CHAPTER 4

The two words most often used by economists are

a. prices and quantities.
b. resources and allocation.
c. supply and demand.
d. efficiency and equity.

ANS: C

In a market economy, supply and demand are important because they

a. play a critical role in the allocation of the economy’s scarce resources.
b. determine how much of each good gets produced.
c. can be used to predict the impact on the economy of various events and policies.
d. All of the above are correct.

ANS: D

Which of the following statements is correct?

a. Buyers determine supply and sellers determine demand.
b. Buyers determine demand and sellers determine supply.
c. Buyers determine both demand and supply.
d. Sellers determine both demand and supply.

ANS: B

The demand for a good or service is determined by

a. those who buy the good or service.
b. the government.
c. those who sell the good or service.
d. both those who buy and those who sell the good or service.

ANS: A

The law of demand states that, other things equal,

a. an increase in price causes quantity demanded to increase.
b. an increase in price causes quantity demanded to decrease.
c. an increase in quantity demanded causes price to increase.
d. an increase in quantity demanded causes price to decrease.

ANS: B

The supply of a good or service is determined by

a. those who buy the good or service.
b. the government.
c. those who sell the good or service.
d. both those who buy and those who sell the good or service.

ANS: C

A demand schedule is a table that shows the relationship between

 a. quantity demanded and quantity supplied.
b. income and quantity demanded.
c. price and quantity demanded.
d. price and income.

ANS: C

The demand curve for a good is

a. a line that relates price and quantity demanded.
b. a line that relates income and quantity demanded.
c. a line that relates quantity demanded and quantity supplied.
d. a line that relates price and income.

ANS: A

The sum of all the individual demand curves for a product is called
a. total demand.
b. consumer demand.
c. aggregate demand.
d. market demand.

ANS: D

The law of supply states that, other things equal,

a. an increase in price causes quantity supplied to increase.
b. an increase in price causes quantity supplied to decrease.
c. an increase in quantity supplied causes price to increase.
d. an increase in quantity supplied causes price to decrease.

ANS: A

The supply curve for a good is

a. a line that relates profit and quantity supplied.
b. a line that relates input prices and quantity supplied.
c. a line that relates price and quantity supplied.
d. a line that relates price and profit.

ANS: C

The sum of all the individual supply curves for a product is called
a. total supply.
b. market supply.
c. aggregate supply.
d. total output.

ANS: B

The dictionary defines equilibrium as a situation in which forces

a. are in balance.
b. are the same.
c. clash.
d. remain constant.
 ANS: A

When the price of a good is higher than the equilibrium price,

a. a shortage will exist.
b. buyers desire to purchase more than is produced.
c. sellers desire to produce and sell more than buyers wish to purchase.
d. quantity demanded exceeds quantity supplied.

ANS: C

Which of the following would cause price to decrease?

a. a decrease in supply
b. an increase in demand
c. a surplus of the good
d. a shortage of the good

ANS: C

When the price of a good is lower than the equilibrium price,

a. a surplus will exist.
b. buyers desire to purchase more than good is produced.
c. sellers desire to produce and sell more than buyers wish to purchase.
d. quantity supplied exceeds quantity demanded.

ANS: B

A shortage exists in a market if

a. there is an excess supply of the good.
b. the situation is such that the law of supply and demand would predict a decrease in the price of the good from its
current level.
c. the current price is below its equilibrium price.
d. quantity supplied exceeds quantity demanded.

ANS: C

Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We would
expect a
a. shortage to exist and the market price of roses to increase.
b. shortage to exist and the market price of roses to decrease.
c. surplus to exist and the market price of roses to increase.
d. surplus to exist and the market price of roses to decrease.

ANS: D

An increase in supply is represented by

a. a movement downward and to the left along a supply curve.
 b. a movement upward and to the right along a supply curve.
c. a rightward shift of a supply curve.
d. a leftward shift of a supply curve.

ANS: C

A decrease in supply is represented by

a. a movement downward and to the left along a supply curve.
b. a movement upward and to the right along a supply curve.
c. a rightward shift of a supply curve.
d. a leftward shift of a supply curve.

ANS: D

CHAPTER 5
Elasticity is
a. a measure of how much buyers and sellers respond to changes in market conditions.
b. the study of how the allocation of resources affects economic well-being.
c. the maximum amount that a buyer will pay for a good.
d. the value of everything a seller must give up to produce a good.

ANS: A

The price elasticity of demand measures

a. buyers’ responsiveness to a change in the price of a good.
b. the extent to which demand increases as additional buyers enter the market.
c. how much more of a good consumers will demand when incomes rise.
d. the movement along a supply curve when there is a change in demand.

ANS: A

Goods with many close substitutes tend to have

a. more elastic demands.
b. less elastic demands.
c. price elasticities of demand that are unit elastic.
d. income elasticities of demand that are negative.

ANS: A

For a good that is a necessity, demand

a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.

ANS: A
A key determinant of the price elasticity of supply is the
a. time horizon.
b. income of consumers.
c. price elasticity of demand.
d. importance of the good in a consumer’s budget.

ANS: A

A key determinant of the price elasticity of supply is

a. the ability of sellers to change the price of the good they produce.
b. the ability of sellers to change the amount of the good they produce.
c. how responsive buyers are to changes in sellers' prices.
d. the slope of the demand curve.

ANS: B

The price elasticity of supply measures how much

a. the quantity supplied responds to changes in input prices.
b. the quantity supplied responds to changes in the price of the good.
c. the price of the good responds to changes in supply.
d. sellers respond to changes in technology.

ANS: B

When a supply curve is relatively flat,

a. sellers are not very responsive to changes in price.
b. the supply is relatively inelastic.
c. the supply is relatively elastic.
d. Both a and b are correct.

ANS: C

As price elasticity of supply increases, the supply curve

a. becomes flatter.
b. becomes steeper.
c. becomes downward sloping.
d. shifts to the right.

ANS: A

If the price elasticity of supply for wheat is less than 1, then the supply of wheat is
a. inelastic.
b. elastic.
c. unit elastic.
d. quite sensitive to changes in income.

ANS: A

CHAPTER 6
In a competitive market free of government regulation,
a. price adjusts until quantity demanded is greater than quantity supplied.
b. price adjusts until quantity demanded is less than quantity supplied.
c. price adjusts until quantity demanded equals quantity supplied.
d. supply adjusts to meet demand at every price.

ANS: C

A price ceiling will be binding only if it is set

a. equal to the equilibrium price.
b. above the equilibrium price.
c. below the equilibrium price.
d. either above or below the equilibrium price.

ANS: C

A price floor is binding when it is set

a. above the equilibrium price, causing a shortage.
b. above the equilibrium price, causing a surplus.
c. below the equilibrium price, causing a shortage.
d. below the equilibrium price, causing a surplus.

ANS: B

The goal of rent control is to

a. facilitate controlled economic experiments in urban areas.
b. help landlords by assuring them a low vacancy rate for their apartments.
c. help the poor by assuring them an adequate supply of apartments.
d. help the poor by making housing more affordable.

ANS: D

Economists generally believe that rent control is

a. an efficient and fair way to help the poor.
b. inefficient, but the best available means of solving a serious social problem.
c. a highly inefficient way to help the poor raise their standard of living.
d. an efficient way to allocate housing, but not a good way to help the poor.

ANS: C

If a tax is levied on the sellers of a product, then the demand curve

a. will shift down.
b. will shift up.
c. will become flatter.
d. will not shift.

ANS: D

If a tax is levied on the buyers of a product, then the supply curve

a. will not shift.
b. will shift up.
c. will shift down.
 d. will become flatter.

ANS: A

If a tax is levied on the buyers of a product, then the demand curve

a. will not shift.
b. will shift down.
c. will shift up.
d. will become flatter.

ANS: B

A tax on the buyers of TV:

a. leads sellers to supply a smaller quantity at every price.
b. leads buyers to demand a smaller quantity at every price.
c. leads buyers to demand a larger quantity at every price.
d. Both (a) and (b) are correct.

ANS: B

A tax on buyers will

a. shift the demand curve upwards by the amount of the tax.
b. shift the demand curve downwards by the amount of the tax.
c. shift the supply curve upwards by the amount of the tax.
d. shift the supply curve downwards by the amount of the tax.

ANS: B

When a tax is imposed on the buyers of a good, the demand curve shifts
a. upward by the amount of the tax.
b. downward by the amount of the tax.
c. upward by less than the amount of the tax.
d. downward by less than the amount of the tax.

ANS: B

CHAPTER 7
Welfare economics is the study of how
a. the allocation of resources affects economic well-being.
b. a price ceiling compares to a price floor.
c. the government helps poor people.
d. a consumer’s optimal choice affects her demand curve.

ANS: A

Willingness to pay
 a. measures the value that a buyer places on a good.
b. is the amount a seller actually receives for a good minus the minimum amount the seller is willing to accept.
c. is the maximum amount a buyer is willing to pay minus the minimum amount a seller is willing to accept.
d. is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

ANS: A

Consumer surplus is
a. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
b. the amount a buyer is willing to pay for a good minus the cost of producing the good.
c. the amount by which the quantity supplied of a good exceeds the quantity demanded of the good.
d. a buyer's willingness to pay for a good plus the price of the good.

ANS: A

Consumer surplus is equal to the

a. Value to buyers - Amount paid by buyers.
b. Amount paid by buyers - Costs of sellers.
c. Value to buyers - Costs of sellers.
d. Value to buyers - Willingness to pay of buyers.

ANS: A

On a graph, the area below a demand curve and above the price measures
a. producer surplus.
b. consumer surplus.
c. deadweight loss.
d. willingness to pay.

ANS: B

A seller’s opportunity cost measures the

a. value of everything she must give up to produce a good.
b. amount she is paid for a good minus her cost of providing it.
c. consumer surplus.
d. out of pocket expenses to produce a good but not the value of her time.

ANS: A

CHAPTER 21
The theory of consumer choice provides the foundation for understanding the
a. structure of a firm.
b. profitability of a firm.
c. demand for a firm's product.
d. supply of a firm's product.

ANS: C

The theory of consumer choice examines

a. the determination of output in competitive markets.
 b. the tradeoffs inherent in decisions made by consumers.
c. how consumers select inputs into manufacturing production processes.
d. the determination of prices in competitive markets.

ANS: B

The theory of consumer choice most closely examines which of the following Ten Principles of Economics?
a. People face trade-offs.
b. The cost of something is what you give up to get it.
c. Trade can make everyone better off.
d. Markets are usually a good way to organize economic activity.

ANS: A

The goal of the consumer is to

a. maximize utility.
b. be on the highest indifference curve.
c. maximize satisfaction.
d. All of the above are the goals of the consumer.

ANS: D

When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that
the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs
a. along the highest indifference curve.
b. along the lowest budget constraint.
c. where the indifference curve is tangent to the budget constraint.
d. All of the above are correct.

ANS: C

The theory of consumer choice provides a(n)

a. literal account of how people make decisions.
b. unrealistic picture of how people make decisions.
c. model that is consistent with how people make decisions.
d. in-depth model that is based more in psychology than in economics.

ANS: C
Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and
bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4. Which of the following combinations
of beers and bratwursts represents a point that would lie directly on the consumer’s budget constraint?
a. 160 beers and 200 bratwursts
b. 40 beers and 50 bratwursts
c. 80 beers and 100 bratwursts
d. 80 beers and 0 bratwursts

ANS: C

Consider two goods, books and hamburgers. The slope of the consumer's budget constraint is measured by the
a. consumer's income divided by the price of hamburgers.
b. relative price of books and hamburgers.
c. consumer's marginal rate of substitution.
 d. number of books purchased divided by the number of hamburgers purchased.

ANS: B

A budget constraint illustrates the

a. prices that a consumer chooses to pay for products he consumes.
b. purchases made by consumers.
c. consumption bundles that a consumer can afford.
d. consumption bundles that give a consumer equal satisfaction.

ANS: C

Indifference curves graphically represent

a. an income level sufficient to allow an individual to achieve a given level of satisfaction.
b. the constraints faced by individuals.
c. an individual's preferences.
d. the relative price of commodities.

ANS: C
A consumer
a. is equally satisfied with any indifference curve.
b. prefers indifference curves with positive slopes.
c. prefers higher indifference curves to lower indifference curves.
d. prefers indifference curves that are straight lines to indifference curves that are right angles..

ANS: C
Figure 21-7

Refer to Figure 21-7. When comparing bundle A to bundle E, the consumer

a. prefers bundle A because it contains more donuts.
b. prefers bundle E because it lies on a higher indifference curve.
c. prefers bundle E because it contains more donuts.
d. is indifferent between the two bundles.
 ANS: B

Refer to Figure 21-7. When comparing bundle B to bundle C, the consumer

a. prefers bundle B because it contains more donuts.
b. is indifferent between the two bundles.
c. prefers bundle C because it contains more cake.
d. In order to compare bundle B to bundle C, we must know the prices of cake and donuts.

ANS: B

Refer to Figure 21-7. A person that chooses to consume bundle C is likely to

a. receive higher total satisfaction at bundle C than at bundle A.
b. spend more on bundle C than bundle A.
c. receive higher marginal utility from cake than from donuts.
d. receive higher marginal utility from donuts than from cake.

ANS: D

Refer to Figure 21-7. Which of the following statements is correct?

a. Bundle A is preferred equally to bundle E.
b. Bundle A is preferred equally to bundle C.
c. Bundle B contains more cake than bundle C.
d. The bundles along indifference curve Indifference Curve 2 are preferred to those along indifference curve
Indifference Curve 3.

ANS: B
Refer to Figure 21-7. Which of the following statements is correct?
a. If a consumer moves from bundle C to bundle A, her loss of cake cannot be compensated for by an increase in
donuts.
b. Bundle E is preferred to all other points identified in the figure.
c. Since more is preferred to less, bundle C may be preferred to bundle E in some circumstances for this consumer.
d. Even though bundle E has more of both goods than bundle B, we could draw a different set of indifference
curves in which bundle B is preferred to bundle E.

ANS: B
Refer to Figure 21-7. Which of the following statements is not true for a consumer who moves from bundle B to bundle
C?
a. At bundle C the consumer would be willing to give up a larger amount of cake in exchange for a donut than at
bundle B.
b. The marginal rate of substitution at bundles B and C are the same since the points lie on the same indifference
curve.
c. The consumer is willing to sacrifice donuts to obtain cake.
d. The consumer receives the same level of satisfaction at bundles B and C.

ANS: B

Refer to Figure 21-7. Which of the following statements is not correct?

a. Bundles on Indifference Curve 3 are preferred to bundles on Indifference Curve 1.
b. The consumer is indifferent between bundles A and E because they contain the same number of donuts.
c. The consumer is indifference between bundles B and C.
d. The consumer prefers bundle C to bundle D.
 ANS: B

A consumer chooses an optimal consumption point where the

a. marginal rate of substitution equals the relative price ratio.
b. slope of the indifference curve equals the slope of the budget constraint.
c. ratio of the marginal utilities equals the ratio of the prices.
d. All of the above are correct.

ANS: D

At the consumer's optimum

a. the budget constraint will have a slope of MU /P .
x x

b. it is still possible for the consumer to increase his consumption of both goods.
c. the indifference curve will intersect the budget constraint at the midpoint of the budget constraint.
d. the slope of the indifference curve is equal to the slope of the budget constraint.

ANS: D

Figure 21-9

Refer to Figure 21-9. Given the budget constraint depicted in the graph, the consumer will choose bundle
a. B.
b. C.
c. D.
d. E.

ANS: B

Refer to Figure 21-9. It would be possible for the consumer to reach I if2

a. the price of Y decreases.

b. the price of X decreases.
c. income increases.
d. All of the above would be correct.
 ANS: D

The consumer's optimum is where

a. MU /MU = P /P .
x y y x

b. MU /P = MU /P .
x y y x

c. P /MU = P /MU .
x x y y

d. MU /MU = P /P .
x y x y

ANS: D

CHAPTER 13
Economists normally assume that the goal of a firm is to
(i) sell as much of their product as possible.
(ii) set the price of the product as high as possible.
(iii) maximize profit.

a. (i) and (ii) are true.

b. (ii) and (iii) are true.
c. (iii) is true.
d. (i) and (iii) are true.

ANS: C

Economists assume that the goal of the firm is to maximize total

a. revenue.
b. profits.
c. costs.
d. satisfaction.

ANS: B

A production function is a relationship between inputs and

a. quantity of output.
b. revenue.
c. costs.
d. profit.

ANS: A

Figure 13-2
Refer to Figure 13-2. The graph illustrates a typical
a. total-cost curve.
b. production function.
c. production possibilities frontier.
d. marginal product of labor curve.

ANS: B

Refer to Figure 13-2. As the number of workers increases,

a. total output increases but at a decreasing rate.
b. marginal product increases but at a decreasing rate.
c. marginal product increases at an increasing rate.
d. total output decreases.

ANS: A

Refer to Figure 13-2. As the number of workers increases,

a. marginal product decreases.
b. total output decreases.
c. marginal product increases but at a decreasing rate.
d. Both a and b are correct.

ANS: A

Refer to Figure 13-2. With regard to cookie production, the figure implies
a. diminishing marginal product of workers.
b. diminishing marginal cost of cookie production.
c. decreasing cost of cookie production.
d. increasing marginal product of workers.

ANS: A

Refer to Figure 13-2. The graph illustrates a typical production function. Based on its shape, what does the
corresponding total cost curve look like?
a. an upward-sloping curve that increases at an increasing rate
b. an upward-sloping curve that increases at a decreasing rate
c. a downward-sloping curve
 d. a horizontal straight line

ANS: A

The marginal product of labor can be defined as

a. change in profit/change in labor.
b. change in output/change in labor.
c. change in labor/change in output.
d. change in labor/change in total cost.

ANS: B

Table 13-2
Number of Workers Output Fixed Cost Variable Cost Total Cost
0 0 $50 $0 $50
1 90 $50 $20 $70
2 170 $50 $40 $90
3 230 $50 $60 $110
4 240 $50 $80 $130

Refer to Table 13-2. The marginal product of the second worker is

a. 90 units.
b. 85 units.
c. 80 units.
d. 20 units.

ANS: C

Refer to Table 13-2. The marginal product of the third worker is

a. 230 units.
b. 100 units.
c. 77 units.
d. 60 units.

ANS: D

Refer to Table 13-2. The marginal product of the fourth worker is

a. 10 units.
b. 60 units.
c. 230 units.
d. 240 units.

ANS: A

Refer to Table 13-2. At which number of workers does diminishing marginal product begin?
a. 1
b. 2
c. 3
d. 4

ANS: B
Refer to Table 13-2. If the firm can sell its output for $1 per unit, what is the profit-maximizing level of output?
a. 240 units
b. 230 units
c. 190 units
d. 170 units

ANS: B

Analyzing the behavior of the firm enhances our understanding of

a. what decisions lie behind the market supply curve.
b. how consumers allocate their income to purchase scarce resources.
c. how financial institutions set interest rates.
d. whether resources are allocated fairly.

ANS: A

Scenario
Zach withdrew $400,000 out of his personal savings account and used it to start his new cookie business. The bank
account pays 3 percent interest per year. During the first year of his business, Zach sold 6,000 boxes of cookies for
$2.50 per box. Also during the first year, the cookie business made monetary outlays of $9,000. You may assume
that there is no opportunity cost to Zach’s time.
Refer to Scenario Zach's accounting profit for the year was
a. $-494,000.
b. $-6,000.
c. $6,000.
d. $12,000.

ANS: C
Refer to Scenario Zach's economic profit for the year was
a. $-506,000.
b. $-6,000.
c. $3,000.
d. $6,000.

ANS: B

A production function describes

a. how a firm maximizes profits.
b. how a firm turns inputs into output.
c. the minimal cost of producing a given level of output.
d. the relationship between cost and output.

ANS: B

Total cost can be divided into two types of costs:

 a. fixed costs and variable costs.
b. fixed costs and marginal costs.
c. variable costs and marginal costs.
d. average costs and marginal costs.

ANS: A

Marginal cost equals

a. total cost divided by quantity of output produced.
b. total output divided by the change in total cost.
c. the slope of the total cost curve.
d. the slope of the line drawn from the origin to the total cost curve.

ANS: C
The nature of a firm’s cost (fixed or variable) depends on the
a. firm’s revenues.
b. time horizon under consideration.
c. price the firm charges for output.
d. explicit but not implicit costs.

ANS: B

The most likely explanation for economies of scale is

a. coordination problems.
b. specialization of labor.
c. increasing marginal cost.
d. decreasing marginal cost.

ANS: B

Economies of scale occur when

a. long-run average total costs rise as output increases.
b. long-run average total costs fall as output increases.
c. average fixed costs are falling.
d. average fixed costs are constant.

ANS: B DIF: 2 REF: 13-4 NAT: Analytic

CHAPTER 14
A firm has “market power” if it can
a. maximize profits.
b. minimize costs.
c. influence the market price of the good it sells.
d. hire as many workers as it needs at the prevailing wage rate.

ANS: C

A key characteristic of a competitive market is that

a. government antitrust laws regulate competition.
 b. producers sell nearly identical products.
c. firms minimize total costs.
d. firms have price setting power.

ANS: B

Competitive markets are characterized by

a. a small number of buyers and sellers.
b. unique products.
c. the interdependence of firms.
d. free entry and exit by firms.

ANS: D

A market is competitive if
(i) firms have the flexibility to price their own product.
(ii) each buyer is small compared to the market.
(iii) each seller is small compared to the market.

a. (i) and (ii) only

b. (i) and (iii) only
c. (ii) and (iii) only
d. (i), (ii), and (iii)

ANS: C

Which of the following is not a characteristic of a perfectly competitive market?

a. Firms are price takers.
b. Firms have difficulty entering the market.
c. There are many sellers in the market.
d. Goods offered for sale are largely the same.

ANS: B

If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost, then
a. a one-unit increase in output will increase the firm's profit.
b. a one-unit decrease in output will increase the firm's profit.
c. total revenue exceeds total cost.
d. total cost exceeds total revenue.

ANS: A

At the profit-maximizing level of output,

a. marginal revenue equals average total cost.
b. marginal revenue equals average variable cost.
c. marginal revenue equals marginal cost.
d. average revenue equals average total cost.

ANS: C
In the short-run, a firm's supply curve is equal to the
a. marginal cost curve above its average variable cost curve.
b. marginal cost curve above its average total cost curve.
c. average variable cost curve above its marginal cost curve.
d. average total cost curve above its marginal cost curve.

ANS: A
Table 14-4
Quantity Total Revenue Total Cost Fixed Cost Variable Cost
0 $0 $3 3 0
1 $7 $5 3 2
2 $14 $8 3 5
3 $21 $12 3 9
4 $28 $17 3 14
5 $35 $23 3 20
6 $42 $30 3 27
7 $49 $38 3 35

Refer to Table 14-4. A firm operating in a competitive market and facing the total costs listed in the table will not
produce an output level beyond
a. 4 units.
b. 5 units.
c. 6 units.
d. 7 units.

ANS: C

Refer to Table 14-4. The firm will produce a quantity greater than 4 because at 4 units of output, marginal cost
a. is less than marginal revenue.
b. equals marginal revenue.
c. is greater than marginal revenue.
d. is minimized.

ANS: A

Refer to Table 14-4. What is the firm’s profit-maximizing strategy?

a. produce 1 unit of output because marginal cost is minimized
b. produce 4 units of output because marginal revenue exceeds marginal cost
c. produce 6 units of output because marginal revenue equals marginal cost
d. produce 8 units of output because total revenue is maximized

ANS: C

When firms have an incentive to exit a competitive market, their exit will
a. lower the market price.
b. necessarily raise the costs for the firms that remain in the market.
c. raise the profits for the firms that remain in the market.
d. shift the demand for the product to the left.

ANS: C

When new firms enter a perfectly competitive market,

 a. demand increases.
b. the short-run market supply curve shifts right.
c. the short-run market supply curve shifts left.
d. existing firms will increase prices to keep the new firms from entering.

ANS: B
a. increase market supply and increase market price.
b. increase market supply and decrease market price.
c. decrease market supply and increase market price.
d. decrease market supply and decrease market price.

ANS: C

Tommy's Tires operates in a perfectly competitive market. If tires sell for $50 each and average total cost per tire is $40 at
the profit-maximizing output level, then in the long run
a. more firms will enter the market.
b. some firms will exit from the market.
c. the equilibrium price per tire will rise.
d. average total costs will fall.

ANS: A

In long run, firms in competitive market face a price equal to:

a. The lowest marginal cost
b. The lowest fixed cost
c. The lowest total cost
d. The lowest average total cost

ANS: D DIF: 2 REF: 14-4 NAT: Analytic

CHAPTER 15
The fundamental source of monopoly power is
a. barriers to entry.
b. profit.
c. decreasing average total cost.
d. a product without close substitutes.

ANS: A

Which of the following is not a characteristic of a monopoly?

a. barriers to entry
b. one seller
c. one buyer
d. a product without close substitutes

ANS: C

The simplest way for a monopoly to arise is for a single firm to

a. decrease its price below its competitors’ prices.
 b. decrease production to increase demand for its product.
c. make pricing decisions jointly with other firms.
d. own a key resource.

ANS: D

Which of the following statements is true of a monopoly firm?

a. A monopoly firm is a price taker and has no supply curve.
b. A monopoly firm is a price maker and has no supply curve
c. A monopoly firm is a price maker and has a downward-sloping supply curve.
d. A monopoly firm is a price maker and has an upward-sloping supply curve.

ANS: B

Monopolies use their market power to

a. charge prices that equal minimum average total cost.
b. increase the quantity sold as they increase price.
c. charge a price that is higher than marginal cost.
d. dump excess supplies of their product on the market.

ANS: C

Monopoly firms have

a. downward-sloping demand curves and they can sell as much output as they desire at the market price.
b. downward-sloping demand curves and they can sell only a limited quantity of output at each price.
c. horizontal demand curves and they can sell as much output as they desire at the market price.
d. horizontal demand curves and they can sell only a limited quantity of output at each price.

ANS: B

Because many good substitutes exist for a competitive firm's product, the demand curve that it faces is
a. unit-elastic.
b. perfectly inelastic.
c. perfectly elastic.
d. inelastic only over a certain region.

ANS: C

Deadweight loss
a. measures monopoly inefficiency.
b. exceeds monopoly profits.
c. equals monopoly profits.
d. equals monopoly revenues minus profits.

ANS: A

When we compare economic welfare in a monopoly market to a competitive market, the profits earned by the monopolist
represent
 a. a transfer of benefits from the consumer to the producer.
b. a loss in total welfare.
c. the higher marginal costs incurred by the monopolists in comparison to competitive firms.
d. the higher marginal revenues gained by the monopolists in comparison to competitive firms.

ANS: A

A monopoly market
a. always maximizes total economic well-being.
b. always minimizes consumer surplus.
c. generally fails to maximize total economic well-being.
d. generally fails to maximize producer surplus.

ANS: C

A monopolist produces
a. more than the socially efficient quantity of output but at a higher price than in a competitive market.
b. less than the socially efficient quantity of output but at a higher price than in a competitive market.
c. the socially efficient quantity of output but at a higher price than in a competitive market.
d. possibly more or possibly less than the socially efficient quantity of output, but definitely at a higher price than
in a competitive market.

ANS: B

For a monopoly, the socially efficient level of output occurs where

a. marginal revenue equals marginal cost.
b. average revenue equals marginal cost.
c. marginal revenue equals average total cost.
d. average revenue equals average total cost.

ANS: B

The social cost of a monopoly is equal to its

a. economic profit.
b. fixed cost.
c. dead weight loss.
d. variable cost.

ANS: C

Figure
Refer to Figure To maximize total surplus, a benevolent social planner would choose which of the following outcomes?
a. 100 units of output and a price of $10 per unit
b. 150 units of output and a price of $10 per unit
c. 150 units of output and a price of $15 per unit
d. 200 units of output and a price of $10 per unit

ANS: C

Refer to Figure. To maximize its profit, a monopolist would choose which of the following outcomes?
a. 100 units of output and a price of $10 per unit
b. 100 units of output and a price of $20 per unit
c. 150 units of output and a price of $15 per unit
d. 200 units of output and a price of $20 per unit

ANS: B

Refer to Figure. The monopolist's maximum profit

a. is $800.
b. is $1,000.
c. is $1,250.
d. cannot be determined from the diagram.

ANS: D

Refer to Figure The deadweight loss caused by a profit-maximizing monopoly amounts to

a. $150.
b. $200.
c. $250.
d. $500.

ANS: C

Price discrimination
a. is illegal in the United States and Europe.
b. can occur in both perfectly competitive and monopoly markets.
c. is illogical because it does not maximize profits.
d. can maximize profits if the seller can prevent the resale of goods between customers.
 ANS: D

Price discrimination is the business practice of

a. bundling related products to increase total sales.
b. selling the same good at different prices to different customers.
c. pricing above marginal cost.
d. hiring marketing experts to increase consumers’ brand loyalty.

ANS: B

When a monopolist is able to sell its product at different prices, it is engaging in

a. distribution pricing.
b. quality-adjusted pricing.
c. price differentiation.
d. price discrimination.

ANS: D

Antitrust laws have economic benefits that outweigh the costs if they
a. prevent mergers that would decrease competition and lower the costs of production.
b. prevent mergers that would decrease competition and raise the costs of production.
c. allow mergers that would decrease competition and raise the costs of production.
d. None of the above is correct because antitrust laws never have economic benefits that outweigh the costs.

ANS: B

In order for antitrust laws to raise social welfare, the government must
a. disallow synergy benefits from accruing to monopolists.
b. disallow any mergers from taking place.
c. be able to determine which mergers are desirable and which are not.
d. always attempt to keep markets in their most competitive form.

ANS: C

Which of the following strategies is not an effective strategy to reduce monopoly inefficiency?
a. antitrust laws
b. price discrimination
c. doing nothing
d. breaking up a natural monopoly into more than one firm

ANS: D

Most firms have

a. no monopoly pricing power.
b. some monopoly pricing power.
c. absolute monopoly pricing power.
d. the ability to earn monopoly profits.
 ANS: B

Which of the following statements is correct?

a. Firms with some degree of monopoly power are common, but firms with substantial monopoly power are rare.
b. Firms with some degree of monopoly power are rare, as are firms with substantial monopoly power.
c. Firms with some degree of monopoly power are common, as are firms with substantial monopoly power.
d. Firms with some degree of monopoly power are rare, but firms with substantial monopoly power are common.

ANS: A DIF: 2 REF: 15-6 NAT: Analytic

LOC: Monopoly TOP: Monopoly MSC: Interpretive

CHAPTER 16
Which of the following is a characteristic of monopolistic competition?
a. ownership of a key resource by a single firm
b. free entry
c. identical product
d. patents

ANS: B

The market for novels is

a. perfectly competitive.
b. a monopoly.
c. monopolistically competitive.
d. an oligopoly.

ANS: C

A monopolistically competitive market has characteristics that are similar to

a. a monopoly only.
b. a competitive firm only.
c. both a monopoly and a competitive firm.
d. neither a monopoly nor a competitive firm.

ANS: C

A market structure with only a few sellers, each offering similar or identical products, is known as
a. oligopoly.
b. monopoly.
c. monopolistic competition.
d. perfect competition.

ANS: A

The commercial jetliner industry consisting of Boeing and Airbus would best be described as a (an)
a. perfectly competitive market.
b. monopolistically competitive market.
c. oligopoly.
d. monopoly.
 ANS: C
A concentration ratio
a. measures the percentage of total output supplied by the four largest firms in the industry.
b. reflects the level of competition in an industry.
c. is related to the control that each firm has over price.
d. All of the above are correct.

ANS: D
The lower the concentration ratio, the
a. more control an individual firm has to set prices.
b. more competitive the industry.
c. less competitive the industry.
d. Both a and c are correct.

ANS: B

Which of the following is a characteristic of oligopoly or monopolistic competition, but not perfect competition?
a. advertising and sales promotion
b. profit maximization according to the MR = MC rule
c. firms being price takers rather than price makers
d. horizontal demand and marginal revenue curves

ANS: A
3. Some firms have an incentive to advertise because they sell a
a. similar product and charge a price equal to marginal cost.
b. similar product and charge a price above marginal cost.
c. differentiated product and charge a price equal to marginal cost.
d. differentiated product and charge a price above marginal cost.

ANS: D

The relationship between advertising and product differentiation is

a. positive; the more differentiated the product, the more a firm is likely to spend on advertising.
b. negative; the more differentiated the product, the less a firm is likely to spend on advertising.
c. zero; there is no relationship between product differentiation and advertising.
d. irrelevant; firms with differentiated products do not need to advertise.

ANS: A

Critics of advertising argue that advertising

a. creates desires that otherwise might not exist.
b. hinders competition.
c. often fails to convey substantive information.
d. All of the above are correct.

ANS: D
Defenders of advertising
a. concede that advertising increases firms’ market power.
b. concede that advertising makes entry by new firms more difficult.
 c. contend that firms use advertising to provide useful information to consumers.
d. All of the above are correct.

ANS: C
Firms in a monopolistically competitive market
a. are price takers.
b. produce an output level that minimizes average total cost in the long run.
c. maximize profits by producing where price equals marginal cost.
d. cannot earn economic profits in the long run.

ANS: D

Which of the following statements is correct?

a. Firms in monopolistic competition and monopoly can earn economic profits in both the short run and the long
run.
b. Both perfectly competitive and monopolistically competitive firms charge a price equal to marginal cost.
c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where
marginal revenue equals marginal cost.
d. Both perfectly competitive and monopolistically competitive firms produce the welfare-maximizing level of
output.

A firm produces the welfare-maximizing level of output

a. only when the market is perfectly competitive.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

ANS: A

A monopolistically competitive market is like a competitive market in that

a. both market structures feature easy entry by new firms in the long run.
b. the main objective of firms in both market structures is something other than profit maximization.
c. firms in both market structures produce the welfare-maximizing level of output.
d. firms in both market structures set price above marginal cost.

ANS: A

A monopolistically competitive market is like both a competitive market and a monopoly in that
a. all three market structures feature easy entry by new firms in the long run.
b. firms in all three market structures maximize profit by producing an output level where marginal revenue equals
marginal cost.
c. firms in all three market structures produce the welfare-maximizing level of output.
d. All of the above are correct.

ANS: B

A monopolistically competitive market is like both a competitive market and a monopoly in that firms in all three market
structures
a. can earn economic profits in the short run.
b. can earn economic profits in the long run.
 c. charge a price above marginal cost.
d. All of the above are correct.

ANS: A

CHAPTER 17

In general, game theory is the study of

a. how people behave in strategic situations.
b. how people behave when the possible actions of other people are irrelevant.
c. oligopolistic markets.
d. all types of markets, including competitive markets, monopolistic markets, and oligopolistic markets.

ANS: A DIF: 2 REF: 17-0

NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional

A distinguishing feature of an oligopolistic industry is the tension between

a. profit maximization and cost minimization.
b. cooperation and self interest.
c. producing a small amount of output and charging a price above marginal cost.
d. short-run decisions and long-run decisions.

ANS: B

In studying oligopolistic markets, economists assume that

a. there is no conflict or tension between cooperation and self-interest.
b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly outcome.
c. each oligopolist cares only about its own profit.
d. strategic decisions do not play a role in such markets.

ANS: C

The simplest type of oligopoly is

a. monopoly.
b. duopoly.
c. monopolistic competition.
d. oligopolistic competition.

ANS: B

A special kind of imperfectly competitive market that has only two firms is called
a. a two-tier competitive structure.
b. an incidental monopoly.
c. a doublet.
d. a duopoly.

ANS: D
An agreement between two duopolists to function as a monopolist usually breaks down because
a. they cannot agree on the price that a monopolist would charge.
b. they cannot agree on the output that a monopolist would produce.
c. each duopolist wants a larger share of the market in order to capture more profit.
d. each duopolist wants to charge a higher price than the monopoly price.

ANS: C

Table
Imagine a small town in which only two residents, Lisa and Mark, own wells that produce safe drinking water. Each
week Lisa and Mark work together to decide how many gallons of water to pump. They bring the water to town and
sell it at whatever price the market will bear. To keep things simple, suppose that Lisa and Mark can pump as much
water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule
and total revenue schedule for water is shown in the table below:

Quantity Price Total Revenue

(in gallons) (and Total Profit)
0 $120 $0
100 110 11,000
200 100 20,000
300 90 27,000
400 80 32,000
500 70 35,000
600 60 36,000
700 50 35,000
800 40 32,000
900 30 27,000
1,000 20 20,000
1,100 10 11,000
1,200 0 0

Refer to Table If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, what price will they
charge?
a. $20
b. $40
c. $60
d. $70

ANS: C
Refer to Table If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how many
gallons of water will be produced and sold?
a. 0
b. 500
c. 600
d. 1,200

ANS: C

1Refer to Table . If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how much profit
will each of them earn?
a. $0
b. $18,000
 c. $32,000
d. $36,000

ANS: B

Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic, how many gallons of
water would be produced and sold?
a. 0
b. 600
c. 900
d. 1,200

ANS: D

Refer to Table 17-1. What is the socially efficient quantity of water?

a. 0 gallons
b. 600 gallons
c. 900 gallons
d. 1,200 gallons

ANS: D

Refer to Table 17-1. If this market for water were perfectly competitive instead of monopolistic, what price would be
charged?
a. $0
b. $50
c. $60
d. $120

ANS: A
Refer to Table. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating as a
monopoly. What will be the price of water once Lisa and Mark reach a Nash equilibrium?
a. $30
b. $40
c. $50
d. $60

ANS: B
Refer to Table. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from operating as a
monopoly. How many gallons of water will be produced and sold once Lisa and Mark reach a Nash equilibrium?
a. 600
b. 700
c. 800
d. 900

ANS: C

As the number of sellers in an oligopoly becomes very large,

a. the quantity of output approaches the socially efficient quantity.
b. the price approaches marginal cost.
c. the price effect is diminished.
d. All of the above are correct.
 ANS: D

In markets characterized by oligopoly,

a. the oligopolists earn the highest profit when they cooperate and behave like a monopolist.
b. collusive agreements will always prevail.
c. collective profits are always lower with cartel arrangements than they are without cartel arrangements.
d. pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market.

ANS: A

Table 17. The information in the table below shows the total demand for premium-channel digital cable TV
subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per
year) to provide premium digital channels in the market area and that the marginal cost of providing the premium
channel service to a household is zero.

Quantity Price (per year)

0 $180
3,000 $150
6,000 $120
9,000 $ 90
12,000 $ 60
15,000 $ 30
18,000 $ 0

Refer to Table 17-3. If there is only one digital cable TV company in this market, what price would it charge for a
premium digital channel subscription to maximize its profit?
a. $30
b. $60
c. $90
d. $150

ANS: C

Refer to Table . Assume there are two digital cable TV companies operating in this market. If they are able to collude on
the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their
agreement will stipulate that
a. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions.
b. each firm will charge a price of $90 and each firm will sell 9,000 subscriptions.
c. each firm will charge a price of $120 and each firm will sell 3,000 subscriptions.
d. each firm will charge a price of $150 and each firm will sell 1,500 subscriptions.

ANS: A

Refer to Table Assume there are two profit-maximizing digital cable TV companies operating in this market. Further
assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be
charged for subscriptions. How much profit will each company earn?
a. $610,000
b. $550,000
c. $410,000
d. $205,000
 ANS: D
Refer to Table Assume there are two profit-maximizing digital cable TV companies operating in this market. Further
assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell.
How many premium digital channel cable TV subscriptions will be sold altogether when this market reaches a Nash
equilibrium?
a. 6,000
b. 9,000
c. 12,000
d. 15,000

ANS: C
Refer to Table. Assume there are two profit-maximizing digital cable TV companies operating in this market. Further
assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell.
What price will premium digital channel cable TV subscriptions be sold at when this market reaches a Nash
equilibrium?
a. $30
b. $60
c. $90
d. $120

ANS: B
Refer to Table. Assume that there are two profit-maximizing digital cable TV companies operating in this market.
Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions
to sell. How much profit will each firm earn when this market reaches a Nash equilibrium?
a. $25,000
b. $90,000
c. $160,000
d. $215,000

ANS: C

Game theory is important for the understanding of

a. competitive markets.
b. monopolies.
c. oligopolies.
d. all market structures.

ANS: C

The prisoners' dilemma provides insights into the

a. difficulty of maintaining cooperation.
b. benefits of avoiding cooperation.
c. benefits of government ownership of monopoly.
d. ease with which oligopoly firms maintain high prices.

ANS: A
A dominant strategy is one that
a. makes every player better off.
b. makes at least one player better off without hurting the competitiveness of any other player.
c. increases the total payoff for the player.
d. is best for the player, regardless of what strategies other players follow.

ANS: D
In a two-person repeated game, a tit-for-tat strategy starts with
a. cooperation and then each player mimics the other player's last move.
b. cooperation and then each player is unresponsive to the strategic moves of the other player.
c. noncooperation and then each player pursues his or her own self-interest.
d. noncooperation and then each player cooperates when the other player demonstrates a desire for the cooperative
solution.

ANS: A
From society’s standpoint, cooperation among oligopolists is
a. desirable, because it leads to less conflict among firms and a wider variety of products for consumers.
b. desirable, because it leads to an outcome closer to the competitive outcome than what would be observed in the
absence of cooperation.
c. undesirable, because it leads to output levels that are too low and prices that are too high.
d. undesirable, because it leads to output levels that are too high and prices that are too high.

ANS: C
The story of the prisoners’ dilemma shows why
a. predatory pricing is clearly not in society’s best interest.
b. economists are unanimous in condemning resale price maintenance, since it inevitably reduces competition.
c. oligopolies can fail to act independently, even when independent decision-making is in their best interest.
d. oligopolies can fail to cooperate, even when cooperation is in their best interest.

ANS: D

CHAPTER 11 PUBLIC GOODS –COMMON RESOURE

When a good is excludable,
a. one person's use of the good diminishes another person's ability to use it.
b. people can be prevented from using the good.
c. no more than one person can use the good at the same time.
d. everyone will be excluded from using the good.

ANS: B

When a good is rival in consumption,

a. one person's use of the good diminishes another person's ability to use it.
b. people can be prevented from using the good.
c. no more than one person can use the good at the same time.
d. everyone will be excluded from obtaining the good.

ANS: A

The Han River is

a. private goods.
b. natural monopolies.
c. common resources.
d. public goods.

ANS: C
A streetlight is a
a. private good.
b. natural monopoly.
c. common resource.
d. public good.

ANS: D

Labor is a
a. private good.
b. natural monopoly.
c. common resource.
d. public good.

ANS: A

Which of the following is not a common resource?

a. congested roads
b. clean water
c. wild gorillas
d. a fireworks display

ANS: D

Which parable describes the problem of wild animals that are hunted to the point of extinction?
a. Coase theorem
b. Tragedy of the Commons
c. Cost-benefit analysis
d. Clean Air Act

ANS: B

An overcrowded beach is an example of

a. a positive externality.
b. a Tragedy of the Commons.
c. an environmentally inefficient allocation of resources.
d. an economically unfair allocation of resources.

ANS: B

The Tragedy of the Commons can be corrected by

a. conducting a cost-benefit analysis.
b. assigning property rights to individuals.
c. providing government subsidies for the resource.
d. making certain everyone in the economy has access to the resource.

ANS: B

Because public goods are

a. excludable, people have an incentive to be free riders.
b. excludable, people do not have an incentive to be free riders.
 c. not excludable, people have an incentive to be free riders.
d. not excludable, people do not have an incentive to be free riders.

ANS: C

The free-rider problem

a. forces the supply of a public good to exceed its demand.
b. results in common resources becoming natural monopolies.
c. explains why many local governments supply public goods.
d. results in public goods becoming private goods.

ANS: C

National defense is a classic example of a public good because

a. there is no market for private security services.
b. it is difficult to exclude people from receiving the benefits from national defense once it is provided.
c. everyone agrees that some level of national defense is important, but only the government knows the optimal
amount.
d. there are no private firms willing to supply defense goods such as tanks and weapons.

ANS: B

Most lighthouses are operated by the government because

a. of the free-rider problem.
b. lighthouses are no longer valued by society.
c. most lighthouses are only tourist attractions in state and national parks.
d. shipping companies would not be able to afford maintenance fees for lighthouses.

ANS: A

Markets fail to allocate resources efficiently when

a. prices fluctuate.
b. people who have property rights abuse their privileges.
c. property rights are not well established.
d. the government refuses to intervene in private markets.

ANS: C

When the absence of property rights causes a market failure, the government can potentially solve the problem
a. by clearly defining property rights.
b. through regulation.
c. by supplying the good itself.
d. All of the above are correct.

ANS: D

CHAPTER 10
An externality is an example of
 a. a corrective tax.
b. a tradable pollution permit.
c. a market failure.
d. Both a and b are correct.

ANS: C

An externality is the impact of

a. society's decisions on the well-being of society.
b. a person's actions on that person's well-being.
c. one person's actions on the well-being of a bystander.
d. society's decisions on the poorest person in the society.

ANS: C

Externalities tend to cause markets to be

a. inefficient.
b. unequal.
c. unnecessary.
d. overwhelmed.

ANS: A
A command-and-control policy is another term for a
a. pollution permit.
b. government regulation.
c. corrective tax.
d. Both a and b are correct.

ANS: B
Corrective taxes differ from most taxes in that corrective taxes
a. enhance economic efficiency.
b. do not raise revenue for the government.
c. cause deadweight loss.
d. cannot be divided between the buyer and seller.

ANS: A

Externalities can be corrected by each of the following except

a. self-interest.
b. moral codes and social sanctions.
c. charity.
d. normal market adjustments.

ANS: D

Markets do not ensure that the air we breathe is clean because

a. clean air has no value.
b. the government prevents markets from doing so.
c. property rights are not well established for clean air.
d. clean air is impossible to produce .
 ANS: C

Property rights are well established for

a. private goods.
b. public goods.
c. common resources.
d. both (b) and (c).

ANS: A

When property rights are not well established,

a. private goods become public goods.
b. markets fail to allocate resources efficiently.
c. the distribution of private goods is unfair.
d. government resources are used inefficiently.

ANS: B

CHATER 18
Capital, labor, and land
a. have derived demands.
b. are factors of production.
c. are inputs used in the production of goods and services.
d. All of the above are correct.

ANS: D

The production function is the

a. increase in the amount of output from an additional unit of labor.
b. marginal product of an input times the price of output.
c. relationship between the quantity of inputs and output.
d. shift in labor demand caused by a change in the price of output.

ANS: C
According to the neoclassical theory of distribution, the wages paid to workers
a. reflect the market prices of the goods those workers produce.
b. reflect the degree of market power held by the firms that pay those wages.
c. fail to reflect those workers’ opportunity costs of leisure.
d. are unrelated to the forces of supply and demand.

ANS: A