CAP Micro MCQ

2. Which of the following market structures has the greatest degree of elasticity? A. Perfect competition. B. Monopolistic competition. C. Oligopoly. D. Monopoly. E. All of the above.

Correct Answer: A (A)

3. Given the table below what is the opportunity cost of wheat in France? A. ,/2 cloth. B. 1/2 wheat. C. 2 cloth. D. 2 wheat. E. 1/4 cloth.

Correct Answer: A (A)

3. Which of the following is not a characteristic of oligopoly? A. P = M C. B. Price-maker.C. Strong barriers to entry. D. Few firms. E. P > MR.

Correct Answer: A (A)

3. Which of the following market structures has the largest number of sellers? A. Perfect competition. B. Monopolistic competition. C. Oligopoly. D. Monopoly. E. All of the above.

Correct Answer: A (A)

1. A price ceiling is characterized by A. a price set below the current (or equilibrium) market price of the good. B. a price set above the current (or equilibrium) market price of the good. C. a shift of the demand curve (function). D. a shift of the supply curve. E. None of the above.

Correct Answer: A (A)

1. For which of the following market structures are the most substitutes available for consumers? A. Perfect competition. B. Monopolistic competition. C. Oligopoly. D. Monopoly. E. All of the above.

Correct Answer: A (A)

1. Which of the following is true? A. TC = (AVC + AFC)Q. B. TFC = TC at all levels of output. C. AVC + AFC = TC. D. MC = TC - TFC. E. ATC = AVC + MC.

Correct Answer: A (A)

14. When an economy produces a combination of goods that lies on the production possibilities frontier, A. resources are being used fully and efficiently. B. prices are constant. C. opportunity cost is constant. D. (L)) resources will never be depleted. E. prices will rise.

Correct Answer: A (A)

2. If the price of a product decreases so that the consumer can buy more of it and other products, this is called the A. income effect. B. substitution effect. C. marginal effect. D. supply effect. E. CPI effect.

Correct Answer: A (A)

2. Which of the following is a characteristic of monopolistic competition? A. P > M C. B. Efficiency.C. Mostly price competition. D. P =MR. E. Homogenous or similar products.

Correct Answer: A (A)

4. A monopsonist is identified by one of the following: A. A wage payment lower than the marginal revenue product of labor. B. Employment level greater than that of a competitive labor market. C. A wage payment higher than that of a competitive labor market. D. A single seller of labor services. E. A marginal factor cost curve lower than the supply curve.

Correct Answer: A (A)

4. The price elasticity of demand for a product is greater if A. the proportion of the good of the consumer's budget is high. B. the period of time to respond to a price change is short. C. the number of substitute products is limited. D. the product is a necessity. E. imports decrease.

Correct Answer: A (A)

4. Which of the following market structures is not a price maker? A. Perfect competition. B. Monopolistic competition. C. Oligopoly. D. Monopoly. E. All of the above.

Correct Answer: A (A)

5. If for two resources, Labor (L) and Capital (K), the ratios of their marginal physical products areMPPK/PK = MPPL/PLthe firm should: A. hire more capital (K) until the ratios are equal. B. hire more labor (L) until the ratios are equal. C. lower the price of capital (PK). D. lower the price of labor (PL). E. seek union membership for labor (L).

Correct Answer: A (A)

5. Which of the following is true? A. Marginal Social Costs = Private Marginal Costs + Negative Externality. B. Marginal Social Costs = Private Marginal Costs + Subsidy. C. Marginal Social Benefits = Private Marginal Benefits + Tax. D. Tax = Positive Externality. E. Subsidy = Negative Externality.

Correct Answer: A (A)

7. If the price of one good (A) increases and the quantity demanded of another good (B) increases, the two goods are A. substitute goods. B. complement goods. C. inferior goods. D. normal goods. E. independent goods.

Correct Answer: A (A) If the question had read "If the price of one good (A) increases and the quantity demanded of other good decreases," the answer would be B, complement goods. Review these definitions.

9. Which of the following is correct? A. In the long run, all inputs are variable. B. In the short run, all inputs are variable. C. In the long run, supply is not able to adjust fully to changes in demand. D. In the short run, supply is able to adjust fully to changes in demand. E. A short run is any distance less than one mile.

Correct Answer: A (A) In other words (in contrast to the other answers or choices), supply is able to adjust fully to changes in demand in the long run. In the short run, all inputs are not variable; some are fixed in quantity. In the short run, supply is unable to adjust fully to the changes in demand.

7. With the presence of a positive externality, which of the following would correct the externality? A. A government subsidy. B. A government tax. C. A higher price. D. A lower level of output. E. A government-created task force.

Correct Answer: A (A) See number 6.

1. Which of the following is an example of an economic rent? A. A superstar basketball player's $50 million earnings. B. A social security retirement income. C. A welfare payment from social services. D. A check to a college student from a parent or guardian. E. A cashier at a restaurant receiving the same $8 an hour that other cashiers receive.

Correct Answer: A (A) This is above the earnings of other basketball players and qualifies as a rent. See the explanation above for number 48.

9. If, for each additional unit of a variable input, the increases in output become smaller, which of the following correctly identifies the concept? A. Diminishing marginal productivity. B. Diminishing marginal utility. C. Increasing marginal utility. D. Increasing marginal productivity. E. Constant costs.

Correct Answer: A (A) This is definitional. You can place "productivity" with inputs and outputs for firms or suppliers. You can place "utility" with satisfaction in purchases and consumers.

4. Which of the following is a characteristic of monopoly? A. A single firm in the industry. B. Price equal to marginal revenue. C. Perfectly elastic demand curve. D. Weak barriers to entry. E. Zero economic profits.

Correct Answer: A (A) This is the most telling characteristic of monopoly; it defines monopoly. To change the other choices to fit monopoly, you would have to rewrite choices B, C, D, and E as follows:

9. Relatively free or easy entry (low or nonexistent barriers to entry) is best matched by which of the following? A. More consumer choices, greater price elasticity of demand, more competitors. B. More consumer choices, lower price elasticity of demand, more competitors. C. More consumer choices, greater price elasticity of demand, fewer competitors. D. Fewer consumer choices, lower price elasticity of demand, fewer competitors. E. Fewer consumer choices, greater price elasticity of demand, more competitors.

Correct Answer: A (A) This refers to "relatively free or easy entry." That is, if competitors are allowed easy entry, there will be more consumer choices. The increased choice for consumers means that they will be more sensitive (elastic) to price increases. Review the table of characteristics of product markets in Chapter 9, Introduction to Product Markets.

6. Which of the following conditions is characteristic of oligopoly? A. A rival firm matches price decreases of rivals, but fails to match any price increases of rivals. B. A rival firm matches price increases of rivals, but fails to match any price decrease of rivals. C. A rival firm fails to match both price increases or price decreases of rivals. D. (I)) Rival firms act independently of each other. E. There is such a large number of firms that firms cannot exercise any price strategy.

Correct Answer: A (A) This refers to the interdependence characteristic of oligopoly. Price decreases are matched in the hope of maintaining or increasing market share. Price increases are not matched for fear of losing market share or having the possibility of gaining market share over the price-increasing rival.

1. If a decrease in income of 10 percent would cause Alec's consumption of vitamins to increase by 15 percent, which of the following statements is the most likely to be correct? A. Alec's income elasticity of demand is 1.5. B. Vitamins would be categorized as an inferior good for Alec. C. Alec's income elasticity of demand is 2/3. D. Vitamins would be categorized as a necessity for Alec. E. Alec's income elasticity of demand is 150.

Correct Answer: A A The income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income, or = 1.5. Inferior goods are those that have a negative income elasticity. In other words, as income increases, demand for them decreases. Necessities are those that have a price elasticity of demand less than one.

12. Which of the following statements about a price ceiling is accurate? A. An effective price ceiling must be at a price below the equilibrium price. B. A price ceiling will increase the quantity of the good supplied. C. A price ceiling will cause a shift in the demand curve for the good. D. A price ceiling will have no effect on the quantity of the good supplied. E. Surpluses in the supply of the good are among the results of a price ceiling.

Correct Answer: A A An effective price ceiling must be below the equilibrium price; requiring firms to charge no more than a price above the equilibrium price would have no effect on their behavior because they wouldn't want to charge more than the equilibrium price anyway. Increases in the quantity of the good supplied and surpluses in the supply of the good would result from a price floor, not a ceiling. The quantity of the good supplied would decrease rather than increase. Additionally, price ceilings do not cause the demand or supply curves to shift.

1. Suppose that there are only two goods: x and y. Which of the following is NOT correct? A. One can have comparative advantage in producing both goods. B. One can have both an absolute advantage and a comparative advantage in producing x. C. One can have absolute advantage and no comparative advantage in producing x. D. One can have comparative advantage and no absolute advantage in producing x. E. All the statements above are true.

Correct Answer: A A Application-of-definition questions can be very tricky. The best approach is to see if the answer choice "fits" the definition or not. Given past classical examples, (B), (C), and (D) can be quickly eliminated. (See the Specialization and Comparative Advantage section in Chapter 5 for more discussion on this.) This question has one more wrinkle in (E), forcing test takers to think about the possibility of having a comparative advantage in producing both goods (which cannot be possible). It is possible to have absolute advantage in producing both goods, but not have comparative advantage in producing both goods (as one can only have a comparative advantage in only one good). Therefore the answer is (A).

5. Relative to a competitive product market with the same costs, a monopoly can be expected to involve A. more deadweight loss B. lower prices C. higher production levels D. more firms E. higher-quality products

Correct Answer: A A Consider that monopolistic markets are characterized by one supplier and several buyers. The seller thus has the ability to control prices by either fixing prices or limiting quantity. As the firm is limiting quantity to maximize its revenue, it is causing more deadweight loss than a firm ordinarily would in a perfectly competitively market. A monopoly is unlikely to lower prices if in fact it is likely to raise prices, so eliminate (B). A monopoly reduces supply by limiting production, so eliminate (C). A monopoly has only one firm, so eliminate (D). Quality of goods is not discussed, as economics assumes that the goods are identical and meet the minimum quality standards, so eliminate (E). Therefore the answer is (A).

4. A bilateral monopoly exists when A. a monopsony buys from a monopoly B. a monopoly sells to two different types of consumers C. a monopoly buys from a monopsony D. a monopolist sells two different types of goods E. a monopoly sells at two different prices

Correct Answer: A A Definition of a bilateral monopoly is when a monopsony buys from a monopoly (i.e., there is only one seller and one buyer of a good or service). See this page. Therefore the answer is (A).

7. Which of the following is more likely to result from a competitive market structure than from a monopoly making the same product? A. Price equal to marginal cost B. Relative welfare loss C. Relatively high price D. Relatively low quantity E. Relatively inferior quality

Correct Answer: A A Given the same market demand and cost curves, a competitive industry will produce more of a good at a lower price than a monopoly. Since monopolies produce lower quantities of a good, the consumer and producer surplus is lower. A lack of competition can also result in goods of inferior quality. While both market structures produce at the quantity where MR = MC, monopolies charge a price above MC while competitive firms charge a price equal to MC, resulting in allocative efficiency in competitive markets.

2. A small business estimates price elasticity of demand for the product to be 3. To raise total revenue, owners should A. decrease price as demand is elastic. B. decrease price as demand is inelastic. C. increase price as demand is elastic. D. increase price as demand is inelastic. E. do nothing; they are already maximizing total revenue.

Correct Answer: A A If you know your elasticity measures, you see that with Ed = 3, you can eliminate any reference to inelastic demand. Choice E is incorrect, as total revenue is maximized at the midpoint of the demand curve where Ed = 1. If Ed > 1, the firm increases total revenue by decreasing the price because the quantity demanded rises by a greater percentage than the fall in price.

4. Which of the following was not a landmark antitrust act? A. The Wagner Act B. The Sherman Act C. The Clayton Act D. The Robinson-Patman Act E. The Celler-Kefauver Act

Correct Answer: A A The Wagner Act gave workers the right to organize. The other four are landmark antitrust acts designed to limit attempts by firms to obtain excessive market power.

4. When the labor demand curve is downward-sloping, an increase in the minimum wage is A. beneficial to some workers and harmful to other workers B. beneficial to all workers and harmful to some employers C. harmful to all workers and employers D. beneficial to all workers and employers E. none of the above

Correct Answer: A A The best approach is to draw the supply and demand for labor (see the figure). As the minimum wage increases from W to W′, the wages rise, but the quantity of labor needed drops. Therefore, increasing the minimum wage would be beneficial for some workers (for those who are employed at the higher wage), but detrimental for others (those who were employed at the lower wage, but are no longer employed). The answer is (A).

14. If corn is produced in a perfectly competitive market and the government placed a price ceiling above equilibrium, which of the following would be true? A. There would be no change in the amount of corn demanded or supplied. B. There would be a shortage created of corn. C. There would be a surplus created of corn. D. The producers of corn would lose revenue due to the decreased price. E. Illegal markets may develop for corn.

Correct Answer: A A The best way to approach this question is to draw the supply and demand curves (see the following figure). Remember that a price ceiling sets a maximum price a producer may charge. Since the price ceiling (PC) is above the equilibrium price, the equilibrium price and quantity do not change as a result of the price ceiling. Therefore the answer is (A).

6. The market demand curve for labor will shift to the right when A. the number of firms increases B. the price of output decreases C. the labor supply curve shifts to the right D. the labor supply curve shifts to the left E. the marginal product of labor decreases

Correct Answer: A A The labor demand curve is independent of the labor supply curve. A decrease in the price of output or a decrease in the marginal product of labor will shift the labor demand curve to the left. Because the market demand curve for labor is the horizontal summation of individual firm labor demand curves, when the number of firms increases, the market demand curve for labor will shift to the right.

6. Which of the following statements accurately describes the relationship between average product (AP) and marginal product (MP) of labor? A. AP rises when MP is above it and falls when MP is below it. B. MP intersects AP at the maximum of MP. C. AP and MP are always parallel to each other. D. AP and MP are either both rising or both falling at all levels of labor. E. AP is always rising when MP is falling and vice versa.

Correct Answer: A A The marginal product "pulls" average product up or down depending on whether it is above or below average product. If the MP—the output of the last or marginal worker hired—is above the average, the average will increase. If the MP is below the average it will fall. MP intersects AP at the maximum of AP, not MP. AP and MP are sometimes both rising, sometimes both falling, and sometimes going in opposite directions, as when MP is above AP and falling and AP is rising.

1. A demand curve slopes downward for an individual as the result of A. diminishing marginal utility B. diminishing marginal returns C. the Fisher effect D. diminishing returns to scale E. increasing marginal cost

Correct Answer: A A The question asks about demand, so eliminate any answer choices that focus on supply—eliminate (B), (D) and (E). The Fisher effect relates to monetary supply, so eliminate (C). The demand curve is downward sloping because each additional unit a consumer consumes gives that consumer less utility than the previous one; therefore the consumer is willing to pay less for additional units, creating a downward sloping demand curve. The answer is (A).

1. The total utility from sardines is maximized when they are purchased until A. marginal utility is zero B. marginal benefit equals marginal cost C. consumer surplus is zero D. distributive efficiency is achieved E. deadweight loss is zero

Correct Answer: A A The question asks about total utility, which refers to consuming sardines. This question focuses on the demand for sardines, so answer choices that refer to supply (D) can be eliminated. As the question does not refer to demand and supply, any answer choices that need the supply and demand curves—(C) and (E)—can be eliminated. To maximize the total utility of sardines, they need to be consumed until the marginal utility is equal to zero (regardless of the price). Therefore the answer is (A).

4. In the long run, a monopolistically competitive firm A. earns zero economic profit B. earns positive economic profit C. earns negative economic profit D. faces a vertical demand curve E. faces a horizontal demand curve

Correct Answer: A A There is no reason to expect a monopolistically competitive firm to face a horizontal or vertical demand curve. It will face a downward sloping demand curve because its product is differentiated, but in the long run, the lack of barriers to entry will allow similar firms to compete away demand until economic profits are zero.

8. Marginal revenue equals marginal cost at the point where A. total revenue is greater than total cost at its greatest distance B. total revenue is equal to total cost C. marginal product is at its highest point D. total product is at its highest point E. average total cost is at its minimum

Correct Answer: A A When a firm produces at a point where MR = MC, then it is maximizing its profits, which is to say that it is producing at the point at which its revenues most exceed its costs. Therefore the answer is (A).

6. When a perfectly competitive labor market is in equilibrium, A. everyone who wants to work has the opportunity to do so B. individual firms face downward sloping labor demand curves C. unemployment can reach as high as 10-15 percent D. individual firms face upward sloping labor demand curves E. individual firms are considered "price makers"

Correct Answer: A A When a perfectly competitive labor market is in equilibrium, individual firms face a horizontal labor demand curve and are considered price takers. Everyone who wants to work at the market wage rate can do so, resulting in an unemployment rate of zero.

3. Which of the following is the best example of a public good? A. A lighthouse on a rocky coastline B. Tickets to the Super Bowl C. A granola bar D. A cup of coffee E. A magazine subscription

Correct Answer: A A —A public good is a good that is nonrival and nonexcludable. In other words, if one person consumes it, all others can still consume it.

3. Which of the following cost and production relationships is inaccurately stated? A. AFC = AVC - ATC B. MC = ΔTVC/ΔQ C. TVC = TC - TFC D. APL = TPL /L E. MC = w/MPL

Correct Answer: A A —AFC plus AVC equals ATC. If you do the subtraction, AFC = ATC - AVC, making choice A the only incorrect statement. If you have studied your production and cost relationships, you recognize that choices B, C, D, and E are all stated correctly.

4. Which of these situations is not an example of price discrimination? A. Brent works nights, so he chooses to buy bread at 7 a.m. rather than at 7 p.m. B. Bob and Nancy each receive a "$1 off" coupon in the mail, but Bob redeems it while Nancy does not. C. Katie buys 12 Cokes for $3, and Josh buys one Coke at a time for $1. D. Velma likes to go to the movies at the lower afternoon matinee price, and Rosemary would rather pay more for the evening show. E. Jason and Jen go to a popular nightclub. Because it is "Ladies' Night," Jen pays no cover charge, but Jason must pay to enter the club.

Correct Answer: A A —If Brent chooses to buy his bread early in the morning rather than in the evening, this is not price discrimination. The other choices describe buying in bulk, redeeming a coupon, or paying a lower price because of the time in which one consumes the good. The nightclub example is price discrimination based upon gender.

5. When the production or consumption of a good creates a positive externality, it is deemed a market failure because at the market quantity A. the marginal social benefit exceeds the marginal social cost. B. the marginal social cost exceeds the marginal social benefit. C. society produces too much of the good. D. the private benefits from consuming the good exceed the social benefits. E. a surplus of the good always exists without government intervention.

Correct Answer: A A-Market equilibrium occurs where marginal private benefit equals marginal cost to society. With a positive externality, the MSB > MPB at the market quantity.

1. For a competitive firm, what is the most important thing to consider in deciding whether to shut down in the short run? A. Compare AVC to MR. B. Compare TR to T C.C. Do not produce if the TFC is not covered by revenue. D. Produce the highest quantity demanded regardless of price. E. Compare P to ATC.

Correct Answer: A A —The firm only operates if the total revenue is at least as great as total variable cost. On a per unit basis, the firm must receive a P = MR that is at least as great as AVC. Since firms pay TFC regardless of production, they are not a factor in whether you should shut down. Choices B, C, and E are wrong because TC and ATC include the fixed costs. Choice D is incorrect because it might not be the profitable strategy, but it is irrelevant to the shutdown decision.

9. Which of the following is true in the long run in perfect competition? A. P = MR = MC = ATC B. P = MR = MC > ATC C. P > MR = MC = ATC D. P = MR > MC = ATC E. P > MR = MC > ATC

Correct Answer: A A-A defining outcome of long-run equilibrium in perfect competition.

9. Suppose a price floor is installed in the market for coffee. One result of this policy would be A. a decrease in the demand for coffee-brewing machines. B. a persistent shortage of coffee in the market. C. an increase in consumer surplus due to lower coffee prices. D. an increase in the demand for coffee. E. a decrease in the profits for the owners of coffee plantations.

Correct Answer: A A-A price floor is a legal minimum price set above the equilibrium price. Higher coffee prices decrease the demand for complementary goods like coffee machines.

6. Which of the following tax systems is designed to redistribute income from the wealthy to the poor? A. A progressive tax system B. A regressive tax system C. A proportional tax system D. An excise tax system E. A tariff system

Correct Answer: A A-A progressive tax system means that higher levels of income pay higher proportions of their income to the tax collector. This system is designed to redistribute income from higher tax brackets to lower tax brackets.

2. The market for Cincinnati Reds baseball tickets is currently in equilibrium. Which of the following events would most likely increase the consumer surplus received by Reds fans? A. The Reds offer discounted parking for all home games. B. The Reds increase hot dog prices to reflect a higher cost of buns. C. The city of Cincinnati is undertaking a huge highway construction project that strands fans in pregame traffic jams for hours. D. The Reds must increase ticket prices to afford the most talented players. E. Fans must pay a steep service charge in order to purchase tickets online or over the phone.

Correct Answer: A A-Anything that effectively lowers the price of attending the Reds game increases CS.

5. The demand for labor falls if A. labor productivity falls. B. the price of the good produced by labor rises. C. the price of a complementary input falls. D. demand for the good produced by labor rises. E. a minimum wage is removed from the labor market.

Correct Answer: A A-Demand for labor is the MRPL curve. Higher labor productivity increases labor demand.

1. Monopoly deadweight loss is the result of A. setting the price above marginal cost. B. setting the price above average total cost. C. monopoly output being greater than the competitive output. D. long-run normal profits. E. marginal revenue equaling marginal cost.

Correct Answer: A A-If P = MC, the market is allocatively efficient and there is no deadweight loss. If the monopoly P > MC, DWL emerges.

8. Suppose the price of beef rises by 10 percent and the quantity of beef demanded falls by 20 percent. We can conclude that A. demand for beef is price elastic and consumer spending on beef is falling. B. demand for beef is price elastic and consumer spending on beef is rising. C. demand for beef is price inelastic and consumer spending on beef is falling. D. demand for beef is price inelastic and consumer spending on beef is rising. E. demand for beef is unit elastic and consumer spending on beef is constant.

Correct Answer: A A-If the percentage change in Qd is greater than the percentage change in price, the good is elastic. In this situation of rising prices, total spending on beef will fall because the upward effect of prices is outweighed by the downward effect of quantity.

1. Which of the following might explain how a price decrease might cause a decrease in quantity demanded and an upward-sloping demand curve? A. The good is inferior and the income effect is stronger than the substitution effect. B. The good is normal and the income effect is stronger than the substitution effect. C. The good is normal and the income effect is weaker than the substitution effect. D. The good is inferior and a luxury. E. The good is highly subsidized, creating a large increase in marginal utility per dollar.

Correct Answer: A A-Income and substitution effects work in opposite directions for inferior goods. A lower price prompts a substitution effect, increasing quantity demanded of the good. A lower price increases purchasing power, and for an inferior good, it decreases consumption. If the income effect outweighs the substitution effect, we can see an upward-sloping demand curve.

6. If the demand for grapes increases simultaneously with an increase in the supply of grapes, we can say that A. equilibrium quantity rises, but the price change is ambiguous. B. equilibrium quantity falls, but the price change is ambiguous. C. equilibrium quantity rises, and the price rises. D. equilibrium quantity falls, and the price falls. E. the quantity change is ambiguous, but the equilibrium price rises.

Correct Answer: A A-Increased demand, by itself, increases equilibrium quantity and increases the price of grapes. Increased supply, by itself, increases equilibrium quantity and decreases the price of grapes. So quantity definitely increases, but the price change is unknown because it depends on how far the curves shift in relation to each other. Quickly draw these in the exam book.

11. Which of the following is a characteristic of perfect competition? A. Firms produce a homogeneous product. B. Barriers to entry exist. C. Firms are price-setting profit maximizers. D. The government regulates the price so that deadweight loss is eliminated. E. Long-run positive profits are available.

Correct Answer: A A-Know the characteristics of all market structures.

7. If total product of labor is rising at an increasing rate, A. marginal product of labor is rising. B. marginal product of labor is at its minimum. C. marginal product of labor is at its maximum. D. marginal cost is rising. E. average product of labor is at its minimum.

Correct Answer: A A-MPL tells you how TPL is changing when more labor is hired. If more labor is increasing TPL at a faster and faster rate, MPL is rising.

6. If a monopsony labor market suddenly were transformed into a perfectly competitive labor market, how would the wage and employment change? A. Both would increase. B. Both would decrease. C. The wage would remain constant, but employment would increase. D. The wage would fall, but employment would increase. E. The wage would rise, but employment would decrease.

Correct Answer: A A-Monopsony lowers both wage and employment when compared to the competitive labor market.

10. Which of the following describes the theory behind the demand curve? A. Decreasing marginal utility as consumption rises. B. Increasing marginal cost as consumption rises. C. Decreasing marginal cost as consumption rises. D. Increasing total utility at an increasing rate as consumption rises. E. The substitution effect is larger than the income effect.

Correct Answer: A A-One of the foundations of the law of demand is falling marginal utility as more of a good is consumed. You can eliminate any choices that refer to marginal cost, and a downward-sloping demand curve would not be the result of total utility that increases at an increasing rate.

3. The monopolistically competitive price is above marginal revenue because A. firms have differentiated products. B. firms are price takers. C. firms produce a homogenous product. D. the market is allocatively efficient. E. profits are normal in the long run.

Correct Answer: A A-Product differentiation results in a small degree of price-setting ability and downward-sloping demand curves for the firms. P = ATC and profits are normal in the long run, and this output level does not occur where ATC is minimized. This defines excess capacity.

2. Monopolistic competition is said to be productively inefficient because A. the long-run price is above minimum average total cost. B. long-run profits are positive. C. firms engage in collusive behavior. D. there exist no barriers to entry. E. there exist diseconomies of scale.

Correct Answer: A A-Profits are normal and P = ATC, but unlike perfect competition, P > minimum ATC, so the industry is not productively efficient.

4. The downward-sloping demand curve is partially explained by which of the following? A. Substitution effects and income effects B. The law of increasing marginal costs C. The principle of comparative advantage D. The law of diminishing marginal returns to production E. The least-cost principle

Correct Answer: A A-Substitution and income effects explain the law of demand.

6. You are told that the Gini coefficient of income inequality has risen from .35 to .85. Which of the following is a likely cause of this change? A. Market power in the factor and output markets has increased. B. Labor market discrimination has been eliminated. C. The distribution of wealth and property has become more equitable. D. The vast majority of adults have achieved at least a college degree. E. The tax system has become even more progressive.

Correct Answer: A A-The Gini coefficient measures income inequality. The closer it gets to one, the more unequal the income distribution. One explanation for inequality is more market power in product and input markets. This redistributes CS to monopoly producers and/or employers.

4. Which of the following goods is likely to have the most elastic demand curve? A. Demand for white Ford minivans B. Demand for automobiles C. Demand for Ford automobiles D. Demand for American-made automobiles E. Demand for a Ford minivan

Correct Answer: A A-The more narrowly a good is defined, the more elastic demand.

8. Nancy has the choice to spend one hour studying for an exam, mowing the lawn for one hour at a wage of $6, or babysitting her niece for one hour at a wage of $8. If we know that Nancy has chosen to study for the exam, which of the following is true? A. The benefit received from studying is greater than the opportunity cost of $8. B. The opportunity cost of studying is $14, which is less than the benefit received from studying. C. Nancy is indifferent to both studying and mowing the lawn. D. Nancy's behavior is irrational, since babysitting was clearly superior to all other options. E. Nancy is indifferent to both babysitting and mowing the lawn.

Correct Answer: A A-The opportunity cost is the value of the most attractive alternative; in this case, the babysitting wage.

10. The market structures of perfect competition and monopolistic competition share which of the following characteristics? A. Ease of entry and exit in the long run B. Homogenous products C. Perfectly elastic demand for the firm's product D. Long-run positive profits E. Rigid or "sticky" prices

Correct Answer: A A-These two market structures are fairly similar, and free entry and exit is one of the characteristics that they share. They also share the characteristic of normal profits in the long run but do not share homogenous products or efficiency.

9. You are told that the income elasticity for DVDs is + 1.5. This means that A. a 10 percent increase in income produces a 15 percent increase in consumption of DVDs. DVDs are a normal luxury good. B. a 10 percent increase in income produces a 15 percent increase in consumption of DVDs. DVDs are an inferior good. C. a 10 percent increase in income produces a 15 percent decrease in consumption of DVDs. DVDs are an inferior good. D. a 10 percent increase in the price of DVDs produces a 15 percent decrease in consumption of DVDs. DVDs are a price elastic good. E. a 10 percent increase in the price of DVDs produces a 15 percent decrease in consumption of DVDs. DVDs are a price inelastic good.

Correct Answer: A A-When EI > 0, it is a normal good. When EI > 1, it is a luxury good.

5. A negative externality in the market for a good exists when A. the market overallocates resources to the production of this good. B. spillover benefits are received by society. C. the marginal social benefit equals the marginal social cost. D. total welfare is maximized. E. the marginal private cost exceeds the marginal social cost.

Correct Answer: A A-When individuals and firms exchange a good that imposes costs on third parties, they have created a negative externality. The market produces "too much" because these spillover costs are not reflected in the private (or market) supply curve. Resources are overallocated to the production of this good.

1. Which of the following is NOT a characteristic of perfectly competitive industry? A. Free entry into the industry. B. Product differentiation. C. Perfectly elastic demand curve. D. Homogeneous products. E. Many sellers and many buyers.

Correct Answer: B (B) The other answers are all correct characteristics of a perfectly competitive industry. Products are homogeneous (the same, identical) under perfect competition.

1. Which of the following statements is true about the demand for labor? A. It rises if the price of a substitute resource falls and the output effect is greater than the substitution effect. B. It falls if the price of the output produced rises. C. It falls if the price of a complementary resource falls. D. It falls if the demand for the output produced by labor increases. E. It falls if the labor becomes more productive.

Correct Answer: A A-When the price of a substitute resource (like capital) falls, two effects move the demand for labor in opposite directions. The firm wants to substitute for more capital and less labor, but lower costs prompt more output to be produced, and this can require more labor. If the output effect outweighs the substitution effect, demand for labor may increase even if capital is less expensive. Labor demand will increase if the labor becomes more productive or if the price of the output produced rises.

8. If a market for a good is producing a negative externality, A. at the market output the marginal costs to society exceed the private marginal costs of production. B. at the market output the marginal benefits to society exceed the private marginal costs of production. C. at the market output the marginal costs to society exceed the total benefits to society. D. at the market output the private marginal costs of production exceed the marginal costs to society. E. at the market output the marginal benefits to society exceed the marginal costs to society.

Correct Answer: A A-With no externality, MSB = MSC. With a negative externality, MSC > MPC = MSB for the good.

1. Economics is a social science that A. is primarily concerned with money. B. is primarily concerned with how resources are used. C. relies solely on the scientific method for analysis. D. is primarily concerned with maximizing spiritual well-being. E. is purely normative.

Correct Answer: B (B)

1. If the price of a product decreases with the price of a substitute product remaining constant such that the consumer buys more of this product, this is called the A. income effect. B. substitution effect. C. marginal effect. D. supply effect. E. CPI effect.

Correct Answer: B (B)

1. When price elasticity of demand is greater than 1, demand is A. perfectly inelastic. B. elastic. C. inelastic. D. unit elastic. E. not measurable.

Correct Answer: B (B)

1. Which of the following is not a characteristic of a kinked demand curve? A. A range of marginal costs over which MR = M C. B. P < MC.C. Interdependence of rivals. D. Pricing at the kink. E. Demand curve discontinuous at the kink.

Correct Answer: B (B)

15. The law of increasing costs A. does not apply to guns and butter. B. is the result of resources not being perfectly adaptable between the production of two goods. C. implies that prices will rise when the costs of making a good rise. D. causes the production possibilities frontier to be a straight line. E. implies that opportunity costs will rise as production levels fall.

Correct Answer: B (B)

2. Firms maximize their profits by producing a level of output at which A. MC = AF C. B. MC = MR.C. P = ATC. D. MR= AVC. E. P = AVC.

Correct Answer: B (B)

3. If there is a positive externality associated with the production of a private good, which of the following is an action of government that would most likely move the market to an efficient outcome? A. Close the firm producing the good. B. Subsidize the firm or its customers. C. Tax the firm. D. Appoint a commission. E. Relocate the firm.

Correct Answer: B (B)

4. Given the table below, which statement is true? A. England has the absolute advantage in both products. B. France should specialize in and export wheat while England should specialize in and export cloth. C. France has the comparative advantage in cloth. D. England has the comparative advantage in wheat. E. France has the absolute advantage in wheat while England has the absolute advantage in cloth.

Correct Answer: B (B)

4. Which of the following is not correct about economies of scale? A. Economies of scale are associated with increases in production of output. B. Economies of scale are associated with the rising or increasing portion of an average total cost (ATC) curve. C. Economies of scale are associated with the declining or decreasing portions of the ATC curve. D. Economies of scale result in decreases in per unit average cost. E. Economies of scale may be associated with the ability to use more specialists in business.

Correct Answer: B (B)

5. A tax imposed on a supplier will more likely be passed on to the consumer in the form of price increase if A. price elasticity of demand is highly elastic. B. price elasticity of demand is highly inelastic. C. price elasticity of demand is unit elastic. D. wage elasticity of demand is highly elastic. E. wage elasticity of demand is highly inelastic.

Correct Answer: B (B)

7. Economists use the term "capital" to mean A. money. B. plant and equipment. C. where the central government is located. D. the center of the economy. E. a major idea.

Correct Answer: B (B)

8. Land refers to A. all productive resources. B. all natural resources. C. farmland only. D. real estate. E. chattels.

Correct Answer: B (B)

2. The basis for the answer in number 1 is A. P or wage rate of labor > MRP of labor and with one additional unit of labor, wage rate < MRP. B. P or wage rate of labor < MRP of labor and with one additional unit of labor WI, > MRP. C. total revenue is at a maximum. D. total output is at a maximum. E. marginal physical product is at a maximum.

Correct Answer: B (B) (see explanation in 1)

11. The greater (higher) the wage elasticity of demand, the A. greater the proportion of capital costs to labor costs in the production of goods. B. greater the price elasticity for the product produced by labor. C. the smaller the number of substitutes for labor. D. the smaller the time period. E. the smaller the proportion of labor costs to total costs.

Correct Answer: B (B) The key concept here is that the demand for labor is derived from the demand for the product that labor produces. Thus, the greater the price elasticity of demand for the product, the greater the wage elasticity of demand for labor. Also, each of the other choices for this question are the opposites of the correct answer, for example, for E the answer should read "the greater the portion of labor costs to total costs." See Chapter 13, Resource Markets, for the complete analysis.

6. With the presence of a negative externality, which of the following would internalize (or correct) the externality? A. A government subsidy. B. A government tax. C. A lower price. D. A higher level of output. E. A government-created task force.

Correct Answer: B (B) The rule to follow is a tax for a negative externality and a subsidy for a positive externality. Both would internalize or correct the externality.

4. Which of the following statements is correct? A. Economic Profits = Accounting Profits. B. Economic Costs = Explicit Costs plus Implicit Costs. C. Economic Costs = Explicit Costs minus Implicit Costs. D. Opportunity Costs = Economic Profits. E. Accounting Costs = Implicit Costs.

Correct Answer: B (B) This is definitional. Review the various definitions of economic (accounting) costs/profits in Chapter 8, Costs, Production, Supply.

8. If, as the price of a particular good increases, the added satisfaction of each additional unit of this good for the consumer decreases, which of the following correctly identifies the concept? A. Diminishing marginal productivity. B. Diminishing marginal utility. C. Increasing marginal utility. D. Increasing marginal productivity. E. Constant costs.

Correct Answer: B (B) This is definitional. You should review the other terms as well. One is in the next question.

12. In the design of a competitive market system, which of the following does NOT describe how resources are allocated? A. Price signals that guide producers on what, when, how, and for whom to produce goods and services. B. Active government ownership and direction of production. C. Voluntary market exchange between buyers and sellers. D. Distribution of income and goods on the basis of contribution or productivity. E. Profit motivation.

Correct Answer: B (B) This is in reference to "Which of the following does NOT describe how resources are allocated (competitive market)?" All of the other choices are related to allocation in a competitive market system. Active government ownership and direction of production is more akin to non-market systems such as socialism.

10. At a Nash equilibrium, A. the supply curve intersects the demand curve B. neither party has an incentive to deviate from his or her strategy C. the marginal revenue curve intersects the marginal cost curve D. the equilibrium is unstable and each party would like to switch strategies E. no additional output could possibly be produced

Correct Answer: B B A Nash equilibrium is a term from game theory that indicates that each party in a strategic game wants to stick with its strategy, given what the other party is doing. After applying the "circle" method explained in this book, a Nash equilibrium occurs whenever two circles appear in the same square of a payoff matrix.

17. A monopoly is less efficient than a perfect competitor because A. a monopoly produces more output and sells for a higher price B. a monopoly produces less output and sells for a higher price C. a monopoly can make profit in the short run but not in the long run D. a perfect competitor breaks even in the short run and the monopoly does not E. a monopoly is allocatively efficient whereas the perfect competitor is productively efficient

Correct Answer: B B A monopoly produces less and sells for more than firms in perfect competition, so eliminate (A). As no short-run-versus-long-run data are given, eliminate (C) and (D). Cost data are not given so eliminate (E). Therefore the answer is (B).

2. A change in which of the following will NOT cause a shift in the demand curve for hamburgers? A. The price of hot dogs B. The price of hamburgers C. The price of hamburger buns D. Income levels of hamburger consumers E. The price of ketchup

Correct Answer: B B A shift in the demand curve comes about due to changes in the price of substitutes, changes in price of complimentary goods, or changes in income (this last point is sometimes forgotten on the AP Exam). Shifts in the demand curve are caused by price changes in substitutes and complimentary goods. This helps eliminate (A) and (C). Choice (E) is tricky, as the price of ketchup would cause a shift in the demand curves for both hot dogs and hamburgers. As our focus is only hamburgers, (E) can be eliminated. Changes in income level will cause the demand curve for hamburgers to shift, so (D) can be eliminated. As the price of hamburgers changes, the demand curve does not shift, but there is a movement along the (existing) demand curve. Therefore the answer is (B).

3. Which of the following will increase wages for tuba makers? A. An increase in the number of graduates at tuba maker training school B. An increase in the price of tubas C. An increase in the price of tuba lessons D. An increase in the tax on tubas E. An effective price ceiling for tubas

Correct Answer: B B An increase in the number of trained tuba makers will increase the labor supply curve (shift it to the right) and decrease the wage. An increase in the price of tuba lessons will decrease the demand for tubas—a complementary good—and thus decrease the price of tubas. Because the demand for tuba makers is derived from the demand for tubas, when tuba demand goes down, tuba maker demand goes down and thus wages go down. A tax on tubas will similarly decrease the demand for tubas and tuba makers and decrease their wages. An effective price ceiling will lower the price and marginal revenue and thus the marginal revenue product (MRPL = MPL×MR), which is the value of an additional worker and the basis for labor demand. When labor demand decreases, equilibrium wage goes down. On the other hand, an increase in the price of tubas will increase MRPL and thus increase the demand for workers and the wage rate.

12. In the absence of intervention, imperfect competition, externalities, public goods, and imperfect information all result in which of the following? A. Demand curves that should be added vertically B. Market failure C. Prices that are too low D. Quantities of output that are too high E. An excess of pollution

Correct Answer: B B Demand curves should be added vertically to find the total demand for public goods, but not for the other items. Prices are too high (higher than marginal cost, which is the benchmark for allocative efficiency) as the result of imperfect competition. Quantities may be too high when negative externalities exist, but are too low when there are positive externalities and for public goods. An excess of pollution results only from negative externalities and perhaps imperfect information. All of these items are sources of market failure, which occurs when resources are not allocated efficiently.

2. A monopoly with a straight, downward-sloping demand curve has a marginal revenue curve that is A. upward sloping B. halfway between the demand curve and the vertical axis C. initially downward sloping and then upward sloping D. parallel to the demand curve E. parallel to the vertical axis

Correct Answer: B B If a monopoly faces a straight downward-sloping demand curve, then the marginal revenue for a monopoly is halfway between the demand curve and the vertical axis. See Figure below. Therefore the answer is (B).

3. If supply and demand both increase, the result is A. a definite increase in price and an indeterminate change in quantity B. a definite increase in quantity and an indeterminate change in price C. a definite decrease in quantity and an indeterminate change in price D. a definite decrease in price and a definite increase in quantity E. a definite increase in price and a definite increase in quantity

Correct Answer: B B If the supply increases, then at any price point, the quantity of that good increases. If the demand increases, then at every price point, the quantity demanded increases (see the figure). The combination of an increase in supply and demand will result in an increase in equilibrium price—eliminate (A) and (C). The change in equilibrium quantity depends on the relative size of the increase in demand and supply, as well as the relative elasticity of supply and demand. The answer is (B).

6. Assume a firm hires labor for $15 each and sells its products for $3 each. If the MP of the 3rd worker is 10, which of the following statements would be the most true? A. The firm should hire more labor so that the MRPL will increase. B. The firm should hire more labor so that the MRPL will decrease. C. The firm should hire less labor so that the MRPL will increase. D. The firm should hire less labor so that the MRPL will decrease. E. The firm should do nothing because it is currently maximizing profit.

Correct Answer: B B If the third worker's MP = 10, then that worker generated income of 10 × $3 = $30. As the worker is paid $15, the firm is making economic profit. Therefore it should hire more workers until the productivity of the last worker just equals the revenue generated by that worker. Eliminate (C), (D) and (E). As more workers are hired (and no other investment in the business is made), each subsequent worker will generate lower and lower marginal revenue and MRPL will decrease.. Therefore the answer is (B).

11. Which of the following could have caused an increase in the demand for ice cream cones? A. A decrease in the price of ice cream cones B. A decrease in the price of ice cream, a complimentary good to ice cream cones C. An increase in the price of ice cream, a complimentary good to ice cream cones D. A decrease in the price of lollipops, a close substitute for ice cream E. An increase in the supply of ice cream cones

Correct Answer: B B Increase in demand refers to a shift in the demand curve. An increase in the demand for a good could be caused by an increase in real income (assuming that it is a normal good), a drop in price of a complimentary good, or a rise in price of a substitute. In this case, the best answer is (B).

4. The necessity for a monopoly to lower its price in order to sell more units of its product explains why A. monopolies are common among public utilities B. the marginal revenue curve is below the demand curve for a monopoly C. the marginal cost curve for a monopoly slopes upward D. monopolies are able to maintain market power E. monopolies differ from monopolistically competitive firms

Correct Answer: B B Monopolies are common among public utilities due to economies of scale. Marginal cost does not rely on price. Monopolies are able to maintain market power due to barriers to entry. And both monopolies and monopolistically competitive firms must lower their price in order to sell more units of their output. The correct answer is (B): The marginal revenue is below the demand curve for monopolies because they must lower their price in order to sell more. Because they lower the price in order to sell one more unit, the marginal revenue is not the price as indicated on the demand curve, but that price minus the lost earnings on all of the previous units that are now selling at a lower price.

4. In an oligopoly market, firms A. cannot earn economic profits B. are interdependent C. are not subject to antitrust legislation D. are large in number E. have no market power

Correct Answer: B B The best approach to this question is to use Process of Elimination. Consider that in oligopoly markets, there are a few (possibly large) firms that dominate the market, so eliminate (D). As perfect competition is reduced, these firms do make economic profit, so eliminate (A). As there are only a few firms that would most probably be subjected to antitrust legislation, and some of the antitrust legislation may have been developed in response to the actions of these oligopolies, eliminate (C). Typically in oligopolistic markets there are several buyers and few sellers. Therefore the sellers have market power, so eliminate (E). While interdependence is not a prerequisite for oligopolistic markets, it is a common feature of such markets. Therefore the answer is (B).

5. In the same period there is a drought affecting the supply of pineapples and a discovery that may assist in the avoidance of cancer. How will this combination of events affect the equilibrium price and quantity of pineapples?Equilibrium Quantity A. Increases Decreases B. Increases Indeterminate C. Indeterminate Increases D. Decreases Indeterminate E. Increases Increases

Correct Answer: B B The drought will decrease the supply of pineapples and the medical discovery will increase the demand. A decrease in supply increases equilibrium price and decreases equilibrium quantity, while an increase in demand increases equilibrium price and increases equilibrium quantity. Because both changes increase price, it is clear that the new equilibrium price will be higher. However, because the decrease in supply decreases quantity and the increase in demand increases quantity, the new equilibrium quantity may be higher, lower, or the same, depending on the relative sizes of the shifts in supply and demand.

4. The law of diminishing marginal utility is most useful for explaining the A. law of supply B. law of demand C. curvature of the total cost curve D. shape of the production possibilities frontier E. diminishing marginal product of capital

Correct Answer: B B The law of diminishing marginal utility states that as you consume more and more of the same good during a given period, your enjoyment gained from each additional unit of the good decreases. This is why more units of a good will be purchased if the price decreases and vice versa—the law of demand. The law of supply is based on increasing marginal costs. Likewise, total cost, production possibilities, and the marginal product of labor are unrelated to marginal utility.

2. The relationship between the marginal revenue curve and the demand curve for a monopoly is most similar to the relationship between the marginal factor cost curve and what curve for a monopsony? A. Labor demand B. Labor supply C. Marginal external cost D. Total cost E. Marginal cost

Correct Answer: B B The marginal revenue curve is below the demand curve for a monopoly, because the monopoly must lower its price on all units sold in order to sell one more. This results in additional revenue that is less than the price on the demand curve by the amount of losses on units previously sold at a higher price. Similarly, the marginal factor cost curve is above the labor supply curve for a monopsony, because it must increase its wage in order to hire one more unit of labor. Thus, the marginal factor cost is larger than the wage rate reflected on the labor supply curve by the additional amount paid to workers previously earning lower wages.

12. The demand curve for labor is derived from A. the market labor demand curve B. the demand curve for the output produced by labor C. the labor supply curve for the firm D. the equilibrium wage in the labor market E. the market labor supply curve

Correct Answer: B B The market labor demand curve is derived by taking the sum of individual firm demand curves; the derivation is not the other way around. The supply curve for labor does not determine labor demand. The equilibrium wage determines the quantity of labor demanded but not the shape of the demand curve for labor. Rather, labor demand is a function of the marginal product of labor and the price of the output, which is derived from the demand for the output produced by labor.

2. The supply curve for lawn-mowing services is likely to slope upward because of A. decreasing marginal costs B. increasing opportunity cost of time C. diminishing marginal utility D. increasing returns to scale E. economies of scope

Correct Answer: B B The question asks about supply, so eliminate (C) because it focuses on demand. Scale (including decreasing marginal costs) and scope refer to a particular firm, whereas the question asks about the aggregate supply of lawn-mowing services. Eliminate (A), (D), and (E). The supply curve is upward sloping because as the price of lawn-mowing services increases, more suppliers are willing to enter the market as their opportunity cost for supplying these services increases compared to their other economic opportunities. In other words, a physician will take the job of a dishwasher if the pay for washing dishes is higher than the pay for being a physician. The answer is (B).

4. When a good is taxed, the tax burden falls mainly on the consumer if A. the demand is inelastic and the supply is inelastic B. the demand is inelastic and the supply is elastic C. the demand is elastic and the supply is inelastic D. the demand is elastic and the supply is elastic E. the tax is levied on the consumers

Correct Answer: B B The tax burden falls primarily on those who have the greatest relative inelasticity. As the question is asking for conditions where the consumer bears most of the tax burden, eliminate (C) and (D). For the consumers to bear most of the burden, the supply needs to be elastic; therefore, eliminate (A). Choice (E) is tricky: Because consumers are charged the tax, suppliers may bear the tax burden through the shift in demand curve. Eliminate (E), and you're left with (B) as the answer.

7. The industry that makes plastic army figures uses a small fraction of the plastic demanded for all purposes. On this basis, we can conclude that the army-figures industry is most likely a(n) A. increasing-cost industry B. constant-cost industry C. decreasing-cost industry D. profit-making industry E. loss-making industry

Correct Answer: B B There is not enough information provided to make conclusions about profits or losses. Increasing-cost industries are those that make up a large proportion of the demand for an input, meaning that expansion of these industries is likely to bid up the prices of those inputs and cause average production costs to increase. Decreasing-cost industries experience decreasing average production costs as output increases, perhaps because mass production of inputs becomes feasible with increased input demand. On the basis of the information provided, the best conclusion is that army figures are made in a constant cost industry, meaning that it uses a small enough proportion of the input (plastic) so that it does not bid up the input price as the industry expands.

11. When a negative externality exists as the result of the production of a good, the socially optimal quantity of output could be achieved by A. free market capitalism B. placing limits on the quantity that can be produced C. government purchases of the good D. setting a minimum on the quantity that can be produced E. subsidizing the good's production

Correct Answer: B B When a negative externality (such as pollution) exists, output exceeds the social optimum. Subsidies, government purchases, free markets, and minimums will either increase or have no effect on the quantity produced. The quantity can be restricted by quantity limits as noted here. Other solutions to negative externalities include taxes and restrictions on problem-causing production methods and emissions.

2. A student decides that, having already spent three hours studying for an exam, she should spend one more hour studying for the same exam. Which of the following is most likely true? A. The marginal benefit of the fourth hour is certainly less than the marginal cost of the fourth hour. B. The marginal benefit of the fourth hour is at least as great as the marginal cost of the fourth hour. C. Without knowing the student's opportunity cost of studying, we have no way of knowing whether or not her marginal benefits outweigh her marginal costs. D. The marginal cost of the third hour was likely greater than the marginal cost of the fourth hour. E. The marginal benefit of the third hour was less than the marginal cost of the third hour.

Correct Answer: B B —If we observe her studying for the fourth hour, then it must be the case that the MB ≥ MC of studying for that next hour. If we observe her putting her books away and doing something else, the opposite must be true.

2. Which characteristic is likely a part of a monopoly market but not of monopolistic competition? A. Differentiated products B. Patents and copyrights C. Possibility of profit in the short run D. Deadweight loss exists E. None of the above

Correct Answer: B B —Monopoly has barriers to entry (e.g., patents) and the monopolistic competitive firm does not. Choices A, C, and D are true of monopolistic competition and monopoly.

6. You learn that one nation has a Gini ratio of .25 and another nation has a Gini ratio of .85. Based on this you might conclude A. the nation with the higher Gini ratio has a more equal distribution of wealth and income. B. the nation with the higher Gini ratio has a more unequal distribution of citizens with college degrees. C. the nation with the lower Gini ratio has more societal barriers like discrimination. D. the nation with the higher Gini ratio has fewer societal barriers like discrimination. E. the nation with the lower Gini ratio has more oligopolistic industries.

Correct Answer: B B —The distribution of human capital is a factor in determining the distribution of income and wealth. A nation that has a more unequal distribution of educational attainment would therefore likely have a more unequal distribution of income.

10. A monopolist may be able to maintain long-run positive profit due to A. deadweight loss. B. economies of scale in production. C. a price that is set equal to average total cost. D. perfectly elastic demand for the product. E. entry of new firms that keep the price high.

Correct Answer: B B-Economies of scale are a common barrier to entry; a key to maintaining long-run positive profits.

3. A competitive labor market is currently in equilibrium. Which of the following most likely increases the market wage? A. More students graduate with the necessary skills for this labor market. B. Demand for the good produced by this labor is stronger. C. The price of a complementary resource increases. D. The Department of Labor removes the need for workers to pass an exam before they can work in this field. E. Over time, one large employer grows to act as a monopsonist.

Correct Answer: B B —The equilibrium wage rises with stronger demand or lessened supply of labor. The stronger demand for the product increases the wage as the demand for labor increases. All other choices either increase the labor supply or decrease the demand, thus decreasing the wage. Emergence of monopsony decreases the wage below competitive levels.

4. Production of energy (i.e., electricity, natural gas, heating oil) creates a negative externality in the form of air pollution blown to communities downwind from the source of the pollution. Of the choices below, which is the most appropriate policy to remedy this negative externality? A. a per unit tax on consumers of subway tickets and city bus passes B. a per unit tax on producers of energy C. a per unit subsidy for energy consumers D. a per unit tax on consumers of energy efficient lightbulbs E. a per unit subsidy for energy producers

Correct Answer: B B —The presence of the negative externality should rule out any choice that refers to a subsidy of either producers or consumers of energy. To reduce consumption and production, we must reduce the market quantity, not encourage more of it. Subsidies could be used to encourage more energy-efficient behavior, but choices A and D would actually inhibit this kind of action. The per unit tax on producers of the negative externality is the most appropriate choice, as the tax shifts the market supply inward, making it closer to the socially optimal supply of energy.

3. Suppose that aluminum is a key production input in the production of bicycles. If the price of aluminum falls, and all other variables are held constant, we expect A. the demand for aluminum to rise. B. the supply of bicycles to rise. C. the supply of bicycles to fall. D. the demand for bicycles to rise. E. the demand for bicycles to fall.

Correct Answer: B B —This is a determinant of supply. If the raw material becomes less costly to acquire, the marginal cost of producing bicycles falls. Producers increase the supply of bicycles. Recognizing this as a supply determinant allows you to quickly eliminate any reference to a demand shift.

6. The competitive market provides the best outcome for society because A. consumer surplus is minimized, while producer surplus is maximized. B. the total welfare is maximized. C. producer surplus is minimized, while consumer surplus is maximized. D. the difference between consumer and producer surplus is maximized. E. the total cost to society is maximized.

Correct Answer: B B —When competitive markets reach equilibrium, no other quantity can increase total welfare (consumer + producer surplus). Total welfare, under the supply and demand curves, is maximized at that point.

2. If average household income rises and we observe that the demand for pork chops increases, pork chops must be A. an inferior good. B. a normal good. C. a surplus good. D. a public good. E. a shortage good.

Correct Answer: B B —When income increases and demand increases, the good is a normal good. Had the demand for pork chops decreased, they would be an inferior good.

12. Suppose the county government sends each parent a coupon that can be used to subsidize the cost of sending each child to daycare. What would you expect to occur in the market for daycare services? A. The demand for daycare falls, lowering the market price. B. The demand for daycare rises, increasing the market price. C. The supply of daycare rises, lowering the market price. D. The supply of daycare falls, increasing the market price. E. A permanent shortage of daycare services exists.

Correct Answer: B B-A subsidy given to consumers acts as an increase in income. Demand for daycare rises, raising the price of daycare.

12. In the short run, a firm employs labor and capital to produce gadgets. If the annual price of capital increases, what will happen to the short-run cost curves? A. The marginal cost and average variable cost curves will shift upward. B. The average fixed cost and average total cost curves will shift upward. C. The marginal cost and average fixed cost curves will shift upward. D. The marginal cost, average fixed cost, average variable cost, and average total cost curves will all shift upward. E. Only the average fixed cost curve will shift upward.

Correct Answer: B B-An increase in the price of capital is an increase in total fixed costs. This increases AFC. Since ATC = AFC + AVC, it also increases ATC. Because fixed costs do not change with output, marginal cost and variable cost remain the same.

11. If the wage paid to all units of labor is $4.50, how many units of labor are hired? A. 1 B. 2 C. 3 D. 4 E. 5

Correct Answer: B B-At the second worker, wage = MRPL.

9. Which of the following is a characteristic of a monopoly market? A. Firms produce a homogeneous product. B. Barriers to entry exist. C. Firms are price-taking profit maximizers. D. Deadweight loss is eliminated through entry of competing firms in the long run. E. In the long run the firm earns normal profits.

Correct Answer: B B-Barriers to entry are a defining characteristic of monopoly.

11. If a market is organized by a cartel, we can expect A. normal profits for all cartel firms. B. an incentive for cartel firms to cheat on the cartel agreement. C. profit maximization by individual firms in the cartel. D. allocative efficiency. E. perfectly competitive prices.

Correct Answer: B B-Cartels are illegal collusive agreements to lower output, raise the price, and maximize joint profits. Each member has an incentive to cheat by producing a little more.

4. Deadweight loss in industries with market power is a result of A. profit-maximizing output occurs where price equals marginal revenue. B. profit-maximizing output occurs where price exceeds marginal cost. C. profit-maximizing output occurs where price equals marginal cost. D. profit-maximizing output occurs where price exceeds average total cost. E. profit-maximizing output occurs where price equals average total cost.

Correct Answer: B B-DWL emerges when output is moved away from where P = MC.

3. If Matt's total utility from consuming bratwurst increased at a constant rate, no matter how many bratwurst Matt consumed, what would Matt's demand curve for bratwurst look like? A. Vertical B. Horizontal C. Downward sloping D. Upward sloping E. First upward, but eventually downward sloping

Correct Answer: B B-Downward-sloping demand is the result of diminishing marginal utility. This consumer's MU is constant, so the demand curve for bratwurst is horizontal.

9. Suppose the market for roses is currently in equilibrium. If the supply of roses falls, while at the same time the demand for roses rises, what can you say about the price and quantity of roses in the market? A. Price and quantity both rise. B. Price rises, but the change in quantity is ambiguous. C. Price and quantity both fall. D. Quantity rises, but the change in price is ambiguous. E. Neither price nor quantity change, as these shifts offset one another.

Correct Answer: B B-If demand increases and supply decreases, the price definitely rises. The quantity is ambiguous and depends upon which effect is stronger. Draw these shifting curves in the margin of your exam book.

2. Which of the following statements is most consistent with a capitalist market economy? A. Economic resources are allocated according to the decisions of the central bank. B. Private property is fundamental to innovation, growth, and trade. C. A central government plans the production and distribution of goods. D. Most wages and prices are legally controlled. E. Most economic resources are owned by the government and leased to the citizens in exchange for lower taxes.

Correct Answer: B B-In a capitalistic market economy, the central government has minimal roles in the production and distribution of goods. Resources are allocated based on relative, not absolute, prices, and prices are determined in markets. The role of private property is central to capitalism.

4. Which of the following is true of equilibrium in a purely (or perfectly) competitive market for good X? A. A shortage of good X exists. B. The quantity demanded equals the quantity supplied of good X. C. A surplus of good X exists. D. The government regulates the quantity of good X produced at the market price. E. Deadweight loss exists.

Correct Answer: B B-In a market free of price controls or other distortions, equilibrium occurs at a price where Qd = Qs. Graphically this is where the demand curve intersects the supply curve. Here, social welfare is maximized, allocative efficiency is attained, and there exists no deadweight loss.

11. Which of the following scenarios would increase a nation's production possibility frontier (PPF)? A. The nation's system of higher education slowly declines in quality. B. The nation invests in research and development of new technology. C. The nation's infant mortality rate increases. D. Environmental pollution severely damages the health of the population. E. Mineral reserves are exhausted.

Correct Answer: B B-Nations that invest in research and technology expect the PPF to expand; the key to economic growth.

9. Which of the following is necessarily a characteristic of oligopoly? A. Free entry into and exit from the market B. A few large producers C. One producer of a good with no close substitutes D. A homogenous product E. No opportunities for collusion between firms

Correct Answer: B B-Oligopolies are industries dominated by a few large firms but can have either homogenous or differentiated products. All other choices describe other market structures in the chapter.

8. The demand curve for a perfectly competitive firm's product is A. downward sloping and equal to the market demand curve. B. perfectly elastic. C. perfectly inelastic. D. kinked at the going market price. E. the same as the firm's marginal cost curve.

Correct Answer: B B-Perfectly competitive firms are price takers, so demand for each firm's product is horizontal: Ed = ∞.

3. An effective price ceiling in the market for good X likely results in A. a persistent surplus of good X. B. a persistent shortage of good X. C. an increase in the demand for good Y, a substitute for good X. D. a decrease in the demand for good Z, a complement with good X. E. a rightward shift in the supply curve of good X.

Correct Answer: B B-Price ceilings are legal maximum prices set below the equilibrium price. A shortage results.

11. Which of the following is the best example of a public good? A. Private violin lessons B. The volunteer fire department in your community C. A $1 ticket for admission to a museum D. A bag of potato chips E. A history textbook

Correct Answer: B B-Public goods like police and fire protection are received by all citizens, even if they do not pay.

12. A rational consumer who is eating Girl Scout cookies stops eating when A. the total benefit equals the total cost of eating cookies. B. the marginal benefit equals the marginal cost of the next cookie. C. the marginal cost of eating cookies is maximized. D. the marginal benefit of eating cookies is minimized. E. the price of the cookie equals the total benefit of the next cookie.

Correct Answer: B B-Rational decision makers consume right up to the point where the MB of the next cookie is exactly equal to the MC of the next cookie.

4. The sales tax that you pay at the grocery store is commonly labeled a A. progressive tax. B. regressive tax. C. proportional tax. D. excise tax. E. tax bracket.

Correct Answer: B B-Sales taxes are typical examples of regressive taxes.

1. A competitive market for coffee, a normal good, is currently in equilibrium. Which of the following would most likely result in an increase in the demand for coffee? A. Consumer income falls. B. The price of tea rises. C. The wage of coffee plantation workers falls. D. Technology in the harvesting of coffee beans improves. E. The price of coffee brewing machines rises.

Correct Answer: B B-Tea is a coffee substitute. Higher tea prices increase coffee demand.

4. Every day Melanie spends her lunch money consuming apples, at $1 each, and oranges, at $2 each. At her current level of consumption, Melanie's marginal utility of apples is 12 and her marginal utility of oranges is 18. If she has already spent all of her lunch money, how should Melanie change her consumption decision to maximize utility? A. She should make no changes; she is consuming the utility maximizing combination of apples and oranges. B. She should increase her apple consumption and decrease her orange consumption until the marginal utility per dollar is equal for both. C. She should decrease her apple consumption and increase her orange consumption until the marginal utility per dollar is equal for both. D. She should increase her apple consumption and decrease her orange consumption until the marginal utility is equal for both. E. She should decrease her apple consumption and increase her orange consumption until the marginal utility is equal for both.

Correct Answer: B B-The utility maximizing rule requires that MU/P is equal for both goods. Now the MU/P is greater for apples than for oranges. Melanie consumes more apples and fewer oranges, which lowers MU of apples and increases the MU of oranges.

10. A cartel is often the result of A. perfectly competitive firms that agree to produce a homogenous product. B. oligopoly competitors that agree to restrict output to maximize joint profits. C. a monopoly that has been regulated by the government. D. a natural monopoly that has evolved into a perfectly competitive industry. E. monopolistically competitive firms that have agreed to earn normal profits in the long run.

Correct Answer: B B-This describes a cartel.

10. The United States is trading salmon to Peru in exchange for anchovies. If these nations are trading based upon relative opportunity costs, what must be the case? A. The United States has comparative advantage in anchovy production, and Peru has comparative advantage in salmon production. B. The United States has comparative advantage in salmon production, and Peru has comparative advantage in anchovy production. C. The United States has absolute advantage in anchovy production, and Peru has absolute advantage in salmon production. D. The United States has absolute advantage in salmon production, and Peru has absolute advantage in anchovy production. E. The United States has comparative advantage in salmon production, and Peru has absolute advantage in anchovy production.

Correct Answer: B B-Trading nations specialize in the good in which they have lower opportunity costs. A nation trades this good to the other in exchange for the good for which it does not have comparative advantage.

14. Which of the following scenarios is the best example of a positive externality? A. Your neighbor has a swimming pool and throws loud late-night parties. B. Your neighbor has a swimming pool and allows you free access. C. Your neighbor has a swimming pool and the powerful chlorine odor blows into your open dining room window. D. Your neighbor has a swimming pool and allows you to use it in exchange for letting his kids use your swing. E. Your neighbor has a swimming pool that is conducive for the breeding of mosquitoes.

Correct Answer: B B-You are the recipient of a spillover benefit from your neighbor's purchase of a pool.

12. Production possibilities frontiers are concave to the origin because A. of inefficiencies in the economy. B. of opportunity cost. C. of the law of increasing costs. D. of constant opportunity costs. E. the extreme points are not as well established.

Correct Answer: C (C)

2. If there is a negative externality associated with the production of a private good, which of the following is an action by government that would most likely move the market to an efficient outcome? A. Close the firm producing the good. B. Subsidize the firm or its customers. C. Tax the firm. D. Appoint a commission. E. Relocate the firm.

Correct Answer: C (C)

2. Opportunity costs or implicit costs of a "Mom & Pop"-owned business are: A. equal to accounting costs. B. equal to accounting profits. C. equal to earnings or profits that could have occurred using resources elsewhere. D. equal to earnings or profits that occurred for Mom & Pop's business. E. equal to earnings or profits of other Mom & Pop businesses.

Correct Answer: C (C)

2. Price times quantity measures A. the international trade gap. B. the budget deficit. C. total revenue. D. price elasticity of demand. E. price elasticity of supply.

Correct Answer: C (C)

3. A positive sign on cross price elasticity of demand indicates that the two products are A. luxuries. B. necessities. C. substitutes. D. complements. E. independent.

Correct Answer: C (C)

3. In the short run, the shut down price is equal to A. minimum point on average total cost. B. maximum point on average total cost. C. minimum point on average variable cost. D. maximum point on average variable cost. E. minimum point on marginal cost.

Correct Answer: C (C)

3. Which of the following is not the basis for a wage differential? A. Higher risk job. B. Investment in human capital. C. Increase in production of SUVs. D. Racial discrimination. E. Psychic income.

Correct Answer: C (C)

4. If consumers are advised that multigrained bread will substantially lessen the risk of cancer, which of the following will happen in the market for multigrained bread? A. The demand curve will shift to the left, decreasing the price of multigrained bread. B. The supply curve will shift to the left, increasing the price of multigrained bread. C. The demand curve will shift to the right, increasing the price of multigrained bread. D. The supply curve will shift to the right, decreasing the price of multigrained bread. E. None of the above.

Correct Answer: C (C)

4. Which of the following is a characteristic of monopolistic competition? A. Economically efficient in the long run. B. Pricing at minimum ATC in long run. C. Excess capacity. D. Very few competitors. E. Most dominant market structure in United States.

Correct Answer: C (C)

5. According to the principle of diminishing marginal utility, A. marginal utility stays the same. B. total utility stays the same. C. marginal utility decreases with each additional unit of a good that is consumed. D. marginal utility and total utility both decrease. E. total utility declines.

Correct Answer: C (C)

5. Marginal cost (MC) is equal to average variable cost (AVC) and average total cost (ATC) when: A. marginal cost (MC) intersects AVC and ATC at their maximum points. B. AVC and ATC intersect MC at its maximum point. C. MC intersects AVC and ATC at their minimum points. D. AVC and ATC intersect MC at its minimum point. E. the economy is in the recovery phase of the business cycle.

Correct Answer: C (C)

5. Which of the following is not correct for the perfectly competitive firm, in the long run? A. price = minimum average cost. B. price = marginal revenue. C. price = minimum average variable cost. D. price = marginal cost. E. normal profits.

Correct Answer: C (C)

5. Which of the following statements is positive? A. An economy that produces more butter than guns is better off than an economy that produces more guns than butter. B. Nations should concentrate their resources on producing wholesome consumer goods as opposed to the weapons of war. C. The production possibilities frontier is concave to the origin because of the law of increasing costs. D. Nations ought to devote at least some of their resources to national defense. E. Nations would do better by producing toward the middle of their production possibilities frontiers as opposed to the extreme points near the axes.

Correct Answer: C (C)

6. The backward bending supply curve is characterized by which of the following? A. As wage rates rise, the quantity of labor supplied continues to rise at every wage rate increase. B. The labor-leisure trade-off continues to favor the supply of more jobs, or the substitution effect. C. The labor-leisure trade-off favors the income effect or more leisure at higher wage rates. D. inexperienced, low-income, younger workers at the backward bending portion. E. discriminated workers.

Correct Answer: C (C)

6. The primary focus of microeconomics is A. families and how they make money. B. firms and how they make profits. C. individual units within the overall economy. D. government. E. small countries.

Correct Answer: C (C)

10. Which of the following represents a measure of a firm's monopoly pricing or market power, i.e., the larger the value of the index, the greater the firm's market pricing power? A. (MC-P)/MC B. (MC-P)/P C. (P-MC)/P D. (P-MC)/MC E. (P-MR)/MC

Correct Answer: C (C) (P - MC)/P is the Lerner index of monopoly pricing power. The higher the value of this ratio, the higher the pricing power of a firm. In effect, the index measures the firm's ability to price its goods over marginal cost. If the socially optimal price for efficiency is P = MC, this ability to price greater than marginal cost suggests inefficiency.

2. Which of the following is a characteristic of monopolistic competition in the long run? A. Strong barriers to entry. B. Homogeneous products. C. Zero economic profits. D. Minimum average total cost equals price. E. Efficiency.

Correct Answer: C (C) All of the other characteristics listed as choices are not appropriate for monopolistic competition. Choices B, D, and E are characteristics of perfect competition in the long run; choice A is characteristic of oligopoly and monopoly.

10. If a firm decreases its prices by 15 percent and its total revenue increases by 30 percent, which of the following is correct? A. The price elasticity of demand is unit elastic. B. The price elasticity of demand is inelastic. C. The price elasticity of demand is elastic. D. The numerical coefficient of elasticity is equal to one. E. The numerical coefficient of elasticity is less than one.

Correct Answer: C (C) Elastic means a coefficient of elasticity greater than 1 or a more than proportional increase of quantity demanded to a decrease in price. Since P X Q = total revenue, if prices decrease by 15 percent and while total revenue increases by 30 percent, there is a factor of 2. That is, the response in quantity demanded was twice the percentage change in price, leading to an increase in total revenue. Price elasticity = 1 (unit elastic, proportional); Price elasticity > I (elastic, more than proportional); price elasticity < 1 (inelastic less than proportional).

12. Which of the following is true about a price floor? A. It is used to correct government policy. B. It is used when the equilibrium price is too high. C. It will be located above the equilibrium price. D. It will be located below the equilibrium price. E. It is when the stock market has closed at a new low.

Correct Answer: C (C) The price floor is established since the market equilibrium price would be too low, e.g., when a $5 market wage (price) for labor is deemed insufficient. So, the government says no one can be paid less than $6 an hour (minimum wage).

2. The Lorenz Curve is used to measure which of the following: A. The ratio of income to wealth in different countries. B. The ratio of public goods to private goods in different countries. C. The ratio of income inequality to income equality in different countries. D. The ratio of the working poor to the non-working poor. E. The ratio of shares of taxation to shares of total income.

Correct Answer: C (C) This is definitional. You should review this along with bases for wage differentials.

1. Which of the following is a correct statement? A. Average total cost equals marginal cost plus average fixed costs. B. Average total cost equals marginal costs plus average variable costs. C. Average total cost equals average fixed costs plus average variable costs. D. Total fixed costs vary with output. E. Total fixed costs equal total variable costs at zero output.

Correct Answer: C (C) This is purely definitional.

12. When marginal cost equals price in a perfectly competitive product market at long run equilibrium, which of the following is NOT correct? A. There is a socially optimal or efficient output and price. B. Other product markets are inefficient by contrast. C. It is a sign of high concentration among sellers. D. The value placed on the product by the buyer is equal to the cost of production of the seller at the margin of an additional sale. E. Marginal cost equals minimum average total cost.

Correct Answer: C (C) This is the only choice that is not a characteristic of perfectly competitive markets; instead, it is a characteristic of oligopolies or other forms of imperfect competition.

8. Usually, the supply curve of firms operating under conditions of perfect competition in product market would be identified as A. perfectly vertical in the long run. B. perfectly horizontal in the short run. C. more elastic in the long run. D. more elastic in the short run. E. discontinuous in the long run.

Correct Answer: C (C) This refers to the supply curve of perfectly competitive firms in product markets. Elasticity tends to be greater in the long run since the firm will be able to adjust to changes in demand. The firm will have more options in availability of resources in order to substitute less expensive resources (inputs) for more expensive resources in the long run.

8. Which of the following best exemplifies economies of scale? A. As a firm's output decreases, average costs for production decrease. B. As a firm's output increases, average costs for production increase. C. As a firm's inputs triple, its output quadruples. D. As a firm's inputs triple, its output doubles. E. As a firm's inputs triple, its output stays constant.

Correct Answer: C (C) With economies of scale, as production increases there are savings in average costs of production. When output increases more than proportionately to increases in input, the firm is getting more output per added input or, in effect, there is a decrease in cost of production.

1. Which of the following is characteristic of a perfectly competitive firm's demand curve? A. average revenue is less than price at all levels of output B. marginal revenue is equal to marginal cost at all levels of output C. price and marginal revenue are equal at all levels of output D. it is the same as the market demand curve E. demand is inelastic at all levels of output

Correct Answer: C C A perfectly competitive firm's demand curve is horizontal at the price determined by the market equilibrium. Thus, each firm can sell as many units as it wants at the market price, and marginal revenue equals the price. It is the need to lower the price in order to sell more units that causes firms with market power to have marginal revenue levels that fall below price levels.

3. The ability for firms to enter and exit a market over time means that A. the marginal cost is zero B. the marginal revenue is zero C. the long run supply curve is more elastic D. the long run supply curve is more inelastic E. the firms make positive economic profit

Correct Answer: C C As companies can enter and exit the market over time, only those suppliers who can efficiently supply will choose to remain in the market. This would make the long run supply curve more elastic, so the answer is (C).

9. If the government subsidizes producers in a perfectly competitive market, then A. the demand for the product will increase B. the demand for the product will decrease C. the consumer surplus will increase D. the consumer surplus will decrease E. the supply will decrease

Correct Answer: C C As the demand curve does not change, answers focusing on demand—(A) and (B)—can be eliminated. A subsidy increases supply, so eliminate (E). Consumer surplus is the area under the demand curve between the equilibrium price and the vertical axis (see the following figure). The consumer surplus before the subsidy is shown by region A, and after the subsidy, consumer surplus increases to include regions B and C. Therefore the answer is (C).

7. Consider a profit-maximizing firm in a perfectly competitive market with several sellers and several buyers (i.e., the firm is a "price taker" of the goods it sells and a "price taker" of the hourly wages it pays its workers). If a technological innovation made by someone in this firm were to significantly raise the firm's marginal physical product (but not that of any other firm's), then this innovation would A. reduce the firm's employment level, because fewer workers are now needed B. raise the workers' hourly wage as they now contribute more marginal revenue C. lead the firm to hire more workers but not to raise their wages D. lead the firm to hire more workers and to pay them higher wages E. None of the above

Correct Answer: C C As the firm is a price taker in the labor market, wages will not be affected, so eliminate (B) and (D). As marginal product of labor has increased (workers have become more productive), the marginal revenue product (amount earned by each worker) has also increased. This will cause the firm to hire more workers until the marginal cost of labor equals the marginal product of labor. Therefore the answer is (C).

11. Which of the following will shift the supply curve for textbooks to the left? A. A decrease in the demand for a substitute in production B. A decrease in the number of buyers C. An increase in printing costs D. Expectations of future surpluses E. A decrease in taxes on textbook suppliers

Correct Answer: C C Both a decrease in the number of buyers and expectations of future surpluses would decrease demand. A decrease in the demand for a substitute in production (say, magazines) would decrease the price of magazines and increase the supply of textbooks, because paper resources would be shifted from magazines to textbooks as the price magazines could garner dropped. A decrease in taxes on textbook suppliers would decrease the cost of supplying textbooks and thus increase their supply, which is based on the marginal cost of provision. An increase in printing costs would increase the cost of textbook production and decreasing textbook supply.

3. What could the government do to most effectively avoid a free rider problem? A. Enact stricter antitrust legislation B. Provide more complete information about the relevant goods C. Supply public goods using tax dollars D. Tax those creating negative externalities E. Subsidize those creating positive externalities

Correct Answer: C C Choices (A), (B), (D), and (E) provide solutions for imperfect competition, incomplete information, and negative and positive externalities respectively. A free rider problem arises when people try to benefit from a public good without paying for it. The government can avoid this by taxing everyone and providing the public good itself, as it does for highways and national defense.

9. An industry with three firms selling a standardized or differentiated product would be called A. a competitive industry B. a monopolistically competitive industry C. an oligopoly D. a duopoly E. a monopoly

Correct Answer: C C Competitive and monopolistically competitive industries both have a relatively large number of competitors. A monopoly consists of only one firm. A duopoly has two competitors, so an industry with 3?5 firms as described would most accurately be called an oligopoly.

9. Which of the following indicates that two goods are complements? A. A positive income elasticity B. A horizontal demand curve C. A negative cross-price elasticity D. A demand elasticity greater than one E. A positive cross-price elasticity

Correct Answer: C C Cross-price elasticity is the only type of elasticity that considers two particular goods, which rules out (A) and (D). A horizontal demand curve simply means that the one good has a perfectly elastic demand, and says nothing about its relationship with another particular good, thus ruling out (B). The cross-price elasticity is the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. If an increase in the price of one good (movie tickets) causes an increase in the quantity of the other good (movie rentals) demanded, the cross-price elasticity is positive and the goods are substitutes. If an increase in the price of one good (gasoline) causes a decrease in the quantity of the other good demanded (sports utility vehicles), the cross-price elasticity is negative and the two goods are complements.

4. When the cross-price elasticity of demand is negative, the goods in question are necessarily A. normal B. inferior C. complements D. substitutes E. luxuries

Correct Answer: C C Cross-price elasticity refers to the demand of a good when the equilibrium price of another good changes. A negative cross-price elasticity means that the demand of a good has decreased when the equilibrium price of another good increases. This means that the two goods are complements. For example, the quantity for rental skis decreases when ticket prices for ski resorts increases. The answer is (C).

6. The owner of a competitive firm making zero economic profit A. should consider shutting down because she could make more elsewhere B. is making less than normal profits C. is making exactly what she would make in her next best alternative job D. will most likely make more profits in the long run E. is making serious resource allocation errors

Correct Answer: C C Economic profit is calculated by subtracting all costs from revenues, including opportunity costs. Because opportunity costs are what could be made in the next best alternative situation, earning zero economic profit means earning the most that could be made elsewhere. Zero economic profits are also called normal profits, and they are what all firms earn in the long run in a competitive industry. They do not indicate any resource allocation errors.

5. Because people with relatively low incomes spend a larger percentage of their income on food than people with relatively high incomes, a sales tax on food would fall into which category of taxes? A. Progressive B. Proportional C. Regressive D. Neutral E. Flat

Correct Answer: C C Extracting proportionally more tax income from the poor is by definition a regressive tax. Therefore the answer is (C).

8. Which of the following statements is accurate in regard to a perfectly competitive firm? A. Demand is downward-sloping. B. The demand curve lies above the marginal revenue curve. C. Price is determined by the equilibrium in the entire market. D. Average revenue differs from price. E. Marginal revenue differs from average revenue.

Correct Answer: C C For a firm in a perfectly competitive market, P = MR = AR, all of which can be read from of the demand curve which is horizontal at the market equilibrium. Like so many of the questions, the answer here can be found immediately by drawing the relevant graphs.

10. A price discriminating monopoly differs from a non-discriminating monopoly because a discriminating monopoly A. has a demand curve that is more elastic than a non-discriminating monopoly B. earns less revenue than a non-discriminating monopoly C. earns more revenue than a non-discriminating monopoly D. will produce less than a non-discriminating monopoly E. has a marginal revenue curve that is less than a non-discriminating monopoly

Correct Answer: C C Price discrimination occurs when a company can charge different prices to different customers for essentially the same product. Therefore any company that can engage in price discrimination will earn higher revenues than those companies that do not. Therefore the answer is (C).

4. A consequence of a price floor is A. a persistent shortage of the good. B. an increase in total welfare. C. a persistent surplus of the good. D. elimination of deadweight loss. E. an increase in quantity demanded and a decrease in quantity supplied.

Correct Answer: C C Price floors are installed when the market equilibrium price is believed to be "too low." This price lies above the equilibrium price, decreasing Qd and increasing Qs, thus creating a surplus. Price controls worsen total welfare and create deadweight loss.

2. Labor, human capital, entrepreneurship, natural resources, and physical capital are all examples of which of the following? A. Public goods B. Inferior goods C. Factors of production D. Outputs E. Substitutes in production

Correct Answer: C C These are all examples of factors of production. They are not public goods because some are excludable and rival in consumption. They are not inferior, which would mean that one would purchase fewer of them as income increased. They are inputs rather than outputs. And they are not substitutes in production, which would mean that one would have to choose which of them to produce using the same resources.

10. A loud party in the neighborhood is disturbing people living nearby who would like to sleep. Which of the following is most likely to lead to an efficient solution to the problem? A. Ban parties B. Permit people to throw parties as they please C. Place a tax on parties equal to the value of the lost sleep that results D. Permit parties only on Tuesdays and Saturdays E. Place a tax on parties equal to the value party-goers receive from their parties

Correct Answer: C C This situation involves a negative externality—noise from the party traveling where it isn't wanted. The most efficient parties are held until the marginal benefit (MB) equals the marginal social cost (MSC), which is the marginal private cost (MPC) plus the marginal external cost (MEC). Banning parties might not be efficient, because the marginal benefit from the first few parties might exceed the marginal social cost. Permitting any and all parties might not be efficient because the number of parties might exceed the number for which MB = MSC. Permitting parties on Tuesdays and Saturdays or charging a tax equal to the party value does not weigh MB against MSC and may result in too many or too few parties. The best choice is to impose a tax equal to the value of lost sleep from a party. This tax equals the marginal external cost, so when deciding whether or not to hold a party, the potential party hosts will consider all of the costs, both private and external, in addition to the

2. If the government wants to establish a socially optimal price for a natural monopoly, it should select the price at which A. average revenue equals zero B. marginal revenue equals zero C. the marginal cost curve intersects the demand curve D. the average total cost curve intersects the demand curve E. marginal revenue equals marginal cost

Correct Answer: C C To achieve the socially optimal outcome, the government should set the price where the marginal cost curve intersects the demand curve. That way, consumers will purchase more of the output until another unit would create less additional benefit than the marginal cost of producing it. The equation of marginal revenue and marginal cost determines the profit-maximizing quantity for a firm, but not the socially optimal outcome for a natural monopoly. Setting price where the average total cost curve intersects the demand curve permits a fair return but not a socially optimal outcome. There is no reason to set price where marginal revenue or average revenue equal zero.

3. Which of the following is not among the methods unions use to increase wages? A. Negotiations to obtain a wage floor B. Restrictive membership policies C. Efforts to decrease the prices of substitute resources D. Featherbedding or make-work rules E. Efforts to increase the demand for the product they produce

Correct Answer: C C Unions are interested in increasing their member's wages. They do this through collective bargaining, wage floors, featherbedding, increasing the demand for their goods (the "Buy American" campaign, for example), and other such tactics. One way to approach this question is through Process of Elimination (which is probably the most efficient way as the tactics listed are all union tactics). Another is to realize that decreasing the price of substitute resources makes those resources more attractive and therefore would hurt union wages. Therefore the answer is (C).

5. When the opportunity for price discrimination arises, A. market segments with relatively elastic demand pay higher prices B. market segments with relatively inelastic demand pay lower prices C. consumer surplus decreases D. demand is horizontal E. demand is vertical

Correct Answer: C C When price discrimination is possible, market segments with relatively elastic demand pay lower prices and those with relatively inelastic demand pay higher prices. Price discrimination does not indicate horizontal or vertical demand curves. Because consumer surplus is the difference between what most consumers would pay, and the price, and price discrimination allows firms to charge consumers prices that are closer to or exactly the most they would pay, consumer surplus decreases.

2. Which of the following scenarios best describes a negative externality? A. A roommate has an extensive music library, and you share the same taste in music. B. Your neighbor has a swimming pool, and you have an open invitation to come on over for a pool party. C. Your neighbor has a swimming pool, and her six-year-old child has his first-grade friends over every day for a pool party. D. Your roommate's mom has decided that your apartment needs cable and pays for it. E. Your dad has purchased a new sports coupe and has agreed that you can drive it to the prom.

Correct Answer: C C —A negative externality is a situation where a third party is harmed by the actions of consumers and/or producers. The first-grade pool party is the best candidate for such a situation, as all of the other choices are likely to benefit you, rather than impose cost upon you.

2. The price of labor is $2, and the price of capital is $1. The marginal product of labor is 200, and the marginal product of capital is 50. What should the firm do? A. Increase capital and decrease labor so that the marginal product of capital falls and the marginal product of labor rises. B. Increase capital and decrease labor so that the marginal product of capital rises and the marginal product of labor falls. C. Decrease capital and increase labor so that the marginal product of capital rises and the marginal product of labor falls. D. Decrease capital and increase labor so that the marginal product of capital falls and the marginal product of labor rises. E. Increase both capital and labor until the ratio of marginal products per dollar is equal.

Correct Answer: C C —Do a quick ratio of marginal product per dollar. When you see that the MPL/PL > MPK/PK , you notice that the firm is getting more "bang for the buck" with labor. Immediately rule out any choice that says they hire less labor. The only way that MPL/PL falls to equal MPK/PK is to decrease the capital and increase the labor, causing the MPK to rise and the MPL to fall. The firm does this until the marginal products divided by the prices are equal.

1. When the price of pears increases, we expect the following: A. Quantity demanded of pears rises. B. Quantity supplied of pears falls. C. Quantity demanded of pears falls. D. Demand for pears falls. E. Supply of pears rises.

Correct Answer: C C —If the price of pears rises, either quantity demanded falls or quantity supplied rises. Entire demand or supply curves for pears can shift, but only if an external factor, not the price of pears, changes.

5. The apple market is in equilibrium. Suppose we observe that apple growers are using more pesticides to increase apple production. At the same time, we hear that the price of pears, a substitute for apples, is rising. Which of the following is a reasonable prediction for the new price and quantity of apples? A. Price rises, but quantity is ambiguous. B. Price falls, but quantity is ambiguous. C. Price is ambiguous, but quantity rises. D. Price is ambiguous, but quantity falls. E. Both price and quantity are ambiguous.

Correct Answer: C C —Increased use of pesticides increases the supply of apples. If the price of a substitute increases, the demand for apples increases. Combining these two factors predicts an increase in the quantity of apples, but an ambiguous change in price. To help you see this, draw these situations in the margin of the exam.

1. Economics is best described as A. the study of how scarce material wants are allocated between unlimited resources. B. the study of how scarce labor can be replaced by unlimited capital. C. the study of how decision makers choose the best way to satisfy their unlimited material wants with a scarce supply of resources. D. the study of how unlimited material wants can best be satisfied by allocating limitless amounts of productive resources. E. the study of how capitalism is superior to any other economic system.

Correct Answer: C C —It is important to remember that society has a limitless desire for material wants, but satisfaction of these wants is limited by scarce economic resources. Economics studies how to solve this problem in the best possible way.

5. Jason earns $1,000 a week and pays a total of $200 in taxes. Jennifer earns $2,000 a week and pays a total of $300 in taxes. We can conclude from this information that their income is taxed with a(n) A. progressive tax B. proportional tax C. regressive tax D. tax bracket E. egalitarian tax

Correct Answer: C C —Jennifer's weekly income is twice Jason's, yet she pays less than double his taxes. This is a regressive tax. A proportional tax would require Jennifer to pay $400, and a progressive tax would require that she pay more than $400 in weekly taxes.

1. Your aunt runs a small firm from her home making apple pies. She hires some friends to help her. Which of the following situations would most likely increase her demand for labor? A. The price of apple peelers/corers rises. B. Your aunt's friends gossip all day, slowing their dough-making process. C. There is a sale on ovens. D. A new study reveals that apples increase your risk of cancer. E. The price of apples increases.

Correct Answer: C C —Since ovens would be a less expensive complementary resource (with more ovens, they can bake more pies), your aunt needs more employees to go along with the extra ovens. Apple corers and peelers are complements, but even if you think they are substitutes, the impact on labor demand is uncertain because of the competing output and substitution effects.

1. Which of the following is most likely an example of production inputs that can be adjusted in the long run, but not in the short run? A. Amount of wood used to make a desk. B. Number of pickles put on a sandwich. C. The size of a McDonald's kitchen. D. Number of teacher's assistants in local high schools. E. The amount of electricity consumed by a manufacturing plant.

Correct Answer: C C —The short run is a period of time too short to increase the plant size. All other choices involve decisions that could increase production almost immediately, with no change in the size of the facility. Increasing the size of a McDonald's kitchen takes quite some time and represents an increase in the total capacity of the kitchen to produce.

13. The top six firms in an oligopolistic industry have market shares of 25%, 25%, 15%, 10%, 6%, and 3%. Many smaller firms split the rest of the market. What is the value of the four-firm concentration ratio? A. 65% B. 54% C. 75% D. 34% E. 50%

Correct Answer: C C-A four-firm concentration ratio is the sum of the market share of the four largest firms in an industry.

1. Which of the following is true about a price ceiling? A. It is used to correct government policy. B. It is used when equilibrium prices are too low. C. It will be located above the equilibrium price. D. It will be located below the equilibrium price. E. It is when the stock market has closed at a new high.

Correct Answer: D (D) If interest rates for mortgage loans are 12 percent (market equilibrium) and the government says that this is too high, the government (state government under old usury laws) might establish a ceiling rate of 10 percent (below the equilib rium rate).

12. Which of the following is most likely to decrease the demand for kindergarten teachers? A. An increase in funding for education B. Increased immigration of foreign citizens and their families C. A decrease in the average number of children per household D. Subsidies given to college students who major in elementary education E. A decrease in the number of classes the state requires for a teaching certificate

Correct Answer: C C-Demand for any type of labor is derived from the demand for the good or service that the labor produces. With fewer children in the household, there will be less demand for kindergarten classes and teachers.

5. Which of the following is the best example of the free-rider effect? A. You and a friend take a road trip to Florida in your friend's car. You pay for the gas. B. In exchange for tutoring your friend in economics, she helps you with your geometry assignment. C. You have ordered a big college football game on pay-per-view, and several of your buddies show up unannounced to watch it at your place. D. You buy your date dinner, but your date insists on leaving a tip for the server. E. A local Girl Scout troop is giving a "free" carwash. You give them a $5 donation.

Correct Answer: C C-Free riders receive the benefit of a public good without contributing to its production.

5. If the government wishes to regulate a natural monopoly so that it earns a normal profit, it sets A. Price = Marginal cost. B. Marginal revenue = Marginal cost. C. Price = Average total cost. D. Price = Marginal revenue. E. Marginal revenue = Average total cost.

Correct Answer: C C-If P = ATC, economic profit is zero, or normal.

8. If it is true that bacon and eggs are complementary goods, then A. the income elasticity of bacon is positive and the income elasticity for eggs is negative. B. the price elasticity for eggs is greater than the price elasticity for bacon. C. the cross-price elasticity between bacon and eggs is negative. D. the income elasticity of bacon is negative and the income elasticity for eggs is positive. E. the cross-price elasticity between bacon and eggs is positive.

Correct Answer: C C-If the price of eggs rises, demand for bacon falls if they are complementary; Exy < 0.

2. Which of the following choices is true of both perfectly competitive firms and monopolistically competitive firms? A. Barriers to entry B. Homogenous products C. Normal profits in the long run D. Excess capacity E. Price-setting behavior

Correct Answer: C C-Know the characteristics of all market structures.

2. Which of the following certainly lowers the equilibrium price of a good exchanged in a competitive market? A. The demand curve shifts to the right. B. The supply curve shifts to the left. C. The demand curve shifts to the left, and the supply curve shifts to the right. D. The demand curve shifts to the right, and the supply curve shifts to the left. E. Both the demand and supply curves shift to the left.

Correct Answer: C C-Leftward demand shifts coupled with rightward supply shifts put downward pressure on prices.

8. When the marginal product of labor is equal to the average product of labor, A. marginal product of labor is at its maximum. B. marginal cost of production is at its minimum. C. marginal cost is equal to minimum average variable cost. D. average total cost is at its minimum. E. total product of labor is at its maximum.

Correct Answer: C C-MC and AVC are inverses of MPL and APL. Because MPL = APL at the maximum of APL, MC = AVC at the minimum of AVC.

8. When a monopolist has maximized profit, A. price is set equal to marginal cost, creating zero economic profit. B. output is set where price is equal to average total cost. C. price is set above marginal cost, creating allocative inefficiency. D. any short-run profit will be eliminated through the long-run entry of new firms. E. output is set where price is equal to marginal cost, eliminating any deadweight loss.

Correct Answer: C C-One of the important results of monopoly is that while output is set where MR = MC, price is set from the demand curve, so P > MC. This creates inefficient resource allocation and deadweight loss that is not eliminated in the long run.

5. Which of the following is a fundamental aspect of the free market system? A. A high degree of government involvement. B. Public ownership of resources. C. Private property. D. Central planners set wages and prices. E. Employers consult government agencies for guidance in hiring workers with appropriate job skills.

Correct Answer: C C-Private property is fundamental to the free market economy.

9. If the price of firm A's cell phone service rises by 5 percent and the quantity demanded for firm B's cell phone service increases by 10 percent, we can say that A. demand for firm B is price elastic. B. supply for firm B is price elastic. C. firms A and B are substitutes because the cross-price elasticity is greater than zero. D. firms A and B are complements because the cross-price elasticity is less than zero. E. firms A and B are complements because the cross-price elasticity is greater than zero.

Correct Answer: C C-The cross-price elasticity measures how sensitive the Qd of good X is to a change in the price of good Y. If this elasticity is greater than zero, the two goods are substitutes, and if it is negative, the two goods are complements.

8. A monopsony employer hires labor up to the point where A. Wage = Marginal factor cost. B. Marginal factor cost = Marginal product of labor C. Marginal factor cost = Marginal revenue product of labor D. Wage = Marginal revenue product of labor E. Wage = Price of the good produced by the labor

Correct Answer: C C-The monopsony hiring decision.

8. Which of the following is an implicit cost for the owner of a small store in your hometown? A. The wage that is paid to the assistant manager B. The cost of purchasing canned goods from a wholesale food distributor C. The value placed on the owner's skills in an alternative career D. The cost of cooling the refrigerated meat display E. The price of placing an advertisement in the local newspaper

Correct Answer: C C-The opportunity cost of starting a small store is the salary given up in the next best alternative for the entrepreneur's skills.

11. If one person has the only original signed copy of The Wealth of Nations by Adam Smith, which of the following would illustrate this situation? A. A downward sloping demand curve. B. An upward sloping supply curve. C. An invisible hand. D. A perfectly vertical supply curve. E. A perfectly horizontal demand curve.

Correct Answer: D (D) Only one copy available means the supply is fixed (vertical supply curve) and does not change with changes in price (perfectly inelastic).

12. In order to hire the least-cost combination of labor and capital, the firm must do which of the following? A. Find the combination of labor and capital where the marginal product of labor is equal to the marginal product of capital. B. Find the combination of labor and capital where the ratio of the marginal product of labor to the marginal product of capital is equal to one. C. Find the combination of labor and capital where the marginal product of labor divided by the price of labor is equal to the marginal product of capital divided by the price of capital. D. Find the combination of labor and capital where the price of labor is equal to the price of capital. E. Find the combination of labor and capital where the marginal revenue product of labor is equal to the marginal revenue product of capital.

Correct Answer: C C-This choice describes the least-cost rule for hiring inputs.

10. An industry described as an oligopoly would most likely have A. normal profits in the long run. B. no opportunities for collusive behavior. C. significant barriers to entry. D. price-taking behavior. E. one firm with no close rivals.

Correct Answer: C C-This is a main identifier of oligopoly.

1. Scarcity is best defined as A. the difference between limited wants and limited economic resources. B. the difference between the total benefit of an action and the total cost of that action. C. the difference between unlimited wants and limited economic resources. D. the opportunity cost of pursuing a given course of action. E. the difference between the marginal benefit and marginal cost of an action.

Correct Answer: C C-This is the definition of scarcity.

5. In a competitive labor market for housepainters, which of the following would increase the demand for housepainters? A. An effective minimum wage imposed on this labor market. B. An increase in the price of gallons of paint. C. An increase in the construction of new houses. D. An increase in the price of mechanical painters so long as the output effect exceeds the substitution effect. E. An increase in home mortgage interest rates.

Correct Answer: C C-This is the idea of derived demand.

2. For the perfectly competitive firm, the profit-maximizing decision to shut down is made when the price A. falls below minimum average total cost. B. is greater than minimum average variable cost, but lower than minimum average total cost. C. falls below minimum average variable cost. D. is equal to minimum average total cost. E. is equal to average fixed cost.

Correct Answer: C C-This is the shutdown point.

12. Which is true of monopolistic competition? A. Firms earn long-run economic profits. B. P = MR = MC = AT C.C. Firms spend money to differentiate and advertise their products. D. In the long run the market is allocatively efficient. E. Excess capacity is eliminated in the long run.

Correct Answer: C C-With product differentiation, monopolistically competitive firms spend money to promote their product as different from the others.

1. The individual firm, operating under perfect competition, is characterized as: A. a price-maker. B. one of a few sellers. C. a price strategist. D. a price-taker. E. interdependent.

Correct Answer: D (D)

1. Which of the following is true about the pure public good? A. The marginal cost of providing an additional unit of the good to additional citizens is greater than zero. B. Consumers can be excluded from its benefits by not paying for it. C. One more unit of a public good for some consumers means one less unit for other consumers. D. The good cannot be divided into discrete units. E. It has a pure moral nature.

Correct Answer: D (D)

2. Macroeconomics focuses on A. government and its laws that affect commerce. B. individuals and their resource use. C. corporations and their production levels. D. the resource use of the entire nation. E. money.

Correct Answer: D (D)

3. Consumer surplus is A. the price of a good divided by its marginal utility. B. the marginal utility of the good divided by its price. C. the total utility of the good. D. the difference between the consumer's value and the market price. E. consumers' annual savings.

Correct Answer: D (D)

3. If the government subsidizes the production of halogen headlights, A. the demand curve will shift to the left. B. the demand curve will shift to the right. C. the supply curve will shift to the left. D. the supply curve will shift to the right. E. the amounts demanded will increase along the demand curve.

Correct Answer: D (D)

3. With capital fixed at one unit with 1, 2, 3 units of labor added in equal successive units, production of the output increases from 300 (1 unit of labor), to 350 (2 units of labor) to 375 (3 units of labor). Which of the following is a correct interpretation? A. This is long run increasing returns to scale. B. This is long run decreasing returns to scale. C. This is long run constant returns to scale. D. This is short run diminishing marginal productivity. E. This is short run increasing marginal productivity.

Correct Answer: D (D)

4. The demand curve for the firm operating under perfect competition is A. upward sloping to the right. B. downward sloping to the right. C. perfectly vertical line. D. perfectly horizontal function. E. concave to origin.

Correct Answer: D (D)

2. Which of the following situations best exemplifies the concept of consumer surplus? A. It refers to a consumer who no longer has any outstanding debts. B. The federal government has taken in more revenue than it has paid out in expenditures. C. A consumer pays more for a pizza than she thought it was worth at the margin of the purchase. D. A consumer pays less for a pizza than she thought it was worth at the margin of the purchase. E. A consumer pays exactly what she thinks the pizza is worth at the margin of the purchase.

Correct Answer: D (D) A consumer surplus is established as the difference between the total utility (satisfaction) received and the price paid by the consumer. Because of diminishing marginal utility, consumers are able to buy a product at the price of the last unit sold (lower marginal utility) while the marginal utility of previous units would be higher.

8. Which of the following is true? A. A marginal social cost = marginal private cost + marginal social benefits. B. Value of externality = marginal social costs. C. Value of externality = marginal private costs. D. Marginal social cost = marginal private cost + negative externality. E. Marginal social cost = marginal private cost + positive externality.

Correct Answer: D (D) A negative externality is an outcome of a market transaction that is not "captured" by the price mechanism by the buyer or the seller and thus, it is incurred by other parties and is added to private costs.

10. Which of the following is true about the relationship of the average total cost (ATC) curve and the marginal cost (MC) curve? A. ATC and MC are always equal. B. ATC and MC are never equal. C. The ATC curve intersects the MC curve at the minimum point of the MC curve. D. The MC curve intersects the ATC curve at the minimum point of the ATC curve. E. The MC curve intersects the ATC curve at the maximum point of the ATC curve.

Correct Answer: D (D) This is a mathematical characteristic of average and marginal cost curves. See Chapter 8 on costs for other explanations.

10. Which of the following is correct about the demand for labor? A. The demand for labor is independent of the demand for other inputs or resources. B. The demand for labor is independent of the demand for the products produced by labor. C. The demand for labor is independent of the availability of other inputs or resources. D. The demand for labor is derived from the demand for the products produced by labor. E. The demand for labor is derived from the demand for labor unions.

Correct Answer: D (D) This is a very important concept, derived demand.

9. Which of the following is true? A. Average total cost = total fixed costs divided by the number of units produced. B. Average total cost = average variable costs divided by the total number of units produced. C. Average total cost = average variable cost plus marginal cost. D. Average total cost = average variable cost plus average fixed cost. E. All of the above.

Correct Answer: D (D) This is simply definitional. See the chapter on costs for other definitions (Chapter 8).

5. Which of the following is true for a firm operating under perfect competition in the long run? A. The firm will engage in non-price competition. B. The firm will realize economic profits. C. The firm will incur economic losses. D. The firm will realize zero economic profits. E. The firm will have a price greater than its marginal revenue.

Correct Answer: D (D) This refers to a firm operating under perfect competition in the long run. For each firm in the long run, P = minimum average cost (zero economic profits). Also, P = MR; P = MC and all the competition is based on price.

1. A competitive firm's demand for labor is determined directly by A. profits B. the opportunity cost of workers' time C. the wage and the average (physical) product of labor D. the marginal (physical) product of labor and the output price E. marginal utility and marginal cost

Correct Answer: D D A competitive firm's demand for labor is determined by that quantity when the marginal productivity of labor is equal to the marginal cost of labor (i.e., when the last worker produces just enough to cover his/her wages). Therefore the answer is (D).

13. A student eats 3 slices of pizza while studying for his Economics exam. The marginal utility of the first slice of pizza is 10 utils, the second slice is 7 utils, and the third slice is 3 utils. Which of the statements below holds true with the above data? A. The student would not eat any more pizza. B. The marginal utility of the 4th slice of pizza will be 0. C. The student should have stopped eating pizza after 2 slices. D. The total utility this student received from eating pizza is 20 utils. E. The total utility decreases after the 1st slice of pizza because of diminishing marginal utility.

Correct Answer: D D As the question makes no prediction of the utility derived from eating more than three slices of pizza, any answer that mentions consequences after the third slice or makes a non-economic judgment on pizza eating—(A), (B), and (C)—can be eliminated. Total utility increases with the consumption of each subsequent slice, as the marginal utility for the three slices is positive, so eliminate (E). The total utility is the sum of the utility received from consuming each slice. In this case it is 10 + 7 + 3 = 20. Therefore, the total utility from consuming three slices of pizza is 20 utils. The answer is (D).

8. A production possibility frontier will be a straight line when A. efficiency is achieved B. the goods on the axes are perfect substitutes in consumption C. utility is maximized D. resources are not specialized E. the marginal product functions for all inputs are straight lines

Correct Answer: D D Efficiency and utility maximization can occur with a curved or straight PPF, as long as the economy operates on the PPF and not within it. The substitutability of the goods in consumption has no bearing on their production, and just because the marginal product functions are straight lines, that does not prevent the PPF from being curved. The curvature of PPFs results from increasing opportunity costs arising from the use of resources that are less and less specialized for the production of a particular good. If the resources used to make the two goods are not specialized, opportunity costs are constant and the PPF is a straight line.

6. An externality A. causes the equilibrium price to be artificially high B. causes the equilibrium price to be artificially low C. exists when markets cannot reach equilibrium D. results in an equilibrium that does not maximize the total benefit to society E. is an action taken by the government to bring the equilibrium price to a more equitable level

Correct Answer: D D For "straight" definition questions, the best approach is to write the definition in your own words and eliminate answer choices that do not match the definition. In this case, externalities are incidental costs that are not accounted for by the buyer or seller. Externalities can be positive (vaccinations) or negative (pollution). Therefore the answer is (D).

8. Which of the following is likely to have the most elastic demand? A. A good with a vertical demand curve B. Cigarettes C. All types of soda pop D. Sprite E. Life-sustaining pills

Correct Answer: D D For a good to have an elastic demand, the quantity of the good demanded must be sensitive to the price. The quantity of a good demanded is completely insensitive to price changes (perfectly inelastic) when the demand curve is vertical. Because cigarettes are addictive, and life-sustaining pills are necessary, the quantities of these goods demanded are likely to be relatively insensitive to price (inelastic). This brings us down to a choice between all soda pop and Sprite. Because there are far more substitutes available for Sprite than there are for all types of soda pop, the demand for Sprite will be more elastic than the demand for all soda pop.

6. If a business wants to increase its revenue and it knows that the demand price elasticity of its product is equal to 0.78, it should A. decrease price because demand is elastic B. decrease price because demand is unit elastic C. decrease price because demand is inelastic D. increase price because demand is inelastic E. increase price because demand is elastic

Correct Answer: D D If the elasticity of demand is less than 1, the demand is inelastic. This means that an increase in price will result in a less-than-proportional decrease in quantity demanded. Therefore the firm should increase its price, as it will increase its revenue. The answer is (D).

12. Unlike a perfectly competitive firm, a monopoly A. will charge the highest price it can on the demand curve B. has a horizontal marginal revenue curve C. has an upward sloping total revenue curve D. faces a downward sloping demand curve E. faces a horizontal demand curve

Correct Answer: D D In the absence of a price ceiling, either type of firm can legally charge any price it wants, but in both cases prices that are too high can result in losses or zero sales. A perfectly competitive firm has a horizontal marginal revenue and demand curve. Both can be expected to have an upward sloping total revenue curve.

3. Mrs. Johnson spends her entire daily budget on potato chips, at a price of $1 each, and onion dip at a price of $2 each. At her current consumption bundle, the marginal utility of chips is 12 and the marginal utility of dip is 30. Mrs. Johnson should A. do nothing; she is consuming her utility maximizing combination of chips and dip. B. increase her consumption of chips until the marginal utility of chip consumption equals 30. C. decrease her consumption of chips until the marginal utility of chip consumption equals 30. D. decrease her consumption of chips and increase her consumption of dip until the marginal utility per dollar is equal for both goods. E. increase her consumption of chips and increase her consumption of dip until the marginal utility per dollar is equal for both goods.

Correct Answer: D D Mrs. Johnson needs to find the combination of chips and dip where the ratio of marginal utility per dollar is equated. Currently, MUc/Pc = 12 and MUd/Pd = 15, so choice A is ruled out. Since she is receiving more "bang for her buck" from dip consumption, she increases dip consumption and therefore decreases chip consumption. MUd falls and MUc rises. She adjusts her spending until MUc/Pc = MUd/Pd.

6. The market demand curve for labor would shift to the left as the result of A. an increase in the price of the good which the labor is producing B. an increase in demand for the good which the labor is producing C. an increase in the wage rate paid to workers D. a decrease in the marginal product of labor E. a decrease in the number of workers willing to work

Correct Answer: D D The demand for labor is determined by the marginal revenue product of labor, which is the product of the marginal product of labor and the marginal revenue from the output produced by the labor. Thus, if the marginal product of labor decreases, so does the demand for labor. An increase in the price of the good would increase the demand for labor, as would an increase in demand for the good. An increase in the wage rate would cause a movement along the labor demand curve rather than a shift in the curve.

3. Marginal cost always intersects average variable cost at A. the profit-maximizing quantity B. the minimum of marginal cost C. the maximum of average variable cost D. the minimum of average variable cost E. the maximum of marginal cost

Correct Answer: D D The marginal cost curve always intersects the average variable cost curve at its lowest point (see Figure below). Therefore the answer is (D).

9. The concentration ratio for a monopoly is A. 0 B. 5 C. 10 D. 100 E. 1,000

Correct Answer: D D The n-firm concentration ratio is the sum of the market shares of the largest n firms in an industry. Because a monopoly holds 100 percent of the market share, regardless of the value of n, the concentration ratio is 100.

2. If a 3 percent increase in price leads to a 5 percent increase in the quantity supplied, A. supply is unit elastic B. demand is inelastic C. demand is elastic D. supply is elastic E. supply is inelastic

Correct Answer: D D The question gives data on the supply curve, so answer choices that refer to demand can be eliminated—eliminate (B) and (C). Elasticity = = 1.7 > 1. As the elasticity of supply is greater than 1, the supply is elastic. Therefore the answer is (D).

10. Education makes Chris a better worker, voter, parent, and citizen. Because the benefits from education go beyond those that Chris enjoys himself, education provides A. increasing marginal utility and should be subsidized B. externalities and should be taxed C. decreasing marginal utility and should be taxed D. externalities and should be subsidized E. an example of a good with inelastic supply

Correct Answer: D D The spillover effects described here are one type of externality. When externalities are positive, subsidies are required to bring the marginal benefit to the creator(s) of the externalities up to the marginal social benefit. Otherwise, these goods and services will be underconsumed. Increasing marginal utility and inelastic supply are not characteristic of education or other sources of positive externalities.

7. Patents, control of resources, economies of scale, and exclusive licenses are A. all requirements for price discrimination B. required in order for a firm to earn short-run profits C. all sources of elastic demand D. all barriers to entry E. all detriments to market power

Correct Answer: D D These items are all barriers to entry that create market power and allow firms to maintain economic profits into the long run. None of them are required for a firm to earn short-run profits, which can occur even in a competitive industry. The requirements for price discrimination are market power, consumers with differing and separable demand elasticities, and the ability to prevent resale.

1. If the price of corn rises 5 percent and the quantity demanded for corn falls 1 percent, then A. E d = 5 and demand is price elastic. B. E d = 1/5 and demand is price elastic. C. E d = 5 and demand is price inelastic. D. E d = 1/5 and demand is price inelastic. E. E d = 5 and corn is a luxury good.

Correct Answer: D D You must know the formula for elasticity: Ed = (%ΔQd)/(%ΔP) = 1/5. Since Ed < 1, this is inelastic demand, and you can quickly eliminate any reference to elastic demand. Although calculators are not allowed on the AP exam, simple calculations can be made in the margins of your exam.

6. Deadweight loss occurs in A. monopolistic competition as P > M C. B. monopoly markets because P > MC.C. oligopoly markets because P > MC. D. All of the above. E. None of the above.

Correct Answer: D D —Allocative inefficiency and deadweight loss in any market structure is when P > MC.

5. Ray and Dorothy can both cook and can both pull weeds in the garden on a Saturday afternoon. For every hour of cooking, Ray can pull 50 weeds and Dorothy can pull 100 weeds. Based on this information, A. Ray pulls weeds, since he has absolute advantage in cooking. B. Dorothy pulls weeds, since she has absolute advantage in cooking. C. Dorothy cooks, since she has comparative advantage in cooking. D. Ray cooks, since he has comparative advantage in cooking. E. Dorothy pulls weeds, since she has comparative advantage in cooking.

Correct Answer: D D —For Ray, the opportunity cost of cooking is 50 weeds, while Dorothy's opportunity cost of cooking is 100 unpulled weeds. Ray does not pull weeds because he has comparative advantage in cooking. Dorothy does not cook because she has comparative advantage in weed pulling.

2. The Law of Diminishing Marginal Returns is responsible for A. AVC that first rises, but eventually falls, as output increases. B. AFC that first rises, but eventually falls, as output increases. C. MP that first falls, but eventually rises, as output increases. D. MC that first falls, but eventually rises, as output increases. E. ATC that first rises, but eventually falls, as output increases.

Correct Answer: D D —The law of diminishing marginal returns says that MPL eventually falls as you add more labor to a fixed plant. This question tests you on the important connection between production and cost. Remember that we derived this "bridge" and found that MC = w/ MPL . So when MPL is initially rising, MC is falling. Eventually when MPL is falling, MC is rising. Choices A, B, and E are just flat wrong. All three average costs begin by falling. AFC continues to fall, but AVC and ATC eventually rise.

4. The market for denim jeans is in equilibrium, and the price of polyester pants, a substitute good, rises. In the jean market A. supply falls, increasing the price and decreasing the quantity. B. supply falls, increasing the price and increasing the quantity. C. demand falls, increasing the price and decreasing the quantity. D. demand rises, increasing the price and increasing the quantity. E. supply and demand both fall, causing an ambiguous change in price but a definite decrease in quantity.

Correct Answer: D D —When a substitute good becomes more expensive, the demand for jeans rises, increasing price and quantity.

4. If the per unit price of labor, a variable resource, increases, it causes which of the following? A. An upward shift in AF C. B. An upward shift in MPL.C. A downward shift in ATC. D. An upward shift in MC. E. A downward shift in AFC.

Correct Answer: D D —When labor is more expensive, the MC of producing the good increases, so the MC curve shifts upward. The price of a variable input has increased, so easily rule out any reference to fixed costs. If anything, a higher wage shifts MPL downward.

8. The law of increasing costs is useful in describing A. a demand curve. B. a marginal benefit curve. C. a linear production possibility frontier. D. a concave production possibility frontier. E. a total fixed costs curve.

Correct Answer: D D-A concave PPF exhibits the law of increasing costs. As more of a good is produced, opportunity costs rise. This is because resources are not perfectly substitutable between the production of different goods.

11. If a consumer is not required to pay a monetary price for each cookie she consumes, the consumer will stop eating cookies when A. the total utility from eating cookies is equal to zero. B. the substitution effect outweighs the income effect from eating cookies. C. the ratio of marginal utility divided by total utility is equal to one. D. the marginal utility from eating the last cookie is zero. E. the marginal utility from eating the next cookie is increasing at a decreasing rate.

Correct Answer: D D-A consumer stops eating cookies when total utility is maximized, which corresponds to when MU = 0. Because marginal utility falls with consumption, the very next cookie will give the consumer disutility (MU < 0), so she stops.

6. Which of the following would improve the efficiency of a monopoly market? A. The government regulates the monopolist to produce the output where marginal revenue equals marginal cost. B. The government provides additional legal barriers to entry. C. The government subsidizes the monopolist so that they achieve even greater economies of scale. D. The government eliminates trade barriers on potential foreign producers. E. The government regulates the monopolist to produce the output where monopoly profits are maximized.

Correct Answer: D D-Allowing more foreign competition lessens market power of a monopolist and improves efficiency as the price falls closer to MC.

15. Oligopoly has at times been the subject of government antitrust regulation. Which of the following is a reason for this government regulation? A. Price is approximately equal to marginal cost. B. Price is approximately equal to average total cost. C. Deadweight loss lessens over time. D. Consumer surplus is lost as market power increases. E. Market efficiency is maximized.

Correct Answer: D D-As industries approach monopoly, prices rise, lowering CS.

4. Which of the following is true of monopoly markets? A. Deadweight loss exists in the short run, but not in the long run. B. A homogenous product allows for long-run entry of competing firms. C. Collusion between close rivals creates pricing above marginal cost. D. Barriers to entry allow for the power to set prices above marginal cost. E. Allocative efficiency is guaranteed because marginal revenue equals marginal cost.

Correct Answer: D D-Barriers to entry are the key to monopoly pricing power.

5. You are told that the cross-price elasticity between goods X and Y is +2.0. This means that A. goods X and Y are normal goods. B. goods X and Y are inferior goods. C. goods X and Y are complementary goods. D. goods X and Y are substitute goods. E. good X is twice as elastic as good Y.

Correct Answer: D D-If Exy > 0, goods are substitutes.

10. If the market price is above the perfectly competitive firm's average total cost curve, we expect that in the long run, A. the industry contracts as firms exit the market. B. the industry expands as firms exit the market. C. the industry contracts as firms enter the market. D. the industry expands as firms enter the market. E. the government seeks to regulate the market to ensure efficient outcomes.

Correct Answer: D D-If P > ATC, positive short-run economic profits exist. Long-run entry expands the market.

7. Good X is exchanged in a competitive market. Which of the following is true if an excise tax is now imposed on the production of good X? A. If the demand curve is perfectly elastic, the price rises by the amount of the tax. B. The consumer's burden of the tax rises as the demand curve is more elastic. C. Consumer surplus rises as a result of the tax. D. The consumer's burden of the tax rises as the demand curve is less elastic. E. If the demand curve is perfectly inelastic, the price does not rise as a result of the tax.

Correct Answer: D D-If the demand curve is more inelastic (more vertical), a greater burden of an excise tax falls upon consumers and less upon producers.

4. The utility-maximizing rule is to choose the basket of goods that A. has the highest marginal utility of each good in the basket. B. has the lowest prices for the goods. C. has the highest value of marginal utility to price for each good. D. the marginal utility to price ratio equal for all goods in the basket. E. the marginal utility to price ratio equal for all goods in the basket subject to the income constraint.

Correct Answer: E (E)

5. The competitive market for gasoline, a normal good, is currently in a state of equilibrium. Which of the following would most likely increase the price of gasoline? A. Household income falls. B. Technology used to produce gasoline improves. C. The price of subway tickets and other public transportation falls. D. The price of crude oil, a raw material for gasoline, rises. E. The price of car insurance rises.

Correct Answer: D D-If the price of a production input (or resource) increases, the supply curve shifts leftward and the price of gasoline rises. Hint: Having a strong grasp of what shifts supply and demand curves will really pay off. Draw these shifting curves in the margin of the exam book!

13. The U.S. government collects tax revenue, buys military equipment from many private firms, and uses this equipment to provide national defense to all Americans. This is a good example of A. a natural monopoly. B. an excise tax on military equipment. C. a regressive tax. D. a public good. E. deadweight loss.

Correct Answer: D D-Know your public goods.

3. One of the reasons that the government discourages and regulates monopolies is that A. producer surplus is lost and consumer surplus is gained. B. monopoly prices ensure productive efficiency but cost society allocative efficiency. C. monopoly firms do not engage in significant research and development. D. consumer surplus is lost with higher prices and lower levels of output. E. lower prices and higher levels of output create deadweight loss.

Correct Answer: D D-Lost CS is a big reason why government keeps an eye on the monopoly power of firms.

4. When a firm is earning a normal profit from the production of a good, it is true that A. total revenues from production are equal to explicit costs. B. explicit costs are equal to implicit costs. C. total revenues from production are equal to implicit costs. D. total revenues from production are equal to the sum of explicit and implicit costs. E. implicit costs are greater than explicit costs.

Correct Answer: D D-Normal profits are also thought of as breakeven economic profits.

8. Which of the following is true of a price floor? A. The price floor shifts the demand curve to the left. B. An effective floor creates a shortage of the good. C. The price floor shifts the supply curve of the good to the right. D. To be an effective floor, it must be set above the equilibrium price. E. The government sets the price floor to assist consumers who are exploited at the equilibrium price.

Correct Answer: D D-Price floors are legal minimum prices so they are set above equilibrium. A surplus results.

12. Jason cleans swimming pools in a perfectly competitive local market. A profit maximizer, he can charge $10 per pool to clean 9 pools per day, incurring total variable costs of $80 and total fixed costs of $20. Which of the following is true? A. Jason should shut down in the short run, with economic losses of $20. B. Jason should shut down in the short run, with economic losses of $10. C. Jason should clean 9 pools per day, with economic losses of $20. D. Jason should clean 9 pools per day, with economic losses of $10. E. Jason should clean 9 pools per day, with economic profits of $10.

Correct Answer: D D-TR > TVC, so Jason does not shut down. Subtracting all costs from TR, he is losing $10 per day.

15. Because of the free-rider effect, the private marketplace tends to A. provide the allocatively efficient amount of a public good. B. produce too much of a public good, requiring the government to intervene and tax the production of it. C. produce a public good in the amount where the marginal benefit to society equals the marginal cost to society. D. produce too little of the public good, requiring the government to intervene and provide it for all. E. produce too little of the public good, requiring the government to intervene and ban it.

Correct Answer: D D-The private marketplace underprovides for a public good because free riders benefit from the good without paying for it. Government must provide the public good.

3. A perfectly competitive employer hires labor up to the point where A. Wage = Marginal factor cost. B. Wage = Marginal product of labor. C. Wage = Marginal revenue. D. Wage = Marginal revenue product of labor. E. Wage = Price of the good produced by the labor.

Correct Answer: D D-This describes the choice that is made by employers in competitive labor markets.

14. Which of the following statements is true of a consumer's utility-maximizing behavior? A. As consumption of good X increases, total utility increases at an increasing rate. B. The consumer should stop consuming good X when marginal utility is maximized. C. The consumer has maximized utility between two goods X and Y when the quantities of the two goods are equalized. D. Utility maximization occurs when the marginal utilities per dollar for goods X and Y are equalized. E. As consumption of good X increases, the marginal utility per dollar spent on good X also increases.

Correct Answer: D D-Utility-maximizing consumers do not equate the units of two goods, they equate MU/P for each good.

7. At the birthday party of your best friend, you see Skylar help himself to a second piece of cake. For this individual, it must be the case that A. the marginal benefit of the second piece of cake is less than the marginal cost. B. the total benefit received from eating cake is falling. C. the ratio of marginal benefit over marginal cost is less than one. D. the marginal benefit of the second piece of cake is greater than the marginal cost. E. Skylar is irrationally consuming too much cake.

Correct Answer: D D-You have to assume that Skylar evaluated the marginal benefits and marginal costs of the second piece of cake and decided that he should consume it.

13. When opportunity cost is constant across all production levels, the productions possibilities frontier is A. concave to the origin. B. convex to the origin. C. undefined. D. shifted. E. a straight diagonal line sloping downward from left to right.

Correct Answer: E (E)

2. For which of the following statements are both the price change and quantity change determinable (for a particular good)? A. Both the supply of and the demand for the good decrease. B. Both the supply of and the demand for the good increase. C. The supply increases and the demand for the good decreases. D. The supply decreases and the demand increases. E. None of the above.

Correct Answer: E (E)

4. For a polluting steel company, a government action to most likely achieve an optimal or efficient outcome would produce what effect on the market equilibrium price and output? A. Output would increase; no change in price. B. Output would increase; price would decrease. C. Output would increase; price would increase. D. Output would decrease; price would decrease. E. Output would decrease, price would increase.

Correct Answer: E (E)

5. Which of the following illustrates the demand curve facing an oligopolist when rival firms follow a price decrease but not a price increase? A. Perfectly horizontal demand curve. B. Highly inelastic demand curve. C. Highly elastic demand curve. D. A demand curve that is tangent to the average total cost curve. E. A demand curve consisting of two discontinuous segments.

Correct Answer: E (E)

9. What you give up to pursue another alternative is known as A. capital. B. land. C. money cost. D. the price of the product. E. opportunity cost.

Correct Answer: E (E)

12. Which of the following is an example of a transfer earning? A. A superstar basketball player's $40 million earnings. B. A social security retirement income. C. A welfare payment from social services. D. A check to a college student from a parent or guardian. E. A cashier at a restaurant receiving the same $8 an hour that other cashiers receive.

Correct Answer: E (E) A transfer earning is a reflection of a competitive labor (resource) market. It is the earning that could have been received elsewhere. A payment in excess of a transfer earning is called an economic rent (as in the next question).

5. Which of the following is NOT a source of wage differentials? A. Differences in human capital stock. B. Racial or gender discrimination. C. Immobility of workers. D. Compensation for risk. E. Decrease in the birth rate.

Correct Answer: E (E) All other factors could cause wages to differ among workers.

2. Which of the following correctly identifies the condition that explains inefficiency for firms in a monopolistically competitive industry? A. Higher output than competitive industries. B. Lower price than competitive industries. C. Price equals marginal cost. D. Price equals marginal revenue. E. Excess capacity compared to competitive industries.

Correct Answer: E (E) None of the other choices is appropriate. Monopolistic competition is characterized by lower output, higher price than competitive industries. Price is greater than MR and greater than MC.

5. Compared to perfect competition in the long run, monopoly has A. more choices of products for consumers. B. more efficiency. C. lower prices. D. higher output. E. price greater than marginal revenue.

Correct Answer: E (E) The other choices represent the "opposite" answers. Choice A should read fewer choices; choice B should read inefficiency; choice C should read higher prices; choice D should read lower output.

7. With respect to the kinked demand curve, which of the following is NOT correct? A. There is no price leader. B. There are relatively equal shares of the market. C. Price is greater than marginal costs. D. It is a noncollusive model. E. The demand curve is of one continuous function.

Correct Answer: E (E) This refers to the question that asks "Which of the following is NOT correct (for the kinked demand curve)?" The major feature of the kinked demand curve is that it consists of two segments (one that indicates "following" and the other that "does not follow" the price changes of rivals), so that the demand function is discontinuous at the kink. See Chapter 12, Imperfect Competition, for the analysis.

5. Which of the following is most likely to result in a shift to the right in the demand curve for orange juice? A. A bumper crop of oranges in Florida B. A decrease in the price of Tang C. Expectations of lower future prices for orange juice D. A law permitting orange pickers to be paid less than the minimum wage E. Expectations of higher future income among juice drinkers

Correct Answer: E E A bumper crop of oranges and the ability to pay orange pickers less would shift the supply curve to the right. Tang is a substitute for orange juice, so if its price decreases, people will buy more Tang and less orange juice, shifting the demand curve for orange juice to the left. Expectations of lower future prices for orange juice might lead people to put off some of their purchases of orange juice until the price drops, thus decreasing demand (shifting it to the left). Expectations of higher future incomes among juice drinkers would lead some of them to make more purchases now. This is called consumption smoothing.

2. Relative to a competitive input market, a monopsony A. pays less and hires more B. pays less and hires the same amount C. pays more and hires more D. pays more and hires fewer E. pays less and hires fewer

Correct Answer: E E A monopsony occurs when there is only one buyer for a specific good (for example, a large company in a small town is virtually the only buyer of labor). As the buyer is interested in maximizing its own revenue, the net result is that wages are depressed and fewer workers are hired (see Figure below). Therefore the answer is (E).

10. Which of the following statements is true for a firm in a perfectly competitive industry? A. Total revenue increases and then decreases. B. Marginal revenue is decreasing. C. Average revenue is initially negative and then becomes positive. D. Marginal revenue is increasing. E. Average revenue equals marginal revenue.

Correct Answer: E E A perfectly competitive firm sells all of its output at the same price. Thus, marginal revenue and average revenue are both constant at the market price. Total revenue is a straight line from the origin with a constant slope equal to the market price.

7. If the government regulates a monopoly to produce at the allocative efficient quantity, which of the following would be true? A. The monopoly would break even. B. The monopoly would incur an economic loss. C. The monopoly would make an economic profit. D. The deadweight loss in this market would increase. E. The deadweight loss in this market would decrease.

Correct Answer: E E As the question does not give any information on the profits the monopoly is making, one cannot comment on them, so eliminate (A), (B) and (C). Regulating a monopoly to allocative efficiency is a measure designed to reduce deadweight loss. Therefore the answer is (E).

8. In order to find the market supply curve for a particular good, one would A. aggregate the firm marginal revenue curves horizontally B. aggregate the firm supply curves vertically C. aggregate the firm marginal cost curves vertically D. aggregate the firm marginal revenue curves vertically E. aggregate the firm supply curves horizontally

Correct Answer: E E By adding supply curves horizontally, the quantities each firm will provide at each price are combined into a total quantity supplied by the market at each price. Vertical summation is going in the wrong direction, adding prices for given quantities. Marginal revenue curves depend on demand, not supply, so it would be inappropriate to use them to find a market supply curve.

3. Normal goods always have a/an A. elastic demand curve B. inelastic demand curve C. elastic supply curve D. negative income elasticity E. positive income elasticity

Correct Answer: E E Normal goods are defined with respect to consumer income levels; therefore, answers that do not reference income—(A), (B), and (C)—can be eliminated As income increases, the demand for a normal good increases. Therefore, the answer is (E).

11. The condition that P = MC is the direct requirement for which type of efficiency? A. Distributive efficiency B. Technical efficiency C. Efficiency in production D. Efficiency in exchange E. Allocative efficiency

Correct Answer: E E Technical efficiency and efficiency in production are two names for the same type of efficiency, which requires that the ratio of the marginal products of the inputs equals the ratio of their costs per unit. Distributive efficiency and efficiency in exchange are also two names for the same type of efficiency, which requires that the price ratio for outputs equals the ratio of the marginal utilities for the outputs. The condition that P = MC is the direct requirement for allocative efficiency. Even if you did not remember this, you might note that allocative efficiency is the only unique type of efficiency among the answer choices—the other two types are listed twice under different names. Because there can be only one correct answer, it must be the one with only one listing.

5. Elsa values her time at $50 per hour, and tutors David for two hours. David is willing to pay $175 for two hours of tutoring, but they negotiate a price of $125 for the entire two hours. Which of the following statements is true about the transaction above: A. Consumer surplus is greater than producer surplus by between $50 and $75. B. Producer surplus is greater than consumer surplus by between $50 and $75. C. Consumer surplus is greater than producer surplus by more than $75. D. Producer surplus is greater than consumer surplus by more than $75. E. The difference between consumer and producer surplus is $25.

Correct Answer: E E The best way to approach numerical questions that give answer choices in ranges is to do the math. In this case, Elsa is willing to provide her services for $100, but she received $125. Therefore the producer surplus is $25. David is will to pay $175 for the services he receives, but he pays $125 for them. Therefore consumer surplus is $50. The difference between consumer and producer surplus is $25, so the answer is (E).

4. After Julia received a raise in her income, she began purchasing more ice cream cones and fewer popsicles. For Julia, popsicles A. disobey the law of demand B. are a joint product C. are a complementary good with ice cream D. are a normal good E. are an inferior good

Correct Answer: E E The law of demand relates price and quantity demanded, not income and quantity demanded. A joint product is produced as a result of production of another good, like leather and beef. Complementary goods are those one purchases more of when the price of another other goes down, like hotel stays and airfare. A normal good is one that the consumer buys more of when income increases (like ice cream in this situation). Thus, the correct answer is an inferior good—one that the consumer purchases less of when income increases.

1. The long-run average cost curve A. is always below the short-run average cost curve B. is always above the short-run average cost curve C. always intersects the short-run average cost curve at the minimum of short-run average cost D. is above the short-run average cost except at one point E. is below the short-run average cost except at one point

Correct Answer: E E The long run average cost curve is always below the short run average cost curve except at the cost- minimizing point for that short run average cost curve. To the left of that point, the firm is using too much capital and fixed costs are too high. to the right of this point, the firm is using too little capital and diminishing returns to scale are causing costs to increase. See Figure below. Therefore the answer is (E).

15. Which of the following examples would result in consumers paying for the largest burden of an excise tax placed on a producer? A. If the demand curve is price elastic and the supply curve is price inelastic B. If the demand curve is price elastic and the supply curve is perfectly elastic C. If the demand curve is price inelastic and the supply curve is price elastic D. If the demand curve is price inelastic and the supply curve is price inelastic E. If the demand curve is perfectly inelastic and the supply curve is price elastic

Correct Answer: E E The side with the more relative inelasticity would bear the greater tax burden. If consumers are to bear the majority of the tax burden, then the demand curve should be inelastic and the supply curve should be elastic. Therefore the answer is (E).

7. Which of the following goods is likely to provide both the largest total utility and the smallest marginal utility? A. Plastic B. Automobiles C. Computers D. Spam E. Air

Correct Answer: E E Total utility is the combined benefit derived from all units of a good, and marginal utility is the benefit from the last unit consumed. Because consumers purchase goods until the marginal utility equals the price, the good with the lowest price will provide the lowest marginal utility. With air being free, we consume it until the marginal benefit is zero. At the same time, the total utility of air is very large, and surpasses the total utility from the other items because air is the only good listed that is required to keep all of us alive.

3. If the perfectly competitive price is currently above minimum ATC, we can expect which of the following events in the long run? A. Price rises as firms enter the industry. B. Market equilibrium quantity rises as firms exit the industry. C. Nothing. The industry is currently in long-run equilibrium. D. Profits fall as the market price rises. E. Price falls as firms enter the industry.

Correct Answer: E E —With P > ATC, you should recognize that positive economic profits exist. Firms enter and price falls toward the breakeven point, so any mention of exit or rising prices can be eliminated. Entry also increases the market quantity of the good produced.

2. The market for good X is currently in equilibrium. Which of the following choices would not cause both a decrease in the equilibrium price of good X and a decrease in the equilibrium quantity of good X? A. A decrease in consumer income and good X is a normal good. B. An increase in consumer income and good X is an inferior good. C. An increase in the price of good Y, a complement for good X. D. A decrease in the price of good Y, a substitute for good X. E. An increase in the number of consumers in the market for good X.

Correct Answer: E E-All other choices would produce a decrease in the demand for good X and would therefore decrease both the price and quantity. You are looking for the only choice that would not. More consumers for good X would increase demand and increase both the price and quantity

4. What is one reason why the government discourages collusion between large firms in the same industry? A. Collusive output levels tend to increase, driving the price above competitive levels. B. Consumer surplus falls as the price is driven downward. C. Collusive output levels tend to decrease, driving the price down to competitive levels. D. Joint profit maximization drives profits downward, forcing colluding firms to exit the industry. E. Joint profit maximization costs society consumer surplus as the price rises above competitive levels.

Correct Answer: E E-Colluding members of an oligopoly act as a monopolist, restraining competition, restricting output, and increasing the price.

9. Which of the following is likely to have a demand curve that is the least elastic? A. Demand for the perfectly competitive firm's output B. Demand for the oligopoly firm's output with a homogenous product C. Demand for the oligopoly firm's output with a differentiated product D. Demand for the monopolistically competitive firm's output E. Demand for the monopoly firm's output

Correct Answer: E E-Demand is more elastic if there are more substitute goods. A monopolist has no close substitutes so is likely the least elastic demand.

1. If firms are entering an industry that is monopolistically competitive, we would expect A. the demand for existing firms to shift rightward. B. the market price of the product to increase. C. the demand for existing firms to become more inelastic. D. economic profits to rise for all firms. E. the demand for existing firms to shift leftward.

Correct Answer: E E-Entry of new firms takes market share from existing firms, so demand curves begin to shift to the left.

12. The local market for bankers is currently in equilibrium. Which of the following increases the local wage paid to bankers? A. Internet banking at home is becoming more popular. B. More college students are majoring in finance and economics, majors that make them attractive as bank employees. C. The price of banking software, a complementary resource to bankers, rises. D. Several banks in the local market merge and consolidate many operations. E. The price of automatic teller machines, a substitute for bankers, decreases and the output effect is greater than the substitution effect.

Correct Answer: E E-If the price of a substitute resource falls, labor demand can increase if the output effect is greater than the substitution effect.

11. If the government wishes to regulate a natural monopoly so that it produces an allocatively efficient level of output, it would be at an output A. where price is equal to average total cost. B. where marginal revenue equals marginal cost. C. where normal profits are made. D. where price is equal to average variable cost. E. where price is equal to marginal cost.

Correct Answer: E E-In perfect competition, P = MR = MC and resources are allocated efficiently. Since a monopoly will not have the situation where P = MR, regulators might try to force the firm to produce where P = MC. This point may or may not ensure a long-run profit for the firm.

12. Which of the following is true of the perfectly competitive firm in the short run? A. The firm earns a normal profit. B. The firm shuts down if the price falls below average total cost. C. The firm earns positive economic profit. D. The firm maximizes profit by producing where the price equals marginal revenue. E. The firm may earn positive, negative, or normal profits.

Correct Answer: E E-In perfect competition, short-run profits may be positive or negative, or normal, but long-run profits are always normal.

7. Land, labor, capital and entrepreneurial talent are often referred to as A. production possibilities. B. goods and services. C. unlimited human wants. D. opportunity costs. E. scarce economic resources.

Correct Answer: E E-Know the four scarce economic resources.

7. Which of the following is most likely to be true in the long run for a monopoly firm? A. P = MR = MC = ATC B. P = MR = MC > ATC C. P > MR = MC = ATC D. P = MR > MC = ATC E. P > ATC > MR = MC

Correct Answer: E E-Like the competitive firm, the monopolist produces where MR = MC, but the P > ATC, which is most likely even further above MR = MC.

6. Which of the following is an example of a long-run adjustment for the owners of a small café? A. The owners switch from whole wheat to sourdough bread. B. The owners hire several part-time workers to cover the dinner shifts. C. The owners work overtime on a busy weekend. D. The owners install more energy-efficient lightbulbs in all of the light fixtures. E. The owners buy the office next door, and this doubles the customer seating.

Correct Answer: E E-Long-run adjustments change the production capacity of a firm.

11. A minimum wage in the market for fast-food workers is likely to produce A. an increase in the demand for fast-food workers. B. a decrease in the supply of fast-food workers. C. a shortage of fast-food workers. D. a lower price of fast-food products. E. a surplus of fast-food workers.

Correct Answer: E E-Minimum wages are price floors in a labor market. A surplus results.

4. Monopolistic competition is often characterized by A. strong barriers to entry. B. a long-run price that exceeds average total cost. C. a price that exceeds average variable cost, causing excess capacity. D. a homogenous product. E. many resources devoted to advertising.

Correct Answer: E E-Monopolistic competition is characterized by product differentiation. One way that firms differentiate their products and protect market share is through extensive advertising.

1. The production of chicken often results in offending odors that are picked up by the wind and blown over rural communities. This is an example of a ______ externality, the result of which are spillover ______ and an _______ of resources to chicken production. A. negative, costs, underallocation B. negative, benefits, overallocation C. negative, benefits, underallocation D. positive, costs, overallocation E. negative, costs, overallocation

Correct Answer: E E-Negative externalities, like "fowl" odors, impose spillover costs upon third parties. These costs, ignored by the market, reflect an over-allocation of resources to chicken production.

4. Which of the following is the best example of a public good? A. A visit to the orthodontist B. A session at the tanning salon C. A large pizza D. A cup of coffee E. The International Space Station

Correct Answer: E E-Public goods cannot be divided among consumers. If one consumes a public good, the next person is not denied consumption of it. All other choices are goods and services that are both rival and excludable.

10. Which of the following causes the supply curve of paper to shift to the left? A. Paper producers expect lower paper prices in the months ahead. B. The price of pencils, a complement to paper, increases. C. Improvements in the technology used to produce paper. D. Household income falls. E. Environmental concerns reduce the yearly amount of timber that can be harvested.

Correct Answer: E E-Restricting the supply of a raw material to paper would increase the price of the production input and decrease the supply of paper.

7. Which of the following increases the demand for interstate truck drivers? A. An increase in the wage of truck drivers B. An increase in the supply of truck drivers C. An increase in the price of diesel fuel, which is used to power semitrucks D. A decrease in the demand for interstate shipping E. A decrease in the price of semitrucks

Correct Answer: E E-Semitrucks are a complementary resource to the truck drivers. If the price falls, demand for the labor rises.

2. Which of the following is the best example of a negative externality and the appropriate plan for eliminating it? A. Air pollution from a factory blows downwind and harms children in a small community. Tax the citizens of the community. B. Your neighbor plants a fragrant blooming cherry tree in her front yard. Give a tree subsidy to your neighbor. C. The waste from a hog farm pollutes a neighbor's drinking water. Give a subsidy to the hog farmer. D. A cigarette smoker suffers multiple health problems from using tobacco. Tax the cigarettes that he is smoking. E. Air pollution from a power plant is blowing downwind and harming the trees in your community. Tax the production of electricity.

Correct Answer: E E-The appropriate fix to a negative externality is to tax either the producers or the consumers of electricity. The health problems of the smoker are not a negative externality, as the smoker is not a third party. The nonsmoking spouse of the smoker whose health is impaired would be a negative externality.

12. A typical characteristic of capitalist market economies is A. government ownership of land and capital. B. extensive price controls. C. centralized government decision making to determine production limits. D. an absence of scarcity. E. private ownership of economic resources.

Correct Answer: E E-The citizens privately own resources in capitalist systems.

7. If the perfectly competitive price is currently below minimum average total cost, we can expect which of the following events in the long run? A. The price will rise and each firm's output will fall as firms exit the industry. B. Market equilibrium quantity will increase as firms exit the industry. C. Nothing. The industry is currently in long-run equilibrium. D. Profits will fall as the market price increases. E. The price will rise to the breakeven point as firms exit the industry.

Correct Answer: E E-The question describes a situation where short-run losses are being incurred. In the long run, firms exit, shifting market supply leftward, increasing market price until the firms earn normal, or breakeven, profits.

6. The elasticity of supply is typically greater when A. producers have fewer alternative goods to produce. B. producers have less time to respond to price changes. C. producers are operating near the limits of their production. D. producers have less access to raw materials necessary for production. E. producers have more time to respond to price changes.

Correct Answer: E E-The supply curve is more elastic as more time elapses.

10. Diminishing marginal returns to short-run production begin when A. the average product of labor begins to fall. B. the total product of labor begins to fall. C. marginal product of labor becomes negative. D. average variable cost begins to rise. E. marginal product of labor begins to fall.

Correct Answer: E E-This defines diminishing marginal returns and is often missed by students, who make the mistake of identifying falling TPL, rather than falling MPL, with diminishing returns.

6. Which of the following would best complete a short definition of economics? "Economics is the study of . . ." A. how unlimited resources are allocated between scarce wants. B. how money is circulated through the economy. C. how corporations maximize the share price of their stock. D. how nations trade goods and services in a global marketplace. E. how scarce resources are allocated to satisfy unlimited wants.

Correct Answer: E E-This is the definition of economics!