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Chapter 07
Efficiency, Exchange, and the Invisible Hand in Action
Multiple Choice Questions
1. The economic theory of business behavior assumes that the goal of a firm is to:
A. earn an accounting profit.

B. earn an economic profit.
C. earn maximum revenue.
D. maximize its profit.
2. Adam Smith coined the term "invisible hand" to describe the process by which:
A. self-interest leads an economy to ruin.

B. self-interest leads to an allocation of goods and services that is relatively efficient.
C. private interests are sacrificed for the benefit of society.
D. the wealthy become richer and the poor become poorer.
3. Explicit costs:
A. measure the opportunity costs of the business owners.

B. are always fixed in the short run.
C. measure the payments made to the firm's factors of production.
D. are always variable in the short run.
4. Which of the following is NOT an example of explicit costs?
A. Wages paid to workers

B. Personal savings of the owner invested in the firm
C. Salaries paid to management
D. Office space rent
5. Explicit costs:
A. are the only costs that matter to business owners.

B. usually exceed implicit costs.
C. are difficult to measure.
D. appear on the firm's balance sheet.
6. Implicit costs:
A. are always fixed.

B. measure the forgone opportunities of the owners of the business.
C. always exceed explicit costs.
D. are irrelevant to business decisions.
7. Accounting profits are:
A. equal to total revenues minus implicit costs.

B. the difference between total revenues and explicit costs.
C. equal to total revenues minus explicit and implicit costs.
D. less than economic profits.
8. An example of an implicit cost is:
A. interest paid on a bank loan.

B. wages paid to a family member.
C. the value of a spare bedroom turned into a home office.
D. operating costs of a company-owned car.
9. If you were to start your own business, your implicit costs would include:
A. rent that you have paid in advance for use of a building.

B. the opportunity cost of your time.
C. profit over and above normal profit.
D. interest that you pay on your business loans.
10. Suppose you quit your job to start a business. In the first month, your total revenue was
$6,000. 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.
You determine that your profit that month was negative $200. Why?
A. You did the math incorrectly.

B. You accounted for lost salary of $200.
C. You accounted for lost salary of $1,000.
D. Your equipment rent is an implicit cost.
11. Curly told Larry about his new business venture: Curly pays Acme International $1,000 per
month for supplies and access to Acme's network, works out of his own apartment on his own
computer and earns monthly revenues of $1,500. Should Larry quit his job and do what Curly
is doing?
A. Yes, if 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. Yes, if Larry can borrow the $1,000 monthly payment for less than 3% interest.
D. Yes, if Larry already owns a computer.
12. If a firm is earning zero economic profits:
A. its revenues are sufficient to pay explicit costs, but not implicit costs.
B. the owner will not be able to pay himself or herself a salary.
C. it will shut down in the long run, but will continue to operate in the short run.
D. the owners are earning a return on their time and investment that is equal to the
opportunity costs of that time and investment.
13. Which of the following would not be included in the calculation of accounting profits?
A. Wages of workers.
B. The salary the owner could have earned working elsewhere.
C. Rent.
D. Medical insurance coverage for workers.
14. Economic profits are:
A. the same as accounting profits.

B. equal to total revenue minus the sum of explicit fixed and variable costs.
C. equal to total revenue minus both explicit and implicit costs.
D. greater than accounting profits.
15. Accounting profits minus implicit costs equals:
A. total revenues.
B. economic profits.
C. explicit costs.
D. fixed and variable costs.
16. It is always true that:
A. accounting profits are positive.

B. economic profits are zero.
C. economic profits are greater than or equal to accounting profits.
D. accounting profits greater than or equal to economic profits.
17. Normal profits occur when:

B. economic profits are positive.
C. economic profits are zero.
D. total revenues are greater than explicit and implicit costs.
18. Chris was the business manager for a real estate firm earning an annual salary of $40,000.
Then Chris decided to become a consultant. Chris hired an administrative assistant at $15,000
per year and rents office space (utilities included) for $3,000 per month. Chris earned
$100,000 in total revenue the first year as a consultant.
Chris's explicit annual cost is _____ and Chris's implicit cost is ______.
A. $15,000; $43,000
B. $18,000; $40,000
C. $36,000; $140,000
D. $51,000; $40,000
Chris's opportunity cost of running her own business is ______ which is the _______.
A. $15,000; implicit cost

B. $51,000; explicit cost
C. $40,000; implicit cost
D. $51,000; economic cost
Chris's accounting profit is _______ and Chris's economic profit is _______.
A. $100,000; $64,000
B. $64,000; $49,000
C. $49,000; $9,000
D. $9,000; 0
In order for Chris to earn normal profit, accounting profit would have to be _______.
A. $51,000
B. $40,000
C. 0
D. $9,000
22. 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.
Refer to the information given above. Pat's explicit cost is _____ and Pat's implicit cost is
______.
A. $16,000; $51,000
B. $15,000; $36,000
C. $16,000; $35,000
D. $35,000; $16,000
Refer to the information given above. 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. -$1,000; -$1,000
Refer to the information given above. For Pat to earn normal profit, accounting profit would
have to be _______.
A. $50,000
B. $35,000
C. $15,000
D. 0
25. If owners of a business are receiving total revenues just sufficient to cover all their explicit
and implicit costs, they are:
A. doing better than their next best alternative.

B. earning a normal profit.
C. earning economic losses.
D. doing worse than their next best alternative.
26.
Refer to the figure above. An output level of 25 units results in accounting profits of _____ and
economic profits of ________.
A. zero; $8
B. $125; $113
C. $125; zero
D. zero; -$8
27.
Refer to the figure above. An accountant would put the total cost of producing 15 units of
output at ______, and an economist would put the total cost of producing 15 units of output at
_______.
A. $69; $6
B. $63; $69
C. $86; $69
D. $63; $6
28.
Refer to the figure above. At what output level or levels are the business owners doing as well
as or better than their next best alternative?
A. 10 units
B. 10 and 15 units
C. 10, 15, and 20 units
D. 10, 15, 20, and 25 units
29.
Refer to the figure above. 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.
30. The statement, "price distributes goods and services to those that value them the most" refers
to the ______ function of price.
A. allocative
B. multiplicative
C. store of value
D. rationing
31. The statement, "price directs resources across different sectors of the economy" refers to the
______ function of price.
A. allocative
B. store of value
C. rationing
D. transitivity
32. Which of the following would be an example of the rationing function of price?
A. Switching from a Ph.D. in economics to finance because finance salaries are higher
B. Bill Gates purchasing the Mona Lisa for $5 billion
C. A firm attempting to lower its explicit costs
D. Government price controls
33. _____________ work together to guide resources to their highest value.
A. The explicit cost and the implicit cost of a profit maximizing firm
B. The short run and long run supply curve
C. The rationing and allocative functions of price
D. The economic profit and accounting profit
34. Generally, ______ motivate firms to enter an industry while ______ motivate firms to exit an
industry.
A. economic profits; economic losses

B. accounting profits; accounting losses
C. accounting profits; economic losses
D. economic profits; accounting losses
35. Last year Pat was a soybean farmer and Chris was a corn farmer. This year, high demand for
ethanol, an automobile fuel made from corn, causes the price of corn to increase.
Refer to the information above. You would predict that this year Pat may:
A. grow more soybeans.

B. switch to growing corn.
C. continue to grow the same amount of soybeans.
D. go out of business.
Refer to the information above. Relative to last year, the price of soybeans is likely to be
______, and the price of corn is likely to be ______.
A. higher; higher
B. higher; lower
C. lower, higher
D. the same; higher
Refer to the information above. Suppose Pat stopped growing soybeans and began growing
corn. What principle would explain that change?
A. The principle of comparative advantage.

B. The scarcity principle.
C. The incentive principle.
D. The equilibrium principle.
38. Suppose all firms in a perfectly competitive industry are experiencing economic profits. One
would expect that, over time, the number of firms will _______ and the market price will _____.
A. rise; fall
B. fall; rise
C. rise; rise
D. rise; stay the same
39. If all firms in a perfectly competitive industry earn a normal profit, then:

C. the number of firms in the industry is stable.
D. market supply will shift to the left.
40. If all firms in a perfectly competitive industry are experiencing economic losses, then firms
will:
A. exit the industry, until economic profits are positive.

B. exit the industry, until accounting profits equal zero.
C. continue in the industry, hoping for better times.
D. exit the industry, until economic profits equal zero.
41. For entry into a particular perfectly competitive industry to occur, which of the following must
be true?
A. Accounting profits are equal to zero

B. Accounting profits equal economic profits
C. Economic profits are greater than zero
D. Economic profits are equal to zero
42. In an industry with free entry and exit, economic profits:
A. indicate a market failure.

B. can never occur.
C. provide incentives for a reallocation of resources out of other industries and into the one
with economic profits.
D. can be sustained indefinitely.
43. In a perfectly competitive industry over the long run:
A. economic profits tend to persist.

B. the number of firms in an industry grows.
C. economic losses tend to persist.
D. economic profits and losses are driven towards zero by entry and exit.
44. Assume that all firms in this industry have identical cost functions.
The long-run equilibrium price in this industry is
A. $15.
B. $10.
C. $5.
D. $5 for some firms and $10 for others.
The long-run equilibrium supply in this industry is
A. Supply A.
B. Supply B.
C. Supply C.
D. A Supply function that lies between Supply A and Supply B.
When price is $15 in this industry,
A. the industry is in its long run equilibrium.

B. it is because supply has shifted from Supply B to Supply A because firms that were not
making a profit left the industry.
C. new firms will be expected to enter.
D. all firms are making zero economic profits.
Firms in this industry will shut down if the price is
A. higher in the short run than in the long run.

B. less than or equal to $15.
C. less than or equal to $10.
D. less than or equal to $5.
The firm depicted in the graph on the right faces a demand curve that
A. is horizontal at the market price.

B. is downward sloping, and less than market demand curve.
C. is the same as the marginal cost curve.
D. is the same as the market demand curve.
In the long run, there will be ______ firms in this market.
A. 10
B. 15
C. 25
D. 50
50. An implication of entry and exit in response to the profit incentive is that, for perfectly
competitive firms,
A. no firm accepts zero economic profits in the long run.

B. firms produce the quantity that minimizes average variable costs in the short run.
C. firms produce the quantity that minimizes average total costs in the long run.
D. demand is completely inelastic.
51. One difference between the long run and the short run in a perfectly competitive industry is
that:
A. economic profits in the long run are always greater than they are in the short run.
B. economic profits in the short run are always greater than they are in the long run.
C. firms necessarily earn zero economic profit in the long run but may earn positive or
negative economic profit in the short run.
D. firms necessarily earn positive economic profit in the long run but may earn positive or
52. The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions.
The long run equilibrium quantity in this industry is
A. 300.
B. 500.
C. 700.
D. more than 700.
Assume that the market is currently as shown in the graph on the left (i.e., price of $8). What
is true of the number of firms?
A. There are currently 30 firms in the industry, and that number will remain stable until there
is a change in demand or in technology.
B. There are currently ten firms in this industry, and that number will remain stable until there
is a change in demand or in technology.
C. It is impossible to tell how many firms currently exist in this industry, but you can tell that
the number of firms is likely to increase in the near future.
D. There are currently ten firms in this industry, and that number is likely to increase in the
near future.
In the long run equilibrium in this market,
A. price will equal $5, and there will be 20 firms in the industry.
B. price will equal $5, and there will be 10 firms in the industry.
C. price will equal $8, and there will be 20 firms in the industry.
D. price will equal $5 and total output will equal 500 units, but there is not enough information
to know how many firms there will be.
A starting assumption about this industry was that all of the firms had identical cost functions.
This assumption
A. is unrealistic because all firms are unique.

B. is realistic because any cost advantage of one firm will be quickly adopted by the others.
C. is unrealistic because firms closely guard their production process secrets.
D. is unrealistic because competition forces all firms to seek the most efficient production
processes.
56. Which ordering best describes how a perfectly competitive industry would respond to a
sudden increase in popularity of the product? The market demand function will shift to the
right, causing the market:
A. price to increase, and a new stable equilibrium to be established at a higher price and
higher quantity.
B. price to increase, and all firms in the industry will earn higher profits for the foreseeable
future.
C. price to increase. Increased profits will encourage new firms to enter, shifting the market
supply function to the right. Long-run market equilibrium will be at a higher quantity than
before the surge in popularity.
D. price and quantity supplied to increase. Increased profits will encourage new firms to enter
shifting the market supply function upward. Long-run market equilibrium will be at a lower
quantity and higher price than before the surge in popularity.
57. One assumption of the perfectly competitive model is that of free entry. This assumption most
directly leads to the implication that:
A. firms will spend significant amounts of money on advertising.

B. positive economic profits will only be possible for in the short run.
C. firms will compete on the basis of better service and amenities rather than price.
D. a single firm will emerge as the industry leader.
58. Free entry of firms is a characteristic of:
A. all industries in the U. S. economy.

B. perfectly competitive industries.
C. centralized economies.
D. industries in which firms are earning positive economic profit.
59. The allocative function of price works well under conditions of:
A. free entry and difficult exit.

B. free entry and free exit.
C. free entry only.
D. free exit only.
60. Barriers to entry are created by:
A. government regulation only.

B. government regulation and natural characteristics of a market.
C. natural characteristics of a market only.
D. restrictions on foreign trade.
61.
Refer to the figure above. If S2 is the short-run industry supply curve for a maple syrup
producer, the profit maximizing output for a single firm is ______ gallons.
A. 500
B. 1000
C. 1500
D. 2000
62.
Refer to the figure above. Suppose S2 is the industry supply curve. At the profit maximizing
quantity price will ______ the opportunity cost of the resources required to enter the market
and firms will _____.
A. be less than; exit the market

B. exceed; exit the market
C. exceed; enter market
D. be less than; enter the market
63.
producer, what is the profit (loss) for this firm?
A. $10,000
B. $15,000
C. $20,000
D. $30,000
64.
Refer to the figure above. Suppose S2 is the industry supply curve and all firms are producing
at the profit maximizing quantity. What will happen to the supply curve in the long run?
A. Quantity supplied will increase but stay on the S2 curve.

B. Supply will shift to S1.
C. Supply will shift to S.
D. Quantity supplied will decrease but stay on S2 curve.
65.
Refer to the figure above. In the long run equilibrium price is _____ and an individual firm's
profit maximizing quantity is _______.
A. $20; 4 million
B. $15; 6 million
C. $15; 3 thousand
D. $10; 8 million
66.
Refer to the figure above. What will be the long-run economic profit for this firm?
A. $0
B. $10,000
C. $15,000
D. $20,000
67. If buyers and sellers are free to pursue their own selfish interests, according to the invisible
hand theory, the result would be:
A. anarchy.
B. exploitation of workers and natural resources.
C. an equitable allocation of resources.
D. an efficient allocation of resources.
68. E-commerce and an internet presence are important to many firms, requiring employees with
specialized skills that are in short supply. The invisible hand solves the employment problem
by:
A. encouraging the government to set up new training programs.

B. giving selfish workers the incentive to acquire the skills in order to receive high wages.
C. allowing the few employees with the skills to exploit the firms.
D. moving slowly until the e-commerce craze ends.
69. In a free market economy, the decisions of buyers and sellers are:
A. random.
B. motivated by custom and tradition.
C. in need of coordination by the government.
D. guided by prices.
70. Some people have argued that the government should provide medical care to everyone.
Under this system:
A. the price of medical care will allocate resources efficiently.

B. the price of medical care will ration resources efficiently.
C. prices will not ration medical care so there will be no scarcity.
D. prices will not ration medical care so some other rationing method will be used.
71. If resources are currently misallocated in a market with no barriers to entry, then the presence
of opportunities to profit:
A. will inspire a more efficient reallocation of resources.

B. will inspire a less efficient reallocation of resources.
C. will not inspire a reallocation of resources in the absence of government regulation.
D. will not inspire a reallocation of resources unless a firm is subsidized.
72. Barriers to entry are _____, and one effect of barriers to entry is to _____ the ability of the
invisible hand to allocate resources efficiently.
A. uncommon today due to antitrust enforcement; improve

B. forces that limit new firms from joining an industry; reduce
C. forces that limit new firms from joining an industry; irrelevant to
D. uncommon today due to antitrust enforcement; reduce
73. Economic rent is:
A. the amount you pay for an apartment in a free market.

B. the payment made to suppliers of an input.
C. the difference between the payment made to the supplier of an input and the supplier's
reservation price.
D. the same as the input supplier's reservation price.
74. Mary Jane is willing to baby-sit for $6 an hour. Her neighbor called and asked her to baby-sit
for $8 an hour. Mary Jane will earn:
A. consumer surplus of $2 per hour.

B. economic rent of $2 per hour.
C. economic profit of $8 per hour.
D. accounting profit of $8 per hour, but economic profit of $0 per hour.
75. Economic rent:
A. equals economic profit minus accounting profit.

B. is driven towards zero by free entry.
C. can be positive, zero, or negative.
D. can never be negative.
76. Angelina Jolie's economic rent from starring in a movie is equal to the difference between:
A. her initial offer and her final salary, including royalties.

B. her initial offer and what she could earn in a different film.
C. her final salary and the average for leading actresses.
D. her final salary and the least she would be willing to accept for a role.
77. Superstar professional athletes can sustain their economic rents because:
A. team owners will pay anything to win the championship.

B. they have excellent union representation.
C. their opportunity costs of playing are high.
D. if their current team does not pay, they can take their unique talents to another team
willing to pay.
78. Professor Plum, who earns $75,000 per year, read in the paper today that the university pays
its basketball coach one million dollars per year in exchange for the coach's agreement to
remain at the university for at least three more years. The coach earns more than Professor
Plum because:
A. demand for sporting events exceeds demand for college courses.

B. universities value sports over academics.
C. the coach is able to earn economic rent due to his unique talents.
D. the coach has more human capital than does Prof. Plum.
79. Unlike economic profits, economic rents:
A. can be less than zero.

B. can't be easily driven to zero by entry.
C. don't involve the idea of opportunity costs.
D. only apply to land.
80. Duke is a particularly highly skilled negotiator. 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, with 75% going to Duke and 25% going to the law firm.
81. Factors of production most likely to earn positive economic rent are:
A. real estate.
B. uniquely talented individuals.
C. fixed factors.
D. factors that are subject to free entry.
82. A supplier of a factor of production has a reservation price of $100. The purchaser of the
factor of production has a reservation price of $200. If the factor of production is unique,
then:
A. there will be no transaction as the reservation prices are unequal.

B. the transaction will occur and the price will be $150.
C. the transaction will occur and the price will be $200.
D. the transaction will occur and the price will be $100.
83. If a single firm, belonging to a perfectly competitive industry in long run equilibrium, discovers
a significant cost saving methodology, then:
A. all firms will enjoy economic profits for a short period of time.
B. the rest of the industry will quickly adopt the new methodology.
C. the firm will enjoy economic profits forever.
D. the firm will lower its price to drive the rest of the industry out of business.
84. Suppose several United States software design companies compete with each other in a
perfectly competitive environment. If one company decides to move some of its offices to a
low-wage country in order to reduce operating costs:
A. the other companies will still be able to remain profitable while operating solely in the
United States.
B. the company that moves to the lower-wage country will earn positive economic profits in
the long run because it will keep a cost advantage.
C. the other companies will also move to the low wage country in order to remain in the
industry.
D. the first company to move will charge a lower price than the companies remaining in the
United States.
85. Cost saving developments—e.g., a new production procedure that shortens a production
process by two steps—in a perfectly competitive industry will lead to:
A. entry by new firms.

B. economic profits by new firms.
C. economic profits for a few firms for a short time.
D. a leftward shift of the supply curve.
86. The statement, "If a deal is too good to be true, it probably is not true" is most closely related
to which principle?
A. The low-hanging fruit principle

B. The no-cash-on-the-table principle
C. The cost-benefit principle
D. The diminishing marginal returns principle
87. The No Cash on the Table principle means unexploited opportunities:
A. never exist.
B. cannot be exploited for long.
C. can exist in equilibrium but rarely do.
D. always exist in equilibrium.
88. Curly usually drives on the freeway to get to work, but this morning he heard on the radio that
there was a major accident causing a long traffic back-up at the first downtown exit. So, Curly
decided to drive on side streets to get to work. When Curly started driving he noticed that:
A. more people than usual were taking the side streets downtown.
B. the side streets were about as crowded as they usually are.
C. fewer drivers were using the side streets than usual.
D. more people were getting on the freeway than usual.
89. When either the costs of production or the benefits of consumption to individuals differ from
those of society:
A. the equilibrium output will be the socially optimal output.

B. the equilibrium is not efficient.
C. the allocation of resources remains correct.
D. the invisible hand had completely failed.
90. The Smart for One, Dumb for All principle indicates that:
A. pursuing selfish interests always promotes social welfare.

B. if everyone is doing it, you should not.
C. pursuing selfish interests always lessens social welfare.
D. pursuing selfish interests sometimes conflicts with social welfare.
91. Adam Smith believed that the individual pursuit of self-interest:
A. was a basic human instinct that must be curbed in order for society to advance.
B. always worked to undermine social benefits.
C. always worked to advance social benefits.
D. sometimes worked to advance social benefits.
92. According to the textbook, individual incentives have led to:
A. the optimal number of stock market analysts because it is a competitive market with no
entry barriers.
B. too many stock market analysts because market analysis does not produce social benefits.
C. too many stock market analysts because the individual incentive to forecast faster exceeds
the social benefit of a faster forecast.
D. too few stock market analysts because the efficient market hypothesis predicts that no
analyst will do better than random chance in the long run.
93. Which of the following statements illustrates the concept of efficiency?
A. The production of the good generates very little pollution.

B. At equilibrium, all mutually beneficial transactions have taken place.
C. The production of the good generates very few by-products.
D. The consumption of the good produces very little waste.
94. Pareto efficiency is a situation in which:
A. no one is made better off.

B. trades remain that would make some better off without harming others.
C. trades have benefited some and harmed others.
D. any further trades will harm someone.
95. Excess demand in a market is evidence of:
A. Pareto efficiency.
B. the opportunity for surplus-enhancing trades.
C. an economic pie that is too small.
D. equilibrium.
96. Which of the following describes a surplus-enhancing transaction?
A. The Federal government taxes wealthy individuals to pay for income support payments to
poor people.
B. The public television station cancels Sesame Street because nobody pledged during that
show even though many kids were watching it.
C. I pay $5.00 for one scoop of ice cream at the ballgame even though I have a whole gallon at
home in my freezer that cost me less than $5.00.
D. Your state government imposes a higher minimum wage law than the one set by federal
law.
97. Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does
come, ticket prices are $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a
ticket, they are sold out.
Refer to the information above. The fact that Ingrid cannot buy a ticket to "Mamma Mia!" is
evidence of:
A. Pareto efficiency in this market.

B. A price ceiling above the equilibrium price.
C. A situation that is not Pareto efficient.
D. The benefits of allocating resources on the first-come, first-served basis.
Refer to the information above. Ingrid decides to try to buy a ticket from a scalper (a person
who has purchased extra tickets at the box office with the intent to resell those tickets). If
Ingrid finds someone who is willing to sell her a ticket for $70, she should:
A. not purchase it because it is overpriced by $10.

B. not purchase it because the cost to the scalper was only $60, and it is unfair of the scalper
to take advantage of the ticket shortage.
C. purchase it because to do so will lead to an increase in surplus.
D. purchase it even though it is not surplus-enhancing.
Refer to the information above. Sven had purchased a ticket at the ticket window for $60.
Sven's reservation price is $65. If Sven attends "Mamma Mia!" and Ingrid does not, it is:
A. inefficient because Sven and Ingrid could have made a mutually beneficial trade.
B. efficient because Sven paid less for the ticket than his reservation price.
C. efficient because Sven arrived at the ticket counter before the show was sold out.
D. inefficient because ticket prices are regulated by the government.
100.Market equilibrium is considered efficient because:
A. prices are low.

B. the price consumers pay equals the profit producers receive.
C. no more trades remain that benefit some without harming others.
D. it assures that both the buyer and seller earn equal surplus.
101.Suppose the market for coffee is in equilibrium at a price of $5 per pound. This means:
A. all producers who want to sell coffee earn a profit.

B. all potential producers not producing coffee require less than $5 to produce coffee.
C. all consumers who want to buy coffee are satisfied.
D. all potential consumers not buying coffee value a pound of coffee at less than $5.
102.Daily Supply and Demand: Oranges in Hurricane Alley
Refer to the figure above. At the price of $4.00, sellers offer _____ pounds of oranges per day,
and buyers want to purchase ____ pounds of oranges a day.
A. 10; 30
B. 10; 20
C. 20; 20
D. 30; 10
Refer to the figure above. The marginal buyer values the tenth pound of oranges at ____.
A. $0
B. $4
C. $8
D. $12
Refer to the figure above. The price of $4.00 per pound will lead to a(n) _____ of _____ pounds
of oranges per day.
A. excess supply; 20
B. excess demand; 30
C. equilibrium quantity; 20
D. excess demand; 20
Refer to the figure above. What is the cost of harvesting the tenth pound of oranges?
A. $2
B. $2.50
C. $4
D. $5
Refer to the figure above. If the supplier sells the tenth pound of oranges to the most eager
buyers for $8, the seller is _____ better off than before and the buyer is ______ better off than
before.
A. $8; $0
B. $6; $2
C. $4; $4
D. $2; $6
107.
Supply and Demand Curve for Jeans in Gallania Mall.
Refer to the figure above. At the price of $60 each, sellers offer _____ pairs of jeans per day,
and buyers wish to purchase _____ pairs of jeans a day.
A. 60; 20
B. 8; 24
C. 16; 16
D. 24; 8
108.
Supply and Demand Curve for Jeans in Gallania Mall. Refer to the figure above. The price of
$60 each will lead to an _____ of _____ pairs of jeans per day.
A. excess supply; 8
B. excess supply; 16
109.
Supply and Demand Curve for Jeans in Gallania Mall. Refer to the figure above. Suppose that
jeans initially sell for $60 each. If the seller lowers the price to $40 each, it would create an
extra ____ of economic surplus. Thus, selling jeans for $60 each is _______.
A. $160; inefficient
B. $80; efficient
C. $80; the equilibrium price
D. $160; efficient
110.
Supply and Demand Curve for Jeans in Gallania Mall. Refer to the figure above. The
equilibrium price will NOT lead to the largest possible total economic surplus when:
A. the jeans are purchased by consumers with reservation prices greater than $40.
B. the jeans market is perfectly competitive.
C. production of jeans generates air pollution.
D. production of jeans experiences diminishing marginal returns to inputs.
111.A market equilibrium is only efficient when:
A. buyers and sellers each earn equal surplus from the transaction.
B. consumer surplus and producer surplus are both zero.
C. all relevant costs, including those imposed on others, are accounted for.
D. income is distributed equitably.
112.Suppose that a firm is located along a river. The firm uses water from the river to cool its
machinery and returns the water to the river several degrees warmer, which has led to a
decline in the fish population downstream of the firm.
The damage to the downstream fish is a(n):
A. relevant cost of production.

B. relevant cost of production only if the firm is charged a fine for the damage done.
C. relevant cost of production only if there are commercial fishing activities downstream.
D. implicit cost of production which the firm will take into account in determining profit
maximizing output.
113.Suppose that a firm is located along a river. The firm uses water from the river to cool its
If the firm does not have to pay for the damage to the downstream fish, the market
equilibrium price will be ________ and the market equilibrium quantity will be _____.
A. inefficiently high; inefficiently low

B. inefficiently high; efficient
C. inefficiently low; inefficiently high
D. efficient; inefficiently low
114.Which of the following statements expresses the justification for making efficiency the first
goal of economic interaction?
A. Efficiency gives the poor an incentive to improve their economic status.

B. Since the consensus on what is a fair distribution of goods is impossible, efficiency is the
next best goal.
C. People are not really concerned about the problems of the poor.
D. Efficiency maximizes total economic surplus and thereby allows other goals to be more
fully achieved.
115.If the demand curve fails to capture all of the benefits of consumption, then the:
A. equilibrium price is efficient but the quantity will be too large.

B. the equilibrium price is inefficiently low.
C. government needs to impose regulations that require more consumption.
D. the equilibrium price is inefficiently high.
116.Which of the following is NOT guaranteed by the efficiency of the market equilibrium?
A. Price represents the value of an extra unit of consumption.

B. Rich and poor will have adequate access to the good.
C. Price represents the cost of an extra unit of production.
D. All mutually beneficial trades will have been made.
117.The argument that efficiency is an appropriate goal assumes that the gains from enhancing
efficiency:
A. will be equally distributed in the population.

B. will benefit the poor by more than the wealthy.
C. could potentially benefit everyone.
D. reduce income disparities in the population.
118.Price ceilings that are below the equilibrium price result in:
A. increased total economic surplus.

B. shortages.
C. surpluses.
D. the same amount of total economic surplus with a reallocation from producers to
consumers.
119.A price ceiling that is below the equilibrium price will cause:
A. producer surplus to fall.

B. total economic surplus to rise.
C. quantity supplied to exceed quantity demanded.
D. demand to increase.
120.Price ceilings above the equilibrium price result in:
A. market prices above the equilibrium price.

B. a market unable to reach Pareto Efficiency.
C. a market that is able to reach Pareto Efficiency.
D. wealth redistribution to benefit the poor.
121.If an individual consumer is willing to pay $11 for one unit of a good but finds he can purchase
it for $7, he has a consumer surplus of:
A. $18.00.
B. $11.00.
C. $7.00.
D. $4.00.
122.If an individual producer is willing to produce one unit of a good for $2.50 but finds he can sell
it for $7.50, he has a producer surplus of:
A. $10.00.
B. $7.50.
C. $5.00.
D. $6.25.
123.The cumulative difference between the price producers actually receive and the price for
which they are willing to produce is:
A. producer surplus.
B. lost surplus.
C. total economics surplus.
D. consumer surplus.
124.The sum of the economic surpluses accruing to buyers and sellers is:
B. equal to profit.
125.Suppose a market is in equilibrium. The area between the demand curve and the market price
is:
A. the total economic surplus.

B. producer surplus.
C. consumer surplus.
D. the surplus loss.
126.Suppose a market is in equilibrium. The area between the market price and the supply curve
is:
A. the surplus loss.

D. total economic surplus.
127.Consumer surplus is the value of:
A. consumer spending on frivolous goods.

B. the cumulative difference between what consumers are willing to pay and the price they
actually pay.
C. the difference between the suggested retail price and the everyday low price.
D. the difference between the list price and the price the consumer can negotiate.
128.Total economic surplus is greatest when:
A. price controls keep prices low enough that most consumers can purchase the item.
B. consumer surplus and producer surplus are equal.
C. consumer surplus exceeds producer surplus.
D. the market is in equilibrium.
129.
Refer to the figure above. When the market is unregulated, consumer surplus equals:
A. ½ × (AJ) × (JE).
B. ½ × (AB) × (BC).
C. ½ × (AG) × (GI).
D. ½ × (EH) × (HC).
130.
Refer to the figure above. When the market is unregulated, producer surplus equals:
A. (DB) × (BC).
B. ½ × (DG) × (GF).
C. ½ × (DB) × (BC).
D. ½ × (FH) × (HC).
131.
Refer to the figure above. Assume that a price ceiling is imposed at point G. The distance
______ measures the extent of the __________.
A. Q2Q1; excess supply

B. FI; excess demand
C. FI; excess supply
D. GF; excess demand
132.
Refer to the figure above. After the price ceiling at price G is imposed, producer surplus
_________ and is represented by the area _______.
A. increases; DBC
B. decreases; DGF
C. increases; 0GFQ2
D. decreases; 0DFQ2
133.
Refer to the figure above. After the price ceiling at price G is imposed, consumer surplus _ is
represented by the area _______.
A. BJEH
B. BAEH
C. JAE
D. GAEF
134.
Refer to the figure above. The surplus loss due to the price ceiling imposed at price G is
represented by the area:
A. FEC.
B. DAC.
C. GJEF.
D. JAE + DGF.
135.
Refer to the figure above. If the market is unregulated, the value of consumer surplus is:
A. $4.
B. $8.
C. $16.
D. $24.
136.
Refer to the figure above. If the market is unregulated, the value of producer surplus is:
A. $16.
B. $24.
C. $32.
D. $48.
137.
Refer to the figure above. If the market is unregulated, the value of the total economic surplus
is:
A. $20.
B. $32.
C. $48.
D. $84.
138.
Refer to the figure above. Suppose a price ceiling is imposed at $4. The value of the consumer
surplus is:
A. $36.
B. $20.
C. $24.
D. $28.
139.
Refer to the figure above. Suppose a price ceiling is imposed at $4. The value of the producer
surplus is:
A. $24.
B. $16.
C. $2.
D. $4.
140.
Refer to the figure above. The total economic surplus after the $4 price ceiling is imposed is
____, so that the surplus lost due to the $4 price ceiling is ________.
A. $4; $48.
B. $24; $16
C. $24; $8
D. $32; $8
141.Subsidies are most likely to:
A. reduce consumer surplus.

B. increase total economic surplus.
C. reduce total economic surplus.
D. leave total economic surplus unchanged, but transfer surplus from producers to
consumers.
142.Suppose that in an effort to help single parents, the government has decided to pay part of
the cost of childcare. This measure will
A. increase efficiency in the childcare market.

B. increase consumer surplus in the childcare market.
C. increase total surplus in the childcare market.
D. leave the quantity of childcare unchanged.
143.
Refer to the figure above. With no subsidy, the equilibrium price of sugar is _____ and the
equilibrium quantity is ______ tons per day.
A. $1,000; 14
B. $1,000; 10
C. $1,500; 14
D. $1,500; 10
144.
Refer to the figure above. With no subsidy, what is the consumer surplus?
A. $1,000
B. $7,500
C. $10,100
D. $14,000
145.
Refer to the figure above. With no subsidy, what is the producer surplus?
A. $0
B. $6,000
C. $7,500
D. $17,000
146.
Refer to the figure above. With the subsidy, the equilibrium price of sugar is _____ and the
A. $1000; 14
B. $1000; 10
C. $1500; 14
D. $1500; 10
147.
Refer to the figure above. With the subsidy, what is the consumer surplus?
A. $1,000
B. $7,500
C. $10,100
D. $14,000
148.
Refer to the figure above. With the subsidy, what is the producer surplus?
A. $0
B. $6,000
C. $7,500
D. $17,000
149.
Refer to the figure above. After the subsidy, consumer surplus ______ by ______ per day.
A. decreased; $500
B. decreased; $1,000
C. increased; $1,000
D. increased; $6,500
150.
Refer to the figure above. The cost of subsidy, which must be borne by taxpayers, is:
A. $500
B. $2,000
C. $1,500
D. $7,000
151.
Refer to the figure above. The net effect of the subsidy program is that total economic surplus
has ______ by _____.
A. increased; $6,500
C. increased; $500
D. decreased; $500
Chapter 07 Efficiency, Exchange, and the Invisible Hand in Action
Answer Key
Multiple Choice Questions
1. The economic theory of business behavior assumes that the goal of a firm is to:
A. earn an accounting profit.

B. earn an economic profit.
C. earn maximum revenue.
D. maximize its profit.
Firms exist to earn profit.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Define and explain the differences between accounting profit; economic profit; and normal
profit.
Topic: The Central Role of Economic Profit
2. Adam Smith coined the term "invisible hand" to describe the process by which:
A. self-interest leads an economy to ruin.

B. self-interest leads to an allocation of goods and services that is relatively efficient.
C. private interests are sacrificed for the benefit of society.
D. the wealthy become richer and the poor become poorer.
Recall Adam Smith's tale of each business owner following his own interests with the
result being that the collective well-being is served.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
profit.
3. Explicit costs:
A. measure the opportunity costs of the business owners.

B. are always fixed in the short run.
C. measure the payments made to the firm's factors of production.
D. are always variable in the short run.
Explicit costs are actual payments a firm makes to its factors of production and suppliers.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
profit.
4. Which of the following is NOT an example of explicit costs?
A. Wages paid to workers

B. Personal savings of the owner invested in the firm
C. Salaries paid to management
D. Office space rent
The use of the owner's personal savings is an implicit cost.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
profit.
5. Explicit costs:
A. are the only costs that matter to business owners.

B. usually exceed implicit costs.
C. are difficult to measure.
D. appear on the firm's balance sheet.
Explicit costs are actual payments a firm makes to its factors of production and suppliers.
AACSB: Analytic
Blooms: Understand
profit.
6. Implicit costs:
A. are always fixed.

B. measure the forgone opportunities of the owners of the business.
C. always exceed explicit costs.
D. are irrelevant to business decisions.
Implicit costs are the opportunity costs of the resources supplied by the owner of the firm.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
profit.
7. Accounting profits are:
A. equal to total revenues minus implicit costs.

B. the difference between total revenues and explicit costs.
C. equal to total revenues minus explicit and implicit costs.
D. less than economic profits.
Accounting profit equals total revenue minus explicit costs.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
profit.
8. An example of an implicit cost is:
A. interest paid on a bank loan.

B. wages paid to a family member.
C. the value of a spare bedroom turned into a home office.
D. operating costs of a company-owned car.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
profit.
9. If you were to start your own business, your implicit costs would include:
A. rent that you have paid in advance for use of a building.

B. the opportunity cost of your time.
C. profit over and above normal profit.
D. interest that you pay on your business loans.
AACSB: Analytic
Blooms: Understand
profit.
10. Suppose you quit your job to start a business. In the first month, your total revenue was
$6,000. 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.
You determine that your profit that month was negative $200. Why?
A. You did the math incorrectly.

B. You accounted for lost salary of $200.
C. You accounted for lost salary of $1,000.
D. Your equipment rent is an implicit cost.
Economic profit is the difference between total revenue and the sum of explicit and implicit
costs.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
11. Curly told Larry about his new business venture: Curly pays Acme International $1,000 per
month for supplies and access to Acme's network, works out of his own apartment on his
own computer and earns monthly revenues of $1,500. Should Larry quit his job and do
what Curly is doing?
A. Yes, if 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. Yes, if Larry can borrow the $1,000 monthly payment for less than 3% interest.
D. Yes, if Larry already owns a computer.
It costs Larry his current wage if he quits to take on this new venture.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
12. If a firm is earning zero economic profits:
A. its revenues are sufficient to pay explicit costs, but not implicit costs.
B. the owner will not be able to pay himself or herself a salary.
C. it will shut down in the long run, but will continue to operate in the short run.
D. the owners are earning a return on their time and investment that is equal to the
opportunity costs of that time and investment.
Normal profit, or the opportunity cost of the owner's resources, is an implicit cost and so is
subtracted from revenue in calculating economic profit.
AACSB: Analytic
Blooms: Understand
profit.
13. Which of the following would not be included in the calculation of accounting profits?
A. Wages of workers.
B. The salary the owner could have earned working elsewhere.
C. Rent.
D. Medical insurance coverage for workers.
Implicit costs are not subtracted when calculating accounting profits.
AACSB: Analytic
Blooms: Understand
profit.
14. Economic profits are:
A. the same as accounting profits.

B. equal to total revenue minus the sum of explicit fixed and variable costs.
C. equal to total revenue minus both explicit and implicit costs.
D. greater than accounting profits.
Implicit costs and explicit costs are subtracted from revenue to calculate economic profit.
AACSB: Analytic
Blooms: Understand
profit.
15. Accounting profits minus implicit costs equals:
A. total revenues.
B. economic profits.
C. explicit costs.
D. fixed and variable costs.
Revenue minus explicit costs equals accounting profit. Revenue minus both explicit and
implicit costs equals economic profit.
AACSB: Analytic
Blooms: Understand
profit.
16. It is always true that:

B. economic profits are zero.
C. economic profits are greater than or equal to accounting profits.
D. accounting profits greater than or equal to economic profits.
Revenue minus explicit costs equals accounting profit. Revenue minus both explicit and
implicit costs equals economic profit.
AACSB: Analytic
Blooms: Understand
profit.
17. Normal profits occur when:

B. economic profits are positive.
C. economic profits are zero.
D. total revenues are greater than explicit and implicit costs.
Normal profit, or the opportunity cost of the owner's resources, is an implicit cost and so is
subtracted from revenue in calculating economic profit.
AACSB: Analytic
Blooms: Understand
profit.
Then Chris decided to become a consultant. Chris hired an administrative assistant at
$15,000 per year and rents office space (utilities included) for $3,000 per month. Chris
earned $100,000 in total revenue the first year as a consultant.
Chris's explicit annual cost is _____ and Chris's implicit cost is ______.
A. $15,000; $43,000
B. $18,000; $40,000
C. $36,000; $140,000
D. $51,000; $40,000
Explicit costs are 12 months of rent and the administrative assistant's salary: $36,000 +
$15,000. The implicit cost is Chris' old salary of $40,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
Chris's opportunity cost of running her own business is ______ which is the _______.
A. $15,000; implicit cost

B. $51,000; explicit cost
C. $40,000; implicit cost
D. $51,000; economic cost
The implicit cost is Chris' old salary of $40,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
Chris's accounting profit is _______ and Chris's economic profit is _______.
A. $100,000; $64,000
B. $64,000; $49,000
C. $49,000; $9,000
D. $9,000; 0
Revenues of $100,000 minus explicit costs of $36,000 (rent) plus $15,000 (administrator
salary) equals $49,000. Subtracting the implicit cost of Chris' old salary of $40,000 equals
$9,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
In order for Chris to earn normal profit, accounting profit would have to be _______.
A. $51,000
B. $40,000
C. 0
D. $9,000
Chris has implicit costs of $40,000, so an accounting profit of $40,000 would just cover
Chris' normal return.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
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.
Refer to the information given above. Pat's explicit cost is _____ and Pat's implicit cost is
______.
A. $16,000; $51,000
B. $15,000; $36,000
C. $16,000; $35,000
D. $35,000; $16,000
Explicit costs are rent, advertising and equipment: 12,000 + 1,000 + 3,000 = 16,000. Pat's
implicit cost is Pat's former salary of $35,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
Refer to the information given above. 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. -$1,000; -$1,000
Explicit costs are rent, advertising and equipment: 12,000 + 1,000 + 3,000 = 16,000, so
accounting profit is revenue of 50,000 - 16,000 = 34,000. Pat's implicit cost is Pat's former
salary of $35,000. Pat's accounting profit is $1,000 less than Pat's old salary.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
Refer to the information given above. For Pat to earn normal profit, accounting profit would
have to be _______.
A. $50,000
B. $35,000
C. $15,000
D. 0
Pat's implicit cost is Pat's former salary of $35,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
25. If owners of a business are receiving total revenues just sufficient to cover all their explicit
and implicit costs, they are:
A. doing better than their next best alternative.

B. earning a normal profit.
C. earning economic losses.
D. doing worse than their next best alternative.
If owners of a business are receiving total revenues just sufficient to cover all their explicit
and implicit costs then they are earning zero economic profits, or normal profit.
AACSB: Analytic
Blooms: Understand
profit.
26.
Refer to the figure above. An output level of 25 units results in accounting profits of _____
and economic profits of ________.
A. zero; $8
B. $125; $113
C. $125; zero
D. zero; -$8
Explicit costs equal revenue, so accounting profit is zero. Implicit costs are 8, so economic
profit is -8.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
27.
Refer to the figure above. An accountant would put the total cost of producing 15 units of
output at ______, and an economist would put the total cost of producing 15 units of output
at _______.
A. $69; $6
B. $63; $69
C. $86; $69
D. $63; $6
Accounting profit considers only explicit costs; economic profit considers explicit and
implicit costs.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
28.
Refer to the figure above. At what output level or levels are the business owners doing as
well as or better than their next best alternative?
A. 10 units
B. 10 and 15 units
C. 10, 15, and 20 units
D. 10, 15, 20, and 25 units
At quantity of 10 total revenues are 50 and total costs are 41; at quantity of 15 total
revenues are 75 and total costs are 69; at quantity of 100 total costs are 100. At higher
quantities, total costs exceed total revenues.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
profit.
29.
Refer to the figure above. Suppose all firms in this industry have identical costs to this firm
and are producing 15 units of output. One can predict that

C. firms will attempt to lower their implicit costs.
D. price must rise.
At 15 units, firms are earning greater than normal profit. Other firms will have an incentive
to enter this industry.
AACSB: Analytic
Blooms: Understand
Learning Objective: 07-02 Explain the Invisible Hand Theory and show how economic profit and economic loss affect the
allocation of resources across industries.
Topic: The Invisible Hand Theory
30. The statement, "price distributes goods and services to those that value them the most"
refers to the ______ function of price.
A. allocative
B. multiplicative
C. store of value
D. rationing
The rationing function of price distributes scarce goods to those who value them most
highly.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
31. The statement, "price directs resources across different sectors of the economy" refers to
the ______ function of price.
A. allocative
B. store of value
C. rationing
D. transitivity
The allocative function of price directs resources away from markets that are overcrowded
and toward markets that are underserved.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
32. Which of the following would be an example of the rationing function of price?
A. Switching from a Ph.D. in economics to finance because finance salaries are higher
B. Bill Gates purchasing the Mona Lisa for $5 billion
C. A firm attempting to lower its explicit costs
D. Government price controls
The rationing function of price distributes scarce goods to those who value them most
highly. It has to do with distributing goods among competing consumers.
AACSB: Analytic
Blooms: Understand
33. _____________ work together to guide resources to their highest value.
A. The explicit cost and the implicit cost of a profit maximizing firm
B. The short run and long run supply curve
C. The rationing and allocative functions of price
D. The economic profit and accounting profit
Prices act to distribute goods and productive resources to their most-valued use.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
34. Generally, ______ motivate firms to enter an industry while ______ motivate firms to exit an
industry.
A. economic profits; economic losses

B. accounting profits; accounting losses
C. accounting profits; economic losses
D. economic profits; accounting losses
Firms have an incentive to seek profit and to avoid loss.
AACSB: Analytic
Blooms: Understand
35. Last year Pat was a soybean farmer and Chris was a corn farmer. This year, high demand
for ethanol, an automobile fuel made from corn, causes the price of corn to increase.
Refer to the information above. You would predict that this year Pat may:
A. grow more soybeans.

B. switch to growing corn.
C. continue to grow the same amount of soybeans.
D. go out of business.
The allocative function of price provides incentive to allocate more resources toward corn
production.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Refer to the information above. Relative to last year, the price of soybeans is likely to be
______, and the price of corn is likely to be ______.
A. higher; higher
B. higher; lower
C. lower, higher
D. the same; higher
The allocative function of price causes resources to move away from soybeans toward
corn. A reduction in soybean supply will increase the price of soybeans. The shift in
demand has increased the price of corn.
AACSB: Reflective Thinking

Blooms: Evaluate
Difficulty: 3 Hard
Refer to the information above. Suppose Pat stopped growing soybeans and began growing
corn. What principle would explain that change?
A. The principle of comparative advantage.

B. The scarcity principle.
C. The incentive principle.
D. The equilibrium principle.
Incentives are behind the allocative function of price.

Blooms: Evaluate
Difficulty: 3 Hard
38. Suppose all firms in a perfectly competitive industry are experiencing economic profits.
One would expect that, over time, the number of firms will _______ and the market price
will _____.
A. rise; fall
B. fall; rise
C. rise; rise
D. rise; stay the same
Entry of new firms in response to profit incentives will shift the market supply curve to the
right.
AACSB: Analytic
Blooms: Understand
39. If all firms in a perfectly competitive industry earn a normal profit, then:

C. the number of firms in the industry is stable.
D. market supply will shift to the left.
There are no incentives to either enter or leave the industry if each firm is earning normal
profit.
AACSB: Analytic
Blooms: Understand
40. If all firms in a perfectly competitive industry are experiencing economic losses, then firms
will:
A. exit the industry, until economic profits are positive.

B. exit the industry, until accounting profits equal zero.
C. continue in the industry, hoping for better times.
D. exit the industry, until economic profits equal zero.
Firms will exit if they are not earning normal profit.
AACSB: Analytic
Blooms: Understand
41. For entry into a particular perfectly competitive industry to occur, which of the following
must be true?
A. Accounting profits are equal to zero

B. Accounting profits equal economic profits
C. Economic profits are greater than zero
D. Economic profits are equal to zero
Entry of new firms is a response to profit incentives.
AACSB: Analytic
Blooms: Understand
42. In an industry with free entry and exit, economic profits:
A. indicate a market failure.

B. can never occur.
C. provide incentives for a reallocation of resources out of other industries and into the
one with economic profits.
D. can be sustained indefinitely.
The incentive to earn profit and avoid loss causes firms to enter profitable markets and exit
unprofitable ones.
AACSB: Analytic
Blooms: Understand
43. In a perfectly competitive industry over the long run:
A. economic profits tend to persist.

B. the number of firms in an industry grows.
C. economic losses tend to persist.
D. economic profits and losses are driven towards zero by entry and exit.
unprofitable ones until the market settles in to a zero-profit equilibrium.
AACSB: Analytic
Blooms: Understand
The long-run equilibrium price in this industry is
A. $15.
B. $10.
C. $5.
D. $5 for some firms and $10 for others.
AACSB: Analytic
Blooms: Apply
The long-run equilibrium supply in this industry is
A. Supply A.
B. Supply B.
C. Supply C.
D. A Supply function that lies between Supply A and Supply B.
AACSB: Analytic
Blooms: Apply
When price is $15 in this industry,
A. the industry is in its long run equilibrium.

B. it is because supply has shifted from Supply B to Supply A because firms that were not
making a profit left the industry.
C. new firms will be expected to enter.
D. all firms are making zero economic profits.
AACSB: Analytic
Blooms: Apply
Firms in this industry will shut down if the price is
A. higher in the short run than in the long run.

B. less than or equal to $15.
C. less than or equal to $10.
D. less than or equal to $5.
AACSB: Analytic
Blooms: Apply
The firm depicted in the graph on the right faces a demand curve that
A. is horizontal at the market price.

B. is downward sloping, and less than market demand curve.
C. is the same as the marginal cost curve.
D. is the same as the market demand curve.
AACSB: Analytic
Blooms: Apply
In the long run, there will be ______ firms in this market.
A. 10
B. 15
C. 25
D. 50

Blooms: Analyze
50. An implication of entry and exit in response to the profit incentive is that, for perfectly
competitive firms,
A. no firm accepts zero economic profits in the long run.

B. firms produce the quantity that minimizes average variable costs in the short run.
C. firms produce the quantity that minimizes average total costs in the long run.
D. demand is completely inelastic.

Blooms: Analyze
51. One difference between the long run and the short run in a perfectly competitive industry is
that:
A. economic profits in the long run are always greater than they are in the short run.
B. economic profits in the short run are always greater than they are in the long run.
C. firms necessarily earn zero economic profit in the long run but may earn positive or
D. firms necessarily earn positive economic profit in the long run but may earn positive or
unprofitable ones until the market settles in to a zero-profit equilibrium.
AACSB: Analytic
Blooms: Understand
The long run equilibrium quantity in this industry is
A. 300.
B. 500.
C. 700.
D. more than 700.

Blooms: Apply
Assume that the market is currently as shown in the graph on the left (i.e., price of $8).
What is true of the number of firms?
A. There are currently 30 firms in the industry, and that number will remain stable until
there is a change in demand or in technology.
B. There are currently ten firms in this industry, and that number will remain stable until
there is a change in demand or in technology.
C. It is impossible to tell how many firms currently exist in this industry, but you can tell
that the number of firms is likely to increase in the near future.
D. There are currently ten firms in this industry, and that number is likely to increase in the
near future.

Blooms: Analyze
In the long run equilibrium in this market,
A. price will equal $5, and there will be 20 firms in the industry.
B. price will equal $5, and there will be 10 firms in the industry.
C. price will equal $8, and there will be 20 firms in the industry.
D. price will equal $5 and total output will equal 500 units, but there is not enough
information to know how many firms there will be.
AACSB: Analytic
Blooms: Apply
A starting assumption about this industry was that all of the firms had identical cost
functions. This assumption
A. is unrealistic because all firms are unique.

B. is realistic because any cost advantage of one firm will be quickly adopted by the
others.
C. is unrealistic because firms closely guard their production process secrets.
D. is unrealistic because competition forces all firms to seek the most efficient production
processes.

Blooms: Analyze
56. Which ordering best describes how a perfectly competitive industry would respond to a
sudden increase in popularity of the product? The market demand function will shift to the
right, causing the market:
A. price to increase, and a new stable equilibrium to be established at a higher price and
higher quantity.
B. price to increase, and all firms in the industry will earn higher profits for the foreseeable
future.
C. price to increase. Increased profits will encourage new firms to enter, shifting the
market supply function to the right. Long-run market equilibrium will be at a higher
quantity than before the surge in popularity.
D. price and quantity supplied to increase. Increased profits will encourage new firms to
enter shifting the market supply function upward. Long-run market equilibrium will be
at a lower quantity and higher price than before the surge in popularity.
The demand shift increases price and so profits. Profits attract new entry, increasing
quantity produced.

Blooms: Create
Difficulty: 3 Hard
57. One assumption of the perfectly competitive model is that of free entry. This assumption
most directly leads to the implication that:
A. firms will spend significant amounts of money on advertising.

B. positive economic profits will only be possible for in the short run.
C. firms will compete on the basis of better service and amenities rather than price.
D. a single firm will emerge as the industry leader.
Free entry means that firms can easily enter if there are profits to be made.
AACSB: Analytic
Blooms: Understand
58. Free entry of firms is a characteristic of:
A. all industries in the U. S. economy.

B. perfectly competitive industries.
C. centralized economies.
D. industries in which firms are earning positive economic profit.
Perfectly competitive firms are characterized by mobile resources, necessary for free entry.
AACSB: Analytic
Blooms: Understand
59. The allocative function of price works well under conditions of:
A. free entry and difficult exit.

B. free entry and free exit.
C. free entry only.
D. free exit only.
Free entry and free exit are necessary for firms to respond to the allocative function of
price.
AACSB: Analytic
Blooms: Understand
60. Barriers to entry are created by:
A. government regulation only.

B. government regulation and natural characteristics of a market.
C. natural characteristics of a market only.
D. restrictions on foreign trade.
Government regulations and natural market characteristics can give rise to barriers to
entry.
AACSB: Analytic
Blooms: Understand
61.
producer, the profit maximizing output for a single firm is ______ gallons.
A. 500
B. 1000
C. 1500
D. 2000
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
62.
Refer to the figure above. Suppose S2 is the industry supply curve. At the profit maximizing
quantity price will ______ the opportunity cost of the resources required to enter the market
and firms will _____.
A. be less than; exit the market

B. exceed; exit the market
C. exceed; enter market
D. be less than; enter the market
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
63.
producer, what is the profit (loss) for this firm?
A. $10,000
B. $15,000
C. $20,000
D. $30,000
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
64.
Refer to the figure above. Suppose S2 is the industry supply curve and all firms are
producing at the profit maximizing quantity. What will happen to the supply curve in the
long run?
A. Quantity supplied will increase but stay on the S2 curve.

B. Supply will shift to S1.
C. Supply will shift to S.
D. Quantity supplied will decrease but stay on S2 curve.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
65.
Refer to the figure above. In the long run equilibrium price is _____ and an individual firm's
profit maximizing quantity is _______.
A. $20; 4 million
B. $15; 6 million
C. $15; 3 thousand
D. $10; 8 million
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
66.
Refer to the figure above. What will be the long-run economic profit for this firm?
A. $0
B. $10,000
C. $15,000
D. $20,000
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
67. If buyers and sellers are free to pursue their own selfish interests, according to the invisible
hand theory, the result would be:
A. anarchy.
B. exploitation of workers and natural resources.
C. an equitable allocation of resources.
D. an efficient allocation of resources.
Adam Smith theorized that the invisible hand of self interest would guide economic agents
to an efficient outcome.
AACSB: Analytic
Blooms: Understand
68. E-commerce and an internet presence are important to many firms, requiring employees
with specialized skills that are in short supply. The invisible hand solves the employment
problem by:
A. encouraging the government to set up new training programs.

B. giving selfish workers the incentive to acquire the skills in order to receive high wages.
C. allowing the few employees with the skills to exploit the firms.
D. moving slowly until the e-commerce craze ends.
The allocative function of price, in this case wages, encourages people to enter professions
that are in short supply.
AACSB: Analytic
Blooms: Understand
69. In a free market economy, the decisions of buyers and sellers are:
A. random.
B. motivated by custom and tradition.
C. in need of coordination by the government.
D. guided by prices.
Prices allocate and ration goods and services in a free market economy.
AACSB: Analytic
Blooms: Understand
70. Some people have argued that the government should provide medical care to everyone.
Under this system:
A. the price of medical care will allocate resources efficiently.

B. the price of medical care will ration resources efficiently.
C. prices will not ration medical care so there will be no scarcity.
D. prices will not ration medical care so some other rationing method will be used.
Medical care is scarce whether it is paid for by the consumer or not. If prices do not ration
medical care, some other method will be necessary.

Blooms: Evaluate
Difficulty: 3 Hard
71. If resources are currently misallocated in a market with no barriers to entry, then the
presence of opportunities to profit:
A. will inspire a more efficient reallocation of resources.

B. will inspire a less efficient reallocation of resources.
C. will not inspire a reallocation of resources in the absence of government regulation.
D. will not inspire a reallocation of resources unless a firm is subsidized.
Without barriers to entry, misallocations of resources tend to fix themselves through the
self-interested actions of firms.
AACSB: Analytic
Blooms: Understand
72. Barriers to entry are _____, and one effect of barriers to entry is to _____ the ability of the
invisible hand to allocate resources efficiently.
A. uncommon today due to antitrust enforcement; improve

B. forces that limit new firms from joining an industry; reduce
C. forces that limit new firms from joining an industry; irrelevant to
D. uncommon today due to antitrust enforcement; reduce
Barriers to entry prevent the allocative function of price from working.
AACSB: Analytic
Blooms: Understand
73. Economic rent is:
A. the amount you pay for an apartment in a free market.

B. the payment made to suppliers of an input.
C. the difference between the payment made to the supplier of an input and the supplier's
reservation price.
D. the same as the input supplier's reservation price.
Economic rent is the part of the payment for a factor of production that exceeds the factor
owner's reservation price.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-03 Explain why economic profit; unlike economic rent; tends toward zero in the long run.
Topic: Economic Rent Versus Economic Profit
74. Mary Jane is willing to baby-sit for $6 an hour. Her neighbor called and asked her to baby-
sit for $8 an hour. Mary Jane will earn:
A. consumer surplus of $2 per hour.

B. economic rent of $2 per hour.
C. economic profit of $8 per hour.
D. accounting profit of $8 per hour, but economic profit of $0 per hour.
AACSB: Analytic
Blooms: Understand
75. Economic rent:
A. equals economic profit minus accounting profit.

B. is driven towards zero by free entry.
C. can be positive, zero, or negative.
D. can never be negative.
AACSB: Analytic
Blooms: Understand
76. Angelina Jolie's economic rent from starring in a movie is equal to the difference between:
A. her initial offer and her final salary, including royalties.

B. her initial offer and what she could earn in a different film.
C. her final salary and the average for leading actresses.
D. her final salary and the least she would be willing to accept for a role.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
77. Superstar professional athletes can sustain their economic rents because:
A. team owners will pay anything to win the championship.

B. they have excellent union representation.
C. their opportunity costs of playing are high.
D. if their current team does not pay, they can take their unique talents to another team
willing to pay.
Economic rent often arises when competitors bid on a unique input, driving its price up.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
78. Professor Plum, who earns $75,000 per year, read in the paper today that the university
pays its basketball coach one million dollars per year in exchange for the coach's
agreement to remain at the university for at least three more years. The coach earns more
than Professor Plum because:
A. demand for sporting events exceeds demand for college courses.

B. universities value sports over academics.
C. the coach is able to earn economic rent due to his unique talents.
D. the coach has more human capital than does Prof. Plum.
The coach is able to extract economic rent from the university.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
79. Unlike economic profits, economic rents:
A. can be less than zero.

B. can't be easily driven to zero by entry.
C. don't involve the idea of opportunity costs.
D. only apply to land.
Economic rent is earned by factors that are unique.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
80. Duke is a particularly highly skilled negotiator. 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, with 75% going to Duke and 25% going to the law firm.
Economic rent is bid up to prevent a unique factor from moving to another firm.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
81. Factors of production most likely to earn positive economic rent are:
A. real estate.
B. uniquely talented individuals.
C. fixed factors.
D. factors that are subject to free entry.
Economic rent is bid up to prevent a unique factor from moving to another firm.
AACSB: Analytic
Blooms: Understand
82. A supplier of a factor of production has a reservation price of $100. The purchaser of the
factor of production has a reservation price of $200. If the factor of production is unique,
then:
A. there will be no transaction as the reservation prices are unequal.

B. the transaction will occur and the price will be $150.
C. the transaction will occur and the price will be $200.
D. the transaction will occur and the price will be $100.
Economic rent is bid up to prevent a unique factor from moving to another firm. Here, the
purchaser of the factor will be willing to pay his reservation price to prevent the unique
factor from going elsewhere.
AACSB: Analytic
Blooms: Understand
83. If a single firm, belonging to a perfectly competitive industry in long run equilibrium,
discovers a significant cost saving methodology, then:
A. all firms will enjoy economic profits for a short period of time.
B. the rest of the industry will quickly adopt the new methodology.
C. the firm will enjoy economic profits forever.
D. the firm will lower its price to drive the rest of the industry out of business.
Firms have an incentive to find the least-cost production methods.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
84. Suppose several United States software design companies compete with each other in a
perfectly competitive environment. If one company decides to move some of its offices to a
low-wage country in order to reduce operating costs:
A. the other companies will still be able to remain profitable while operating solely in the
United States.
B. the company that moves to the lower-wage country will earn positive economic profits
in the long run because it will keep a cost advantage.
C. the other companies will also move to the low wage country in order to remain in the
industry.
D. the first company to move will charge a lower price than the companies remaining in the
United States.
Firms have an incentive to find the least-cost production methods. If one company employs
a lower-cost method, the others must follow in order to remain competitive.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
85. Cost saving developments—e.g., a new production procedure that shortens a production
process by two steps—in a perfectly competitive industry will lead to:
A. entry by new firms.

B. economic profits by new firms.
C. economic profits for a few firms for a short time.
D. a leftward shift of the supply curve.
The first firms to adopt a cost-saving technology will profit for a short time, but eventually
all firms will adopt the same technology.
AACSB: Analytic
Blooms: Understand
86. The statement, "If a deal is too good to be true, it probably is not true" is most closely
related to which principle?
A. The low-hanging fruit principle

B. The no-cash-on-the-table principle
C. The cost-benefit principle
D. The diminishing marginal returns principle
Deals that are good are quickly exploited. If the deal remains available then it probably was
not that great a deal in the first place.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
87. The No Cash on the Table principle means unexploited opportunities:
A. never exist.
B. cannot be exploited for long.
C. can exist in equilibrium but rarely do.
D. always exist in equilibrium.
Unexploited opportunities are quickly exploited, removing the opportunity to continue to

benefit.
AACSB: Analytic
Blooms: Understand
88. Curly usually drives on the freeway to get to work, but this morning he heard on the radio
that there was a major accident causing a long traffic back-up at the first downtown exit.
So, Curly decided to drive on side streets to get to work. When Curly started driving he
noticed that:
A. more people than usual were taking the side streets downtown.
B. the side streets were about as crowded as they usually are.
C. fewer drivers were using the side streets than usual.
D. more people were getting on the freeway than usual.
When other commuters heard about the accident they exploited the faster route, just like
Curly. Therefore, the side streets were more crowded than usual.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
89. When either the costs of production or the benefits of consumption to individuals differ
from those of society:
A. the equilibrium output will be the socially optimal output.

B. the equilibrium is not efficient.
C. the allocation of resources remains correct.
D. the invisible hand had completely failed.
Equilibrium is not socially optimal if individual costs and benefits differ from the costs and
benefits experienced by society as a whole.
AACSB: Analytic
Blooms: Understand
Topic: The Invisible Hand in Action
90. The Smart for One, Dumb for All principle indicates that:
A. pursuing selfish interests always promotes social welfare.

B. if everyone is doing it, you should not.
C. pursuing selfish interests always lessens social welfare.
D. pursuing selfish interests sometimes conflicts with social welfare.
Self interest sometimes leads to the best outcome, but there are situations in which the
pursuit of self interest leads to an inefficient outcome.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-04 Identify whether the market equilibrium is socially efficient; and why no opportunities for gain
remain open to individuals when a market is in equilibrium.
Topic: The Distinction Between an Equilibrium and a Social Optimum
91. Adam Smith believed that the individual pursuit of self-interest:
A. was a basic human instinct that must be curbed in order for society to advance.
B. always worked to undermine social benefits.
C. always worked to advance social benefits.
D. sometimes worked to advance social benefits.
Self interest sometimes leads to the best outcome, but there are situations in which the
pursuit of self interest leads to an inefficient outcome.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
92. According to the textbook, individual incentives have led to:
A. the optimal number of stock market analysts because it is a competitive market with no
entry barriers.
B. too many stock market analysts because market analysis does not produce social
benefits.
C. too many stock market analysts because the individual incentive to forecast faster
exceeds the social benefit of a faster forecast.
D. too few stock market analysts because the efficient market hypothesis predicts that no
analyst will do better than random chance in the long run.
Increased speed of forecasting stock prices provides little benefit to society, but self-
interest encourages people to become analysts.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
93. Which of the following statements illustrates the concept of efficiency?
A. The production of the good generates very little pollution.

B. At equilibrium, all mutually beneficial transactions have taken place.
C. The production of the good generates very few by-products.
D. The consumption of the good produces very little waste.
In equilibrium every trade that would benefit both the buyer and the seller have occurred.
AACSB: Analytic
Blooms: Understand
94. Pareto efficiency is a situation in which:
A. no one is made better off.

B. trades remain that would make some better off without harming others.
C. trades have benefited some and harmed others.
D. any further trades will harm someone.
Pareto efficiency occurs when every beneficial trade has taken place.
AACSB: Analytic
Blooms: Understand
95. Excess demand in a market is evidence of:
A. Pareto efficiency.
B. the opportunity for surplus-enhancing trades.
C. an economic pie that is too small.
D. equilibrium.
A market that is out of equilibrium is a market in which some mutually beneficial trades
remain.
AACSB: Analytic
Blooms: Understand
96. Which of the following describes a surplus-enhancing transaction?
A. The Federal government taxes wealthy individuals to pay for income support payments
to poor people.
B. The public television station cancels Sesame Street because nobody pledged during
that show even though many kids were watching it.
C. I pay $5.00 for one scoop of ice cream at the ballgame even though I have a whole
gallon at home in my freezer that cost me less than $5.00.
D. Your state government imposes a higher minimum wage law than the one set by federal
law.
A voluntary transaction is evidence that the buyer and the seller both benefit.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Refer to the information above. The fact that Ingrid cannot buy a ticket to "Mamma Mia!" is
evidence of:
A. Pareto efficiency in this market.

B. A price ceiling above the equilibrium price.
C. A situation that is not Pareto efficient.
D. The benefits of allocating resources on the first-come, first-served basis.
There is excess demand at the $60 price.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Refer to the information above. Ingrid decides to try to buy a ticket from a scalper (a person
who has purchased extra tickets at the box office with the intent to resell those tickets). If
Ingrid finds someone who is willing to sell her a ticket for $70, she should:
A. not purchase it because it is overpriced by $10.

B. not purchase it because the cost to the scalper was only $60, and it is unfair of the
scalper to take advantage of the ticket shortage.
C. purchase it because to do so will lead to an increase in surplus.
D. purchase it even though it is not surplus-enhancing.
The price is less than Ingrid's reservation price and apparently greater than the seller's
reservation price.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Refer to the information above. Sven had purchased a ticket at the ticket window for $60.
Sven's reservation price is $65. If Sven attends "Mamma Mia!" and Ingrid does not, it is:
A. inefficient because Sven and Ingrid could have made a mutually beneficial trade.
B. efficient because Sven paid less for the ticket than his reservation price.
C. efficient because Sven arrived at the ticket counter before the show was sold out.
D. inefficient because ticket prices are regulated by the government.
Sven could have sold Ingrid the ticket for $70 earning them each a surplus.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
100. Market equilibrium is considered efficient because:
A. prices are low.

B. the price consumers pay equals the profit producers receive.
C. no more trades remain that benefit some without harming others.
D. it assures that both the buyer and seller earn equal surplus.
Equilibrium extracts the maximum amount of surplus because all mutually beneficial trades
take place.
AACSB: Analytic
Blooms: Understand
101. Suppose the market for coffee is in equilibrium at a price of $5 per pound. This means:
A. all producers who want to sell coffee earn a profit.

B. all potential producers not producing coffee require less than $5 to produce coffee.
C. all consumers who want to buy coffee are satisfied.
D. all potential consumers not buying coffee value a pound of coffee at less than $5.
In equilibrium consumers who value the product at less than the price do not obtain the
product.
AACSB: Analytic
Blooms: Understand
102. Daily Supply and Demand: Oranges in Hurricane Alley
Refer to the figure above. At the price of $4.00, sellers offer _____ pounds of oranges per
day, and buyers want to purchase ____ pounds of oranges a day.
A. 10; 30
B. 10; 20
C. 20; 20
D. 30; 10
Read the quantity from the x-axis at the point that corresponds with the price on the supply
curve for the sellers and the demand curve for the buyers.
AACSB: Analytic
Blooms: Understand
Refer to the figure above. The marginal buyer values the tenth pound of oranges at ____.
A. $0
B. $4
C. $8
D. $12
The marginal buyer is the buyer whose reservation price just equals the price on the
demand curve.
AACSB: Analytic
Blooms: Understand
Refer to the figure above. The price of $4.00 per pound will lead to a(n) _____ of _____
pounds of oranges per day.
A. excess supply; 20
B. excess demand; 30
At $4.00, thirty pounds are demanded but only ten pounds are supplied.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Refer to the figure above. What is the cost of harvesting the tenth pound of oranges?
A. $2
B. $2.50
C. $4
D. $5
The marginal cost is the same as the supply curve. Read the cost on the y-axis.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Refer to the figure above. If the supplier sells the tenth pound of oranges to the most eager
buyers for $8, the seller is _____ better off than before and the buyer is ______ better off
than before.
A. $8; $0
B. $6; $2
C. $4; $4
D. $2; $6
The tenth pound costs the seller $4 to produce. The marginal buyer of the tenth pound
values that pound of oranges at $12.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
107.
Supply and Demand Curve for Jeans in Gallania Mall.
Refer to the figure above. At the price of $60 each, sellers offer _____ pairs of jeans per
day, and buyers wish to purchase _____ pairs of jeans a day.
A. 60; 20
B. 8; 24
C. 16; 16
D. 24; 8
Read the quantity from the x-axis at the point that corresponds with the price on the supply
curve for the sellers and the demand curve for the buyers.
AACSB: Analytic
Blooms: Understand
108.
Supply and Demand Curve for Jeans in Gallania Mall. Refer to the figure above. The price
of $60 each will lead to an _____ of _____ pairs of jeans per day.
A. excess supply; 8
B. excess supply; 16
At $60, 24 pairs of jeans are supplied and 8 are demanded.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
109.
Supply and Demand Curve for Jeans in Gallania Mall. Refer to the figure above. Suppose
that jeans initially sell for $60 each. If the seller lowers the price to $40 each, it would
create an extra ____ of economic surplus. Thus, selling jeans for $60 each is _______.
A. $160; inefficient
B. $80; efficient
C. $80; the equilibrium price
D. $160; efficient
Lowering the price adds surplus equal to the triangle of new trades: trades that occur at
prices below $60 but above $40. That triangle's area is ½ × (60 - 20) × (16 - 8) or ½ × 40
× 8 = 160.
AACSB: Analytic
Blooms: Evaluate
Difficulty: 3 Hard
110.
Supply and Demand Curve for Jeans in Gallania Mall. Refer to the figure above. The
equilibrium price will NOT lead to the largest possible total economic surplus when:
A. the jeans are purchased by consumers with reservation prices greater than $40.
B. the jeans market is perfectly competitive.
C. production of jeans generates air pollution.
D. production of jeans experiences diminishing marginal returns to inputs.
Market equilibrium is not efficient when all costs and benefits are not accounted for.

Blooms: Evaluate
Difficulty: 3 Hard
111. A market equilibrium is only efficient when:
A. buyers and sellers each earn equal surplus from the transaction.
B. consumer surplus and producer surplus are both zero.
C. all relevant costs, including those imposed on others, are accounted for.
D. income is distributed equitably.
Market equilibrium is not efficient when all costs and benefits are not accounted for.
AACSB: Analytic
Blooms: Understand
112. Suppose that a firm is located along a river. The firm uses water from the river to cool its
The damage to the downstream fish is a(n):
A. relevant cost of production.

B. relevant cost of production only if the firm is charged a fine for the damage done.
C. relevant cost of production only if there are commercial fishing activities downstream.
D. implicit cost of production which the firm will take into account in determining profit
maximizing output.
Costs imposed on others are costs of production even if the firm does not have to pay
those costs.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
113. Suppose that a firm is located along a river. The firm uses water from the river to cool its
If the firm does not have to pay for the damage to the downstream fish, the market
equilibrium price will be ________ and the market equilibrium quantity will be _____.
A. inefficiently high; inefficiently low

B. inefficiently high; efficient
C. inefficiently low; inefficiently high
D. efficient; inefficiently low
Market equilibrium is not efficient when all costs and benefits are not accounted for. In this
case, the firm's calculated costs are lower than the total social costs so it produces more
than is socially optimal.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
114. Which of the following statements expresses the justification for making efficiency the first
goal of economic interaction?
A. Efficiency gives the poor an incentive to improve their economic status.

B. Since the consensus on what is a fair distribution of goods is impossible, efficiency is
the next best goal.
C. People are not really concerned about the problems of the poor.
D. Efficiency maximizes total economic surplus and thereby allows other goals to be more
fully achieved.
While efficiency is not the only goal, it generates surplus from use of resources, allowing us
to meet other goals.
AACSB: Analytic
Blooms: Understand
115. If the demand curve fails to capture all of the benefits of consumption, then the:
A. equilibrium price is efficient but the quantity will be too large.

B. the equilibrium price is inefficiently low.
C. government needs to impose regulations that require more consumption.
D. the equilibrium price is inefficiently high.
Market equilibrium is not efficient when all costs and benefits are not accounted for. In this
case, the benefits of consumption are under-stated.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
116. Which of the following is NOT guaranteed by the efficiency of the market equilibrium?
A. Price represents the value of an extra unit of consumption.

B. Rich and poor will have adequate access to the good.
C. Price represents the cost of an extra unit of production.
D. All mutually beneficial trades will have been made.
Market equilibrium does not address issues of poverty.
AACSB: Analytic
Blooms: Understand
117. The argument that efficiency is an appropriate goal assumes that the gains from enhancing
efficiency:
A. will be equally distributed in the population.

B. will benefit the poor by more than the wealthy.
C. could potentially benefit everyone.
D. reduce income disparities in the population.
Efficiency only creates additional benefits, but does not address the distribution of those
benefits.

Blooms: Evaluate
Difficulty: 3 Hard
118. Price ceilings that are below the equilibrium price result in:
A. increased total economic surplus.

B. shortages.
C. surpluses.
D. the same amount of total economic surplus with a reallocation from producers to
consumers.
A price ceiling that is less than the equilibrium price prevents prices from rising to
equilibrium, so excess demand remains.
AACSB: Analytic
Blooms: Understand
Learning Objective: 07-05 Calculate total economic surplus and explain how it is affected by policies that prevent markets
from reaching equilibrium.
Topic: The Cost of Preventing Price Adjustments
119. A price ceiling that is below the equilibrium price will cause:
A. producer surplus to fall.

B. total economic surplus to rise.
C. quantity supplied to exceed quantity demanded.
D. demand to increase.
A price ceiling that is less than the equilibrium price reduces the area of producer surplus.
AACSB: Analytic
Blooms: Understand
120. Price ceilings above the equilibrium price result in:
A. market prices above the equilibrium price.

B. a market unable to reach Pareto Efficiency.
C. a market that is able to reach Pareto Efficiency.
D. wealth redistribution to benefit the poor.
A price ceiling that is above the equilibrium price will have no effect on the market.
AACSB: Analytic
Blooms: Understand
121. If an individual consumer is willing to pay $11 for one unit of a good but finds he can
purchase it for $7, he has a consumer surplus of:
A. $18.00.
B. $11.00.
C. $7.00.
D. $4.00.
Consumer surplus is the reservation price minus the price paid.
AACSB: Analytic
Blooms: Understand
122. If an individual producer is willing to produce one unit of a good for $2.50 but finds he can
sell it for $7.50, he has a producer surplus of:
A. $10.00.
B. $7.50.
C. $5.00.
D. $6.25.
Producer surplus is the price received minus the seller's reservation price.
AACSB: Analytic
Blooms: Understand
123. The cumulative difference between the price producers actually receive and the price for
which they are willing to produce is:
B. lost surplus.
Producer surplus is the price received minus the seller's reservation price.
AACSB: Analytic
Blooms: Understand
124. The sum of the economic surpluses accruing to buyers and sellers is:
B. equal to profit.
Producer surplus plus consumer surplus equals total surplus.
AACSB: Analytic
Blooms: Understand
125. Suppose a market is in equilibrium. The area between the demand curve and the market
price is:
A. the total economic surplus.

D. the surplus loss.
Consumer surplus is the area between the consumers' reservation prices and the price
they must pay in the market.
AACSB: Analytic
Blooms: Understand
126. Suppose a market is in equilibrium. The area between the market price and the supply
curve is:
A. the surplus loss.

D. total economic surplus.
Producer surplus is the area between the price received and the sellers' reservation prices.
AACSB: Analytic
Blooms: Understand
127. Consumer surplus is the value of:
A. consumer spending on frivolous goods.

B. the cumulative difference between what consumers are willing to pay and the price they
actually pay.
C. the difference between the suggested retail price and the everyday low price.
D. the difference between the list price and the price the consumer can negotiate.
Consumer surplus measures the difference between the price consumers are willing to pay
and the price they must pay in the market.
AACSB: Analytic
Blooms: Understand
128. Total economic surplus is greatest when:
A. price controls keep prices low enough that most consumers can purchase the item.
B. consumer surplus and producer surplus are equal.
C. consumer surplus exceeds producer surplus.
D. the market is in equilibrium.
The areas of the triangles that measure consumer surplus and producer surplus are largest
in equilibrium.
AACSB: Analytic
Blooms: Understand
129.
Refer to the figure above. When the market is unregulated, consumer surplus equals:
A. ½ × (AJ) × (JE).
B. ½ × (AB) × (BC).
C. ½ × (AG) × (GI).
D. ½ × (EH) × (HC).
Consumer surplus is the triangle above price and below the demand curve.
AACSB: Analytic
Blooms: Understand
130.
Refer to the figure above. When the market is unregulated, producer surplus equals:
A. (DB) × (BC).
B. ½ × (DG) × (GF).
C. ½ × (DB) × (BC).
D. ½ × (FH) × (HC).
Producer surplus is the triangle below price and above the supply curve.
AACSB: Analytic
Blooms: Understand
131.
Refer to the figure above. Assume that a price ceiling is imposed at point G. The distance
______ measures the extent of the __________.
A. Q2Q1; excess supply

B. FI; excess demand
C. FI; excess supply
D. GF; excess demand
Q3 is demanded when price is G but only Q2 is supplied.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
132.
Refer to the figure above. After the price ceiling at price G is imposed, producer surplus
_________ and is represented by the area _______.
A. increases; DBC
B. decreases; DGF
C. increases; 0GFQ2
D. decreases; 0DFQ2
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
133.
Refer to the figure above. After the price ceiling at price G is imposed, consumer surplus _
is represented by the area _______.
A. BJEH
B. BAEH
C. JAE
D. GAEF
Consumer surplus is the area above price and below the demand curve.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
134.
Refer to the figure above. The surplus loss due to the price ceiling imposed at price G is
represented by the area:
A. FEC.
B. DAC.
C. GJEF.
D. JAE + DGF.
Lost surplus is the area between the demand and supply curves between the quantity that
is traded with the price ceiling and the quantity that would be traded in equilibrium.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
135.
Refer to the figure above. If the market is unregulated, the value of consumer surplus is:
A. $4.
B. $8.
C. $16.
D. $24.
Consumer surplus is the triangle above price and below the demand curve.
AACSB: Analytic
Blooms: Understand
136.
Refer to the figure above. If the market is unregulated, the value of producer surplus is:
A. $16.
B. $24.
C. $32.
D. $48.
AACSB: Analytic
Blooms: Understand
137.
Refer to the figure above. If the market is unregulated, the value of the total economic
surplus is:
A. $20.
B. $32.
C. $48.
D. $84.
Producer surplus plus consumer surplus equals total surplus.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
138.
Refer to the figure above. Suppose a price ceiling is imposed at $4. The value of the
consumer surplus is:
A. $36.
B. $20.
C. $24.
D. $28.
Consumer surplus is the area above price and below the demand curve. Here it is a triangle
with area ½ × (10 - 8) × 4 = 4 plus a rectangle with area (8 - 4) × 4 = 16.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
139.
Refer to the figure above. Suppose a price ceiling is imposed at $4. The value of the
producer surplus is:
A. $24.
B. $16.
C. $2.
D. $4.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
140.
Refer to the figure above. The total economic surplus after the $4 price ceiling is imposed
is ____, so that the surplus lost due to the $4 price ceiling is ________.
A. $4; $48.
B. $24; $16
C. $24; $8
D. $32; $8
Total surplus is producer surplus plus consumer surplus. Calculate the area before the
price ceiling. It is $32. With the price ceiling it is $24. The lost surplus is 32 - 24 = 8.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
141. Subsidies are most likely to:
A. reduce consumer surplus.

B. increase total economic surplus.
C. reduce total economic surplus.
D. leave total economic surplus unchanged, but transfer surplus from producers to
consumers.
Subsidies cause areas of total surplus to shrink.
AACSB: Analytic
Blooms: Understand
142. Suppose that in an effort to help single parents, the government has decided to pay part of
the cost of childcare. This measure will
A. increase efficiency in the childcare market.

B. increase consumer surplus in the childcare market.
C. increase total surplus in the childcare market.
D. leave the quantity of childcare unchanged.
Subsidies cause areas of consumer surplus to grow, but total surplus to shrink.
AACSB: Analytic
Blooms: Understand
143.
Refer to the figure above. With no subsidy, the equilibrium price of sugar is _____ and the
A. $1,000; 14
B. $1,000; 10
C. $1,500; 14
D. $1,500; 10
Read the price on the y-axis and the quantity on the x-axis using the World price supply
curve.
AACSB: Analytic
Blooms: Understand
144.
Refer to the figure above. With no subsidy, what is the consumer surplus?
A. $1,000
B. $7,500
C. $10,100
D. $14,000
Consumer surplus without the subsidy is a triangle with area ½ × (3,000 - 1,500) × 10 =
7,500.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
145.
Refer to the figure above. With no subsidy, what is the producer surplus?
A. $0
B. $6,000
C. $7,500
D. $17,000
There is no producer surplus when supply is a horizontal line at the market price.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
146.
Refer to the figure above. With the subsidy, the equilibrium price of sugar is _____ and the
A. $1000; 14
B. $1000; 10
C. $1500; 14
D. $1500; 10
Read the price on the y-axis and the quantity on the x-axis using the price with subsidy
supply curve.
AACSB: Analytic
Blooms: Understand
147.
Refer to the figure above. With the subsidy, what is the consumer surplus?
A. $1,000
B. $7,500
C. $10,100
D. $14,000
Consumer surplus is a triangle with area ½ × (3,000 - 1,000) × 14 = 14,000.
AACSB: Analytic
Blooms: Understand
Difficulty: 3 Hard
148.
Refer to the figure above. With the subsidy, what is the producer surplus?
A. $0
B. $6,000
C. $7,500
D. $17,000
There is no producer surplus when supply is a horizontal line at price.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
149.
Refer to the figure above. After the subsidy, consumer surplus ______ by ______ per day.
A. decreased; $500
C. increased; $1,000
D. increased; $6,500
Consumer surplus without the subsidy is $7,500 and with the subsidy it is $14,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
150.
Refer to the figure above. The cost of subsidy, which must be borne by taxpayers, is:
A. $500
B. $2,000
C. $1,500
D. $7,000
The cost is the area of the rectangle (1,500 - 1,000) × 14 = 7,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
151.
Refer to the figure above. The net effect of the subsidy program is that total economic
surplus has ______ by _____.
A. increased; $6,500
C. increased; $500
D. decreased; $500
Consumer surplus increased by $6,500 at a cost to taxpayers of $7,000.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard

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Test Bank for Principles of Microeconomics 5th

Edition Frank Bernanke 007731851X

Multiple Choice Questions

A. earn an accounting profit.

A. self-interest leads an economy to ruin.

A. measure the opportunity costs of the business owners.

4. Which of the following is NOT an example of explicit costs?

A. Wages paid to workers

A. are the only costs that matter to business owners.

A. are always fixed.

A. equal to total revenues minus implicit costs.

8. An example of an implicit cost is:

A. interest paid on a bank loan.

A. rent that you have paid in advance for use of a building.

$1,000 in monthly rent for office space.

A. You did the math incorrectly.

A. Yes, if Larry has at least $1,000 in savings to get started.

12. If a firm is earning zero economic profits:

14. Economic profits are:

A. the same as accounting profits.

15. Accounting profits minus implicit costs equals:

16. It is always true that:

A. accounting profits are positive.

A. accounting profits are positive.

A. $15,000; implicit cost

Chris's accounting profit is _______ and Chris's economic profit is _______.

A. doing better than their next best alternative.

A. new firms will enter the industry.

33. _____________ work together to guide resources to their highest value.

A. economic profits; economic losses

A. grow more soybeans.

A. The principle of comparative advantage.

A. new firms will enter the industry.

A. exit the industry, until economic profits are positive.

A. Accounting profits are equal to zero

42. In an industry with free entry and exit, economic profits:

A. indicate a market failure.

A. economic profits tend to persist.

The long-run equilibrium price in this industry is

The long-run equilibrium supply in this industry is

When price is $15 in this industry,

A. the industry is in its long run equilibrium.

Firms in this industry will shut down if the price is

A. higher in the short run than in the long run.

A. is horizontal at the market price.

In the long run, there will be ______ firms in this market.

A. no firm accepts zero economic profits in the long run.

The long run equilibrium quantity in this industry is

In the long run equilibrium in this market,

A. is unrealistic because all firms are unique.

A. firms will spend significant amounts of money on advertising.

58. Free entry of firms is a characteristic of:

A. all industries in the U. S. economy.

A. free entry and difficult exit.

60. Barriers to entry are created by:

A. government regulation only.

A. be less than; exit the market

A. Quantity supplied will increase but stay on the S2 curve.

A. encouraging the government to set up new training programs.

A. the price of medical care will allocate resources efficiently.

A. will inspire a more efficient reallocation of resources.

A. uncommon today due to antitrust enforcement; improve

A. the amount you pay for an apartment in a free market.

A. consumer surplus of $2 per hour.

Chris's accounting profit is _ and Chris's economic profit is _.