ECON 120 Final

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c The law of diminishing returns notes that it takes larger and larger increases in the variable inputs to increase output by the same amount.

According to the law of diminishing returns, when some factors of production are fixed, in order to increase production by a given amount, a firm will eventually need to add successively: a.) smaller and smaller quantities of the variable factors of production. b.) constant quantities of the variable factors of production. c.) larger and larger quantities of the variable factors of production. d.) larger and larger quantities of the fixed factor of production.

c This is as reported in the textbook.

According to the textbook, the percentage of gross domestic product devoted to healthcare between the years 1940 and 2013: a.) declined from 4% to less than 2%. b.) increased from 4% to about 6%. c.) increased from 4% to more than 17%. d.) increased from 4% to more than 40%.

d Adam Smith's theory of the invisible hand posits that the actions of independent, self-interested buyers and sellers will often (but not always) result in the most efficient allocation of resources.

Adam Smith's theory of the invisible hand posits that the most efficient allocation of resources is often achieved by: a.) reducing economic inequality. b.) government intervention in the market. c.) collective action. d.) the actions of independent, self-interested buyers and sellers.

d Opportunity cost includes both implicit costs and explicit costs. If she goes to the movies, Amy will give up the opportunity to earn $20 plus the $15 cost of the ticket.

Amy is thinking about going to the movies tonight. A movie ticket costs $15, and she'll have to cancel a $20 dog-sitting job that she would have been willing to do for free. The opportunity to Amy cost of going to the movies is: a.) $5 b.) $15. c.) $20. d.) $35

d External benefits and external costs are not considered by firms and consumers. Thus, if a good involves an external cost, then private markets will produce too much of the good, and if a good involves an external benefit, then private markets will provide too little of the good.

An external benefit implies that private markets will provide ______ than the socially optimal quantity, and an external cost implies that private markets will provide ______ than the socially optimal quantity. a.) more; more b.) less; less c.) more; less d.) less; more

c Absolute advantage means being able to produce more in a given time period.

An individual has an absolute advantage in producing pizzas if that individual: a.) has a lower opportunity cost of producing pizzas than anyone else. b.) can produce more pizzas in a given amount of time than anyone else. c.) has a higher opportunity cost of producing pizzas than anyone else. d.) charges the lowest price for pizzas.

a Mary's reservation price is greater than Joe's, so they could each benefit from trade.

Assume that Joe is willing to produce a hamburger for $1, and Mary is willing to pay $3 for a hamburger. Which of the following is true? a.) Joe and Mary can make a mutually beneficial exchange. b.) Joe and Mary cannot make a mutually beneficial exchange. c.) Joe and Mary will not trade in equilibrium. d.) Joe and Mary will only trade if the equilibrium price is less than $1.

d At the world price of $1,000 per ton, the quantity demanded domestically is 100 tons per year, and the quantity supplied domestically is 20 tons per year, implying that the country imports 80 tons per year. With the tariff, the price of sugar becomes $2,000 per ton. At that price, the quantity demanded domestically is 80 tons per year, and the quantity supplied domestically is 40 tons per year, implying that the country imports 40 tons per year.

Compared to an open economy without a tariff, the amount of imported sugar will drop from _____ tons to _____ tons after the tariff is imposed. a.) 20; 10 b.) 40; 20 c.) 60; 30 d.) 80; 40

d Marginal revenue is the change in total revenue that results from a one-unit change in output.

For all firms, the additional revenue collected from the sale of one additional unit of output is termed: a.) price. b.) average revenue. c.) marginal profit. d.) marginal revenue.

d Perfectly competitive firms do not have to lower price to sell an additional unit; monopolists do. As a result, marginal revenue is less than price for a monopolist.

For perfectly competitive firms, marginal revenue ______ price; for monopolists marginal revenue ______ price. a.) equals; equals b.) equals; is greater than c.) is less than; equals d.) equals; is less than

c If the economy is open, the domestic price of cars will become the world price of cars.

If this is an open economy, the price of a car will be ________. a.) $6,000/car b.) $8,000/car c.) $10,000/car d.) $14,000/car

d When the price of a variable factor of production increases, the cost of producing each additional unit of output increases, so the profit-maximizing level of output falls.

In general, when the price of a variable factor of production increases: a.) total cost falls. b.) the profit maximizing level of output rises. c.) the profit-maximizing price falls. d.) the profit-maximizing level of output falls.

a A monopoly is the only supplier of a unique product with no close substitutes.

In many cities in the United States, a single firm provides electricity. Those firms are: a.) monopolists. b.) oligopolists. c.) monopolistic competitors. d. )perfect competitors.

c Government transfers of goods or services are termed in-kind transfers.

When the government transfers resources to the poor in the form of a good or service, it is called: a.) the Earned Income Tax Credit (EITC). b.) Temporary Assistance to Needy Families (TANF). c.) an in-kind transfer. d.) a regressive tax.

b Market equilibrium does not address issues of poverty.

Which of the following is NOT necessarily true in a market equilibrium? a.) Price represents the value of an extra unit of consumption. b.) Both rich and poor have adequate access to the good. c.) Price represents the cost of an extra unit of production. d.) All mutually beneficial trades have been made.

b Implicit costs are the opportunity costs of the resources supplied by the firm's owners.

Which of the following statements about implicit costs is true? a.) They are always fixed. b.) They measure the forgone opportunities of the firm's owners. c.) They exceed explicit costs. d.) They do not enter into the calculation of economic profit.

c The opportunity cost of seeing the movie is the economic surplus you give up by not seeing your favorite band ($50-$30=$20) plus the $15 you could have received by selling your movie ticket.

You won a free ticket to see the latest Star Trek movie this Friday night (which you can costlessly resell for its face value of $15). Your favorite band is also performing on Friday and is your only alternative activity. Friday is your last chance to see either the movie or the band. Tickets to see your favorite band cost $30, and on any given day, you would be willing to pay as much as $50 for a ticket. Based on this information, what is your opportunity cost of going to see the Star Trek movie on Friday? a.) $0 b.) $30 c.) $35 d.) $50

b If the firm uses 9 employee hours, its total cost is $176 (= 9 × $14 + $50), and its total revenue is $240 (= 120 × $2). Thus, its profit is $64 (= $240 - $176).

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The table below describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. When the firm uses 9 employee-hours, it earns a daily ______ of ______. a.) loss; $64 b.) profit; $64 c.) loss; $114 d.) profit; $114

d 9 × $14 = $126 in labor costs plus $50 in rent for a total cost of $176.

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The table below describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. When the firm uses 9 employee-hours, its total cost each day is: a.) $126 b.) $64 c.) $56 d.) $176

a If the quantity that sellers wish to sell is 3.9 tons, and the quantity that buyers wish to buy is 4.7 tons, then there is excess demand, which will lead the price of oranges to rise.

Suppose that when the price of oranges is $3 per pound, the quantity demanded is 4.7 tons per day and the quantity supplied is 3.9 tons. In this case: a.) excess demand will lead the price of oranges to rise b.) excess supply will lead the price of oranges to fall c.) excess demand will lead the price of oranges to fall d.) excess supply will lead the price of oranges to rise

b Total revenue when either 5 or 6 are sold is $30; therefore, the marginal revenue from selling the 6th unit is zero.

Suppose the table below describes the demand for a good produced by monopolist. The total revenue from selling 6 units is ______, and the marginal revenue of selling the 6th unit is ______. a.) $5; 5 b.) $30; 0 c.) $24; $5 d.) $30; $1

b At any given price, the steeper demand curve is, the less elastic demand will be.

Suppose two demand curves intersect and so have a point in common. At that point, demand shown by the steeper curve will be _______ the flatter curve. a.) more elastic than b.) less elastic than c.) as elastic as d.) more likely to be unit elastic than

c Given her demand curve, Ava would choose to stay 2 days at a price of $200 per day.

The figure below shows Ava's demand curve for days in the hospital. The marginal cost of an additional day in the hospital is $200. If Ava had to pay the entire marginal cost of spending a day in the hospital, then she would choose to stay ______ day(s). a.) 0 b.) 1 c.) 2 d.) 3

b The monopolist loses $4 on each of the 4 units sold.

The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. At this monopolist's profit-maximizing level of output, it: a.) earns an economic profit of $16 per day. b.) incurs an economic loss of $16 per day. c.) earns an economic profit of $64 per day. d.) incurs an economic loss of $64 per day.

c The monopolist maximizes its profit by choosing the level of output at which marginal revenue equals marginal cost, or 4 units per day. From the demand curve, we can see that at this level of output, the monopolist should charge $18 per unit.

The figure below shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. This monopolist maximizes its profit by producing ______ units per day and charging a price of ______ per unit. a.) 4; $6 b.) 8; $6 c.) 4; $18 d.) 8; $14

c Price elasticity of supply is the percentage change in quantity supplied that occurs in response to a 1 percent change in price.

The percentage change in quantity supplied that results from a 1 percent change in price is known as the: a.) cross-price elasticity of supply. b.) slope of the supply curve. c.) price elasticity of supply d.) cross-price elasticity of demand

b The world price is the price at which a good or service is traded on international markets.

The price at which a good or service is traded on international markets is called the ________ price. a.) international b.) world c.) universal d.) market

b If the quantity of bananas demanded exceeds the quantity supplied, then price will rise.

The price of bananas will increase in response to: a.) an excess supply of bananas. b.) an excess demand for bananas. c.) an increase quantity of bananas supplied. d.) an increase in the supply of bananas.

c Since Leo loses $0.75 from each program for each dollar he earns, he would lose $7.50 from each program if he earned $10 for a total loss of $15 from the two programs.

Leo is a welfare recipient who qualifies for two means-tested cash benefit programs. If he does not earn any income, he receives $225 from each program. For each dollar he earns (which his employer is required to report to the welfare agency), his benefit from each program is reduced by 75 cents until the benefit equals zero. Suppose Leo earns $10. He will lose ______ from each benefit, for a total loss of _____. a.) $.75; $1.00 b.) $7.50; $7.50 c.) $7.50; $15.00 d.) $.75; $1.50

b Students face a marginal price of zero and so take more food than is optimal.

Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. The buffet in Jamie's dorm is an example of: a.) an efficient subsidy. b.) the tragedy of the commons. c.) excess supply in the market. d.) a good with positive externalities.

a Second-hand cigarette smoke is a negative externality. This suggests that a tax on cigarettes will increase total economic surplus.

Numerous studies have shown that breathing second-hand cigarette smoke is harmful to your health. This suggests that a tax on cigarettes will: a.) increase total economic surplus. b.) decrease total economic surplus. c.) have no effect on total economic surplus. d.) lead to a decrease in the price of cigarettes.

c According to the Cost-Benefit Principle, Pat should drive if the marginal benefit of driving (saving half an hour) is greater than its marginal cost ($0.50).

Pat can either drive to work, which takes half an hour and uses $1.50 worth of gas, or take the bus, which takes an hour and costs $1.00. How should Pat get to work? a.) Pat should take the bus because it costs $0.50 less than driving. b.) Pat should drive because it saves half an hour relative to taking the bus. c.) Pat should drive if saving half an hour is worth $0.50 or more. d.) Pat should take the bus if saving half an hour is worth $0.50 or more.

d The short run is a period of time sufficiently short that at least some of a firm's factors of production are fixed.

The short run is best defined as: a.) one year or less. b.) a period of time sufficiently short that all factors of production are variable. c.) the period of time between quarterly accounting reports. d.) a period of time sufficiently short that at least one factor of production is fixed.

d The negative relationship between price and quantity demanded is implied by the law of demand.

The tendency for consumers to purchase more of a good or service as its price falls is captured by: a.) the law of supply. b.) the law of increasing cost. c.) cross-price elasticity of demand. d.) the law of demand.

d At a price of $9 buyers will want to buy 1 unit, and sellers will want to sell 6 units, a difference of 5 units.

Refer to the figure below. At a price of $9, there will be: a.) an excess demand of 5 units. b.) an excess supply of 6 units. c.) an excess demand of 1 unit. d.) an excess supply of 5 units.

d At a price of $2.50 per pound, Laura wants to buy 1.5 pounds per week and Chris wants to buy 3 pounds per week, so market demand is 4.5 pounds per week.

Refer to the figure below. If Laura and Chris are the only two consumers in this market then at a price of $2.50 per pound, the market demand for hamburger is: a.) 1.5 pounds per week b.) 3 pounds per week c.) 4 pounds per week d.) 4.5 pounds per week

c At price ceiling of $40 would have no effect on this market since the equilibrium price, $35, is less than $40.

Refer to the figure below. If the government imposed a price ceiling of $40, what would happen in this market? a.) There would be excess supply. b.) There would be excess demand. c.) The price ceiling would have no effect. d.) The equilibrium quantity would fall.

c At price of $45, there would be excess supply, so sellers would have an incentive lower their prices to increase sales.

Refer to the figure below. Suppose all the sellers in this market started out charging a price of $45 per unit. What is the most likely result? a.) They would all make a large profit because $45 is more than the equilibrium price. b.) They would all just break even because $45 is their reservation price. c.) They would lower their prices because at $45 there would be excess supply. d.) They would lower their prices because at $45 there would be excess demand.

c An increase in input prices will cause supply to shift leftward.

Refer to the figure below. Suppose the solid line represents the current supply of Star Wars action figures. If the price of the plastic used to make action figures rises, current supply will: a.) shift to S(B). b.) not change because a change in the price of plastic will not affect the demand for action figures. c.) shift to S(A). d.) not change; only the quantity supplied will change.

c Martha's opportunity cost of making a pie (3/4 of a cake) is less than Julia's (5/6 of a cake), and Julia's opportunity cost of making a cake (6/5 of a pie) is less than Martha's (4/3 of a pie).

Refer to the table above. ______ has the comparative advantage in making pies and ______ the comparative advantage in making cakes. a.) Martha; Martha b.) Julia; Julia c.) Martha; Julia d.) Julia; Martha

b It takes Martha longer to make both pies and cakes than Julia.

Refer to the table below. According to the table, Martha has the absolute advantage in: a.) pies. b.) neither pies nor cakes. c.) cakes. d.) both pies and cakes.

a Martha has the comparative advantage in pies, and Julia has the comparative advantage in cakes. To see this note that Martha's opportunity cost of making a pie (3/4 of a cake) is less than Julia's (5/6 of a cake), and Julia's opportunity cost of making a cake (6/5 of a pie) is less than Martha's (4/3 of a pie).

Refer to the table below. Based on their comparative advantage, Martha should specialize in _______ while Julia should specialize in _______. a.) pies; cakes b.) cakes; pies c.) neither pies nor cakes; both pies and cakes d.) both pies and cakes; neither pies nor cakes

a In the time it takes Martha to make a pie, she could have made 3/4 (= 60/80) of a cake.

Refer to the table below. Martha's opportunity cost of making of a pie is: a.) 3/4 of a cake. b.) 4/3 of a cake. c.) 8 cakes. d.) 80 cakes.

a At Q=15, firms are earning an economic profit. Thus, other firms will have an incentive to enter this industry.

Refer to the table below. Suppose all firms in this industry have identical costs to this firm and are producing 15 units of output. One can predict that a.) new firms will enter the industry. b.) old firms will exit the industry. c.) firms will attempt to lower their implicit costs. d.) price must rise.

b Total cost is $100, so dividing by 4 gives $25.

Refer to the table below. The average cost of 4 units of this activity is: a.) $20 b.) $25 c.) $30 d.) $40

c Total cost increases from $40 to $60 when you go from 2 to 3 units, so the marginal cost of the 3rd unit is $20.

Refer to the table below. The marginal cost of the 3rd unit of this activity is: a.) $30 b.) $25 c.) $20 d.) $10

b Price discrimination brings the level of output closer to the socially optimal quantity.

Relative to a single price monopolist, a price discriminating monopolist generates: a.) less total surplus. b.) more total surplus. c.) the same amount of total surplus, but lower profits. d.) the same amount of total surplus, but higher profits.

b Economic rent is earned by factors of production that are unique. As a result, competition does not drive economic rent to zero.

Unlike economic profit, economic rent: a.) can be less than zero. b.) may not be driven to zero by competition. c.) doesn't involve opportunity costs. d.) only applies to land.

d The amount of the tariff is the difference between the world price plus the tariff ($2000) and the world price ($1000).

What is the amount of tariff imposed on a ton of sugar? a.) $1 b.) $50 c.) $500 d.) $1,000

a Two goods are substitutes if an increase in the price of one good leads to a rightward shift in the demand for the other.

What might cause a demand curve to shift to the right? a.) An increase in the price of a substitute. b.) An increase in the product's own price. c.) An increase in the price of a complement. d.) A decrease in the price of a substitute.

c An external cost, also called a negative externality, is a cost of an activity that falls on people other than those who pursue the activity.

A cost of an activity that falls on people not engaged in the activity is call a(n): a.) external benefit. b.) prisoner's dilemma. c.) negative externality. d.) positive externality.

c A market equilibrium is only efficient if the market supply and demand curves capture all of the relevant costs and benefits associated with production and consumption.

A market equilibrium is only efficient if: a.) the consumer surplus and the producer surplus associated with a given transaction are equal. b.) consumer surplus and producer surplus are both zero. c.) all relevant costs and benefits are reflected in the market supply and demand curves. d.) output is distributed equitably among consumers.

d A perfectly competitive firm faces a horizontal demand curve at the market price because it need not lower its price to sell more output and it would sell no output if it raised its price above the market price.

A price-taker faces a demand curve that is: a.) vertical at the market price. b.) upward sloping. c.) downward sloping. d.) horizontal at the market price.

b A socially optimal public health policy should expand the proportion of the population vaccinated until the marginal cost of an additional vaccination is equal to the marginal cost of an additional vaccination.

A socially optimal public health policy should expand the proportion of the population vaccinated: a.) whenever the marginal benefit of an additional vaccination is positive. b.) until the marginal cost of an additional vaccination equals the marginal benefit of an additional vaccination. c.) until the marginal benefit of an additional vaccination equals zero. d.) until the marginal benefit of an additional vaccination is greater than the marginal cost of an additional vaccination.

a A tariff is a tax imposed on an imported good.

A tariff is a tax imposed on ______ good. a.) an imported b.) a luxury c.) an illegal d.) a domestic

b Monopolistic competition is an industry structure in which a large number of firms produce slightly differentiated products that are all reasonably close substitutes for one another.

A monopolistically competitive firm is one: a.) that behaves like a monopolist. b.) of many firms that sell products that are close but not perfect substitutes. c.) of many firms that all sell the exact same product. d.) of a small number of firms that sell products that are close but not perfect substitutes.

d A negative income tax is a system under which the government grants each citizen a cash payment, financed by an additional tax on earned income.

A program under which the government gives all citizens a substantial lump sum payment that is financed by a tax earned income is termed a(n) ______. a.) positive income tax. b.) in-kind transfer. c.) unearned income tax credit. d.) negative income tax.

d A situation is efficient if no change is possible that will help some people without harming others.

A situation is efficient if it is: possible to find a transaction that will make at least one person better off, even if others are made worse off. possible to find a transaction that will make everyone better off. a.) possible to find a transaction that will make at least one b.) person better off without harming others. c.) not possible to find a transaction that will make at least d.) one person better off without harming others.

a Since Carmen's music imposes a cost on Paul, it generates a negative externality.

Carmen listens to opera music every evening when she gets home from work. Carmen loves listening to opera, but her neighbor Paul, who can also hear the music, hates it. If Paul is the only person besides Carmen who can hear the music, then Carmen's music generates: a.) a negative externality. b.) a positive externality. c.) neither a positive nor a negative externality. d.) both a positive and a negative externality.

a Quick Burger's payoff would fall by $9,000 per month (from $24,000 to $15,000) if it did not operate a drive-through window.

b If Quick Burger and The Sunshine Café cannot negotiate with each other, then Quick Burger will choose to operate a drive-through window because Quick Burger's payoff is higher when it operates a drive-though.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. If Quick Burger has the legal right to operate a drive-through, and Quick Burger and The Sunshine Café CANNOT negotiate with each other, then will Quick Burger operate a drive-though window? a.) No, because it is not socially efficient to operate a drive-through. b.) Yes, because Quick Burger's payoff is higher when it operates a drive-through. c.) No, because it would lower the payoff for The Sunshine Café. d.) It cannot be determined.

b When Quick Burger operates a drive-through window, total monthly payoffs are only $35,000, compared to $38,000 when Quick Burger does not operate a drive-through window.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. Is it socially optimal for Quick Burger to operate a drive-through window? a.) No, because The Sunshine Café's payoff is lower when Quick Burger operates a drive-through window. b.) No, because total payoffs are higher when Quick Burger does not operate a drive-through window. c.) Yes, because Quick Burger's payoff is higher when Quick Burger operates a drive-though window. d.) Yes, because total payoffs are higher when Quick Burger operates a drive-through window.

d Although Quick Burger's payoff is higher when it operates a drive-through window, both firms are better off when the Sunshine Café pays Quick Burger $10,500 per month not to operate the drive-through window. Under this arrangement, Quick Burger's monthly payoff is $25,500 and the Sunshine Café's monthly payoff is $12,500.

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. Suppose Quick Burger has the legal right to operate a drive-through window, and Quick Burger and the Sunshine Café can negotiate with each other at no cost. Which of the following arrangements would lead to the socially optimal outcome? a.) Quick Burger pays The Sunshine Café $12,500 per month to operate the drive-through window. b.) Quick Burger pays The Sunshine Café $10,500 per month to operate the drive-through window. c.) The Sunshine Café pays Quick Burger $12,500 per month not to operate the drive-through window. d.) The Sunshine Café pays Quick Burger $10,500 per month not to operate the drive-though window.

b If Larry is earning more than $500 per month at his current job, then if he did was Curly was doing, his economic profit would be negative.

Curly told Larry about his new business venture: Curly pays Acme International $1,000 per month for supplies, works out of his apartment on his own computer and earns a monthly revenue of $1,500. Should Larry quit his job and do what Curly is doing? a.) Yes, as long as Larry has at least $1,000 in savings to get started. b.) Not if Larry is earning more than $500 per month at his current job. c.) Not unless Larry can borrow the $1,000 monthly payment at no interest. d.) Yes, as long as Larry can work out if his apartment and owns a computer.

c Economic rent is bid up to prevent a unique factor from moving to another firm.

Duke is a highly skilled negotiator who could work for many law firms. The law firm that hires Duke is able to collect twice as much revenue per hour of Duke's time than it can for any other negotiator in town. The increased revenue will: a.) be evenly split between Duke and the law firm to maximize surplus. b.) all go to the law firm because the firm bears the risk of running the business. c.) all go to Duke because, if it didn't, another firm could hire Duke away. d.) be split between Duke and the law firm, but how it will be split cannot be determined without more information.

c Economic rent is the part of the payment for a factor of production that exceeds the owner's reservation price.

Economic rent is: a.) the amount people pay for an apartment in a perfectly competitive market. b.) the payment made to the owner of a factor of production, which is usually equal to the owner's reservation price. c.) the difference between the payment made to the owner of a factor of production and the owner's reservation price. d.) sometimes higher and sometimes lower than the owner's reservation price.

c Economics is the study of how people make choices under conditions of scarcity and the implications of those choices for society as a whole.

Economics is best defined as the study of: a.) inflation, interest rates and the stock market. b.) supply and demand. c.) how people make choices in the face of scarcity and the implications of those choices for society as a whole. d.) the financial concerns of businesses and individuals.

c When production is subject to economies of scale, the average cost of production declines as the number of units produced increases.

Economies of scale exist when: a.) firms become larger. b.) input prices are falling. c.) the average cost of production falls as output rises. d.) doubling all the inputs leads to less than double the output.

c When markets are efficient, total economic surplus is maximized, implying that there are more resources available to achieve society's other goals.

Efficiency is an important goal because when markets are efficient: a.) there is less income inequality. b.) the poor benefit more than the wealthy. c.) there are more resources available to achieve other goals. d.) there is no need for government intervention in the economy.

d The non-refundable $600 you paid for your meal plan is a sunk cost; no matter how many meals you eat up to 150, your marginal cost is 0.

For the Fall semester, you had to pay a nonrefundable fee of $600 for your meal plan, which gives you up to 150 meals. If you eat 100 meals, your marginal cost of the 100th meal is: a.) $6. b.) $4. c.) $0.25. d.) $0.

c At a price of 25 cents each, Al wants to buy 9, Betty wants to buy 2, and Carol wants to buy 5, so the market demand is 16.

Fran runs a doughnut shop in a tiny 3-person town. The table below shows the quantity demand by the three townspeople at various prices. When the price of a doughnut is 25 cents, what is the market demand for doughnuts? a.) 9 doughnuts b.) 13 doughnuts c.) 16 doughnuts d.) 20 doughnuts

b The marginal cost to Frank of spending an additional hour in the east orchard is always 10 apples. His marginal benefit of spending the first hour in the west orchard is 40 apples; his marginal benefit of the 2nd hour is 24 apples (= (32 × 2) - 40); his marginal benefit of the 3rd hour is 11 apples (= (25 × 3) - (32 × 2)); and his marginal benefit of the 4th hour is 5 apples (= (20 × 4) - (25 × 3)). So the marginal benefit of the 1st, 2nd and 3rd hour in the east orchard is greater than its marginal cost. But, the marginal benefit of the 4th hour is less than its marginal cost.

Frank owns an apple farm and plans to spend 4 hours today picking apples. The number of apples he can pick per hour depends on the total number of hours he spends working in either the east orchard or the west orchard in the manner shown in the table below. How should Frank divide his time between the east and the west orchard? a.) He should spend all 4 hours in the east orchard. b.) He should spend 3 hours in the east orchard and 1 hour in the west orchard. c.) He should spend 2 hours in east orchard and 2 hours in the west orchard. d.) He should spend 1 hour in the east orchard and 3 hours in the west orchard.

b If Frank spends 1 hour in the east orchard he can pick 40 apples. If he spends 2 hours in the east orchard, he can pick 64 (= 32 × 2) apples. Thus, the marginal benefit of the 2nd hour he spends picking in the east orchard is 24 (= 64 - 40).

Frank owns an apple farm and plans to spend 4 hours today picking apples. The number of apples he can pick per hour depends on the total number of hours he spends working in either the east orchard or the west orchard in the manner shown in the table below. What is the marginal benefit to Frank of the 2nd hour he spends picking in the east orchard? a.) 8 apples b.) 24 apples c.) 32 apples d.) 64 apples

a Positive externalities yield benefits to others while negative externalities impose costs on others.

Given that most people like the smell of baking cinnamon rolls and dislike the smell of burning tires, baking cinnamon rolls generates ______ externality, and burning tires generates ______ externality. a.) a positive; a negative b.)a negative; a positive c.) a positive, no d.) no; a negative

b If the economy is open, the domestic price of cars will become the world price of cars. At a price of $10,000 per car, the quantity of cars demanded domestically will be 60 thousand, and the quantity of cars supplied domestically will be 20 thousand, implying that the country will import 40 thousand cars.

How many cars will this country import in an open economy situation? a.) 20,000 b.) 40,000 c.) 60,000 d.) 80,000

b The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here -60 / 20 = -3. By convention, the price elasticity of demand is expressed in terms of its absolute value.

If 20% increase in the price of a good leads to a 60% decrease in the quantity demanded, then what is the price elasticity of demand? a.) 30. b.) 3. c.) 1/3. d.) 1/6.

a An oligopoly is an industry in which a small number of large firms produce products that are either close or perfect substitutes.

If a firm functions in an oligopoly, it is: a.) one of a small number of firms that produce goods that are either close or perfect substitutes. b.) the only firm that produces a good with no close substitutes. c.) one of a large number of firms that produce goods that are either close or perfect substitutes. d.) one of a large number of firms that produce a good with no close substitute.

b A production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion.

If a firm's production process exhibits increasing returns to scale, then doubling all the firm's inputs will lead output to _____. a.) double. b.) more than double. c.) less than double. d.) fall by one-half.

c Following the Cost-Benefit Principle, all firms maximize their profit by choosing the level of output at which marginal revenue equals marginal cost.

If a monopolist's marginal revenue exceeds its marginal cost at its current level of output, then to maximize its profit the monopolist should: a.) do nothing. b.) decrease output in order to increase the gap between marginal revenue and marginal cost. c.) increase output until marginal revenue equals marginal cost. d.) increase output until price equals marginal cost.

c The price elasticity of supply at a point is the percentage change in quantity supplied divided by the percentage change in price.

If a one percent increase in the price of oranges leads to a five percent increase in the quantity supplied, the price elasticity of supply for oranges is ______. a.) 1/5 b.) 1/2 c.) 5 d.) 2

c Subsidies are used to increase provision of activities with positive externalities and taxes are used to decrease provision of activities that generate negative externalities.

If an activity generates a positive externality, the government can increase total economic surplus by ______ the activity, and if an activity generates a negative externality, the government can increase total economic surplus by ______ the activity. a.) taxing; banning b.) subsidizing; banning c.) subsidizing; taxing d.) publicizing; taxing

d Firms do not consider external costs when making their output decisions, so if a good generates a negative externality, they will produce more than the socially optimal quantity at the market equilibrium.

If coal mining produces a negative externality because it leads to environmental damage, then the a.) socially optimal quantity of coal is zero. b.) quantity of coal produced at the market equilibrium will be less than the socially optimal quantity. c.) quantity of coal produced at the market equilibrium will be greater than the socially optimal quantity. d.) cost to society of producing an additional ton of coal will be less than the cost to coal mining companies of producing an additional ton of coal.

d Demand along a horizontal demand curve is perfectly elastic.

If consumers completely cease purchasing a product when its price increases by any amount, then demand is: a.) inelastic. b.) perfectly inelastic. c.) unit elastic. d.) perfectly elastic.

b If an increase in price leads to a relative small percentage drop in quantity demanded (that is, if demand is inelastic), then total revenue will increase.

If demand is ______ with respect to price, a price increase will ______ total revenue. a.) elastic; increase b.) inelastic; increase c.) unit elastic; decrease d.) inelastic; decrease

b Due to adverse selection, those who buy health insurance will tend to be those who are the most likely to require health care.

If fewer families choose to purchase medical insurance because of rising health insurance premiums, then: a.) those who remain insured will tend to spend less on health care. b.) those who remain insured will tend to have higher-than-average rates of illness. c.) the frequency of illness in the general population will fall. d.) those who remain insured will tend to have lower-than-average rates of illness.

b A situation is efficient if no change is possible that will help some people without harming others.

If it is possible to make a change that will help some people without harming others, then the situation is: a.) efficient. b.) inefficient. c.) fair. d.) unfair.

d The income elasticity of demand for a good is the percentage by which quantity demanded changes in response to a one percent change in income. For normal goods, an increase in income leads to an increase in consumption (and a decrease in income leads to a decrease in consumption), implying that the income elasticity of demand is positive for normal goods.

If most consumer goods and services are ______, then most income elasticities are ______. a.) normal; negative b.) inferior; positive c.) normal; greater than one d.) normal; positive

a If pencils and paper are complements, and the price of paper increases, then the demand for pencils will fall. As a result, the equilibrium price and quantity of pencils will fall.

If pencils and paper are complements for most consumers, then if the price of paper increases, you would expect: a.) the equilibrium price and quantity of pencils to fall b.) the equilibrium price and quantity of pencils to rise c.) the equilibrium price of pencils to fall and the equilibrium quantity of pencils to rise d.) the equilibrium price of pencils to rise and the equilibrium quantity of pencils to fall

a Marginal revenue is derived from demand.

If the demand curve facing a monopolist shifts, then the monopolist's: a.) marginal revenue curve and profit-maximizing level of output will change. b.) marginal revenue curve will not change, but its profit-maximizing level of output will. c.) total cost curve will change, but its variable cost curve will not. d.) marginal revenue curve will change, but its profit-maximizing level of output will not.

b A normal good is a good for which an increase in income leads to an increase in demand and a decrease in income leads to a decrease in demand.

If the demand for a good decreases as income decreases, then the good is a(n): a.) complementary good. b.) normal good. c.) inferior good. d.) substitute good.

d If the production of meat imposes costs on people other than those who buy and sell the meat, then the equilibrium quantity will be higher than the socially optimal quantity.

If the local slaughterhouse gives off an unpleasant stench, then the equilibrium quantity of meat will be _____ the quantity that maximizes total economic surplus. a.) more equitable b.) equal to c.) lower than d.) higher than

b The socially optimal expenditure on a public health measure should is the amount for which the marginal benefit to society of the measure is equal to its marginal cost.

If the marginal benefit of additional spending on a public health measure is greater than its marginal cost, then total economic surplus a.) will decrease if the government increases spending on the health measure. b.) will increase if the government increases spending on the health measure. c.) has been maximized. d.) is equal to zero.

d It is efficient for firms with the smallest marginal cost of pollution abatement to reduce pollution the most.

If the marginal cost of pollution abatement is smaller for large firms than it is for small firms, then it is efficient for: a.) small firms to reduce pollution by more than large firms. b.) small firms and large firms to reduce pollution by a fixed proportion. c.) small firms and large firms to increase pollution by a fixed proportion. d.) large firms to reduce pollution by more than small firms.

d Pollution should be reduced until the marginal benefit of reducing pollution equals the marginal cost of reducing pollution. If the marginal cost of reducing pollution is positive, then the marginal benefit of reducing pollution should be positive too, implying that the optimal amount of pollution is greater than zero.

If the marginal cost of reducing pollution is positive, then: a.) pollution should be reduced as much as technically feasible. b.) the marginal benefit of reducing pollution is zero. c.) the optimal amount of pollution is zero. d.) the optimal amount of pollution is greater than zero.

d Buyers and sellers do not consider external costs, so the market will produce more than the socially optimal quantity.

If the market equilibrium quantity is greater than the socially optimal quantity, one can infer that: a.) firms are earning an economic loss. b.) firms are earning a positive economic profit. c.) there is a positive externality associated with this good. d.) there is a negative externality associated with this good.

b If the supply and demand curves do not capture all of the costs and benefits of producing another unit of output, then the market equilibrium will not be efficient.

If the market supply curve does not capture all of the costs to society of producing an additional unit of good, then: a.) the market equilibrium will be socially optimal. b.) the market equilibrium will not be efficient. c.) the allocation of resources will be efficient. d.) the market will not be in equilibrium.

a If the percentage change in quantity demanded is greater than the percentage change in price, then the price elasticity of demand will be greater than one, and demand is said to be elastic with respect to price.

If the price elasticity of demand for a good is greater than one, then the demand for that good is: a.) elastic. b.) inelastic. c.) unit elastic. d.) perfectly elastic.

a If the price of a good or service in a closed economy is greater than the world price, and that economy opens itself to trade, the economy will tend to become a net importer of that good or service.

If the price of a good in a closed economy is greater than the world price, then if the country opens its markets to world trade the country will be a ______ of that good. a.) net importer b.) net exporter c.) importer and exporter d.) producer

b If the percentage change in quantity is less than the percentage change in price, then the price elasticity of demand will be less than one in absolute value, implying that demand is inelastic.

If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is: a.) negative. b.) inelastic. c.) elastic. d.) unit elastic.

b A market that is out of equilibrium is a market in which some mutually beneficial trades remain.

If there is excess demand in a market, then this suggests that: a.) there is no way to help some people without harming others. b.) there is an opportunity for mutually beneficial trades. c.) the market price is above the equilibrium price. d.) the market is in equilibrium.

a If the economy is open, the domestic price of cars will become the world price of cars. At a price of $10,000 per car, the quantity of cars supplied domestically will be 20,000 .

If this is an open economy, quantity supplied of cars by the domestic producers will be ________. a.) 20,000 b.) 40,000 c.) 60,000 d.) 80,000

d If two goods are substitutes, then if the price of one increases, the quantity demanded of the other will increase, implying that the cross-price elasticity of demand between the two goods is positive.

If two products are substitutes, then the: a.) income elasticity of demand for both will be high. b.) price elasticity of demand for both will be positive. c.) cross-price elasticity of demand between them will be negative. d.) cross-price elasticity of demand between them will be positive.

c Comparative advantage means having a lower opportunity cost.

If you have a comparative advantage in a particular task, then: a.) you are better at it than other people. b.) you give up more to accomplish that task than do others. c.) you give up less to accomplish that task than do others. d.) you have specialized in that task, while others have not.

c Due to entry and exit in a perfectly competitive market, firms earn zero economic profit in the long run.

In perfectly competitive markets, an implication of entry and exit in response to economic profit and loss is that: a.) firms must earn positive economic profit in the long run. b.) all firms will exit the market in the long run. c.) firms will earn zero economic profit in the long run. d.) market demand is completely elastic.

b Although part of the increase in health care expenditures is the result of costly new health care technology, a great deal of the increase is due to the emergence of the third-party payment system.

In the United States, the emergence of the third-party payment system has: a.) led health care costs to decrease over time. b.) led health care costs to increase over time. c.) had almost no impact on health care costs. d.) led people to consume less than the socially optimal level of health care.

a Two goods are substitutes if they serve similar functions for people.

It is likely that for most people: a.) coffee and tea are substitutes. b.) coffee and non-dairy creamer are substitutes. c.) coffee and Coke are complements. d.) coffee and coffee mugs are substitutes.

b Because both activities have the same cost (Janie's time and her dislike of the task), the activity with the greatest benefit will yield the greatest economic surplus.

Janie must choose to either mow the lawn or wash clothes. If she mows the lawn, she will earn $30, and if she washes clothes, she will earn $45. She dislikes both tasks equally and they both take the same amount of time. Janie will therefore choose to ______ because it generates a ______ economic surplus. a.) mow the lawn; bigger b.) wash clothes; bigger c.) mow the law; smaller d.) wash clothes; smaller

a The price of the non-refundable ticket is a sunk cost, so the only thing that Jody should include in calculating the opportunity cost of going out to dinner, is the entertainment value of the concert.

Jody has purchased a non-refundable $75 ticket to attend a Miley Cyrus concert on Friday night. Subsequently, she is asked to go to out dinner at no expense to her. If she uses cost-benefit analysis to choose between going to the concert and going out to dinner, the opportunity cost of going out to dinner should include: a.) only the entertainment value of the concert. b.) the cost of the ticket plus the entertainment value of the concert. c.) only the cost of concert ticket. d.) neither the cost of the ticket nor the entertainment value of the concert.

c In the second hour John spends cleaning windows, he cleans 4 additional windows and earns $2 per window for a total benefit of $8.

a In the first hour John spends cleaning windows he cleans 7 windows and earns $2 per window for a total benefit of $14.

c In the third hour John spends cleaning windows he cleans 3 additional windows and earns $2 per window for a total benefit of $6. He could have spent that hour earning $7 at the store, so his opportunity cost is $7. Since $6 is less than $7, he should not clean windows for a third hour.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the table below: Should John spend a third hour cleaning windows? a.) Yes, because he would earn $28. b.) Yes, because the additional amount he would earn is $14, which is greater than his opportunity cost of $7. c.) No, because the additional amount he would earn is $6, which is less than his opportunity cost of $7. d.) Yes, because the additional amount he would earn is $6, which is better than earning nothing.

c Each hour John spends cleaning windows is one fewer hour he can work at the store. His wage at the store is $7 per hour, so that is what he sacrifices per hour spent cleaning windows.

a The benefit to Ali of listening to her music is $300 per month (the amount you would have to pay her to give up listening to her music). The cost to Kate of listening to Ali's music is $100 per month (the amount Kate would be willing to pay to avoid hearing Ali's music). Since the benefit to Ali of listening to her music is greater than the cost to Kate of hearing her music, it is socially optimal for Ali to play her music if they live together.

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali play her music in the apartment? a.) Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate. b.) No, because the benefit to Ali of listening to her music is less than the cost to Kate. c.) Yes, because the benefit to Ali of listening to her music is less than the cost to Kate. d.) No, because the benefit to Ali of listening to her music is greater than the cost to Kate.

b Since the benefit to Ali of listening to her music ($300) is greater than the cost to Kate of hearing Ali's music ($100), Ali will play her music if they live together. Kate's surplus from living together will be the rent she saves by not living alone ($400) minus her share of the rent when living together minus the $100 cost of listening to Ali's music. Ali's surplus from living together will be the rent she saves by not living alone ($400) minus her share of the rent when living together. So, if Kate pays $250 per month and Ali pays $350 per month, then Kate's net surplus from living together will be $400 - $250 - $100 = $50, and Ali's net surplus from living together will be $400 - $350 = $50. That is, under this arrangement they will each be $50 better off than when they live alone.

Kate and Ali can live together a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. Which, if any, of the following ways of splitting the total monthly rent would induce them to live together? a.) Kate pays $150 per month and Ali pays $450 per month b.) Kate pays $250 per month and Ali pays $350 per month c.) Kate pays $375 per month and Ali pays $125 per month d.) There is no way to split the rent to induce them to live together

b To determine what Larry should do, determine the value of each option as if it were his only choice. In this case, the value to Larry from attending Elite U (net of tuition) is $60,000 - $50,000 = $10,000. His value from attending State College (net of tuition) is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition) is $15,000 - 0 = $15,000. Thus, his economic surplus will be the highest if he attends State College.

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry maximizes his economic surplus by attending: a.) Elite U. b.) State College. c.) NoName U because he has a full scholarship there. d.) NoName U because the annual cost is only $20,000.

a If Larry attends Elite U, he not only has to pay $50,000 in out-of-pocket expenses, but he also has to give up the value his next-best option. To determine the value of his next best option, note that the value to Larry from attending State College (net of tuition) is $40,000 - $20,000 = $20,000. And, his value from attending NoName U (net of tuition) is $15,000 - 0 = $15,000. Since going to State College is his next best option, and his opportunity cost of going to Elite U is $50,000 + $20,000 = $70,000.

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry's opportunity cost of attending Elite U is: a.) $70,000 b.) $50,000 c.) $20,000 d.) $15,000

c Because Matt was willing to drive to campus to save $4 last week, we can assume that the cost of driving to campus is no more than $4, so he should be willing to drive to campus to save $5.

Matt has decided to purchase his textbooks for the semester. His options are to purchase the books online with next day delivery at a cost of $175, or to drive to campus tomorrow to buy the books at the university bookstore at a cost of $170. Last week he drove to campus to buy a concert ticket because they offered 25 percent off the regular price of $16.Given that driving to campus to buy the concert ticket was rational for Matt, Matt should: a.) not drive to campus to buy the books because the $5 he would save is only two percent of the cost of the books, and that is much less than the 25 percent he saved on the concert ticket. b.) drive to campus to buy the books because the books are cheaper at the bookstore than online. c.) drive to campus to buy the books because the $5 he would save is more than he saved by driving to campus to buy the concert ticket. d.) not drive to campus to buy the books because the cost of gas and his time must certainly be more than the $5 he would save.

c The benefit of staying Pat home with the kids is the $12,000 per year saved on childcare plus the value of Pat spending more time with the kids. The cost of Pat staying home with the kids is $25,000 in foregone earnings. Thus, weighing costs and benefits, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than $13,000 per year.

Pat earns $25,000 per year (after taxes), and Pat's spouse, Chris, earns $35,000 (after taxes). They have two pre-school-aged children. Childcare for their children costs $12,000 per year. Given that Chris doesn't want to stay home with the kids, regardless of what Pat does, Pat should stay home with the kids if, and only if, the value of Pat spending more time with the kids is greater than: a.) $37,000 per year. b.) $25,000 per year. c.) $13,000 per year. d.) $12,000 per year.

b Accounting profit equals total revenue minus explicit costs. Here, $50,000 - $12,000 - $1,000 - $3,000 = $34,000. Economic profit equals total revenue minus the sum of both explicit and implicit costs. Here, $50,000 - $12,000 - $1,000 - $3,000 - $35,000 = -$1,000

Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. Pat's accounting profit is _______, and Pat's economic profit is _______. a.) $50,000; $15,000 b.) $34,000; -$1,000 c.) $34,000; $15,000 d.) $15,000; -$1,000

d Price discrimination is the practice of charging different buyers different prices for essentially the same good or service.

Price discrimination means charging: a.) higher prices to women and minorities. b.) different prices for different products because production costs are different. c.) the same price to all buyers even if production costs are different. d.) different prices to different buyers for essentially the same good or service.

c At least some people will fail to consider the benefits of immunization that are provided to others, so they will judge the private costs of immunization to exceed the private benefits.

Private markets will lead to a ______ vaccination rate because: a.) socially optimal; price serves as a signal of marginal benefit and marginal cost. b.) suboptimally high; the external cost of being vaccinated would not fully be taken into account by decision makers. c.) suboptimally low; the external benefit of being vaccinated would not fully be taken into account by decision makers. d.) inequitable; health care services should not be provided based on ability to pay.

b Protectionism is the view that free trade is harmful and should be restricted.

Protectionism is the view that: a.) a country's free trade agreements should be enforced. b.) free trade is harmful and should be restricted. c.) a country can best defend itself against foreign attack if it opens itself to trade. d.) free trade agreements best protect a nation's economic interests.

c When price is $2.00 total expenditure is $2.00 × 30 = $60, when price is $2.50 total expenditure is $2.50 × 20 = $50. Alternatively, when price is $2.00, we are on the elastic portion of the demand curve, implying that as price increases total expenditure will fall.

Refer to the figure below. If the price of a latte increases from $2.00 to $2.50: a.) total expenditure would increase. b.) total expenditure would stay the same. c.) total expenditure would decrease. d.) the change in total expenditure, if any, would depend on the supply curve.

d The equilibrium price and quantity are the values that correspond to the intersection of the supply curve and the demand curve.

Refer to the figure below. The equilibrium price is ______, and the equilibrium quantity is ______. a.) $30; 15 b.) $25; 20 c.) $25; 5 d.) $35; 20

b After 66 units, larger and larger increases in the number of employee hours are needed to increase output by 33 units per day.

Refer to the table below. The law of diminishing marginal returns becomes evident after ______ units of output are produced. a.) 33 b.) 66 c.) 99 d.) 132

b Buyers will only purchase an item if its price is less than or equal to their reservation price.

Shelly purchases a leather purse for $400. One can infer that: a.) she paid too much. b.) her reservation price was at least $400. c.) her reservation price was exactly $400. d.) her reservation price was less than $400.

c Curly did not want to sell hot dogs at $4.50, so his reservation price must be more than $4.50, but since he is willing to sell for $5.00, his reservation price cannot be more than $5.00.

Suppose that the market price for hot dogs sold by street vendors has just risen from $4.50 to $5.00, and that in response Curly has now begun operating a hot dog cart. We can assume that Curly's reservation price for hot dogs is: a.) at least $5.00. b.) $4.50. c.) greater than $4.50 but no more than $5.00. d.) $5.00.

b Chris should continue to expand output as long as price is at least as great as marginal cost. The marginal cost of each of the first 4 mugs is less than $7.50, but the marginal cost of the 5th mug is $8. Since $8 is greater than $7.50, Chris will only produce 4 mugs per day. [Note that at 4 mugs per day, Chris's total revenue ($30 = $7.50 × 4) is sufficient to cover his variable cost ($22 = $32 - $10), so she will not shut down.]

Suppose Chris is a potter who makes mugs. His total costs depend on the number of mugs he makes each day, as shown in the table below. If the market for mugs is perfectly competitive, and mugs sell for $7.50 each, then Chris should make ______ mugs per day. a.) 0 b.) 4 c.) 5 d.) 6

d The third bike yields a marginal revenue of $4, which is greater than $3, but the fourth bike yields a marginal revenue of -$4, which is less than $3. Thus, Island Bikes will rent 3 bikes and charge $12 per bike.

b Island Bikes can divide the original market into two submarkets: one in the morning and one in the afternoon. The first submarket consists of customers A through C and the second submarket consists of customers D through F. In the morning, Island Bikes will rent out 3 bikes and charge $12, and in the afternoon, Island Bikes will rent out 2 bikes and charge $6.

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the afternoon, it will rent out ______ bike(s) and charge ______ per bike. a.) 1; $8 b.) 2; $6 c.) 3; $4 d.) 5; $10

c Island Bikes can divide the original market into two submarkets: one in the morning and one in the afternoon. The first submarket consists of customers A through C and the second submarket consists of customers D through F. In the morning, Island Bikes will rent out 3 out bikes and charge $12, and in the afternoon, Island Bikes will rent 2 out bikes and charge $6.

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed below. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the morning, it will rent out ______ bike(s) and charge ______ per bike. a.) 1; $22 b.) 2; $16 c.) 3; $12 d.) 4; $8

c Mary's benefit from owning the truck is $15,000 and the cost is $12,000, so her economic surplus is $3,000.

Suppose Mary is willing to pay up to $15,000 for a used Ford pick-up truck. If she buys one for $12,000, her ______ would be ______. a.) benefit; $12,000 b.) cost; $15,000 c.) economic surplus; $3,000 d.) economic surplus; $12,000

c The fixed factor of production is the office space, which rents for $50 per day.

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The table below describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. This firm's fixed cost each day is: a.) $66 b.) $64 c.) $50 d.) $14

c Like a perfectly competitive firm, a monopolist maximizes profit by choosing the output level at which marginal revenue equals marginal cost.

Suppose a monopolist faces the demand curve shown below. If the monopolist's marginal cost is constant and equal to $30, its profit-maximizing level of output is: a.) 50 units. b.) 40 units. c.) 20 units. d.) 30 units.

d When demand decreases, there will excess supply at the original equilibrium price. Thus, sellers will lower their prices.

Suppose demand decreases, but there is no change in supply. As the market reaches its new equilibrium: a.) excess demand will lead the price to rise. b.) excess supply will lead the price to rise. c.) excess demand will lead the price to fall. d.) excess supply will lead the price to fall.

a Tom valued the bike at $215, and Helen valued the bike at $185, so the total economic surplus from this transaction is $30 (= $215 - $185).

Suppose that Tom bought a bike from Helen for $195. If Helen's reservation price was $185, and Tom's reservation price was $215, the total economic surplus from this transaction was: a.) $30 b.) $185 c.) $195 d.) $215

b The cross-price elasticity of demand between substitutes is positive: an increase in the price of one will lead to an increase in demand for the other.

Suppose that if the price of plane tickets increased, more people would choose to travel by train. If this happened, you would know that: a.) plane tickets are an inferior good. b.) the cross-price elasticity between plane tickets and train tickets is positive. c.) the cross-price elasticity between plane tickets and train tickets is negative. d.) plane tickets and train tickets are complements.

c In this case, the cost of expanding output will not be fully reflected in the market supply curve for cotton, so the equilibrium quantity of cotton will be inefficiently high and the price of cotton will be inefficiently low.

Suppose the production of cotton causes substantial environmental damage because the pesticides used by cotton farmers often make their way into nearby rivers and streams, and are very harmful to fish and other wildlife. If cotton farmers do not have to pay for the environmental damage caused by the pesticides used to grow cotton, then the market equilibrium price will be ______ and the market equilibrium quantity will be ______. a.) inefficiently high; inefficiently low b.) inefficiently high; inefficiently high c.) inefficiently low; inefficiently high d.) inefficiently low; inefficiently low

c When the firm goes from selling 3 to 4 units of output, is has to lower its price from $8 to $7. Thus, while it gains $7 from selling the 4th unit, it loses $3 because it has to charge $1 less for the first 3 units. Thus, marginal revenue is equal to $7 - $3 = $4.

Suppose the table below describes the demand for a good produced by monopolist. The monopolist's marginal revenue from selling the 4th unit of output is less than $7 because: a.) marginal cost is greater than $3. b.) the consumer only pays $4 for the 4th unit. c.) it has to charge $1 less for each of the first 3 units of output. d.) demand is perfectly elastic.

d A decrease in the equilibrium price and quantity of corn suggests a decrease in the demand for corn. If corn is a normal good, and consumer income falls, then demand will fall.

Suppose you observe a decrease in the equilibrium price and quantity of corn. Of the options listed below, this is best explained by: a.) a decrease in the cost of growing corn. b.) an increase in the cost of growing corn. c.) a rise in consumer income assuming corn is a normal good. d.) a fall in consumer income assuming corn is a normal good.

c Economic profit is the difference between total revenue and the sum of explicit and implicit costs. Here, then, you had revenue of $6000 and your explicit costs were $5200, so your implicit cost must have been $1000 if you earned a profit of -$200.

Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space. $200 in monthly rent for equipment. $3,000 to your workers in wages for the month. $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that: a.) you do not have any implicit costs. b.) your implicit costs are $200 per month. c.) your implicit costs are $1,000 per month. d.) the rent you pay on your equipment is an implicit cost.

a The Coase theorem states that if at no cost people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities.

The Coase theorem states that if private parties can negotiate the purchase and sale of the right to perform activities that cuase externalities, then they: a.) can always arrive at efficient solutions to the problems caused by externalities. b.) will never arrive at efficient solutions to the problems caused by externalities. c.) will never perform activities that generate negative externalities. d.) will always perform activities that generate positive externalities.

d The Cost-Benefit Principle states that an action should be taken if, and only if, its benefits exceed its costs.

The Cost-Benefit Principle indicates that an action should be taken if, and only if: a.) its benefits are positive. b.) its costs are small. c.) its benefits are a result of its costs. d.) its benefits exceed its costs.

b According to the Cost-Benefit Principle, a firm should produce another unit of output as long as the extra benefit of producing that unit is greater than the extra cost. This is just another way of saying that the firm should increase output whenever price is greater than marginal cost (and it should stop when price is equal to marginal cost).

The Cost-Benefit Principle tells us that a firm should continue to expand production as long as: a.) the firm's profit is positive. b.) price of the good is greater than its marginal cost. c.) it can sell another unit of the good. d.) the supply curve is upward sloping.

c Marginal benefit is the increase in total benefit that results from carrying out one additional unit of an activity.

The marginal benefit of an activity is the: a.) same as the total benefit of an activity. b.) total benefit of an activity divided by the level of the activity. c.) extra benefit associated with an extra unit of the activity. d.) total benefit associated with an extra unit of the activity.

b Free entry and free exit are necessary for firms to respond to economic profit and loss.

The allocative function of price cannot operate unless there is: a.) a significant barrier to entry. b.) both free entry and free exit. c.) either free entry or free exit. d.) neither free entry no free exit.

c Specialization allows two parties with different opportunity costs to benefit from trade because by specializing they can increase their combined output.

The benefits of specialization can be used to explain why: a.) workers prefer to work on a variety of tasks during the day. b.) machines are more productive than human workers. c.) individuals and nations benefit from trade. d.) big companies take advantage of smaller ones.

d The EITC is a policy under which low-income workers receive credits on their federal income tax.

The earned income tax credit (or EITC): a.) reduces the tax rate on investment income. b.) provides tax credits to firms who hire low-income workers. c.) reduces the sales tax paid by low-income workers. d.) gives low-income workers credits on their federal income taxes.

c Economic surplus is defined as the benefit of an action minus its cost.

The economic surplus of an action is: a.) the benefit gained by taking an action. b.) the difference the explicit and implicit costs of taking an action. c.) the difference between the benefit and the cost of taking an action. d.) the money a person has left over after taking an action.

c A market for any good consists of all buyers and sellers of that good.

The entire group of buyers and sellers of a particular good or service makes up: a.) the demand curve. b.) the supply curve. c.) the market. d.) the equilibrium price and quantity.

b The tragedy of the commons arises when individuals overuse commonly held resources because they do not take into consideration the fact that their use of the resource lowers its value to others.

The essential cause of the tragedy of the commons is the fact that: a.) marginal costs are increasing. b.) one person's use of a commonly held resource imposes an external cost on others. c.) people do not always specialize according to their comparative advantage. d.) governments may choose not to tax activities that generate negative externalities.

b The formula for the price elasticity of demand at a given point is (P/Q) × (1/slope). Here, (5/4) × (1/0.5) = 5/2. Since this is greater than one, demand is elastic at point A.

The following graph depicts demand. At point A, demand is: a.) inelastic. b.) elastic. c.) unit elastic. d. )perfectly elastic.

a The formula for the price elasticity of demand at a given point is (P/Q) × (1/slope). Here, (5/4) × (1/0.5) = 5/2.

The following graph depicts demand. The price elasticity of demand at point A is: a.) 5/2. b.) 5/8. c.) 2/5. d.) 8/5.

d The formula for slope is rise/run, here 1/2 or, 0.5.

The following graph depicts demand. The slope of the demand curve (ignoring the negative sign) is: a.) 2. b.) 1.5. c.) 1. d.) 0.5.

c Given that the consumer pays only a small part of the true cost of the health care, the consumer will consume beyond the point where marginal cost equals marginal benefit.

The growth of medical insurance in general and first-dollar coverage specifically has reduced the marginal cost of treatment to the consumer. Therefore, the current level of medical treatment in the United States is: a.) equal to the efficient level. b.) less than the efficient level. c.) greater than the efficient level. d.) less than or equal to the efficient level.

b The tariff increases the price of each ton from $1000 to $2000, which leads domestic production to increase from 20 tons to 40 tons per year.

The increase in the price of sugar created by the tariff will lead domestic production to increase by ____ tons per year, compared to when the economy is open without the tariff. a.) 10 b.) 20 c.) 30 d.) 40

d The total cost to society of reducing pollution will be the smallest if firms with the smallest marginal cost of pollution abatement reduce pollution the most, so that the marginal cost of pollution abatement is the same across all firms.

The most efficient distribution of pollution abatement is such that the: a.) extent of pollution abatement is the same across all geographic regions. b.) extent of pollution abatement is the same across all polluters. c. )largest reductions in pollution are made by the largest polluters. d.) marginal cost of abatement is the same across all polluters.

b Since firms in perfectly competitive markets have no control over the market price, their most important challenge is deciding how much to produce.

The most important challenge facing a firm in a perfectly competitive market is deciding: a.) whether to maximize its profits. b.) how much to produce. c.) what price to charge. d.) whether to advertise.

b The opportunity cost of an activity is not the total value of all possible activities that you could have pursued, but only the value of the one alternative you give up, which is presumably the next-best one.

The opportunity cost of an activity includes the value of: a.) all of the alternatives that must be forgone. b.) the next-best alternative that must be foregone. c.) the least-best alternative that must be foregone. d.) the chosen activity minus the value of the next-best alternative.

c The extent to which first-dollar health insurance leads people to consume more than the socially optimal level of medical care is larger the higher the elasticity of demand for medical care.

The overconsumption of medical care due to first-dollar health insurance coverage is: a.) larger the lower the elasticity of demand for medical care. b.) smaller the higher the elasticity of demand for medical care. c.) larger the higher the elasticity of demand for medical care. d.) small regardless of the elasticity of demand for medical care.

c The price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a 1 percent change in its price.

The price elasticity of demand for a good measures the responsiveness of: a.) demand to a one percent change in price of that good. b.) price to a one percent change in the demand for that good. c.) quantity demanded to a one percent change in price of that good. d.) price to a one percent change in the quantity demanded of that good.

b Most firms exist to earn profit for their owners.

The primary objective of most private firms is to: a.) maximize revenue. b.) maximize profit. c.) minimize cost. d.) maximize output.

d Because profit-maximizing monopolists produce a level of output at which price is greater than marginal cost, monopolists always produce less than the socially optimal level of output.

The reason economists consider monopoly to be socially undesirable is that monopolists: a.) earn too much economic profit. b.) can charge any price they want. c.) exploit the inelastic nature of demand. d.) produce less than the socially optimal level of output.

d The cross-price elasticity of demand is the percentage by which the quantity demanded of one good changes in response to a one percent change in the price of another good.

The responsiveness of the quantity demanded of one good to a change in the price of a different good is measured by the: a.) price elasticity of demand. b.) income elasticity of demand. c.) price elasticity of supply. d.) cross-price elasticity of demand.

a The allocative function of price is to direct resources away from markets that are overcrowded and toward markets that are underserved.

The role that prices play in directing resources away from overcrowded markets and towards markets that are underserved is known as the ______ function of price. a.) allocative b.) market c.) rationing d.) transitive

a The tragedy of the commons is the tendency for a resource that has no price to be used until its marginal benefit is zero.

The tragedy of the commons refers to the: a.) overuse of resources that have no price. b.) overuse of resources that have no cost. c.) under production of goods that have external benefits. d.) failure of the Coase theorem when negotiation is costly.

d A means-tested benefit program is one in which the benefit level declines as the recipient earns additional income.

To say that a given welfare program is means-tested implies that: a.) in order to qualify, one must have the means. b.) the size of the payment reflects the mean value of consumption based on family size. c.) in order to qualify, one must show that one means to find a job. d.) the more income one earns, the smaller the size of the benefit.

b Profit is defined as total revenue from the sale of a firm's product minus all costs (both implicit and explicit) incurred producing it.

Total revenue minus both explicit and implicit costs defines a firm's: a.) gross earnings. b.) profit. c.) marginal earnings. d. )net worth.

c If the government imposed a tax of $91 on each ton of smoke emitted, then Dirty Inc. would choose process B, and Filthy Inc. would choose process D, so that together they would emit 4 tons.

Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. Suppose pollution is initially unregulated. If the City Council imposes a tax of $91 per day on each ton of smoke emitted, then total emissions will fall to ______ tons of smoke per day. a.) 1 b.) 2 c.) 4 d.) 8

d If there is no requirement to reduce pollution, both firms will choose production process A (where costs are lowest), and each will emit 4 tons of smoke per day.

Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. If pollution is unregulated, then a total of ______ tons of smoke will be emitted each day. a.) 1 b.) 2 c.) 4 d.) 8

a Both firms will have to move from process A to process C. As a result, Dirty Inc.'s cost will rise by $270 (from $110 to $380), and Filthy Inc.'s cost will rise by $90, from $400 to $490. So, the total cost to society of this policy will be $360.

Two companies, Dirty Inc. and Filthy Inc., each of which has access to 5 different production processes, each of which has a different cost and produces a different amount of pollution. The daily costs of the processes and the number of tons of smoke emitted are shown in the table below. Suppose pollution is initially unregulated. If the City Council requires each firm to reduce emissions by 50 percent, then the total cost to society of this policy will be ______ per day. a.) $360 b.) $380 c.) $490 d.) $870

d Domestic supply and domestic demand intersect at a price of $14,000 per car.

What is the price of cars if this were a closed economy? a.) $6,000/car b.) $8,000/car c.) $10,000/car d.) $14,000/car

b In an open economy, the price of a good becomes the world price of that good, which in this case is $1000 per ton.

What is the world price of sugar without the tariff? a.) $500/ ton b.) $1,000/ton c.) $1,500/ton d.) $2,000/ton

a Since a physician who is compensated under a conventional health insurance plan has no special incentive to hold down costs, the physician is more likely to recommend the more costly option.

When Cody went to the physician with a sore elbow, after hearing Cody's symptoms and examining the elbow manually, Cody's physician had two options: (1) prescribe an anti-inflammatory drug and advise Cody to abstain from vigorous physical activity for a period; or (2) advise Cody to undergo a magnetic resonance imaging (MRI) exam, a costly diagnostic procedure. Which of the following physicians is more likely to recommend option 2? a.) A physician who is compensated under a conventional health insurance plan. b.) A physician who is part of an HMO. c.) A physician who is concerned about the marginal cost of an MRI. d.) All physicians would recommend option 2.

a If an increase in price leads total revenue to fall to zero, then this suggests that demand for the product was perfectly elastic at the original price (i.e., the demand curve was horizontal at that price).

When Joe's Gas raises its price for regular unleaded gasoline, total revenue from regular unleaded gas falls to zero. It must be the case that a.) the demand for Joe's regular unleaded gasoline is perfectly elastic. b.) the demand for Joe's regular unleaded is inelastic. c.) there are not many good substitutes for Joe's regular unleaded gasoline. d.) consumers are switching to premium grades of gasoline.

d There is neither excess demand nor excess supply when the market is in equilibrium.

When a market is in equilibrium: a.) there is either excess demand or excess supply. b.) both excess demand and excess supply are positive. c.) both excess demand and excess supply are positive and equal to each other. d.) there is neither excess demand nor excess supply.

d While reducing barriers to trade increases total value of all goods and services produced by a nation, it does not guarantee that each individual citizen will be better off.

When a nation reduces the barriers to international trade: a.) each individual citizen becomes better off. b.) each individual citizen becomes worse off. c.) the total value of all goods and services produced by the nation falls. d.) the total value of all goods and serviced produced by the nation rises.

b If the percentage change in price is negative (that is, if price falls), then the percentage change in quantity demanded will be positive, since price and quantity demanded move in opposite directions.

When calculating price elasticity of demand, if the percentage change in price is negative, then the percentage change in quantity demanded is typically: a.) greater than one. b.) positive. c.) less than one. d.) negative.

c In perfectly competitive markets, all firms sell the same standardized product. Although each firm in perfectly competitive market faces a perfectly elastic demand curve, the market demand curve does not have to be perfectly elastic.

Which of the following is a defining characteristic of all perfectly competitive markets? a.) Each firm in the market faces a perfectly inelastic demand curve. b.) The market demand curve is perfectly elastic. c.) All firms sell the same standardized product. d.)Consumers display strong brand loyalty.

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