Eccon Review 5-10

Demand is more inelastic for luxury goods. True or False

False

An attempt by one oligopolist to increase its market share by cutting prices will leave competitors unaffected. Explanation Any attempt by one oligopolist to increase its market share (either by nonprice competition or by cutting prices) will impact the market share of the other oligopolies in the market.

False

Because a perfectly competitive firm has no market power, its marginal cost curve is flat (i.e., horizontal). Explanation Because a perfectly competitive firm has no market power, its marginal revenue curve (demand) is flat (i.e., horizontal).

False

If the prices of the factors used to produce a good change, both the demand curve and the supply curve of the good will shift. True or False

False

Two indifference curves can cross one another. True or False

False

Unlike consumers and business firms, the public sector has no maximizing goals. True or False

False

When a firm sets its price on the basis of the price being charged by other firms in the market, there is evidence that the firm has market power. True or False Explanation A perfectly competitive firm is compelled to take the market price that is determined by the interaction of supply and demand and therefore has no market power.

False

When a rational consumer has stopped buying, she or he will have allocated a limited budget so that the marginal utility per good will be the same. True or False

False

Entry and exit are long-run investment decisions. Explanation An investment decision is the decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

True

For perfectly competitive firms, marginal revenue always equals price. True or False Explanation Because a competitive firm can sell all its output at the prevailing price, the marginal revenue will always be equal to price and the MR curve.

True

Product differentiation is used by an oligopoly in an effort to gain market share. Explanation Product differentiation is designed to make one firm's products appear different from and superior to those produced by other firms in order to gain market share.

True

Short-run choices imply that at least one factor of production is fixed. True or False Explanation The short run is the period in which the quantity (and quality) of some inputs can't be changed-in other words, they are fixed.

True

A payoff matrix shows Multiple Choice The risks and rewards of alternative decision options. The payoffs of one firm always choosing to price low. What companies will do no matter what the other firm does. The losses from strategic decisions of two countries. Explanation A payoff matrix shows either the profit or the loss for one firm given the choices of another firm.

The risks and rewards of alternative decision options.

The law of diminishing marginal utility gives us a deeper understanding of the downward-sloping demand curve because Multiple Choice When marginal utility is high, we are willing to pay a higher price. Consumers are willing to pay a higher price for a greater quantity. Consumers do not respond to a change in price.

When marginal utility is high, we are willing to pay a higher price.

Table 19.2 Quantity ConsumedTotal UtilityMarginal Utility115152 9330 4 3 In Table 19.2, the total utility when four units are consumed is Multiple Choice 6. 30. 33. 3.

33

In Figure 20.1, total revenue is maximized at the unit price of Multiple Choice $80. $60. $50. $100.

$100.

In the article "Men vs. Women: How They Spend," Multiple Choice Both sexes make the same annual income. Both sexes spend the same amount of money on clothing purchases. Both sexes spend more than they earn.

Both sexes spend more than they earn.

Restaurants like to give away free salty peanuts while you wait for your food in order to encourage you to Multiple Choice buy more peanuts at the souvenir shop. Buy expensive salty food on the menu. Buy more beverages. None of the choices are correct.

Buy more beverages.

Assume a given amount of output can be produced by several small plants or one large plant with identical minimum per-unit costs. This long-run situation reflects the existence of Multiple Choice Diseconomies of scale. Economies of scale. Diminishing returns. Constant returns to scale. Explanation When there is no economic advantage to a large plant, because a large plant is no more efficient than a small plant, constant returns to scale exist.

Constant returns to scale.

Refer to Figure 23.6 for a perfectly competitive firm. Given the current market price, we expect to see Multiple Choice Exit from this industry. Costs rise to absorb the profits earned by the firms in the industry. Entry into this industry. No change in the number of firms in this industry. Explanation Currently firms are experiencing economic losses (P < ATC), which will cause some firms to exit the market in the long run.

Exit from this industry.

The profit-maximizing rate of output in Figure 24.1 is Multiple Choice F. I. H. E. Explanation Profit is maximized at the output level where MR is equal to MC, at output level F.

F

All consumers in the market enjoy a consumer surplus. True or False

False

Cross-price elasticity looks at the impact that income changes have on sales. True or False

False

Market price is the same thing as equilibrium price. True or False

False

The cross-price elasticity sign for substitute goods is negative. True or False

False

In most markets, the equilibrium price is achieved Multiple Choice Through government mandate. Through trial and error. Using an equilibrium price formula. Through detailed databases. Explanation The equilibrium price is determined by the collective behavior of many buyers and sellers. The price is determined not by any single individual but rather by a simple process of trial and error until quantity demanded and quantity supplied are equal.

Through trial and error.

The term opportunity cost refers to Multiple Choice The most a consumer is willing to exchange to get an item. The slope of the demand line for a consumer or slope of the supply line for the producer. The minimum price that a producer will accept for a product. All of the choices are correct. Explanation Opportunity cost refers to the most desired good or service that is forgone in order to obtain something else.

All of the choices are correct.

For the perfectly competitive firm, the marginal revenue is always Multiple Choice Decreasing. Increasing. Constant. Equal to average total cost. Explanation Because a competitive firm can sell all its output at the prevailing price, the marginal revenue will always be equal to price and the MR curve will be equal to the demand curve.

Constant.

Total revenue plus total cost equals profit. True or False Explanation Total revenue minus total cost equals profit.

False

The average variable cost curve slopes upward with a higher rate of output in the short run because of Multiple Choice Implicit but not explicit costs. The effect of diminishing returns. Diseconomies of scale. The shape of the average fixed cost curve. Explanation At some point the average variable cost rises because of diminishing returns in the production process.

The effect of diminishing returns.

If catfish farmers expect catfish prices to fall in the future, then right now Multiple Choice The market supply curve for catfish will shift to the right. There will be a movement down along the market supply curve for catfish. The market supply curve for catfish will shift to the left. There will be a movement up along the market supply curve for catfish. Explanation Expectations of lower prices in the future will entice producers to produce more now, at higher price levels that increase supply.

The market supply curve for catfish will shift to the right.

If someone invents a more cost effective way to produce frozen pizzas, then Multiple Choice There will be a movement down along the market supply curve for frozen pizzas. The market supply curve for frozen pizzas will shift to the left. There will be a movement up along the market supply curve for frozen pizzas. The market supply curve for frozen pizzas will shift to the right. Explanation Technological improvements that reduce the cost of production will improve profit margins at every price level, which will increase supply.

The market supply curve for frozen pizzas will shift to the right.

Even if a market is not competitive, the firms in the market may behave competitively if Multiple Choice A natural monopoly exists. There are economies of scale. Potential competition exists. The market is regulated. Explanation In contestable markets, markets are subject to potential entry if prices or profits increase, and monopoly behavior may be restrained by potential competition.

Potential competition exists.

Evaluating a supply and a demand curve independently, if the equilibrium price rises, Multiple Choice The producer surplus will increase. The consumer surplus will fall. The consumer surplus will increase. The producer surplus will fall.

The consumer surplus will fall.

When the percentage change in quantity demanded is

B) Demand is inelastic.

Market power is the ability of a firm to Multiple Choice Advertise. Act as a price taker. Control the price and quantity supplied. Increase the number of substitute goods. Explanation Firms in an oligopoly have market power because they can influence the price of their products; in perfectly competitive markets sellers have no control over price.

Control the price and quantity supplied.

When individual supply curves shift, ceteris paribus, the market supply curve shifts. Explanation The market supply curve indicates the combined sales intentions of all market participants, so when one market participant changes, the market supply curve changes.

True

Advertising plays a role in reducing the cross-price elasticity of demand. Explanation Firms with market power attempt to preserve and extend that power through advertising.

True

An indifference curve shows the combinations of two goods that yield the same level of utility. True or False

True

Barriers to entry are obstacles that make it difficult or impossible for would-be producers to enter a particular market. Explanation Barriers to entry include patents, economies of scale, ownership of key resources, and government regulation, which prevent competitors from entering an industry.

True

Colluding oligopolists face a conflict between maximizing joint market profit or their own market share. Explanation Oligopolies' joint, or collective, interest is in maximizing industry profit. The individual interest of each oligopolist, however, is to maximize its own share of sales and profit. Obviously these goals may conflict.

True

Competitive market pressures were a driving force in the spectacular growth of the computer industry. Explanation The driving force behind all the price reductions, quality improvements, and growth in the computer industry is competition.

True

Marginal cost always reflects the cost of variable factors. True or False Explanation Marginal cost is the change in total cost that occurs when more output is produced. However, fixed costs are constant, so the change in total cost will be the result of a change in variable costs only.

True

Fixed costs Multiple Choice Increase as we move from the short run to the long run. Increase with the level of production in the short run. Are constant in the short run. Can be altered in the short run but not in the long run. Explanation The short run is the period in which the quantity (and quality) of some inputs can't be changed-in other words are fixed.

Are constant in the short run.

The long-run ATC curve is simply a composite of the best short-run ATC possibilities. True or False Explanation The long-run cost curve is just a summary of our best short-run cost possibilities, using existing technology and facilities.

True

Refer to Figure 21.5. Economies of scale occur in the following range of factory sizes Multiple Choice #1 through #5. #1 through #3. #3 only. #1 to #2. Explanation Reductions in minimum average costs that come about through increases in the size (scale) of plants and equipment occur over the range of plant sizes 1 through 3.

#1 through #3.

To calculate market supply, we Multiple Choice Add the quantities supplied for each individual supply schedule horizontally. Add the quantities supplied for each individual supply schedule vertically. Find the average quantity supplied at each price. Find the difference between the quantity supplied and the quantity demanded at each price. Explanation Market supply represents the combined supply quantities of all market participants.

Add the quantities supplied for each individual supply schedule horizontally.

When demand is elastic, the absolute number for price elasticity will be Multiple Choice Greater than 0. Greater than 1. Equal to 1. Less than 1.

Greater than 1.

A rightward shift in a demand curve and a leftward shift in a supply curve both result in a Multiple Choice Lower equilibrium price. Lower equilibrium quantity. Higher equilibrium price. Higher equilibrium quantity. Explanation An increase in demand causes equilibrium price and equilibrium quantity to increase. A decrease in supply causes equilibrium price to increase and equilibrium quantity to decrease.

Higher equilibrium price.

Which of the following statements about markets is not true? Multiple Choice Markets necessarily have a physical location. Markets have both a demand side and a supply side. The two types of markets include the factor and product markets. Every market transaction involves an exchange of money for goods or resources or a direct exchange of goods or resources without money called barter. Explanation Markets exist wherever and whenever an exchange takes place, even in cyberspace.

Markets necessarily have a physical location.

Refer to Figure 26.2 for a monopolistically competitive firm. At the profit-maximizing output and price, this firm is producing at an output level that achieves Multiple Choice Neither productive nor allocative efficiency. Productive efficiency. Maximum economies of scale. Allocative efficiency. Explanation The allocative efficient output level is where price is equal to marginal cost, and the production efficient output level is at the output level that minimizes ATC. The point that minimizes losses, where MR is equal to MC, does not correspond with either of those efficient points.

Neither productive nor allocative efficiency.

When the price of taking a ride in Uber increases, the demand for Lyft rides increases, ceteris paribus. Uber and Lyft are therefore Multiple Choice Complements. Substitutes. Inelastic. Elastic. Explanation If the cross-price elasticity of demand is positive, an increase in the price of Uber causes an increase in demand for Lyft, and the goods must be substitutes.

Substitutes

How might an oligopolist increase total revenue without changing price? Multiple Choice Reduce output. Reduce marketing efforts. Through nonprice competition. Reduce costs. Explanation The goal of nonprice competition is to influence demand. Advertising is an effective way to enhance market power by changing consumer tastes without changing prices.

Through nonprice competition.

To keep a market from being contested, firms might Multiple Choice Increase their concentration ratio. Practice price discrimination. Match price reductions by rivals. Seek to obtain a monopoly franchise from the government. Explanation A contestable market is an imperfectly competitive industry subject to potential entry if prices or profits increase. A government franchise will prevent entry and therefore will protect a firm's market power.

Seek to obtain a monopoly franchise from the government.

Higher education levels and better management Multiple Choice Shift the MC curve upward. Shift the long-run ATC curve downward. Cause MPP to slope downward. Lead to greater diseconomies of scale. Explanation Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the production function to shift upward and the production cost curves to shift downward-in particular the long-run ATC curve.

Shift the long-run ATC curve downward.

Table 21.4 Output (Units per Day)Total Cost (Dollars per Day)016130242358478 At 2 units of output in Table 21.4, the average variable cost is Multiple Choice $21. $12. $13. $6. Explanation AVC is equal to VC ($42 - $16) divided by quantity (2), which is $13.

$13.

What is the total variable cost when output is 100 units in Figure 21.2? Multiple Choice $9,600. $296. $200. $20,000. Explanation VC can be found by multiplying AVC by quantity at any output level. So at an output level of 100, VC is equal to $20,000 ($200 ×100).

$20,000.

Refer to the data in Figure 22.1. The profit-maximizing output for this firm is Multiple Choice 200 units. 280 units. 100 units. Above 280 units. Explanation Profit is maximized when the vertical distance between the total revenue curve and the total cost curve is maximized.

200 units.

In Figure 24.1, total profit is represented by the area Multiple Choice CDFE. ABFE. ABDC. ABGHE. Explanation Profit is equal to price times quantity, which will be the shaded area ABDC.

ABDC.

Ceteris paribus, if income increases and as a result,

B) Good X is a normal good and good Y is an inferior good.

Marginal cost is the increase in total cost associated with a one-unit Multiple Choice Increase in production. Increase in input usage. Decrease in production. Decrease in input usage. Explanation Marginal cost is the increase in total cost associated with a one-unit increase in production.

Increase in production.

Which of the following is the best explanation for why individuals own small businesses? Multiple Choice To provide a product consumers want. To gain experience for their next job. The expectation of profit. Because they cannot earn a living working for corporate America. Explanation The basic incentive for producing goods and services is the expectation of profit. Next

The expectation of profit.

Which of the following is a determinant of supply? Multiple Choice Consumer tastes or preferences. The prices of the factors of production. Consumers' income. Number of buyers. Explanation The determinants of supply include technology, factor costs, taxes and subsidies, expectations, prices of other goods, and number of sellers.

The prices of the factors of production.

Which of the following is most likely a fixed cost? Multiple Choice The material used to make jackets. The labor on an automotive assembly line. The rent for a factory. The electricity used to run packaging equipment. Explanation The factory lease is an example of a fixed cost. Once you lease a factory, you're obligated to pay for it whether or not you use it. Labor, energy, and raw material costs will vary with output.

The rent for a factory.

If MPP declines with greater output, then MC must increase. Explanation At the point of diminishing marginal returns, the marginal physical product declines, the marginal cost increases, and the marginal cost curve will be upward-sloping.

True

In Figure 21.4, a firm that produces over 800 units of output should choose a plant with which short-run average total cost function? Multiple Choice ATC1 only. ATC3 only. ATC2 only. Either ATC2 or ATC3. Explanation In the long run, the firm would choose the plant that yielded the lowest average cost for any desired rate of output.

ATC3 only.

In Figure 21.4, a firm that produces over 800 units of output should choose a plant with which short-run average total cost function? Multiple Choice ATC3 only. Either ATC2 or ATC3. ATC1 only. ATC2 only. Explanation In the long run, the firm would choose the plant that yielded the lowest average cost for any desired rate of output.

ATC3 only.

The shutdown point occurs where price is below the minimum of Multiple Choice ATC. AVC. MR. AFC. Explanation A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when price is less than average variable cost.

AVC.

Table 21.4 Output (Units per Day)Total Cost (Dollars per Day)016130242358478 At 4 units of output in Table 21.4, total fixed costs are Multiple Choice $20.00. $19.50. $16.00. $78.00. Explanation The total fixed cost is $16 at any unit of output because total cost is $16 at 0 units of output.

$16.00.

Table 21.4 Output (Units per Day)Total Cost (Dollars per Day)016130242358478 At 4 units of output in Table 21.4, total fixed costs are Multiple Choice $78.00. $19.50. $16.00. $20.00. Explanation The total fixed cost is $16 at any unit of output because total cost is $16 at 0 units of output.

$16.00.

Refer to Table 21.3 below: Table 21.3 Units of LaborUnits of OutputMPP00 1 30266 3 304116 What is the unit labor cost in Table 21.3 for the second unit of labor if the MPP represents daily output and the wage rate is $72 per day? Multiple Choice $0.50 per unit of output. $72.00 per unit of output. $2.00 per unit of output. $36.00 per unit of output. Explanation The wage rate divided by the marginal physical product is equal to the unit labor cost. When the wage rate is $72 per day and the MPP is 36 additional units per day, the unit labor cost is $2.00= (72/36).

$2.00 per unit of output.

Table 21.2 Output (units per day)0102030Total cost (dollars per day)$40$54$62$80 Average fixed cost at 20 units of output in Table 21.2 is Multiple Choice $2.00. $2.50. $1.00. $4.00. Explanation Average fixed cost is equal to fixed cost divided by quantity. Fixed cost of 40 (because total cost is $40 at 0 units of output) divided by 20 is equal to $2.00.

$2.00.

Table 21.4 Output (Units per Day)Total Cost (Dollars per Day)016130242358478 The marginal cost of the fourth unit of output in Table 21.4 is Multiple Choice $16.00. $20.00. $19.50. $4.00. Explanation Marginal cost is equal to the change in total cost ($78 - $58) divided by the change in quantity (4 - 3), which is $20.

$20.00.

What is the marginal cost of the 120th unit of output in Figure 21.2? Multiple Choice $1.20. $288.00. $200.00. $208.00. Explanation According to the graph, marginal cost is equal to $288 at the quantity 120.

$288.00.

Refer to Table 21.5: Table 21.5 QTFCTVCTCAVCMC0 15--1 23 2 43 15 The marginal cost of the third unit of output in Table 21.5 is Multiple Choice $4. $3. $30. $15. Explanation Marginal cost is equal to the change in total cost ($30 - $27) divided by the change in quantity (3 - 2), which is $3. Total cost is found by adding the TFC and TVC at an output of 3.

$3.

Table 24.1 Monopoly Costs and Revenue QuantityPriceTotal Cost1$500$4002$450$6503$400$9504$350$1,3005$300$1,700 In Table 24.1, according to the profit maximization rule, at the profit-maximizing level of output, the average total cost is Multiple Choice $316.67. $340. $400. $325. Explanation Profit is maximized at the output level where the difference between revenue and cost is greatest (where MR is equal to MC). This occurs at three units of output, and ATC is equal to $316.67 (950/3).

$316.67.

What is the total cost of 120 units in Figure 21.2? Multiple Choice $24,960. $34,560. $10,560. $9,600. Explanation TC can be found by multiplying ATC by quantity at any output level. So at an output level of 120, TC is equal to $34,560= ($288 ×120).

$34,560.

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual explicit costs for the firm described above? Multiple Choice $360,000. $450,000. $90,000. $160,000. Explanation The explicit costs include wages and salaries, raw materials, equipment, rent, and interests for a total of $360,000.

$360,000.

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual explicit costs for the firm described above? Multiple Choice $450,000. $160,000. $90,000. $360,000. Explanation The explicit costs include wages and salaries, raw materials, equipment, rent, and interests for a total of $360,000.

$360,000.

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual explicit costs for the firm described above? Multiple Choice $90,000. $450,000. $360,000. $160,000. Explanation The explicit costs include wages and salaries, raw materials, equipment, rent, and interests for a total of $360,000.

$360,000.

What is the total fixed cost in Figure 21.2? Multiple Choice $10,000. $80. $9,600. $29,600. Explanation AFC can be found at any quantity of output by taking the difference between ATC and AVC. Once you have AFC, you can multiply it by quantity to get FC. For example, at the quantity of 120, AFC is equal to $80 ($288 - $208) and FC is equal to $9,600 ($80 ×120).

$9,600.

Refer to Table 21.5: Table 21.5 QTFCTVCTCAVCMC0 15--1 23 2 43 15 The total cost of 3 units of output in Table 21.5 is Multiple Choice $38. $15. $30. $23. Explanation Total cost is equal to fixed cost plus variable cost, which is $30.

30

Refer to Table 21.3 below: Table 21.3 Units of LaborUnits of OutputMPP00 1 30266 3 304116 How many units of output can be produced when one unit of labor is employed in Table 21.3? Multiple Choice 36. 30. 66. 0. Explanation Because the marginal physical product of the first worker is 30, the total units of output increased from 0 to 30 with the employment of one worker.

30.

Refer to Table 3.1 to answer the following question Table 3.1 Individual Demand and Supply Schedules Quantity Demanded byPriceAlejandroBenCarlMarket$8.00842_____6.001244_____4.002046_____2.002246_____ Quantity Supplied byPriceAveryBrandonCassandra $8.006046_____$6.004244_____$4.002442_____$2.00640_____ In Table 3.1, the equilibrium market quantity is Multiple Choice 14. 22. 30. 70.

30.

What is the total fixed cost in Figure 21.2? Multiple Choice $9,600. $29,600. $10,000. $80. Explanation AFC can be found at any quantity of output by taking the difference between ATC and AVC. Once you have AFC, you can multiply it by quantity to get FC. For example, at the quantity of 120, AFC is equal to $80 ($288 - $208) and FC is equal to $9,600 ($80 ×120).

9,600

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. If the price per unit of good X is $3, the consumer would maximize utility at point Multiple Choice C. A. B. D.

A.

The marginal cost curve intersects the minimum of which of the following cost curves? Multiple Choice ATC. TC. MPP. AFC. Explanation The MC curve will always intersect both the ATC and AVC curves at their lowest points.

ATC.

In Figure 21.4, a firm that produces between 600 and 800 units per period should choose a plant with a short-run average total cost function of Multiple Choice ATC2 or ATC3. ATC3 only. ATC2 only. ATC1 only. Explanation In the long run, the firm would choose the plant that yielded the lowest average cost for any desired rate of output.

ATC2 only.

For an oligopoly, a few firms cannot dominate in the long run unless Multiple Choice A cartel is formed. A firm has a high concentration ratio. The market is contestable. Barriers to entry exist. Explanation Barriers to entry, such as patents, huge advertising budgets, brand loyalty, and exclusive contracts with retailers, can keep new entrants out of an industry.

Barriers to entry exist.

High training costs make it more costly for consumers to switch products. This is an example of Multiple Choice Contestable markets. Cartels. Government regulation. Barriers to entry. Explanation If consumers need training (at significant cost) to switch to a new product, new competitors face significant barriers to entry-the cost of retraining staff.

Barriers to entry.

In Figure 23.3, diagram "a" presents the cost curves that are relevant to a firm's production decision, and diagram "b" shows the market demand and supply curves for the market. Use both diagrams to answer the following question: In Figure 23.3, at a price of p1 in the long run Multiple Choice Firms will exit the market. Economic profits equal zero. P = ATC. Firms will enter the market. Explanation Economic profits attract new suppliers, and the market supply curve shifts to the right. Prices decrease, equilibrium quantity increases, and profits approaches zero.

Firms will enter the market.

Adding together the market share of the largest firms in an industry results in the concentration ratio for a market. Explanation The standard measure of market power is the concentration ratio. The concentration ratio is a measure of market power that relates the size of firms to the size of the product market.

True

Adding together the market share of the largest firms in an industry results in the concentration ratio for a market. Group startsTrue or False Group ends Explanation The standard measure of market power is the concentration ratio. The concentration ratio is a measure of market power that relates the size of firms to the size of the product market.

True

Advertising makes it expensive for new firms to enter an industry. Explanation Advertising not only strengthens brand loyalty but also makes it expensive for new producers to enter the market, making it a viable barrier to entry.

True

Along a linear or straight-line demand curve, demand is more elastic at higher prices. T/F

True

An increased tax on profits leaves the optimal rate of output unchanged in the short run. True or False Explanation Taxes on profits are neither a fixed cost nor a variable cost since they depend on the existence of profits. They don't affect marginal costs or price and so leave the optimal rate of output unchanged.

True

An oligopolistic market may be difficult to enter because of government regulation or the expense of nonprice competition. Explanation Barriers to entry include patents, nonprice competition, control of distribution outlets, and government regulation.

True

As long as an economic profit is available, a perfectly competitive market will continue to attract new entrants. True or False Explanation High profits attract new suppliers, and the market supply curve shifts to the right. Prices decrease and equilibrium quantity increases until profits approach zero.

True

Competitive market pressures were a driving force in the spectacular growth of the computer industry. True or False Explanation The driving force behind all the price reductions, quality improvements, and growth in the computer industry is competition.

True

Economic profit is zero when a firm's revenues just cover its economic cost. True or False Explanation The inducement to take on the added responsibilities of owning and operating a business is the potential for economic profit, which represents something over and above normal profits.

True

Economies of scale occur when the long-run average cost curve slopes downward. Explanation Economies of scale are reductions in minimum average costs that come about through increases in the size (scale) of plants and equipment.

True

Open and explicit agreements concerning pricing and output shares transform an oligopoly into a Multiple Choice Monopoly. Cartel. Differentiated oligopoly. Perfectly competitive firm. Explanation The most explicit form of coordination among oligopolists is price-fixing, which occurs when firms in an oligopoly explicitly agree to charge a uniform (monopoly) price.

Cartel.

Entry and exit are long-run investment decisions. True or False Explanation An investment decision is the decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

True

Game theory is the study of decision making in situations where strategic interaction occurs between rivals. Explanation Game theory attempts to explain behavior in strategic situations, in which an actors success depends on the choices of others.

True

If MPP declines with greater output, then MC must increase. True or False Explanation At the point of diminishing marginal returns, the marginal physical product declines, the marginal cost increases, and the marginal cost curve will be upward-sloping.

True

If choosing a larger plant will reduce minimum average costs, there are economies of scale. Explanation If the minimum average costs that come about through increases in the size (scale) of plants and equipment decrease, then economies of scale exist.

True

If choosing a larger plant will reduce minimum average costs, there are economies of scale. True or False Explanation If the minimum average costs that come about through increases in the size (scale) of plants and equipment decrease, then economies of scale exist.

True

In 2016 Apple was the most valuable brand name. Explanation The most valuable brand name in 2016 was Apple.

True

In a perfectly competitive market, firms will earn zero economic profits in the long run. True or False Explanation At the long-run equilibrium when there is zero economic profit (P = ATC), entry and exit cease, therefore maintaining zero profits.

True

The basic incentive to supply goods and services is the expectation of profit. Explanation Profit isn't the only thing that motivates producers; they also may worry about social status and crave recognition. However, the principal incentive for producing goods and services is the expectation of profit.

True

The difference between the accountant's and the economist's measurement of cost is equal to implicit costs. True or False Explanation Accounting cost refers to the explicit dollar outlays made by a producer. Economic cost, in contrast, refers to the value of all costs, both explicit and implicit.

True

The law of diminishing returns indicates that the marginal physical product of a variable input declines as more of it is employed, ceteris paribus. True or False Explanation The problems of crowded facilities apply to most production processes in the short run because of fixed resources, so as an input increases the marginal output declines.

True

The marginal cost curve intersects the minimum of the average total cost curve and also the minimum of the average variable cost curve. Explanation The MC curve will always intersect both the ATC and AVC curves at their lowest points.

True

The market price equals the equilibrium price if quantity demanded equals quantity supplied at the market price. True or False

True

If two goods are complementary, it means that when the price of one good increases, the demand for the other rises. True or False Explanation When two goods are complementary, like gasoline and cars, an increase in the price of one good will cause the demand of the other good to fall. For example, if the price of gasoline rises, the demand for fossil fuel-burning cars will fall.

False

In monopolistic competition, no buyer or seller has any control over the market price of a good. Explanation Monopolistic competition is a market in which many firms produce similar but somewhat differentiated goods or services, and therefore each maintains some independent control of its own price.

False

In monopolistically competitive markets, product differentiation is a significant barrier to entry. Explanation Monopolistic competition is a market in which many firms produce differentiated goods or services and have low barriers to entry.

False

In the United States, price ceilings on human organs have caused an increase in demand. Group ends Explanation The price does not cause a change in demand-only a change in quantity demanded.

False

Land, labor, and capital are bought and sold in the product market. Group ends Explanation Land, labor, and capital are bought and sold in the factor market.

False

Market demand is identical to individual demand. True or False Explanation Market demand differs from one individual's demand curve in that the quantities are much larger, and market demand is the sum of all the individual demands for the product in the market.

False

Maximizing revenue maximizes profits. True or False Explanation Total costs increase as output expands and at some point at an increasing rate. Therefore, maximizing revenue may not necessarily maximize profit.

False

Modest shifts of the market marginal cost curve will have no impact on the production decision of a monopolistically competitive firm. Explanation Any shift in the market marginal cost curve will impact the demand curve and the production decision for the individual firm. For example, if more firms enter the market, the market marginal cost curve shifts to the right, driving down the average price. The firm's demand curve shifts to the left and becomes more elastic because more close substitutes (other firms) are available.

False

Most product markets are perfectly competitive. True or False Explanation Few, if any, product markets are perfectly competitive. However, many industries function much like the competitive model; therefore, understanding how the market works is important.

False

Normal profit is zero when a firm's revenues just cover its economic cost. Explanation A firm that is making zero economic profits is covering all of its costs, including its opportunity costs-in other words, a provision for normal profit.

False

Normal profit is zero when a firm's revenues just cover its economic cost. True or False Explanation A firm that is making zero economic profits is covering all of its costs, including its opportunity costs-in other words, a provision for normal profit.

False

Oligopoly is a type of industry in which firms are independent. Explanation Firms in an oligopoly are so large that when one makes a pricing or marketing change, it can affect the profitability of the other firms in the industry. Therefore, firms in an oligopoly are interdependent, not independent.

False

Optimal consumption is the mix of consumer goods sold that maximizes utility for producers. True or False

False

Price discrimination only occurs when consumers have only partial information about a product's price and availability. True or False

False

Shutting down a firm's operation and quitting production is equivalent to exiting the industry. True or False Explanation A shutdown decision is a short-run production decision, whereas the decision to enter or exit an industry is a long-run investment decision.

False

The production decision is a long-run supply decision. True or False Explanation A firm's production decision is the selection of the short-run rate of output that maximizes profits.

False

The production decision is another term for the investment decision. Explanation A production decision is the selection of the short-run rate of output (with existing plants and equipment), including shutdown (producing zero) or production; an investment decision is the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

False

The production decision is another term for the investment decision. True or False Explanation A production decision is the selection of the short-run rate of output (with existing plants and equipment), including shutdown (producing zero) or production; an investment decision is the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

False

The productivity of any input is independent and is not affected by the other resources that are used. True or False Explanation The productivity of any factor of production depends on the amount of other resources available to it. For example, a snow removal worker will be more productive with a show shovel than without one.

False

The supply curve shifts to the right when a seller sells a good. Group ends Explanation The market supply curve is a summary of the supply intentions of all producers.

False

The total cost at a zero level of output is always equal to the variable cost. Group startsTrue or False True, unselectedbutton,Incorrect unavailable Falseselected button,Correctunavailable Group ends Explanation The total cost at a zero level of output is always equal to the fixed cost.

False

The total cost at a zero level of output is always equal to the variable cost. True or False Explanation The total cost at a zero level of output is always equal to the fixed cost.

False

The total cost at a zero level of output is always equal to the variable cost. True or False Explanation The total cost at a zero level of output is always equal to the fixed cost.

False

Total output may continue to rise even though marginal physical product is negative. True or False Explanation Marginal physical product (MPP) is the change in total output that results from employing one more unit of input. As long as MPP is positive, a firm can add to its total output by employing the worker. If MPP is negative, total output will fall.

False

Unit labor cost represents the increase in output because an additional worker is hired. True or False Explanation The wage rate divided by the marginal physical product is equal to the unit labor cost, which indicates the labor cost to produce one unit.

False

When price does not cover average total cost at any rate of output, the firm should shut down in the short run. True or False Explanation A firm should shut down if it does not cover its average variable cost. When price is less than ATC but greater than AVC, a firm will lose less if it operates because it is covering some of its fixed costs.

False

Product differentiation refers to Multiple Choice The charging of different prices for the same product in different markets. The selling of identical products in different markets. Features that make one product appear different from competing products in the same market. Different prices for the same product in a certain market. Explanation Product differentiation, a characteristic of monopolistic competition, occurs when one product is different (actually or perceived) from competing products in the same market.

Features that make one product appear different from competing products in the same market.

If the government places a price ceiling on cancer-treating drugs, then Multiple Choice Fewer people will die from cancer. Fewer cancer treating drugs will be available. There will be no change in the number of people who die from cancer. The supply of cancer-treating drugs will increase. Explanation Price ceilings increase the quantity demanded, decrease the quantity supplied, and create market shortages.

Fewer cancer treating drugs will be available.

Which of the firms in Figure 26.5 is most likely a monopoly in the long run? Multiple Choice Firm A. Firm B. Firm D. Firm C. Explanation Firm A is most likely a monopoly because it faces a downward-sloping demand curve and is making positive economic profits.

Firm A.

Refer to Figure 26.5. Which firm is least likely to engage in advertising? Multiple Choice Firm B only. Firm A only. Firms A, C, and D. Firm C only. Explanation Firms in a perfectly competitive market are least likely to engage in advertising. Based on the horizontal demand curve, Firm B is a perfectly competitive firm.

Firm B only.

Refer to Figure 26.5. Which firm faces possible retaliation from rival firms? Multiple Choice Firm A. Firm B. Firm C. Firm D. Explanation Oligopolists are interdependent and face a kinked demand curve, which is illustrated by Firm C's diagram.

Firm C.

Refer to Figure 26.5. Which firm faces possible retaliation from rival firms? Multiple Choice Firm C. Firm D. Firm A. Firm B. Explanation Oligopolists are interdependent and face a kinked demand curve, which is illustrated by Firm C's diagram.

Firm C.

The kinked oligopoly demand curve does not describe the demand curve for monopolistic competition because in monopolistically competitive markets, Multiple Choice Firms have no market power. There is no nonprice competition. There is not as much product differentiation as in oligopoly. Firms are not as interdependent as oligopolistic firms. Explanation In an oligopoly, firms are interdependent; if one lowers price, usually the rest of the firms match that; and if one firm raises price, the others may not match. This results in the unique kinked demand curve of oligopolies.

Firms are not as interdependent as oligopolistic firms.

Suppose that an economy wants to eliminate the resource waste associated with excess capacity in monopolistically competitive markets. Which of the following would achieve this goal? Multiple Choice Firms are allowed to establish significant barriers to entry. Firms are encouraged to produce less output. Firms are required to set price equal to marginal cost. Firms are required to charge the same price. Explanation Competitive firms compete by achieving greater efficiency and offering their products at the lowest possible price. Firms in imperfectly competitive markets don't 'compete' in the same way. In monopolistic competition, firms have their own captive markets-consumers who prefer their particular brands over competing brands-and therefore price reductions by one firm won't induce many consumers to switch brands. In this case, the only way to achieve efficiency is to require firms to charge a price equal to marginal cost.

Firms are required to set price equal to marginal cost.

Refer to Figure 23.2 for a perfectly competitive firm. Given the current market price of $100, we expect to see Multiple Choice Firms enter the industry, driving down the market price. Firms exit from the industry, driving up the market price. No change in the number of firms in the industry and no change in the market price. Firms enter the industry, driving up the market price. Explanation A competitive firm maximizes total profit at the output rate where MR is equal to MC. If at this output economic profits (P > ATC) exist, these profits attract new firms. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

Firms enter the industry, driving down the market price.

Refer to Figure 23.6 for a perfectly competitive firm. Given the current market price, we expect to see Multiple Choice No change in the number of firms in the industry and no change in the market price. Firms enter the industry, driving down the market price. Firms exit from the industry, driving up the market price. Firms exit from the industry, driving down the market price. Explanation Currently firms are experiencing economic losses (P < ATC), which will cause some firms to exit the market in the long run. This causes a decrease in the market supply curve and an increase in market price.

Firms exit from the industry, driving up the market price.

The market structure for an industry can limit the amount of profit a firm can make. Explanation Not all businesses have an equal opportunity to earn an economic profit. The opportunity for profit may be limited by the structure-how many other firms offer similar products-in which the firm is engaged.

True

The monopolistically competitive firm earns zero economic profit in the long run. Explanation Although each firm has some control over its own pricing decisions, entry-induced leftward shifts of the demand curve facing the firm will ultimately eliminate economic profits.

True

The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. True or False

True

The rational consumer chooses a combination of two goods that is on the budget constraint and is tangent to the highest indifference curve possible. True or False

True

The shape of the demand curve facing an oligopolist depends on the responses of its rivals to a change in the price of its own output. Explanation Consumers' willingness and ability to purchase a good at alternative prices from a particular firm will depend on the price and availability of its substitutes; therefore, the shape of the demand curve facing an oligopolist depends on the responses of its rivals to a change in the price of its own output.

True

The vertical distance between a firm's ATC and AVC curves grows smaller as output increases. True or False Explanation The difference between the ATC and the AVC is AFC, which declines as output increases.

True

To reduce our dependence on foreign oil, policy makers must realize that the cross-price elasticity sign for gasoline and fossil fuel-burning cars is negative. True or False

True

Total cost refers to the market value of all resources used in producing a good or service. True or False Explanation Total cost includes both explicit and implicit costs.

True

Total output may continue to rise even though marginal physical product is declining. Explanation Marginal physical product (MPP) is the change in total output that results from employing one more unit of input. As long as MPP is positive, a firm can add to its total output by employing the worker.

True

Total output may continue to rise even though marginal physical product is declining. True or False Explanation Marginal physical product (MPP) is the change in total output that results from employing one more unit of input. As long as MPP is positive, a firm can add to its total output by employing the worker.

True

When a firm is able to achieve the output indicated by a production function, it is producing with technical efficiency. True or False Explanation Technical efficiency is getting the most output attainable from any given level of factor inputs. The points on the production function represent the output using the inputs efficiently.

True

When firms enter a monopolistically competitive industry, the industry cost curves shift to the right. Explanation Barriers to entry are low in monopolistic competition. Hence new firms will enter if economic profits are available, driving the industry cost curves to the right and the average price down the market demand curve.

True

When individual supply curves shift, ceteris paribus, the market supply curve shifts. True or False

True

Which of the following industries is perfectly competitive? Multiple Choice Heavy duty trucks. Fast-food restaurants. Cell phone service. Wholesale fresh flowers. Explanation A firm in perfect competition cannot differentiate its product, has no control over the market price, and has no market power. The wholesale flower market fits these characteristics best.

Wholesale fresh flowers.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. If the price per unit of good X is $1, the optimal consumption is found at point Multiple Choice C. D. B E.

C.

Suppose the income elasticity of demand for used jet skis

D) Fall by 3.5 percent.

In which of the following types of markets does a single firm have the most market power? Multiple Choice Monopoly. Monopolistic competition. Perfect competition. Oligopoly. Explanation The monopoly or single seller of a good has the most market power because it does not have any competitors and its only price limit is what consumers are willing and able to pay.

Monopoly.

Consumers who actually purchase a good either were willing to pay that price or more. True or False

True

Economic explinations=

D) Prices and income.

If demand is inelastic, a reduction in price will lead to a drop in total revenue. True or False

True

According to the law of demand, a demand curve Multiple Choice Has a negative slope. Has a positive slope. Exceeds the economy's ability to produce. Is a horizontal or flat line.

Has a negative slope.

Assuming that a good has a downward-sloping, linear demand curve. =

D) increases, then decreases.

When the wage rate is $10 per hour and the MPP of a worker is 15 units per hour, the unit labor cost is Multiple Choice $15.00 per unit. $150.00 per hour. $0.67 per unit. $10.00 per hour. Explanation The wage rate divided by the marginal physical product is equal to the unit labor cost. When the wage rate is $10 per hour and the MPP is 15 units per hour, the unit labor cost is $0.67 (10/15). Next Visit question mapQuestion 27 of 50 Total27 of 50 Prev

$0.67 per unit.

Refer to Table 21.3 below: Table 21.3 Units of LaborUnits of OutputMPP00 1 30266 3 304116 What is the unit labor cost in Table 21.3 for the second unit of labor if the MPP represents daily output and the wage rate is $72 per day? Multiple Choice $0.50 per unit of output. $2.00 per unit of output. $36.00 per unit of output. $72.00 per unit of output. Explanation The wage rate divided by the marginal physical product is equal to the unit labor cost. When the wage rate is $72 per day and the MPP is 36 additional units per day, the unit labor cost is $2.00= (72/36).

$2.00 per unit of output.

Suppose the price of soccer shoes decreases by 7 percent and as a result, there is a 12 percent rise in the quantity of shin guards demanded. The value of the cross-price elasticity of demand is Multiple Choice 1.71. 0.58. -0.58. -1.71

-1.71

Explain what is necessary if a business is to earn economic profits. Profit = total revenue - total costs Economists include both implicit and explicit costs There has to be an incentive to earn money in a given market; businesses won't invest in a market if there isn't a profit to be made. Essay Edit Unavailable Profit = total revenue - total costs Economists include both implicit and explicit costs There has to be an incentive to earn money in a given market; businesses won't invest in a market if there isn't a profit to be made. Explanation To earn economic profits, a business must see opportunities that others have missed, discover new products, find new and better methods of production, or take above-average risks.

...

Assume the price of cola is $8 per unit and the price of pretzels is $4 per unit. Table 19.3 Michael's Utility Schedule Units of ColaTU of ColaMU of ColaUnits of PretzelsTU of PretzelsMU of Pretzels14040130302 322 2039624366164112 478 5124 584 In Table 19.3, what is the marginal utility of the fifth unit of cola? Multiple Choice 24. 12. 6. 16.

12

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. If the price per unit of good X is $1, the consumer would maximize utility by consuming Multiple Choice 21 units of Y. 15 units of Y. 25 units of Y. 10 units of Y.

15 units of Y.

Table 21.4 Output (Units per Day)Total Cost (Dollars per Day)016130242358478 For the output levels in Table 21.4, the minimum of the average variable cost curve occurs at a production rate of Multiple Choice 3 units per day. Zero units per day. 2 units per day. 4 units per day. Explanation AVC is equal to VC divided by quantity. The AVC is $14, $13, $14, and $15.5 with output levels of 1 through 4 respectively. Therefore, AVC is minimized at 2 units of output.

2 units per day.

Table 25.2 Pool SweeperOutput (Revenue)Market Share (%)North Star$20,000 Hurricane$16,000 Blue Lagoon$2,000 Clean Sweep$2,000 Refer to Table 25.2. Assume there are only four firms in the pool sweeper industry. What is the Herfindahl-Hirschman Index for this industry? Multiple Choice 2,500. 50. 4,150. 4,125. Explanation The HHI is equal to the sum of the squares of the market shares of the firms in the industry. Therefore if you take the sum of the squares of 50 percent, 40 percent, 5 percent, and 5 percent, you will get an HHI of 4,150.

4,150.

Which of the following affects both the marginal and average total cost curves of a firm in the short run? Multiple Choice A change in property taxes. A change in consumer income. A change in profit taxes. A change in payroll taxes. Explanation Marginal cost is the change in total cost that occurs when more output is produced. However, fixed costs are constant, so the change in total cost will be the result of a change in variable costs only. A change in variable costs will impact both the marginal and the average total cost.

A change in payroll taxes.

In a competitive market where firms are earning economic profits, which of the following should be expected as the industry moves to long-run equilibrium, ceteris paribus? Multiple Choice A higher price and fewer firms. A lower price and more firms. A lower price and fewer firms. A higher price and more firms. Explanation If economic profits exist in an industry, more firms will want to enter it. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

A lower price and more firms.

The long run is Multiple Choice A period longer than one year. The period required to produce a unit of the firm's output. A period long enough for all inputs to be variable. Approximately one year. Explanation A period long enough for all inputs to be varied (no fixed costs) is considered the long run.

A period long enough for all inputs to be variable.

The long run is Multiple Choice The period required to produce a unit of the firm's output. A period longer than one year. Approximately one year. A period long enough for all inputs to be variable. Explanation A period long enough for all inputs to be varied (no fixed costs) is considered the long run.

A period long enough for all inputs to be variable.

A production decision involves choosing Multiple Choice A rate of output and is a short-run decision. The amount of plants and equipment and is a short-run decision. The amount of plants and equipment and is a long-run decision. A rate of output and is a long-run decision. Explanation A production decision is the selection of the short-run rate of output (with existing plants and equipment), including shutdown (producing zero) or production.

A rate of output and is a short-run decision.

Which of the following is least likely to increase labor productivity? Multiple Choice A safer work environment. Increased managerial capabilities. Improved labor skills. Technological advances. Explanation Advances in technological or managerial knowledge and human or physical capital increase our productive capability. Next

A safer work environment.

The price ceiling that the federal government placed on human organs caused Multiple Choice A surplus. An increase in supply. An increase in demand. A shortage.

A shortage.

Along a linear or straight-line demand curve, demand is more elastic at higher prices. True or False

True

Explicit costs Multiple Choice Include only payments to labor. Are the dollar payments made for the use of resources. Include the market value of all resources used to produce a good. Are the total value of resources used to produce a good but for which no monetary payment is made. Explanation An explicit cost is a payment made for the use of a resource.

Are the dollar payments made for the use of resources.

Which of the following is likely to have the most inelastic price elasticity of demand? Multiple Choice Hondas. Pickup trucks. Automobiles. The Hondas one Honda dealer sells.

Automobiles

Which of the following is a determinant of market supply? Multiple Choice Consumer expectations. Consumers' income. Consumers' desire for the good. Available technology. Explanation The determinants of market supply include technology, factor costs, taxes and subsidies, producer expectations, prices of related goods, and number of sellers.

Available technology.

Technological changes that increase productivity shift the Multiple Choice Production function downward. Average total cost curve downward. Marginal cost curve upward. Marginal physical product curve downward. Explanation Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the production function to shift upward and the production cost curves to shift downward-in particular the ATC curve.

Average total cost curve downward.

Which ... determinant of demand?

B) Technological advances.

The fact that a cup of gold

B) The marginal utility of a cup of gold is greater than the marginal utility of a cup of water.

One type of explicit price-fixing is known as price leadership. Explanation Price leadership is a subtle (not explicit) pricing pattern that allows one firm to establish the (market) price for all firms in the industry.

False

Monopolistically competitive firms have a "monopoly" element to them because Multiple Choice There are high barriers to entry. There is only one seller. Brand loyalty gives them a captive audience. The cross-price elasticity is very high. Explanation The 'monopoly' element in monopolistic competition is that advertising creates brand loyalty and a captive audience and gives firms more control over price.

Brand loyalty gives them a captive audience.

Restaurants like to give away free salty peanuts while you wait for your food in order to encourage you to Multiple Choice buy more peanuts at the souvenir shop. Buy expensive salty food on the menu. Buy more beverages. None of the choices are correct. Explanation Free salty snacks encourage you to buy expensive complements.

Buy more beverages.

Suppose Caesar allocates his entire budget to the purchase of soft drinks and chips. The marginal utility of the last bottle of soft drink purchased is 12 utils, and each bottle costs $1.20. The marginal utility of the last bag of chips purchased is 8 utils, and each bag costs $1. In order to maximize his utility, Caesar should Multiple Choice Buy more soft drinks and fewer chips since he gets more marginal utility per dollar from soft drinks. Not change anything because he has made the choice that gives him the most total utility. Buy more soft drinks and fewer chips because the soft drink has fewer calories. Buy more chips and fewer soft drinks because of the lower price for chips. Explanation To maximize utility, the consumer should choose the good that delivers the most marginal utility per dollar. The marginal utility per dollar from the soft drink is 10 while the marginal utility per dollar from the bag of chips is 8; therefore Caesar should buy more soft drinks and fewer chips.

Buy more soft drinks and fewer chips since he gets more marginal utility per dollar from soft drinks.

Price discrimination works best when Multiple Choice Sellers cannot meet collectively. Buyers have information about prices charged to different customers. A product is purchased frequently by consumers. Buyers do not have perfect information about the price.

Buyers do not have perfect information about the price.

Choose the letter of the diagram in Figure 3.1 that best describes the type of shift that would occur in each situation for the market listed on the left, ceteris paribus. Figure 3.1 Shifts of Supply and Demand Candy bars: People become more health-conscious and prefer vegetables instead of candy bars. Multiple Choice A. B. C. D. Explanation A change in tastes and preferences away from candy bars causes demand to decrease.

C

Which of the following does not influence the price elasticity of demand?

C) Costs of production.

Accoridng to the law of diminishing marginal utility:

C) Each successive unit of...

Assume the price elasticity of demand for MC Pretzel Co.

C) Increase because the percentage increase in price is greater.....

If the price elasticity of demand is 1.0, and a firm raises its price by 10 percent, the total revenue will:

C) Not change

The price elasticity of demand is defined as the:

C) Percentage change in quantity demanded divided by the perentage change in price.

Which of the following is purchased in a product market? Multiple Choice Cell phone service. Undeveloped farmland in Texas. Crude oil. The skills of an X-ray technician. Explanation A product market is where finished goods and services are bought and sold. Cell phone service is a finished product.

Cell phone service.

The marginal physical product is the Multiple Choice Change in total input required to produce one additional unit of output. Change in total output associated with one additional unit of input. Number of units of output obtained from all units of input employed. Additional cost of an additional unit of output. Explanation The marginal physical product (MPP) is the change in total output associated with one additional unit of input.

Change in total output associated with one additional unit of input.

Sellers can gain profits from price discrimination because Multiple Choice Total revenues are maximized when all buyers pay the same price. Charging different prices based on willingness to pay can increase revenues without increasing costs. Total expenses are less with price discrimination. Different prices charged to different customers can lower total revenue.

Charging different prices based on willingness to pay can increase revenues without increasing costs.

Table 21.2 Output (units per day)0102030Total cost (dollars per day)$40$54$62$80 Above 10 units of output, the average fixed cost in Table 21.2 Multiple Choice Continues to decline. Stays below $0.50. Remains constant. Rises above $2.00. Explanation The numerator (fixed costs) is constant and the denominator (quantity) increases as output expands; therefore any increase in output will lower average fixed cost.

Continues to decline.

The amount of satisfactions obained... is:

D) Marginal utility.

When demand is price inelastic, ceteris paribus, an increase in:

D) Price leads to greater total revenue.

When two or more goods are being purchased,

D) The ratioin of marginal utility to price is the same for all goods.

Refer to Figure 22.2 for a perfectly competitive firm. The profit-maximizing quantity of output is Multiple Choice D. B. E. C. Explanation A firm will maximize profit at a quantity where marginal revenue is equal to marginal cost.

D.

Megan used to work at the local pizzeria for $15,000 per year but quit in order to start her own deli. To buy the necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest). Last year she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000. She asked her dad the accountant and her mom the economist to calculate her costs for her. Multiple Choice Dad says her cost is $31,000 and Mom says her cost is $35,000. Dad says her cost is $25,000 and Mom says her cost is $16,600. Dad says her cost is $31,000 and Mom says her cost is $47,600. Dad says her cost is $9,000 and Mom says her cost is $2,400. Explanation Profit is equal to revenue minus costs. An accountant will consider only explicit costs, whereas an economist will consider economic costs, which include explicit and implicit costs.

Dad says her cost is $31,000 and Mom says her cost is $47,600.

Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $15, Multiple Choice The firm will have above-normal profits. Economic profits will be zero. The firm should produce 39 units. The firm should shut down. Explanation When the market price is $15, the profit-maximizing output is 31 units. At that point price is equal to ATC, and profits will be zero.

Economic profits will be zero.

Assume milk is used to produce ice cream. Ceteris paribus, a decrease in the price of milk will cause the equilibrium price of ice cream to Multiple Choice Increase and the equilibrium quantity of ice cream to increase. Decrease and the equilibrium quantity of ice cream to increase. Decrease and the equilibrium quantity of ice cream to decrease. Increase and the equilibrium quantity of ice cream to decrease. Explanation If the cost of producing ice cream decreases, the supply of ice cream will increase. An increase in supply causes equilibrium price to fall and equilibrium quantity to increase.

Decrease and the equilibrium quantity of ice cream to increase.

Assume peanut butter and jelly are complements. Ceteris paribus, an increase in the price of peanut butter will cause the equilibrium price of jelly to Multiple Choice Decrease and the equilibrium quantity of jelly to decrease. Decrease and the equilibrium quantity of jelly to increase. Increase and the equilibrium quantity of jelly to increase. Increase and the equilibrium quantity of jelly to decrease.

Decrease and the equilibrium quantity of jelly to decrease.

Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5. If the company increases the price of each Frisbee from $12 to $16, the number of Frisbees demanded will Multiple Choice Increase by 20.0 percent. Decrease by 33.3 percent. Decrease by 14.3 percent. Increase by 7.0 percent.

Decrease by 14.3 percent.

If rival oligopolists completely ignore Mitchell's Tool Company's price changes, then Mitchell's Tool Company's Multiple Choice Demand curve will not have a kink. Most profitable strategy will be to raise its price. Demand curve will be less elastic than if rivals matched price changes. Demand and marginal revenue curves will be the same. Explanation The kinked demand curve is really a composite of the demand curve if rivals match price changes and the demand curve if rivals do not match price changes. Therefore, if Mitchell's rivals do not respond to its price changes, the demand curve will not be kinked.

Demand curve will not have a kink.

If the price of Good X falls and total revenue rises, then Multiple Choice Demand for Good X is inelastic. Demand for Good X is elastic. Demand for Good X is unitary elastic. The price elasticity of demand for Good X is equal to 1.

Demand for Good X is elastic.

A price decrease will cause total revenue to fall if Multiple Choice The price elasticity of demand is less than zero. Demand is unitary elastic. Demand is inelastic. Demand is elastic.

Demand is inelastic.

Both perfect competitors and monopolistic competitors Multiple Choice Use marginal cost pricing. Earn zero economic profit in the long run. Experience product differentiation. Find prices pushed to the minimum of long-run ATC by entry. Explanation Given the ease of entry and exit in perfect and monopolistic competition markets, as long as firms are making a profit or losing money, firms will enter or exit the market and the disappearance of economic profits (losses) is inevitable.

Earn zero economic profit in the long run.

Refer to Figure 26.2 for a monopolistically competitive firm. At the profit-maximizing output and price, this firm is Multiple Choice Earning an economic loss. Earning a monopoly profit. Breaking even. Earning an economic profit. Explanation Profit is maximized or losses are minimized at the output level where the MR is equal to MC. At that output level, the price is below ATC but above AVC; therefore the firm is incurring economic losses but is losing less than if it were to shut down.

Earning an economic loss.

Accounting costs and economic costs differ because Multiple Choice Economic costs include explicit costs and accounting costs do not. Accounting costs include explicit costs and economic costs do not. Accounting costs include implicit costs and economic costs do not. Economic costs include implicit costs and accounting costs do not. Explanation Accounting costs refer to the explicit dollar outlays made by a producer. Economic costs, in contrast, refer to the value of all costs, both explicit and implicit.

Economic costs include implicit costs and accounting costs do not.

One World View article is titled "Flat Panels, Thin Margins." New firms continue to enter the industry even though prices are falling because Multiple Choice Normal profits are being earned. Total costs equal total revenues. Total costs are greater than total revenues. Economic profits are being earned. Explanation The lure of profits in the television industry continues to encourage firms to enter this expanding market even as prices drop.

Economic profits are being earned.

Table 22.1 Assume an apple farmer incurs the following costs and revenuesFertilizer$200Seeds$75Water$250Wages$750Property taxes$600Interest payments on borrowed funds$1,200Sales of apples$4,000 Suppose the entrepreneur could earn $800 as an employee elsewhere. This means the entrepreneur is earning Multiple Choice Accounting losses. Economic losses. Economic profits. Breakeven profits. Explanation Economic profit is the accounting profit ($925) minus implicit costs ($800), which is $75.

Economic profits.

Table 22.1 Assume an apple farmer incurs the following costs and revenuesFertilizer$200Seeds$75Water$250Wages$750Property taxes$600Interest payments on borrowed funds$1,200Sales of apples$4,000 Suppose the entrepreneur could earn $800 as an employee elsewhere. This means the entrepreneur is earning Multiple Choice Breakeven profits. Economic losses. Economic profits. Accounting losses. Explanation Economic profit is the accounting profit ($925) minus implicit costs ($800), which is $75.

Economic profits.

One In the News article titled "Funeral Giant Moves In on Small Rivals" reports that profit for a Houston-based funeral giant is 31 cents on every dollar versus a profit of 12 cents for the funeral industry in general. Such profits are most likely the result of Multiple Choice Constant returns to scale. Higher minimum average costs. A downward shift in the production function. Economies of scale. Explanation As the size of a firm increases, it may be able to reduce the costs of doing business. Economies of scale can give a large firm a competitive advantage over smaller firms.

Economies of scale.

One In the News article titled "Funeral Giant Moves In on Small Rivals" reports that profit for a Houston-based funeral giant is 31 cents on every dollar versus a profit of 12 cents for the funeral industry in general. Such profits are most likely the result of Multiple Choice Constant returns to scale. Higher minimum average costs. Economies of scale. A downward shift in the production function. Explanation As the size of a firm increases, it may be able to reduce the costs of doing business. Economies of scale can give a large firm a competitive advantage over smaller firms.

Economies of scale.

Reductions in minimum average costs that come about through increases in the size of plants and equipment are called Multiple Choice Economies to monopoly power. Economies of scale. Diseconomies of entry. Barriers to entry. Explanation Economies of scale occur when a firm increases efficiency by investing in a larger plant or more equipment.

Economies of scale.

Refer to Figure 23.2 for a perfectly competitive firm. Given the current market price of $100, we expect to see Multiple Choice Costs rise to absorb the profits earned by the firms in the industry. No change in the number of firms in this industry. Exit from this industry. Entry into this industry. Explanation A competitive firm maximizes total profit at the output rate where MR is equal to MC. If at this output economic profits (P > ATC) exist, these profits attract new suppliers, and the market supply curve shifts to the right.

Entry into this industry.

In long-run perfectly competitive equilibrium, marginal cost Multiple Choice Equals the minimum of the AVC. Equals the minimum of the ATC. Is less than ATC. Is greater than ATC. Explanation Competition drives costs down to their bare minimum-the hallmark of economic efficiency. This is illustrated by the tendency of perfectly competitive firms' prices to be driven down to the level of minimum average costs.

Equals the minimum of the ATC.

In the long run, an oligopolist is most likely to Multiple Choice Face a straight demand curve. Experience economic profits when sufficient barriers to entry are present. Experience zero economic profits because barriers to entry do not exist in the long run. Produce at the most technically efficient output level due to long-run competition. Explanation Oligopoly markets have high barriers to entry; therefore it is likely that profits will persist in the long run.

Experience economic profits when sufficient barriers to entry are present.

Suppose the income elasticity of demand for used jet skis is 3.5. If the level of income decreases by 1 percent, the number of used jet skis sold will, ceteris paribus, Multiple Choice Fall by 0.29 percent. Rise by 0.29 percent. Rise by 3.5 percent. Fall by 3.5 percent.

Fall by 3.5 percent.

Better management shifts the production function downward and the total cost curve upward. Explanation Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the production function to shift upward and the production cost curves to shift downward-in particular the MC curve.

False

Diseconomies of scale imply that the average total cost curve is downward-sloping in the long run. Explanation Diseconomies of scale imply that the average total cost curve is upward-sloping in the long run.

False

For a competitive firm, the supply curve is that part of the average variable cost curve that is above the short-run marginal cost curve. True or False Explanation The marginal cost curve is the supply curve above the AVC.

False

For a monopolistically competitive firm, barriers to entry are high, which allows the firm to earn positive economic profits in the long run. Explanation Entry barriers are low in monopolistic competition, so new entrants cannot be kept out of the market.

False

Since there are many college bookstores in the United States, college bookstores have no power to influence book prices on campus. Explanation Concentration ratios do not necessarily convey the extent to which market power may be concentrated in a local market. In fact, many industries, including college bookstores, with low concentration ratios nationally are represented by just one or a few firms locally.

False

The cross-price elasticity sign for substitute goods is negative. True or False Explanation The sign on the cross-price elasticity for substitute goods is positive. For example, if the price of Coke falls, the quantity demanded for Pepsi will fall. That is a negative change divided by a negative change, which equals a positive number. The cross-price elasticity formula is the percentage change in the quantity demanded for Pepsi divided by the percentage change in the price of Coke.

False

The joint and individual interests of oligopolists are to maximize industry profit. Explanation Oligopolies' joint, or collective, interest is in maximizing industry profit. The individual interest of each oligopolist, however, is to maximize its own share of sales and profit.

False

The market supply curve is a statement of actual sales by suppliers. Explanation The market supply curve is a summary of the supply intentions of all producers.

False

The sign on the income elasticity formula will be positive for inferior goods and negative for normal goods. True or False

False

When a rational consumer has stopped buying, she or he will have allocated a limited budget so that the marginal utility per good will be the same. True or False Explanation A rational consumer will allocate spending so that the marginal utility per dollar is the same.

False

When businesses earn zero economic profit, they have no incentive to stay in business. True or False Explanation A firm that is making zero economic profits is covering all of its costs, including its opportunity costs-in other words, a provision for normal profit and a motive to stay in business.

False

When entrepreneurs decide to build a plant, they are making a production decision. Explanation A firm's production decision is the selection of the short-run rate of output that maximizes profits. The decision to build a plant is an investment decision, which is a long-run decision.

False

When price does not cover average total cost at any rate of output, the firm should shut down in the short run. Explanation A firm should shut down if it does not cover its average variable cost. When price is less than ATC but greater than AVC, a firm will lose less if it operates because it is covering some of its fixed costs.

False

In Figure 23.3, diagram "a" presents the cost curves that are relevant to a firm's production decision, and diagram "b" shows the market demand and supply curves for the market. Use both diagrams to answer the following question: In Figure 23.3, at a price of p2 in the long run Multiple Choice Firms will enter the market. Economic profits equal zero. Firms will exit the market. P = AVC. Explanation Entry and exit cease at the long-run equilibrium when there is zero economic profit (P = ATC).

Firms will enter the market.

In the short run, when a firm produces zero output, total cost equals Multiple Choice Variable costs. Zero. Marginal costs. Fixed costs. Explanation Fixed costs must be paid even if no output is produced. Variable costs start at zero; therefore when a firm produces zero, total costs are equal to fixed costs.

Fixed costs.

When a producer can control the market price for the good it sells, the producer Multiple Choice Is a perfectly competitive firm. Is certain to make a profit. Has market power. Is an entrepreneur. Explanation A firm that has market power will have the ability to control the market price for the good it sells, unlike a perfectly competitive firm that risks losing all of its customers, who will shop elsewhere, if it increases the price of its product.

Has market power.

Price leadership Multiple Choice Results in inflexible prices. Accounts for kinked oligopoly behavior. Helps achieve monopoly profit for the market. Results in predatory pricing. Explanation If all oligopolists in a particular product market follow the lead of one firm in raising prices, the result is the same as if they had all agreed to raise prices simultaneously: a monopoly price.

Helps achieve monopoly profit for the market.

A demand curve that is completely elastic is Multiple Choice Upward-sloping. Horizontal. Downward-sloping. Vertical.

Horizontal

Demand is more price-elastic Multiple Choice If the product has very few substitutes. In the long run. If the product is a small part of the consumer's budget. If the product is a necessity. Explanation In the long run consumers can usually find other substitutes. For example, you may own a gas-guzzling car right now and not be able to afford to switch to an electric or hybrid car. But if gasoline prices rise, in the long run you will switch to a more fuel-efficient car.

In the long run.

Demand is more price-elastic Multiple Choice If the product is a small part of the consumer's budget. In the long run. If the product has very few substitutes. If the product is a necessity.

In the long run.

Economic cost Multiple Choice Decreases as the level of production increases. Includes only implicit costs. Is the sum of actual monetary payments made for resources used to produce a good. Includes both implicit and explicit costs. Explanation Economic cost is the value of all resources used to produce a good or service; it includes both explicit and implicit costs.

Includes both implicit and explicit costs.

Economic cost Multiple Choice Decreases as the level of production increases. Is the sum of actual monetary payments made for resources used to produce a good. Includes both implicit and explicit costs. Includes only implicit costs. Explanation Economic cost is the value of all resources used to produce a good or service; it includes both explicit and implicit costs.

Includes both implicit and explicit costs.

If the market wage for fast-food restaurants is $4 and the government enforces a minimum wage of $7, the unemployment rate will Multiple Choice Increase as quantity of labor supplied increases and quantity of labor demanded decreases. Increase as quantity of labor supplied decreases and quantity of labor demanded increases. Increase as quantity of labor supplied increases and quantity of labor demanded increases. Not be affected by the minimum wage. Explanation Price floors set above the equilibrium price will cause a surplus. In this case a lot of people want a job at a wage that few employers will pay.

Increase as quantity of labor supplied increases and quantity of labor demanded decreases.

The supply curve is upward-sloping (i.e., it takes a higher price to induce greater production) because of Multiple Choice The decreasing skill level of additional workers. Increasing marginal costs. Increasing fixed costs. Increasing total costs. Explanation The marginal cost curve is the supply curve, and the marginal cost increases when diminishing marginal product occurs.

Increasing marginal costs.

Monopolistic competition results in allocative Multiple Choice Efficiency and productive efficiency. Inefficiency and productive efficiency. Inefficiency and productive inefficiency. Efficiency and productive inefficiency. Explanation The typical firm in a monopolistically competitive market produces at a rate of output that is less than its minimum-ATC output rate. This implies that the same level of industry output could be produced at lower cost with fewer firms. And because the price is higher than the opportunity cost, consumers demand fewer goods than they would otherwise. We end up with the wrong (suboptimal) mix of output and misallocated resources.

Inefficiency and productive inefficiency.

Price discrimination Multiple Choice Is a method used by sellers to pit one buyer against the other. Is illegal. Is a way for sellers to elicit the maximum willingness to pay from buyers. Rarely occurs in the airline industry.

Is a way for sellers to elicit the maximum willingness to pay from buyers.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume that the price of both goods X and Y are $1 each. Point D on the graph. Multiple Choice Is affordable but does not yield the highest utility possible. Is affordable and is the optimal consumption bundle for this individual. Is not affordable. Lies on an indifference curve that is not obtainable. Explanation Point D is affordable because it lies on the budget constraint line. This point intersects with indifference curve I2, which gives a lower level of utility than point C, which lies on indifference curve I3 and gives the consumer a higher level of utility.

Is affordable but does not yield the highest utility possible.

The marginal cost curve Multiple Choice Is the long-run supply curve for a competitive firm at prices below the AVC curve. Slopes downward to the right as output increases. Is not affected by changes in the price of variable inputs. Is the short-run supply curve for a competitive firm at prices above the AVC curve. Explanation For competitive firms, marginal cost defines the lowest price a firm will accept for a given quantity of output. In this sense, the marginal cost curve is the supply curve; it tells us how quantity supplied will respond to price. However, a firm will shut down if price falls below minimum average variable cost. The supply curve does not exist below minimum AVC.

Is the short-run supply curve for a competitive firm at prices above the AVC curve.

When a firm is earning positive economic profits, this is an indication that the firm Multiple Choice Is using its resources in one of a number of ways that would yield positive economic profits. Should leave this market in the long run. Is using its resources in the best possible way. Is producing at the minimum ATC. Explanation Because competitive firms always strive to produce at the rate of output at which price equals marginal cost, the price signal the consumer gets in a competitive market is an accurate reflection of opportunity cost. As such, it offers a reliable basis for making choices about the mix of output and allocation of resources.

Is using its resources in the best possible way.

If an individual demands a good, it means that he or she Multiple Choice Must need the good. Has a strong desire for the good. Prefers the good to all other choices. Is willing and able to purchase the good at some price.

Is willing and able to purchase the good at some price.

Which of the following is not true about a monopolistic competitor? Multiple Choice It charges a higher price than a perfectly competitive firm, ceteris paribus. It maximizes profit at the point where MC = MR. It can earn economic profits in the long run. It produces less output than a perfectly competitive firm, ceteris paribus. Explanation Given the ease of entry and exit, as long as firms are making a profit or losing money, firms will enter or exit the market and the disappearance of economic profits (losses) is inevitable.

It can earn economic profits in the long run.

The demand curve facing an oligopoly firm is kinked because Multiple Choice It is most likely that competitors will match price hikes as they practice price leadership. Its competitors will match only price hikes. The demand curve that is most inelastic is the most probable situation facing the company. It is most likely that rivals will match price cuts but not price increases. Explanation If an oligopoly firm raises price, it is not likely that rivals will match, so it will lose market share. This result is on the more elastic portion of the demand curve. If an oligopoly company lowers price, rivals will tend to match. This result is on the more inelastic portion of the demand curve. Hence the shape of the demand curve is kinked.

It is most likely that rivals will match price cuts but not price increases.

In the short run, which of the following is most likely a variable cost? Multiple Choice Interest payments on borrowed funds. Labor and raw materials costs. Contractual lease payments. Property taxes. Explanation Variable costs are the costs of production that change when the rate of output is altered, such as labor or material costs.

Labor and raw materials costs.

In the short run, which of the following is most likely a variable cost? Multiple Choice Property taxes. Labor and raw materials costs. Contractual lease payments. Interest payments on borrowed funds. Explanation Variable costs are the costs of production that change when the rate of output is altered, such as labor or material costs.

Labor and raw materials costs.

Often antitrust enforcers Multiple Choice Lack the resources to prosecute anticompetitive behavior. Prefer to break up companies that violate antitrust laws. Lack a legal structure to prosecute companies for monopoly behavior. Cannot measure market concentration. Explanation Often the resources allocated for antitrust enforcement are much less than the resources of the companies they are monitoring.

Lack the resources to prosecute anticompetitive behavior.

A factor market is any place or process where Multiple Choice Finished goods are bought and sold. Land, labor, or capital is bought and sold. Finished services are bought and sold. None of the choices are correct. Explanation A factor market is where the factors of production (land, labor, or capital) are bought and sold.

Land, labor, or capital is bought and sold.

The period in which there are no fixed costs is the Multiple Choice Long run. Production run. Short run. Implicit run. Explanation The long run is a period of time long enough for all inputs to be varied (no fixed costs).

Long run.

Intel's chief executive says the company might expand the technology it is using in its planned $2.5 billion chip-manufacturing factory in China if the U.S. government allows it, underscoring the technology giant's ambitions in the world's fourth-biggest economy. The Intel executive is making a Multiple Choice Short-run decision, and therefore a decision about how much to produce. Decision that would definitely increase costs. Decision that would cause ATC to increase. Long-run decision, and therefore an investment decision. Explanation In the long run, a firm has no fixed costs and can select any desired plant size, which is an investment decision. Once a plant is built, leased, or purchased, a firm has fixed costs and focuses on short-run output or production decisions.

Long-run decision, and therefore an investment decision.

The average total cost (ATC) curve will be downward sloping so long as Multiple Choice Marginal cost is less than average total cost. Marginal cost is greater than average total cost. Average fixed cost is less than average total cost. Average variable cost is less than average total cost. Explanation If the marginal cost is less than the average total cost, the average total cost must be decreasing. For instance, if you have a 3.5 GPA (grade point average) and get only a 3.0 in your last (marginal) accounting class, your GPA will fall.

Marginal cost is less than average total cost.

An imperfection in the market mechanism that prevents optimal outcomes is called Multiple Choice Antitrust behavior. Collusion. Market failure. Price leadership. Explanation An imperfection in the market mechanism that prevents socially optimal outcomes is called a market failure.

Market failure.

If an oligopoly market is contestable and new firms enter, the Multiple Choice Market power of the former oligopolists will be reduced. Number of firms in the industry will decrease. Former oligopolists will raise their prices. Profitability of the industry will increase. Explanation The profitability of a monopoly or oligopoly will attract new competitors. If it is a contestable market, rivals will enter the market, and the power of the former monopolist or oligopolists will be reduced.

Market power of the former oligopolists will be reduced.

Which of the following is consistent with long-run equilibrium for a perfectly competitive market? Multiple Choice Maximum technical efficiency is achieved. Average variable costs of production are maximized. Economic profits are positive. Average total costs of production are maximized. Explanation Competition drives costs down to their bare minimum-the hallmark of economic efficiency. This is illustrated by the tendency of perfectly competitive firms' prices to be driven down to the level of minimum average costs.

Maximum technical efficiency is achieved.

In the short run, a monopolistically competitive firm Multiple Choice Makes profits just as it does in the long run because entry is blocked. Produces at a rate at which long-run average cost equals price, but not at which long-run marginal cost equals marginal revenue. May make economic profits, but it fails to make economic profits in the long run because of the entry of new firms. May make profits just as it does in the long run because firms can enter easily. Explanation Given the ease of entry and exit in perfect and monopolistic competition markets, as long as firms are making a profit or losing money, firms will enter or exit the market and the disappearance of economic profits (losses) is inevitable. This means that firms will produce where MR = MC and where price = ATC.

May make economic profits, but it fails to make economic profits in the long run because of the entry of new firms.

Assume that Anna buys peanut butter and bread. If the price of peanut butter falls, then Multiple Choice Her indifference curves will shift away from the origin. Her entire budget constraint will shift away from the origin. One end of her budget constraint will move away from the origin. Her entire budget constraint will shift toward the origin. Explanation Whenever the price of a good changes, the budget constraint shifts. If only one price is changed, then only one end of the budget constraint is shifted.

One end of her budget constraint will move away from the origin.

The most desired goods and services that are foregone in order to obtain something else are the Multiple Choice Average total cost. Marginal cost. Variable cost. Opportunity cost. Explanation The opportunity cost of a product is measured by the most desired goods and services that could have been produced with the same resources. For example, the opportunity cost of doing your economics homework might be the haircut that you could have received during that time.

Opportunity cost.

The most desired goods or services that are given up when a choice is made are called the Multiple Choice Economic profit. Opportunity cost. Rationing device. Utility cost. Explanation Opportunity cost is defined as the most desired goods or services that are forgone in order to obtain something else.

Opportunity cost.

A good is normal if the sign on the income elasticity formula is Multiple Choice Greater than 1. Less than 1. Positive. Negative.

Positive

A perfectly competitive firm will maximize profits by choosing an output level where Multiple Choice Price is greater than total cost. Price equals marginal cost. Price is greater than marginal cost. Price equals total cost. Explanation A competitive firm maximizes total profit at the output rate where MC is equal to price (which is the same as MR in perfect competition). If MC is less than price, the firm can increase profits by producing more. If MC exceeds price, the firm should reduce output.

Price equals marginal cost.

To maximize profits, a competitive firm will seek to expand output until Multiple Choice Total revenue equals total cost. Price equals $0. The elasticity of demand equals 1. Price equals marginal cost. Explanation If an extra unit brings in more revenue than it costs to produce, it is adding to total profit. Total profits must increase in this case. Hence a competitive firm wants to expand the rate of production whenever price exceeds MC.

Price equals marginal cost.

Which of the following characterizes a firm that is in long-run perfectly competitive equilibrium where profits are maximized? Multiple Choice Price equals marginal cost. Price exceeds marginal cost. Price equals minimum ATC. Positive economic profit. Explanation As long as an economic profit is available, it will continue to attract new entrants, causing the market supply to increase. Price and profit declines will cease when the price of the good equals its minimum average cost of production.

Price equals minimum ATC.

A kinked demand curve indicates that rival oligopolists match all Multiple Choice Increased advertising. Advertising reductions. Price increases. Price reductions. Explanation The demand curve will be kinked if rival oligopolists match price reductions but not price increases.

Price reductions.

A rightward shift of the market demand curve for drones, ceteris paribus, causes equilibrium Multiple Choice Price to increase and equilibrium quantity to decrease. Price to decrease and equilibrium quantity to decrease. Price to increase and equilibrium quantity to increase. Price to decrease and equilibrium quantity to increase. Explanation An increase in demand causes equilibrium price and equilibrium quantity to increase.

Price to increase and equilibrium quantity to increase.

A rightward shift of the market demand curve for drones, ceteris paribus, causes equilibrium Multiple Choice Price to increase and equilibrium quantity to decrease. Price to increase and equilibrium quantity to increase. Price to decrease and equilibrium quantity to decrease. Price to decrease and equilibrium quantity to increase. Explanation An increase in demand causes equilibrium price and equilibrium quantity to increase.

Price to increase and equilibrium quantity to increase.

The pricing strategy in which there is an explicit agreement among producers regarding price is called Multiple Choice Price discrimination. Price-fixing. Price leadership. Marginal cost pricing. Explanation The most explicit form of coordination among oligopolists is price fixing, which occurs when firms in an oligopoly explicitly agree to charge a uniform (monopoly) price.

Price-fixing.

When price exceeds average variable cost but not average total cost, the firm should, in the short run, Multiple Choice Minimize total losses by producing at the rate of output where ATC is minimized. Shut down. Minimize per-unit losses by producing at the rate of output where ATC is minimized in the short run. Produce at the rate of output where MR = MC. Explanation A competitive firm maximizes total profit (minimizes losses) at the output rate where MC is equal to MR. If at that output level the price (or MR) is less than ATC but greater than AVC, then a perfectly competitive firm is losing less than its fixed costs and should continue producing in the short run in order to minimize its losses.

Produce at the rate of output where MR = MC.

When price exceeds average variable cost but not average total cost, the firm should, in the short run, Multiple Choice Produce at the rate of output where MR = MC. Minimize total losses by producing at the rate of output where ATC is minimized. Shut down. Minimize per-unit losses by producing at the rate of output where ATC is minimized in the short run. Explanation A competitive firm maximizes total profit (minimizes losses) at the output rate where MC is equal to MR. If at that output level the price (or MR) is less than ATC but greater than AVC, then a perfectly competitive firm is losing less than its fixed costs and should continue producing in the short run in order to minimize its losses.

Produce at the rate of output where MR = MC.

As a result of a shortage, Multiple Choice Consumers increase demand for the product. Producers reduce supply. Producers increase output and raise price. Government purchases decrease. Explanation If a shortage exists, buyers will compete for goods by offering to pay higher prices, and producers will increase the quantity supplied.

Producers increase output and raise price.

Oligopolists have a mutual interest in coordinating production decisions in order to maximize joint Multiple Choice Profits. Market share. Costs. Revenues. Explanation An oligopoly strives to behave like a monopoly to maximize industry profits.

Profits

Oligopolists have a mutual interest in coordinating production decisions in order to maximize joint Multiple Choice Costs. Profits. Revenues. Market share. Explanation An oligopoly strives to behave like a monopoly to maximize industry profits.

Profits.

Which of the following is generally a fixed cost? Multiple Choice Utilities. Wages. Property taxes on land used in production. Profit taxes. Explanation Fixed costs, such as the cost of the basic plants and equipment and property taxes, do not vary with the rate of output.

Property taxes on land used in production.

Which of the following is most likely a fixed cost? Multiple Choice Raw materials cost. Labor cost. Energy cost. Property taxes. Explanation Property tax is an example of a fixed cost. Once you purchase land, you're obligated to pay for it whether or not you use it. Labor, energy, and raw material costs will vary with output.

Property taxes.

The exit of firms from a market, ceteris paribus, Multiple Choice Shifts the market supply curve to the right. Shifts the market demand curve to the left. Increases the equilibrium output in the market. Reduces the economic losses of remaining firms in the market. Explanation If economic losses exist in an industry, firms will want to exit. As they do, the market supply curve will shift to the left and cause the market price to increase until profits are normal.

Reduces the economic losses of remaining firms in the market.

The entry of firms into a market, ceteris paribus, Multiple Choice Shifts the market demand curve to the left. Decreases the equilibrium output in the market. Reduces the economic profit of each firm already in the market. Shifts the market supply curve to the left. Explanation As more firms enter a market, the market supply curve will shift to the right and cause the market price to drop along with profits.

Reduces the economic profit of each firm already in the market.

A monopoly realizes larger profits than a comparable competitive market by Multiple Choice Producing at output levels with more favorable cost structures and charging the competitive market price, thereby increasing profits per unit. Setting a higher price at the competitive level of output, thereby increasing total revenue. Producing a greater quantity at the competitive price, thereby increasing profits. Reducing production and pushing prices up. Explanation A monopoly receives larger profits than a comparable competitive industry by reducing the quantity supplied and pushing prices up.

Reducing production and pushing prices up.

Any point on the budget constraint Multiple Choice Represent a combination of two goods that are affordable. Gives the consumer the highest level of utility. Represents combinations of two goods that yield the same utility. Reflects the price of one good divided by the price of another good.

Represent a combination of two goods that are affordable.

Nonprice competition results in Multiple Choice Marginal cost pricing. Low entry barriers. Resource misallocation. Production efficiency. Explanation Because the resources used in nonprice competition (advertising, packaging, service, etc.) may have more desirable uses, these industry structures lead to resource misallocation.

Resource misallocation.

If the equilibrium price in a perfectly competitive market for walnuts is $4.99 per pound, then an individual firm in this market can Multiple Choice Sell an additional pound of walnuts at $4.99. Not sell additional walnuts unless the firm lowers its price. Sell more only by increasing its advertising budget. Not sell additional walnuts at any price because the market is at equilibrium. Explanation An individual firm in a perfectly competitive market is so small relative to the entire market that it confronts a horizontal demand curve (perfectly elastic demand) for its output. It does not need to lower its price to sell more; it can sell as much as it can produce at the market price.

Sell an additional pound of walnuts at $4.99.

If the equilibrium price in a perfectly competitive market for walnuts is $4.99 per pound, then an individual firm in this market can Multiple Choice Not sell additional walnuts at any price because the market is at equilibrium. Sell more only by increasing its advertising budget. Not sell additional walnuts unless the firm lowers its price. Sell an additional pound of walnuts at $4.99. Explanation An individual firm in a perfectly competitive market is so small relative to the entire market that it confronts a horizontal demand curve (perfectly elastic demand) for its output. It does not need to lower its price to sell more; it can sell as much as it can produce at the market price.

Sell an additional pound of walnuts at $4.99.

The law of supply implies that Multiple Choice Supply curves are flat. Supply curves are upward-sloping to the right. Supply curves are downward-sloping to the right. A change in a determinant of demand shifts the supply curve. Explanation The law of supply says that larger quantities will be offered for sale at higher prices, thereby causing the supply curve to be upward-sloping to the right.

Supply curves are upward-sloping to the right.

Short-run supply determinants include Multiple Choice Consumer preferences. Number of buyers. Income. Technology. Explanation The determinants of a firm's supply include the price of factor inputs, technology, and expectations (for costs, sales, technology, taxes, and subsidies).

Technology.

If there is a surplus at a given price, then Multiple Choice That price is lower than the equilibrium price. The market is in equilibrium at that price. The price is zero. That price is greater than the equilibrium price.

That price is greater than the equilibrium price.

If there is a surplus at a given price, then Multiple Choice The market is in equilibrium at that price. That price is greater than the equilibrium price. That price is lower than the equilibrium price. The price is zero. Explanation At prices above equilibrium, quantity supplied will be greater than quantity demanded, so a market surplus will exist.

That price is greater than the equilibrium price.

Economic losses are a signal to producers Multiple Choice That they are using resources in the most efficient way. That they are not using resources in the best way. That consumers are content with the allocation of resources. That consumer demand is being satisfied. Explanation Because competitive firms always strive to produce at the rate of output at which price equals marginal cost, the price signal the consumer gets in a competitive market is an accurate reflection of opportunity cost. As such, it offers a reliable basis for making choices about the mix of output and allocation of resources.

That they are not using resources in the best way.

Maximum total revenue occurs when Multiple Choice Price multiplied by quantity is 1.0. The absolute value of the price elasticity of demand is 100. The absolute value of the price elasticity of demand is 1.0.

The absolute value of the price elasticity of demand is 1.0.

When economists talk about "optimal outcomes" in the marketplace, they mean that Multiple Choice Everyone who wants a good or service can have it. The allocation of resources by the market is perfect. The allocation of resources by the market is likely to be the best possible, given scarce resources and income constraints. All the consumer desires are satisfied and business profits are maximized.

The allocation of resources by the market is likely to be the best possible, given scarce resources and income constraints.

Which of the following is always downward-sloping? Multiple Choice The average total cost curve when it is below the marginal cost curve. The marginal cost curve when it is above the average total cost curve. The average total cost curve when it is above the marginal cost curve. The marginal cost curve when it is below the average total cost curve. Explanation If the marginal cost is less than the average total cost, the average total cost must be decreasing. For instance, if you have a 3.5 GPA (grade point average) and get only a 3.0 in your last (marginal) accounting class, your GPA will fall.

The average total cost curve when it is above the marginal cost curve.

A buyer is said to have a demand for a good only when Multiple Choice The buyer is not willing to buy the good and does not have enough income to purchase the good. The buyer is both willing and able to purchase the good. The buyer has the income but the good is not preferred. An adequate supply of the good is available for purchase. Explanation Demand is the ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus

The buyer is both willing and able to purchase the good.

Barb's Soccer Ball Company produces 800 soccer balls per week. If the firm used marginal cost pricing to determine soccer ball output, it would produce 600 soccer balls. Consumers do not receive the most desirable quantity of soccer balls from Bib's because Multiple Choice The cost of producing the additional 200 soccer balls is less than the amount that consumers are willing to pay for the additional soccer balls. The cost of producing the additional 200 soccer balls is greater than the amount that consumers are willing to pay for the additional soccer balls. Economic losses are occurring. The firm must be earning higher than normal economic profits. Explanation The marginal cost pricing characteristic of competitive markets permits society to answer the WHAT to produce question efficiently. The amount consumers are willing to pay for a good (its price) equals its opportunity cost (marginal cost). But this is not true when a firm produces quantities at which MC is greater than the price.

The cost of producing the additional 200 soccer balls is greater than the amount that consumers are willing to pay for the additional soccer balls.

If demand is very inelastic, Multiple Choice The demand curve will be horizontal. The demand curve will be very steep. The demand curve is upward-sloping. The demand curve will be very flat.

The demand curve will be very steep.

In 2007 a company sold 35,000 drones at $150 each. In 2008 the same company sold 40,000 drones at $170 each. This information suggests that Multiple Choice From 2007 to 2008, the demand curve for drones was upward-sloping because of improved technology. The demand for drones increased from 2007 to 2008. The supply of drones increased from 2007 to 2008. The price of drones increased because the costs of production increased from 2007 to 2008. Explanation An increase in demand causes equilibrium price and equilibrium quantity to increase.

The demand for drones increased from 2007 to 2008.

In the article "After iPhone Price Cut, Sales Are Up by 200 Percent," Multiple Choice The survey of quantity demanded after a price change for the iPhones showed that iPhones are an inferior good. The demand for iPhones is inelastic. The demand for iPhones is highly elastic. There was no way to calculate the price elasticity of demand.

The demand for iPhones is highly elastic.

Profit is Multiple Choice The difference between total revenue and total cost. Earned at all points along the production function. The difference between total cost and variable cost. Possible only with technical efficiency. Explanation The most desirable rate of output is the one that maximizes total profit-the difference between total revenue and total costs.

The difference between total revenue and total cost.

Normal profit implies that Multiple Choice Economic profit must be positive. Firms will expand their scale of production. The factors employed are earning as much as they could in the best alternative employment. Economic profit must be negative. Explanation Normal profit is the profit made that covers all explicit costs and implicit costs but does not include any profit above and beyond what could have made with those resources used elsewhere.

The factors employed are earning as much as they could in the best alternative employment.

Refer to Figure 22.3 for a perfectly competitive firm. Which of the following statements is true for this firm between the prices of $10 and $15? Multiple Choice The firm is experiencing economic profits because the market price is greater than or equal to the minimum AVC. The firm is experiencing zero economic profits. The firm is experiencing economic losses and should shut down. The firm is experiencing economic losses but should continue to produce. Explanation A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when price is less than average variable cost. When the price is between $10 and $15, price is less than ATC, so the firm is losing money, but it is losing less than it would if it shut down.

The firm is experiencing economic losses but should continue to produce.

Refer to Figure 19.2. Diminishing marginal utility begins after Multiple Choice The fifth apple. The first apple. The third apple. The fourth apple.

The first apple.

The World View article on the rise in gold prices indicates that Multiple Choice The law of supply is not really relevant to the article. The law of supply is true: as the price of gold rises, miners around the world search for new deposits of gold. The law of supply is true because as the price of gold rises, the quantity supplied of gold actually falls. The quantity supplied falls when the price of gold rises. Explanation The law of supply states that, ceteris paribus, an increase in price will cause an increase in quantity supplied. This is illustrated in the article on gold prices in the World View. As the price of gold has risen, miners around the world have searched for more sources of gold. Next Visit question mapQuestion 20 of 50 Total20 of 50 Prev

The law of supply is true: as the price of gold rises, miners around the world search for new deposits of gold.

The World View article on the rise in gold prices indicates that Multiple Choice The law of supply is true because as the price of gold rises, the quantity supplied of gold actually falls. The law of supply is not really relevant to the article. The quantity supplied falls when the price of gold rises. The law of supply is true: as the price of gold rises, miners around the world search for new deposits of gold.

The law of supply is true: as the price of gold rises, miners around the world search for new deposits of gold.

The best measure of the economic cost of doing your homework is Multiple Choice The economic cost plus the accounting cost of doing the homework. The most valuable opportunity you give up when you do your homework. The amount you would have to pay to get someone else to do it. The tuition paid for your education plus the cost of any required textbooks. Explanation The economic or opportunity cost of any activity is the value of the best forgone alternative. Therefore, if you gave up working to do your homework, your opportunity cost is the wage that you would have earned.

The most valuable opportunity you give up when you do your homework.

A nationwide concentration ratio is likely to understate market power when Multiple Choice Firms sell nationally. The true markets are local and small. There is extensive foreign competition. A market is perfectly contestable. Explanation Concentration ratios do not necessarily convey the extent to which market power may be concentrated in a local market. In fact, many industries, including newspapers, with low concentration ratios nationally are represented by just one or a few firms locally.

The true markets are local and small.

Diseconomies of scale are reflected in Multiple Choice The downward-sloping segment of the long-run marginal cost curve. The downward-sloping segment of the long-run average total cost curve. A downward shift of the long-run average total cost curve. The upward-sloping segment of the long-run average total cost curve. Explanation When increasing the size (scale) of a plant reduces operating efficiency, the average total cost curve will increase. Next

The upward-sloping segment of the long-run average total cost curve.

The term market mechanism refers to Multiple Choice Government laws and regulations concerning how the market should operate. The establishment of a ceiling price in a market. Supply curves but not demand curves. The use of market prices and sales to determine resource allocation. Explanation Market mechanism refers to the use of market prices and sales to signal desired outputs or resource allocations. Next Visit question mapQuestion 21 of 50 Total21 of

The use of market prices and sales to determine resource allocation.

The term market mechanism refers to Multiple Choice Government laws and regulations concerning how the market should operate. The use of market prices and sales to determine resource allocation. Supply curves but not demand curves. The establishment of a ceiling price in a market.

The use of market prices and sales to determine resource allocation.

Monopolistic competition results in Multiple Choice Marginal cost pricing. Production efficiency. The wrong mix of output. Allocative efficiency. Explanation Because the demand curve facing a firm in monopolistic competition slopes downward, firms will charge a price greater than marginal cost, just like firms in an oligopoly or monopoly. As a consequence, price always exceeds the opportunity cost. Consumers respond to these flawed signals by demanding fewer goods from monopolistically competitive industries than they would otherwise. We end up with the wrong (suboptimal) mix of output and misallocated resources.

The wrong mix of output.

Perfectly competitive firms cannot individually affect market price because Multiple Choice Demand is perfectly inelastic for their goods. There are many firms, none of which has a significant share of total output. There is an infinite demand for their goods. The government exercises control over the market power of competitive firms. Explanation A firm that has market power can control the market price for the good it sells, unlike a perfectly competitive firm that risks losing all of its customers, who will shop elsewhere, if the firm increases the price of its product.

There are many firms, none of which has a significant share of total output.

Patents are a barrier to entry. Explanation Barriers to entry include patents, economies of scale, ownership of key resources, and government regulation.

True

Which of the following is an example of product differentiation? Multiple Choice Sugar can be made from sugar beets or sugar cane, and consumers cannot tell the difference. Consumers substitute SUVs for cars because SUVs accommodate more passengers. Mills produce softwood and hardwood, but the two are used for different purposes. Two shampoos differ only in their labels, but consumers pay $0.20 more for the label they recognize. Explanation The shampoo market is an example of a firm having a distinct identity-a brand image. The recognized label is perceived by consumers as being somewhat different from the output of all other firms in the industry and therefore can command a higher price.

Two shampoos differ only in their labels, but consumers pay $0.20 more for the label they recognize.

Refer to Figure 20.2. Suppose the areas 0P1AB and 0P2CD are equal. We can conclude that the price elasticity of demand between point A and point C is Multiple Choice Impossible to determine. It depends on whether the price has increased or decreased. Elastic. Inelastic. Unitary elastic.

Unitary elastic.

If the price of "X" increases and you buy more "Y," then Multiple Choice "X" and "Y" are complements, and the price of "Y" will increase. "X" and "Y" are complements, and the price of "Y" will decrease. "X" and "Y" are substitutes, and the price of "Y" will increase. "X" and "Y" are substitutes, and the price of "Y" will decrease. Explanation Substitutes are competitive goods. They will have similar prices if not the same price in the same location.

"X" and "Y" are substitutes, and the price of "Y" will increase.

Refer to Figure 21.5. Economies of scale occur in the following range of factory sizes Multiple Choice #1 to #2. #1 through #3. #3 only. #1 through #5. Explanation Reductions in minimum average costs that come about through increases in the size (scale) of plants and equipment occur over the range of plant sizes 1 through 3.

#1 through #3.

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What is the accounting profit for the firm described above? Multiple Choice -$90,000. $200,000. $90,000. $0. Explanation Accounting profit is equal to revenue ($360,000) minus explicit costs ($360,000), which is $0.

$0.

Table 21.2 Output (units per day)0102030Total cost (dollars per day)$40$54$62$80 At 20 units of output in Table 21.2, the average variable cost is Multiple Choice $1.10 per unit. $3.10 per unit. $1.75 per unit. $2.00 per unit. Explanation AVC is equal to VC ($62 - $40) divided by quantity (20), which is $1.10.

$1.10 per unit.

Refer to Table 21.5: Table 21.5 QTFCTVCTCAVCMC0 15--1 23 2 43 15 The total variable cost of 2 units of output in Table 21.5 is Multiple Choice $27. $15. $12. $8. Explanation Because the marginal cost of the second unit of output is $4, the variable cost increased from $8 to $12 with the additional unit of output.

$12.

Table 21.2 Output (units per day)0102030Total cost (dollars per day)$40$54$62$80 At 10 units of output in Table 21.2, the total fixed cost is Multiple Choice $44. $40. $14. $54. Explanation The total fixed cost is $40 at any unit of output because total cost is $40 at 0 units of output.

$40.

Table 21.2 Output (units per day)0102030Total cost (dollars per day)$40$54$62$80 At 30 units of output in Table 21.2, the total variable cost is Multiple Choice $30. $50. $80. $40. Explanation To find the total variable cost at 30 units of output, you must subtract the fixed cost ($40) from the total cost ($80), which is $40.

$40.

Table 21.2 Output (units per day)0102030Total cost (dollars per day)$40$54$62$80 At 30 units of output in Table 21.2, the total variable cost is Multiple Choice $50. $30. $80. $40. Explanation To find the total variable cost at 30 units of output, you must subtract the fixed cost ($40) from the total cost ($80), which is $40.

$40.

Refer to Figure 23.1 for a perfectly competitive firm. This firm should shut down in the short run if the market price is below Multiple Choice $10. $20. $15. $5. Explanation A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when price is less than the minimum average variable cost ($5).

$5.

Refer to Figure 23.1 for a perfectly competitive firm. This firm should shut down in the short run if the market price is below Multiple Choice $20. $15. $5. $10. Explanation A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when price is less than the minimum average variable cost ($5).

$5.

Table 25.1 Company XYZ's Possible ResponsesCompany ABC's ActionCharge high PricesCharge low PricesCharge high PricesProfit gain/loss=$0Profit loss=$5,000Charge low PricesProfit gain=$50,000Profit loss=$500 Given the payoff matrix in Table 25.1, if the probability of rivals matching a price reduction is 99 percent, what is the expected payoff for a price cut by Company ABC? Multiple Choice $0. $5. -$500. -$5,000. Explanation The expected value of a choice is equal to the sum of the probability of rivals matching times the size of the loss from price cuts and the probability of rivals not matching times the gain from a lone price cut. In this case, ((.99 ×$-500) + (.01 ×$50,000)), which is $5.

$5.

Table 21.4 Output (Units per Day)Total Cost (Dollars per Day)016130242358478 At 3 units of output in Table 21.4, average fixed costs are Multiple Choice $19.50. $15.50. $16.00. $5.33. Explanation AFC is equal to FC ($16) divided by quantity (3), which is $5.33.

$5.33.

Refer to the data in Figure 22.1. The total fixed costs for this firm are approximately Multiple Choice $200. $100. $50. $600. Explanation The total fixed cost is $50 because total cost is $50 at 0 units of output.

$50.

Lashondra is the owner/operator of an interior design firm. Last year she earned $400,000 in total revenue. Her explicit costs were $200,000 (assume that this amount represents the total opportunity cost of these resources). During the year she received offers to work for other design firms. One offer would have paid her $120,000 per year and the other would have paid her $130,000 per year. Lashondra's economic profit is equal to Multiple Choice $70,000. $0. $200,000. -$50,000. Explanation Accounting profit is equal to revenue ($400,000) minus explicit costs ($200,000), which is $200,000. Economic profit is equal to accounting profit ($75,000) minus implicit costs-the best forgone alternative-($130,000); therefore her economic profit is $70,000.

$70,000.

What is the average fixed cost when output is 120 units in Figure 21.2? Multiple Choice $208.00. $96.00. $80.00. $0.67. Explanation AFC can be found at any quantity of output by taking the difference between ATC and AVC. For example, at the quantity of 120, AFC is equal to $80 ($288 - $208).

$80.00.

Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 in rented property, and $35,000 in interest costs on capital. The owner/manager does not choose to pay himself, but he could receive income of $90,000 by working elsewhere. The firm earns revenues of $360,000 per year. What are the annual implicit costs for the firm described above? Multiple Choice $450,000. $160,000. $90,000. $360,000. Explanation Implicit costs are the value of resources used, even when no direct payment is made: $90,000.

$90,000.

Table 22.1 Assume an apple farmer incurs the following costs and revenuesFertilizer$200Seeds$75Water$250Wages$750Property taxes$600Interest payments on borrowed funds$1,200Sales of apples$4,000 Suppose the entrepreneur could earn $1,000 as an employee elsewhere. This means the accounting profit is Multiple Choice $925. -$1,000. -$75. $1,525. Explanation Accounting profit is equal to revenue ($4,000) minus explicit costs ($200 + $75 + $250 + $750 + $600 + $1,200), which is $925. The $1,000 is an implicit cost and does not impact accounting profit.

$925.

Table 24.1 Monopoly Costs and Revenue QuantityPriceTotal Cost1$500$4002$450$6503$400$9504$350$1,3005$300$1,700 In Table 24.1, according to the profit maximization rule, at the profit-maximizing level of output, total cost is Multiple Choice $1,200. $650. $950. $900. Explanation Profit is maximized at the output level where the difference between revenue and cost is greatest (where MR is equal to MC). This occurs at three units of output, and TC is equal to $950.

$950.

Explain how a firm's cost curves and optimal rate of output are affected by (a) property taxes; (b) payroll taxes; and (c) taxes on profits. (a) Property taxes are levied on land and buildings and must be paid regardless of whether the land or buildings are used. Therefore, they are a fixed cost for the firm, and they shift the firm's ATC curve upward. Since they don't affect the MC curve, the optimal rate of output does not change when a property tax is levied. (b) Payroll taxes are levied on the wages paid by the firm and add to the cost of hiring labor. Therefore, they shift the firm's MC curve upward and reduce its optimal rate or output. (c) Profit taxes are paid only when profits are made and therefore are neither a fixed cost nor a variable cost. Therefore, they do not affect the firm's cost curves or optimal rate of output.

...

Explain how market power is measured. Essay Market power is measured in a few key ways: Number of producers Size of firm Barriers to entry in market Availability of substitute goods Concentration Ratio: the proportion of total industry output produced by (usually) the four largest firms - If the industry produces 1 million products and the four biggest firms produce 700k of them, the concentration ratio is 70% Essay Edit Unavailable Market power is measured in a few key ways: Number of producers Size of firm Barriers to entry in market Availability of substitute goods Concentration Ratio: the proportion of total industry output produced by (usually) the four largest firms - If the industry produces 1 million products and the four biggest firms produce 700k of them, the concentration ratio is 70% Explanation The standard measure of market power is the concentration ratio, which tells the share of output (or combined market share) accounted for by the largest firms in an industry and allows one to relate the size of firms to the size of the product market.

...

Why is there an emphasis on nonprice competition in oligopoly markets rather than on lowering prices to gain market share? Essay Firms will not usually employ price competition because competitors will engage in price reduction but not price rises, this leads firms to engage in nonprice competition. Nonprice competition is where firms rely on advertisement and product differentiation to garner costumers. Essay Edit Unavailable Firms will not usually employ price competition because competitors will engage in price reduction but not price rises, this leads firms to engage in nonprice competition. Nonprice competition is where firms rely on advertisement and product differentiation to garner costumers. Explanation Oligopoly firms resist lowering prices because of the uncertainty involved in rivals' responses. Oligopolists find it safer to attempt to gain market share by using nonprice competitive methods such as advertising.

...

If the price of cell phones increases by 5 percent and the quantity demanded falls by 2 percent, the absolute value of the price elasticity of demand is Multiple Choice 5 percent. 2.1. 0.4. 5.0. Explanation The price of elasticity formula is the percentage change in quantity demanded divided by the percentage change in price. Here it is 2%/5%=.4 (dropping the negative sign).

0.4

Suppose the quantity demanded of ski boats falls from 4.0 million to 3.0 million as a result of an average price increase from $20,000 to $25,000 per boat. The absolute value of the price elasticity of demand is closest to Multiple Choice 0.29. 1.29. 0.78. 0.20.

1.29.

Refer to Figure 21.3. The best estimate of where diminishing marginal returns begin is at an output level of Multiple Choice 20. 10. 40. 30. Explanation The best estimate of where diminishing marginal returns begin is 20 because that is the output level where the total cost curve begins getting steeper, which means the costs are rising faster as output increases.

20

Refer to Table 21.3 below: Table 21.3 Units of LaborUnits of OutputMPP00 1 30266 3 304116 What is the marginal physical product of the fourth unit of labor in Table 21.3? Multiple Choice 116. 20. 29. 5. Explanation The marginal physical product is the difference in total output associated with one additional unit of input, which is 20 (116 - 96).

20

Refer to Table 21.3 below: Table 21.3 Units of LaborUnits of OutputMPP00 1 30266 3 304116 What is the marginal physical product of the fourth unit of labor in Table 21.3? Multiple Choice 20. 29. 116. 5. Explanation The marginal physical product is the difference in total output associated with one additional unit of input, which is 20 (116 - 96).

20

The combined market share of the top four firms in a monopolistically competitive industry will typically be in the range of Multiple Choice Zero to 2 percent. Zero to 5 percent. 70 to 100 percent. 20 to 40 percent. Explanation Concentration ratios between 70 to 100 percent are common in oligopolies. Although a few firms may stand above the rest in a monopolistically competitive market, the combined market share of the top four firms will typically be in the range of 20 to 40 percent.

20 to 40 percent.

Table 21.2 Output (units per day)0102030Total cost (dollars per day)$40$54$62$80 For the output levels in Table 21.2, the minimum of the average variable cost curve occurs at a production rate of Multiple Choice 10 units per day. 20 units per day. 30 units per day. Zero units per day. Explanation The AVC is $1.40, $1.10, and $1.33 for 10, 20, and 30 units of output respectively. Therefore, AVC is minimized at 20 units of output.

20 units per day.

Table 21.4 Output (Units per Day)Total Cost (Dollars per Day)016130242358478 The marginal cost of the fourth unit of output in Table 21.4 is Multiple Choice $19.50. $20.00. $16.00. $4.00. Explanation Marginal cost is equal to the change in total cost ($78 - $58) divided by the change in quantity (4 - 3), which is $20.

20.00

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. If the price per unit of good X is $3, the consumer would maximize utility by consuming Multiple Choice 10 units of Y. 21 units of Y. 30 units of Y. 25 units of Y.

21 units of Y.

Table 21.4 Output (Units per Day)Total Cost (Dollars per Day)016130242358478 For the output levels in Table 21.4, the minimum of the average total cost curve occurs at a production rate of Multiple Choice Zero units per day. 3 units per day. 2 units per day. 4 units per day. Explanation ATC is equal to TC divided by quantity. The ATC is $30, $21, $19.3, and $19.5 with output levels of 1 through 4 respectively. Therefore, ATC is minimized at 3 units of output.

3 units per day.

Suppose there are three firms in a market. The largest firm has sales of $50 million, and each of the other two firms has sales of $25 million. The Herfindahl-Hirschman Index of this industry is Multiple Choice 2,500. 3,750. 2,550. 3,125. Explanation The HHI is equal to the sum of the scares of the market share of each firm in the industry. Therefore if you take the square of 50 percent and add it to the square of 25 percent multiplied by 2 (because there are 2 firms with 25 percent market share), you will get an HHI of 3,750.

3,750.

If income falls 4 percent for a year and as a result the quantity of new homes demanded falls from 23 million to 20 million units for the year, the value of the income elasticity of demand for new homes is closest to Multiple Choice 0.6. 1.8. 3.5. 2.9.

3.5

For product X, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded will increase by Multiple Choice 1 percent for each 3.5 percent decrease in price, ceteris paribus. 3.5 units for each $1 decrease in price, ceteris paribus. 3.5 percent for each 1 percent decrease in price, ceteris paribus. 1 unit for each $3.50 decrease in price, ceteris paribus.

3.5 percent for each 1 percent decrease in price, ceteris paribus.

Refer to Figure 22.3 for a perfectly competitive firm. At a market price of $23, profit per unit is maximized at an output of Multiple Choice 13 units. 31 units. 25 units. 39 units. Explanation The difference between price and average cost-profit per unit-is illustrated by the vertical distance between the price and ATC curves. At a price of $23, the profit per unit is maximized at the output that minimizes ATC, 31.

31 units.

Refer to Figure 22.3 for a perfectly competitive firm. At a market price of $23, profit per unit is maximized at an output of Multiple Choice 31 units. 39 units. 13 units. 25 units. Explanation The difference between price and average cost-profit per unit-is illustrated by the vertical distance between the price and ATC curves. At a price of $23, the profit per unit is maximized at the output that minimizes ATC, 31.

31 units.

Refer to Table 21.3 below: Table 21.3 Units of LaborUnits of OutputMPP00 1 30266 3 304116 What is the marginal physical product of the second unit of labor in Table 21.3? rev: 10_04_2018_QC_CS-141781 Multiple Choice 36. 18. 33. 66. Explanation The marginal physical product is the difference in total output associated with one additional unit of input, which is 36 (66 - 30). Next Visit question mapQuestion 44 of 50 Total44

36

Refer to Figure 22.3 for a perfectly competitive firm. At a market price of $23, total profits are maximized at an output of Multiple Choice 13. 25. 31. 39. Explanation Total profit is maximized at the output level where price is equal to MC, 39.

39.

Assume the price of cola is $8 per unit and the price of pretzels is $4 per unit. Table 19.3 Michael's Utility Schedule Units of ColaTU of ColaMU of ColaUnits of PretzelsTU of PretzelsMU of Pretzels14040130302 322 2039624366164112 478 5124 584 In Table 19.3 the marginal utility per dollar of the second cola is Multiple Choice 6. 12. 4. 10. Explanation The marginal utility per dollar is equal to the marginal utility divided by the price of the product. The marginal utility of the second cola is 32, so the marginal utility per dollar is 32/8=4.

4

Assume the price of cola is $8 per unit and the price of pretzels is $4 per unit. Table 19.3 Michael's Utility Schedule Units of ColaTU of ColaMU of ColaUnits of PretzelsTU of PretzelsMU of Pretzels14040130302 322 2039624366164112 478 5124 584 The marginal utility per dollar of the third pretzel is Multiple Choice 4. 12. 5. 6.

4

osh is eating pizza at his favorite Italian restaurant. Below is his utility from this consumption: Table 19.1 Slice of PizzaTotal UtilityMarginal UtilityFirst slice2020Second slice3919Third slice-15Fourth slice59- Refer to Table 19.1. The marginal utility Josh enjoys from the fourth slice of pizza is Multiple Choice 20 utils. 0 utils. 5 utils. 54 utils. Explanation Marginal utility is the change in total utility as a buyer consumers more units of a good. The change in marginal utility from the third to the fourth slice of pizza is 59 - 54 = 5. Next Visit question mapQuestion 45 of 50 Total45 of 50 Prev

5 utils.

Suppose there are only three firms in a market. The largest firm has sales of $500 million, the second-largest has sales of $300 million, and the smallest has sales of $200 million. The market share of the largest firm is Multiple Choice 50 percent. 100 percent. 60 percent. 40 percent. Explanation Total market sales are equal to $1,000 ($500 + $300 + $200), and therefore the largest firm has 50 percent ($500/$1,000) of the market share.

50 percent.

Table 25.2 Pool SweeperOutput (Revenue)Market Share (%)North Star$20,000 Hurricane$16,000 Blue Lagoon$2,000 Clean Sweep$2,000 Refer to Table 25.2. Assume there are only four firms in the pool sweeper industry. What is the market share for North Star? Multiple Choice 20 percent. 50 percent. 10 percent. 5 percent. Explanation Total market sales are equal to $40,000 ($20,000 + $16,000 + $2,000 + $2,000). Therefore North Star has 50 percent ($20,000/$40,000) of the market share.

50 percent.

Josh is eating pizza at his favorite Italian restaurant. Below is his utility from this consumption: Table 19.1 Slice of PizzaTotal UtilityMarginal UtilityFirst slice2020Second slice3919Third slice-15Fourth slice59- Refer to Table 19.1. What is Josh's total utility from consuming the third slice of pizza? Multiple Choice 20 utils. 5 utils. 0 utils. 54 utils.

54 utils.

Josh is eating pizza at his favorite Italian restaurant. Below is his utility from this consumption: Table 19.1 Slice of PizzaTotal UtilityMarginal UtilityFirst slice2020Second slice3919Third slice-15Fourth slice59- Refer to Table 19.1. What is Josh's total utility from consuming the third slice of pizza? Multiple Choice 54 utils. 5 utils. 0 utils. 20 utils. Explanation Total utility is the sum of all of the marginal utilities. If you add the 15 marginal utility units that Josh received from consuming the third slice of pizza to the total utility units of 39 he enjoyed from the second slice, 39 + 15 = 54.

54 utils.

Table 19.2 Quantity ConsumedTotal UtilityMarginal Utility115152 9330 4 3 In Table 19.2, the marginal utility of the third unit is Multiple Choice 30. 3. 5. 6. Explanation Marginal utility is the change in total utility obtained by consuming one additional good or service. Total utility increases from 24 to 30 when the third unit is consumed, an increase of 6 utils.

6

Refer to Figure 19.2. With no budget constraint, a rational consumer will consume Multiple Choice 6 apples. 1 apple. 0 apples. an infinite number of apples.

6 apples.

Which of the following affects both the marginal and average total cost curves of a firm in the short run? Multiple Choice A change in property taxes. A change in profit taxes. A change in payroll taxes. A change in consumer income. Explanation Marginal cost is the change in total cost that occurs when more output is produced. However, fixed costs are constant, so the change in total cost will be the result of a change in variable costs only. A change in variable costs will impact both the marginal and the average total cost.

A change in payroll taxes.

Which of the following affects the ATC curve for a firm but not the MC curve? Multiple Choice A change in the price of the good. A change in profit taxes. A change in payroll taxes. A change in property taxes. Explanation Fixed costs such as the cost of the basic plants and equipment and property taxes do not vary with the rate of output and therefore do not affect marginal costs but do affect the ATC.

A change in property taxes.

Ceteris paribus, if buyers expect the price of airline tickets to fall in the future, then right now there should be Multiple Choice No change in the supply of or demand for airline tickets because the price is not changing right now. A decrease in the supply of airline tickets. An increase in the demand for airline tickets. A decrease in the demand for airline tickets.

A decrease in the demand for airline tickets.

If bagels and doughnuts are substitutes, then a decrease in the price of doughnuts will result in Multiple Choice An increase in the demand for doughnuts. A decrease in the demand for doughnuts. An increase in the demand for bagels. A decrease in the demand for bagels. Explanation Consumers will substitute the relatively cheaper doughnuts when the price of doughnuts falls, thereby causing the demand for bagels to decrease.

A decrease in the demand for bagels.

Ceteris paribus, which of the following is most likely to cause an increase in the quantity demanded of perfume? Multiple Choice An increase in the price of electricity. A decrease in the price of perfume. A decrease in tastes for perfume. An increase in income. Explanation Quantity demanded and price are inversely related. Tastes and income changes would cause a change in demand (a shift), and the price of electricity would impact the supply of perfume.

A decrease in the price of perfume.

Ceteris paribus, if the price of a digital camera rises, then we can expect Multiple Choice An increase in the demand for digital cameras. An increase in the quantity demanded of digital cameras. A decrease in the demand for digital cameras. A decrease in the quantity demanded of digital cameras. Explanation Quantity demanded and price are inversely related.

A decrease in the quantity demanded of digital cameras.

Assuming labor is a variable input, an increase in labor productivity will result in Multiple Choice A downward shift in the MC curve. A downward shift in the production function. A downward shift in the MPP curve. An upward shift in the ATC curve. Explanation Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the production function to shift upward and the production cost curves to shift downward-in particular the MC curve.

A downward shift in the MC curve.

Assuming labor is a variable input, an increase in labor productivity will result in Multiple Choice A downward shift in the MPP curve. A downward shift in the MC curve. An upward shift in the ATC curve. A downward shift in the production function. Explanation Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the production function to shift upward and the production cost curves to shift downward-in particular the MC curve.

A downward shift in the MC curve.

Which of the following characterizes a competitive market? Multiple Choice A downward-sloping demand curve for the firm. Some of the firms sell at a price above the market equilibrium price. A vertical demand curve facing each firm in the market. A downward-sloping demand curve for the market. Explanation The market demand curve for a product is always downward-sloping (law of demand). The demand curve confronting a perfectly competitive firm is horizontal (perfectly elastic demand).

A downward-sloping demand curve for the market.

Which of the following characterizes a competitive market? Multiple Choice A vertical demand curve facing each firm in the market. A downward-sloping demand curve for the market. Some of the firms sell at a price above the market equilibrium price. A downward-sloping demand curve for the firm. Explanation The market demand curve for a product is always downward-sloping (law of demand). The demand curve confronting a perfectly competitive firm is horizontal (perfectly elastic demand).

A downward-sloping demand curve for the market.

Diminishing returns occur because Multiple Choice Of lower opportunity costs of the factors of production. Of the use of inferior factors of production. Of inefficiency in the production process. A firm increases the amount of a variable input without changing a fixed input. Explanation In the short run, a production process is characterized by a fixed amount of available land and capital. Typically the only factor that can be varied in the short run is labor. Yet as more labor is hired, each unit of labor has less capital and land to work with.

A firm increases the amount of a variable input without changing a fixed input.

Refer to Figure 23.6 for a perfectly competitive firm. If this firm produces the level of output corresponding to point B in the short run, it will earn Multiple Choice The maximum profit possible. The minimum loss possible. A loss greater than necessary. A profit, although not the maximum profit possible. Explanation A competitive firm maximizes total profit or minimizes losses at the output rate where MR is equal to MC. If MC is less than MR, the firm can reduce its losses by producing more.

A loss greater than necessary.

One In the News article in the text titled "The Real March Madness: Ticket Prices " described how professional scalpers use the Internet to sell hard-to-get tickets to concerts and sporting events. When scalpers resell tickets at prices closer to equilibrium, Multiple Choice A market shortage is made larger, and the scalpers reap a profit. A market shortage is made smaller, and the scalpers reap a profit. A market shortage is made larger, and the original sellers reap a profit. A market surplus is made smaller, and the scalpers reap a profit. Explanation The fact that the tickets are hard to get implies a shortage. As prices near the equilibrium price, quantity demanded and quantity supplied will get closer together, thus reducing the shortage. Scalpers will reap a profit because they were able to buy low and sell high.

A market shortage is made smaller, and the scalpers reap a profit.

One In the News article in the text titled "The Real March Madness: Ticket Prices " described how professional scalpers use the Internet to sell hard-to-get tickets to concerts and sporting events. When scalpers resell tickets at prices closer to equilibrium, Multiple Choice A market shortage is made smaller, and the scalpers reap a profit. A market shortage is made larger, and the original sellers reap a profit. A market surplus is made smaller, and the scalpers reap a profit. A market shortage is made larger, and the scalpers reap a profit. Explanation The fact that the tickets are hard to get implies a shortage. As prices near the equilibrium price, quantity demanded and quantity supplied will get closer together, thus reducing the shortage. Scalpers will reap a profit because they were able to buy low and sell high.

A market shortage is made smaller, and the scalpers reap a profit.

Oligopolists will maximize total profits for all of the firms in the market at the rate of output where Multiple Choice TR = TC for the total market. MR = MC for the marginal firm. AR = AC for each firm. A monopoly firm would produce if it was maximizing profits. Explanation An oligopoly will maximize profits where marginal revenue equals marginal cost, just like a monopoly.

A monopoly firm would produce if it was maximizing profits.

Refer to Figure 26.4 for a monopolistically competitive firm. If the firm currently faces Demand1 and MR1, then it will earn Multiple Choice A positive economic profit, and firms will enter the industry. A negative economic profit, and firms will enter the industry. Zero economic profit, and neither entry nor exit will occur. A negative economic profit, and firms will exit the industry. Explanation If the firm currently faces Demand1 and MR1, then its price is less than ATC, profits are negative, and firms will exit the market.

A negative economic profit, and firms will exit the industry.

Refer to Figure 26.4 for a monopolistically competitive firm. If the firm currently faces Demand1 and MR1, then it will earn Multiple Choice Zero economic profit, and neither entry nor exit will occur. A negative economic profit, and firms will enter the industry. A negative economic profit, and firms will exit the industry. A positive economic profit, and firms will enter the industry. Explanation If the firm currently faces Demand1 and MR1, then its price is less than ATC, profits are negative, and firms will exit the market.

A negative economic profit, and firms will exit the industry.

Suppose income falls 5 percent in a year, and as a result, housing construction falls from 10 million to 5 million units annually. Based on this information, housing starts are Multiple Choice Price-inelastic. Price-elastic. An inferior good. A normal good. Explanation A normal good is a good for which demand increases when income rises.

A normal good.

Which of the following is a common barrier to entry in a monopoly market? Multiple Choice A vertical supply curve. Economic profits greater than zero for the monopolist. A rising long-run average total cost curve. A patent on a new product. Explanation Examples of barriers to entry include patents, monopoly franchises, regulation, economies of scale, and control of key inputs.

A patent on a new product.

Which of the following would not cause the market supply of cell phones to change? Multiple Choice Telecommunications are deregulated, and anyone who wants to can produce and sell cell phones. A cheaper technology for producing plastics used in producing cell phones is developed. A reduction in the demand for cell phones causes the price to fall. Taxes levied on cell phone production are reduced. Explanation A change in the price of cell phones will cause a movement along the supply curve or a change in the quantity supplied.

A reduction in the demand for cell phones causes the price to fall.

The equilibrium price of a good or service in a competitive market is Multiple Choice Lower than it should be because bankruptcies are common in competitive markets. Higher than it should be because profits are included in the price. Higher than the opportunity cost of producing the product. A reflection of the opportunity cost of producing the product. Explanation The marginal cost pricing characteristic of competitive markets permits society to answer the WHAT to produce question efficiently. The amount consumers are willing to pay for a good (its price) equals its opportunity cost (marginal cost).

A reflection of the opportunity cost of producing the product.

An indifference map shows Multiple Choice A set of indifference curves and a set of budget constraints. A set of indifference curves. One indifference curve. A set of budget constraints and one indifference curve. Explanation An indifference map depicts all the combinations of goods that would yield various levels of satisfaction. A single indifference curve, in contrast, illustrates all combinations that provide a single (equal) level of total utility.

A set of indifference curves.

When the demand for coffee increases, ceteris paribus, the equilibrium price will also increase because Multiple Choice There must be a surplus of the good. Market demand must be upward-sloping. The market supply and demand curves do not intersect. A shortage exists at the old equilibrium price. Explanation When demand increases, if the equilibrium price doesn't change, quantity demanded will be greater than quantity supplied, causing a shortage. Next Visit question mapQuestion 24 of 50 Total24 of

A shortage exists at the old equilibrium price.

If a price is below equilibrium, Multiple Choice A shortage will cause the price to fall and the quantity supplied to decrease. A shortage will cause the price to rise and the quantity supplied to increase. A surplus will cause the price to fall and the quantity supplied to decrease. A surplus will cause the price to fall and the quantity supplied to increase. Explanation A price below equilibrium causes a shortage. This puts upward pressure on both price and quantity.

A shortage will cause the price to rise and the quantity supplied to increase.

If a price is above equilibrium, Multiple Choice A shortage will cause the price to fall and the quantity supplied to decrease. A shortage will cause the price to rise and the quantity supplied to increase. A surplus will cause the price to fall and the quantity supplied to decrease. A surplus will cause the price to fall and the quantity supplied to increase. Explanation A price above equilibrium causes a surplus. This puts downward pressure on both price and quantity.

A surplus will cause the price to fall and the quantity supplied to decrease.

If a price is above equilibrium, Multiple Choice A shortage will cause the price to fall and the quantity supplied to decrease. A surplus will cause the price to fall and the quantity supplied to increase. A surplus will cause the price to fall and the quantity supplied to decrease. A shortage will cause the price to rise and the quantity supplied to increase.

A surplus will cause the price to fall and the quantity supplied to decrease.

Which of the following events would cause a rightward shift in the market supply curve for automobiles? Multiple Choice A higher sales tax on automobiles. A technological improvement that reduces the cost of production. A decrease in the number of sellers. An increase in the wages of autoworkers. Explanation Technological improvements that reduce the cost of production will improve profit margins at every price level, which increases supply. An increase in wages and a decrease in the number of sellers will decrease supply, and a higher sales tax will decrease demand.

A technological improvement that reduces the cost of production.

Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5 If the company increases the price of each frisbee from $12 to $16, the number of frisbees sold will:

A) Decrease by 14.3 percent.

When the average total cost curve is rising, the marginal cost curve will be Multiple Choice Below the average fixed cost curve. Below the average total cost curve. Falling with greater output. Above the average total cost curve. Explanation If the marginal cost is greater than the average total cost, the average total cost must be increasing. For instance, if you have a 3.5 GPA (grade point average) and get a 4.0 in your last (marginal) economics class, your GPA will rise.

Above the average total cost curve.

Which of the following statements about the relationship between economic costs and accounting costs is true? Multiple Choice Accounting costs are equal to or greater than economic costs. Accounting costs must always equal economic costs. Accounting costs are always less than or equal to economic costs. Accounting costs are always greater than economic costs. Explanation Accounting costs refer to the explicit dollar outlays made by a producer. Economic costs, in contrast, refer to the value of all costs, both explicit and implicit. Therefore accounting costs will be less than economic costs when implicit costs exist.

Accounting costs are always less than or equal to economic costs.

Adam is the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year. Which of the following is true about Adam's accounting and economic profit? Multiple Choice Accounting profit = $175,000; economic profit = $75,000. Accounting profit = $75,000; economic profit = $0. Accounting profit = $0; economic profit = negative $75,000. Accounting profit = $75,000; economic profit = negative $100,000. Explanation Accounting profit is equal to revenue ($250,000) minus explicit costs ($175,000), which is $75,000. Economic profit is equal to accounting profit ($75,000) minus implicit costs ($75,000); therefore his economic profit is $0.

Accounting profit = $75,000; economic profit = $0.

Adam is the owner/operator of a flower shop. Last year he earned $250,000 in total revenue. His explicit costs were $175,000 paid to his employees and suppliers (assume that this amount represents the total opportunity cost of these resources). During the year he received three offers to work for other flower shops with the highest offer being $75,000 per year. Which of the following is true about Adam's accounting and economic profit? Multiple Choice Accounting profit = $75,000; economic profit = $0. Accounting profit = $175,000; economic profit = $75,000. Accounting profit = $75,000; economic profit = negative $100,000. Accounting profit = $0; economic profit = negative $75,000. Explanation Accounting profit is equal to revenue ($250,000) minus explicit costs ($175,000), which is $75,000. Economic profit is equal to accounting profit ($75,000) minus implicit costs ($75,000); therefore his economic profit is $0.

Accounting profit = $75,000; economic profit = $0.

To calculate market demand, we Multiple Choice Add the quantities demanded for each individual demand schedule vertically. Find the average quantity demanded at each price. Add the quantities demanded for each individual demand schedule horizontally. Find the difference between the quantity demanded and the quantity supplied at each price. Explanation Market demand represents the combined demands of all market participants, added together horizontally, because the horizontal axis measures quantity.

Add the quantities demanded for each individual demand schedule horizontally.

If economic profits are earned in a competitive market, then over time Multiple Choice Normal profit will fall to zero as more firms enter. The market supply curve will shift to the left. Equilibrium price will rise as more firms enter. Additional firms will enter the market. Explanation If economic profits exist in an industry, more firms will want to enter it. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

Additional firms will enter the market.

Which of the following would most likely have a price elasticity coefficient greater than 1? Multiple Choice Airline travel in the long run. Cigarettes. Electricity. Gasoline in the short run. Explanation The long-run price elasticity of demand is higher than the short-run elasticity because consumers have more time to adjust and find alternative products. While demand for necessities is relatively inelastic, which goods are necessities is influenced by the availability of substitute goods. Consumers of cigarettes and gasoline would argue that very few if any substitutes exist to cigarettes and gasoline.

Airline travel in the long run.

According to an In The News article titled "Rivals Match Southwest's Flash Sale," Multiple Choice Airlines often match their rivals' fares rather than risk losing price-sensitive passengers. Airlines will match their rivals' fares but are often slow to react because the firms prefer to sell at the higher price. American Airlines, Continental Airlines, and United Airlines matched Southwest's fare cuts, but US Airways, JetBlue Airways, and Delta Air Lines did not. Rival airlines put pressure on Southwest to retreat back to higher prices. Explanation Typically rival firms will match price cuts but not price increases. In particular, all of the airlines followed Southwest's lead in lowering fares.

Airlines often match their rivals' fares rather than risk losing price-sensitive passengers.

Which of the following industries is not an example of monopolistic competition? Multiple Choice Airlines. Notebook computers. Toys. Pizza delivery. Explanation The airline industry is an oligopoly because there are only a few sellers, entry barriers are high, and firms are interdependent.

Airlines.

Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $10, Multiple Choice The firm should produce 31 units. The firm will shut down in the short run. An economic loss will occur. The firm will earn normal profits. Explanation When the market price is $10, the profit-maximizing output is 25 units. At that point price is less than ATC, and economic losses will be incurred.

An economic loss will occur.

Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $10, Multiple Choice The firm will shut down in the short run. The firm should produce 31 units. The firm will earn normal profits. An economic loss will occur. Explanation When the market price is $10, the profit-maximizing output is 25 units. At that point price is less than ATC, and economic losses will be incurred.

An economic loss will occur.

Which of the following does not affect marginal costs? Multiple Choice An increase in state unemployment taxes. An increase in property taxes. A decrease in Social Security taxes. An increase in payroll taxes. Explanation Fixed costs such as the cost of the basic plants and equipment and property taxes do not vary with the rate of output and therefore do not affect marginal costs.

An increase in property taxes.

The productivity of workers will increase in response to Multiple Choice An increase in diminishing returns. An increase in the amount of physical capital per worker. Higher resource costs. Lower wages. Explanation The productivity of any factor of production depends on the amount of other resources available to it. For example, a snow removal worker will be more productive with a show shovel than without.

An increase in the amount of physical capital per worker.

The productivity of workers will increase in response to Multiple Choice An increase in diminishing returns. Lower wages. An increase in the amount of physical capital per worker. Higher resource costs. Explanation The productivity of any factor of production depends on the amount of other resources available to it. For example, a snow removal worker will be more productive with a show shovel than without.

An increase in the amount of physical capital per worker.

An increase in the equilibrium price of electricity can be caused by Multiple Choice A decrease in the demand for electricity. An increase in the quantity demanded of electricity. An increase in the supply of electricity. An increase in the demand for electricity. Explanation An increase in demand causes equilibrium price and equilibrium quantity to increase. Next Visit question mapQuestion 18 of 50 Total1

An increase in the demand for electricity.

Peanut butter and jelly are complements. A decrease in the price of one will result in Multiple Choice A decrease in the demand for the other. A decrease in the quantity demanded of the other. An increase in the demand for the other. An increase in the quantity demanded of the other. Explanation Complementary goods are consumed together. If the price of peanut butter decreases, the quantity demanded of peanut butter will increase. Now that consumers have more peanut butter, they will buy more jelly.

An increase in the demand for the other.

Ceteris paribus, which of the following would you expect to have no effect on the demand curve for new automobiles? Multiple Choice A rise in the price of gasoline. Consumer expectations that the price of new automobiles will be lower next year. Consumer expectations that a significant recession will develop and last for a year. An increase in the price of new automobiles. Explanation An increase in the price of new automobiles will cause a movement along the demand curve. The entire curve would not change.

An increase in the price of new automobiles.

Ceteris paribus, which of the following is most likely to cause an increase in the quantity supplied of perfume? Multiple Choice An improvement in perfume-making technology. An increase in the salaries paid to perfume makers. An increase in the price of perfume. An increase in the number of sellers of perfume. Explanation If the price of a product is the only variable changing, then we can track changes in quantity supplied along the supply curve.

An increase in the price of perfume.

If income rises by 10 percent and the quantity sold of a particular vehicle falls by 7 percent, then this particular type of vehicle is Multiple Choice An irregular good. A substandard good. An inferior good. A normal good.

An inferior good.

It is most difficult for new firms to enter Multiple Choice A perfectly competitive market. An oligopolistic market. A monopolistically competitive market. A perfectly contestable market. Explanation Although oligopolies are protected by barriers to entry, the monopoly market typically has the highest barriers to entry.

An oligopolistic market.

Which of the following is a consequence of competition? Multiple Choice Elimination of the most efficient firms. Price-gouging behavior. An unrelenting squeeze on prices and profit. Positive economic profit in the long run. Explanation The quest for profits causes a squeeze on prices and profits. This unrelenting competition has been observed in the computer market and is a fundamental characteristic of the competitive process.

An unrelenting squeeze on prices and profit.

Explicit costs Multiple Choice Include only payments to labor. Include the market value of all resources used to produce a good. Are the dollar payments made for the use of resources. Are the total value of resources used to produce a good but for which no monetary payment is made. Explanation An explicit cost is a payment made for the use of a resource.

Are the dollar payments made for the use of resources.

Implicit costs Multiple Choice Include only payments to labor. Are the sum of actual monetary payments made for resources used to produce a good. Include the value of all resources used to produce a good. Are the value of resources used, for which no monetary payment is made. Explanation Implicit costs are the value of resources used, even when no direct payment is made.

Are the value of resources used, for which no monetary payment is made.

The law of diminishing marginal utility states that Multiple Choice As a consumer enjoys successive units of a good, eventually marginal utility will fall. The total utility of a good rises at a fast rate as more units of a good are consumed. The total utility of consuming the next unit of a good falls. Marginal utility always falls to zero after two or three units of a good consumed.

As a consumer enjoys successive units of a good, eventually marginal utility will fall.

Which panel of Figure 3.3 represents the changes in the market for cigarettes when the government increases subsidies for the production of tobacco and at the same time bans smoking in public buildings? Multiple Choice D. B. C. A.

B

For an oligopoly, a few firms cannot dominate in the long run unless Multiple Choice A cartel is formed. A firm has a high concentration ratio. Barriers to entry exist. The market is contestable. Explanation Barriers to entry, such as patents, huge advertising budgets, brand loyalty, and exclusive contracts with retailers, can keep new entrants out of an industry.

Barriers to entry exist.

Refer to Table 3.1 to answer the following question Table 3.1 Individual Demand and Supply Schedules Quantity Demanded byPriceAlejandroBenCarlMarket$8.00842_____6.001244_____4.002046_____2.002246_____ Quantity Supplied byPriceAveryBrandonCassandra $8.006046_____$6.004244_____$4.002442_____$2.00640_____ In Table 3.1, if the price is $4, the market will Multiple Choice Experience a surplus of 30 units. Be in equilibrium. Experience a shortage of 22 units. Experience a surplus of 56 units.

Be in equilibrium.

If a price ceiling is to be effective, it should be set Multiple Choice Above the equilibrium price, and it will create a market surplus. Below the equilibrium price, and it will create a market surplus. Above the equilibrium price, and it will create a market shortage. Below the equilibrium price, and it will create a market shortage. Explanation Price ceilings set above the equilibrium price will not be effective because the market price will tend toward the equilibrium price. Therefore, in order for a price ceiling to prevent the attainment of equilibrium, it must be set below the equilibrium price.

Below the equilibrium price, and it will create a market shortage.

If a price ceiling is to be effective, it should be set Multiple Choice Below the equilibrium price, and it will create a market shortage. Below the equilibrium price, and it will create a market surplus. Above the equilibrium price, and it will create a market shortage. Above the equilibrium price, and it will create a market surplus. Explanation Price ceilings set above the equilibrium price will not be effective because the market price will tend toward the equilibrium price. Therefore, in order for a price ceiling to prevent the attainment of equilibrium, it must be set below the equilibrium price.

Below the equilibrium price, and it will create a market shortage.

If a price ceiling is to be effective, it should be set Multiple Choice Below the equilibrium price, and it will create a market surplus. Below the equilibrium price, and it will create a market shortage. Above the equilibrium price, and it will create a market shortage. Above the equilibrium price, and it will create a market surplus.

Below the equilibrium price, and it will create a market shortage.

Suppose Caesar allocates his entire budget to the purchase of soft drinks and chips. The marginal utility of the last bottle of soft drink purchased is 12 utils, and each bottle costs $1.20. The marginal utility of the last bag of chips purchased is 8 utils, and each bag costs $1. In order to maximize his utility, Caesar should Multiple Choice Buy more soft drinks and fewer chips because the soft drink has fewer calories. Not change anything because he has made the choice that gives him the most total utility. Buy more chips and fewer soft drinks because of the lower price for chips. Buy more soft drinks and fewer chips since he gets more marginal utility per dollar from soft drinks

Buy more soft drinks and fewer chips since he gets more marginal utility per dollar from soft drinks

Product differentiation occurs when Multiple Choice One firm produces many varieties of a product. A completely new process is used to produce a familiar product. Buyers perceive differences in the products of several companies. Sellers perceive differences in the products of several companies. Explanation Product differentiation, a characteristic of monopolistic competition, occurs when one product is different (actually or perceived) from competing products in the same market by consumers.

Buyers perceive differences in the products of several companies.

Choose the letter of the diagram in Figure 3.1 that best describes the type of shift that would occur in each situation for the market listed on the left, ceteris paribus. Figure 3.1 Shifts of Supply and Demand Candy bars: People become more health-conscious and prefer vegetables instead of candy bars. Multiple Choice B. C. D. A.

C

Refer to Figure 23.6 for a perfectly competitive firm. Assuming that points A, B, C and D are all above AVC, this firm will maximize profits by producing the level of output that corresponds to point Multiple Choice A. C. D. B. Explanation A competitive firm maximizes total profit at the output rate where MR is equal to MC. If MC is less than MR, the firm can increase profits by producing more. If MC exceeds MR, the firm should reduce output.

C.

Refer to Figure 23.6 for a perfectly competitive firm. Assuming that points A, B, C and D are all above AVC, this firm will maximize profits by producing the level of output that corresponds to point Multiple Choice D. A. C. B. Explanation A competitive firm maximizes total profit at the output rate where MR is equal to MC. If MC is less than MR, the firm can increase profits by producing more. If MC exceeds MR, the firm should reduce output.

C.

If a perfectly competitive firm is producing a rate of output at which MC exceeds price, then the firm Multiple Choice Is maximizing profit. Can increase its profit by decreasing output. Can increase its profit by increasing output. Must have an economic loss. Explanation If MC exceeds price, a firm is spending more to produce that extra unit than it is getting back, and total profits will decline. Hence a firm will want to decrease production whenever price is less than MC.

Can increase its profit by decreasing output.

Entrepreneurship Multiple Choice Always involves greater rewards than risks. Can result in economic losses. Cannot earn an economic profit. Occurs in small businesses, but not large corporations. Explanation The inducement of entrepreneurship is the potential for economic profit; however, the potential for profit is not a guarantee of profit. Substantial risks of economic loss are attached to starting and operating a business.

Can result in economic losses.

Entrepreneurship Multiple Choice Always involves greater rewards than risks. Cannot earn an economic profit. Occurs in small businesses, but not large corporations. Can result in economic losses. Explanation The inducement of entrepreneurship is the potential for economic profit; however, the potential for profit is not a guarantee of profit. Substantial risks of economic loss are attached to starting and operating a business.

Can result in economic losses.

Entrepreneurship Multiple Choice Cannot earn an economic profit. Occurs in small businesses, but not large corporations. Always involves greater rewards than risks. Can result in economic losses. Explanation The inducement of entrepreneurship is the potential for economic profit; however, the potential for profit is not a guarantee of profit. Substantial risks of economic loss are attached to starting and operating a business.

Can result in economic losses.

Open and explicit agreements concerning pricing and output shares transform an oligopoly into a Multiple Choice Cartel. Monopoly. Perfectly competitive firm. Differentiated oligopoly. Explanation The most explicit form of coordination among oligopolists is price-fixing, which occurs when firms in an oligopoly explicitly agree to charge a uniform (monopoly) price.

Cartel

Airline companies engage in price discrimination by Multiple Choice Engaging in price-fixing. Charging unrestricted fares. Giving a temporary price cut. Charging higher prices to customers who must travel on short notice.

Charging higher prices to customers who must travel on short notice.

Airline companies engage in price discrimination by Multiple Choice Giving a temporary price cut. Charging unrestricted fares. Charging higher prices to customers who must travel on short notice. Engaging in price-fixing. Explanation Price discrimination occurs when sellers charge different prices to different individuals. Airlines engage in price discrimination when they charge business travelers who have to fly tomorrow a higher price than vacation travelers who have more time to book their travel.

Charging higher prices to customers who must travel on short notice.

Ceteris paribus, a consumer that purchases a sports car must consider the price of gasoline because these goods are Multiple Choice Substitutes in production. Complements in production; by-products. Substitutes in consumption. Complements in consumption. Explanation If you buy a car, in order to drive it you must buy gas, which is a complement in consumption.

Complements in consumption.

Ceteris paribus, for the owner of a sawmill, lumber and the sawdust that go into particle board are Multiple Choice Substitutes in production. Complements in production; by-products. Unrelated in the sawmill operator's decision. None of the choices are correct.

Complements in production; by-products.

Graphically, as a consumer buys more of a good, the marginal utility line will Multiple Choice Increase steadily and then decline. Increase as more goods are consumed. Follow the same shape as the total utility line. Continuously decline if diminishing returns are present.

Continuously decline if diminishing returns are present.

A firm that makes zero economic profits Multiple Choice Must eventually go bankrupt and exit the industry. Covers all its costs, including a provision for normal profit. Does not cover its variable costs and should shut down in the short run. Incurs an accounting loss if fixed costs are greater than variable costs. Explanation A firm that is making zero economic profits is covering all of its costs including its opportunity costs; in other words, it is earning a normal profit.

Covers all its costs, including a provision for normal profit.

Normal profit Multiple Choice Covers the full opportunity cost of the resources used by the firm. Is sufficient to induce entry into the industry. Is the accounting profit earned when economic profits are greater than zero. Is an above-average rate of return. Explanation Normal profit is the profit made that covers all explicit costs and implicit costs but does not include any profit above and beyond what could have made with those resources used elsewhere.

Covers the full opportunity cost of the resources used by the firm.

The "$99 iPads" The Economy Tomorrow analysis indicates that the success of the iPad Multiple Choice Created new entrants into the tablet market. Attracted new firms with identical products. Caused exit of firms from the tablet market. Caused the quality of products to fall. Explanation The economic profits of Apple's iPad caused the entry of new firms and put pressure on Apple to lower price and improve quality.

Created new entrants into the tablet market.

What is the most likely response by rivals when an oligopolist cuts its price to increase its sales? Multiple Choice Raise their prices. Ignore the change. Cut their prices. Reduce their costs. Explanation The demand curve will be kinked if rival oligopolists match price reductions but not price increases.

Cut their prices.

Which panel of Figure 3.3 represents the changes in the market for beef when the price of corn (cattle feed) rises and the people become more fearful of mad cow disease? Multiple Choice B. D. C. A. Explanation An increase in costs causes supply to decrease, and the fear of disease will cause the demand to decrease.

D

Megan used to work at the local pizzeria for $15,000 per year but quit to start her own deli. To buy the necessary equipment, she withdrew $20,000 from her inheritance (which paid 8 percent interest). Last year she paid $25,000 for ingredients and $500 per month rent but had revenue of $50,000. She asked her dad the accountant and her mom the economist to calculate her annual profit for her. Multiple Choice Dad says she lost $11,000 and Mom says she lost $26,000. Dad says her profit is $9,000 and Mom says she lost $6,000. Dad says her profit is $19,000 and Mom says her profit is $2,400. Dad says her profit is $31,000 and Mom says her profit is $16,600. Explanation Profit is equal to revenue minus costs. An accountant will consider only explicit costs, whereas an economist will consider economic costs that include explicit and implicit costs.

Dad says her profit is $19,000 and Mom says her profit is $2,400.

In making a production decision, an entrepreneur Multiple Choice Can change both fixed and variable inputs. Decides whether to enter or exit the market. Determines plants and equipment. Decides what level of output will maximize profits. Explanation A firm's production decision is the selection of the short-run rate of output that maximizes profits.

Decides what level of output will maximize profits.

In making a production decision, an entrepreneur Multiple Choice Decides what level of output will maximize profits. Determines plants and equipment. Decides whether to enter or exit the market. Can change both fixed and variable inputs. Explanation A firm's production decision is the selection of the short-run rate of output that maximizes profits.

Decides what level of output will maximize profits.

In a competitive market, if the market price is equal to the minimum point of the firm's ATC curve, the firm may seek to earn economic profits by Multiple Choice Decreasing price. Decreasing production costs through technological improvements. Increasing price. Producing at the rate of output where price equals demand. Explanation When the market is at long-run equilibrium, the quest for profits encourages producers to discover cheaper ways to manufacture their products. This results in lower costs and encourages further increases in the rate of output.

Decreasing production costs through technological improvements.

Refer to Figure 25.1 for an oligopoly firm. Assume that the existing price and quantity are $10 and 2,000 units. Which of the following statements is most likely correct? Multiple Choice Demand curves D1 and D2 both assume that rivals will not match any price changes. Demand curves D1 and D2 both assume that rivals match any price changes. Demand curve D1 assumes that rivals match any price changes. Demand curve D2 assumes that rivals match any price changes. Explanation D1 is an inelastic demand curve, which means if the firm lowers its price, quantity demanded does not change significantly. This would only occur if the firm's competitors matched its price decrease.

Demand curve D1 assumes that rivals match any price changes.

Over the price range from $180 to $120 in Figure 20.1, ceteris paribus, Multiple Choice Demand is increasing. Utility is maximized. Demand is elastic. Total revenue is maximized.

Demand is elastic.

Higher prices will increase total revenue if Multiple Choice Demand is inelastic. Demand is elastic. The price elasticity of demand is zero. Demand is unitary elastic.

Demand is inelastic.

Refer to Table 3.1 to answer the following question Table 3.1 Individual Demand and Supply Schedules Quantity Demanded byPriceAlejandroBenCarlMarket$8.00842_____6.001244_____4.002046_____2.002246_____ Quantity Supplied byPriceAveryBrandonCassandra $8.006046_____$6.004244_____$4.002442_____$2.00640_____ In Table 3.1, if the price is $2, the market will Multiple Choice Experience a surplus of 30 units. Experience a surplus of 56 units. Experience a shortage of 22 units. Be in equilibrium. Explanation Quantity demanded (32) is greater than quantity supplied (10) by 22 (32 - 10) when the price is $2. Refer to Table 3.1: Table 3.1: Answer Individual Demand and Supply Schedules Quantity Demanded byPriceAlejandroBenCarlMarket$8.00842146.001244204.002046302.00224632 Quantity Supplied byPriceAveryBrandonCassandra $8.0030182270$6.0016142050$4.001261230$2.00001010

Experience a shortage of 22 units.

When technology improves, the firm's marginal cost curve shifts Multiple Choice Upward, and supply increases. Downward, and supply increases. Upward, and supply decreases. Downward, and supply decreases. Explanation If any determinant of supply changes, the supply curve shifts. An increase in technology will lower the marginal cost of producing a good, and the supply curve will shift to the right.

Downward, and supply increases.

The demand curve faced by a monopolistically competitive firm is Multiple Choice Flat. Upward-sloping. Kinked. Downward-sloping. Explanation The competition is less intense in monopolistic competition than in a perfectly competitive market where firms have a horizontal demand curve. A monopolistically competitive firm confronts a downward-sloping demand curve for its output because of brand loyalty and product differentiation.

Downward-sloping.

When oligopoly firms collude to raise prices, Multiple Choice Each firm benefits, but society loses. Both the colluding firms and society benefit. Everyone is eventually a loser. Only the price leader benefits while other firms and society lose. Explanation Market power contributes to market failure when it leads to resource misallocation (restricted output) or greater inequity (monopoly profits or higher prices).

Each firm benefits, but society loses.

Suppose a perfectly competitive firm is experiencing zero economic profits. In an effort to increase profits, the firm decides to initiate an advertising campaign for its product. The most likely short-run result of this campaign, ceteris paribus, would be Multiple Choice The ability to sell more at the existing market price. The ability to sell more at a higher price. The ability to sell more at a lower price. Economic losses for the firm. Explanation A perfectly competitive industry has several distinguishing characteristics, including many firms, identical products, and low entry barriers. Because the products are identical, it is not necessary or even beneficial to advertise.

Economic losses for the firm.

Refer to Figure 22.3 for a perfectly competitive firm. If the market price is $15, Multiple Choice The firm should shut down. Economic profits will be zero. The firm will have above-normal profits. The firm should produce 39 units. Explanation When the market price is $15, the profit-maximizing output is 31 units. At that point price is equal to ATC, and profits will be zero.

Economic profits will be zero.

The difference between the total revenue and total cost curves at a given output is equal to Multiple Choice Average revenue. Either profit or losses depending on the curves relative position. Profit per unit. Average total cost. Explanation Profit is the difference between total revenue and total cost. It is represented as the vertical distance between the total revenue curve and the total cost curve.

Either profit or losses depending on the curves relative position.

If long-run economic losses are being experienced in a competitive market, Multiple Choice Normal profit will fall to zero as firms enter. Equilibrium price will rise as firms exit. More firms will enter the market. The market supply curve will shift to the right. Explanation If economic losses exist in an industry, firms will want to exit. As they do, the market supply curve will shift to the left and cause the market price to increase until profits are normal.

Equilibrium price will rise as firms exit.

Refer to Table 3.1 to answer the following question Table 3.1 Individual Demand and Supply Schedules Quantity Demanded byPriceAlejandroBenCarlMarket$8.00842_____6.001244_____4.002046_____2.002246_____ Quantity Supplied byPriceAveryBrandonCassandra $8.006046_____$6.004244_____$4.002442_____$2.00640_____ In Table 3.1, if the price is $8, the market will rev: 08_29_2018_QC_CS-134973 Multiple Choice Experience a surplus of 30 units. Experience a shortage of 22 units. Be in equilibrium. Experience a surplus of 56 units.

Experience a surplus of 56 units.

In the long run, an oligopolist is most likely to Multiple Choice Experience economic profits when sufficient barriers to entry are present. Experience zero economic profits because barriers to entry do not exist in the long run. Produce at the most technically efficient output level due to long-run competition. Face a straight demand curve. Explanation Oligopoly markets have high barriers to entry; therefore it is likely that profits will persist in the long run.

Experience economic profits when sufficient barriers to entry are present.

Economies of scale Multiple Choice Explain why average variable and average total costs decline in the short run. Explain why average total costs decline as output increases in the long run. Explain why average total costs increase as output increases in the long run. Incorrect Exist in both the short run and the long run. Explanation Economies of scale (or increasing returns to scale) exist when all inputs double but output more than doubles, which implies that the average costs have decreased.

Explain why average total costs decline as output increases in the long run.

In defining economic costs, economists emphasize Multiple Choice Explicit and implicit costs while accountants recognize only implicit costs. Only explicit costs while accountants recognize only implicit costs. Only explicit costs while accountants recognize explicit and implicit costs. Explicit and implicit costs while accountants recognize only explicit costs. Explanation Accounting costs refer to the explicit dollar outlays made by a producer. Economic costs, in contrast, refer to the value of all costs, both explicit and implicit.

Explicit and implicit costs while accountants recognize only explicit costs.

If a monopolistic competitor lowers its price, it will attract a significant number of new customers. Explanation Because each monopolistically competitive firm has its own captive market- consumers who prefer its particular brand over competing brands-lower prices will not be effective at inducing consumers to switch brands. Instead, imperfectly competitive firms engage in nonprice competition.

FAlse

A cartel is a group of firms with an implicit, informal agreement to fix prices and output shares in a particular market. Explanation A cartel is a group of firms with an explicit, formal agreement to fix prices and output shares in a particular market.

False

A monopoly is a market in which no buyer or seller has market power. Explanation The monopoly or single seller of a good has the most market power because it does not have any competitors and its only price limit is what consumers are willing and able to pay.

False

A monopoly is a market in which no buyer or seller has market power. True or False Explanation The monopoly or single seller of a good has the most market power because it does not have any competitors and its only price limit is what consumers are willing and able to pay.

False

A monopoly is considered more desirable to society than a perfectly competitive firm because a monopoly has the incentive to pursue research and development. Explanation Although monopolists have a clear financial advantage in pursuing research and development activities, they have no clear incentive to do so. Research and development aren't necessarily required for profitable survival. In fact, research and development that make existing plants and equipment technologically obsolete run counter to a monopolist's vested interest and so may actually be suppressed.

False

Actual output will always equal the limit described in the production function. True or False Explanation The purpose of a production function is to tell us how much output we can produce with varying amounts of factor inputs, not necessarily how much we actually produce.

False

As a result of specialization and trade, individuals no longer have to make choices about how to spend their incomes. Group ends Explanation Because of scarcity, market consumers will always have to make choices.

False

Because a perfectly competitive firm has no market power, its marginal cost curve is flat (i.e., horizontal). True or False Explanation Because a perfectly competitive firm has no market power, its marginal revenue curve (demand) is flat (i.e., horizontal).

False

Cross-price elasticity looks at the impact that income changes have on sales. T/F

False

If close substitutes are available that have only slight product differentiation, a firm can still be a monopoly. Explanation A monopoly is one firm that is protected by high barriers to entry with substantial market power that sells a unique product. If a firm has close substitutes, it is operating in a monopolistic competitive market.

False

If marginal utility is rising, then total utility must be falling. True or False Explanation As long as marginal utility is positive, total utility must be increasing from consuming a good.

False

If the demand curve for each firm in Industry X is horizontal, then the demand curve for Industry X must also be horizontal. True or False Explanation The market demand curve for a product is always downward-sloping (law of demand). The demand curve confronting a perfectly competitive firm is horizontal (perfectly elastic demand).

False

A U-shaped average total cost curve implies Multiple Choice First diminishing returns, and then increasing returns. That total costs are at a minimum at the minimum of the average cost curve. A linear total cost curve. First marginal cost below average total cost, and then marginal cost above average total cost. Explanation So long as the marginal cost of producing one more unit is less than the previous average cost, average cost must fall. Average total costs must increase whenever marginal cost exceeds average cost.

First marginal cost below average total cost, and then marginal cost above average total cost.

A U-shaped average total cost curve implies Multiple Choice First marginal cost below average total cost, and then marginal cost above average total cost. That total costs are at a minimum at the minimum of the average cost curve. A linear total cost curve. First diminishing returns, and then increasing returns. Explanation So long as the marginal cost of producing one more unit is less than the previous average cost, average cost must fall. Average total costs must increase whenever marginal cost exceeds average cost.

First marginal cost below average total cost, and then marginal cost above average total cost.

Sam's surf shop has total costs of $2,000 when it is not producing any surfboards. This means that Multiple Choice Fixed costs are zero. The shop is very inefficient in its production. Fixed costs are $2,000. Variable costs are $2000. Explanation The initial dominance of falling AFC, combined with the later resurgence of rising AVC (due to increasing MC), is what gives the ATC curve its characteristic U shape.

Fixed costs are $2,000.

Which of the following costs do not change when output changes in the short run? Multiple Choice Average variable costs. Average fixed costs. Fixed costs. Variable costs. Explanation Fixed costs such as the cost of the basic plants and equipment do not vary with the rate of output.

Fixed costs.

Which of the following is a factor of production for the Little Biscuit Bread Company? Multiple Choice Productivity. Flour. Money. Bread. Explanation Factors of production are resources used to produce goods and services. Productivity is a measurement of how much output we get from an input such as labor.

Flour.

One In the News feature reports that General Motors planned to essentially quit making cars and trucks in the United States for nine weeks from mid-May through July 2009 and Omaha Power planned to close one of its nuclear plants permanently. Based on these particular news clips, what is the difference between GM's and Omaha Power's decisions? Multiple Choice Omaha Power was trying to get rid of excess inventory, and GM was trying to become more efficient. GM's decision to idle plants was a short-run shutdown decision. Omaha Power, by contrast, made a long-run decision to exit a specific market. There is no difference between GM's and Omaha Power's decisions; both were trying to get rid of excess inventory. GM was trying to maximize profits while Omaha Power was trying to minimize losses. Explanation GM's decision to idle plants was a short-run shutdown decision; it is still in business. Dell, by contrast, made a long-run decision to cease operations and exit a specific market.

GM's decision to idle plants was a short-run shutdown decision. Omaha Power, by contrast, made a long-run decision to exit a specific market.

In an effort to maximize profits, oligopolists could participate in all of the following but Multiple Choice Price leadership. Price-fixing. Cartels. Game theory. Explanation Price leadership, price-fixing, and entering cartels can help oligopolists maximize profit. Game theory is a field of study and while many of us engage in game theory implicitly it is not an explicit action.

Game theory.

Which of the following is most likely an inferior good? Multiple Choice A custom-built mansion. Generic canned food. Rolex watches. Nike running shoes.

Generic canned food.

At equilibrium in a monopoly, economic profits will most likely be Multiple Choice Normal. Greater than zero. Negative. Zero. Explanation A monopoly receives larger profits than a comparable competitive industry by reducing the quantity supplied and pushing prices up.

Greater than zero.

In monopolistic competition, a firm Multiple Choice Has no market power. Captures significant economies of scale. Has a standardized product that all firms produce. Has a downward-sloping demand curve. Explanation The competition is less intense in monopolistic competition than in a perfectly competitive market where firms have a horizontal demand curve. A monopolistically competitive firm confronts a downward-sloping demand curve for its output because of brand loyalty and product differentiation.

Has a downward-sloping demand curve.

If a firm can change market prices by altering its output, then it Multiple Choice Is a price taker. Faces a horizontal demand curve. Has market power. Is a competitive firm. Explanation A firm that has market power will have the ability to control the market price for the good it sells, unlike a perfectly competitive firm that risks losing all of its customers, who will shop elsewhere, if it increases the price of its product.

Has market power.

When a producer can control the market price for the good it sells, the producer Multiple Choice Has market power. Is an entrepreneur. Is a perfectly competitive firm. Is certain to make a profit. Explanation A firm that has market power will have the ability to control the market price for the good it sells, unlike a perfectly competitive firm that risks losing all of its customers, who will shop elsewhere, if it increases the price of its product.

Has market power.

When a producer can control the market price for the good it sells, the producer Multiple Choice Has market power. Is an entrepreneur. Is certain to make a profit. Is a perfectly competitive firm. Explanation A firm that has market power will have the ability to control the market price for the good it sells, unlike a perfectly competitive firm that risks losing all of its customers, who will shop elsewhere, if it increases the price of its product.

Has market power.

Which of the following is not a characteristic of a perfectly competitive market? Multiple Choice Perfect information. High barriers to entry. Homogeneous products. Zero economic profit in the long run. Explanation A perfectly competitive industry has several distinguishing characteristics, including many firms, identical products, and low entry barriers. Because of the low entry barriers, perfectly competitive firms will earn zero economic profit in the long run.

High barriers to entry.

Greater labor productivity means Multiple Choice Higher output per worker. Lower output per worker. Lower output per labor-hour. Higher labor cost per unit of output. Explanation When labor productivity increases, it means that each worker can add more to the total output than before.

Higher output per worker.

Greater labor productivity means Multiple Choice Lower output per labor-hour. Higher output per worker. Lower output per worker. Higher labor cost per unit of output. Explanation When labor productivity increases, it means that each worker can add more to the total output than before.

Higher output per worker.

Which of the following is not a barrier to entry? Multiple Choice Economies of scale. Homogeneous Products. Control of essential factors of production. Government regulation. Explanation Barriers to entry include patents, economies of scale, ownership of key resources, and government regulation.

Homogeneous Products.

Elasticity of supply tells us Multiple Choice How much sellers will increase production in response to a change in price. How much sellers will change their price as their quantity supplied changes. How much producers will increase production with changes in consumers' income. How much supply responds to a change in quantity demanded.

How much sellers will increase production in response to a change in price.

As compared to sociologists and psychologists, economists accept consumer tastes as given and instead focus on Multiple Choice How culture affects consumer preferences. How price will affect actual consumer purchases. How advertising molds consumer desires. What consumers desire.

How price will affect actual consumer purchases.

If a good is normal, its Multiple Choice Price elasticity of demand is positive. Income elasticity of demand is negative. Cross-price elasticity is positive. Income elasticity of demand is positive. Explanation For a normal good demand increases when income rises; therefore the ratio of the percentage change in quantity demanded divided by the percentage change in income will always be positive.

Income elasticity of demand is positive.

If the market wage for fast-food restaurants is $4 and the government enforces a minimum wage of $7, the unemployment rate will Multiple Choice Increase as quantity of labor supplied decreases and quantity of labor demanded increases. Increase as quantity of labor supplied increases and quantity of labor demanded increases. Not be affected by the minimum wage. Increase as quantity of labor supplied increases and quantity of labor demanded decreases.

Increase as quantity of labor supplied increases and quantity of labor demanded decreases.

Assume the price elasticity of demand for MC Pretzel Co. pretzels is 0.8. If the company increases the price of each bag of pretzels, total revenue will Multiple Choice Increase because the percentage increase in price is greater than the percentage change in quantity demanded. Be impossible to predict because the percentage change in price is not known. Decrease because fewer bags will be sold. Increase because demand is elastic and revenue will rise.

Increase because the percentage increase in price is greater than the percentage change in quantity demanded.

Marginal cost is the increase in total cost associated with a one-unit Multiple Choice Decrease in input usage. Increase in production. Decrease in production. Increase in input usage. Explanation Marginal cost is the increase in total cost associated with a one-unit increase in production.

Increase in production.

If a monopolist is producing a level of output where MR exceeds MC, then it should Multiple Choice Lower its output. Raise its price. Shift its marginal cost curve upward. Increase its output. Explanation If an extra unit brings in more revenue than it costs to produce (MR MC), it is adding to total profit. Hence a firm will want to expand the rate of production whenever MR exceeds MC.

Increase its output.

The goal of a company in an oligopoly industry is to Multiple Choice Increase market share and profits. Obtain the highest price possible. Always follow rivals if they raise price. Be the market leader in innovation. Explanation Oligopoly industries are characterized by a battle for larger market shares and higher profits by the large firms.

Increase market share and profits.

In order to sell additional units of their products, competitive firms must Multiple Choice Increase output. Cut their expenses. Increase their advertising. Lower their price. Explanation An individual firm in a perfectly competitive market is so small relative to the entire market that it confronts a horizontal demand curve (perfectly elastic demand) for its output. It does not need to lower its price to sell more; it can sell as much as it can produce at the market price.

Increase output.

In order to sell additional units of their products, competitive firms must Multiple Choice Increase their advertising. Lower their price. Cut their expenses. Increase output. Explanation An individual firm in a perfectly competitive market is so small relative to the entire market that it confronts a horizontal demand curve (perfectly elastic demand) for its output. It does not need to lower its price to sell more; it can sell as much as it can produce at the market price.

Increase output.

Price leadership is a method by which oligopolies can Multiple Choice Increase prices without explicit price-fixing. Illegally raise prices. Maintain the "kink" in their demand curves. Encourage competition. Explanation Price leadership is a subtle (not explicit) pricing pattern that allows one firm to establish the (market) price for all firms in the industry.

Increase prices without explicit price-fixing.

If Carmen's Coffee Company wants to increase total revenue and the price elasticity of demand is 0.43, the company should Multiple Choice Increase the price of its coffee. Advertise since this is the only option that will increase total revenue. Decrease the price of its coffee. Keep the price constant since a price increase or decrease will cause total revenue to fall.

Increase the price of its coffee.

The creation of the Internet has contributed to all of the following except Multiple Choice Increased productivity. Reduced transaction costs. Increased marginal costs. Reduced information costs. Explanation The creation of the Internet cut the cost of gathering information about markets and inputs, allowed firms to engage in greater specialization, allowed firms to manage their inventories and supply chains much more efficiently, and reduced transaction and communications costs.

Increased marginal costs.

Which of the following would cause a firm's production function to shift upward? Multiple Choice Hiring more workers. An increase in production by the firm. An increase in factor costs. Increased training for the firm's workers. Explanation Advances in technological or managerial knowledge and human or physical capital increase our productive capability and therefore cause the production function to shift upward. Next Visit question mapQuestion 45 of 50 Total45

Increased training for the firm's workers.

Assume a good has a downward-sloping, linear demand curve. Starting at a price of zero, as the price of the good increases, total revenue Multiple Choice Is constant. Increases indefinitely. Decreases indefinitely because the quantity sold will decrease. Increases, then decreases.

Increases, then decreases.

Monopolistic competition results in allocative Multiple Choice Efficiency and productive efficiency. Inefficiency and productive inefficiency. Inefficiency and productive efficiency. Efficiency and productive inefficiency. Explanation The typical firm in a monopolistically competitive market produces at a rate of output that is less than its minimum-ATC output rate. This implies that the same level of industry output could be produced at lower cost with fewer firms. And because the price is higher than the opportunity cost, consumers demand fewer goods than they would otherwise. We end up with the wrong (suboptimal) mix of output and misallocated resources.

Inefficiency and productive inefficiency.

Price ceilings are intended to address the problem of Multiple Choice Inefficiency in production. Business bankruptcies. Shortages. Inequity in the distribution of goods and services.

Inequity in the distribution of goods and services.

Price ceilings are intended to address the problem of Multiple Choice Inefficiency in production. Inequity in the distribution of goods and services. Business bankruptcies. Shortages. Explanation Price ceilings are intended to help the poor, In other words, they are used to address the problem of inequity.

Inequity in the distribution of goods and services.

The decision to enter or exit an industry is known as the Multiple Choice Output decision. Profit maximization decision. Production decision. Investment decision. Explanation An investment decision is the decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

Investment decision.

Product differentiation Multiple Choice Involves charging different prices to different customers. Is commonly practiced in perfect competition and monopoly markets. Involves advertising unique product features. Is a rarely successful advertising campaign. Explanation Product differentiation is designed to make one firm's products appear different from and superior to those produced by other firms.

Involves advertising unique product features.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. In Figure 19.3, point E Multiple Choice Gives the consumer a very high level of utility and is affordable. Represents a very low level of utility and is not desirable. Is a high level of utility but not affordable. Is optimal and affordable. Explanation Point E on the graph is a very high level of total utility but given the current budget constraint is not affordable.

Is a high level of utility but not affordable.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. In Figure 19.3, point E Multiple Choice Represents a very low level of utility and is not desirable. Is a high level of utility but not affordable. Is optimal and affordable. Gives the consumer a very high level of utility and is affordable.

Is a high level of utility but not affordable.

An In the News article, "Too Many Sellers: The Woes of T-Shirt Shops," states that if T-shirt shops are perfectly competitive firms, then each shop Multiple Choice Is a price setter. Confronts a downward-sloping demand curve for its own output. Is a price taker. Has market power. Explanation A perfectly competitive firm risks losing all of its customers, who will shop elsewhere, if it increases the price of its product above the market-established price. Therefore, it's compelled to take the market price that is determined by the interaction of supply and demand.

Is a price taker.

For perfectly competitive firms, price Multiple Choice Is greater than marginal revenue. And marginal revenue are not related. Is equal to marginal revenue. Is less than marginal revenue. Explanation Because a competitive firm can sell all its output at the prevailing price, the marginal revenue will always be equal to price, and the MR curve will be equal to the demand curve.

Is equal to marginal revenue.

In the News article, "Are Profits Bad?" most Americans feel that the profit motive Multiple Choice Is bad. Do not motivate better product results and lower prices. Is good. Cause firms to ignore social needs. Explanation In the Roper public opinion survey, most Americans (42 percent) thought that the profit motive was good compared to 27 percent who thought it was bad.

Is good.

The marginal revenue of a monopolist Multiple Choice Is negative up to the rate of output that maximizes total revenue. Is positive up to the rate of output that maximizes total revenue. Is equal to price at all output levels. Is above a downward-sloping demand curve. Explanation As long as marginal revenue is positive, the sale of the last unit will add to total revenue. If marginal revenue is negative, the sale of that last unit will reduce total revenue.

Is positive up to the rate of output that maximizes total revenue.

One of the main differences between an oligopolistic firm and a monopolistically competitive firm is that a monopolistically competitive firm Multiple Choice Has high barriers to entry; an oligopoly does not. Has no market power; an oligopoly has some market power. Faces a horizontal demand curve; an oligopoly does not. Is relatively independent; an oligopoly is interdependent. Explanation An oligopoly is characterized by high concentration ratios, market power, and interdependence, whereas monopolistic competition is characterized by a high degree of brand loyalty, low concentration ratios, some market power, and independent product decisions.

Is relatively independent; an oligopoly is interdependent.

Marginal cost Multiple Choice Is the change in total output from hiring one more factor of production. Falls when there are diminishing returns. Is the change in total cost associated with a one-unit increase in production. Is the change in the total cost when hiring one more factor of production. Explanation Marginal cost is the increase in total cost associated with a one-unit increase in production.

Is the change in total cost associated with a one-unit increase in production.

Profit Multiple Choice Must be reported to Wall Street quarterly. Is always a number greater than zero. Is the difference between total revenue and total cost. Is the difference between variable costs and fixed costs. Explanation Profit is the difference between a firm's sales revenues and its total costs. It's the residual that the owners of a business receive.

Is the difference between total revenue and total cost.

The equilibrium price in a competitive market Multiple Choice Remains unchanged forever. Is the price at which the quantity of a good demanded in a given time period equals the quantity supplied. Remains unchanged only if demand doesn't change. Ensures that anyone who wants the good can get it. Explanation Equilibrium occurs at the intersection of the supply and demand curves.

Is the price at which the quantity of a good demanded in a given time period equals the quantity supplied.

The marginal cost curve Multiple Choice Is the long-run supply curve for a competitive firm at prices below the AVC curve. Is not affected by changes in the price of variable inputs. Is the short-run supply curve for a competitive firm at prices above the AVC curve. Slopes downward to the right as output increases. Explanation For competitive firms, marginal cost defines the lowest price a firm will accept for a given quantity of output. In this sense, the marginal cost curve is the supply curve; it tells us how quantity supplied will respond to price. However, a firm will shut down if price falls below minimum average variable cost. The supply curve does not exist below minimum AVC.

Is the short-run supply curve for a competitive firm at prices above the AVC curve.

The demand curve facing an oligopoly firm is kinked because Multiple Choice Its competitors will match only price hikes. It is most likely that rivals will match price cuts but not price increases. The demand curve that is most inelastic is the most probable situation facing the company. It is most likely that competitors will match price hikes as they practice price leadership. Explanation If an oligopoly firm raises price, it is not likely that rivals will match, so it will lose market share. This result is on the more elastic portion of the demand curve. If an oligopoly company lowers price, rivals will tend to match. This result is on the more inelastic portion of the demand curve. Hence the shape of the demand curve is kinked.

It is most likely that rivals will match price cuts but not price increases.

Which of the following is true about the kink in the demand curve? Multiple Choice It is the result of different rival responses to price increases and reductions. It leads to an explanation of price flexibility. It occurs because rivals do not respond to price reductions. It occurs because rivals match price increases. Explanation The demand curve will be kinked if rival oligopolists match price reductions but not price increases.

It is the result of different rival responses to price increases and reductions.

Which of the following is not true about advertising? Multiple Choice It raises the price of goods and services. It is a form of nonprice competition. It creates brand loyalty. It results in efficient allocation of resources. Explanation A successful advertising campaign alters the demand curve facing the firm by either shifting it to the right or making it less elastic. Advertising is very expensive and therefore increases a firm's costs.

It results in efficient allocation of resources.

If a firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked demand model Multiple Choice It will gain market share. It will lose market share to the firms that do not follow the price increase. Its market share will not be affected. It will not gain market share but will definitely increase profits. Explanation According to the kinked demand model, oligopolists will not increase prices because the consumers will substitute the relatively cheaper competitors' goods, revenues will fall, and profits will decrease.

It will lose market share to the firms that do not follow the price increase.

If a firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked demand model Multiple Choice It will lose market share to the firms that do not follow the price increase. Its market share will not be affected. It will gain market share. It will not gain market share but will definitely increase profits. Explanation According to the kinked demand model, oligopolists will not increase prices because the consumers will substitute the relatively cheaper competitors' goods, revenues will fall, and profits will decrease.

It will lose market share to the firms that do not follow the price increase.

According to the text, one argument in favor of concentration of market power is that Multiple Choice Market power always increases incentives for innovation and invention. Market power results in higher prices and lower quantities. The exercise of market power provides a more desirable mix of output. Large firms can sometimes produce more efficiently than small firms because of economies of scale in production. Explanation A large firm with economies of scale can produce goods at a lower unit (average) cost than a small firm. If such economies of scale exist, we could attain greater efficiency (higher productivity) by permitting firms to grow to market-dominating size.

Large firms can sometimes produce more efficiently than small firms because of economies of scale in production.

The additional pleasure or satisfaction from a good declines as more of it is consumed in a given period. This is the definition of the Multiple Choice Total revenue rule. Law of demand. Law of diminishing marginal utility. Law of diminishing total utility.

Law of diminishing marginal utility.

The shape of the marginal cost curve reflects the Multiple Choice Competitiveness of the firm. Law of demand. Law of diminishing returns. Law of diminishing marginal utility. Explanation Whenever marginal physical product is increasing, the marginal cost of producing a good must be falling, so the marginal cost curve will be downward-sloping. At the point of diminishing marginal returns, the marginal physical product declines and the marginal cost increases, so the marginal cost curve will be upward-sloping.

Law of diminishing returns.

An In the News article titled "Selling "Pure Water": A $Billion Scam?" refers to the use of advertising. When a firm successfully advertises its product, the price elasticity of demand becomes Multiple Choice More elastic. Less efficient. More efficient. Less elastic. Explanation By differentiating their products through advertising, monopolistic competitors establish brand loyalty. Brand loyalty gives producers greater control over the price of their products by making the demand less elastic.

Less elastic.

Assume apples and oranges are substitutes. Suppose apple growers launch a successful advertising campaign that convinces consumers apples are a better product. As a result the cross-price elasticity of apples and oranges will become Multiple Choice More negative. More positive. Less positive (move closer to zero). Less negative (move closer to zero).

Less positive (move closer to zero).

Brand loyalty usually makes the demand curve for a product Multiple Choice Unitary elastic. More income-elastic. More price-elastic. Less price-elastic. Explanation The more brand loyalty a firm can establish, the less likely consumers are to switch brands when price is increased. In other words, brand loyalty makes the demand curve facing the firm less price-elastic.

Less price-elastic.

Table 21.1 Units of LaborUnits of Output00115235345452 If a fifth unit of labor was added to Table 21.1, its MPP would most likely be Multiple Choice Greater than 7. 0. 7. Less than 7. Explanation The MPP of the fifth worker would likely be less than 7 because diminishing marginal returns have already set in and the MPP of the fourth worker is 7.

Less than 7.

Economic profit is Multiple Choice Greater than accounting profit by the amount of implicit cost. Greater than accounting profit by the amount of explicit cost. Less than accounting profit by the amount of explicit cost. Less than accounting profit by the amount of implicit cost. Explanation Accounting profit refers to revenue minus explicit dollar outlays made by a producer. Economic profit, in contrast, refers to revenue minus the value of all costs, both explicit and implicit. Therefore economic profit will be less than accounting profit when implicit costs exist.

Less than accounting profit by the amount of implicit cost.

Economic profit is Multiple Choice Greater than accounting profit by the amount of implicit cost. Less than accounting profit by the amount of explicit cost. Greater than accounting profit by the amount of explicit cost. Less than accounting profit by the amount of implicit cost. Explanation Accounting profit refers to revenue minus explicit dollar outlays made by a producer. Economic profit, in contrast, refers to revenue minus the value of all costs, both explicit and implicit. Therefore economic profit will be less than accounting profit when implicit costs exist.

Less than accounting profit by the amount of implicit cost.

Investment decisions are made on the basis of the relationship of price to Multiple Choice Short-run average total cost. Long-run average total cost. Short-run marginal cost. Long-run fixed cost. Explanation An investment decision is the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry. Therefore, a firm should compare price to long-run costs, which are all variable.

Long-run average total cost.

If Tesla is thinking about building a new factory, it is making a Multiple Choice Short-run decision that may enhance its profit. Long-run decision that will definitely enhance its profit. Long-run decision that may enhance its profit. Short-run decision that will definitely enhance its profit. Explanation An investment decision is the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

Long-run decision that may enhance its profit.

If Tesla is thinking about building a new factory, it is making a Multiple Choice Short-run decision that may enhance its profit. Short-run decision that will definitely enhance its profit. Long-run decision that may enhance its profit. Long-run decision that will definitely enhance its profit. Explanation An investment decision is the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

Long-run decision that may enhance its profit.

Intel's chief executive says the company might expand the technology it is using in its planned $2.5 billion chip-manufacturing factory in China if the U.S. government allows it, underscoring the technology giant's ambitions in the world's fourth-biggest economy. The Intel executive is making a Multiple Choice Short-run decision, and therefore a decision about how much to produce. Decision that would cause ATC to increase. Decision that would definitely increase costs. Long-run decision, and therefore an investment decision. Explanation In the long run, a firm has no fixed costs and can select any desired plant size, which is an investment decision. Once a plant is built, leased, or purchased, a firm has fixed costs and focuses on short-run output or production decisions.

Long-run decision, and therefore an investment decision.

If a firm in an oligopoly expands its market share at prevailing prices, its competitors Multiple Choice Lose market share. Increase their market share. Ignore the expansion. Increase their profits. Explanation Given a certain level of demand, rivals will lose market share if one firm expands sales at the prevailing market price.

Lose market share.

If a monopolistically competitive firm raises its price, it will Multiple Choice Lose some of its customers, but nowhere close to all its customers. Lose most of its customers. Not lose any of its customers. Lose all of its customers. Explanation A monopolistically competitive firm confronts a downward-sloping demand curve for its output. So when a company increases the price of its product, it loses some customers, but not all or even most of them.

Lose some of its customers, but nowhere close to all its customers.

If a monopolistically competitive firm raises its price, it will Multiple Choice Not lose any of its customers. Lose all of its customers. Lose most of its customers. Lose some of its customers, but nowhere close to all its customers. Explanation A monopolistically competitive firm confronts a downward-sloping demand curve for its output. So when a company increases the price of its product, it loses some customers, but not all or even most of them.

Lose some of its customers, but nowhere close to all its customers.

Temporary price reductions intended to alter market shares or drive out competition are referred to as Multiple Choice Predatory pricing. Price-fixing. Price leadership. Retaliation. Explanation Predatory pricing is a temporary price reduction designed to alter market shares or drive out competition.

Predatory pricing.

One In the News article in the text titled "The Real March Madness: Ticket Prices " described how professional scalpers use the Internet to sell hard-to-get tickets to concerts and sporting events. Apparently the initial price of the tickets being scalped was too Multiple Choice Low for equilibrium, resulting in a surplus of tickets. Low for equilibrium, resulting in a shortage of tickets. High for equilibrium, resulting in a surplus of tickets. High for equilibrium, resulting in a shortage of tickets. Explanation The fact that the tickets are hard to get implies a shortage. A price below the equilibrium price will result in a shortage.

Low for equilibrium, resulting in a shortage of tickets.

Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to Multiple Choice Offer more high-priced products. Lower his price to increase revenue. Keep his price the same to maximize revenues. Raise his price to increase revenues.

Lower his price to increase revenue.

Compared to the outcome under a marginal cost pricing strategy, a monopolistically competitive firm will produce a Multiple Choice Greater output and charge a higher price. Lower output and charge a lower price. Lower output and charge a higher price. Greater output and charge a lower price. Explanation Because the demand curve facing a firm in monopolistic competition slopes downward, firms will charge a price greater than marginal cost (higher price) and will produce to the left of the efficient point (less output).

Lower output and charge a higher price.

If oligopolists start cutting prices to capture a larger market share, the result will be Multiple Choice Lower prices, decreased output, and larger profits. Higher prices, increased output, and larger profits. Lower prices, increased output, and larger profits. Lower prices, increased output, and smaller profits. Explanation An attempt by one oligopolist to increase its market share by cutting prices will lead to a general reduction in the market price because all of the oligopolists will end up reducing prices to gain (or maintain) market share. This will reduce profits as prices slide down the market demand curve.

Lower prices, increased output, and smaller profits.

Businesses that fail to account for implicit costs, like the strawberry farmer, Hiroshi Fujishige, who failed to consider the enormous opportunity of selling his property to Disneyland, will Multiple Choice Go out of business immediately. Make more money when they shut down. Make higher-than-normal profits. Have to increase revenues in order to stay in business. Explanation Fujishige could have made even more money if he had stopped growing strawberries.

Make more money when they shut down.

Which of the following characterizes monopolistic competition? Multiple Choice Many interdependent firms sell a homogeneous product. A few firms produce all of the market supply of a good. A few firms produce a particular type of product. Many firms produce a particular type of product, but each maintains some independent control over its own price. Explanation Monopolistic competition is a market in which many firms produce similar but somewhat differentiated goods or services, and therefore each maintains some independent control of its own price.

Many firms produce a particular type of product, but each maintains some independent control over its own price.

Which of the following may not characterize an oligopoly? Multiple Choice A few firms. Substantial market power. High barriers to entry. Many firms. Explanation An oligopoly is a market with a few firms that are protected by high barriers to entry and have substantial market power.

Many firms.

The competitive market model is important because Multiple Choice It characterizes all the markets in the U.S. economy. It shows how laissez faire can overcome market failures. Many industries function much like the competitive model. It shows that firms can earn economic profits in the long run. Explanation Few, if any, product markets are perfectly competitive. However, many industries function much like the competitive model; therefore, understanding how the market works is important.

Many industries function much like the competitive model.

The average total cost (ATC) curve will be downward sloping so long as Multiple Choice Marginal cost is less than average total cost. Average variable cost is less than average total cost. Average fixed cost is less than average total cost. Marginal cost is greater than average total cost. Explanation If the marginal cost is less than the average total cost, the average total cost must be decreasing. For instance, if you have a 3.5 GPA (grade point average) and get only a 3.0 in your last (marginal) accounting class, your GPA will fall.

Marginal cost is less than average total cost.

If the marginal physical product (MPP) is falling, then the Multiple Choice Total cost of each unit of output is rising. Marginal cost of each unit of output is rising. Total cost of each unit of output is falling. Marginal cost of each unit of output is falling. Explanation At the point of diminishing marginal returns, the marginal physical product declines and the marginal cost increases.

Marginal cost of each unit of output is rising.

The behavior expected in a competitive market includes Multiple Choice Very little entry and exit. Marginal cost pricing. Aggressive behavior among competitors to control prices. Little technological growth. Explanation Profit maximization induces the competitive firm to produce at that rate of output where marginal costs equal price. The profit motive encourages entry and exit as well as technology development. Perfectly competitive firms are 'price takers.'

Marginal cost pricing.

Which characteristic of competitive markets permits society to answer the WHAT to produce question efficiently? Multiple Choice Total cost pricing. Average cost pricing. Minimum cost pricing. Marginal cost pricing. Explanation The marginal cost pricing characteristic of competitive markets permits society to answer the WHAT to produce question efficiently. The amount consumers are willing to pay for a good (its price) equals its opportunity cost (marginal cost).

Marginal cost pricing.

Which of the following represents the change in total cost that results from a one-unit increase in production? Multiple Choice Marginal cost. Marginal revenue. Total revenue. Marginal profit. Explanation Marginal cost is the change in total cost that occurs when more output is produced.

Marginal cost.

Ceteris paribus, the law of diminishing returns states that beyond some point, the Multiple Choice Output of any good increases as more of a variable input is used. Addition to total utility diminishes as more units of a good are consumed. Returns on stocks and bonds diminish with higher security prices. Marginal physical product of a factor of production diminishes as more of it is employed with a given quantity of other inputs. Explanation The law of diminishing returns says that the marginal physical product of a variable input declines as more of it is employed along with a constant quantity of other (fixed) inputs. Next Visit question mapQuestion 21 of 50 Total21 of 50 Prev

Marginal physical product of a factor of production diminishes as more of it is employed with a given quantity of other inputs.

The slope of the indifference curve is equal to the Multiple Choice Income of the consumer. Marginal rate of substitution. Ratio of the price of one good to the price of the other good. Slope of the demand curve. Explanation The slope of the indifference curve is called the marginal rate of substitution. It is the absolute value of the slope of the indifference curve. It's equal to the relative marginal utilities of the two goods.

Marginal rate of substitution.

The slope of the indifference curve is equal to the Multiple Choice Marginal rate of substitution. Ratio of the price of one good to the price of the other good. Slope of the demand curve. Income of the consumer.

Marginal rate of substitution.

Short-run profits are maximized at the rate of output where Multiple Choice Average total costs are minimized. Marginal revenue is equal to marginal cost. Marginal revenue is zero. Total revenue is maximized. Explanation A competitive firm maximizes total profit at the output rate where MC is equal to MR. If MC is less than MR, the firm can increase profits by producing more. If MC exceeds MR, the firm should reduce output.

Marginal revenue is equal to marginal cost.

Short-run profits are maximized at the rate of output where Multiple Choice Average total costs are minimized. Total revenue is maximized. Marginal revenue is zero. Marginal revenue is equal to marginal cost. Explanation A competitive firm maximizes total profit at the output rate where MC is equal to MR. If MC is less than MR, the firm can increase profits by producing more. If MC exceeds MR, the firm should reduce output.

Marginal revenue is equal to marginal cost.

Short-run profits are maximized at the rate of output where Multiple Choice Marginal revenue is equal to marginal cost. Marginal revenue is zero. Average total costs are minimized. Total revenue is maximized. Explanation A competitive firm maximizes total profit at the output rate where MC is equal to MR. If MC is less than MR, the firm can increase profits by producing more. If MC exceeds MR, the firm should reduce output.

Marginal revenue is equal to marginal cost.

Refer to Figure 22.3 at quantity level B Multiple Choice Marginal cost is greater than marginal revenue, so it should cut production. The company is maximizing profit. The company is minimizing loss. Marginal revenue is greater than marginal cost, so the firm should expand production. Explanation Profit maximization occurs where marginal revenue equals marginal cost. At quantity B, marginal revenue is greater than marginal cost, which tells the firm that it should expand production.

Marginal revenue is greater than marginal cost, so the firm should expand production.

If an oligopoly market is contestable and new firms enter, the Multiple Choice Number of firms in the industry will decrease. Profitability of the industry will increase. Former oligopolists will raise their prices. Market power of the former oligopolists will be reduced. Explanation The profitability of a monopoly or oligopoly will attract new competitors. If it is a contestable market, rivals will enter the market, and the power of the former monopolist or oligopolists will be reduced.

Market power of the former oligopolists will be reduced.

Which of the following statements about markets is not true? Multiple Choice Every market transaction involves an exchange of money for goods or resources or a direct exchange of goods or resources without money called barter. Markets have both a demand side and a supply side. The two types of markets include the factor and product markets. Markets necessarily have a physical location. Explanation Markets exist wherever and whenever an exchange takes place, even in cyberspace.

Markets necessarily have a physical location.

Which of the following statements about markets is not true? Multiple Choice Markets necessarily have a physical location. The two types of markets include the factor and product markets. Markets have both a demand side and a supply side. Every market transaction involves an exchange of money for goods or resources or a direct exchange of goods or resources without money called barter.

Markets necessarily have a physical location.

The demand curve will be kinked if rival oligopolists Multiple Choice Match price increases but not price reductions. Match price reductions but not price increases. Match both price increase and price reductions. Do not match price changes at all. Explanation The demand curve will be kinked if rival oligopolists match price reductions but not price increases.

Match price reductions but not price increases.

All of the following are ways a business can earn economic profits except Multiple Choice Maximize implicit costs but not explicit costs. Take above-average risks. Discover new products. Find new and better methods of production. Explanation To earn economic profits, a business must see opportunities that others have missed, discover new products, find new and better methods of production, or take above-average risks. A firm will want to minimize costs in order to maximize profit.

Maximize implicit costs but not explicit costs.

The most desirable rate of output for a firm is the output that Multiple Choice Minimizes total costs. Minimizes marginal costs. Maximizes total profit. Maximizes total revenue. Explanation The most desirable rate of output is the one that maximizes total profit-the difference between total revenue and total costs.

Maximizes total profit.

A production function shows the Multiple Choice Minimum amount of output that can be obtained from alternative combinations of inputs. Maximum output of a good attainable from different combinations of factor inputs. Output capacity of the entire economy. Maximum quantity of inputs required to produce a given quantity of output. Explanation The production function is a technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs.

Maximum output of a good attainable from different combinations of factor inputs.

A production function shows the Multiple Choice Minimum amount of output that can be obtained from alternative combinations of inputs. Maximum quantity of inputs required to produce a given quantity of output. Maximum output of a good attainable from different combinations of factor inputs. Output capacity of the entire economy. Explanation The production function is a technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs.

Maximum output of a good attainable from different combinations of factor inputs.

A change in demand means there has been a shift in the demand curve, and a change in quantity demanded Multiple Choice Results from a change in price of other goods. Means a shortage or surplus will result from holding prices constant. Also means demand has shifted. Means that price has changed and there is movement along the demand curve. Explanation Movements along a demand curve are a response to price changes for that good.

Means that price has changed and there is movement along the demand curve.

In a perfectly competitive market, when price is equal to the Multiple Choice Minimum short-run average total cost, it has reached the shutdown point. Minimum average total cost, economic profit is zero. Marginal cost, accounting profit is maximized. Minimum average variable cost, economic profit is zero. Explanation Total profit can be computed as TR minus TC, or it can be computed as profit per unit (price minus ATC) multiplied by the quantity sold. If price is equal to minimum ATC, profit will be zero.

Minimum average total cost, economic profit is zero.

For which of the following market structures will the firm's demand curve be tangent to the ATC curve in the long run? Multiple Choice Monopoly. Monopolistic competition. Oligopoly. Duopoly. Explanation Given the ease of entry and exit in perfect and monopolistic competition markets, as long as firms are making a profit or losing money, firms will enter or exit the market and the disappearance of economic profits (losses) is inevitable. This means that firms will produce where MR = MC and where price = ATC.

Monopolistic competition.

Which of the following market structures will have only normal profit in the long run? Multiple Choice Monopoly. Monopolistic competition. Duopoly. Oligopoly. Explanation Given the ease of entry and exit in perfect and monopolistic competition markets, as long as firms are making a profit or losing money, firms will enter or exit the market and the disappearance of economic profits (losses) is inevitable. This means that firms will produce where MR = MC and where price = ATC. Economic profit of zero is a normal profit- just not more than if those same resources were being used in a different capacity.

Monopolistic competition.

Which of the following characterizes the difference between oligopoly and monopolistic competition? Multiple Choice Monopolistically competitive firms experience zero long-run economic profit; oligopolists may experience positive long-run economic profit. Oligopolists are independent of each other; monopolistically competitive firms are interdependent. There are many oligopolists but only a few monopolistically competitive firms. Monopolistically competitive firms face horizontal demand curves; oligopolists face downward-sloping demand curves. Explanation Given the ease of entry and exit in perfect and monopolistic competition, as long as firms are making a profit or losing money, firms will enter or exit the market and the disappearance of economic profits (losses) is inevitable. Oligopoly markets have high barriers to entry; therefore it is likely that profits will persist in the long run.

Monopolistically competitive firms experience zero long-run economic profit; oligopolists may experience positive long-run economic profit.

Which type of firm engages in nonprice competition? Multiple Choice Monopolistically competitive firms. Perfectly competitive firms. Extremely efficient firms. Price takers. Explanation Competitive firms compete by achieving greater efficiency and offering their products at the lowest possible price. Firms in imperfectly competitive markets don't compete in the same way because price reductions aren't a very effective way to increase sales or market share in monopolistic competition. Therefore, imperfectly competitive firms engage in nonprice competition.

Monopolistically competitive firms.

Which type of firm engages in nonprice competition? Multiple Choice Perfectly competitive firms. Extremely efficient firms. Monopolistically competitive firms. Price takers. Explanation Competitive firms compete by achieving greater efficiency and offering their products at the lowest possible price. Firms in imperfectly competitive markets don't compete in the same way because price reductions aren't a very effective way to increase sales or market share in monopolistic competition. Therefore, imperfectly competitive firms engage in nonprice competition.

Monopolistically competitive firms.

In which of the following types of markets does a single firm have the most market power? Multiple Choice Oligopoly. Perfect competition. Monopolistic competition. Monopoly. Explanation The monopoly or single seller of a good has the most market power because it does not have any competitors and its only price limit is what consumers are willing and able to pay.

Monopoly.

Refer to Figure 23.5 for a perfectly competitive firm. Given the current market price of $200, we expect to see Multiple Choice No change in the number of firms in the industry and no change in the market price. Firms exit from the industry, driving down the market price. Firms enter the industry, driving down the market price. Firms exit from the industry, driving up the market price. Explanation If the market price is $200, the price will be equal to the firm's ATC (minimum point). The firm will not incur economic losses or economic profits. Therefore, no incentive exists for entry or exit.

No change in the number of firms in the industry and no change in the market price.

If the price elasticity of demand is 1.0, and a firm raises its price by 10 percent, the total revenue will Multiple Choice Not change. Rise by 100 percent. Rise by 10 percent. Fall by 10 percent.

Not change.

The soft drink market is dominated by Coke, Pepsi, and very few other firms. The firms often start price wars. The market can best be classified as Multiple Choice Perfect competition. Monopolistic competition. Oligopoly. Monopoly. Explanation A market with only a few firms is an oligopoly. In addition, the concentration ratio in the soft drink market is 93 percent. Any industry with a concentration ratio above 60 percent is considered an oligopoly.

Oligopoly.

The soft drink market is dominated by Coke, Pepsi, and very few other firms. The firms often start price wars. The market can best be classified as Multiple Choice Perfect competition. Oligopoly. Monopolistic competition. Monopoly. Explanation A market with only a few firms is an oligopoly. In addition, the concentration ratio in the soft drink market is 93 percent. Any industry with a concentration ratio above 60 percent is considered an oligopoly.

Oligopoly.

Assume that Anna buys peanut butter and bread. If the price of peanut butter falls, then Multiple Choice Her entire budget constraint will shift away from the origin. One end of her budget constraint will move away from the origin. Her indifference curves will shift away from the origin. Her entire budget constraint will shift toward the origin.

One end of her budget constraint will move away from the origin.

The most desired goods and services that are foregone in order to obtain something else are the Multiple Choice Average total cost. Variable cost. Marginal cost. Opportunity cost. Explanation The opportunity cost of a product is measured by the most desired goods and services that could have been produced with the same resources. For example, the opportunity cost of doing your economics homework might be the haircut that you could have received during that time.

Opportunity cost.

The most desired goods or services that are given up when a choice is made are called the Multiple Choice Rationing device. Economic profit. Opportunity cost. Utility cost. Explanation Opportunity cost is defined as the most desired goods or services that are forgone in order to obtain something else.

Opportunity cost.

If a market changes from oligopoly to perfect competition, then as a result Multiple Choice Output should increase in the long run. Fewer resources will be allocated to the market. Profitability should rise in the long run. Prices should rise in the long run. Explanation An oligopoly strives to behave like a monopoly to maximize industry profits. A monopoly and an oligopoly produce a lower quantity at a higher price than would a perfectly competitive market.

Output should increase in the long run.

The concentration ratio for an oligopoly is considered Multiple Choice Under 40 percent. Over 60 percent. 90 percent. 100 percent. Explanation The sum of the top four firms' market shares in a typical oligopoly is over 60 percent.

Over 60 percent.

In which of the following cases would a firm exit from a market? Multiple Choice P > long-run ATC. P > short-run ATC. P < short-run ATC. P < long-run ATC. Explanation If economic losses exist in an industry (P < ATC), firms will want to exit. As they do, the market supply curve will shift to the left and cause the market price to increase until profits are normal.

P < long-run ATC.

If a firm decides to make the investment decision to expand its capacity, then it must have discovered that Multiple Choice P = AVC. P = ATC. P > AVC. P > ATC. Explanation If economic profits exist (P > ATC) in an industry, more firms will want to enter or expand their capacity. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

P > ATC.

If a firm decides to make the investment decision to expand its capacity, then it must have discovered that Multiple Choice P > ATC. P = AVC. P = ATC. P > AVC. Explanation If economic profits exist (P > ATC) in an industry, more firms will want to enter or expand their capacity. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

P > ATC.

A perfectly competitive firm should expand output when Multiple Choice P < ATC. P > ATC. P < MC. P > MC. Explanation If an extra unit brings in more revenue than it costs to produce, it is adding to total profit. Total profits must increase in this case. Hence a competitive firm should expand the rate of production whenever price exceeds MC.

P > MC.

A perfectly competitive firm should expand output when Multiple Choice P > ATC. P < MC. P < ATC. P > MC. Explanation If an extra unit brings in more revenue than it costs to produce, it is adding to total profit. Total profits must increase in this case. Hence a competitive firm should expand the rate of production whenever price exceeds MC.

P > MC.

In which of the following cases would a firm enter a market? Multiple Choice P < short-run ATC. P < long-run ATC. P > long-run ATC. P > short-run ATC. Explanation If economic profits exist (P > ATC) in an industry, more firms will want to enter. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

P > long-run ATC.

In which of the following cases would a firm enter a market? Multiple Choice P > short-run ATC. P < short-run ATC. P > long-run ATC. P < long-run ATC. Explanation If economic profits exist (P > ATC) in an industry, more firms will want to enter. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

P > long-run ATC.

Refer to Figure 26.4 for a monopolistically competitive firm. In the long run this firm will charge a price of ________ and produce an output of _______. Multiple Choice P3; Q4 P4; Q3 P2;Q1 P1; Q2 Explanation In the long run the firm will produce where MR is equal to MC and price is just tangent to ATC.

P4; Q3

Examples of barriers to entry include Multiple Choice Standardized products. Patents. Economic profits. Price taking. Explanation Barriers to entry include patents, economies of scale, ownership of key resources, and government regulation.

Patents.

Greater-than-normal profit represents Multiple Choice Below-average returns to capital. Exploitation of workers. Payment for entrepreneurship. Explicit costs minus implicit costs. Explanation The inducement to take on the added responsibilities of owning and operating a business is the potential for economic profit, which represents something over and above normal profits.

Payment for entrepreneurship.

Greater-than-normal profit represents Multiple Choice Explicit costs minus implicit costs. Exploitation of workers. Below-average returns to capital. Payment for entrepreneurship. Explanation The inducement to take on the added responsibilities of owning and operating a business is the potential for economic profit, which represents something over and above normal profits.

Payment for entrepreneurship.

A change in which of the following will change the optimal rate of output? Multiple Choice Payroll taxes. Profit taxes. Property taxes. Inflation taxes. Explanation If any determinant of supply changes, the supply curve shifts. An increase in payroll taxes, for example, would raise the marginal cost. This would shift the supply curve to the left, therefore changing the optimal rate of output.

Payroll taxes.

A change in which of the following will change the optimal rate of output? Multiple Choice Profit taxes. Payroll taxes. Property taxes. Inflation taxes. Explanation If any determinant of supply changes, the supply curve shifts. An increase in payroll taxes, for example, would raise the marginal cost. This would shift the supply curve to the left, therefore changing the optimal rate of output.

Payroll taxes.

There are many corn farmers, each of whom produces the same product. The corn market can best be classified as Multiple Choice Monopolistic competition. Perfect competition. Oligopoly. Monopoly. Explanation Many agricultural products are produced in perfectly competitive markets because there are a large number of producers with no market power and no barriers to entry, and they sell a homogeneous product.

Perfect competition.

Which of the following market structures is characterized by the absence of market power? Multiple Choice Perfect competition. Monopoly. Oligopoly. Monopolistic competition. Explanation In a perfectly competitive market, firms have absolutely no market power due to the fact that they sell a homogeneous product and have so many competitors. Firms in all of the other market structures have at least some control over price.

Perfect competition.

Which of the following market structures will have higher output in the long run than monopolistic competition, ceteris paribus? Multiple Choice Monopoly. Oligopoly. Perfect competition. Duopoly. Explanation In the long run a competitive industry produces at the lowest point on the ATC curve where, as in monopolistic competition, the demand curve facing each firm slopes downward. Hence it can't be tangent to the ATC curve at its lowest point. Instead the demand curve of a monopolistically competitive firm must touch the ATC curve on the left side of the U at a lower output.

Perfect competition.

Which of the following is not a barrier to entry? Multiple Choice Patents. Perfect information. Control of distribution outlets. Well-established brand loyalty. Explanation Barriers to entry include patents, economies of scale, ownership of key resources, and government regulation.

Perfect information.

It is easiest for new firms to enter a Multiple Choice Perfectly competitive market. Duopoly market. Oligopoly market. Monopoly market. Explanation Oligopolies, including duopolies, and monopolies are protected by barriers to entry; the perfectly competitive market has no barriers to entry.

Perfectly competitive market.

Price leadership Multiple Choice Typically results in greater instability in oligopolistic markets. Results in a more competitive market. Is common in perfectly competitive markets. Permits oligopolistic firms in a given market to coordinate market wide price changes. Explanation Price leadership is a subtle (not explicit) pricing pattern that allows one firm to establish the (market) price for all firms in the industry.

Permits oligopolistic firms in a given market to coordinate market wide price changes.

An In the News article titled "Eliminating the Competition with Low Prices" indicates that, in order to protect their prices and profits, the major carriers operating at the Washington, DC, Dulles airport Multiple Choice Used patents. Permanently reduced their prices. Acquired smaller carriers. Practiced predatory pricing. Explanation When the new airline, Independence, entered the DC market, United Airlines slashed fares. The rest of the 'Big Six' (Delta, American, Northwest, US Airways, and Continental) did the same. Once Independence exited the market, fares increased. This is an example of predatory pricing.

Practiced predatory pricing.

An In the News article titled "Eliminating the Competition with Low Prices" indicates that, in order to protect their prices and profits, the major carriers operating at the Washington, DC, Dulles airport Multiple Choice Used patents. Practiced predatory pricing. Acquired smaller carriers. Permanently reduced their prices. Explanation When the new airline, Independence, entered the DC market, United Airlines slashed fares. The rest of the 'Big Six' (Delta, American, Northwest, US Airways, and Continental) did the same. Once Independence exited the market, fares increased. This is an example of predatory pricing.

Practiced predatory pricing.

The In the News article "A Sirius Mistake? FCC Approves XM-Sirius Merger" discusses the proposed merger of two satellite radio companies. Antitrust officials will examine the merger in order to Multiple Choice Protect the government from frivolous lawsuits. Prevent the abuse of market power. Increase the profitability of monopolies. Prevent economies of scale. Explanation The Sherman Act prohibits 'conspiracies in restraint of trade,' including mergers, contracts, or acquisitions that threaten to monopolize an industry.

Prevent the abuse of market power.

According to "Oil Spikes On OPEC Pact," OPEC wants to behave like a monopoly, choosing a rate of industry output that maximizes total industry profit. The challenges for all cartels, OPEC in particular, include all of the following except Multiple Choice Preventing some members from decreasing production. Allocating market share. Coordination. Replicating monopoly outcomes. Explanation The challenges for cartels are maintaining low production, allocating market share, coordination, and replicating monopoly outcomes.

Preventing some members from decreasing production.

The federal government placed an upper limit on human organ prices, which is called a Multiple Choice Price floor. Price ceiling. Price support. None of the choices are correct.

Price ceiling.

The total revenue effect of a movement along a demand curve can best be predicted using the Multiple Choice Law of demand. Price elasticity of demand. Utility-maximizing rule. Law of diminishing marginal utility.

Price elasticity of demand.

A catfish farmer will shut down production when Multiple Choice He is losing money. Price falls below AVC. Total revenue falls below total costs. The best he can do is break even. Explanation A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when total revenue is less than total variable cost or price is less than average variable cost.

Price falls below AVC.

A catfish farmer will shut down production when Multiple Choice The best he can do is break even. He is losing money. Price falls below AVC. Total revenue falls below total costs. Explanation A firm should shut down only if the losses from continuing production exceed fixed costs. This happens when total revenue is less than total variable cost or price is less than average variable cost.

Price falls below AVC.

A firm experiencing economic losses will still continue to produce output in the short run as long as Multiple Choice Price is above average variable cost. Revenues are greater than total fixed cost. Price is above average fixed cost. MR = MC. Explanation If the price is greater than AVC, a firm is losing less than its fixed costs and should continue producing in the short run.

Price is above average variable cost.

A perfectly competitive market results in efficiency because Multiple Choice Price is driven down to minimum ATC. MC < P. Price rises high enough to equal marginal cost. Zero economic profit is achieved. Explanation When the competitive pressure on prices is carried to the limit, we get the right answer to the HOW to produce question. Competition drives costs down to their bare minimum-the hallmark of economic efficiency.

Price is driven down to minimum ATC.

A perfectly competitive market results in efficiency because Multiple Choice Price rises high enough to equal marginal cost. Price is driven down to minimum ATC. MC < P. Zero economic profit is achieved. Explanation When the competitive pressure on prices is carried to the limit, we get the right answer to the HOW to produce question. Competition drives costs down to their bare minimum-the hallmark of economic efficiency.

Price is driven down to minimum ATC.

The pricing strategy in which one firm is allowed by its rivals to establish the market price for all firms in the market is called Multiple Choice Overt collusion. Price leadership. Pattern pricing. Price-fixing. Explanation Price leadership is a subtle (not explicit) pricing pattern that allows one firm to establish the (market) price for all firms in the industry.

Price leadership.

When demand is price-inelastic, ceteris paribus, an increase in Multiple Choice Total revenue indicates a reduction in price. Total revenue means quantity rises. Price leads to lower total revenue. Price leads to greater total revenue. Explanation Higher prices result in higher total revenue only if the price elasticity of demand is inelastic (price elasticity is less than 1).

Price leads to greater total revenue.

In the $80 to $40 price range in Figure 20.1, demand is Multiple Choice Perfectly price-elastic. Price-elastic. Price-inelastic. Unitary elastic. Explanation At price levels less than $100, a decrease in the price causes revenue to decrease, which implies that demand is inelastic.

Price-inelastic.

In the $80 to $40 price range in Figure 20.1, demand is Multiple Choice Price-elastic. Price-inelastic. Perfectly price-elastic. Unitary elastic.

Price-inelastic.

Economic explanations of consumer behavior take into consideration Multiple Choice Social status. Ego gratification. Lack of self-confidence. Prices and income.

Prices and income.

When price exceeds average variable cost but not average total cost, the firm should, in the short run, Multiple Choice Minimize per-unit losses by producing at the rate of output where ATC is minimized in the short run. Shut down. Produce at the rate of output where MR = MC. Minimize total losses by producing at the rate of output where ATC is minimized. Explanation A competitive firm maximizes total profit (minimizes losses) at the output rate where MC is equal to MR. If at that output level the price (or MR) is less than ATC but greater than AVC, then a perfectly competitive firm is losing less than its fixed costs and should continue producing in the short run in order to minimize its losses.

Produce at the rate of output where MR = MC.

When price exceeds average variable cost but not average total cost, the firm should, in the short run, Multiple Choice Shut down. Produce at the rate of output where MR = MC. Minimize per-unit losses by producing at the rate of output where ATC is minimized in the short run. Minimize total losses by producing at the rate of output where ATC is minimized. Explanation A competitive firm maximizes total profit (minimizes losses) at the output rate where MC is equal to MR. If at that output level the price (or MR) is less than ATC but greater than AVC, then a perfectly competitive firm is losing less than its fixed costs and should continue producing in the short run in order to minimize its losses.

Produce at the rate of output where MR = MC.

A monopolistically competitive firm maximizes profits or minimizes losses in the short run by Multiple Choice Producing at the output level where MC equals ATC. Setting price equal to marginal cost. Producing at the output level where MR equals MC. Producing at the output level where ATC is minimized. Explanation Profit-maximizing (or loss-minimizing) firms, regardless of the market structure, will choose to produce at the output level where MR = MC as long as P > AVC.

Producing at the output level where MR equals MC.

When a business advertises that its product has unique features that make it superior to other similar products, it is engaging in Multiple Choice Price competition. Predatory pricing. Product differentiation. Contestable market advertising. Explanation Product differentiation is designed to make one firm's products appear different from and superior to those produced by other firms.

Product differentiation.

Which of the following most characterizes monopolistic competition? Multiple Choice Price discrimination. Price leadership. Economies of scale. Product differentiation. Explanation Product differentiation, a characteristic of monopolistic competition, occurs when one product is different (actually or perceived) from competing products in the same market.

Product differentiation.

Which one of the following is not a danger of experimenting with pricing for an oligopoly? Multiple Choice Retaliation. Firms matching price reductions. The uncertainty of competitor response. Product differentiation. Explanation Oligopolists avoid price competition and instead pursue nonprice competition (e.g., advertising and product differentiation) to reduce the risk of retaliation, price wars, and uncertainty.

Product differentiation.

The concentration ratio measures the Multiple Choice Number of plants owned by an oligopoly. Percentage of total profits made by a firm in a specific market. Proportion of total output produced by the largest firms in a specific market. Relative size of a firm compared to other industries. Explanation The standard measure of market power is the concentration ratio. The concentration ratio is a measure of market power that relates the size of firms to the size of the product market.

Proportion of total output produced by the largest firms in a specific market.

Refer to Figure 26.3 for a monopolistically competitive firm. The output level that is allocatively efficient for this firm is Multiple Choice Q3. Q1. Zero. The firm should shut down because it is not earning an economic profit. Q2. Explanation The allocative efficient output and price combination is where price is equal to marginal cost, at Q2.

Q2.

Nonprice competition results in Multiple Choice Resource misallocation. Marginal cost pricing. Low entry barriers. Production efficiency. Explanation Because the resources used in nonprice competition (advertising, packaging, service, etc.) may have more desirable uses, these industry structures lead to resource misallocation.

Resource misallocation.

According to consumer choice theory, rational behavior requires that consumers compare the marginal utility of each purchase with its price. True or False

True

Collusion is undesirable and illegal because Multiple Choice Government intervention leads to inefficient outcomes. It leads to greater production than would occur in a competitive market. It is unprofitable and the government must bail out firms that are bankrupted by collusion. Resources are misallocated and the level of output is restricted. Explanation Market power contributes to market failure when it leads to resource misallocation (restricted output) or greater inequity (monopoly profits or higher prices).

Resources are misallocated and the level of output is restricted.

A change in the price of a good Multiple Choice Causes a shift in the supply curve. Results in a change in quantity supplied. Results in a change in supply. Is a determinant of supply. Explanation Because the supply curve shows the quantity supplied at different price levels, when the price changes, we can track changes in quantity supplied along the supply curve.

Results in a change in quantity supplied.

A competitive market creates strong pressure for technological innovation that Multiple Choice Shifts the supply curve to the right. Provides the firm with more market power. Shifts the firm's demand curve to the right. Allows the firm to raise the price of its product. Explanation When the market is at long-run equilibrium, the quest for profits encourages producers to discover cheaper ways to manufacture their products. This results in lower costs and encourages further increases in the rate of output.

Shifts the supply curve to the right.

The period in which at least one input is fixed in quantity is the Multiple Choice Short run. Investment decision. Long run. Production run. Explanation The short run is the period in which the quantity (and quality) of some inputs can't be changed, or in other words inputs are fixed.

Short run.

Suppose a hurricane hits Alabama, causing widespread damage to houses and businesses. The governor of Alabama places price ceilings on all building materials to keep the prices reasonable. Which of the following is the most likely result? Multiple Choice A faster recovery from the storm. More people will be able to purchase building materials. Shortages of building materials and a slower recovery from the storm. The supply of building materials to Alabama will increase. Explanation Price ceilings increase the quantity demanded, decrease the quantity supplied, and create market shortages. Fewer people would be able to purchase building materials because less material would be available.

Shortages of building materials and a slower recovery from the storm.

Nobel Prize-winning economist Gary Becker corrected President Clinton's elasticity estimate for cigarette smoking by Multiple Choice Showing that the demand for cigarettes in the short run was more inelastic than the president calculated. Showing that cigarettes were actually price-elastic. Correcting the president's math. Showing that the long-run response to a price increase in cigarettes was likely to be more elastic than the president had estimated.

Showing that the long-run response to a price increase in cigarettes was likely to be more elastic than the president had estimated.

The marginal physical product of labor in Figure 21.1 is negative for the Multiple Choice Sixth worker. Fifth worker. Fourth worker. Third worker. Explanation If total output decreases with the addition of a new worker, the marginal physical product is not only diminishing but is actually negative.

Sixth worker.

The Herfindahl-Hirschman Index is the sum of the Multiple Choice Squared market shares of the firms in the market. Market shares of all the firms in the market. Market shares of the top four firms in the market. Squared concentration ratios for the firms in the market. Explanation The Herfindahl-Hirschman Index (HHI) is a measure of industry concentration that accounts for the number of firms and the size of each summing the squared market shares of the firms in the market.

Squared market shares of the firms in the market.

Refer to the data in Figure 22.1. The shape of the total revenue curve indicates that the price of this good Multiple Choice Stays the same as output rises. Falls at first as output rises, but then rises as output rises. Falls as output rises. Rises as output rises. Explanation The straight-line total revenue curve has a constant slope of $10. That indicates that the price is always $10 even when output rises.

Stays the same as output rises.

Which of the following may characterize a monopoly? Multiple Choice Substantial market power. Low barriers to entry. Many firms. Differentiated product. Explanation A monopoly is one firm that is protected by high barriers to entry with substantial market power that sells a unique product.

Substantial market power.

Oil and alternative sources of energy such as wind and solar are Multiple Choice Inferior goods. Complementary goods. Substitute goods. Income-elastic goods.

Substitute goods.

Ceteris paribus, for a farmer, corn and wheat are Multiple Choice Substitutes in production. Complements in production; by-products. Unrelated in a farmer's decision. None of the choices are correct.

Substitutes in production.

Which industry here is unlikely to exhibit price discrimination? Multiple Choice New cars. Colleges. Airlines. Supermarkets.

Supermarkets

The market price for any good or service sold in a perfectly competitive market is determined by Multiple Choice Government regulation. The largest firm in the industry. Supply and demand. Strategic interaction. Explanation A perfectly competitive firm risks losing all of its customers, who will shop elsewhere, if it increases the price of its product above the market-established price. Therefore, it is compelled to take the market price that is determined by the interaction of supply and demand.

Supply and demand.

If the wages of the workers that harvest corn each fall decreases, ceteris paribus, then the Multiple Choice Supply curve for corn will shift right. Supply curve for corn will shift left. Demand curve for corn will shift right. None of the choices are correct.

Supply curve for corn will shift right.

If the wages of the workers that harvest corn each fall decreases, ceteris paribus, then the Multiple Choice Supply curve for corn will shift right. Supply curve for corn will shift left. Demand curve for corn will shift right. None of the choices are correct. Explanation If the cost of production decreases, the supply of the good will increase.

Supply curve for corn will shift right.

Oligopolistic behavior includes Multiple Choice Tacit collusion. High concentration ratios. High barriers to entry. Independent pricing. Explanation Tacit collusion is most easily and effectively accomplished in an oligopoly market because there are only a few firms that strive to maximize profits, which can be accomplished if the firms act in unison to set prices and output. Yet each firm will be motivated by its own self-interest.

Tacit collusion.

If there is a shortage at a given price, then Multiple Choice That price is greater than the equilibrium price. That price is less than the equilibrium price. That price is the equilibrium price. There is no equilibrium price in the market. Explanation At prices below equilibrium, quantity demanded will be greater than quantity supplied, so a market shortage will exist.

That price is less than the equilibrium price.

Which of the following is not a determinant of the price elasticity of demand? Multiple Choice The time frame-whether it is in the short run or long run. The amount of income the consumer has. The share of a consumer's budget. The number of substitute goods available. Explanation The determinants of price elasticity of demand are the number of substitutes, whether the product is a necessity or luxury, the time frame, and the weight of the product in terms of the consumer's budget.

The amount of income the consumer has.

An investment decision involves choosing Multiple Choice A rate of output and is a short-run decision. A rate of output and is a long-run decision. The amount of plants and equipment and is a short-run decision. The amount of plants and equipment and is a long-run decision. Explanation An investment decision is the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

The amount of plants and equipment and is a long-run decision.

An investment decision involves choosing Multiple Choice The amount of plants and equipment and is a short-run decision. A rate of output and is a short-run decision. The amount of plants and equipment and is a long-run decision. A rate of output and is a long-run decision. Explanation An investment decision is the long-run decision to build, buy, or lease plants and equipment, or to enter or exit an industry.

The amount of plants and equipment and is a long-run decision.

Cross price elasticity measures Multiple Choice The change in quantity demanded for one good relative to a change in the price of another good. How complements and substitutes differ from one another. How sensitive quantity demanded is to a change in price. The change in quantity demanded when income changes. Explanation Cross-price elasticity is used to measure whether two goods are substitutes or complements. It measures how the quantity demanded for one good changes as the price of another good changes. If two goods are strong substitutes, the cross-price elasticity number will be positive and high. Consumers with strong brand loyalty view other goods as very weak substitutes, and the cross-price elasticity number will be low.

The change in quantity demanded for one good relative to a change in the price of another good.

Cross price elasticity measures Multiple Choice The change in quantity demanded when income changes. The change in quantity demanded for one good relative to a change in the price of another good. How sensitive quantity demanded is to a change in price. How complements and substitutes differ from one another. Explanation Cross-price elasticity is used to measure whether two goods are substitutes or complements. It measures how the quantity demanded for one good changes as the price of another good changes. If two goods are strong substitutes, the cross-price elasticity number will be positive and high. Consumers with strong brand loyalty view other goods as very weak substitutes, and the cross-price elasticity number will be low.

The change in quantity demanded for one good relative to a change in the price of another good.

To find the average percentage change in quantity demanded, Multiple Choice The change in quantity demanded is divided by the average quantity. The change in quantity demanded is divided by the change in price. The change in price is divided by the percentage change in quantity demanded. The change in price is divided by the average price.

The change in quantity demanded is divided by the average quantity.

Marginal cost is equal to Multiple Choice Average total cost multiplied by quantity produced. Total cost divided by quantity produced. The change in fixed costs as more units are produced. The change in total costs divided by the change in quantity produced. Explanation Marginal cost is the change in total cost divided by the change in quantity produced. It is equivalent to the rate of change in total costs as output increases. It is also equal to the change in variable costs.

The change in total costs divided by the change in quantity produced.

Evaluating a supply and a demand curve independently, if the equilibrium price rises, Multiple Choice The producer surplus will fall. The consumer surplus will fall. The consumer surplus will increase. The producer surplus will increase. Explanation The consumer surplus is reduced when the price rises. However, the producer surplus would increase.

The consumer surplus will fall.

Barb's Soccer Ball Company produces 800 soccer balls per week. If the firm used marginal cost pricing to determine soccer ball output, it would produce 600 soccer balls. Consumers do not receive the most desirable quantity of soccer balls from Bib's because Multiple Choice The firm must be earning higher than normal economic profits. Economic losses are occurring. The cost of producing the additional 200 soccer balls is greater than the amount that consumers are willing to pay for the additional soccer balls. The cost of producing the additional 200 soccer balls is less than the amount that consumers are willing to pay for the additional soccer balls. Explanation The marginal cost pricing characteristic of competitive markets permits society to answer the WHAT to produce question efficiently. The amount consumers are willing to pay for a good (its price) equals its opportunity cost (marginal cost). But this is not true when a firm produces quantities at which MC is greater than the price.

The cost of producing the additional 200 soccer balls is greater than the amount that consumers are willing to pay for the additional soccer balls.

If two goods are complementary goods, then Multiple Choice The cross-price elasticity will be greater than 1. The cross-price elasticity sign will be positive. The cross-price elasticity sign is not important. The cross-price elasticity sign will be negative.

The cross-price elasticity sign will be negative.

The main difference between perfect competition and monopolistic competition is Multiple Choice The ease of entry and exit. The number of firms in the market. The degree of product differentiation. The long-run economic profits that are expected. Explanation A monopolistically competitive firm confronts a downward-sloping demand curve for its output because of brand loyalty and product differentiation. This is distinguished from a purely competitive firm, which confronts a horizontal demand curve because consumers view its products and those of competitors as interchangeable (homogeneous).

The degree of product differentiation.

Which of the following is the best explanation for why individuals own small businesses? Multiple Choice To gain experience for their next job. The expectation of profit. To provide a product consumers want. Because they cannot earn a living working for corporate America. Explanation The basic incentive for producing goods and services is the expectation of profit.

The expectation of profit.

The federal government's lawsuit against AT&T was motivated in large part by Multiple Choice AT&T's inefficient and inadequate R&D expenditures. Its practice of price discrimination. The diseconomies of scale resulting from AT&T's enormous size. The extension of its market power to other markets. Explanation The lawsuit against American Telephone and Telegraph's (AT&T's) phone monopoly occurred because AT&T supplied 96 percent of all long-distance service and over 80 percent of local telephone service. AT&T kept long-distance charges high and compelled consumers to purchase hardware from its own subsidiary.

The extension of its market power to other markets.

Each of the following is a determinant of market power but which is the critical determinant of market power? Multiple Choice The number of producers. The size of each firm. The extent of barriers to entry. The availability of substitute goods. Explanation The determinants of market power include number of producers, size of each firm, barriers to entry, and availability of substitute goods. However, the extent of barriers to entry is the most critical factor in maintaining control over price.

The extent of barriers to entry.

Which of the following is true about the output level where marginal revenue equals marginal cost? Multiple Choice The firm is maximizing profit. The firm should increase its output. The firm should reduce its output. Economic profits are equal to zero. Explanation A firm maximizes total profit at the output rate where MR is equal to MC. If MC is less than MR, the firm can increase profits by producing more. If MC exceeds MR, the firm should reduce output.

The firm is maximizing profit.

Refer to Figure 26.3 for a monopolistically competitive firm in the long run. Which of the following observations results in the problem of excess capacity? Multiple Choice The firm is producing at Q3 instead of where MR = MC. The firm is producing at Q1 instead of where MC = demand. The firm is earning only zero economic profits in the long run. The firm is producing less than the minimum-ATC output rate. Explanation This monopolistically competitive firm would produce at Q1, a rate of output that is less than its minimum-ATC output rate, and therefore has excess capacity.

The firm is producing less than the minimum-ATC output rate.

Refer to Figure 19.2. Diminishing marginal utility begins after Multiple Choice The fifth apple. The fourth apple. The first apple. The third apple. Explanation The graph shows how marginal utility changes as more apples are consumed. Diminishing marginal utility states that successive consumption of a product will cause the marginal utility to fall. In the graph the marginal utility begins to decline after the first apple.

The first apple.

If a good had a zero price (i.e., the good was free), a rational person would consume Multiple Choice The good until the marginal utility was maximized. The good until the marginal utility of the last unit was zero. The good until total utility was zero. An infinite amount of the good.

The good until the marginal utility of the last unit was zero.

Which of the following is the slope of the production function with respect to an input? Multiple Choice The average product of the input. The input price. The unit cost of the input. The marginal physical product of the input. Explanation The slope of the production function shows how output changes as we employ more workers in fixed-resource factory.

The marginal physical product of the input.

Which of the following is the slope of the production function with respect to an input? Multiple Choice The marginal physical product of the input. The average product of the input. The unit cost of the input. The input price. Explanation The slope of the production function shows how output changes as we employ more workers in fixed-resource factory.

The marginal physical product of the input.

The equilibrium price in a market is found where Multiple Choice The market supply curve intersects the market demand curve. The market demand curve intersects the y-axis. The market supply curve intersects the x-axis. The market supply curve intersects the y-axis.

The market supply curve intersects the market demand curve.

AT&T argued that the merger with T-Mobile should be approved by the Justice Department because Multiple Choice It will result in higher prices for consumers. There are many wireless providers available for consumer. AT&T will gain additional wireless towers from T-Mobile. The merger will lead to efficiencies because a larger firm can enjoy economies of scale and can keep prices low. Explanation To justify the merger that will leave the U.S. wireless market in the hands of only three providers, AT&T argued that it will gain millions of new T-Mobile customers, which allows it to spread the fixed costs of production over more customers, leading to economies of scale.

The merger will lead to efficiencies because a larger firm can enjoy economies of scale and can keep prices low.

The term opportunity cost refers to the Multiple Choice Financial costs of all the factors of production used to produce a good or service. The most desired good or service given up when something is obtained. Value of every other good given up when a good or service is obtained. Amount of resources used to produce a good but not a service.

The most desired good or service given up when something is obtained.

The best measure of the economic cost of doing your homework is Multiple Choice The most valuable opportunity you give up when you do your homework. The economic cost plus the accounting cost of doing the homework. The amount you would have to pay to get someone else to do it. The tuition paid for your education plus the cost of any required textbooks. Explanation The economic or opportunity cost of any activity is the value of the best forgone alternative. Therefore, if you gave up working to do your homework, your opportunity cost is the wage that you would have earned.

The most valuable opportunity you give up when you do your homework.

An industry's market structure refers to Multiple Choice The number and size of the firms in the industry. How much firms spend on advertising. What types of products are produced in that industry. Whether the market is a product market or a resource market. Explanation The number of firms and their size are the key elements in the determination of market structure. There are four main market structures: perfect competition, oligopoly, monopoly, and monopolistic competition.

The number and size of the firms in the industry.

Which of the following is a determinant of market supply but not the supply curve of an individual firm? Multiple Choice The price of factor inputs. Expectations. The number of firms in the market. Technology. Explanation The market supply of a competitive industry is determined by the prices of factor inputs, technology, expectations, taxes, subsidies, and the number of firms in the industry. The number of firms in the industry does not impact the supply curve of the individual firm.

The number of firms in the market.

The basic formula for price elasticity of demand is Multiple Choice The percentage change in income divided by the percentage change in price. The percentage change in quantity demanded divided by the percentage change in price. The change in quantity demanded divided by the change in price. The percentage change in price divided by the percentage change in quantity demanded.

The percentage change in quantity demanded divided by the percentage change in price.

The price elasticity of demand is equal to Multiple Choice The percentage change in quantity demanded times the percentage change in price. The percentage change in quantity demanded divided by the percentage change in price. The unit change in quantity demanded times the unit change in price. The unit change in price divided by the unit change in quantity demanded.

The percentage change in quantity demanded divided by the percentage change in price.

The formula for cross-price elasticity is Multiple Choice The percentage change in the quantity demanded for one good divided by the percentage change in the price of another good. The percentage change in the quantity demanded divided by the average change in price. The percentage change in the quantity demanded for one good divided by the percentage change in income. The percentage change in the price of one good divided by the percentage change in the quantity demanded of another good.

The percentage change in the quantity demanded for one good divided by the percentage change in the price of another good.

If a company is the sole U.S. producer of good X, the market may still be contestable because of all but which one of the following? Multiple Choice New technology may threaten to make good X obsolete. Foreign producers can provide good X to the U.S. market. The presence of a government franchise. Many domestic firms can potentially begin production of good X. Explanation A contestable market is an imperfectly competitive industry subject to potential entry if prices or profits increase. A government franchise will prevent entry, and therefore this would not be a contestable market.

The presence of a government franchise.

Refer to Figure 24.3. Which of the following statements is true about the price elasticity of demand at price P2? Multiple Choice The price elasticity is unitary. The price elasticity is zero. The price elasticity is elastic. The price elasticity is inelastic. Explanation At P2 MR is equal to zero, which means the monopoly can change its price; and revenue doesn't change, which means the price elasticity of demand is 1.

The price elasticity is unitary.

Tickets to a sporting event go on sale and sell out almost instantly. This suggests that Multiple Choice The tickets must be very expensive. There are too many tickets to the event. The price for the tickets is below the equilibrium price. There is a surplus of tickets.

The price for the tickets is below the equilibrium price.

The In the news article titled "Gas Prices Jump in Matthew's Wake" suggests gasoline prices increased a s a result of damage caused by Hurricane Matthew. When the availability of gasoline decreases as a result of this damage the supply curve shifts to the left, causing Multiple Choice A surplus to exist at the original equilibrium price. Consumers pay lower prices as they decide to drive less. The price of gasoline to move up along the market demand curve. The price of gasoline to move up along the market supply curve

The price of gasoline to move up along the market demand curve.

Which of the following is not held constant when considering the demand for pizza? Multiple Choice Expectations of higher prices for pizzas. The price of spaghetti (a substitute). The price of pizza. Consumer incomes.

The price of pizza.

Which of the following is not held constant when considering the demand for pizza? Multiple Choice Expectations of higher prices for pizzas. The price of spaghetti (a substitute). The price of pizza. Consumer incomes. Explanation The demand curve reflects the quantity of a good consumers are willing and able to buy at alternative prices in a given period, holding constant other factors such as tastes, income, prices of related goods, and expectations.

The price of pizza.

A perfectly competitive firm is a price taker because Multiple Choice It has market power. Its products are differentiated. The price of the product is determined by many buyers and sellers. Market supply is upward-sloping. Explanation A perfectly competitive firm risks losing all of its customers, who will shop elsewhere, if it increases the price of its product above the market-established price. Therefore, it is compelled to take the market price that is determined by the interaction of supply and demand.

The price of the product is determined by many buyers and sellers.

When firms are interdependent, Multiple Choice One firm can ignore other companies in the market when making decisions. The profit of one firm depends on how its rivals respond to its strategic decisions. They can act independently of one another. Then the market is perfectly competitive. Explanation One firm in an oligopoly may decide to cut prices, but the success of this decision will depend on whether the other firms match the price reduction.

The profit of one firm depends on how its rivals respond to its strategic decisions.

A market is said to be in equilibrium when Multiple Choice Demand is fully satisfied at all alternative prices. The buying intentions of all consumers are realized. The supply intentions of all sellers are realized. The quantity demanded equals the quantity supplied. Explanation Equilibrium occurs at the intersection of the supply and demand curves.

The quantity demanded equals the quantity supplied.

If the elasticity of demand is 3, and the price rises by 15 percent, then Multiple Choice The percentage change in quantity demanded will fall as income rises. The quantity demanded will increase by 5 percent. The quantity demanded will rise by 4.5 percent. The quantity demanded will fall by 45 percent.

The quantity demanded will fall by 45 percent.

Which of the following is most likely a fixed cost? Multiple Choice The labor on an automotive assembly line. The electricity used to run packaging equipment. The material used to make jackets. The rent for a factory. Explanation The factory lease is an example of a fixed cost. Once you lease a factory, you're obligated to pay for it whether or not you use it. Labor, energy, and raw material costs will vary with output.

The rent for a factory.

If an oligopolist is going to change its price or output, its initial concern is Multiple Choice The response of its competitors. A change in its cost structure. The concentration ratio. The response of the Federal Trade Commission. Explanation The initial concern of firm when it decreases its price is how responsive consumers will be to the change; however, how much an oligopolist's sales increase depends on the response of rival oligopolists.

The response of its competitors.

Which of the following should not be included when calculating accounting profit? Multiple Choice The cost of utilities. The cost of taxes. The cost of rent. The return on the next best alternative investment opportunity. Explanation The cost of taxes, rent, and utilities are all explicit costs. The return on the next best alternative investment opportunity is an implicit cost and therefore is not included when calculating accounting profit.

The return on the next best alternative investment opportunity.

A shift in supply is defined as a change in Multiple Choice Quantity supplied because of a change in price. The supply curve because of a change in a determinant of supply. Equilibrium quantity. Price. Explanation Changes in supply occur because a change in a nonprice determinant will cause a shift in the supply curve.

The supply curve because of a change in a determinant of supply.

Assume that steel is used to produce monkey wrenches. Ceteris paribus, if the price of steel rises, then Multiple Choice There will be a rightward movement along the initial supply curve for monkey wrenches. The supply curve for monkey wrenches will shift to the right. The supply curve for monkey wrenches will shift to the left. There will be a leftward movement along the initial supply curve for monkey wrenches. Explanation When steel prices increase, the costs to produce monkey wrenches increase. As costs increase, profit margins decrease, making it less profitable to produce monkey wrenches at all price levels.

The supply curve for monkey wrenches will shift to the left.

Perfect competition is a situation in which Multiple Choice Every year, owners are likely to earn economic profits. Every year, owners are likely to earn economic losses. There are many firms and several buyers or sellers have market power. There are many firms and no buyer or seller has market power. Explanation A perfectly competitive firm has no market power-no ability to control the market price for the good it sells because if it boosts its price, consumers will shop elsewhere.

There are many firms and no buyer or seller has market power.

Perfect competition is a situation in which Multiple Choice There are many firms and several buyers or sellers have market power. Every year, owners are likely to earn economic profits. Every year, owners are likely to earn economic losses. There are many firms and no buyer or seller has market power. Explanation A perfectly competitive firm has no market power-no ability to control the market price for the good it sells because if it boosts its price, consumers will shop elsewhere.

There are many firms and no buyer or seller has market power.

If the actual market price were fixed at $15 per unit in Figure 3.2, Figure 3.2 Supply and Demand Multiple Choice There would be a surplus of 40 units. There would be a surplus of 20 units. There would be a shortage of 40 units. There would be a shortage of 20 units. Explanation At a price of $15, the quantity supplied is 50 while the quantity demanded is 10.

There would be a surplus of 40 units.

In Figure 21.1, diminishing marginal returns first occur with the Multiple Choice Third worker. Second worker. Fourth worker. Fifth worker. Explanation The third worker adds less to total output than the second worker, adding only 12 units of output to the second worker's 16.

Third worker.

In most markets, the equilibrium price is achieved Multiple Choice Through detailed databases. Using an equilibrium price formula. Through government mandate. Through trial and error. Explanation The equilibrium price is determined by the collective behavior of many buyers and sellers. The price is determined not by any single individual but rather by a simple process of trial and error until quantity demanded and quantity supplied are equal.

Through trial and error.

Average total cost is equal to Multiple Choice Total cost multiplied by quantity. The sum of average variable cost and marginal cost. Total cost divided by quantity produced. Total cost divided by fixed cost. Explanation Average total cost or unit cost per item is total cost divided by the quantity produced.

Total cost divided by quantity produced.

If the marginal cost curve is rising, which of the following must be true? Multiple Choice The average total cost curve must be rising. Total costs must be rising. The average total cost curve must be above the marginal cost curve. The average total cost curve must be below the marginal cost curve. Explanation Marginal cost is the increase in total cost associated with a one-unit increase in production. So as long as MC is positive, the total costs must be rising. Average total cost can be decreasing and can be either above or below the marginal cost curve when the marginal cost curve is upward-sloping.

Total costs must be rising.

If the marginal cost curve is rising, which of the following must be true? Multiple Choice Total costs must be rising. The average total cost curve must be rising. The average total cost curve must be below the marginal cost curve. The average total cost curve must be above the marginal cost curve. Explanation Marginal cost is the increase in total cost associated with a one-unit increase in production. So as long as MC is positive, the total costs must be rising. Average total cost can be decreasing and can be either above or below the marginal cost curve when the marginal cost curve is upward-sloping.

Total costs must be rising.

The shaded area in Figure 24.1 represents Multiple Choice Total profit. Total loss. Total cost. Total revenue. Explanation Total profit is equal to the difference between price and average total costs times quantity, which will be the shaded area.

Total profit.

The goal of the business firms in a market economy is to maximize Multiple Choice Total profits. Total sales. Total utility. Total welfare. Explanation Businesses are motivated by profit.

Total profits.

If the demand for cigarettes is inelastic, Multiple Choice Total revenue will fall if the price of cigarettes rises. A price reduction will actually cause the quantity demanded to fall. Total revenue will rise if the price of cigarettes rises. No matter how high the price goes, the quantity demanded will not fall.

Total revenue will rise if the price of cigarettes rises.

Economic profit is the difference between Multiple Choice Total costs and total economic costs. Accounting profit and explicit costs. Accounting profits and external costs. Total revenues and total economic costs. Explanation Economic profit refers to revenue minus the value of all costs, both explicit and implicit.

Total revenues and total economic costs.

If marginal utility is negative, then Multiple Choice Total utility will increase with additional consumption. The good or service being consumed is an inferior good. Total utility is at a minimum. Total utility will decrease with additional consumption. Explanation As long as marginal utility is positive, total utility must be increasing; but when marginal utility is negative, consumption of one more good will decrease total utility.

Total utility will decrease with additional consumption.

Refer to Figure 21.3. The vertical difference between the total cost curve and the total fixed cost curve represents Multiple Choice Average variable costs. Average fixed costs. Total marginal costs. Total variable costs. Explanation Total cost minus total fixed cost is total variable cost.

Total variable costs.

A change in price changes the quantity demanded and is represented by a movement along the demand curve. Explanation Movements along a demand curve are a response to price changes for that good. Shifts of the demand curve occur when the determinants of demand change.

True

A demand curve will be kinked if rivals match price reductions but not price increases. Explanation The demand curve will be kinked if rival oligopolists match price reductions but not price increases.

True

A distinguishing characteristic of monopolistic competition is that there are many firms in an industry. Explanation Monopolistic competition is a market in which many firms produce similar but somewhat differentiated goods or services and therefore each maintains some independent control of its own price.

True

A monopolistically competitive firm confronts a downward-sloping demand curve and as a result has some market power. Explanation Monopolistic competition is a market in which many firms produce similar but somewhat differentiated goods or services, and therefore each faces a downward-sloping demand curve and maintains some independent control of its own price.

True

A perfectly competitive firm has no market power. Explanation A perfectly competitive firm is compelled to take the market price that is determined by the interaction of supply and demand and therefore has no market power.

True

In monopolistic competition, modest changes in the output or price of any single firm will have no significant influence on the sales of other firms. Explanation In monopolistic competition, modest changes in the output or price of any single firm will have no perceptible influence on the sales of any other firm. This relative independence results from the fact that the effects of any one firm's behavior will be spread over many other firms (rather than only two or three other firms, as in an oligopoly).

True

In the long run, a company should choose the plant size that yields the lowest average total cost for the desired rate of output. True or False Explanation In the long run, the firm would choose the plant that yielded the lowest average cost for any desired rate of output.

True

In the short run, a firm will maximize profits if it increases output when marginal revenue is greater than marginal cost. True or False Explanation If an extra unit brings in more revenue than it costs to produce, it is adding to total profit. Hence a competitive firm should expand the rate of production whenever price or MR exceeds MC.

True

Marginal physical product is the change in total output associated with one additional unit of input. True or False Explanation Marginal physical product (MPP) is the change in total output that results from employing one more unit of input.

True

Market power can cause market failure if it results in a misallocation of resources. Explanation Market power contributes to market failure when it leads to resource misallocation (restricted output) or greater inequity (monopoly profits or higher prices).

True

Market power can cause market failure if it results in a misallocation of resources. True or False Explanation Market power contributes to market failure when it leads to resource misallocation (restricted output) or greater inequity (monopoly profits or higher prices).

True

Monopolistically competitive firms advertise to differentiate their product from those of competitors. Explanation An imperfectly competitive firm typically uses advertising to enhance its own product's image, thereby increasing the size of its captive market (consumers who identify with a particular brand).

True

Monopolistically competitive firms advertise to differentiate their product from those of competitors. Explanation An imperfectly competitive firm typically uses advertising to enhance its own product's image, thereby increasing the size of its captive market (consumers who identify with a particular brand).

True

Oligopolies can be characterized as a strategic game among rival companies. Explanation Game theory, originated in mathematics, was applied to the behavior of oligopoly firms because they engage in strategic decision making with a view to how their competitors will react to their decisions

True

Oligopolists consider the possible responses of rivals when making decisions. Explanation Oligopolists have to consider the potential responses of rivals when formulating price or output strategies. This strategic interaction is the inevitable consequence of their oligopolistic position.

True

One of the two reasons why we are driven to buy and sell goods and services in the market is that most of us are incapable of producing everything we want to consume. Group ends Explanation Individuals have an absolute inability to produce all the things we need and desire.

True

One symptom of the inefficiencies associated with monopolistic competition is industry wide excess capacity. Explanation The typical firm in a monopolistically competitive market produces at a rate of output that is less than its minimum-ATC output rate. This implies that the same level of industry output could be produced at lower cost with fewer firms.

True

Perfect information is a necessary condition of perfect competition. True or False Explanation The competitive market process relies on the free flow of information about products and prices.

True

Perfectly competitive markets are responsive to the demand of consumers. True or False Explanation Competition forces firms to improve products and reduce prices because those firms that do not will be forced to shut down and perhaps exit the industry.

True

Assume the price of cola is $8 per unit and the price of pretzels is $4 per unit. Table 19.3 Michael's Utility Schedule Units of ColaTU of ColaMU of ColaUnits of PretzelsTU of PretzelsMU of Pretzels14040130302 322 2039624366164112 478 5124 584 Refer to Table 19.3. Suppose Michael has $28 to spend on cola and pretzels. What combination should he purchase in order to maximize his utility? Multiple Choice Three colas and one pretzel. Three colas and four pretzels. Two colas and three pretzels. One cola and five pretzels. Explanation To maximize utility, the consumer should choose the goods that deliver the most marginal utility per dollar. The first pretzel has a MU per dollar of 7.5, the second pretzel and first cola have a MU per dollar of 5, and the third pretzel and the second coke have a MU per dollar of 4. Once Michael buys three pretzels and two colas, he will have spent his $28 and maximized his utility. Next

Two colas and three pretzels.

A firm cannot maintain above-normal profits over the long run Multiple Choice Without the existence of a cartel. Unless barriers to entry exist. Unless predatory pricing occurs. Without retaliation occurring. Explanation Above-normal profits encourage entry into the market by profit-motivated entrepreneurs. In order for the profits to be maintained, barriers to entry must exist.

Unless barriers to entry exist.

At any given rate of output, the difference between total cost and fixed cost is Multiple Choice Average variable cost. Marginal cost. Variable cost. Zero in the short run. Explanation Total costs include both fixed and variable costs; therefore, if you subtract fixed costs from total costs, you can determine the value of variable costs.

Variable cost.

Changes in short-run total costs result from changes in Multiple Choice Fixed costs. The price elasticity of demand. Variable costs. Profit. Explanation Total costs rise as output increases because additional variable costs must be incurred.

Variable costs.

Changes in short-run total costs result from changes in Multiple Choice Variable costs. Fixed costs. Profit. The price elasticity of demand. Explanation Total costs rise as output increases because additional variable costs must be incurred.

Variable costs.

Entry into a market characterized by monopolistic competition is generally Multiple Choice Very easy because few barriers exist. As difficult as in oligopoly. Entirely blocked by existing firms. More difficult than entry into monopolized markets. Explanation Monopolistically competitive markets have a large number of producers with some market power and no barriers to entry, and the firms sell differentiated products.

Very easy because few barriers exist.

Technically the elasticity number is negative because Multiple Choice When price rises quantity demanded will rise, but for simplicity economists take the absolute value of the elasticity number. The demand curve is upward-sloping. When price falls quantity demanded will fall, but for simplicity economists take the absolute value of the elasticity number. When price falls quantity demanded will rise, but for simplicity economists take the absolute value of the elasticity number.

When price falls quantity demanded will rise, but for simplicity economists take the absolute value of the elasticity number.

In a perfectly competitive industry, economic profit Multiple Choice Will approach zero in the long run as more firms enter the market. Will always be negative in the long run because of ease of entry. Can persist in the long run because of homogeneous products. Can persist in the long run because of barriers to entry. Explanation When economic profits exist in an industry, more producers try to enter. As they do, prices and economic profits decline. When losses are incurred, firms begin to exit the industry. In the long run economic profit will be zero.

Will approach zero in the long run as more firms enter the market.

In a perfectly competitive industry, economic profit: Multiple Choice Can persist in the long run because of barriers to entry. Can persist in the long run because of homogeneous products. Will approach zero in the long run as prices are driven to zero. Will approach zero in the long run as prices are driven to the level of average production costs. Explanation If economic profits exist in an industry, more firms will want to enter it. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

Will approach zero in the long run as prices are driven to the level of average production costs.

In a perfectly competitive industry, economic profit: Multiple Choice Can persist in the long run because of homogeneous products. Can persist in the long run because of barriers to entry. Will approach zero in the long run as prices are driven to zero. Will approach zero in the long run as prices are driven to the level of average production costs. Explanation If economic profits exist in an industry, more firms will want to enter it. As they do, the market supply curve will shift to the right and cause the market price to drop until profits are normal.

Will approach zero in the long run as prices are driven to the level of average production costs.

Table 19.2 Quantity ConsumedTotal UtilityMarginal Utility115152 9330 4 3 In Table 19.2, diminishing marginal utility occurs Multiple Choice Only with the second unit. With the first and third units only. With all units after the first. With the second and fourth units only.

With all units after the first.

Which of the following characterizes monopolistic competition? Multiple Choice Zero long-run profit. Marginal cost pricing. Price leadership. Retaliation. Explanation Given the ease of entry and exit, as long as firms are making a profit (loss), firms will enter (exit) the market, and the disappearance of economic profits (losses) is inevitable.

Zero long-run profit.

The ___________ surplus will rise if the price of the good ________. Multiple Choice producer; falls total; rises consumer; falls consumer; rises

consumer; falls

The law of diminishing marginal utility does not apply to goods that a person really enjoys. True or False

false

In Figure 23.3, diagram "a" presents the cost curves that are relevant to a firm's production decision, and diagram "b" shows the market demand and supply curves for the market. Use both diagrams to answer the following question: In Figure 23.3, the price at which a firm makes zero economic profits is Multiple Choice p1. p4. p2. p3. Explanation Firms will make zero economic profits when the profit per unit is zero (P = ATC), which occurs at p3.

p3.

Demand and Cost Data for Sylvie's Shampoo Company Table 26.2 A Monopolistically Competitive Firm PriceDemand Data QuantityCost Data OutputTotal Cost$2266$96$2077$104$1888$114$1699$126$141010$140 Refer to Table 26.2. At the profit-maximizing output and price, Sylvie's Shampoo Company. will earn a ________ economic profit, and ________ the market will occur. Multiple Choice negative; exit from positive; entry into negative; entry into positive; exit from Explanation Positive economic profit ($36) entices firms to enter the market for the opportunity to earn greater-than-normal profits.

positive; entry into

If the price of "X" increases and you buy more "Y," then Multiple Choice "X" and "Y" are substitutes, and the price of "Y" will decrease. "X" and "Y" are substitutes, and the price of "Y" will increase. "X" and "Y" are complements, and the price of "Y" will increase. "X" and "Y" are complements, and the price of "Y" will decrease.

"X" and "Y" are substitutes, and the price of "Y" will increase.

Refer to Table 3.1 to answer the following question Table 3.1 Individual Demand and Supply Schedules Quantity Demanded byPriceAlejandroBenCarlMarket$8.00842_____6.001244_____4.002046_____2.002246_____ Quantity Supplied byPriceAveryBrandonCassandra $8.006046_____$6.004244_____$4.002442_____$2.00640_____ In Table 3.1, the equilibrium market price is Multiple Choice $2. $6. $8. $4.

$4.

Total utility is maximized when:

C) Marginal utility is zero

Table 19.2 Quantity ConsumedTotal UtilityMarginal Utility115152 9330 4 3 In Table 19.2, the total utility when two units are consumed is Multiple Choice 15. 24. 6. 9.

24

Refer to Table 3.1 to answer the following question Table 3.1 Individual Demand and Supply Schedules Quantity Demanded byPriceAlejandroBenCarlMarket$8.00842_____6.001244_____4.002046_____2.002246_____ Quantity Supplied byPriceAveryBrandonCassandra $8.006046_____$6.004244_____$4.002442_____$2.00640_____ In Table 3.1, the equilibrium market quantity is Multiple Choice 70. 14. 22. 30.

30

osh is eating pizza at his favorite Italian restaurant. Below is his utility from this consumption: Table 19.1 Slice of PizzaTotal UtilityMarginal UtilityFirst slice2020Second slice3919Third slice-15Fourth slice59- Refer to Table 19.1. The marginal utility Josh enjoys from the fourth slice of pizza is Multiple Choice 54 utils. 20 utils. 5 utils. 0 utils.

5 utils.

Use the indifference curves and the budget lines in Figure 19.3 to answer the indicated question. Assume the price of Y is $1 per unit. In Figure 19.3, given an income of $30 and a price for good Y of $1, which of the following two points represent optimal consumption? Multiple Choice A when the price of X is $3 and C when the price of X is $1. A when the price of X is $1 and D when the price of X is $3. B when the price of X is $1 and C when the price of X is $3. B when the price of X is $1 and D when the price of X is $3.

A when the price of X is $3 and C when the price of X is $1.

Ceteris paribus, which of the following would generally cause an increase in the demand curve for new automobiles? Multiple Choice Consumer expectations that the price of new automobiles will be lower next year. The new models being perceived as ugly compared with old models. An increase in consumers' income. A decrease in the price of new automobiles.

An increase in consumers' income.

Ceteris paribus, which of the following is most likely to cause a decrease in the supply of skateboards? Multiple Choice An increase in the price of skateboards. An increase in the cost of materials used to produce skateboards. An improvement in skateboard-making technology. All of the choices are correct.

An increase in the cost of materials used to produce skateboards.

Assume that pencils and pens are substitutes. If the price of pencils rises ceteris paribus, then we will see Multiple Choice An increase in the supply of pens. A decrease in the supply of pens. An increase in the demand for pens. A decrease in the demand for pens.

An increase in the demand for pens.

Ceteris paribus, which of the following would you expect to have no effect on the demand curve for new automobiles? Consumer expectations that a significant recession will develop and last for a year. An increase in the price of new automobiles. A rise in the price of gasoline. Consumer expectations that the price of new automobiles will be lower next year.

An increase in the price of new automobiles

Price elasticity of demand shows how:

B) Quantitiy demanded responds to price changes.

An increase in the price of gasoline above equilibrium will Multiple Choice Cause a surplus of gasoline. Cause a shortage of gasoline. Shift the gasoline supply curve to the right. Shift the gasoline demand curve to the right.

Cause a surplus of gasoline.

Assume two goods are substitutes. Ceteris paribus, a decrease in the price of one good will cause the equilibrium price of the other good to Multiple Choice Increase and the equilibrium quantity of the other good to decrease. Decrease and the equilibrium quantity of the other good to decrease. Decrease and the equilibrium quantity of the other good to increase. Increase and the equilibrium quantity of the other good to increase.

Decrease and the equilibrium quantity of the other good to decrease.

Assume a series of forest fires reduces the supply of lumber, which is an input in the production of wooden bats. Baseballs and wooden bats are complements. If the price of wooden bats increases, we can expect the Multiple Choice Supply of baseballs to decrease. Supply of baseballs to increase. Demand for baseballs to decrease. Demand for baseballs to increase.

Demand for baseballs to decrease.

As a result of specialization and trade, individuals no longer have to make choices about how to spend their incomes. True or False

False

To reduce our dependence on foreign oil, policy makers must realize that the cross-price elasticity sign for gasoline and fossil fuel-burning cars is negative. T/F

False

If Josh's income increases, then Multiple Choice His entire budget constraint will shift toward the origin. His indifference curves will shift away from the origin. His entire budget constraint will shift away from the origin. One end of his budget constraint will move away from the origin.

His entire budget constraint will shift away from the origin.

A change in demand means there has been a shift in the demand curve, and a change in quantity demanded Multiple Choice Also means demand has shifted. Results from a change in price of other goods. Means a shortage or surplus will result from holding prices constant. Means that price has changed and there is movement along the demand curve.

Means that price has changed and there is movement along the demand curve.

Which of the following is not a determinant of demand? Multiple Choice The cost of the factor inputs. Desire for the good. Income of the consumer. The price of other goods.

The cost of the factor inputs.

When the market mechanism is allowed to operate freely, prices will determine Multiple Choice Only the mix of output to be produced and the resources to be used in the production process. Only for whom the output is produced and the mix of output to be produced. Only the resources to be used in the production process and for whom the output is produced. The mix of output to be produced, the resources to be used in the production process, and for whom the output is produced.

The mix of output to be produced, the resources to be used in the production process, and for whom the output is produced.

Market demand is determined by all of the following except Multiple Choice Income. The number of potential sellers. Tastes. Expectations about future income.

The number of potential sellers.

The In the news article titled "Gas Prices Jump in Matthew's Wake" suggests gasoline prices increased a s a result of damage caused by Hurricane Matthew. When the availability of gasoline decreases as a result of this damage the supply curve shifts to the left, causing Multiple Choice The price of gasoline to move up along the market demand curve. A surplus to exist at the original equilibrium price. The price of gasoline to move up along the market supply curve Consumers pay lower prices as they decide to drive less.

The price of gasoline to move up along the market demand curve.

Assume that steel is used to produce monkey wrenches. Ceteris paribus, if the price of steel rises, then Multiple Choice There will be a leftward movement along the initial supply curve for monkey wrenches. The supply curve for monkey wrenches will shift to the right. There will be a rightward movement along the initial supply curve for monkey wrenches. The supply curve for monkey wrenches will shift to the left.

The supply curve for monkey wrenches will shift to the left.

In most markets, the equilibrium price is achieved Multiple Choice Through government mandate. Using an equilibrium price formula. Through trial and error. Through detailed databases.

Through trial and error.

The goal of the business firms in a market economy is to maximize Multiple Choice Total utility. Total profits. Total welfare. Total sales.

Total profits

If marginal utility is negative, then Multiple Choice Total utility will increase with additional consumption. The good or service being consumed is an inferior good. Total utility is at a minimum. Total utility will decrease with additional consumption.

Total utility will decrease with additional consumption.

A change in price changes the quantity demanded and is represented by a movement along the demand curve. True or False

True

Economists focus on the effect of changes in income and prices in influencing actual consumer purchases. True or False

True

One of the two reasons why we are driven to buy and sell goods and services in the market is that most of us are incapable of producing everything we want to consume. True or False

True