad institutions may also align self-interest with the social interest. c. the social interest is not something that economists worry about. *d. good institutions may be hard to find or create. 3139. The ability to raise price above average cost without fear that other firms will enter the market is called: *a. market power. b. mark-up. c. buying power. d. profit maximization. 3140. All of the following are examples of sources of market power, EXCEPT: a. patents. *b. diseconomies of scale. c. exclusive access to an important input. d. technological innovation. 3141. For a monopolist, the relationship between marginal revenue and price: a. is MR > P. b. is MR = P. *c. is MR < P. d. depends on the elasticity of demand. 3142. The change in ________ revenue from selling an additional unit is known as _______ revenue. a. total; average *b. total; marginal c. average; total d. average; marginal 3143. When a firm’s output of a product is ________ relative to the entire market’s output of that product, an increase in the firm’s output will cause the market price of that product to __________. a. small; rise b. small; fall c. large; rise *d. large; fall 3144. If the demand curve is a straight line, the marginal revenue curve is a straight line beginning at the same point on the _______ axis as the demand curve but with _______ the slope. a. vertical; half *b. vertical; twice c. horizontal; half d. horizontal; twice 3145. To maximize profits, the monopolist will select a quantity where marginal revenue ________ marginal cost. a. is greater than *b. is equal to c. is less than d. has the same absolute value as 3146. At the profit-maximizing level of output, the monopolist will set the price at the point on the _________. a. marginal revenue curve *b. demand curve c. marginal cost curve d. total profit curve 3147. The monopolist’s profit can be calculated by using the formula: *a. (P – AC) × Q. b. (MR – AC) × Q. c. (P – MC) × Q. d. (MR – MC) × Q. 3148. The __________ inelastic the demand curve, the __________ a monopolist will raise its price above __________. *a. more; more; marginal cost b. more; less; marginal cost c. less; less; average cost d. less; more; average cost 3149. Use this figure to answer questions 11-15 Figure 13.1 Refer to Figure 13.1. The monopolist will maximize profits by setting a price equal to: a. P1. b. P2. *c. P3. d. P4. 3150. Figure 13.1 Refer to Figure 13.1. The profit maximizing monopolist will sell output equal to: a. Q1. *b. Q2. c. Q3. d. Q4. 3151. Figure 13.1 Refer to Figure 13.1. The area on the graph that represents the monopolist's profit is: a. CDFGJ. *b. CDFG. c. FGHJKL. d. FGH. 3152. Figure 13.1 Refer to Figure 13.1. The area on the graph that represents the consumer surplus in the case of a monopoly is: *a. AB. b. ABCD. c. ABCDE. d. ABCDEFGHI. 3153. Figure 13.1 Refer to Figure 13.1. The area on the graph that represents the deadweight loss in the case of a monopolist is: a. AB. b. CDFG. *c. EHI. d. I. 3154. In an economy dominated by monopolies, firms want to _________ prices, and the changes in cost spread throughout the economy resulting in ___________. a. lower; economic growth b. lower; poverty and stagnation c. raise; economic growth *d. raise; poverty and stagnation 3155. Patents give firms an expectation of ________, and this can potentially ________ innovation and therefore economic growth. a. losses; discourage b. losses; encourage c. profits; discourage *d. profits; encourage 3156. A natural monopoly gets market power from ___________. A single firm is able to supply the entire market at a ________cost than can two or more firms. a. the government; lower b. the government; higher *c. economies of scale; lower d. economies of scale; higher 3157. By setting the price charged by a monopolist at the point at which the marginal cost curve intersects the demand curve, government regulators can achieve: a. lower prices and lower output. b. higher prices and lower output. *c. lower prices and higher output. d. higher prices and higher output. 3158. All of the following are sources of market power, EXCEPT: a. patents. b. laws preventing entry of competitors. c. hard-to-duplicate inputs. *d. diseconomies of scale. 3159. Price discrimination occurs when a firm sells: a. different products at the same price to different customers. b. different products at different prices to different customers. c. the same product at the same price to different customers. *d. the same product at different prices to different customers. 3160. Price discrimination is: a. illegal in most states. b. only done by firms that are monopolies. *c. easy to find if you look for it. d. only possible if firms can separate markets geographically. 3161. If the demand curves of two separate markets are identical, a firm will find it most profitable to charge __________ prices in the two markets because the marginal revenue curves are ________in the two markets. a. different; the same b. different; different *c. the same; the same d. the same; different 3162. If a firm is able to divide their customers into two groups, the firm can maximize profits by setting _________ equal to marginal cost in each market. *a. marginal revenue b. demand c. price d. average cost 3163. If a firm segments the market and practices price discrimination, which of the following statements is correct about the new prices relative to a single price monopoly? a. The new prices are both higher. b. The new prices are both lower. *c. One of the new prices is higher and one of the new prices is lower. d. There is not enough information to answer the question. 3164. Assume that a company practices perfect price discrimination. The company is: *a. charging each customer a price exactly equal to their maximum willingness to pay. b. charging two different prices to two different groups of customers. c. requiring that two different products be purchased together. d. charging the same price to all customers. 3165. Which of the following are principles of price discrimination? I. It is more profitable to set different prices in different markets than a single price. II. The monopolist should set a higher price in markets with more inelastic demand. III. Arbitrage makes it difficult to practice price discrimination. a. I only b. I and II only c. III only *d. I, II, and III 3166. To maximize profit, the monopolist should ________ in markets with more inelastic demand. *a. set a higher price b. not sell c. set a lower price d. allow arbitrage 3167. If a firm practices perfect price discrimination, the price of the last unit of the good sold will be _____ marginal cost. a. greater than *b. equal to c. less than d. There is not enough information to answer the question. 3168. If airlines were forced by regulators to charge all customers the same price, vacationers could expect: a. higher prices with no change in the number of available flights. b. fewer available flights at the same price. *c. both higher prices and fewer available flights. d. both lower prices and more available flights. 3169. If a firm is unable to prevent arbitrage, the firm: *a. will not be able to practice price discrimination effectively. b. will charge a higher price in the market with the more inelastic demand. c. will charge a higher price in the market with the more elastic demand. d. will charge each customer their maximum willingness to pay. 3170. Which of the following is NOT an example of arbitrage? a. buying furniture at a low price in North Carolina and then taking it to Maine and selling it for a higher price *b. going to a volume discount store and buying a 2-gallon container of mustard because it is cheaper per ounce than mustard purchased at a grocery store c. going to a discount outlet and buying electronics and then selling them for a higher price on eBay d. buying cases of bottles of water for $0.25 per bottle and selling them to tourists on the National Mall in Washington, DC, for $1.50 per bottle 3171. Suppose a McDonald’s restaurant in an airport charges higher prices than a McDonald’s restaurant in the city. We can assume that the demand in the airport is likely _______ than the demand in the city. Also, McDonald’s _______ prevent arbitrage. a. more elastic; can *b. more inelastic; can c. more elastic; cannot d. more inelastic; cannot 3172. In which industry would be the easiest to prevent arbitrage? a. clothing *b. haircuts c. furniture d. packaged food 3173. All of the following could be attempts to practice price discrimination, EXCEPT: *a. greeting Walmart customers as they enter the store. b. asking customers to enter their zip code when they visit a website. c. requiring future college students to submit their parents’ tax returns. d. talking to a potential buyer about a car that is for sale. 3174. Price discrimination will: a. always increase total surplus. b. always decrease total surplus. c. increase total surplus if output decreases in comparison with the result after no price discrimination. *d. increase total surplus if output increases in comparison with the result after no price discrimination. 3175. The quantity produced with perfect price discrimination is ______ the efficient quantity. a. greater than *b. equal to c. less than d. There is not enough information to answer the question. 3176. In industries with high fixed costs, price discrimination can: *a. help cover the fixed costs. b. reduce the ability to cover fixed costs. c. increase fixed costs. d. decrease fixed costs. 3177. Bundling is a form of price discrimination in which: a. the use of one good is dependent on a second good. b. each customer is charged his or her maximum willingness to pay. c. selling the same product at different prices. *d. products are required to be bought together in a package. 3178. If you purchase an iPhone at a store, you are required to also purchase a monthly mobile phone contract. This is an example of: a. bundling. *b. tying. c. perfect price discrimination. d. arbitrage. 3179. A cartel is a group of _______ who try to act as if they were a __________. a. buyers; competitive firm b. buyers; monopoly c. suppliers; competitive firm *d. suppliers; monopoly 3180. All the following are reasons that cartels collapse, EXCEPT: a. new entrants response. b. government prosecution. c. demand response. *d. All of the above are reasons that cartels collapse. 3181. A member of a cartel will find it profitable to cheat when: a. no other members cheat. b. only some of the other members cheat. c. all members cheat. *d. All of the answers are correct. 3182. A dominant strategy has a _______ payoff than any other strategy __________ what other players do. a. lower; depending on b. lower: no matter c. higher; depending on *d. higher; no matter 3183. Suppose Bill and Ted are assigned to work on a group project. Ted is bright and does excellent work. Bill struggles and makes quite a few errors. Suppose that each of the students can choose either to work hard or to take it easy. Also assume they will both receive the same grade on the project. The game is represented below. In the game: a. Ted does not have a dominant strategy. *b. Ted's dominant strategy is to work hard. c. Ted's dominant strategy is to take it easy. d. Both are dominant strategies for Ted. 3184. Suppose Bill and Ted are assigned to work on a group project. Ted is bright and does excellent work. Bill struggles and makes quite a few errors. Suppose that each of the students can choose either to work hard or to take it easy. Also assume they will both receive the same grade on the project. The game is represented below. In the game: *a. Bill does not have a dominant strategy. b. Bill's dominant strategy is to work hard. c. Bill's dominant strategy is to take it easy. d. Both are dominant strategies for Bill. 3185. Ginger and Mary are the only two students in a class. The professor tells the two students that she is going to assign relative grades. The exam is given as a take-home exam but the students are told to not look at their notes. Each student will write a better essay if they cheat, and they are sure they will not be caught. The strategies and payoffs are represented below. In each ordered pair, the first outcome is Ginger's grade, and the second outcome is Mary Ann's grade. Based on the above game, the expected outcome is: a. neither of the students cheats. b. Ginger does not cheat, but Mary Anne cheats. *c. both of the students cheat. d. We cannot predict the outcome because neither student has a dominant strategy. 3186. The prisoners' dilemma describes situations in which the pursuit of ________ interest leads to a group outcome that is in the interest of _________. a. individual; everyone *b. individual; no one c. group; everyone d. group; no one 3187. High prices of cartels will _______ entrants and _______ quantity demanded. a. attract; increase *b. attract; decrease c. discourage; increase d. discourage; decrease 3188. It is typically easier to maintain a cartel in a natural resource than in a manufactured good because: *a. it is hard to stop entry into the production of a good that can be produced anywhere. b. buyers are willing to pay higher prices for natural resources. c. cheating is more difficult to monitor in the production of natural resources. d. manufactured goods are generally produced in only a few places in the world. 3189. Major league basketball—the NBA—is: a. not a cartel because there are too many teams. b. an example of a cartel that has broken down over time because of cheating. *c. a buyers’ cartel that pays lower prices for inputs. d. a pure monopoly because there is no substitute for professional basketball. 3190. Antitrust laws give __________ the power to ____________ business practices that may be anticompetitive. a. companies; carry out b. companies; regulate or prohibit c. government; carry out *d. government; regulate or prohibit 3191. Government-supported cartels typically result in: a. higher prices. b. lower-quality service. c. less innovation. *d. All of the answers are typical results from government-supported cartels. 3192. Cartels are more likely to be successful under all of the following conditions, EXCEPT when: a. the good is limited in supply. *b. cheating is difficult to detect. c. the good is only found in a few places in the world. d. there are few substitutes for the good. 3193. A market dominated by a small number of firms is called: *a. an oligopoly. b. a monopoly. c. monopolistic competition. d. monopsony. 3194. An oligopoly will result in less output produced than in perfect competition because: a. reducing output in an oligopoly causes the price to fall. *b. reducing output in an oligopoly causes the price to rise. c. reducing output in an oligopoly causes new entrants into the market. d. all oligopolies are essentially cartels. 3195. The more firms there are in an oligopoly, the closer the price will be to: *a. the price under perfect competition. b. the monopoly price. c. average revenue. d. the marginal value of the good. 3196. The market structure known as monopolistic competition is like a monopoly in that __________; it is also like perfect competition in that __________. a. there is only one seller; price equals marginal revenue b. there are long-run positive profits; all buyers and sellers are price-takers. c. the firm earns zero average economic profit; the firms face downward-sloping demand curves for their products *d. the firm has some control over price; there are many firms in the market 3197. The fact that average costs are not minimized under monopolistic competition may be offset by the advantage of: a. uniform, standardized products. *b. greater dynamism and product variety. c. lower marginal costs. d. higher long-run industry profits. 3198. Which of the following is NOT explained in the textbook as one of the possible roles of advertising? a. to provide information b. to send signals about product quality *c. to help maintain a cartel d. to provide more enjoyment as part of the product 3199. A good whose value increases the more that other consumers use the good is called: *a. a network good. b. a normal good. c. an inferior good. d. a common good. 3200. All of the following are features of markets for network goods, EXCEPT: a. usually sold by monopolies or oligopolies. *b. the "best" product always wins. c. standard wars are common. d. competition is "for the market" instead of "in the market." 3201. Each of the following is given in the textbook as an example of a market leader that dominates its market, despite having some competitors, EXCEPT: a. Microsoft Office. b. eBay. c. Match.com. *d. Toshiba 3202. One of the characteristics of a coordination game is that: *a. the players are better off if they choose the same strategies. b. there is only one Nash equilibrium. c. the players are better off if they choose different strategies. d. it closely resembles a prisoner’s dilemma. 3203. Another characteristic of a coordination game is that: a. there is only one coordination equilibrium. *b. there are multiple strategies on which players could potentially coordinate. c. the players’ outcomes do not depend at all on the strategies chosen by other players. d. there are at least three players. 3204. A Nash equilibrium is a situation in which ______ players have an incentive to _________ their strategy unilaterally. *a. no; change b. no; keep c. some; change d. some; keep 3205. Use this figure to answer questions 7-9 Figure 16.1 Refer to Figure 16.1, which shows the outcomes for Fred and Barney's decisions about which video game console to purchase. If they play the same console, they both get more enjoyment from playing online together and sharing games. How many Nash equilibriums are there in this game? a. zero b. one *c. two d. four 3206. Figure 16.1 Refer to Figure 16.1, which shows the outcomes for Fred and Barney's decisions about which video game console to purchase. If they play the same console, they both get more enjoyment from playing online together and sharing games. How will this game probably end? a. Fred and Barney both choose PlayStation. b. Fred and Barney both choose Xbox. *c. Fred and Barney both choose the same console, but it could be either PlayStation or Xbox. d. Fred and Barney choose different systems, but it cannot be determined who will choose each system. 3207. Figure 16.1 Refer to Figure 16.1, which shows the outcomes for Fred and Barney's decisions about which video game console to purchase. If they play the same console, they both get more enjoyment from playing online together and sharing games. Is this a coordination game? *a. Yes, because the players do better if they choose the same system, regardless of which system. b. Yes, because there is one outcome that is better than all of the others. c. No, because there are two possible Nash equilibriums. d. No, because the outcome for each player is independent of the other player’s choice. 3208. The battle between Toshiba’s HD-DVD and Sony’s Blu-ray is an example of each of the following, EXCEPT: a. a standard war. b. a coordination game where there are two good equilibrium. *c. a prisoner’s dilemma. d. a common occurrence with network goods. 3209. In a standard war, the losing standard is likely to __________ and the winning standard is ____________ to last very long. a. stay around; guaranteed b. stay around; not guaranteed c. disappear quickly; guaranteed *d. disappear quickly; not guaranteed 3210. Firms that have successfully competed for the market, and have become the standard, typically do which of the following? *a. make choices in light of potential competition b. reduce the quality of customer service c. behave like a monopoly that has no competition d. begin competing in the market 3211. If a competitor can credibly enter a market and take away business from the incumbent, then economists say that the market is: a. perfectly competitive. b. a cartel. *c. contestable. d. not in a Nash equilibrium. 3212. A market is more likely to be contestable if: a. the fixed costs of market entry are high. *b. the fixed costs of market entry are low. c. the variable costs of market entry are high. d. the variable costs of market entry are low. 3213. A market is more likely to be contestable if: *a. there are few or no legal barriers to entry. b. there are many legal barriers to entry. c. the incumbent has a unique, hard-to

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Download 1. The demand curve for physician office visits is