ECON251 Exam 2

Compared to a perfectly competitive industry, the price charged by a single-price monopoly with the same costs is a. more than the competitive industry. b. the same as the competitive industry. c. less than the competitive industry. d. not comparable to the competitive industry.

A Because it produces less output, the monopoly is able to boost the price it charges.

The marginal social benefit from healthcare is ___ the willingness and ability to pay for it. a. larger than b. equal to c. less than d. Not comparable to

A Because the marginal social benefit exceeds people's willingness to pay for healthcare, an unregulated market provides less than the efficient quantity of healthcare.

A technological advance a. shifts the firm's total product curve upward. b. does not shift the firm's total product curve. c. shifts the firm's total product curve downward. d. cannot occur without raising the firm's average total costs and hence shifts the average total cost curve upward.

A By shifting the total product curve upward, the technological advance generally shifts the average total cost curve downward.

For a common resource, unregulated equilibrium quantity is ____ the efficient quantity and ____ deadweight loss is created. a. greater than; a b. equal to; no c. less than; a d. greater than; no

A The unregulated equilibrium for a common resource is that the resource is over used. The equilibrium quantity is greater than the efficient quantity and hence a deadweight loss is created.

The marginal product of labor equals the average product of labor when the a. average product of labor is at its maximum. b. average product of labor is at its minimum. c. marginal product of labor is at its maximum. d. None of the above answers are correct because the marginal product of labor never equals the average product of labor.

A When MP > AP, the average product rises when employment increases; when MP < AP, the average product falls; and when MP = AP, the average product is at its maximum.

A monopolist finds that when it produces 20 units of output, its demand is elastic. At this level of output, its marginal revenue necessarily is a. positive. b. zero. c. negative. d. none of the above is correct because the marginal revenue and the elasticity of demand are unrelated.

A When demand is elastic, MR is positive; when demand is inelastic, MR is negative.

Over the range of output where the MP curve slopes upward, the a. MC curve slopes downward. b. AFC curve slopes upward. c. firm is experiencing economies of scale. d. total cost curve slopes downward.

A When the MP curve slopes upward, each additional unit of the variable factor produces more additional output than the previous unit of the factor. So the added cost of producing the added units falls — that is, the MC curve slopes downward — because each variable factor has the same additional cost as the previous factor, but each produces more additional output.

All of the following are prohibited if they substantially lessen competition EXCEPT a. price discrimination. b. cutting prices to meet competition. c. contracts that prevent a firm from selling competing items (exclusive dealing). d. acquiring a competitor's shares or assets.

B Cutting prices to meet competition is legal and is a hallmark of competitive markets.

Because an oligopoly has a small number of firms, a. each firm can act as a monopoly. b. the firms are interdependent. c. the firms may legally form a cartel. d. the HHI for the industry is small.

B The firms are interdependent because each firm's actions will affect its profit as well its competitors' profits.

A firm's goal is to maximize its a. revenue. b. costs. c. profit. d. None of the above.

C By maximizing its profit, the firm insures that it has the best chance of surviving and simultaneously makes its owners as well off as possible.

Price discrimination allows a monopoly to a. lower its marginal cost. b. reduce its producer surplus. c. increase its economic profit. d. charge all customers a higher price.

C By price discriminating, a monopoly increases its economic profit, which is the incentive to price discriminate.

Which of the following statements is true? a. A competitive market cannot use its resources efficiently. b. Resource use is efficient when marginal social benefit exceeds marginal social cost by as much as possible. c. When demand is the same as marginal social benefit and supply is the same as marginal social cost, a perfectly competitive market is efficient. d. A perfectly competitive market cannot be efficient in the long run because the firms cannot make an economic profit.

C Efficiency is achieved when MSB = MSC.

When deciding upon how much to spend on product development, a firm will consider a. only the marginal revenue from product development. b. only the marginal cost of product development. c. both the marginal revenue and marginal cost of product development. d. the price and average total cost of product development.

C For virtually all business decisions, a firm compares the marginal revenue and marginal cost resulting from the decision.

Globalization has ____ the demand for low-skilled workers and _____ the demand for high-skilled workers. a. increased; increased b. increased; decreased c. decreased; increased d. decreased; decreased

C Globalization also has increased the demand for high-skilled workers and so is a second reason why their wages and incomes have increased.

Economists point out that direct regulation of pollution by the government a. is the most efficient way to deal with the external costs from pollution. b. is almost always combined with the assignment of property rights. c. can require that firms use abatement even if the technology is not the least-cost solution. d. None of the above answers are correct.

C Government agencies often do not have the knowledge necessary to choose the least-cost solution to the problems created by pollution.

The implicit rental rate of capital includes the ____ and the ____. a. normal profit; economic profit b. economic profit; economic depreciation c. normal profit; economic depreciation. d. economic depreciation; forgone interest

D Answer d is the definition of implicit rental rate

Universal coverage of health insurance means that a. the government must pay all healthcare bills. b. doctors must be employed by the government and hospitals must be owned by the government. c. everyone is covered by health insurance, except for already existing health problems. d. everyone is covered by health insurance, including already existing health problems.

D Answer d is the definition of universal coverage.

If a perfectly competitive firm incurs an economic loss, it a. always shuts down immediately. b. continues to operate until either the price rises or its costs fall so that it no longer has an economic loss. c. shuts down if P > AVC. d. shuts down if P < AVC.

D As long as P > AVC, the firm's losses are smaller if it operates than if it shuts down.

A farmer discovers that the total cost of growing 50 acres of eggplant is $50,000 and that the total cost of growing 51 acres of eggplant is $52,000. The marginal cost of the 51st acre of eggplant is a. $52,000. b. $50,000. c. $2,000. d. $1,000.

D Because total cost equals total fixed cost plus total variable cost, total fixed cost equals $6. Then, average fixed cost is total fixed cost divided by total output, so average fixed cost equals $6 ÷ 3 = $2.

The idea that political parties will have similar policy proposals reflects a. free riding. b. rational ignorance. c. government failure. d. the principle of minimum differentiation.

D Both parties want to appeal to a majority of voters in order to be elected. So to appeal to voters, both present similar proposals, which is the principle of minimum differentiation.

The possibility that an employee might not work hard is an example of the a. problem of opportunity cost. b. principle of scarcity. c. limited liability doctrine. d. principal-agent problem.

D By loafing, the agent — the employee — takes an action that is not in the best interests of the principal — the owner.

A normal profit is a. the profit the business always earns. b. a cost that is always accurately measured by an accountant. c. the amount of profit an accountant calculates for a company. d. not the same as the company's economic profit.

D Economic profit is any profit over and above normal profit.

The measured annual distribution of wealth a. understates inequality because it does not take into account the family's stage in its life cycle. b. understates inequality because it does not take into account the distribution of human capital. c. overstates inequality because it takes into account the family's stage in its life cycle. d. overstates inequality because it does not take into account the distribution of human capital.

D If human capital were included in the measured wealth distribution, the distribution would be more equal.

The efficient amount of a public good a. is as much as the public demands. b. cannot be provided unless the tragedy of nonexcludability is overcome. c. is the amount that has the marginal social benefit exceeding the marginal social cost by as much as possible. d. is such that the marginal social benefit equals the marginal social cost.

D If the marginal social benefit from any good equals the marginal social cost, the efficient amount is produced.

Using an incentive system of organizing a business means that a manager's commands give the workers the incentive to maximize the firm's profit.

False An incentive system sets up incentives, such as paying sales agents by commission, that give workers the incentive to maximize the firm's profit.

Total costs first fall and then, as diminishing returns sets in, total costs rise as the firm expands its output.

False As output increases, total cost always rises.

Monopolistically competitive firms incur an economic loss if they produce the level of output that sets MR = MC.

False By producing the quantity that sets MR = MC, a firm maximizes its profit.

The distribution of income in the United States is less equal than in other countries.

False Compared to other nations, the distribution of income in the United States is neither extremely equal nor extremely unequal.

A firm's producer surplus equals its economic profit.

False Economic profit = producer surplus - fixed cost.

Economies of scale occur when an increase in the number of workers employed increases total output.

False Economies of scale occur when an increase in output leads to a fall in the average cost.

Taxing private producers of education can help overcome the externality problem of education.

False Education has an external benefit, so the right policy is to subsidize, not tax, education.

Firms exit a market whenever they cannot make an economic profit.

False Even if they do not make an economic profit, firms remain in the industry as long as they break even, that is, make zero economic profit.

New technology raises firms' costs, which causes all firms to incur an economic loss in the short run.

False Firms that adopt the new technology lower their costs and make a temporary economic profit.

Flu vaccination is a good example of a negative production externality.

False Flu vaccination is a good example of a positive consumption externality.

For a single-price monopoly, marginal revenue, MR, equals price, P.

False For a single-price monopoly, P > MR.

Government failure generally leads to underprovision of public goods.

False Government failure leads to the overprovision of public goods.

If P > ATC, a perfectly firm incurs an economic loss.

False If P < ATC, the firm incurs an economic loss.

If the price is less than a perfectly competitive firm's minimum ATC, to maximize its profit the firm immediately shuts down.

False If P < AVC, the firm shuts down (if P < ATC the firm suffers an economic loss).

Advertising by monopolistically competitive firms must increase their markups.

False If firms advertise, then the demand for each firm's product can become more elastic, which reduces the firm's makeup.

The inefficiency created by a negative production externality can be overcome if the government subsidizes production of the good.

False If production of a good creates an external cost, to attain efficiency its production needs to be taxed, not subsidized.

Rate of return regulation gives producers a strong incentive to minimize their costs.

False If the costs rise, the producer knows that the regulators will allow the company to hike its price to offset the higher costs.

Markets — rather than firms — likely will coordinate economic activity in situations where there are economies of scale.

False If there are economies of scale (the cost of producing a unit of a good or service falls as more are produced) firms coordinate the activity because they can capture these economies of scale.

If two firms' decisions about whether to conduct R&D can be characterized as a game of chicken, the Nash equilibrium is for neither to conduct R&D.

False In a game of chicken, the Nash equilibrium is for one firm to conduct R&D but it is not possible to predict which firm undertakes the R&D.

In a perfectly competitive industry many firms produce very similar but slightly different products.

False In a perfectly competitive industry, each of the many firms produces an identical product

In a one-time only prisoners' dilemma game, the best strategy for a prisoner is to confess only if the prisoner believes that the other player will confess.

False In a prisoners' dilemma game, the Nash equilibrium is for each player to confess.

The short run is the period of time over which only one factor of production is variable.

False In the short run, at least one factor or production is fixed.

Income in the United States is distributed normally; that is, it has the common bell shape.

False Income in the United States is skewed, with relatively few people earning above-average incomes and many people earning below-average incomes.

The poorest 20 percent of American families receive about 15 percent of the nation's total income; the richest 20 percent receive about 25 percent of the nation's total income.

False Income is less equally distributed than the question states: The poorest 20 percent receive less than 4 percent of total income and the richest 20 percent receive more than 50 percent of total income.

Inheritances generally make the income distribution more equal.

False Inheritances make the income distribution less equal

A person's marginal benefit from a public good increases as more of the good is consumed.

False Like the marginal benefit from a private good, the marginal benefit from a public good decreases as more of the good is consumed.

Limit pricing refers to attempts by firms to set their price at the highest possible limit.

False Limit pricing refers to the situation in which an established firm sets a low price in order to keep new competitors out of the market.

Marginal cost equals total cost divided by total output.

False Marginal cost equals the additional total cost divided by the additional output.

Marginal cost is always greater than average total cost.

False Marginal cost usually starts below the average total cost and then rises above it

Monopolistic competition occurs when monopolies compete with each other.

False Monopolistic competition occurs when many firms, each making a slightly differentiated product, compete with each other.

Free entry is the reason that monopolistically competitive firms have excess capacity.

False Monopolistically competitive firms have excess capacity because they produce differentiated goods.

To maximize its profit, in the short run a monopolistically competitive firm produces the level of output that sets P = ATC.

False Monopolistically competitive firms use the same rule as all firms: to maximize their profit, produce so that MR equals MC.

Most nations leave the delivery of health care services to the private market.

False Most nations do not leave the provision of healthcare to the private market.

Concentration ratios indicate that most of the nation's goods and services are produced in oligopolistic markets.

False Most of the goods and services are produced in competitive markets.

There are no barriers to entry in oligopoly.

False Oligopoly has only a small number of firms competing because barriers to entry prevent new firms from entering the market.

Price discrimination is an attempt by a monopolist to capture the producer surplus.

False Price discrimination captures consumer surplus, not producer surplus.

The only situation in which price fixing among competitors is legal is if it is necessary to prevent a firm from going bankrupt.

False Price fixing is automatically and always illegal.

Rational ignorance is the situation wherein politicians are uninformed about certain voters' desires.

False Rational ignorance occurs when a voter is uninformed about an issue because the benefit to the voter of becoming informed is less than the cost to the voter.

In moving from perfect competition to single-price monopoly, the monopoly captures as economic profit the entire consumer surplus lost by consumers.

False Single-price monopolists capture only part of the consumer surplus. They create deadweight loss, part of which is the consumer surplus lost to everyone in society.

The ATC curve always passes through the minimum point of the MC curve.

False The MC curve always passes through the minimum point of the ATC curve.

In the United States, the Patient Protection and Affordable Care Act creates a system of healthcare with universal coverage and a single payer.

False The Patient Protection and Affordable Care Act aims for a system of universal coverage but it creates a system using private and government insurance and subsidizes the private insurance.

Total variable costs are always greater than total fixed costs.

False The amount of variable cost and the amount of fixed cost are not necessarily related, except that in the long run all costs are variable costs.

The average total cost curve, like the average product of labor curve, has an upside-down U-shape.

False The average total cost curve has a "right-sideup" U shape.

The farther the Lorenz curve is from the line of equality, the more equal is the distribution of income.

False The closer the Lorenz curve to the line of equality, the more equal the income distribution.

If oligopolistic firms are able to sustain an outputrestricting, price-increasing collusive agreement, they will produce the efficient level of output.

False The collusive agreement described in the problem decreases output below its efficient level.

When external costs are present, the private market produces less than the efficient level of output.

False The existence of external costs means that the private market produces more than the efficient amount of the good.

If the marginal product of another worker exceeds the marginal product of the previous worker hired, the firm is experiencing economies of scale.

False The firm has increasing marginal returns because only one factor has been changed.

The market demand curve in a perfectly competitive industry is horizontal.

False The firm's demand curve is horizontal, but the market demand curve slopes downward.

A perfectly competitive firm's supply curve is its ATC curve.

False The firm's supply curve is its MC curve above its AVC curve.

A perfectly competitive firm's supply curve shows the quantities of output supplied at all prices that enable the firm to earn an economic profit.

False The firm's supply curve shows the amount that will be produced regardless of whether or not the firm earns an economic profit.

Monopolistically competitive firms can make an economic profit in the short run and in the long run.

False The firms cannot make an economic profit in the long run because there are no barriers to entry.

The four-firm concentration ratio is the sum of the squared market shares of the four largest firms in an industry.

False The four-firm concentration is the sum of the market shares of the four largest firms.

The larger the initial Herfindahl-Hirschman Index, the more likely the Federal Trade Commission is to allow a merger to take place.

False The lower the initial HHI, the more likely the Federal Trade Commission will not challenge a merger.

The marginal social benefit curve for a public good is obtained the same way as the marginal social benefit curve for a private good.

False The marginal social benefit curve for a public good is derived by adding vertically each individual's marginal benefit curve; the marginal social benefit curve for a private good is derived by adding horizontally each person's marginal benefit curve.

A movie shown in an uncrowded movie theater is both nonexcludable and nonrival.

False The movie is nonrival but not nonexcludable because a theater can easily exclude people who do not pay to see the movie.

The private market produces more than the efficient amount of a good having an external benefit.

False The private market produces less than the efficient amount of a good with an external benefit.

By definition, a firm is economically efficient whenever the business must increase its use of resources in order to increase the amount it produces.

False The question gives the definition of technological efficiency.

Firms in a competitive market make a long-run economic profit if demand increases.

False The short-run economic profit from the increase in demand attracts new firms. The new firms produce more output, the price falls, and the economic profit is eliminated.

The larger the Gini ratio, the more equally incomes are distributed.

False The smaller the Gini ratio, the more equal the income distribution.

At the efficient quantity, the total producer surplus must equal the total consumer surplus.

False The sum of the producer surplus plus consumer surplus is maximized but there is no necessary reason for them to equal each other.

The tragedy of the commons is that people use an inefficiently small quantity of the common resource.

False The tragedy of the commons is that an inefficiently large quantity of the common resource is used.

Because firms must hire workers, the wages paid to the workers are not part of the opportunity cost of running the business.

False The wages are an opportunity cost because the fund used to pay it could have been used to purchase something else.

If males on average earn more than females, there must be discrimination in the labor market.

False There might be discrimination, but there are other possibilities, such as specialization, that can account for wage differentials.

When firms enter a market, the market demand increases.

False When firms enter a market, the market supply increases.

When the long-run average cost (LRAC) curve slopes upward, the firm is experiencing economies of scale.

False When the LRAC curve slopes upward, average cost increases when output increases, so over this range of output the firm is experiencing diseconomies of scale.

Because you are a member of the public, your decision to buy a pizza is a public choice.

False Your decision to buy a pizza is a private choice because it affects only you not the public at large.

Per person expenditure on healthcare is larger in the United States than any other nation.

True U.S. per person expenditure on healthcare is about twice that of the average in other developed nations.

Price wars can break out when a small number of new firms enter an industry.

True When a small number of new firms enter a market, the firms might find themselves in a prisoners' dilemma in which competition forces the price of the product down.

A natural monopoly regulated using an average cost pricing rule produces an inefficient level of output.

True With an average cost pricing rule, the natural monopoly produces less than the efficient amount of output.

Barriers to entry are essential to a monopoly.

True Without barriers to entry, other firms will enter the industry so that it no longer is a monopoly.

Monopolistic competition is similar to perfect competition because there are a large number of firms in both market structures.

True A competitive industry has a large number of firms.

If demand decreases, then some firms in a competitive market exit the market.

True A decrease in demand lowers the price and the firms incur an economic loss. The economic loss will lead some firms to exit the market.

A marginal cost pricing rule imposed on a natural monopoly creates an efficient use of resources.

True A marginal cost pricing rule means that the firm produces the efficient quantity but the firm incurs an economic loss.

Compared to a single-price monopoly, a perfectly price-discriminating monopoly reduces the amount of consumer surplus.

True A perfectly price-discriminating monopolist converts the entire consumer surplus into additional economic profit for itself.

When a single-price monopoly is maximizing its profit, P > MC.

True A single-price monopoly produces at MR = MC. Because P > MR, the equality between MR and MC means that P > MC.

Advertising can signal product quality.

True Advertising can be used to signal to consumers that the product is high quality.

Assigning a property right is a potential method that can lead to the efficient use of a common resource.

True Assigning a property right, establishing a quota, and assigning individual transferable quotas are three methods that can lead to the efficient use of a common resource.

The vertical distance between the MSC curve and the MC curve is equal to the marginal external cost.

True At any quantity, the difference between the marginal social cost and the marginal private cost is the marginal external cost.

A monopoly can make an economic profit indefinitely.

True Barriers to entry limit the competition faced by the monopoly, so it is able to make an economic profit indefinitely.

A private market produces less than the efficient quantity of pure public goods.

True Because of the free-rider problem, a private unregulated market produces less than the efficient amount of a public good.

The price of an ITQ equals the difference between the marginal private benefit at the quota quantity minus the marginal cost of using the resource.

True Because the ITQ can be sold, less efficient users will sell their ITQs to more efficient users, which leads to the efficient use of a common resource

Giving top executives of large corporations stock in the companies is a method of handling a principal-agent problem.

True Because the price of a share of stock generally rises when the company increases its profits, giving executives stock in the company gives executives the incentive to maximize the company's profit.

Product differentiation gives each monopolistically competitive firm a downward sloping demand curve.

True By making its product different from those of its competitors, each monopolistically competitive firm has a unique product and hence a downward-sloping demand curve.

The Sherman Act prohibits conspiracies that restrict interstate trade.

True Conspiracies that restrain trade are outlawed in the first section of the Sherman Act.

A disadvantage of the corporate form of business organization is that its profits are taxed twice.

True Corporate profits are taxed once as income to the corporation. The profits are taxed a second time because the shareholders must also pay a tax on them, either as dividends or as capital gains.

Transaction costs are a reason why firms can be more efficient than markets in coordinating economic activity.

True Doing business with a firm might require only one transaction, whereas conducting the same business in markets might require many transactions.

In a perfectly competitive industry, no single firm can significantly affect the price of the good.

True Each firm is a price taker.

If a firm is economically efficient, it must be technologically efficient.

True Economic efficiency means that the firm necessarily is technologically efficient; technological efficiency, however, does not necessarily mean that the firm is economically efficient.

The efficient use of a common resource requires using the resource to the point where the MSC of using the resource equals the MSB of the resource.

True Efficient use of any resource requires that the MSC equal the MSB.

Externalities can arise from both production and consumption.

True Externalities can arise from both production and consumption and can be either positive or negative.

As additional people use a common resource, the marginal private benefit for the initial users decreases.

True For instance, as more people fish in an area, the catch of all the initial fishers decreases.

Globalization has increased the salary received by the "winner" of a contest to become the top executive of large multinational company.

True Globalization has increased the size of the pool of job candidates, which has, in turn, increased the size of the "award" won by the winner.

Government redistribution makes the income distribution more equal.

True Government redistribution programs increase the income of poorer households and decrease the income of richer households.

A single firm in a contestable market might be unable to make an economic profit.

True In a contestable market, if the firm sets its price so that it makes an economic profit, competitors enter the market.

More years of schooling and more years of work experience both will increase human capital.

True In general, people with more human capital have higher wages, so more schooling and more work experience generally lead to higher wages.

In the long run, all costs are variable costs and no costs are fixed cost.

True In the long run, all factors of production can be varied so all costs are variable costs.

In the long run, in a perfectly competitive market consumers pay the lowest possible price that allows the firms to earn zero economic profit.

True In the long run, the price equals the lowest possible average total cost.

A perfectly competitive firm can make an economic profit, zero economic profit, or incur an economic loss in the short run.

True In the short run, depending on market demand and the firm's costs, a perfectly competitive firm can make an economic profit, incur an economic loss, or make zero economic profit.

A subsidy can be the appropriate policy for a good or service with an external benefit.

True Left alone, the private market would produce less than the efficient amount of the good. A subsidy will increase the amount produced.

A major advantage of the corporate form of business organization is limited liability.

True Limited liability means that owners of corporations are not liable for its debts if the company goes bankrupt.

Monopolistically competitive firms have large marketing and selling costs.

True Marketing and advertising play key roles in monopolistically competitive firms' efforts to differentiate their products.

A monopolistically competitive firm can make an economic profit if it develops new products.

True Monopolistically competitive firms constantly try to further differentiate their products, and developing new products is one method they use.

To maximize their profits, both monopolies and perfectly competitive firms produce the level of output that sets MR = MC.

True No matter its industry type, a firm producing so that MR = MC earns the maximum profit.

In the political marketplace, voters and firms demand policies.

True On the other side of political marketplace, politicians and bureaucrats supply policies.

A firm's opportunity costs include resources bought in a market and resources supplied by the owner.

True Opportunity costs include ALL the costs of running a business.

Technology limits a firm's profits.

True Other limiting factors are information and marketing constraints.

Income in the United States is distributed less equally today than forty years ago.

True Over the past four decades, the distribution in the United States has become less equal.

Patents grant the patent owner a legal monopoly.

True Patents legally prohibit anyone else from producing the same good.

Public goods face the free-rider problem.

True Public goods are nonexcludable and therefore face a severe free-rider problem.

Rent seeking is a cost to society of monopoly.

True Rent seeking refers to the use of resources to establish a monopoly.

Repeated games are more likely to have a cooperative equilibrium than one-time only games.

True Repeated games have strategies that are unavailable in games played only once, such as the titfor-tat strategy. These new strategies often can result in the cooperative equilibrium. So, repeated games are more likely to have a cooperative equilibrium.

Resale price maintenance might create efficiency if it induces dealers to provide the efficient standard of service when selling a product.

True Resale price maintenance can lead to efficiency, as described in the question, but it can also lead to inefficiency if it enables dealers to operate as a cartel and charge the monopoly price.

Since 1970, the world distribution of income has become more equally distributed.

True Since 1970, average incomes in very poor nations such as India and China have increased, thereby increasing the equality of the world distribution of income.

If the marginal product of labor exceeds the average product of labor, the average product of labor rises when more workers are hired.

True This result is a reflection of the relationship between marginals and averages.

The change in total cost from producing another unit of output equals the a. average total cost. b. variable cost. c. average variable cost. d. marginal cost.

A Average total cost equals total cost divided by total output, that is, $24 ÷ 4, or $6.

The concept of diminishing returns a. applies to both labor and to capital. b. applies to labor but does not apply to capital. c. applies to capital but does not apply to labor. d. does not apply to either labor or capital.

A All factors are subject to diminishing returns.

A form of business that is simple to set up, whose profits are taxed only once, and is run by a single owner is a a. proprietorship. b. partnership. c. corporation. d. either a proprietorship or partnership, depending on other information.

A Answers (b) and (d) are incorrect because partnerships (which are easy to set up and whose profits are taxed only once) have more than one owner

A monopolist finds that the marginal revenue from producing another unit of output exceeds the marginal cost of the unit. To increase its profit the monopolist will a. produce the unit. b. not produce the unit, but not cut back its production at all. c. not produce the unit and cut back its production by at least one unit. d. do none of the above.

A As long as MR exceeds MC, producing the unit adds to the firm's total profit because it adds more to revenue than to cost.

The short-run market supply curve is a. the sum of the quantities supplied by all the firms. b. undefined because the number of firms is constant in the short run. c. vertical at the total level of output being produced by all firms. d. horizontal at the current market price.

A At any price, the market quantity supplied is the sum of the quantities that all the firms supply.

A monopoly movie theater discovers that viewers who watch movies at 8 P.M. are willing to pay more than viewers who watch 5 P.M. As a result, if the movie theater owner wants to price discriminate and earn a larger economic profit, the owner sets a. a higher price at 8 P.M. b. the same price at 5 P.M. as at 8 P.M. c. a lower price at 8 P.M. d. There is not enough information given to answer the question.

A Customers who are willing to pay more are charged a higher price.

For a common resource such as fish, the marginal private cost of an additional fisher is ____ the marginal social cost of an additional fisher. a. less than b. equal to c. greater than d. not comparable to

A Each additional fisher decreases the stock of fish, thereby making it more costly for the other fishers to catch fish. The increased cost imposed on the other fishers is an external cost.

The efficient quantity of a public good is likely to be provided if a. voters are well informed. b. rational ignorance is combined with special interest lobbying. c. politicians are well informed. d bureaucrats are rationally ignorant.

A If voters are well informed, they can ensure that politicians force bureaucrats to provide the efficient amount of the public good.

The world distribution of income is ____ the U.S. distribution of income. a. less equal than b. equal to c. more equal than d. not comparable to

A Incomes in the world range from the extremely poor, who live on less than $2.50 per day, to the very rich, who live in industrialized countries.

Prior to the Patient Protection and Affordable Care Act, patients' out-of-pocket cost was the ____ part of the total expenditure on healthcare services and healthcare services probably were inefficiently ____. a. smallest; overprovided b. smallest; underprovided c. largest; overprovided d. largest; underprovided

A Prior to the passage of the Patient Protection and Affordable Care Act, the smallest part of the healthcare expenditures was made by patients' out-of-pocket expenditures. Compared to other countries indicates that healthcare services were overprovided.

Most firms are a. proprietorships. b. partnerships. c. corporations. d. nonprofit

A Proprietorships are the most numerous type of business organization.

Which of the following is a possible government solution to the problem posed by a good with an external benefit? a. Subsidize the production of the good. b. Tax the production of the good. c. Tax the consumption of the good. d. All of the above are possible solutions.

A Subsidies are a solution to the problem posed by an external benefit.

Which curve intersects the minimum point of the average total cost curve and the average variable cost curve, that is, goes through the minimum points of the ATC curve and the AVC curve? a. The marginal cost (MC ) curve b. The average fixed cost (AFC ) curve c. The marginal product (MP ) curve d. None of the above because no curve goes through the minimum points of the ATC and AVC curves.

A The MC curve intersects both the ATC and the AVC curves at their minimums.

The marginal cost of the 100th ton of paper is $80 and the marginal external cost is $30. The marginal social cost is a. $110. b. $50. c. $2,400. d. None of the above answers are correct.

A The MSC equals the MC plus the marginal external cost.

Total product divided by the total quantity of labor employed equals the a. average product of labor. b. marginal product of labor. c. average total cost. d. average variable cost.

A The average product of labor is total product (output) per worker.

The capture theory of intervention predicts that government regulation will maximize a. economic profit. b. consumer surplus. c. deadweight loss. d. total surplus.

A The capture theory predicts that regulation benefits the interest of producers, who have managed to "capture" the regulator.

Which of the following is necessarily true when a perfectly competitive firm is in short-run equilibrium? a. MR = MC. b. P = minimum LRAC. c. P = ATC. d. All of the above are true at short-run equilibrium.

A The condition MR = MC is necessary for the firm to be maximizing profit.

Of the following, which an example of public good? a. The defense services provided by a new stealth bomber b. A pair of pants c. A cable television system d. An uncrowded theme park such as Walt Disney World

A The defense services are nonrival and nonexcludable and so are a public good.

Taco Bell is a monopolistically competitive firm. Taco Bell's demand curve is ____ and its marginal revenue curve is ____. a. downward sloping; downward sloping b. horizontal; horizontal c. upward sloping; downward sloping d. downward sloping; upward sloping

A The downward sloping demand curve and the resulting downward sloping marginal revenue curve are the result of product differentiation.

A natural monopoly under rate of return regulation has an incentive to a. inflate its costs. b. produce more than the efficient quantity of output. c. charge a price equal to marginal cost. d. maximize consumer surplus

A The firm's incentive to inflate its costs is a drawback of rate-of-return regulation.

In a duopoly with a collusive agreement, when is the industry-wide economic profit as large as possible? a. When both firms comply with the collusive agreement. b. When one firm cheats on the cartel and the other firm does not. c. When both firms cheat on the collusive agreement. d. The answer is indeterminate because it depends on the industry's MR curve.

A The interest of the industry as a whole is to maintain the cartel.

18 If a perfectly competitive industry becomes a singleprice monopoly and costs do not change, the producer ____, demanders ____, and society ____. a. benefits; are harmed; is harmed b. is harmed; benefit; is harmed c. is harmed; are harmed; is harmed d. is harmed; benefit; benefits

A The producer benefits because the monopoly can make an economic profit; consumers lose because of the reduction in consumer surplus; and society loses due to the deadweight loss.

The method of organizing production that uses a managerial hierarchy is a. a command system. b. an incentive system. c. a principal-agent system. d. None of the above.

A The question gives the definition of a command system.

Which of the following is rival and nonexcludable? a. A public good b. A common resource c. A private good d. A natural monopoly

B A common resource, such as fish in the ocean, is rival and nonexcludable.

Of the approximate total population of 300 million people in America, about how many have incomes below the official poverty level? a. Approximately 13 million b. Approximately 46 million c. Approximately 73 million d. Approximately 104 million

B According to the government's measure of poverty, 46 million Americans lived in poverty.

The four-firm concentration ratio measures the share of the largest four firms in total industry a. profits. b. sales. c. cost. d. capital.

B Adding the percentage of the industry's sales made by the four largest firms is the definition of the four-firm concentration ratio

Business travelers usually pay higher airline fares than families on a vacation. So, a. business travelers aren't maximizing their wellbeing. b. business travelers have a greater willingness to pay for air travel than do vacation travelers. c. the MC of serving vacation travelers is lower than that of serving business travelers. d. vacation travelers have a greater willingness to pay for air travel than do business travelers.

B Airlines price discriminate and charge business travelers, who are willing to pay more, a higher price than vacation travelers, who are not willing to pay a high price.

Assortative mating ____ the distribution of income. a. makes the distribution of income more equal. b. makes the distribution of income less equal. c. has no effect on the distribution of income. d. might make the distribution of income more equal or less equal.

B Assortative mating refers to "like marrying like," thereby making the distribution of income less equal.

For prices below the minimum average variable cost, a perfectly competitive firm's supply curve is a. horizontal at the market price. b. vertical at zero output. c. the same as its marginal cost curve. d. the same as its average variable cost curve.

B At prices below the minimum average variable cost, the firm shuts down and produces zero.

For a perfectly competitive firm, MR always equals a. ATC. b. P. c. AVC. d. none of the above because MR is not always equal to the same thing.

B Because a perfectly competitive firm can always sell another unit of output at the market price, the market price is the firm's marginal revenue.

28 If a natural monopoly is required to set its price equal to its marginal cost, a. the company makes an economic profit. b. the company incurs an economic loss. c. competitors will enter the market. d. the company will produce more than the efficient level of output.

B Because the company incurs an economic loss, it needs to be subsidized or allowed to price discriminate in order to breakeven (make zero economic profit).

Which of the following is a reason why the wage rate paid high-skilled workers exceeds the wage rate paid low-skilled workers? a. The market for high-skilled workers is more competitive than the market for low-skilled labor. b. The demand for high-skilled workers exceeds the demand for low-skilled workers. c. The number of high-skilled workers exceeds the number of low-skilled workers. d. Low-skilled workers often are in the process of acquiring more human capital.

B Because the demand for high-skilled workers exceeds the demand for low-skilled workers, high-skilled workers have a higher wage rate.

In a duopoly with a collusive agreement, when can one firm have the maximum possible economic profit? a. When both firms comply with the collusive agreement. b. When one firm cheats on the agreement and the other firm does not cheat. c. When both firms cheat on the agreement. d. The answer is indeterminate because it depends on the firm's MR curve.

B Each firm's individual interest is to be the lone cheater on the cartel agreement. Compare this answer to the previous answer.

When a firm is experiencing economies of scale, a. the MP curve slopes upward. b. the LRAC curve slopes downward. c. diminishing returns to labor have been suspended. d. the MC curve slopes downward.

B Economies of scale means that increases in output lower the firm's long-run average costs.

Taco Bell can use its equipment and staff to produce and sell tacos, burritos, and drinks less expensively than would be the case if each had to be purchased separately in a market. This situation demonstrates a. economies of scale. b. economies of scope. c. long-term contracts. d. none of the above.

B Economies of scope are present when production of a variety of products lowers the cost of producing each unit.

If firms in a market are incurring an economic loss, then as some exit, the price ____ and the surviving firms' economic losses ____. a. rises; do not change b. rises; become smaller c. falls; become larger d. falls; become smaller

B Firms continue to exit as long as they incur an economic loss, thereby driving the price higher and reducing the survivors' economic losses.

In the long run, a perfectly competitive firm can a. make an economic profit. b. make zero economic profit. c. incur an economic loss. d. All of the above are possible.

B Free entry and exit mean that only zero economic profit is possible in the long run.

In the long run, a monopolistically competitive firm's economic profit is zero because of a. product differentiation. b. the lack of barriers to entry. c. excess capacity. d. the downward-sloping demand curve of each firm.

B If firms in the industry are making an economic profit, the absence of barriers to entry means that new firms enter the industry and compete away the economic profit.

Monopolistically competitive firms constantly develop new products in an effort to a. make the demand for their product more elastic. b. increase the demand for their product. c. increase the marginal cost of their product. d. None of the above answers is correct.

B If the firm can increase the demand for its product, it can temporarily make an economic profit.

Following a decrease in demand, the price falls more in the ____ and the quantity decreases more in the ____. a. short run; short run b. short run; long run c. long run; short run d. long run; long run

B In the short run, both the price and quantity fall, and firms incur an economic loss. The economic loss means that firms exit the industry and the supply decreases. Thus the price rises from its initial fall, but the amount of the industry output continues to decrease.

Limit pricing refers to a. the fact that a monopoly firm always sets the highest price possible. b. a situation in which a firm might set a low price to keep potential competitors from entering its market. c. how the price is determined in a Nash equilibrium. d. none of the above.

B Limit pricing can occur in contestable markets when the firm plays an entry deterrence game.

The mean (average) U.S. family income in 2012 was approximately a. $13,000. b. $70,000. c. $93,000. d. $150,000.

B Mean household income in the United States is a little more than $71,000.

What type of industry structure has many firms, each producing a slightly different good, with no barriers to entry or exit? a. Perfect competition b. Monopolistic competition c. Oligopoly d. Monopoly

B Monopolistic competition is similar to perfect competition insofar as there are many firms with no barriers to entry or exit. It is dissimilar in that each firm produces a unique but closely related good.

Which of the following statements about monopolistically competitive firms is correct? a. In the long run, they have deficient capacity. b. They have high selling costs. c. They produce the efficient amount of output. d. They rarely advertise.

B Monopolistically competitive firms incur large selling costs trying to differentiate their products.

If the government assigns private property rights to a common resource, then the a. resource is under-utilized. b. marginal private cost becomes equal to the marginal social cost. c. government needs to set a quota to achieve efficiency. d. None of the above answers is correct.

B Once property rights are assigned, the marginal private cost equals the marginal social cost and the efficient quantity of the common resource is used.

Public choices ____ lead the government to produce more than the efficient quantity of a good, a situation which, when it occurs, is called ____. a. can; market failure b. can; government failure c. cannot; market failure d. cannot; government failure

B Public choices are frequently made by the government and in some situations can lead to inefficient overprovision of a good or service, that is, can create government failure.

Paul runs a shop that sells printers. Paul's business is a perfect competitor and can sell each printer for a price of $200. The marginal cost of selling one printer an hour is $100, the marginal cost of selling a second printer is $100, and the marginal cost of selling a third printer is $250. To maximize his profit, Paul should sell a. one printer an hour. b. two printers an hour. c. three printers an hour. d. more than three printers an hour.

B Selling the second printer adds $50 to Paul's total profit, so it will be sold; however selling the third printer lowers Paul's total profit by $50, so it will not be sold.

The LRAC curve generally is a. shaped as an upside-down U. b. U-shaped. c. upward sloping. d. downward sloping.

B The LRAC curve has a U shape: When output increases, at first the LRAC falls but as output increases still more, the LRAC rises.

For a common resource, efficiency requires that the ____ equals the ____. a. marginal private benefit; marginal private cost b. marginal social benefit; marginal social cost c. marginal private benefit; marginal social benefit d. marginal social cost; marginal private cost

B The efficient quantity sets the marginal social benefit equal to the marginal social cost.

Governments often provide public-goods such as national-defense because a. governments know how to produce these goods. b. of the free-rider problems that result in underproduction by private markets. c. people do not value national defense very highly. d. of the potential that private firms will make excess profits.

B The free-rider problem limits the private market's ability to produce the efficient amount of public goods.

In the long run, a. only the amount of capital the firm uses is fixed. b. all factors of production are variable. c. all factors of production are fixed. d. a firm must experience diseconomies of scale.

B The long run is the amount of time until all factors of production become variable

Which of the following is a natural barrier to the entry of new firms in an industry? a. Licensing b. Economies of scale c. Issuing a patent d. Granting a public franchise

B The other possibilities are legal barriers to entry.

Which of the following is NOT a reason for the existence of firms? a. Lower transactions costs for firms b. Principal-agent problem c. Economies of scope d. Economies of team production

B The principal-agent problem is a difficulty that firms must overcome.

Activity for the purpose of creating a monopoly in order to earn an economic profit is a. not legal in the United States. b. called rent seeking. c. called price discrimination. d. called legal monopoly.

B The question defines rent seeking.

10 Because of an increase in labor costs, a monopoly finds that its MC and ATC have risen. Presuming that the monopoly does not shut down, it will ____ its price and ____ the quantity it produces. a. raise; increase b. raise; decrease c. lower; increase d. lower; decrease

B The rise in marginal costs shifts the MC curve up, which leads the firm to decrease the quantity it produces and raise the price it charges.

A free rider is someone who a. does not pay taxes. b. cannot be excluded from consuming a public good even though he or she did not pay for the good. c. paid more than his or her fair share for the provision of a public good. d. cannot be forced to pay for his or her consumption of a private good.

B This answer is the definition of a free rider.

When the marginal product of labor curve is below the average product of labor curve, a. the average product of labor curve has a positive slope. b. the average product of labor curve has a negative slope. c. the total product curve has a negative slope. d. the firm experiences diseconomies of scale.

B This answer reflects the average/marginal relationship that when the marginal is below the average, the average falls.

An unregulated market produces too ___ of a good with an external cost and too ___ of a good with an external benefit. a. much; much b. much; little c. little; much d. little; little

B This answer summarizes the "bottom line" results about how externalities affect efficiency.

If demand for a good decreases, in the short run the price a. falls and each firm produces more output to make up for the lower price. b. falls and, as long as the price remains above the firms' average variable cost, each firm produces less output. c. does not change, but some firms shut down because less is demanded. d. does not change because each firm produces less output.

B When the price falls, each firm moves down its MC curve and produces less. This response — each firm producing less — accounts for the reduction in the quantity supplied along the market supply curve when the price falls.

Monopolistically competitive firms compete only on price.

Because its product is differentiated, monopolistically competitive firms compete on product quality and marketing, as well as on price.

In the prisoners' dilemma game with a Nash equilibrium, a. only one prisoner confesses. b. neither prisoner confesses. c. both prisoners confess. d. any confession is thrown out of court.

C Both players confess even though it is in their joint interest for neither to confess.

A monopoly can make an economic profit a. only in the short run. b. only in the long run. c. indefinitely, that is, in both the short run and the long run. d. The premise of the question is wrong because a monopoly can never make an economic profit.

C A monopoly can make an economic profit and, because of the barriers to entry, the economic profit can last indefinitely.

Compared to a perfectly competitive industry with the same cost, the amount of output produced by a single-price monopoly is a. more than the competitive industry. b. the same as the competitive industry. c. less than the competitive industry. d. not comparable to the competitive industry.

C A single-price monopoly creates a deadweight loss because it produces less than a competitive industry.

Over the past several decades, the distribution of income within most countries has become ____ equal and the distribution of income in the world has become ____ equal. a. more; more b. more; less c. less; more d. less; less

C Although income within most nations has become distributed less equally, the overall world distribution of income has become more equal because incomes within very poor countries have grown relatively rapidly.

A monopolistically competitive firm is like a monopoly firm insofar as a. both face perfectly elastic demand. b. both make an economic profit in the long run. c. both have MR curves that lie below their demand curves. d. neither is protected by high barriers to entry.

C Both have downward-sloping demand curves, so both have MR curves that lie below their demand curves.

Suppose that the marginal social benefit from another unit of a public good exceeds the marginal social cost of producing it. The quantity produced a. equals the efficient quantity. b. exceeds the efficient quantity. c. is less than the efficient quantity. d. might exceed, be less than, or equal to the efficient quantity but because the good is a public good, more information is needed.

C If one more unit is produced, the gain to society (the marginal social benefit) exceeds the cost to society (the marginal social cost), so total surplus increases if another unit is produced.

Which of the following is true for a single-price monopoly? a. Price always equals marginal cost, that is, P = MC at all levels of output. b. For all levels of output, price equals marginal revenue, that is, P = MR. c. In the short run, the monopoly might make zero economic profit or incur an economic loss. d. None of the above because all the statements are false.

C If the demand for a monopoly's good declines or its costs rise, a monopoly, like any firm, might make zero economic profit or incur an economic loss.

If an R&D game between two firms is a game of chicken, then the equilibrium has a. both firms conducting the R&D. b. neither firm conducting the R&D. c. one of the two firms conducting the R&D. d. a flaw because R&D must be done but the game's equilibrium is that it might be done.

C In the Nash equilibrium, one firm conducts the R&D, even though the firm that does not conduct the R&D has a higher profit.

In the short run, after an increase in demand firms ____ and in the long run, after an increase in demand firms ____. a. incur an economic loss; make zero economic profit b. make an economic profit; make an economic profit c. make an economic profit; make zero economic profit d. make zero economic profit; make zero economic profit

C In the short run, the price rises and the firms make an economic profit but in the long run the price falls to eliminate the economic profit.

Comparing the wage rates between never-married men and women with equal human capital, researchers have found that the wage rates are a. farther apart than the wage rates of other men and women in the labor force generally. b. the same as wage rates of other men and women in the labor force generally. c. equal. d. not comparable because men and women work at different jobs.

C Never-married men and never-married women have the same degree of specialization in market work and their wage rates are the same.

Which of the following would show the LEAST amount of inequality? a. Measured annual income b. Measured annual wealth c. Lifetime income d. Measured annual income and annual wealth are equally distributed and are more equally distributed than lifetime income.

C Over people's lifetimes, the degree of inequality is less than in any given year.

A monopoly that is able to perfectly price discriminate a. charges everyone the lowest price that they want to pay for each unit purchased. b. produces less output than it would were it a single-price monopoly. c. eliminates consumer surplus. d. creates a larger deadweight loss than it would if it were a single-price monopoly.

C Prefect price discrimination eliminates all consumer surplus by converting it into producer surplus.

Which of the following is rival and excludable? a. A public good b. A common resource c. A private good d. A natural monopoly

C Private foods are rival and excludable; most goods are private goods.

Technological change has ____ the demand for lowskilled workers and _____ the demand for highskilled workers. a. increased; increased b. increased; decreased c. decreased; increased d. decreased; decreased

C Technological change has increased the demand for high-skilled workers and thereby raised the wage rates and incomes rate of high-skilled workers.

A copper ore refiner pollutes the water upstream from a brewery. The transactions costs of reaching an agreement between the two are low. When will the amount of copper refining be at its efficient level? a. If the property right to the stream is assigned to the ore refiner but not if it is assigned to the brewery. b. If the property right to the stream is assigned to the brewery but not if it is assigned to the ore refiner. c. Whenever the property right to the stream is assigned to either the refiner or the brewer. d. None of the above because there is no such thing as the efficient level of copper refining since refining copper creates pollution.

C The Coase theorem shows that when transactions costs are low and the number of parties involved is small, to whom a property right is assigned makes no difference: The externality will be eliminated and the efficient level of production will result.

The idea that increasing the equality of the income distribution reduces economic efficiency is called the a. negative tax trap. b. progressive tax problem. c. big trade-off. d. problem of poverty.

C The big tradeoff points out a cost of increasing income equality: decreasing economic efficiency.

Suppose that firms in a perfectly competitive market are making economic profits. Over time, a. other firms enter the market so that the price rises and economic profits fall. b. some firms leave the market so that both the price and economic profits rise. c. other firms enter the market so that both price and economic profits fall. d. nothing happens because there are no incentives for change.

C The entry of new firms lowers the price and the economic profit, thereby driving the industry toward its long-run equilibrium

The farther away a Lorenz curve for income is from the line of equality, the a. more equally wealth is distributed. b. more equally income is distributed. c. less equally income is distributed. d. None of the above.

C The farther away the Lorenz curve is from the line of equality, the less equally income is distributed.

A monopolistically competitive firm has excess capacity because in the a. short run MR = MC. b. short run the firm does not produce at the minimum marginal cost. c. long run the firm does not produce at the minimum average total cost. d. long run the firm earns an economic profit.

C The firm produces less output than that which minimizes its long-run ATC.

Monopolistically competitive firms compete on all of the following EXCEPT a. quality. b. price. c. quantity. d. marketing.

C The firms compete on all the factors listed except quantity.

The LRAC curve a. equals the minimum points on all the short-run ATC curves. b. equals the lowest possible marginal cost of producing the different levels of output. c. equals the lowest attainable average total cost for all levels of output when all factors can be varied. d. generally lies above the short-run ATC curves.

C The long-run average cost curve, or LRAC curve, shows the lowest possible average total cost for producing any level of output.

If the company produces no output, it must pay a. no costs. b. a small amount of variable cost. c. its fixed cost. d. its owners a normal profit.

C The marginal cost equals the difference in total cost ($24 − $21 = $3) divided by the change in output (4 − 3 = 1) so the marginal cost is $3.

Of the following, which is a perfect competitor? a. AT&T, one of the three major providers of landbased long distance telephone service in the United States. b. The company that provides your local cable TV service. c. A tomato grower living in Florida. d. DeBeers, the provider of more than 70 percent of the rough diamonds in the world.

C The other possibilities describe industries with only a few firms, so they cannot be perfectly competitive firms.

When will new firms want to enter a market? a. When MR = MC for the existing firms in the market. b. Any time the price of the good has risen. c. When the new firms can make economic profits. d. When the firms in the market are not maximizing profit.

C The possibility of making an economic profit leads to entry into the industry.

When individual transferable quotas are used in the market for a common resource, the market price of an ITQ is equal to the a. marginal private benefit at the quota quantity. b. marginal social benefit at the quota quantity. c. marginal private benefit at the quota quantity minus the marginal private cost. d. marginal social benefit at the quota quantity minus the marginal private cost.

C The price equals the value of the ITQ, the marginal private benefit at the quota quantity minus the cost of using the resource, which is the marginal private cost

The tragedy of the commons is the absence of incentives to a. correctly measure the marginal cost. b. prevent under use of the common resource. c. prevent overuse and depletion of the common resource. d. discover the resource.

C The tragedy of the commons is that common resources are used too intensively.

Government tax and redistribution programs a. generally redistribute income away from the poor and give it to the rich. b. have no net redistributive effects. c. generally redistribute income away from the rich and give it to the poor. d. are dwarfed by the scale of government programs designed to give away goods and services below cost.

C These government programs result in income after redistribution being distributed more equally than market income.

A strategy in which a firm takes the same action that the other firm did in the last period is a a. dominant strategy. b. trigger strategy. c. tit-for-tat strategy. d. wimp's strategy.

C Tit-for-tat implies that "I'll do to you what you did to me last time."

Pat's Catering finds that when it caters 10 meals a week, its total cost is $3,000. If, at this level of output, Pat has a total variable cost of $2,500, what is Pat's fixed cost? a. $250 b. $300 c. $500 d. $3,000

C Total cost equals fixed cost plus variable cost, so fixed cost equals total cost minus variable cost.

The cost of a variable factor, such as the wage paid to workers, rises. This change shifts the a. total fixed cost curve upward. b. marginal product of labor curve downward. c. average variable cost curve upward. d. marginal product of labor curve upward.

C Wages are a variable cost, so a rise in the wage rate shifts the average variable cost curve upward.

A perfectly competitive firm is definitely incurring an economic loss when a. MR < MC. b. P > ATC. c. P < ATC. d. P > AVC.

C When P < ATC, the firm incurs an economic loss.

A perfectly competitive firm marginal costs rise. But its demand curve does not change. As a result, the firm ____ the amount it produces and ____ its price. a. decreases; raises b. increases; lowers c. decreases; does not change d. increases; raises

C When the marginal costs rise, the MC curve shifts upward. In response, the firm decreases the amount it produces. The firm's demand curve did not change, which indicates that the (market) price is constant.

The Herfindahl-Hirschman index (HHI) in an industry is 900. A merger is proposed that will raise the HHI to 980. In this case, the a. Sherman Act will prohibit the merger. b. Federal Trade Commission will challenge the merger. c. Federal Trade Commission will not challenge the merger. d. rule of reason will prevent the merger if it is a merger among competitors.

C Whenever the initial HHI is below 1,500, the Federal Trade Commission will not contest a merger in the industry.

On average, which families have the highest incomes? a. Black households b. Households of Hispanic origin c. White households d. Households of Hispanic origin and white households are tied for the highest income

C White households have the highest average income.

Suppose the efficient scale of production is such that a market has only three firms in it. This market is a. a three-firm monopoly. b. an economies-of-scale oligopoly. c. a cost-based oligopoly. d. a natural oligopoly.

D A natural oligopoly occurs when the efficient scale of production is large enough so that the market can support only a small number of firms.

In order to sell more output, a single-price monopoly must ____ its price and a price-discriminating monopoly must ____ its price. a. raise; raise b. raise; lower c. lower; raise d. lower; lower

D All monopolies must lower their price in order to sell more output.

Which of the following constraints limits a firm's profit? a. Technology constraints b. Information constraints c. Market constraints d. All of the above limit a firm's profit.

D All of the constraints limit the amount of profit a firm can earn.

Amy realizes that her personal benefit from becoming an expert on welfare reform is limited, so she does not learn about this issue. Amy's decision reflects a. the rival nature of information. b. the nonexcludability principle. c. the principle of minimum differentiation. d. rational ignorance.

D Amy is pursuing her own self-interest and rationally decides not to become an expert on welfare reform.

For a common resource, the equilibrium with no government intervention is such that ____ equals ____. a. marginal private benefit; marginal social cost b. marginal social benefit; marginal social cost c. marginal private benefit; marginal social benefit d. marginal social benefit; marginal private cost

D An unregulated equilibrium is the quantity that sets the marginal private benefit, which equals the marginal social benefit, equal to the marginal private cost, which does not equal the marginal social cost.

Diminishing marginal returns occurs when a. all factors are increased and output decreases. b. all factors are increased and output increases by a smaller proportion. c. a variable factor is increased and output decreases. d. a variable factor is increased and its marginal product falls.

D Answer (d) is the definition of diminishing returns.

Product differentiation a. means that monopolistically competitive firms can compete on quality and marketing. b. occurs when a firm makes a product that is slightly different from that of its competitors. c. makes a monopolistically competitive firm's demand curve downward sloping. d. All of the above answers are correct.

D Answer b is the definition of product differentiation and answers a and c are results of product differentiation.

Production of rubber for sneakers creates an external cost of $2 per ton of rubber. What government tax or subsidy program will lead to the efficient amount of rubber being produced? a. A subsidy of more than $2 per ton of rubber. b. A subsidy of $2 per ton of rubber. c. A tax of more than $2 per ton of rubber. d. A tax of $2 per ton of rubber.

D Imposing a tax equal to the marginal external cost sets the marginal private cost, including the tax, equal to the marginal social cost, thereby ensuring that the efficient amount of rubber will be produced.

Which of the following is NOT a characteristic of a perfectly competitive industry? a. A downward-sloping market demand curve. b. A perfectly elastic demand for each firm. c. Each firm decides its quantity of output. d. Each firm produces a good slightly different from that of its competitors.

D In perfect competition, each firm produces a good identical to that of its competitors.

15 In the short run, which of the following is FALSE? a. Perfectly competitive firms can possibly make an economic profit. b. The number of firms is fixed. c. To maximize its profit, a perfectly competitive firm produces enough output so that MR = MC. d. Perfectly competitive firms always produce at the minimum ATC

D In the long run, perfectly competitive firms produce at the minimum ATC, but that is not necessarily the case in the short run.

In the long-run equilibrium in a perfectly competitive market, the firms produce at the ____ possible average total cost and the price equals the ____ possible average total cost. a. highest; highest b. highest; lowest c. lowest; highest d. lowest; lowest

D In the long-run, perfectly competitive firms produce at the minimum average total cost and the price equals this lowest possible average total cost.

In the short run, a perfectly competitive firm can a. make an economic profit. b. make zero economic profit. c. incur an economic loss. d. All of the above answers are possible.

D In the short run, any type of profit or loss is possible: the firm might make an economic profit, zero economic profit, or incur an economic loss.

In the short run a monopoly can make a. only an economic profit. b. only an economic profit or zero economic profit. c. only zero economic profit. d. an economic profit, zero economic profit, or incur an economic loss.

D In the short run, depending on demand and cost, any firm can make an economic profit, zero economic profit, or incur an economic loss.

Price wars can be the result of a. a cooperative equilibrium. b. a firm playing a tit-for-tat strategy in which last period the competitors complied with a collusive agreement. c. new firms entering the industry and immediately agreeing to comply with a collusive agreement. d. new firms entering an industry and all firms then finding themselves in a prisoners' dilemma.

D Neither the new firms nor the old ones want a price war, but a prisoners' dilemma game might make a price war inevitable.

New technology in an industry means that a. all firms in the industry permanently make an economic profit regardless of whether they adopt the technology. b. firms that adopt the new technology permanently make an economic profit. c. firms that do not adopt the new technology permanently make an economic profit. d. firms that adopt the new technology temporarily make an economic profit.

D New technology creates economic profits, giving firms the incentive to adopt the technology. The increased competition from these firms ultimately eliminates the economic profit.

Which of the following statements about the Sherman Act is correct? a. The Sherman Act was the second federal antitrust law. b. The Sherman Act legalized monopolization. c. The Sherman Act outlawed natural monopolies. d. The Sherman Act made restriction of interstate trade illegal.

D The Sherman Act was the first federal antitrust law and outlawed restriction of interstate trade.

A monopolistically competitive firm is like a perfectly competitive firm insofar as a. both face perfectly elastic demand. b. both can make an economic profit in the long run. c. both have MR curves that lie below their demand curves. d. neither is protected by high barriers to entry.

D The absence of high barriers to entry accounts for the large number of firms in each industry.

Which of the following illustrates the concept of external cost? a. Bad weather decreases the size of the wheat crop. b. An increase in the demand for cheese raises the price paid by consumers of pizza, thereby harming these consumers. c. Smoking harms the health of the smoker. d. Smoking harms the health of nearby nonsmokers.

D The bystanders are not the consumers of the cigarettes, so the harm that befalls them is an external cost.

Contests among superstars a. are a reason why technological change has decreased income inequality. b. have been diminished by the on-going globalization. c. need the prizes of the winners to be similar to the prizes of the losers in order for them to have incentive effects. d. explain why top business executives are paid such high incomes.

D The executives who "win" the contest and become top executives are paid enormous incomes as their "prize."

If one person's consumption of a good does not decrease the quantity available for everyone else, the good is a. excludable. b. nonexcludable. c. rival. d. nonrival.

D The good is nonrival because many people can simultaneously consume the same unit of the good.

A disadvantage of the corporate form of business organization is its a. limited liability for its owners. b. unlimited liability for its owners. c. ability to be run by professional managers. d. tax liability because retained profits are taxed twice.

D The profit is taxed once when the corporation earns it as a profit. It is taxed again when an owner sells his or her stock in the company if the profit was retained by the corporation and led to an increase in the price of the stock

Suppose that one taxi company in your city is granted a license by the city so that it is the only cab company that may operate within the city limits. Granting this license is an example of a a. natural barrier to entry. b. case in which a single firm controls a resource necessary to produce the good. c. price-discriminating monopoly. d. legal barrier to entry.

D The taxi company has been granted a legal monopoly.

The higher the cost of acquiring skills, the ____ are the high-skilled and low-skilled labor ____ curves. a. closer together; demand b. farther apart; demand c. closer together; supply d. farther apart; supply

D The vertical distance between the supply curve of high-skilled labor and of low-skilled labor equals the cost of acquiring the skill.

Which of the following is NOT an opportunity cost of operating a business? a. The wages paid to the workers. b. The salary paid to the owners. c. The interest not earned on funds used to buy capital equipment. d. ALL of the above are an opportunity cost of running a business.

D The wages paid the workers and the salary paid the owners are opportunity costs of running a business. So, too, is the forgone interest on the funds used to buy capital equipment because this interest could have been used to buy something else

In a Lorenz diagram for income, the line of equality shows a. the most equitable income distribution. b. how unequally incomes are distributed. c. how much redistribution occurs. d. the income distribution if everyone received the same income.

D This answer defines the line of equality.

Constant returns to scale means that as production is increased, a. total output remains constant. b. average total cost rises. c. average total cost rises at the same rate as the factors. d. total output increases in the same proportion as the factors.

D This is the definition of constant returns to scale.

The short run is a time period in which a. one year or less elapses. b. all factors of production are variable. c. all factors of production are fixed. d. there is at least one fixed factor of production and the other factors of production can be varied.

D This is the definition of the short run.

Brand names a. are an unnecessary expense. b. mean a firm does not need to advertise. c. provide no value to consumers. d. give firms an incentive to maintain consistent quality.

D To preserve their valuable brand names, firms must maintain consistent quality.

Max's Christmas tree lot has a monopoly on sales of Christmas trees. To increase his sales from 100 trees to 101 trees, he must drop the price of all his trees from $28 to $27. What is Max's marginal revenue when he lowers his price and increases his sales from 100 to 101 trees? a. $2,800 b. $28 c. $27 d. -$73

D Total revenue when 100 trees are sold is $2,800; when 101 trees are sold, it is $2,727. Hence the marginal revenue from the 101st tree is -$73.

Tying arrangements are ____ illegal and ____ increase the firm's profit. a. always; always b. always; do not always c. not always; always d. not always; do not always

D Tying arrangements are illegal under the Clayton action only if they substantially lessen competition or create monopoly. Whether a tying arrangement allows a firm to increase its profit depends on the demand for the two products.

The economy's marginal social benefit curve for a public good is obtained by summing the individual a. marginal cost curves horizontally. b. marginal cost curves vertically. c. marginal benefit curves horizontally. d. marginal benefit curves vertically.

D Vertical summation shows the price everyone in total is willing to pay for any particular quantity.

In the political marketplace, which of the following groups lobby for policies that will help them? i. politicians ii. voters iii. firms iv. bureaucrats a. iii only b. ii and iv c. i and iv d. ii and iii.

D Voters and firms lobby politicians and bureaucrats for policies that help them.

If the average total cost (ATC ) curve slopes downward, then at that level of output the marginal cost (MC ) curve must be a. sloping upward. b. sloping downward. c. above the ATC curve. d. below the ATC curve.

D When the marginal cost is less than the average cost, the average cost falls as output expands.

A low concentration ratio indicates a low level of competition.

False A low concentration ratio indicates a high degree of competition.

Monopolies decrease the deadweight loss from perfectly competitive industries.

False A monopoly creates deadweight loss; it does not reduce it.

A perfectly competitive firm can charge whatever price it wants for its goods.

False A perfectly competitive firm is a price taker, for instance, a wheat farmer who can charge only the going price for the wheat grown.

A progressive income tax is one whose average tax rate falls as income increases.

False A progressive income tax is one whose average tax rate increases with income.

A single-price monopoly charges each consumer the highest single price the consumer will pay.

False A single-price monopoly charges each consumer the same price.

Total cost equals fixed cost plus variable cost.

Total cost is the sum of fixed cost and variable cost.

The costs imposed by pollution are examples of external costs.

True The costs of pollution are external costs because they are costs of production that are not paid by the producers.

In monopolistic competition, price exceeds marginal cost.

True The firm sets MR = MC, but because P > MR, it is the case that P > MC. The difference between P and MC is the markup.

A fish in the middle of the ocean is a common resource.

True The fish is rival, because if one person catches it another cannot, and nonexcludable, because the people cannot prevent the other from trying to catch it.

When firms are incurring persistent economic losses, some firms exit the market and the price rises.

True The higher price decreases the surviving firms' economic losses.

Firms in a competitive market make a short-run economic profit if demand increases.

True The increase in demand raises the price of the product, thereby allowing the firms producing it to make an economic profit.

Monopolistic competition leads to more product variety than perfect competition.

True The increased product variety from monopolistic competition is a benefit of monopolistic competition relative to perfect competition.

The demand for low-skilled workers is less than the demand for high-skilled workers.

True The labor demand curve is the MRP curve. Because the MRP of low-skilled workers is less than high-skilled workers, the demand for low-skilled workers is less than that for high-skilled workers

No part of any short-run average total cost curve lies below the long-run average total cost curve.

True The long-run average cost curve shows the least possible cost to produce any level of output.

For a common resource, the marginal private benefit from using the resource exceeds the marginal social benefit.

True The marginal social benefit takes account of the fact that an additional user of a resource decreases the quantity that all previous users of the resource obtain.

If the production of a good involves an external cost, the marginal social cost exceeds the marginal private cost.

True The marginal social cost equals the marginal private cost plus the marginal external cost. If there is a marginal external cost then the marginal social cost exceeds the marginal private cost.

A difference between a perfectly competitive firm and a monopoly is that the monopolist's decisions about how much to produce affect the good's price.

True The monopolist is the only producer in the market, so the monopolist's decisions about how much to produce determine the market price.

A firm's normal profit is part of the opportunity cost of running the business.

True The normal profit is the payment accruing to an owner for the owner's entrepreneurial ability.

If a proprietorship goes bankrupt, the owner is responsible for all the firm's debts.

True The owners of proprietorships and partnerships face unlimited liability for the debts of their companies.

The Coase theorem states that if property rights exist and transactions costs are low, there will be no externalities regardless of who owns the property rights.

True The question essentially is the definition of the Coase theorem.

A public good is nonexcludable and nonrival.

True The question gives the definition of a public good.

The minimum efficient scale of a firm is the smallest level of output at which the long-run average total cost is at its minimum.

True The question gives the definition of the minimum efficient scale.

The law of diminishing returns implies that the marginal product of a factor of production eventually falls as more of the factor is used.

True The question presents the definition of diminishing returns.

In the long run, all factors are variable.

True The question presents the definition of the long run.

If it does not shut down, to maximize its profit a perfectly competitive firm produces the level of output that sets MR = MC.

True The rule to maximize profit is to produce the level of output at which MR = MC.

A sales associate working in the sportswear department at JCPenney is an example of an "agent."

True The sales associate is (indirectly) hired by the shareholders of JCPenney to help sell sportswear. The associate is an agent for the owners, who are the principals.

The short-run market supply curve is upward sloping.

True The short-run market supply curve is the sum of the quantities supplied by all the firms in the market.

Efficient use of resources occurs when making one person better off must make someone else worse off.

True The statement conveys the meaning of efficiency.

The big tradeoff is the idea that equalizing the distribution of income reduces economic efficiency.

True The trade-off results because more redistribution, and hence more equal incomes, lessens incentives to work, thereby creating inefficiency.

If a monopoly can successfully price discriminate, it can increase its economic profit.

True This motivation lies behind price discrimination.

An oligopolist will consider the reactions of its competitors before it decides to cut its price.

True This mutual interdependence makes oligopoly a difficult industry structure to analyze.

Consumers underestimate the benefit of healthcare.

True This result is a reason why the marginal social benefit from health care exceeds its marginal benefit.