ECON Exam

If Susan bought nine gallons of gasoline at $1.50 per gallon, the car wash cost $1, but if she bought 10 gallons of gasoline, the car wash was free. Given that Susan is going to get the car wash, the marginal cost of the tenth gallon of gasoline is a. zero. b. $.50. c. $1.00. d. $1.50.

$.50.

Oliver buys a new wallet for $50. If his willingness to pay is ____, he receives consumer surplus of $15 on his purchase

$65.

A ticket to a concert costs $45. You have a ticket and can resell it for $75. Your opportunity cost of actually attending the concert is a) $30. b) $45. c) $75. d) $120.

$75

Pitfalls to Avoid in Economic Thinking

(1) violation of ceteris paribus (2) Good intentions do not necessarily result in good outcomes. (3) Association is NOT causation (4) Fallacy of Composition

Factors that shift the Production possibilities curve (PPC) outward

- An increase in resources (labor and/or capital) - Advancements in technology - Improvements in institutions (ex: legal system improvements)

Real earnings of all employees in a competitive market would be equal if

1) All individuals were identical in preferences, skills, and background 2) All jobs were equally attractive 3) Workers were perfectly mobile among jobs

What are the 4 major factors that can undermine the invisible hand and reduce the efficiency of markets?

1) Lack of competition 2) Externalities 3) Public goods 4) Poorly informed buyers or sellers

8 Guidelines of economic thought process

1) There are always tradeoffs 2) Individuals choose purposefully 3) Incentives matter 4) Think on the margin 5) More information leads to better decision-making, but more information is costly to get 6) Many choices create secondary effect 7) Value is subjective 8) Economic thinking is scientific thinking

The distinguishing characteristics of an oligopolistic market are

1) a small number of rival firms 2) interdependence among the sellers because each is large relative to the size of the market 3) substantial economies of scale 4) high entry barriers to the market.

Which of the following best explains why a firm in a competitive price-taker market must take the price determined in the market? a) The short-run average total costs of firms that are price takers will be constant b) If a price taker increased its price, consumers would buy from other suppliers. c) Firms in a price-taker market will have to advertise in order to increase sales. d) There are no good substitutes for the product supplied by a firm that is a price taker.

If a price taker increased its price, consumers would buy from other suppliers.

How does a profit-maximizing firm decide to hire an additional unit of a resource?

If it generates more revenue for the firm than the cost of employing it. If the marginal revenue product of employing an additional unit of a resource is less than the cost, the firm will not employ it.

Factors that cause a change in demand (shift of the curve)

1. changes in consumer income 2. changes in the number of consumers in a market 3. changes in the price or availability of a related good. 4. changes in expectations 5. demographic changes 6. changes in consumer tastes and preferences

Factors that will cause a change in supply (shift the supply curve)

1. changes in resource prices 2. changes in technology 3. Elements of nature and political disruptions (ex: natural disasters, war and political unrest in middle east) 4. Changes in taxes

If an increase in the price of good A causes the demand for good B to decrease, this indicates that

A and B are complements.

A substantial revision of the income tax code that made business and personal tax returns much easier to complete would tend to cause which of the following changes in the labor market for accountants? a) An increase in the demand for accountants. b) An increase in the employment of accountants. c) A decrease in the wage rate of accountants. d) An increase in the number of students choosing to major in accounting.

A decrease in the wage rate of accountants.

Price floor

A legal minimum on the price at which a good can be sold

Free market

A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.

The economic way of thinking is

A set of basic concepts that helps one understand human choices.

Economic Theory

A set of definitions, postulates, and principles assembled in a manner that makes clear the "cause-and-effect" relationships.

AFC =

ATC - AVC

Modern economics as a field of study is usually thought to have begun with

Adam Smith and the writing of The Wealth of Nations.

Which of the following could be an institutional barrier to employment? a) Licensing requirements. b) Labor unions. c) Minimum wages. d) All of the above.

All of the above

Which of the following is true? a. Scarcity and poverty are basically the same thing. b. Poverty implies that some basic level of need has not been attained. c. Scarcity is the result of prices being set too high. d. All of the above are true.

B Poverty implies that some basic level of need has not been attained

Velcro is becoming more and more popular for a variety of uses, including as fasteners for shoes. What should happen to the equilibrium price and quantity for shoelaces as a result? a) Both price and quantity will increase. b) Both price and quantity will decrease. c) Price will increase and quantity decrease. d) Price will decrease and quantity increase. e) Nothing.

Both price and quantity will decrease.

Which of the following is a normative economic statement? a) If we doubled the size of welfare payments, we would reduce the number of homeless persons. b) Companies should be concerned with more than just their profits. c) An increase in spending on airport security will reduce the number of hijackings. d) If social security were to be privatized, workers would earn a higher rate of return on their retirement contributions.

Companies should be concerned with more than just their profits.

Which of the following best explains why productive workers can command high wages? a) The bargaining power of labor unions. b) The presence of minimum wage legislation. c) Wage and price controls that reflect the political power of labor organizations. d) Competition among employers for productive workers.

Competition among employers for productive workers.

What is necessary for the invisible hand of market prices to work properly?

Competition and property rights that are well-defined and enforced.

Scarcity

Concept of economics that indicates that there is less of a good freely available than people would like.

Assume that supply increases greatly and demand increases slightly. Which of the following will happen? a) Equilibrium price will fall and equilibrium quantity will rise. b) Equilibrium price will rise and equilibrium quantity will fall. c) Equilibrium price will rise and equilibrium quantity will rise. d) Equilibrium price will fall and equilibrium quantity will fall. e) Neither equilibrium price nor equilibrium quantity will change.

Equilibrium price will fall and equilibrium quantity will rise.

A freeze in Florida devastates the orange crop at the same time a new study is released showing the health benefits of vitamin C (leading consumers to want to buy more orange juice). How will the equilibrium price and quantity of orange juice change in response to the combination of these two events? a. Equilibrium quantity will decrease, equilibrium price will increase. b. Equilibrium price will decrease, the effect on quantity is ambiguous. c. Equilibrium price will increase, the effect on quantity is ambiguous. d. Equilibrium quantity will increase, the effect on price is ambiguous.

Equilibrium price will increase, the effect on quantity is ambiguous.

Assume that supply decreases greatly and demand decreases slightly. Which of the following will happen?

Equilibrium price will rise and equilibrium quantity will fall.

Capital

Human-made resources (such as tools, equipment, and structures) used to produce other goods and services. They enhance our ability to produce in the future

Which of the following is a positive economic statement? a) Too much government spending is the biggest problem facing the U.S. economy. b) Creating jobs is the most serious problem facing the U.S. economy. c) Raising taxes provides additional revenue that should be used to finance health care. d) If taxes are over 50 percent of national income, job creation falls.

If taxes are over 50 percent of national income, job creation falls.

Which of the following statements accurately describes a difference between a firm that is a monopolist and one that is in a competitive price-searcher market? a. A competitive price searcher produces at the output level where marginal cost equals marginal revenue; a monopolist does not. b. A monopolist faces a downward-sloping demand curve; a competitive price searcher does not. c. A monopolist charges a price higher than marginal cost; a competitive price searcher does not. d. In the long run, a competitive price searcher will earn zero economic profit because of low entry barriers, while a monopolist may earn positive economic profits in the long run.

In the long run, a competitive price searcher will earn zero economic profit because of low entry barriers, while a monopolist may earn positive economic profits in the long run.

Diseconomies of scale

Increases in the firm's per-unit costs associated with increases in firm size due to inefficiencies and monitoring problems.

If price falls, what happens to the quantity demanded for a product?

It increases.

If price rises, what happens to quantity supplied of a product?

It increases.

Normative economics

Judgments about "what ought to be" in economic matters. Normative economic views cannot be proved false because they are based on opinion

Capital is a term economists use to refer to

Man-made resources used to produce other goods and services.

A resources marginal revenue product is equal to what?

Marginal product (MP) x Marginal Revenue (MR)

Total output/ units of labor =

Marginal revenue product

Which of the following is the primary source of rapid growth in the real earnings of workers? a) Strong unions. b) Government regulation of labor markets. c) Rapid growth in worker productivity. d) Increases in the minimum wage.

Rapid growth in worker productivity.

Economies of scale

Reductions in the firm's per-unit costs associated with the use of large plants to produce a large volume of output.

Which of the following would be the most likely result from a new government program that provided significant financial aid for children of low- and middle-income families to attend college? a. Starting salaries for new college graduates would rise because of an increase in the number of high-quality graduates. b. Starting salaries for college graduates would be unaffected. c. The productivity of the labor force would be permanently lower because more young people would choose to be students instead of workers. d. Starting salaries of new college graduates would fall as the supply of graduates increased.

Starting salaries of new college graduates would fall as the supply of graduates increased.

If the demand for a good increases, which of the following will generally occur in a market setting? a. The price of the good will decrease. b. The supply of the good will increase. c. The quantity supplied will increase. d. Producer profits will fall.

The quantity supplied will increase.

What did Adam Smith believe about competitive markets?

They would lead to coordination, order, and efficiency without the direction of central authority (gov't intervention)

Long run curves have just

Total cost

a decrease in supply will cause a) increase in demand b) a decrease in demand c) an increase in quantity demanded d) a decrease in quantity demanded e) a decrease in equilibrium price

a decrease in quantity demanded

Which of the following would cause a firm's cost curve to shift downward? a) a decrease in resource prices b) an increase in taxes c) an increase in demand for the firm's product d) a reduction in output

a decrease in resource prices

If a major hurricane were to destroy the rice crop in Louisiana, there would be

a decrease in the supply of rice.

Inferior good

a good that consumers demand less of when their incomes increase (ex: taking a bus)

Assuming that bus travel is an inferior good, an increase in consumer income, other things being equal, will cause a) an upward movement along the demand curve for bus travel. b) a downward movement along the demand curve for bus travel. c) a rightward shift in the demand curve for bus travel. d) a leftward shift in the demand curve for bus travel.

a leftward shift in the demand curve for bus travel.

An increase in the price of metal raises the cost of manufacturing refrigerators. As a result, the market changes to a new equilibrium because of

a leftward shift in the supply curve for refrigerators.

If an advancement in computer technology reduces the need for businesses to hire accountants, students majoring in accounting should expect

a lower rate of return on their human capital investment.

Factor Market

a market for the factors of production

A legal minimum wage is an example of a. the invisible hand principle. b. a price floor. c. a price ceiling. d. a fringe benefit.

a price floor.

Both price floors and price ceilings, when effective, lead to

a reduction in the quantity traded.

In a price-taker market, profits are

a reward for creating value.

In a price-taker market, profits are a) the result of consumers being charged arbitrarily high prices. b) a reward for creating value. c) the result of barriers to entry into the market. d) a signal that fewer resources are needed in a market.

a reward for creating value.

A technological breakthrough lowers the cost of manufacturing DVD players. As a result, the market changes to a new equilibrium because of

a rightward shift in the supply curve for DVD players.

A monopoly is best defined as a. a single seller of a product that has characteristics very similar to the products produced in other industries. b. a single seller of a well-defined product for which there are no good substitutes operating in a market with high barriers to entry. c. a market in which a small number of rival sellers produce the entire market output. d. any firm operating in a contestable market.

a single seller of a well-defined product for which there are no good substitutes operating in a market with high barriers to entry.

Because private owners are held responsible for damages their property causes to the property of others, private owners have

a strong incentive to take steps to reduce the chance that they will harm the property of others.

If an increase in the government-imposed minimum wage pushes the price (wage) of unskilled labor above market equilibrium, which of the following will most likely occur in the unskilled labor market? a) An increase in quantity of unskilled labor demanded. b) A decrease in the quantity of unskilled labor supplied. c) A shortage of unskilled labor. d) A surplus of unskilled labor (unemployment).

a surplus of unskilled labor (unemployment).

Short run

a time period so short that a firm is unable to vary some of its factors of production (ex: a firms plant size)

Compared to the outcome when the firms are price takers, competitive price-searcher markets will result in a) a wider variety of products and higher prices. b) less product variety and higher prices. c) a wider variety of products and lower prices. d) less product variety and lower prices.

a wider variety of products and higher prices.

Which of the following is a normative economic statement? a)Congress should increase the legal minimum wage. b) An increase in the legal minimum wage would cause unemployment to increase. c) An increase in the legal minimum wage would cause unemployment to decrease. d) An increase in the legal minimum wage would lead to more equality in the distribution of income.

a) Congress should increase the legal minimum wage.

Which of the following is most likely to be true of economic and accounting profits? a) Economic profits are less than accounting profits. b) Accounting profits are less than economic profits. c) Economic profits plus accounting profits equal zero. d) Accounting profits minus economic profits equal zero.

a) Economic profits are less than accounting profits.

According to Adam Smith, which of the following is true of individual self-interest? a) It is a powerful force for economic progress when it is directed by competitive markets. b) It is a powerful force for economic progress when individuals are wisely directed by a strong central government. c) It is a major factor in retarding the economic progress of humankind. d) It could be either a positive or negative force for economic progress, depending on the moral influences of political leaders.

a) It is a powerful force for economic progress when it is directed by competitive markets.

A fruit packing plant usually shuts down for three months each year. During that period, what happens to its costs? a) Its fixed costs are greater than zero. b) Its variable costs are greater than zero. c) Its total costs are zero. d) Its fixed costs are zero.

a) Its fixed costs are greater than zero.

Which of the following about costs is true? a) The difference between the ATC and AVC curves will decline as output expands. b) The AFC will remain constant as output increases. c) If ATC is increasing, then AVC must be greater than ATC. d) Implicit costs and fixed costs are always the same.

a) The difference between the ATC and AVC curves will decline as output expands.

If a Subway restaurant near campus reduces its sandwich prices by 15 percent, and as a result, its total revenue from sandwich sales increases, this indicates that the price elasticity of demand was a) elastic. b) of unitary elasticity. c) inelastic. d) equal to 0.15.

a) elastic.

Rebel Records announces it is cutting the prices of its bluegrass album titles by 25 percent. If Rebel is seeking to increase revenues, it must believe that the elasticity of demand for bluegrass albums is a) elastic. b) inelastic. c) of unitary elasticity. d) perfectly inelastic.

a) elastic.

Suppose IBM announces it is cutting the prices of some of its software titles (mainly games) by 25 percent. Assuming that IBM is seeking to increase revenues, it must believe that the elasticity of demand for these products is a) elastic. b) inelastic. c) of unitary elasticity. d) perfectly inelastic.

a) elastic.

Positive economics a) postulates relationships among economic variables that are potentially refutable by real-world events. b) is strictly quantitative and is, therefore, of little value to policy makers. c) will usually indicate which economic policy is best. d) is the same as normative economics.

a) postulates relationships among economic variables that are potentially refutable by real-world events.

When economists say the price elasticity of supply is elastic, they mean that a) suppliers are willing to produce much larger amounts of their good. b) suppliers are willing to produce only a small amount more of their good. c) consumers are willing to purchase much larger quantities of the good. d) the change in quantity supplied is relatively small compared to the change in price.

a) suppliers are willing to produce much larger amounts of their good.

Competitive behavior a. occurs as a reaction to scarcity. b. occurs only in a market system. c. occurs only when the government allocates goods and services. d. always generates waste.

a. occurs as a reaction to scarcity.

If a surplus exists in a market, the actual price is a) above equilibrium price and quantity supplied is greater than quantity demanded. b) above equilibrium price and quantity demanded is greater than quantity supplied. c) below equilibrium price and quantity demanded is greater than quantity supplied. d) below equilibrium price and quantity supplied is greater than quantity demanded.

above equilibrium price and quantity supplied is greater than quantity demanded.

Which of the following is not scarce? a. an individual's time b. air c. pencils d. automobiles

air

When economists use the term ceteris paribus, they indicate

all other factors are assumed to be constant.

Jonathan notes that if he produces 10 pairs of shoes per day, his average fixed cost (AFC) is $14 and his marginal cost (MC) is $8; if he produces 20 pairs of shoes per day, his MC is $15. What is his AFC when output is 20 pairs of shoes per day? a) $5 b) $7 c) $8 d) $15

b) $7

Which of the following describes a situation in which demand must be inelastic? a) Total revenue decreases by 10 percent when the price of jackets rises by 10 percent. b) Total revenue decreases by less than 10 percent when the price of jackets rises by 10 percent. c) Total revenue increases by more than 10 percent when the price of jackets rises by 10 percent. d) Total revenue decreases by $10 when the price of jackets rises by $10.

Total revenue increases by more than 10 percent when the price of jackets rises by 10 percent.

Compensation where the top performer receives much higher rewards than other competitors, even if the others perform at only slightly lower levels, is called a) a compensating differential. b) round-robin pay. c) tournament pay. d) base pay.

Tournament pay

Which of the following is true with regard to value and exchange? a) Exchange generally moves a good from a person who values it more to a person who values it less. b) Transaction costs reduce our ability to gain from potentially advantageous trades. c) Middlemen increase transaction costs and, thereby, reduce the potential gains derived from trade. d) Physical goods have an objective value that is unrelated to time and the person of ownership.

Transaction costs reduce our ability to gain from potentially advantageous trades.

True or false: Voluntary exchange is generally mutually beneficial to the trading partners

True

What is a private owner prohibited from doing?

Using the property in a manner that invades or infringes on the property of another.

Which of the following is a true statement regarding the economic impact of a subsidy? a. The distribution of the benefits from a subsidy will depend on whether the subsidy is legally granted to the buyer or seller. b. When demand is relatively inelastic, the benefits of a subsidy will mainly accrue to sellers. c. When supply is relatively elastic, the benefits of a subsidy will mainly accrue to buyers. d. When demand is relatively elastic, the benefits of a subsidy will mainly accrue to buyers.

When supply is relatively elastic, the benefits of a subsidy will mainly accrue to buyers.

Which of the following is part of the economic way of thinking? a) Opportunity costs will always be incurred when scarce resources are used to produce a good. b) When the cost of an option increases, individuals will be less likely to choose it. c) In addition to their immediate direct effects, economic actions often generate secondary effects that are observable only after the passage of time. d) All of the above are part of the economic way of thinking.

d) All of the above are part of the economic way of thinking.

Which one of the following statements about pitfalls in economic decision making is correct? a) Policymakers have good intentions and therefore their proposals will create good outcomes. b) Potential secondary effects do not need to be considered when deciding whether to implement a new government program. c) A good outcome is guaranteed from a government program if it is created with good intentions. d) Government programs can be implemented with good intentions but can lead to undesirable outcomes because of unintended consequences.

d) Government programs can be implemented with good intentions but can lead to undesirable outcomes because of unintended consequences.

Ethan washes and irons his own shirts. Sophia, his boss, sends her clothes to a laundry. Which is the most plausible economic explanation for this difference a) Ethan must enjoy ironing more than Sophia does. b) Ethan must be better at ironing than Sophia is. c) The opportunity cost of ironing is greater for Ethan. d) Sophia has a higher opportunity cost of laundering her clothes than Ethan does.

d) Sophia has a higher opportunity cost of laundering her clothes than Ethan does.

For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a) The relevant time horizon is short. b) The good is a necessity. c) The market for the good is broadly defined. d) There are many close substitutes for this good.

d) There are many close substitutes for this good.

Assume that supply decreases greatly and demand decreases slightly. Which of the following will happen? a) Equilibrium price will fall and equilibrium quantity will rise. b) Equilibrium price will rise and equilibrium quantity will fall. c) Equilibrium price will rise and equilibrium quantity will rise. d) Equilibrium price will fall and equilibrium quantity will fall. e) Neither equilibrium price nor equilibrium quantity will change.

b) Equilibrium price will rise and equilibrium quantity will fall.

Which of the following most clearly distinguishes between positive and normative economics? a) Positive economics is the study of what ought to be; normative economics is concerned with the facts. b) Positive economics is the study of the facts; normative economics is concerned with what ought to be. c) Positive economics is the study of supply and demand in narrowly defined markets such as the market for shoes; normative economics focuses on highly aggregated markets such as the market for all consumer products. d) Positive economics is the study of goods that are scarce; normative economics is concerned with goods that are not scarce.

b) Positive economics is the study of the facts; normative economics is concerned with what ought to be.

In the short run, the firm's average fixed costs a) always increase as output increases. b) always decline as output increases. c) equal zero. d) remain constant as output expands.

b) always decline as output increases.

The short-run average total cost (ATC) curve of a firm will tend to be U-shaped because a) larger firms always have lower per-unit costs than smaller firms. b) at small output rates, average fixed costs (AFC) will be high, while at large output rates, marginal cost (MC) will be high. c) diminishing returns will be present when output is small, while high AFC will push average total cost to high levels when output is large. d) diseconomies of scale will be present at both small and large output rates.

b) at small output rates, average fixed costs (AFC) will be high, while at large output rates, marginal cost (MC) will be high.

Whenever average total cost exceeds marginal cost, a) average total cost is rising. b) average total cost is falling. c) marginal cost is rising. d) marginal cost is falling.

b) average total cost is falling.

If a college enforces a new policy where anyone caught cheating is immediately expelled, the basic postulate of economics suggests that a) cheating will be completely eliminated. b) fewer students will attempt to cheat. c) the amount of cheating will be unaffected. d) any of the above is possible because student behavior is unpredictable.

b) fewer students will attempt to cheat.

Suppose the number of coffee mugs purchased increased by 5 percent when consumer income increased by 10 percent. Assuming other factors are held constant, coffee mugs would be classified as a) inferior goods. b) normal goods. c) elastic goods. d) inelastic goods.

b) normal goods.

Firms will only adopt more automated methods of production when a) they reduce the need for workers. b) they lower production costs. c) they lengthen the production process. d) other firms in the industry are doing it.

b) they lower production costs.

Someone notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. This person has

confused association and causation.

Suppose there is an increase in the excise tax imposed on cigarettes, a good for which the demand is relatively inelastic. The short-run burden of the tax increase will be borne primarily by a. consumers, because the increase in market price will be large relative to the increase in the excise tax. b. consumers, because the increase in market price will be small relative to the increase in the excise tax.

consumers, because the increase in market price will be large relative to the increase in the excise tax.

Variable costs (VC)

costs that change as output changes (ex: producing more = higher variable cost) (ex: producing less = lower variable cost)

Fixed Costs (FC)

costs that remain constant as output changes

According to Laffer which of the following is true? a) An increase in tax rates will always cause tax revenues to increase b) When marginal tax rates are high, an increase in tax rates is likely to cause tax revenues to increase c) When marginal taxes are low an increase in tax rates will probably cause tax revenues to decline d) When marginal tax rates are high, a reduction in tax rates may increase tax revenue.

d) When marginal tax rates are high, a reduction in tax rates may increase tax revenue.

An example of a non-pecuniary job characteristic is a) over-time pay. b) salary. c) an end-of-the-year bonus. d) a comfortable work environment.

d) a comfortable work environment.

When deciding whether to buy a second car, the economic way of thinking indicates that the purchaser should compare a) the benefits expected from two cars with the cost of both. b) the additional benefits expected from a second car with the cost of the two cars. c) the dollar cost of the two cars with the potential income that the cars will generate. d) the additional benefits of the second car with the additional cost of the second car.

d) the additional benefits of the second car with the additional cost of the second car.

Average fixed costs a) will remain unchanged as output expands. b) are defined as the change in total costs divided by the change in output. c) will always increase as output increases. d) will always decrease as output expands.

d) will always decrease as output expands.

An increase in the demand for new houses leads to an increase in the demand for construction workers. What does this concept illustrate?

derived demand

The demand for resources is what type of demand?

derived demand

When an economist states a good is scarce, she means that

desire for the good exceeds the amount that is freely available from nature.

Which way are demand curves sloping

downward sloping

Real earnings

earnings adjusted for differences in the general level of prices across time periods or geographic areas. When real earnings are equal, the same bundle of goods and services can be purchased with the earnings.

Some economists argue that competitive price-searcher markets are inefficient because

firms do not produce the output rate that would minimize their average total costs.

Price controls

government-imposed limits on the prices that producers may charge in the market. Price controls force buyers and sellers to alter prices on certain products.

A price-discriminating firm charges the lowest price to the group that

has the most elastic demand

A price-discriminating firm charges the lowest price to the group that a) has the most elastic demand. b) purchases the largest quantity. c) engages in the most arbitrage. d) is least responsive to price changes.

has the most elastic demand.

In order for effective price discrimination to occur, a seller must a) be a pure monopolist. b) have large economies of scale and control over a key natural resource. c) face a horizontal demand curve for its product. d) have at least two distinguishable groups of consumers.

have at least two distinguishable groups of consumers.

Monopolists may be able to earn profit, even in the long run, as the result of a) consumer ignorance. b) an inelastic demand for its product. c) product differentiation. d) high barriers to entry.

high barriers to entry

Which of the following would increase the likelihood that firms in an industry could successfully collude? a. a large number of firms in the industry b. unstable demand conditions in the industry c. high barriers to entry in the industry d. product characteristics that make it difficult for firms to detect other firms that cheat on the agreement

high barriers to entry in the industry

The marginal productivity principle says that a profit-maximizing firm should

hire labor until another worker costs more to hire than he can earn for the firm.

Assume that skilled labor costs twice as much as unskilled labor, a profit-maximizing firm will

hire until the marginal product of unskilled labor is one-half that of skilled labor.

The major determinant of your income is a) whether or not your family is wealthy. b) your personality-if the coworkers and the boss like you. c) how productive you are combined with demand for what you produce. d) if you earn a salary or if you are paid by the hour.

how productive you are combined with demand for what you produce.

If production of a good creates external benefits, a competitive market will likely produce a) less output than would maximize profit. b) more output than would maximize profit. c) less output than is efficient. d) more output than is efficient.

less output than is efficient.

In the short run, a perfectly competitive firm will always shut down if total revenue is ____ at all positive output levels. a) less than total cost b) less than total cost but greater than variable cost c) less than total cost but greater than fixed cost d) greater than fixed cost e) less than variable cost

less than variable cost

If a firm in a competitive price-searcher market raises its price, it will a) lose all of its sales. b) increase its sales. c) lose only some of its sales. d) have to go out of business.

lose only some of its sales.

Which of the following would most likely decrease the price of beef? a. lower prices of grains used to produce cattle feed b. higher prices for chicken, a substitute for beef c. a cow disease that destroys millions of cattle (and makes their meat unfit for consumption) before they are ready for market d. an increase in consumer income

lower prices of grains used to produce cattle feed

The basic difference between macroeconomics and microeconomics is that

macroeconomics focuses on the aggregate economy, and microeconomics focuses on small components of that economy.

When economists say an individual has made a rational choice, they mean the individual has

made the choice by weighing their own subjective costs and benefits.

The firm's average total costs will be a minimum at the output level where the a. firm just begins to confront diminishing returns to the variable factors. b. marginal costs are a minimum. c. firm's average fixed costs are at their minimum. d. marginal cost curve crosses the firm's average total cost curve.

marginal cost curve crosses the firm's average total cost curve.

A profit-maximizing monopolist will continue expanding output as long as a) marginal revenue exceeds marginal cost. b) marginal revenue is positive. c) the cost of producing an additional unit exceeds the marginal revenue derived from the unit. d) economic profit is more than zero.

marginal revenue exceeds marginal cost.

What happens when quantity supplied equals the quantity demanded?

market is in equilibrium

Price ceiling

maximum legal price that can be charged for a product

As price increases, producers will supply

more

When the time the consumer has to adjust to price changes is short, the demand will be what?

more inelastic

If mutual interdependence among firms is present, each profit-maximizing firm in the market a) produces a product that must be identical to the products of its rivals. b) must consider the reactions of its rivals when it determines its price policy. c) faces a perfectly elastic demand curve for its product. d) faces a perfectly inelastic demand curve for its product.

must consider the reactions of its rivals when it determines its price policy.

If bus travel is an inferior good, then its income elasticity of demand will be

negative

Working conditions, prestige, variety, location, employee freedom, and employee responsibilities are all examples of a) the tools of employment discrimination. b) sociological factors affecting employment. c) pecuniary job characteristics. d) non-pecuniary job characteristics.

non-pecuniary job characteristics.

When a shortage of a good is present due to a price ceiling, a) the amount supplied will be greater than the amount demanded. b) the quality of the good will generally improve. c) non-price factors, such as discrimination or waiting in line, will play a greater role in the allocation of the good. d) the demand for the product will increase and, thereby, eliminate the shortage.

non-price factors, such as discrimination or waiting in line, will play a greater role in the allocation of the good.

A market situation in which only a small number of mutually interdependent, rival sellers exists is known as a(n) a. oligopoly market. b. monopoly market. c. open price-taker market. d. competitive price-searcher market.

oligopoly market.

When significant economies of scale are present in the production process, an industry will tend naturally toward monopoly because a. one firm will be able to produce the entire market output at a lower cost than several smaller firms. b. marginal revenue will be less than market price, giving firms the incentive to equate marginal cost with price instead of equating marginal cost and marginal revenue. c. economies of scale can only be present when firms produce identical products and there is no reason to have more than one firm producing the same exact product. d. consumers will be unwilling to compare the prices charged by several different firms.

one firm will be able to produce the entire market output at a lower cost than several smaller firms.

The highest valued alternative that must be given up in order to choose an action is called its

opportunity cost.

Wages in the United States are higher than those in Mexico primarily because

output per worker is higher in the United States.

If there was an increase in the tax on cell phones, what would be the effect on the equilibrium price and quantity of cell phones? a. price increases, quantity decreases b. price decreases, quantity decreases c. price increases, quantity increases d. price decreases, quantity increases

price increases, quantity decreases

If the demand for a certain product increased, what would be the effect on the equilibrium price and quantity? a. price increases, quantity decreases b. price decreases, quantity decreases c. price increases, quantity increases d. price decreases, quantity increases

price increases, quantity increases

The government sometimes provides public goods because a) private markets would not produce any of the goods. b) private markets would not produce the efficient quantity of the goods. c) private markets would charge too high a price for the goods. d) the government produces public goods more efficiently than private markets can.

private markets would not produce the efficient quantity of the goods.

Complements

products that are usually consumed jointly

Low-skill workers earn a lower wage than more experienced, higher skilled workers because the

supply of low-skill workers is large relative to the demand for workers in this skill category.

People make decisions at the margin. Thus, when deciding whether to purchase a second car, they would compare a. the total benefits expected from two cars with the costs of the two cars. b. the additional benefits expected from a second car with the total cost of the two cars. c. the dollar cost of the two cars with the potential income that the two cars will generate. d. the additional benefits of the second car with the additional costs of the second car.

the additional benefits of the second car with the additional costs of the second car.

In voluntary exchange, if the seller of a product gains,

the buyer must also gain; mutual gain provides the foundation for exchange.

Total cost (TC)

the cost of all the inputs a firm uses in production

When economists say the demand for a product has decreased, they mean

the demand curve has shifted to the left.

If coffee and cream are complements, a decrease in the price of coffee will cause a. the demand for cream to decrease. b. the demand for cream to increase. c. the demand for coffee to increase. d. no change in the demand for cream; only quantity demanded would be affected.

the demand for cream to increase.

Which of the following would most likely cause the current demand for DVD players to fall? a. an increase in consumer income b. an increase in the price of DVD players c. an increase in the price of Blu-ray players, a substitute good d. the expectation that the price of DVD players will decrease sharply during the next six months

the expectation that the price of DVD players will decrease sharply during the next six months

A rational decision maker takes an action if and only if a) the expected marginal benefit of the action exceeds the expected marginal cost of the action. b) the expected marginal cost of the action exceeds the expected marginal benefit of the action. c) the marginal cost of the action is zero. d) the opportunity cost of the action is zero.

the expected marginal benefit of the action exceeds the expected marginal cost of the action.

"If Tom had twice as much money, he could consume twice as much. If everyone had twice as much money, they could consume twice as much." This quote illustrates

the fallacy of composition.

Who receives the biggest benefit from subsidies?

the group with the smallest elasticity (inelastic) receives the biggest benefit.

The two conflicting tendencies that a firm has in an oligopolistic industry are

the incentive to cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firm's share of the profit.

The opportunity cost of an activity is measured by

the individual's subjective values and opinions

Bill lives in Montana and likes to grow zucchini. He applies fertilizer to his crop twice during the growing season and notices that the second layer of fertilizer increases his crop but not as much as the first layer. What economic concept best explains this observation? a. the law of diminishing marginal utility b. the law of diminishing returns c. return equalization principle d. the principal-agent problem

the law of diminishing returns

In the short run, a firm will eventually experience rising average total costs because of a) economies of scale. b) diseconomies of scale. c) the law of supply. d) the law of diminishing returns.

the law of diminishing returns.

The deadweight loss resulting from levying a tax on an economic activity is a. the tax revenue directed to the government as the result of the tax. b. the loss of potential gains from trade from activities forgone because of the tax. c. the increase in the price of an activity as the result of the tax levied on it. d. the marginal benefits derived from the expansion in government activities made possible by the increase in tax revenues.

the loss of potential gains from trade from activities forgone because of the tax.

According to the law of comparative advantage, both individuals and nations will be able to produce a larger joint output if each productive activity is undertaken by

the low opportunity cost producer

People are willing to pay more for a diamond than for a bottle of water because

the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

As a result of the law of diminishing returns, what happens when the employment of the resource expands?

the marginal product of a resource will fall. As a result, the marginal revenue product of a resource will also decline as its employment expands

If the cost of using skilled labor was twice the cost of using unskilled labor, and both were used by a profit- maximizing firm, the firm would adjust the quantity of each type of labor until

the marginal product of skilled labor was twice that of unskilled labor.

A profit-maximizing restaurant owner will hire more buspersons to keep more tables clean and quickly available to new customers, as long as

the marginal revenue product of buspersons exceeds their wage rate.

With a price ceiling above the equilibrium price, a. quantity demanded would exceed quantity supplied. b. quantity supplied would exceed quantity demanded. c. the market would be in equilibrium. d. the equilibrium price would be expected to fall over time.

the market would be in equilibrium.

If the price of tickets to the World Series were set below the equilibrium price, a. the quantity demanded would be smaller than the quantity supplied. b. the demand for World Series tickets would be highly responsive to the price. c. there would be no transactions between buyers and sellers of the tickets. d. the number of persons seeking to obtain tickets to World Series games would be greater than the number of tickets available.

the number of persons seeking to obtain tickets to World Series games would be greater than the number of tickets available.

Along the inelastic portion of a demand curve, a) the change in price will always be less than the change in quantity demanded. b) the percentage change in price will be less than the percentage change in quantity demanded. c) the change in price will always be more than the change in quantity demanded. d) the percentage change in price will be more than the percentage change in quantity demanded.

the percentage change in price will be more than the percentage change in quantity demanded.

If entry-restricting legal barriers effectively organized the funeral home industry of a large city into a monopoly cartel, economic theory indicates that, compared to the previously competitive situation, a) the price of funeral services would decline, and output would increase. c) both the price and output of funeral services would decline. d) the price of funeral services would increase, and output would decline. e) both the price and output of funeral services would increase.

the price of funeral services would increase, and output would decline.

What happens with quantity supply and quantity demand when the price is too low?

the quantity demanded by consumers will exceed the quantity supplied (excess demand)

If the market price is above the equilibrium price, there will be a tendency for price to decrease, causing a. the quantity demanded to decrease and the quantity supplied to increase until they are equal. b. the quantity demanded to increase and the quantity supplied to decrease until they are equal. c. both quantity demanded and quantity supplied to decrease until they are equal. d. both quantity demanded and quantity supplied to increase until they are equal.

the quantity demanded to increase and the quantity supplied to decrease until they are equal.

What happens with quantity supply and quantity demand when the price is too high?

the quantity supplied by producers will exceed the quantity demanded.

When economists say the supply of a product has decreased, they mean

the supply curve has shifted to the left

The expression "There's no such thing as a free lunch" means

the use of resources to produce a good has an opportunity cost because of scarcity. Production of a good requires the use of scarce resources regardless of whether it is supplied free to the consumers.

The opportunity cost of going to college is a) the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses. b) the value of the best opportunity a student gives up to attend college. c) zero for students who are fortunate enough to have all of their college expenses paid by someone else. d) zero, since a college education will allow a student to earn a larger income after graduation.

the value of the best opportunity a student gives up to attend college.

If a government-imposed price floor legally sets the price of milk above market equilibrium what would most likely happen?

there would be a surplus of milk

On short run cost curve, Average fixed cost (AFC)

will be high for small rates but will always decline as output expands.

Normal profit rate

zero economic profit

An increase in the price of a resource would cause producers to...

substitute other inputs for the resource.

Which of the following actions is consistent with the basic economic postulate (the guidepost) that incentives matter? a. Consumers buy fewer potatoes when the price of potatoes increases. b. A politician votes against a pay raise for himself because most of his constituents are strongly opposed to it and would vote against him in the next election. c. Farmers produce less corn because corn prices have declined. d. All of the above.

All of the above.

Rationing

Allocating a limited supply of a good or resource among people who would like to have more of it.

Which of the following would reduce the price of basketballs and increase the quantity sold? a) An increase in the demand for basketballs. b) A decrease in the demand for basketballs. c) A decrease in the supply of basketballs. d) An increase in the supply of basketballs.

An increase in the supply of basketballs.

Which of the following is true of the interaction of supply and demand? a) As the price increases, the quantity demanded and the quantity supplied will increase. b) As the price increases, the quantity demanded and the quantity supplied will decrease. c) As the price increases, the quantity demanded increases and the quantity supplied will decrease. d) As the price increases, the quantity demanded will decrease and the quantity supplied will increase. e) As the price increases, neither the quantity demanded nor quantity supplied will change.

As the price increases, the quantity demanded will decrease and the quantity supplied will increase.

How would a decrease in consumer income affect the market for lawn mowers? a) Demand would decrease, leading to an increase in price and a reduction in quantity sold. b) Demand would decrease, leading to a reduction in price and a reduction in quantity sold. c) Demand would increase, leading to an increase in price and an increase in quantity sold. d) Demand would increase, leading to a reduction in price and an increase in quantity sold.

Demand would decrease, leading to a reduction in price and a reduction in quantity sold.

Which of the following is the primary source of cross-country differences in the real earnings of workers? a) Differences in natural resource endowments. b) Differences in output per worker. c) Differences in the average number of hours worked. d) Differences in the share of workers that are members of a labor union. e) Access to modern technology.

Differences in output per worker.

Which of the following is most likely to contribute to the presence of monopoly in an industry? a) Economies of scale. b) An elastic market demand for the product produced by the industry. c) Inefficiency due to bureaucratic decision-making procedures in the industry. d) Controlling over 50 percent of the market

Economies of scale.

Which of the following is true of America's millionaires? a) Most millionaires inherited at least half of their wealth. b) Millionaires are far more likely than others to be self-employed entrepreneurs. c) It is virtually impossible to achieve this status by saving and investing over a lengthy period of time. d) Only about 20 percent of the millionaires in the United States have college degrees.

Millionaires are far more likely than others to be self-employed entrepreneurs.

Which of the following would be most likely if firms in a competitive price-searcher market were earning economic profit? a) Production inefficiencies would persist until the profit was eliminated. b) Firms would decrease their rate of output in the short run, causing a decline in profitability in the market. c) New firms would enter the market, resulting in fewer sales by existing firms. d) All firms in the market would continue to produce at their current levels and continue to charge the same price.

New firms would enter the market, resulting in fewer sales by existing firms.

in economics, the term scarcity refers to the fact that

No society can produce enough to satisfy fully the desires of people for goods and services

Suppose both the equilibrium price and quantity rise for a particular product. Which of the following best explains this situation? a) Supply and demand simultaneously increased and the shift in supply was greater than the shift in demand. b) Supply and demand simultaneously increased and the shift in supply was less than the shift in demand. c) Supply and demand simultaneously decreased and the shift in supply was greater than the shift in demand. d) Supply and demand simultaneously decreased and the shift in supply was less than the shift in demand.

Supply and demand simultaneously increased and the shift in supply was less than the shift in demand.

How would a decrease in the cost of production affect the market for video games? a) Supply would decrease, leading to an increase in price and a reduction in quantity sold. b) Supply would decrease, leading to a reduction in price and a reduction in quantity sold. c) Supply would increase, leading to an increase in price and an increase in quantity sold d) Supply would increase, leading to a reduction in price and an increase in quantity sold.

Supply would increase, leading to a reduction in price and an increase in quantity sold.

Marginal

Term used to describe the effects of a change in the current situation. For example, a producer's marginal cost is the cost of producing an additional unit of a product, given the producer's current facility and production rate.

What did Adam Smith stress?

That free exchange and competitive markets would harness self-interest as a creative force. He believed that individuals pursuing their own interests would be directed by the "invisible hand" of market prices toward the production of goods that were most advantageous to society.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than competitors.

Absolute Advantage

The ability to produce more of a good or service than competitors when using the same amount of resources.

How does an additional individual's consumption of a good that is nonrival-in-consumption, such as a radio broadcast, affect the amount of the good available to other consumers? a) The amount available to others will decline. b) The amount available to others will increase. c) The amount available to others is unaffected. d) The amount available to others is eliminated.

The amount available to others is unaffected.

The actual benefit of a government subsidy is determined primarily by

The elasticities of demand and supply

What happens when price performs the rationing function?

The good or resource is allocated to those willing to give up the most "other things" in order to get it.

Opprotunity Cost

The highest valued alternative that is sacrificed

Marginal revenue (MR)

The increase in a firm's total revenue that results from the production and sale of one additional unit of output.

Marginal Product

The increase in the total output that results from the employment of one additional unit of a resource

How will the price and output of an unregulated monopolist compare with the ideal levels that might be reached if the market was competitive? a. The output of the monopolist will be larger and the price lower. b. The output of the monopolist will be larger and the price higher. c. The output of the monopolist will be smaller and the price lower. d. The output of the monopolist will be smaller and the price higher.

The output of the monopolist will be smaller and the price higher.

If the ice cream industry is a competitive price-taker market and all ice cream producers are earning zero economic profit, what will be the impact of an increase in the demand for ice cream? a) Firms will exit the ice cream industry in the long run since they are earning zero economic profit. b) The firms will now be able to earn long-run economic profit assuming that barriers to entry remain low and new firms can enter the market. c) A shortage of ice cream will develop. d) The price of ice cream will rise initially, inducing the existing firms to expand output and new firms to enter the industry.

The price of ice cream will rise initially, inducing the existing firms to expand output and new firms to enter the industry.

Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. How will the price and output of the chemical products in a competitive market compare with their values under conditions of ideal economic efficiency? a) The price would be too low, and the output would be too large. b) The price would be too high, and the output would be too large. c) The price would be too low, and the output would be too small. d) The price would be too high, and the output would be too small.

The price would be too low, and the output would be too large.

Suppose that country A produces mostly consumption goods and few investment goods, while country B produces mostly investment goods with few consumption goods. Other things constant, which of the following is most likely to happen in the future? a) The per capita income of country A will grow more rapidly than country B. b) The population of country B will grow more rapidly than country A. c) The production possibilities curve (PPC) of country B will shift out more rapidly than the PPC of country A. d) The production possibilities curve (PPC) of country A will shift out more rapidly than the PPC of country B.

The production possibilities curve (PPC) of country B will shift out more rapidly than the PPC of country A.

Which of the following is a major shortcoming of government regulation of business monopoly? a) The regulators often estimate production costs incorrectly and thus force firms into loss positions. b) The regulators often come to represent the interests of the established firms and use their power to limit competition. c) The regulators usually permit firms to make unusually high accounting profits. d) The regulators, acting in consumers' interests, often force prices so low that even with efficient production techniques the regulated firms lose money.

The regulators often come to represent the interests of the established firms and use their power to limit competition.

Positive economics

The scientific study of "what is" among economic relationships

If Georgia experiences a late frost that damages the peach crop, which of the following would likely be the result? a) The supply curve for peaches to shift to the right and the price of peaches to fall. b) The supply curve for peaches to shift to the left and the price of peaches to rise. c) The demand curve for peaches to shift to the left and the price of peaches to fall. d) The demand curve for peaches to shift to the right and the price of peaches to rise.

The supply curve for peaches to shift to the left and the price of peaches to rise.

How would a decrease in the price of the feed grains used to feed cattle affect the market for beef? a) The demand for beef would increase, increasing beef prices. b) The demand for beef would decrease, decreasing beef prices. c) The supply of beef would increase, decreasing beef prices. d) The supply of beef would decrease, increasing beef prices.

The supply of beef would increase, decreasing beef prices.

Which of the following statements best describes the scientific method? a) The use of modern electronic testing equipment to understand the world. b) The unbiased development and testing of theories about how the world works. c) The use of controlled laboratory experiments to understand the way the world works. d) Finding evidence to support preconceived theories about how the world works.

The unbiased development and testing of theories about how the world works.

For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Why?

There are many close substitutes for this good.

Economists have argued that rent control is "the best way to destroy a city, other than bombing." Why would economists say this? a) They anticipate that low rents will cause low-income people to move into the city, reducing the quality of life for other people. b) They anticipate that rent control will benefit landlords at the expense of tenants, increasing inequality in the city. c) They anticipate that rent controls will cause a construction boom, which will make the city crowded and more polluted. d) They anticipate that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.

They anticipate that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.

During the imposition of price controls in the 1970s, long gasoline lines were common. In the absence of price controls, markets would have eliminated such excess demand by a. allowing the price to rise, so gas was rationed to those willing to pay the most for it. b. increasing the gap between supply and demand. c. allowing price to decline, so the poor could afford to buy more gas. d. mandating a 50-mile-per-hour speed limit to reduce consumption.

allowing the price to rise, so gas was rationed to those willing to pay the most for it.

Over the past 20 years, both the quantity of health care provided and health care prices have been rising rapidly. Economic theory would suggest that the observed data could best be explained as a. an increase in supply, while demand remained relatively constant. b. a decrease in both supply and demand. c. an increase in demand, while supply remained relatively constant. d. a sharp increase in both supply and demand.

an increase in demand, while supply remained relatively constant.

An increase in demand will cause

an increase in quantity supplied

if we observe a decrease in the price of a good and an increase in the amount of a good bought and sold, this could be explained by

an increase in supply of the good.

A hurricane damaged much of the housing in Miami. Shortly thereafter, the price of plywood rose significantly. The events suggest that a. a decrease in the supply of plywood caused the price of plywood to rise. b. an increase in the supply of plywood caused the price of plywood to rise. c. a decrease in the demand for plywood caused the price of plywood to rise. d. an increase in the demand for plywood caused the price of plywood to rise.

an increase in the demand for plywood caused the price of plywood to rise.

Using a production possibilities curve, a technological advance that increases the amount of output for the same amount of inputs would be illustrated as

an outward shift of the curve.

The average variable cost curve and average total cost curve become closer together as output increases because

average fixed cost, which is the difference between them, declines with output.

Economies of scale imply that within some range a firm can increase the size of operation and a) total cost will decrease. b) fixed cost will decrease. c) average total cost will decrease. d) average total cost will increase. e) average variable cost will decrease.

average total cost will decrease.

For effective price discrimination to occur, a seller must a) be a pure monopolist. b) have large economies of scale and control over a key natural resource. c) face a horizontal demand curve for its product. d) be able to prevent consumers from reselling the product to other consumers.

be able to prevent consumers from reselling the product to other consumers.

Economic theory suggests that government-operated monopolies will a. be highly efficient and follow policies that are in the consumers' interest. b. be dominated by persons who, while seeking to serve the public interest, are not hard-nosed enough to run a business efficiently. c. be inefficient because of poor incentives for operational efficiency. d. favor the consumer at the expense of special interest groups in and out of government.

be inefficient because of poor incentives for operational efficiency.

Fringe benefits

benefits other than normal money wages that are supplied to employees in exchange for their labor services. Higher fringe benefits come at the expense of lower money wages.

(I) Oligopolistic firms have an incentive to collude to increase profits. (II) Oligopolistic firms have an incentive to cheat on collusive agreements to increase profits. a. I is true; II is false. b. I is false; II is true. c. Both I and II are false. d. Both I and II are true.

both I and II are true.

As people have more time to adjust to a price change,

both supply and demand become more elastic.

As output is expanded, if marginal cost (MC) is less than average total cost (ATC), a) ATC must be at its minimum. b) ATC must be at its maximum. c) ATC must be decreasing. d) the firm must be earning economic profit.

c) ATC must be decreasing.

Which of the following was a key belief of Adam Smith? a) He felt that human goodness would provide adequate goods and services to everyone. b) He stressed that limited exchange and command economies would prevent the exploitation of poor people. c) He believed that individuals pursuing their own interests would direct economic activity in the most advantageous way. d) He lectured about the importance of gold and silver in providing a stable monetary system.

c) He believed that individuals pursuing their own interests would direct economic activity in the most advantageous way.

A local restaurant offers an "all you can eat" buffet for $15. Mia eats four servings but leaves half of a fifth helping uneaten. Why? a) Her marginal value of a serving of brunch has fallen below $15. b) Her marginal value of a serving has fallen below $3 ($15 divided by 5 servings). c) Her marginal value of food has fallen to zero. d) The total value she places on the buffet exactly equals $15.

c) Her marginal value of food has fallen to zero.

Which of the following statements is correct about the economic way of thinking? a) If the buyer of a good gains, the seller must lose an equal amount. b) The value of goods is objective; it is equal to the cost of supplying the good. c) Opportunity costs will always be incurred when scarce resources are used to produce a good. d) Changes in incentives generally have no effect on human behavior.

c) Opportunity costs will always be incurred when scarce resources are used to produce a good.

Suppose an increase in the price of microwaves leads to an increase in total expenditures on the microwaves. Which of the following is true for this price change? a) Microwaves are an inferior good. b) The demand for microwaves is perfectly elastic. c) The demand for microwaves is inelastic. d) The demand for microwaves is elastic.

c) The demand for microwaves is inelastic.

As a company adds the first four workers to its production process in the short run, its output rises from 0 to 12 to 25 to 35 to 43. Addition of the fifth worker will most likely lead to an output rate a) greater than 51. b) equal to 51. c) less than 51. d) greater than 51 if the firm experiences diseconomies of scale. e) none of the above.

c) less than 51.

When the marginal product of labor diminishes, a) average fixed cost rises. b) average variable cost is constant. c) marginal cost rises. d) average total cost must rise. e) total cost rises at a diminishing rate.

c) marginal cost rises.

If demand is inelastic, an increase in the price of a good will cause total expenditures on the good to a) fall. b) remain constant since the decrease in quantity sold is exactly offset by the price increase. c) rise. d) rise if it is a normal good and fall if it is an inferior good.

c) rise.

In general, an organization of sellers designed to coordinate supply decisions so that the joint profits of the members is maximized is called a(n) ____. If they are successful, the total market output and price will most closely approximate the output and price in a(n) ____ market. (Fill in the blanks.) a. cooperative; open price-taker b. cartel; monopoly c. cartel; open price-taker d. OPEC; competitive price-searcher

cartel; monopoly

The marginal revenue product of a resource is best described as the a. selling price of the last unit of output produced. b. increment of total cost resulting from the use of an additional unit of the resource. c. marginal product of the resource divided by the unit price of the good produced. d. change in total revenue resulting from employing an additional unit of the resource.

change in total revenue resulting from employing an additional unit of the resource.

Part of the entrepreneurial process in a competitive market economy involves a) obtaining governmental control over the market so that a new product has some chance of being successful. b) knowing from the start the proper output and price to set for each new product. c) choosing the best structure, size, and scope of production for the firm to produce a new product. d) knowing in advance with certainty what products consumers will want to buy.

choosing the best structure, size, and scope of production for the firm to produce a new product.

Market prices generally promote social cooperation because they a) clarify the options available to people and encourage individuals to help others in exchange for income. b) encourage government officials to levy taxes to provide people with the necessities of life. c) eliminate scarcity by allowing prices to rise. d) reward only altruistic actions, whereby, people seek to help others without the expectation of personal gain.

clarify the options available to people and encourage individuals to help others in exchange for income.

Is the basis for trade comparative or absolute advantage?

comparative advantage

When the price of a product falls, the quantity supplied will

decrease

The exit of existing firms from a competitive market will a) increase market supply and increase market prices. b) increase market supply and decrease market prices. c) decrease market supply and increase market prices. d) decrease market supply and decrease market prices.

decrease market supply and increase market prices.

Automated production methods are only attractive when they a) reduce labor productivity. b) replace workers. c) decrease per-unit costs of production. d) lower wages.

decrease per-unit costs of production.

A decrease in the demand of one complement good will cause an ____ in demand for the other

decrease?

Even countries that depend primarily on market forces to resolve the basic economic questions will usually rely on the collective decision-making process to a) determine the prices of goods and resources. b) allocate goods that are essential to life. c) determine the distribution of income among citizens. d) define and enforce private-property rights and designate the acceptable forms of competitive economic behavior.

define and enforce private-property rights and designate the acceptable forms of competitive economic behavior.

The burden of a tax will fall primarily on sellers when the a) demand for the product is highly inelastic and the supply is relatively elastic. b) demand for the product is highly elastic and the supply is relatively inelastic. c) tax is legally (statutorily) imposed on the seller of the product. d) tax is legally (statutorily) imposed on the buyer of the product.

demand for the product is highly elastic and the supply is relatively inelastic.

The benefit of a subsidy will go primarily to buyers when the a) demand for the product is highly inelastic and supply is relatively elastic. b) demand for the product is highly elastic and the supply is relatively inelastic. c) subsidy is legally (statutorily) granted to the seller of the product. d) subsidy is legally (statutorily) granted to the buyer of the product.

demand for the product is highly inelastic and supply is relatively elastic.

When a firm increases its plant size in the long run and its per-unit costs fall, this is called a. diminishing returns and is shown by the downward-sloping portion of the MP curve (or the upward-sloping portion of the MC curve). b. constant returns to scale and is shown by the flat portion of the LRATC curve. c. diseconomies of scale and is shown by the upward-sloping portion of the LRATC curve. d. economies of scale and is shown by the downward-sloping portion of the LRATC curve.

economies of scale and is shown by the downward-sloping portion of the LRATC curve.

A downward-sloping portion of a long-run average total cost curve is the result of a) economies of scale. b) diseconomies of scale. c) diminishing returns. d) the existence of fixed resources.

economies of scale.

If the price of tickets to Disney World increases 10 percent, and as a result, attendance falls by 15 percent, the demand for the tickets is

elastic

If you were a government official that wanted to raise the equilibrium price of milk, which of the following actions would you take? a) take milk from government storage and sell it. b) encourage farmers to produce more milk c) subsidize purchases of dairy equipment d) encourage farmers to produce less milk

encourage farmers to produce less milk

Suppose demand increases and supply increases. Which of the following will happen: a) equilibrium price will, rise, fall, or stay the same while equilibrium quantity will decrease b) equilibrium price will, rise, fall, or stay the same while equilibrium quantity will increase c) equilibrium quantity will rise, fall, or stay the same, while equilibrium price will increase. d) equilibrium quantity will rise, fall, or stay the same, while equilibrium price will decrease. e) cannot be determined

equilibrium price will, rise, fall, or stay the same while equilibrium quantity will increase

The more elastic the supply of a product, the more likely it is that the burden of a tax will

fall on buyers

What does the assumption, What's good for the individual is good for the group represent

fallacy of composition

True or false: if one trading partner gains, the other must lose

false

"If gasoline were taxed, the price of gasoline would rise. Consequently, the demand for gasoline would fall, causing the price to fall to the original level." This statement is a. essentially correct. b. incorrect--after the demand falls, the price would fall but to some level higher than the original level. c. incorrect--demand and quantity demanded are confused. The price increase would reduce quantity demanded, not demand. d. incorrect--after the demand falls, the price would fall but to some level lower than the original level.

incorrect--demand and quantity demanded are confused. The price increase would reduce quantity demanded, not demand.

"If income were redistributed in favor of the poor, we would eliminate scarcity." The preceding statement is

incorrect; it confuses the elimination of poverty with the elimination of the constraint imposed by scarcity.

An increase in the demand for a product will cause the demand for and prices of the resources used to create the product to

increase

When the price of a product rises, the quantity supplied will

increase

A profit-maximizing monopolist that produces in the short run will a) produce the level of output where marginal revenue exceeds marginal cost by the largest amount. b) increase output as long as the marginal revenue exceeds the marginal cost of producing that unit. c) produce the level of output where average total cost is at a minimum. d) increase price as long as the average revenue exceeds the average total cost. e) produce the level of output where average revenue exceeds average total cost by the largest amount.

increase output as long as the marginal revenue exceeds the marginal cost of producing that unit.

Economics is the study of how

individuals make choices because of scarcity.

The demand for salt is a) inelastic because there are few substitutes for salt and it represents a large percentage of a consumer's budget. b) inelastic because there are many substitutes for salt and it represents a large percentage of a consumer's budget. c) inelastic because there are few substitutes for salt and it represents a small percentage of a consumer's budget. d) elastic because there are no substitutes for salt and it represents a large percentage of a consumer's budget. e) elastic because there are many substitutes for salt and it represents a large percentage of a consumer's budget.

inelastic because there are few substitutes for salt and it represents a small percentage of a consumer's budget.

Who gets the tax burden

inelastic group

Prices direct economic activity in a market economy by a) influencing the actions of buyers and sellers. b) reducing scarcity of the goods and services produced. c) eliminating the need for government intervention. d) allocating goods and services in the most equitable way.

influencing the actions of buyers and sellers.

the demand curve reveals that as consumers have more and more of a good or service, they value additional units

less and less

With respect to the average cost curves, the marginal cost curve a) intersects average total cost, average fixed cost, and average variable cost at their minimum points. b) intersects average total cost, average fixed cost, and average variable cost at their maximum points. c) intersects both average total cost and average variable cost at their minimum points. d) intersects average total cost where it is increasing and average variable cost where it is decreasing. e) intersects only average total cost at its minimum point.

intersects both average total cost and average variable cost at their minimum points.

A "change in quantity supplied"

is a movement along the same supply curve

A "change in supply"

is a shift of the entire supply cure

Price is important in a market economy because it a) eliminates imbalances between supply and demand. b) serves as the rationing mechanism for the limited supplies of goods and services. c) coordinates the choices of consumers and producers and brings them into harmony. d) is all of the above.

is all of the above

When an economist says a firm is earning zero economic profit, this implies that the firm a. will be forced out of business in the near future unless market conditions change. b. is earning a zero rate of return on its assets. c. is earning as high a rate of return now as could be earned in other industries. d. has an accounting profit of zero.

is earning as high a rate of return now as could be earned in other industries.

When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years)

is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price

When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years) a) is usually needed for the members to solidify their cooperation. b) usually results in finer control of prices and markets by the group and larger profit margins. c) is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price. d) seldom has any impact on the agreement, as long as the participants maintain high profit levels as a result of the agreement.

is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price.

The value of a good depends on what?

it depends on many factors, including who uses it and under what circumstances.

Specialization in production is beneficial because

it permits people to expand production and achieve rates of output that would otherwise be unattainable

What happens to the total spending on a good when demand is elastic and price increases.

it would decrease

Factors of production

labor, capital, natural resources, and entrepreneurial ability

A decrease in the supply of a good will a. decrease the demand for the good. b. cause the price of the good to fall. c. lead to an increase in the price of the good. d. increase the quantity of the good bought and sold.

lead to an increase in the price of the good.

As price decreases, producers will supply

less

Rent controls tend to cause persistent imbalances in the market for housing because a) quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage. b) quantity demanded exceeds quantity supplied but price cannot fall to remove the surplus. c) quantity supplied exceeds quantity demanded but price cannot rise to remove the shortage. d) quantity supplied exceeds quantity demanded but price cannot fall to remove the surplus.

quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage.

A tax imposed on the sellers of a good will a) raise the price paid by buyers and lower the equilibrium quantity. b) raise the price paid by buyers and raise the equilibrium quantity. c) raise the net price received by sellers and raise the equilibrium quantity. d) raise the net price received by sellers and lower the equilibrium quantity.

raise the price paid by buyers and lower the equilibrium quantity.

An individual who possesses a specialized skill that is difficult to execute will

receive a high wage only when this skill is in great demand relative to its supply.

A successful advertising campaign would likely

reduce price elasticity of demand by stressing the uniqueness of the product.

Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls a. are effective in helping the poor find housing. b. improve the quality of housing available to consumers. c. create a surplus of rental housing. d. reduce the future supply of rental housing.

reduce the future supply of rental housing.

A "change in quantity demanded"

refers to a movement along the same demand curve

A "change in demand"

refers to a shift of the entire demand curve

To increase joint profits, a cartel will attempt to

restrict output in order to increase the market price of the good produced.

In a competitive market, if the production process involves an external benefit, the market will a) produce the economically efficient outcome. b) result in a market price that is higher than the efficient one. c) result in a market price that is lower than the efficient one. d) result in too much of the good being produced compared to the ideal efficient outcome.

result in a market price that is lower than the efficient one.

Consider two goods--one that generates external costs and another that generates external benefits. The actual market outcome would a) result in output that is lower than the efficient output for both goods. b) result in output that is higher than the efficient output for both goods. c) result in output that is lower than the efficient output for the good with an external benefit and output that is higher than the efficient output for the good with an external cost. d) result in output that is higher than the efficient output for the good with an external benefit and output that is lower than the efficient output for the good with an external cost.

result in output that is lower than the efficient output for the good with an external benefit and output that is higher than the efficient output for the good with an external cost.

A decrease in the price of flour will shift the supply curve for donuts a. leftward, causing the equilibrium price to increase and quantity to decrease. b. leftward, causing the equilibrium price and quantity to decrease. c. rightward, causing the equilibrium price to decrease and equilibrium quantity to increase. d. rightward, causing the equilibrium price and quantity to increase.

rightward, causing the equilibrium price to decrease and equilibrium quantity to increase.

What is needed in any economic decision

scarcity and choice

Suppose the demand curve for a good is highly elastic and the supply curve is highly inelastic. If the government taxes this good, who would bear a larger share of the tax burden

sellers

According to the law of supply, as the price of a good decreases a. buyers will buy more of the good. b. sellers will produce more of the good. c. buyers will buy less of the good. d. sellers will produce less of the good.

sellers will produce less of the good.

All things constant, a decrease in bus, train, and airplane fares will a. shift the demand curve for automobiles to the left. b. cause a movement along the demand curve for automobiles. c. shift the demand curve for automobiles to the right. d. have no impact on the demand curve for automobiles.

shift the demand curve for automobiles to the left.

The law of diminishing marginal returns explains the general shape of the firm's

short-run cost curves

The law of diminishing marginal returns explains the general shape of the firm's a) long-run cost curves. b) short-run cost curves. c) both short-run and long-run cost curves. d) The law of diminishing returns has nothing to do with cost curves.

short-run cost curves.

For a college student who wishes to calculate the true costs of going to college, the costs of room and board a) should be counted in full, regardless of the costs of eating and sleeping elsewhere. b) should be counted only to the extent that they are more expensive at college than elsewhere. c) usually exceed the opportunity cost of going to college. d) plus the cost of tuition equals the opportunity cost of going to college.

should be counted only to the extent that they are more expensive at college than elsewhere.

When an entrepreneur introduces a new improved product that is highly valued relative to cost a) consumers will be worse off. b) the demand for the products that are good substitutes for the new product will increase. c) some of the existing products will become obsolete and businesses producing those products will fail. d) total employment will decline if there are business failures.

some of the existing products will become obsolete and businesses producing those products will fail.

Law of supply

states that there is a direct relationship between the price of a good or service and the amount of it that suppliers are willing to produce.

the law of diminishing returns

states that, as more units of a variable factor are applied to a fixed amount of other resources, output will eventually increase by smaller and smaller amounts.

Even though firms in competitive price-searcher markets do not produce at minimum ATC, competitive price-searcher markets may still be consistent with economic efficiency because a) strict government regulations force the firms in these markets to keep their costs low. b) they provide consumers with a greater diversity of products. c) they encourage more advertising in both price-searcher and price-taker markets. d) special legal protections for price searchers make it possible for them to more efficiently use resources.

they provide consumers with a greater diversity of products

Profits and losses play an important role in helping a) to signal to government which businesses are suffering losses so that they can be subsidized. b) consumers decide which products they value the most by looking at each firm's profit. c) to allocate scarce resources in a manner that maximizes the value created to society. d) ensure that the total profits in the economy exactly equal the total losses.

to allocate scarce resources in a manner that maximizes the value created to society.

Economic profit =

total revenue - total cost. (total costs include implicit and explicit costs)

A compensation structure that generates much higher pay rates for the top performers, while those whose productivity is only a little lower receive substantially less compensation, is called a) tournament pay. b) competing differentials. c) dueling executives. d) winner take all.

tournament pay

In economics, secondary effects refer to the

unintended consequences of a change that are not immediately identifiable but are felt only with time

Which way are supply curves sloping

upward sloping

The benefit (or satisfaction) that an individual expects to derive from an activity is called

utility

Equilibrium

when demand and supply are in balance. when the quantity supplied equals the quantity demanded.

Excess demand

when quantity demanded is more than quantity supplied

Excess supply

when quantity supplied is more than quantity demanded