Business Economics

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248 multiple choice questions in Business Economics
Economics and Business (Maastricht University)
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1. Decisions that involve doing something or not (like seeing a movie) and decisions that involve choosing a level
(square footage of an apartment) are
A) completely dissimilar, requiring two different models on how to decide.
B) reasonably dissimilar with the cost-benefit principle useful only when deciding on the level.
C) similar, requiring a comparison of total benefits and total costs.
D) similar, requiring a comparison of marginal benefits and marginal costs.
E) dissimilar with coin flipping the preferred mechanism for deciding the yes or no questions.
2. The marginal benefit of an activity is the

A) same as the total benefits of the activity.
B) total benefit divided by the level of the activity.
C) change in the activity divided by the change in benefits.
D) extra benefit associated with an extra unit of the activity.
E) little bit of benefit one gets from activities that are healthy but unpleasant.
3. The distinguishing feature of microeconomics is studying

A) choices.
B) the performance of national economics.
C) the overall price level.
D) choices made by individuals or groups in the context of individual markets.
E) how to improve the performance of national economics.
4. The range of topics or issues that fit within the definition of economics is
A) limited to market activities, e.g., buying soap.
B) limited to individuals and firms.
C) extremely wide, requiring only the ideas of choice and scarcity.
D) limited to governments and nations.
E) very limited.
5. Economic models claim to be a(n)

A) reasonable abstraction of how people make choices, highlighting the most important factors.
B) exact replication of the decision-making process people use.
C) interesting chalkboard exercise with little applicability to the real world.
D) exceptionally accurate method of predicting nearly all behavior of everyone.
E) absolutely correct description of the world.
6. The existence of the cost-benefit principle stems from

A) the economist's mind.
B) the tradeoffs the scarcity principle indicates must be made.
C) itself, i.e., it stands on its own.
D) opportunity costs.
E) the unlimited nature of resources.
7. If the total benefits of watching 1,2, and 3 baseball games on TV are 100, 120, and 125 then the marginal benefits
are
A) 100,120, and 125.
B) 100, 20, and 5.
C) 100, 609, and 41.67.
D) 100, 240, and 375.
E) 100, 10, and -30.
8. The economic surplus of a particular action is

A) the value of the action.
B) the cost of the action.
C) the difference between the benefit and the cost of the action.
D) the average of the benefits and costs.
E) the ratio of the benefits to the costs.
9. Jenna decides to see a movie that costs $7 for the ticket and has an opportunity cost of $20. After the movie, she
says to one of her friends that the movie was not worth it. Apparently,
A) Jenna failed to apply the cost-benefit model to her decision.
B) Jenna was not rational.
C) the economic model of cost-benefit analysis failed.
D) Jenna overestimated the benefits of the movie.
E) this proves the limitations of economic models, specifically the cost-benefit principle.

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10. Joe has decided to purchase his textbooks for the semester. His options are to purchase the books via the Internet
with next day delivery to his home at a cost of $250, or to drive to campus tomorrow to buy the books at the
university bookstore at a cost of $245. Last week he drove to campus to buy a concert ticket because they offered 20
percent off the regular price of $20.
A) It would not be rational for Joe to drive to campus to purchase the books because the $5 saving is only two
percent of the cost of the books, and that is much less than the 20 percent he saved on the concert ticket.
B) It would be rational for Joe to drive to campus because it costs less to buy the books there than via the Internet.
C) It would be rational for Joe to drive to campus because the $5 saving is more than he saved by driving there to
buy the concert ticket.
D) It would not be rational for Joe to drive to campus to purchase the books because the cost of gas and his time
must certainly be more than the $5 he would save.
E) There is insufficient information to determine whether it would be rational or not for Joe to purchase the books
via the Internet or on campus.
11. In deciding the number of students to allow to enroll in the economics classes, the Chairperson of the Economics
Department is making a(n) __________________ decision.
A) microeconomic
B) macroeconomic
C) economic surplus
D) marginal choice
E) imperfect
12. If all the world's resources were to magically increase 100 fold, then
A) the scarcity principle would still govern behavior.
B) economics would no longer be relevant.
C) the scarcity principle would disappear.
D) everyone would be satisfied.
E) tradeoffs would become unnecessary.
13. Assume the minimum that Joe would be willing to accept to drive to the university campus is equal to the amount he
saved on the concert ticket (see question 85). What would be the amount of his economic surplus if he bought his
textbooks at the university bookstore rather than via the Internet?
A) $5
B) $1
C) $50
D) $20
E) There would be no economic surplus from purchasing the books at the university bookstore.
14. The number of US households with access to the Internet and those with broadband connections is growing rapidly.
As an economic naturalist, one could predict that when a major purchase is being considered, families will
A) collect as much information as humanly possible beforehand.
B) always buy online.
C) never buy online.
D) collect more information beforehand because the cost of finding and acquiring it is lower.
E) collect more information beforehand because the benefit of information is now larger.
15. Another name for the marginal benefit of an activity is the:

A) reservation price.
B) opportunity cost.
C) economic surplus.
D) No-Free-Lunch principle.
E) scarcity.
16. The use of economic models, like the cost-benefit principle, means economists believe that
A) this is how people explicitly choose between alternatives.
B) this is a reasonable abstraction of how people choose between alternatives.
C) those who explicitly make decisions this way are smarter.
D) with enough education, all people will start to explicitly make decisions this way.
E) this is the way the world ought to explicitly make decisions.
17. Economics is conventionally divided into two subjects called:

A) marginal benefit and marginal cost.
B) reservation price and opportunity cost.
C) microeconomics and macroeconomics.
D) rational economics and irrational economics.
E) economic surplus and economic deficit.

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Use the following to answer questions 18-24:
The following table shows the relationship between the speed of a computer's CPU and the benefits and costs. Assume that all
other features of the computer are the same, i.e., CPU speed is the only source of variation.
CPU Total Marginal Total Marginal

Mhz Benefit Benefit Cost Cost
600 $1,000 $900
700 $1,500 $100
800 $400 $1,400
900 $2,200 $1,900
1,000 $2,400 $600
18. The marginal cost of upgrading from a 700 to a 800 Mhz computer is
A) $600.
B) $500.
C) $400.
D) $200.
E) $100.
19. Choosing the 1,000 Mhz computer would be inefficient because

A) the extra benefit is less than the extra cost.
B) the extra benefit is equal to the extra cost.
C) it is impossible to tell the difference compared to a 600 Mhz computer.
D) it will be surpassed by a 1,100 Mhz computer very soon.
E) the total cost exceeds the total benefit.
20. The total benefit of an 800 Mhz computer is

A) $400.
B) $500.
C) $800.
D) $1,900.
E) $2,200.
21. The marginal benefit of upgrading from a 600 Mhz computer to a 700 Mhz computer is
A) $1,500.
B) $500.
C) $50.
D) $5.
E) $2.14.
22. Buying the 700 Mhz computer would be inconsistent with the cost-benefit principle because
A) the total benefit exceeds the total cost.
B) the average benefit exceeds the average cost.
C) the marginal benefit exceeds the marginal cost.
D) the difference between the total benefit and the total cost is positive.
E) the total benefit is too large.
23. Application of the cost-benefit principle would lead one to purchase a __________ computer because __________.
A) 900 Mhz; the total benefit exceeds the total cost
B) 700 Mhz; the marginal benefit is $500 and the marginal cost is $100
C) 1,000 Mhz; one could play Quake3 really fast.
D) 600 Mhz; it is certainly fast enough
E) 800 Mhz; the marginal benefits and marginal costs are equal
24. The total cost of a 700 Mhz computer is

A) $1,000.
B) $900.
C) $300.
D) $200.
E) $100.
25. If Sally works for 10 hours she can sell 15 insurance contracts, and if she works for 11 hours she can sell 18
insurance contracts. The marginal benefit of the 11th hour of Sally's work equals:
A) 18 insurance contracts.
B) 15 insurance contracts.

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C) 33 insurance contracts.
D) 1 insurance contract.
E) 3 insurance contracts.
26. In general, rational decision making requires one to choose the actions that yield the
A) largest total benefit.
B) smallest total cost.
C) smallest net benefit.
D) smallest average cost.
E) largest economic surplus.
27. Salvator bid on a Mark McGuire baseball card that was offered in an auction on an Internet web site. His first bid for
$10 was quickly surpassed by another bidder, and he entered a second bid for $20. This was also eventually
surpassed, at which time he entered a bid for $50 (the maximum he was willing to bid for the card). When the auction
deadline passed, he was notified that his was the highest bid and he would soon be receiving the card. In his
excitement, he logged onto a chat board for baseball card collectors and posted a notice that he had just purchased
the Mark McGuire card. Soon he received a reply from another collector offering to buy the card for $60, but Salvator
politely declined the offered. During the next few days a series of offers were made, all of which he turned down until
a collector offered to pay $75 for the card. Salvator decided he could not pass up this offer and accepted it. From this
we can conclude that Salvator's economic surplus from purchasing the Mark McGuire card was equal to:
A) $75.
B) $25.
C) $50.
D) $125.
E) $40.
28. An economic naturalist is described as someone who

A) uses economic arguments to protect forests and wetlands from development.
B) has a natural talent for drawing graphs.
C) applies economic insights to everyday life.
D) studies the process of natural selection in a marginal cost and marginal benefit framework.
E) is concerned about environmental issues but also enjoys wealth accumulation.
th
29. The 7 beer that Tim consumes will produce an extra benefit of 10 cents and has an extra cost of zero (Tim is at a
frat party). The cost-benefit principle predicts that Tim will
A) realize he has had too much to drink and go home.
th
B) drink the 7 beer and continue until the marginal benefit of drinking another beer is zero.
C) volunteer to be the designated drunk.
th
D) not drink the 7 beer.
E) flip a coin to decide.
30. Arthur would be willing to pay someone else to wash his car for $15 but not for $20, suggesting that Arthur's
A) reservation price is less than $15.
B) benefit of a clean car exceeds $20.
C) reservation price is greater than $20.
D) benefit of a clean car is less than $15.
E) benefit of a clean car is at least $15 but less than $20.
31. Jose is vacationing on Padre Island during Spring Break. He goes to the beach early on a sunny afternoon because
he knows it will be crowded and he wants to have sufficient room to put out a large beach towel to lie on while
sunning himself. Later that afternoon the beach fills to capacity and the family next to Jose raises a large beach
umbrella to shade themselves from the sun. The shade from the umbrella also covered the area where Jose was
lying. In this case, the sunlight was:
A) scarce because Jose would have to forego a place on the beach to receive the sunlight.
B) not scarce because it is freely available (i.e., Jose did not have to pay money for it).
C) scarce because the neighboring family absorbed all the sunlight with their umbrella.
D) not scarce because Jose could move to another location to receive the sunlight.
E) scarce because the beach was full to capacity
32. Suppose a person makes a choice that seems inconsistent with the cost-benefit principle. Which of the following
statements represents the most reasonable conclusion to draw?
A) The person (explicitly or implicitly) over-estimated the benefits or under-estimated the costs or both
B) The abstraction of the cost-benefit principle is so great as to be unable to explain behavior.
C) The person does not grasp how decisions should be made.
D) The person is simply irrational.
E) Because people don't explicitly calculate benefits and costs, it is not surprising that choices are made which
violate the cost-benefit principal.

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33. Which of the following questions would not be part of macroeconomics?

A) What caused the great depression?
B) At what rate does the US economy typically grow?
C) Did the sharp increase in gasoline prices alter SUV sales?
D) How does government spending affect the economy?
E) Do trends exist in the national rate of unemployment?
34. Given the information in question 97, in order to maximize her income, Sonya should:
A) ride the bus because it costs less money.
B) take the cab because the opportunity cost is less than that of riding the bus.
C) ride the bus because the opportunity cost is less than that of taking a cab.
D) take the cab because the opportunity cost is greater than that of riding the bus.
E) ride the bus because the opportunity cost is greater than that of taking a cab.
35. Sophia wants to go to a friend's house this evening, but has promised her mother that she would clean the house
during that time. Her brother, James, has offered to clean the house for her if she will pay him $10. Sophia replies,
"I'll pay you five dollars (and not a cent more!)." The:
A) $10 represents Sophia's reservation price of going to her friend's house this evening.
B) $5 represents Sophia's opportunity cost of cleaning the house this evening.
C) $10 represents James's reservation price and Sophia's opportunity cost of going to her friend's house this
evening.
D) difference between the $10 James has asked for to clean the house and the $5 Sophia has offered represents
the economic surplus of going to her friend's house this evening.
E) $10 represents the opportunity cost and the $5 is the marginal benefit of going to her friend's house this
evening.
36. Economics is best defined as the study of

A) prices and quantities.
B) inflation and interest rates.
C) how people make choices under the conditions of scarcity and the results of the choices.
D) graph drawing.
E) wages and incomes.
37. A rational person is one that

A) is reasonable.
B) makes choices that are easily understood.
C) possesses well-defined goals and seeks to achieve them.
D) believes the claims made by infomercials.
E) highly cynical.
38. If the marginal costs of 1, 2, and 3 hours of talking on the phone are $50, $75, and $105, then the total costs are
A) $50, $150, and $315.
B) $50, $41.67, $115.
C) $50, 125, and $230.
D) $50, $175, and $405.
E) impossible to calculate with information given.
39. The marginal cost of an activity is the

A) change in the costs of the activity divided by the change in the level of the activity.
B) same as the total costs of the activity.
C) ratio of total costs to the level of the activity.
D) change in the level of the activity divided by the change in the costs of the activity.
E) reservation costs.
40. That individuals make inconsistent choices and the inconsistencies have a strong pattern is, in the view of the
textbook,
A) evidence of the severe limitations of economic models.
B) an indication of widespread irrationality.
C) additional support for the study of economics to identify the inconsistencies and improve decision-making.
D) of limited importance.
E) a well kept secret that should remain that way.
41. In applying the cost-benefit principle one should calculate the:

A) total cost and total benefit and choose that quantity of an activity where they are equal.
B) marginal cost and marginal benefit and choose that quantity of an activity where the marginal benefit exceeds
the marginal cost by the greatest amount.

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C) total cost and total benefit and choose that quantity of an activity where the total cost exceeds the total benefit
by the greatest amount.
D) marginal cost and marginal benefit and choose that quantity of an activity where the marginal benefit equals the
marginal cost.
E) marginal cost, total cost, marginal benefit, and marginal cost and choose that quantity of an activity where the
marginal cost equals the total cost and the marginal benefit equals the total benefit.
42. The study of national economies and policies to improve their performance is known as
A) microeconomics.
B) economics.
C) macroeconomics.
D) intereconomics.
E) intraeconomics.
43. The scarcity principle indicates that __________ and the cost-benefit principle indicates __________.
A) choices must be made; how to make the choices
B) how to make the choices; choices must be made
C) choices must be made; just one of many possible ways to make the choices
D) choices must be made; the choices will be poor
E) choices must be made; the costs can never outweigh the benefits of the choices
44. Forest is a mountain man living in complete isolation in Montana. He is completely self sufficient through hunting,
fishing, and farming. He has not been in the city to buy anything in five years. One can infer
A) the scarcity principle does not apply to Forest.
B) Forest is not required to make choices.
C) the scarcity principle still applies because more hunting means less fishing and so on.
D) Forest is very satisfied.
E) Forest knew the Unabomber.
45. The textbook suggests that applying the basic principles of economics to the details of everyday life will
A) make one an economic naturalist.
B) get one invited to fewer parties.
C) lessen one's understanding of the world.
D) give an air of intellectual superiority.
E) make even the simplest decision overly complex and paralyze action.
46. The reservation price of a good or service is a monetary measure of the __________ to the consumer.
A) necessity of the good
B) quality of the good
C) lowest price acceptable
D) benefit of the good
E) prestige of the good
47. The scarcity principle indicates that

A) no matter how much one has, it is never enough.
B) compared to 100 years ago, individuals have less time today.
C) with limited resources, having more of "this" means having less of "that."
D) because tradeoffs must be made, resources are therefore scarce.
E) the wealthier a person is, the fewer the number of tradeoffs he must make.
48. When economists say there is no such thing as a free lunch, they mean that:
A) we must pay money for everything we get.
B) it is against the law to accept goods or services without paying for them.
C) the more lunch a person eats the more weight the person will gain.
D) each day we decide to eat lunch is another day we must pay out money.
E) every choice we make involves a tradeoff.
49. The Smithville Elementary School Teachers Association petitions the Smithville School Board to provide a computer
lab for their school. To support their argument the Association presents data from national studies that show when
students are provided with computer training they earn an average of $5,000 of additional income during their lives.
In order for the School Board to make a rational choice, it should:
A) determine if other elementary schools have computer labs.
B) build the computer lab because the children will be able to earn a higher income during their lives.
C) not build the computer lab because the study was not based on a study of the Smithville area.
D) build the computer lab if the additional cost per student is less than or equal to the additional income.
E) build the computer lab if the additional cost per student is greater than or equal to the additional income.

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50. Choosing to study for an exam until the extra benefit (improved score) equals the extra cost (mental fatigue) is
A) not rational.
B) an application of the cost-benefit principle.
C) an application of the scarcity principle.
D) the relevant opportunity cost.
E) less desirable than studying for the entire evening.
51. The Third Wave Computer Company employs Sally to assemble personal computers. Sally can assemble 1
computer if she works 1 hour, 4 computers in 2 hours, 7 computers in 3 hours, 9 computers in 4 hours, and 10
computers in 5 hours. Each computer consists of a motherboard that costs $250, a hard drive costs $150, a case
costs $25, a monitor that costs $200, a keyboard at $50 and a mouse costs $25. The cost of employing Sally is $50
per hour. What is the marginal cost of producing the computers Sally assembles during her second hour of work?
A) $2,150
B) $2,850
C) $2,800
D) $700
E) $750
52. The Third Wave Computer Company sells each computer for computers $725. Using the information in question 88,
how many hours should the Third Wave Computer Company employ Sally to maximize its benefit from her
employment?
A) 1 hour
B) 2 hours
C) 3 hours
D) 4 hours
E) 5 hours
53. According to the textbook, the incentive to save M dollars on a product is

A) directly dependent on the price of the product.
B) purely a question of whether it is worth it to do what is necessary to receive the M dollars of savings.
C) stronger if the M dollars are a large percentage of the list price of the product.
D) inversely related to the price of the product.
E) weaker if the M dollars are a small percentage of the list price of the product.
54. Shelly purchases a leather purse for $400. One can infer that
A) she paid too much.
B) her reservation price was at least $400.
C) her reservation price was exactly $400.
D) her reservation price was less than $400.
E) she paid too little.
55. Samantha has estimated that with a college education she will be able to earn an additional $40,000 of income. The
cost of attending a state university is $25,000, while a private university costs $40,000 (all estimates are calculated in
current dollars). Samantha would make a rational decision if she chooses to attend:
A) the private university, but not the state university.
B) the state university, but not the private university.
C) neither the state nor the private university.
D) either the state or the private university
E) any university regardless of the cost and income.
56. The logical implication of the scarcity principle is that

A) one will never be satisfied with what one has.
B) as wealth increases, making tradeoffs becomes less necessary.
C) as wealth decreases, making tradeoffs becomes less necessary.
D) choices must be made.
E) resources need to be made unlimited.
57. Rajiv has estimated that the additional benefit of writing 100 more lines of computer programming code is $10 and
the additional cost is $6. He should:
A) not write the code because it would not be a rational choice.
B) write the code because it would be a rational choice and an optimal quantity.
C) write the code because it would be a rational choice but it is not an optimal quantity.
D) not write the code because it would not be a rational choice but it would be an optimal quantity.
E) not write the code because it would not be a rational choice, nor would it be an optimal quantity.
58. Whether studying the size of the U.S. economy or the number of children a couple will choose to have, the unifying

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concept is
A) wants are limited, resources are limited, and thus tradeoffs must be made.
B) wants are unlimited, resources are limited, and thus tradeoffs must be made.
C) wants are unlimited, resources are limited to some but not to others and thus some people must make
tradeoffs.
D) wants are unlimited, resources are unlimited, and thus nirvana has been reached.
E) wants are unlimited, resources are limited, and thus government needs to do more.
59. The cost-benefit principle predicts that Juan should do X and not Z but instead Juan chooses to do Z. Which of the
following statements is not a reasonable explanation for the difference in the predicted and actual outcome?
A) Juan had information not contained in the application of the cost-benefit principle.
B) Juan ignored information that should have been included.
C) Juan inaccurately estimated a benefit, a cost, or both.
D) The cost-benefit principle is inherently flawed and produces predictions rarely supported by observation.
E) Juan faced a constraint not included in the cost-benefit principle.
60. If your reservation price for a pre-cooked meal is $15 and the opportunity cost of the pre-cooked meal is $12, the
economic surplus of having a pre-cooked meal equals:
A) $3.
B) minus $3.
C) $27.
D) $12/$15.
E) $15/$12.
61. The cost-benefit principle indicates that an action should be taken

A) if the total benefits exceed the total costs.
B) based on flipping a coin or speaking with a psychic.
C) if the average benefits exceed the average costs.
D) if the net benefit (benefit minus cost) is zero.
E) if the extra benefit is greater than or equal to the extra costs.
62. The opportunity cost of an activity is the value of

A) an alternative forgone.
B) the next-best alternative forgone.
C) the least-best alternative forgone.
D) the difference between the chosen activity and the next-best alternative forgone.
E) the alternative one would have preferred to choose.
63. In order to properly ignore opportunity costs, the value of the next-best alternative and therefore all alternatives would
have to be
A) large and positive.
B) negative.
C) small.
D) zero.
E) infinite.
64. Suppose a retail store was offering 10% off all prices on all goods. The incentive to take advantage of the 10%
savings is
A) unrelated to the list price of one good.
B) inversely related to the list price of the good.
C) directly related to the list price of the good.
D) independent of the list price.
E) stronger for those buying goods with low list prices.
65. In order for an economic model to be valid,

A) all people must explicitly mimic the model.
B) most people must explicitly mimic the model.
C) most people must act as if they explicitly mimic the model.
D) it must gain professional acceptance.
E) it must be mathematical.
Figure 1.1

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$ per shirt
$75
$30 MC
$10
MB
0 10 15 20 Quantity of shirts
th
66. The net benefit of adding the 20 shirt to one's wardrobe is
A) $20.
B) $10.
C) 0.
D) -$10.
E) -$20.
th
67. The marginal cost of adding the 10 shirt to one's wardrobe is
A) $75.
B) $45.
C) $30.
D) $10.
E) 0.
68. The best number of shirts to own is

A) 5.
B) 10.
C) 12.
D) 15.
E) 20.
th
69. The net benefit of adding the 10 shirt to one's wardrobe is
A) $5.
B) $10.
C) $15.
D) $30.
E) $45.
th
70. The marginal benefit of adding the 10 shirt to one's wardrobe is
A) $75.
B) $45.
C) $30.
D) $10.
E) 0.
71. Steve has estimated that the marginal benefit of studying an additional hour of economics (instead of biology) is an
increase of 15 points on the weekly test and the marginal cost is a decrease of 10 points on his weekly biology test.
Applying the optimal quantity rule to maximize his test scores, he should:
A) not study the additional hour of economics, but rather should study an additional hour of biology.
B) study the additional hour of economics, but no more than one additional hour.
C) not study the additional hour of economics, but rather should study an additional one-and-one-half hours of
biology.
D) study the additional hour of economics, plus some additional time studying economics.

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E) not study economics nor biology.
72. The concept of scarcity applies equally to Bill Gates and a homeless person because;
A) both have the same legal rights protected by the U.S. constitution.
B) they have the same access to the markets for goods and services.
C) there are only 24 hours in the day for both of them.
D) they are both consumers.
E) both must breathe air in order to live.
73. The extra cost that results from an extra unit of an activity is the
A) marginal benefit.
B) marginal surplus.
C) marginal cost.
D) reservation cost.
E) same as the opportunity cost.
74. The principle of scarcity applies to

A) the poor exclusively.
B) nations exclusively.
C) all consumers.
D) all firms.
E) everyone; consumers, firms, governments, and nations.
75. The study of choices made in the face of scarce resources is the essence of
A) political science.
B) biology.
C) sociology.
D) economics.
E) geography.
76. Tony notes that an electronics store is offering a flat $20 off all prices in the store. Tony reasons that if he wants to
buy something with a price of $50 that it is a good offer but if he wants to buy something with a price of $500 it is not
a good offer. This is an example of
A) inconsistent reasoning; saving $20 is saving $20.
B) the proper application of the cost-benefit principle.
C) rational choice because in the first case he saves 40% and in the second case he saves 4%.
D) marginal cost equals marginal benefit thinking.
E) opportunity costs.
77. The web site for this textbook can be viewed simultaneously by thousands of students around the world without
paying money to view it. Does this suggest that the concept of scarcity does not apply to web sites?
A) No, because each of the students incurs an opportunity cost measured by the next best alternative to viewing
the web site.
B) Yes, because an additional student viewing the web site does not prevent another student from viewing it.
C) Yes, because the students do not have to pay money to view the web site and, thus they do not have to forgo
something else to view it.
D) No, because the more students who view it the slower the transmission of the information to each of the
students.
E) Yes, because the technology of the internet and the world wide web have made the principles of economics
outdated.
78. The extra benefit that comes from an extra unit of activity is called the _________of the activity.
A) benefit.
B) marginal benefit.
C) marginal cost.
D) average benefit.
E) reservation benefit.
79. The scarcity principle applies to

A) all decisions.
B) only market decisions, e.g., buying a car.
C) only non-market decisions, e.g., watching a sunset.
D) only the poor.
E) only the wealthy.
80. Deciding to pursue an activity as long as the extra benefits are at least equal to the extra costs defines the

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A) cost-benefit principle.
B) scarcity principle.
C) No-Free-Lunch principle.
D) marginal principle.
E) extra principle.
81. Maria spends her afternoon at the beach, paying $2 to rent a beach umbrella and $10 for food and drinks rather than
spending an equal amount of money to go to a movie. The opportunity cost of going to the beach is:
A) zero, because the money she spent was for food, drinks and an umbrella rather than to enter the beach.
B) the $12 she spent on the umbrella, food and drinks.
C) only $2 because she would have spent the money on food and drinks whether or not she went to the beach.
D) the movie she missed seeing.
E) the movie she missed seeing plus the $12 she spent on the umbrella, food and drinks.
82. Suppose Xena's reservation price for a new sword is $1,000 but she is able to purchase one for $900. Her
__________ is __________.
A) benefit; $100
B) cost; -$100
C) economic surplus; $1,000
D) economic surplus; $100
E) costs; -$900
83. Janie must either mow the lawn or wash clothes, earning her a benefit of $30 or $45, respectively. Janie will
therefore choose to _________because the economic surplus is ________.
A) mow; greater
B) wash; greater
C) mow; smaller
D) wash; smaller
E) mow; the same as for washing
84. The cost-benefit principle:

A) is not one of the authors' core ideas in economics.
B) implies that the cost of all alternatives should be included when choosing among alternatives.
C) states that an action should be taken only if the extra benefit is at least as great as the extra cost.
D) states that an action should be taken only if the extra benefit is greater than the extra cost.
E) states that an action should be taken only if the extra benefit is less than the extra cost.
85. According to the textbook, psychologists have found that if people lose $10 on the way to make a $10 purchase they
tend to __________ while if they make the $10 purchase and then lose or break the good they tend to __________.
A) not make the purchase; make the purchase again
B) not make the purchase; not make the purchase again
C) make the purchase anyway; make the purchase again
D) make the purchase anyway; not make the purchase again
E) get widely upset; go psycho
86. For a given question to be considered an economic question, it would need to involve
A) explicit prices.
B) making a choice.
C) a graph.
D) limited resources.
E) limited resources and making a choice.
87. Benny has one hour before bedtime and he can either watch TV or listen to his new Korn CD. He chooses to listen
to the CD. The scarcity principle's influence on Benny is seen in
A) the decision to listen to music.
B) the decision not to watch TV.
C) the fixed amount of time before bed.
D) the decision to choose between TV and music.
E) Benny's taste in music.
88. If a campus organization provides a free lunch to all students who show up, then
A) the scarcity principle has been violated.
B) the scarcity principle still applies to the decision to allocate the time to go and eat.
C) the lunch is completely without cost.
D) no tradeoffs are involved.
E) it is a free lunch because no price was charged.

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89. Dean decided to play golf rather than prepare for his exam in economics that is day after tomorrow. One can infer
that
A) Dean has made an irrational choice.
B) Dean is doing poorly in his economics class.
C) the economic surplus from playing golf exceeded the surplus from studying.
D) Dean needs to grow up.
E) the cost of studying was greater than the cost of golfing.
90. With ATM machines it is possible to retrieve cash from the bank at any time. One hundred years ago, one could only
get cash from the bank during business hours, say, 9 am to 3 pm. The difference is because
A) flexibility was not valued 100 years ago.
B) it was impossible to provide 24 hour a day service 100 years ago.
C) the cost of providing 24 hour a day service is much lower today.
D) government forced banks to become more convenient.
E) cash is a more popular means of making payments today.
91. Sonya is employed at a stock brokerage firm where she earns $25 per hour. The office she works at is located
downtown. To get to work each day, she must either ride a series of buses that takes one-and-a-half hours at a cost
of $2, or take a cab that takes 30 minutes and costs $20. The opportunity cost:
A) of riding the bus is $2, and taking the cab is $20.
B) of riding the bus is $37.50, and taking the cab is $12.50.
C) of riding the bus is $35.50, and taking the cab is -$5.
D) of riding the bus is $39.50, and taking the cab is $32.50.
E) of riding the bus is $27, and taking the cab is $20.
92. The reservation price of a particular good or service is the

A) minimum amount one would be willing to pay for it.
B) same as the market price.
C) maximum amount one would be willing to pay for it.
D) price at which one develops reservations about its quality.
E) price one must pay to ensure one gets it.
93. The study of individual choices and group behavior in individual markets defines
A) microeconomics.
B) economics.
C) the scarcity principle.
D) macroeconomics.
E) game theory.
94. Which of the following decisions would not be part of microeconomics?

A) What college major to select.
B) How to make the largest profit.
C) Whether to study or watch TV tonight.
D) How will an early freeze in California affect the price of fruit.
E) Should the federal budget always be balanced.
95. Amy is thinking about going to the movies tonight to see Nutty Professor 2. A ticket costs $7 and she will have to
cancel her dog-sitting job that pays $30. The cost of seeing the movie is
A) $7.
B) $30.
C) $37.
D) $37 minus the benefit of seeing the movie.
E) indeterminate.
96. Viewing the loss of $10 before a $10 purchase as being different from the loss or destruction of the $10 purchase is
A) consistent with rational behavior.
B) related to income, i.e., the wealthy would see it as being the same.
C) related to income, i.e., the poor would see it as being the same.
D) evidence of the uselessness of economic reasoning.
E) inconsistent with rational behavior because, in either case, one has experienced a $10 reduction on wealth.
97. Macroeconomics differs from microeconomics in that:

A) the concept of scarcity applies to the latter but does not apply to the former.
B) the latter studies individual markets while the former studies groups of markets, including the whole economy.
C) rational decisions are relevant to the former but not the latter.
D) the former is the study of how people make choices under conditions of scarcity while the latter is concerned

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with the results of those choices for society.

E) the former explains such concepts as how prices are determined in markets while the latter explains the overall
price level.
98. Macroeconomics is distinguished by its concentration on

A) choices.
B) the performance of national economics and ways to improve upon the performance.
C) individual markets.
D) the level of prices in specific markets.
E) abstract models.
99. Imagine a world with unlimited resources (including time). On this planet,
A) personal strife would not exist.
B) the scarcity principle would not apply but the cost-benefit principle would.
C) the cost-benefit principle would be irrelevant because tradeoffs would not exist.
D) the scarcity principle would still apply.
E) the discipline of economics would be more important.
100. At the very least, Joe Average and Bill Gates are both identically limited by
A) their wealth.
B) their knowledge.
C) the square footage in their homes.
D) the 24 hours that comprise a day.
E) their influence.

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Answer Key -- test01
1. D
2. D
3. D
4. C
5. A
6. B
7. B
8. C
9. D
10. C
11. A
12. A
13. B
14. D
15. A
16. B
17. C
18. C
19. A
20. D
21. B
22. C
23. E
24. A
25. E
26. E
27. B
28. C
29. B
30. E
31. A
32. A
33. C
34. B
35. B
36. C
37. C
38. C
39. A
40. C
41. D
42. C
43. A
44. C
45. A
46. D
47. C
48. E
49. D
50. B
51. A
52. D
53. B
54. B
55. D
56. D
57. C
58. B
59. D
60. A
61. E
62. B
63. D
64. C
65. C
66. E
67. C
68. D
69. E
70. A
71. D
72. C
73. C

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74. E
75. D
76. A
77. A
78. B
79. A
80. A
81. D
82. D
83. B
84. C
85. D
86. E
87. C
88. B
89. C
90. C
91. E
92. C
93. A
94. E
95. C
96. E
97. B
98. B
99. C
100. D

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1. If one fails to account for opportunity costs in decision making, then applying the cost-benefit rule will be flawed
because
A) the benefits will be overstated.
B) the costs will be understated.
C) the benefits will be understated.
D) the costs will be overstated.
E) the benefits and costs will be understated.
2. Monica has purchased a $25 ticket to attend a Back Street Boys concert on Friday evening. Subsequently, she is
asked to go to dinner and dancing at no expense to her. If she uses cost-benefit analysis to choose between going to
the concert and going on the date, she should:
A) include only the entertainment value of the concert in the opportunity cost of going on the date.
B) include the cost of the ticket plus the entertainment value of the concert in the opportunity cost of going on the
date.
C) include only the cost of concert ticket in the opportunity cost of going on the date.
D) include neither the cost of the ticket plus the entertainment value of the concert in the opportunity cost of going
on the date.
E) have a psychiatric evaluation because dates cannot be evaluated using cost-benefit analysis.
3. Jason studied 5 hours for his first History test and his test score was 85; 6 hours for his second History test and
scored 90; and 7 hours for his third History test and scored 95. He also studied 5 hours for his first Math test and his
test score was 68; 6 hours for his second Math test and scored 78; and 7 hours for his third Math test and scored 88.
The average benefit per hour studied for the History tests was ________ and the average benefits per hour studied
for the Math tests was _______ .
A) 15; 13
B) 5; 10
C) 90; 78
D) 13; 15
E) 10: 5
4. Using the information in question 92 and assuming Jackson decides to drive his car to San Francisco and back on a
two-month trip, which of the listed costs would be fixed costs and which would be variable costs?
A) The cost of the car would be a fixed cost, and the cost of gas, insurance, maintenance and depreciation would
variable costs.
B) The costs of the car and insurance would be a fixed costs, and the cost of gas, maintenance and depreciation
would variable costs.
C) The costs of the car, depreciation and insurance would be a fixed costs, and the cost of gas and maintenance
would variable costs.
D) All of the costs would be variable costs.
E) All of the costs would be fixed costs.
Sharon, a marketing major, has an economics test and a finance test to take tomorrow and she has four hours tonight to
allocate to studying the two subjects. The data below show her scores on the two tests based on the time spend studying.
(Hint: Studying economics for 0 hours means studying finance for 4 hours.)
Hours Spent Studying Economics

0 1 2 3 4
Economics Score 65 77 86 89 91
Finance Score 80 79 77 70 50
5. To efficiently allocate her 4 hours of study time, Sharon should seek to maximize the
A) economics test score.
B) difference in the two test scores.
C) finance test score.
D) combined test scores.
E) economics test score first and then the finance test score.
st th
6. The sequence of marginal costs from the 1 to the 4 hour of economics studying is
A) 30, 29, 27, 20.
B) 79, 77, 70, 50.
C) 1, 2, 7, 20.
D) -1, -2, -7, -20.
E) 1, 3, 10, 30.
7. To efficiently allocate her time, Sharon should study economics for __________ hours and finance for __________
hours.

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A) 2; 2
B) 1; 3
C) 3; 1
D) 0; 4
E) 4; 0
8. Spending 3 hours on economics and 1 hour on finance would be __________ because __________.
A) efficient; the economics score is higher.
B) inefficient; the improvement in economics is 3 points but the decline in finances is 7 points
C) efficient; the finance score is still passing.
D) inefficient; the economics score exceeds the finance score.
E) efficient; she really understands economics.
st th
9. The sequence of marginal benefits from the 1 to the 4 hour of economics studying is
A) 12,4.5, 1, -5.
B) 77, 86, 89, 91.
C) 26, 14, 5, 2.
D) 12, 21, 24, 26.
E) 12, 9, 3, 2.
10. The cost of spending an extra hour studying economics is

A) falling.
B) the resulting test score in finance.
C) constant.
D) the resulting decrease in the finance test score compared to its previous value.
E) missing an hour's worth of TV.
11. The benefit of spending an extra hour studying economics is

A) the resulting test score.
B) the resulting increase in the test score over its previous value.
C) the resulting test score divided by hours spent studying.
D) increasing.
E) constant.
12. Dillion purchased his nonrefundable, nontransferable ticket to see the M.C. Hammer/Vanilla Ice Career Revival show
for $30 last week while Bob has yet to buy his ticket but wants to go. In deciding whether to go to the show, the price
of the ticket is a __________ to Dillion and a __________ to Bob.
A) sunk cost; sunk cost
B) relevant cost; irrelevant cost
C) sunk cost; variable cost
D) fixed cost; variable cost
E) irrelevant cost; relevant cost
13. Susan studied 2 hours for her first English quiz and scored 90, and 3 hours for her second English quiz and scored
95. During the same week she also studied 1 hour for her first History quiz and her test score was 68, and 2 hours for
her second History quiz and scored 78. She would have more efficiently allocated her study time if she had:
A) studied more time for her second History quiz and less time for her second English quiz.
B) studied more time for her second English quiz and less time for her second History quiz.
C) studied the same amount of time for both the second English and second History quizzes.
D) studied more time for both the second English and second History quizzes.
E) not studied for the second History quiz and allocated all of her study time to prepare for the second English
quiz.
14. While eating dinner one evening, you receive a phone call from a telemarketing firm. The firm's representative
informs you that your name is one of only five names drawn in a recent lottery. Each of the five people will receive a
prize. In order to claim your prize, however, you must visit Summer Resorts, Inc. the following Friday (with no
commitment to purchase anything), take a 90 minute tour of their facilities, and, at that time, your prize will be
awarded. In order to visit Summer Resorts, Inc. the next Friday, you would have to miss 8 hours of work ($15 per
hour), pay for the gas to drive there and back home ($20), and buy lunch ($10). Because you won't go to work that
day you won't have to pay the $3 for gas to drive to and from work, nor pay to park for which you have a monthly
pass that costs $50. Using cost-benefit analysis, you determine that it is rational for you to visit Summer Resorts, Inc.
if the prize has a minimum value to you of:
A) $177
B) $180
C) $183
D) $147
E) $98

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15. Dividing the total cost of n units of an activity by n reveals the

A) average benefit.
B) marginal cost.
C) units per cost.
D) average cost.
E) additional cost.
16. That $100 dollars today is equivalent to more than $100 next month is known as the
A) interest rate.
B) opportunity benefit.
C) time value of money.
D) inflation ledge.
E) risk premium.
17. When making a decision, the important costs to identify and consider are the __________ costs and the __________
costs.
A) opportunity; marginal
B) opportunity; variable
C) sunk; marginal
D) marginal; average
E) marginal; fixed
18. Class attendance today is nearly 100% but on most other days it is less. The likely explanation for this would be
A) the opportunity cost of not attending today is much higher than usual.
B) random chance.
C) the episode of Jerry Springer was a rerun.
D) students thought today's class was a review.
E) the opportunity cost of attending today is much higher than usual.
19. The least important cost to consider when making a choice is the
A) variable cost.
B) average cost.
C) sunk cost.
D) fixed cost.
E) opportunity cost.
20. Benefits and costs are reciprocal in the sense that

A) the value of an activity's benefits must equal (1/value of the activity's costs).l
B) benefits are sometimes mistaken for costs.
C) when benefits are multiplied by costs the result is always 1.
D) failing to receive a benefit is a cost.
E) failing to incur a cost is not considered a benefit.
21. The opportunity cost of any activity is defined as

A) the value of the least best alternative activity forgone.
B) the time one spends involved in the activity.
C) the value of the next best alternative activity forgone.
D) the income one spends on the activity.
E) the value of some unspecified alternative activity forgone.
22. Anticipating a lack of food in stores as a result of the Y2K computer bug, the Adams family took funds from their
savings account to purchase the equivalent of 3 months of canned goods to stockpile in their pantry. Fortunately,
there were no shortages as a result of the Y2K computer bug, so the Adams family will eventually consume the food.
As a result of their pre-Y2K preparations, the Adams family incurred:
A) no opportunity cost because they will eventually consume all the food they bought.
B) an opportunity cost equal to the cost of the food purchased.
C) an opportunity cost equal to the benefit of the food.
D) an opportunity cost equal to the foregone interest income on the funds removed from their saving account.
E) an opportunity cost equal to the cost of the food purchased plus the foregone interest income on the funds
removed from their saving account.
23. Fixed costs are costs that

A) are always irrelevant to decision making.
B) change as the level of activity changes.
C) do not depend on the level of the activity.
D) are dependent on how much activity is chosen.

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E) are always relevant to decision making.
24. To efficiently allocate a resource that is perfect divisible across different activities, one should allocate the resource
such that the:
A) marginal benefit is greatest for each unit of production.
B) marginal cost is greatest for each unit of production.
C) marginal benefit is the same for every activity.
D) marginal cost is the same for every activity.
E) marginal cost equals the marginal benefit for every activity.
25. Any cost that is independent of the amount of activity is classified as a(n)
A) variable cost.
B) average cost.
C) opportunity cost.
D) sunk cost.
E) fixed cost.
26. Any cost that is dependent of the amount of activity chosen is classified as a(n)
A) fixed cost.
B) average cost.
C) variable cost.
D) opportunity cost.
E) sunk cost.
27. If resources are continuously divisible, the efficient allocation of resources across activities occurs where
A) the marginal cost of all resources are equal.
B) the total cost of all resources are equal.
C) the marginal benefits of all resources are equal.
D) the total benefits of all resources are equal.
E) the difference between one total benefit and total cost of all resources is zero.
28. When 5 units of activity M are chosen, the average benefits are $13 and the average costs are $12. One can infer
that
A) more units should be chosen.
B) 5 is the optimal amount.
C) fewer units should be chosen.
D) total benefits are less than total costs.
E) insufficient information is available to judge if 5 units are optimal or not.
29. Samantha is the owner of a small bus company that has permits to run two routes daily in the city. The company has
six buses and, currently, Samantha has three buses on each route. On Route 1, the daily revenue per bus is $75 and
the third bus on the route takes in $50 in fares a day. On Route 2, the daily revenue per bus is $60 and the third bus
to run this route takes in $60 in fares each day. To efficiently allocate the buses between the two routes, Samantha
should:
A) shift the third bus from Route 2 to Route 1.
B) shift all three buses from Route 2 to Route 1.
C) shift the third bus from Route 1 to Route 2.
D) shift all three buses from Route 1 to Route 2.
E) leave the bus allocation as it is currently.
30. In general, to make optimal decisions one needs information on the

A) average benefits and marginal costs.
B) marginal benefits and marginal costs.
C) marginal benefits and average costs.
D) average benefits and average costs.
E) benefits and costs, which can be either average or marginal.
31. Ian paid $475 for an airline ticket to fly to Acapulco, Mexico for a spring break vacation. Unfortunately, he fell ill and
could not go to Acapulco. When he called the airline to cancel the ticket, he was reminded that the ticket was non-
refundable, but that he could exchange it for another ticket within one year if he pays a $75 fee at the time of the
exchange. Several months later he is deciding whether to exchange the ticket for a ticket of the same price to
Acapulco. The opportunity cost of go to Acapulco would equal the:
A) ticket price of $475 plus the $75 exchange fee, if he has no other trip that he will take within the year.
B) ticket price of $475 plus the $75 exchange fee, if he has another trip that he will take within the year.
C) $75 exchange fee, if he has no other trip that he will take within the year.
D) $75 exchange fee, if he has another trip that he will take within the year.
E) $0, if he has no other trip that he will take within the year.

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32. The reason $100 today is equivalent to more than $100 next year is due to
A) inflation.
B) uncertainty.
C) greed.
D) the ability to invest the $100 today and earn interest.
E) rising prices.
33. Sonja is the sole owner and manager of Words.com, providing translation services via the internet, where she earns
a salary of $50,000 plus the potential for future profits. She is considering an offer for a top management position with
another internet firm at a salary of $75,000 per year.
A) She should accept the management position because she would earn more income with the other firm.
B) She should refuse the management position because, despite the higher salary, the future profits from her
current business will be greater.
C) A cost-benefit analysis of her decision should include an opportunity cost of $75,000.
D) A cost-benefit analysis of her decision should not include an opportunity cost of $75,000 because her current
salary plus future profits could be greater than the salary offered by the other firm.
E) A cost-benefit analysis of her decision should include an average cost of $75,000.
34. Anytime one purchases a ticket in advance of an event, if the ticket is non-refundable and non-transferable then on
the day of the event,
A) the ticket is part of the cost of going.
B) the ticket is a variable cost.
C) is part of the cost of going if it was expensive.
D) the ticket is a sunk cost and should pay no role in the decision to go or not.
E) the ticket is a fixed cost but not a sunk cost.
35. Mark recently switched his long distance telephone service from MTI to AC&C and had to pay his local telephone
company a $10 fee to make the change. As an incentive to try their long distance services, AC&C promised to
reimburse him for the switching fee if he choose to switch to another carrier after trying their service. From Marks
perspective, the switching fee is a.:
A) fixed cost and a sunk cost
B) fixed cost, but not a sunk cost.
C) variable cost and a sunk cost.
D) variable cost, but not a sunk cost.
E) neither a fixed cost nor a sunk cost.
36. Sunk costs are different from other concepts of costs in that they
A) can be either variable or fixed.
B) cannot be lessened by choosing any particular course of action.
C) influence the decision of which activity to do or not do.
D) rise as the level of the activity rises.
E) must be included for an accurate cost-benefit analysis.
37. The time value of money implies that the value of:
A) a dollar earned today is worth less than a dollar spent tomorrow.
B) a dollar earned in the future decreases as the interest rate that can be earned on interest bearing money market
accounts increases.
C) a dollar earned in the future decreases as the interest rate that can be earned on interest bearing money market
accounts decreases.
D) a dollar earned in the future increases as the interest rate that can be earned on interest bearing money market
accounts decreases.
E) a dollar earned in the future is unrelated to the interest rate that can be earned on interest bearing money
market accounts.
38. A cost that cannot be recovered at the time a decision is being made is termed a(n)
A) fixed cost.
B) variable cost.
C) sunk cost.
D) average cost.
E) opportunity cost.
39. A campus organization is holding a lottery to raise money. The cost of a ticket is $2 but the buyer can choose to
either receive the prize money all at once or half at the time of the drawing and the remainder in 3 months. To
ensure that all buyers do not make the same choice, the structure of the prizes must be such that
A) the amount of the all-at-once prize is smaller.
B) the two prizes should be the same amount.

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C) the total amount of the half and half prize is smaller.

D) the amount of the all at once prize is larger.
E) the amount of the all at once prize is equal to one half of the total amount of the half and half prize.
40. The reason sunk costs are irrelevant to decision making is

A) they are fixed.
B) they are non-monetary.
C) they will be borne no matter which particular action is chosen or not.
D) they tend to be forgotten.
E) they result from poor decision making.
41. Which of the following statements is true?

A) All fixed costs are sunk costs.
B) Variable costs can also be sunk costs.
C) Sunk costs can be fixed costs.
D) Some opportunity costs are sunk costs.
E) All sunk costs are fixed costs.
42. Which of the following costs should be included when analyzing choices within a cost-benefit framework?
A) Fixed costs
B) Sunk costs
C) Marginal costs
D) Sunk costs and marginal costs
E) Fixed costs and opportunity costs
Fund Raising Total Average Total Average

Employees Donations Donations Labor Costs Labor Costs
1 $30,000 $8,000
2 $42,426 $17,000
3 $17,321 $27,000
4 $60,000 $9,500
5 $13,416 $50,000
nd
43. The marginal benefit (extra donations) of the 2 employee is
A) $42,426.
B) $21,213.
C) $12,426.
D) $11,337.
E) $9,766.
44. The Chairman of the Economics Department at What'sAMatterU says that fundraisers should be hired as long as
their marginal donations exceed their marginal labor costs. Following this criteria, __________ employees are hired
and net benefits are __________.
A) 1; $22,000
B) 2; $25,426
C) 3; $25,426
D) 2; $3,476
E) 2; $42,426
45. The Dean of Finance at What'sAMatterU argues that the best number of fundraisers to hire is where average labor
costs are the lowest. This would mean __________ employee(s) and a net benefit of __________.
A) 1; $36,000
B) 1; $22,000
C) 2; $21,213
D) 2; $8,500
E) 1; $8,000
46. The net benefit of hiring fundraisers is largest when __________ employees are hired.
A) 5
B) 4
C) 3
D) 2
E) 1

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47. The President of What'sAMatterU decides to hire fundraisers as long as the average benefit exceeds the average
cost, resulting in __________ employees being hired and a net benefit (total donations minus total labor costs) of
__________.
A) 5; $17,082
B) 5; $67,082
C) 4; $60,000
D) 4; $22,000
E) 5; $38,000
48. The total labor cost of 4 employees is

A) $21,500.
B) $22,000.
C) $38,000.
D) $43,121.
E) $44,750.
49. The average labor cost of 3 employees is

A) $6,000.
B) $6,500.
C) $7,675.
D) $8,750.
E) $9,000.
50. The average benefit (average donation) of 4 employees is

A) $13,222.
B) $15,000.
C) $16,748.
D) $18,883.
E) $19,915.
51. Total donations raised by three employees are

A) $43,899.
B) $45,000.
C) $48,911.
D) $51,963.
E) $57,721.
th
52. The marginal labor cost (extra labor cost) of the 4 employee is
A) $9,500.
B) $10,000.
C) $10,750.
D) $11,000.
E) $12,000.
53. At the University of the Heartland tuition is $50 per credit hour up to a maximum of 12 credit hours, student fees are
$150 per student, room and board is $1,500 per student each semester, and books cost and average of $60 per
course. For a student taking 12 or fewer credit hours
A) fixed costs would include tuition, students fees and room and board, while variable costs would include only the
cost of books.
B) fixed costs would include students fees and room and board, while variable costs would include tuition and the
cost of books.
C) fixed costs would include tuition, students fees, room and board, and the cost of books, but no variable costs.
D) fixed costs would include tuition, and room and board, while variable costs would include students fees and the
cost of books.
E) fixed costs would include tuition, and students fees, while variable costs would include room and board and the
cost of books.
54. Suppose Darlene purchased a computer 2 weeks ago for $2000. Today she can purchase a new computer that is
twice as fast for $1400. She also discovers that the current computer sells used for $300. The sunk cost of her
current computer is
A) $0.
B) $300.
C) $1100.
D) $1700.
E) $2000.

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55. Shelia is a volleyball player who wears out 10 pairs of shoes each volleyball season. Before the season she
purchases all ten pairs because she can get a volume discount from the manufacturer's representatives. She gets a
price quote from two representatives from whom she has previously purchased shoes. Representative A will sell her
10 pairs for $495 plus a shipping fee of $11. Representative B will sell her the same 10 pairs for $509. The average
cost of buying the shoes from Representative A is _______ and from Representative B is ______.
A) $50.60; $50.90
B) $506; $509
C) $56; $59
D) $49.50; $50.90
E) $495; $509
56. Jackson just paid $1,000 cash for a 1979 Corvette and he needs to travel to San Francisco this summer. He can
either drive his car or take a bus. In order to make a rational decision, he decides to calculate the costs of driving the
car on the trip. He knows the cost of the car was $1,000, he estimates the cost of gas at 10 cents per mile, the car
repair shop estimates maintenance at 3 cents per mile, his car insurance costs $600 for 6 months, and from a web
site he determines that depreciation is about $1 per mile. Which of the above costs are sunk cost and, therefore,
should not be included in his analysis?
A) Maintenance, depreciation, insurance and loan payment costs
B) Maintenance, depreciation and insurance costs
C) Depreciation, insurance and loan payment costs
D) Insurance and loan payment costs
E) The cost of the car
Ontel engineers proposed developing a 2 Gigahertz microprocessor in early 1999 at a cost of $20 million for a working
prototype. By mid 2000, the $20 million had been spent with no prototype. The engineers request an additional $10 million to
finish the project. For convenience, assume the marginal cost of producing the chip once it is developed is zero.
57. In early 1999, sunk costs of this project were __________ and in mid 2000 sunk costs were __________.
A) 0; $20 million
B) 0; $30 million
C) $20 million; $30 million
D) $20 million; $10 million
E) $20 million; 0
58. If the expected revenues of a 2 Gigahertz chip are $15 million, Ontel should
A) stop development and take a $20 million loss.
B) finish development and earn a $5 million profit.
C) stop development to avoid a $10 million loss.
D) finish development and earn a $5 million loss.
E) finish development and take a $15 million loss.
59. In deciding whether to continue the 2-gig chip, Ontel executives should compare the __________ to the expected
revenues.
A) $20 million spent plus the extra $10 million
B) $20 million spent
C) extra $10 million
D) $20 million spent minus the extra $10 million
E) $20 million spent plus the extra $10 million plus $5 million for cost overruns.
60. A senior executive at Ontel argues that the engineers should only be granted the additional $10 million if Ontel can
collect $30 million in revenues after the chip is developed. The executive's argument is
A) correct.
B) incorrect; Ontel need only collect $20 million.
C) incorrect; the $20 million is already spent is a fixed cost and should be ignored.
D) incorrect; the $20 million already spent is a sunk cost and should be ignored.
E) possibly correct; insufficient information to say.
61. Keyshawn Smith, a professional football player, has been offered two different compensation packages by his team
from which he must choose one. Package A will pay him a signing bonus of $2 million when he signs his contract at
the beginning of the year and a monthly salary during the season of $500,000. Package B will pay him a monthly
salary during the season of $500,000 and a $2. 1 million bonus at the end of the year. The minimum interest rate on
a one-year certificate of deposit that would make Package A at least as valuable a benefit as Package B is:
A) 10 percent.
B) one percent.
C) 5 percent.

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D) 2.5 percent.
E) 15 percent.
62. In a world without inflation or uncertainty, the concept of the time value of money would
A) no longer exist.
B) indicate that $100 today is equivalent to less than $100 next month.
C) still exist.
D) possibly exist.
E) disappear.
63. To avoid the mistake of ignoring opportunity costs, the textbook recommends framing questions in the form of
A) should I do A?
B) should I do B?
C) why should I do A?
D) should I do A or B?
E) should I do A or B or C or… Z?
64. Paying interest when one borrows money is

A) capitalist exploitation.
B) a payment to the lender to cover his opportunity cost of not being able to use the loaned amount.
C) a way to ensure those who truly need additional resources will not get them.
D) a development of post industrialization economics.
E) proper when borrowing from a bank but unnecessary when borrowing from friends or family.
65. Darla is a computer specialist who works for Ibid.com. Ibid.com, like most internet companies, is a recent startup
company that gave her stock options when she joined the firm, but she must wait one more year to sell them. Darla is
now considering a job offer from a firm in real estate industry that provides a higher salary, but no stock options and,
if she leaves her current job, she loses her stock options with Ibid.com. Her best estimate is that in one year the stock
options would sell for $125,000. The current value of her stock options is:
A) $125,000.
B) $100,000 at an interest rate of 10 percent.
C) $100,000 at an interest rate of 15 percent.
D) $100,000 at an interest rate of 20 percent.
E) $100,000 at an interest rate of 25 percent.
Units of
Activity Cost A Cost B Benefit
1 $10 $20 $100
2 $10 $30 $150
3 $10 $50 $180
4 $10 $70 $200
5 $10 $90 $205
66. The average variable cost of 2 units of activity is

A) $5.
B) $15.
C) $20.
D) $25.
E) $30.
67. The average benefit of 5 units of activity is

A) $41.
B) $50.
C) $60.
D) $75.
E) $100.
68. The variable cost of 3 units of activity is

A) $50.
B) $70.
C) $80.
D) $100.
E) indeterminate.

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69. The total cost of 5 units of activity is

A) $260.
B) $100.
C) $90.
D) $10.
E) indeterminate.
70. The average cost of 4 units of activity is

A) $2.
B) $10.
C) $18.
D) $20.
E) $50.
71. The average benefit of 3 units of activity is

A) $41.
B) $50.
C) $60.
D) $75.
E) $100.
72. Which of the following is the only inference supported by the data?
A) Cost B is a fixed cost.
B) The benefits of this activity decline.
C) Cost A is a variable cost.
D) Five units of activity is the best choice.
E) Cost A is a fixed cost.
DMA is in the process of developing a new microprocessor. The data above reflect the past and future expenditures. The
question facing management is whether to go forward with the project.
Item Value
Research and Development to Date $20,000,000
Interest Payments on Plant and Equipment $400,000
Salaries for Engineers $600,000
Salaries for Support Staff $700,000
Materials $700,000
73. A senior executive claims that the R&D costs are sunk and the correct average cost measure of completing the
project and selling 20,000 units is $100. This figure is __________ because __________.
A) incorrect; it ignores the R&D expenditures
B) correct; it includes all the relevant costs
C) incorrect; it includes the interest payments
D) correct; the interest payments must be made
E) incorrect; the senior executive miscalculated; it should be $110
74. The most important cost(s) in deciding the fate of the project is (are)
A) salaries of engineers.
B) salaries and materials.
C) salaries, materials, and interest payments.
D) materials.
E) salaries, materials, interest payments, and past R&D.
75. The least important cost(s) in deciding the fate of the project is the
A) R&D expenditures to date.
B) interest payments.
C) salaries for engineers.
D) salaries for support staff.
E) materials.
76. An accountant at DMA reports to upper management that, based on selling 20,000 units, the average cost of
completing the project is $1,100. This figure is __________ because __________.

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A) correct; it includes all the relevant costs

B) incorrect; it includes the interest payments
C) incorrect; it includes the R&D expenditures
D) correct; the firm must recover all that it has spent
E) incorrect; it includes the interest payments and the R&D expenditures
77. The expenditures for R&D are __________, the interest payments are __________, and salaries and materials are
__________.
A) sunk costs; sunk costs; fixed costs
B) fixed costs; variable costs; fixed costs
C) sunk costs; fixed costs; fixed costs
D) sunk costs; fixed costs, variable costs
E) fixed costs; sunk costs; variable costs
78. The Director of Marketing at DMA, whose undergraduate degree was in economics, claims that completing the
project of selling 20,000 units has an average cost of $80. This is __________ because __________.
A) incorrect; it ignores the R&D expenditures
B) correct; it includes all the relevant costs
C) incorrect; it includes the interest payments
D) incorrect; it ignores both the R&D expenditures and the interest payments
E) incorrect; it includes the salaries of the support staff
In many cities, discount clubs are popular. For a fixed annual fee, one can purchase goods at 95% of their listed price;
otherwise, one pays the list price. Suppose that the fee is $100 and the interest rate is 10%. Finally, assume the discount
club's list prices are the same as any other store.
79. Suppose the Jones family plans to spend $1000. They __________ purchase the membership because
__________.
A) will; the net benefit of membership is $50.
B) will not; the net benefit of membership is -$60.
C) will; the net benefit of membership is $60.
D) will not; the net benefit of membership is -$50.
E) will; it seems like a good deal.
80. The benefit of not buying a membership is __________ and the cost of not buying a membership is __________.
A) 100; 5 percent of spending.
B) 100; -5 percent of spending.
C) 0; 0.
D) $110; 5 percent of spending.
E) $110; -5 percent of spending.
81. The benefit of purchasing a membership is

A) 5 percent of spending.
B) 95 percent of spending
C) 95 percent of savings.
D) 5 percent of savings.
E) zero.
82. Suppose the Dilbert family plans to spend $3000. They will have a net benefit of __________ if they __________the
membership.
A) $110; do not purchase
B) $40; purchase
C) $40; do not purchase
D) -$150; do not purchase
E) $150; purchase
83. The cost of a membership is

A) $100.
B) $100 minus the savings.
C) $100 plus $10 of forgone interest.
D) $100 plus $1 of forgone interest.
E) $100 minus $10 of forgone interest.
84. The level of spending that causes the net benefit of membership to be zero is

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A) 0.
B) $1000.
C) $1500.
D) $2000.
E) $2200.
85. The average cost of 20 units of an activity is the

A) total cost of 20 units of the activity divided by 20.
B) 20 divided by the total cost of 20 units of the activity.
C) extra cost of 20 units of the activity divided by 20.
D) reciprocal of the total cost of 20 units of the activity.
E) change in total cost of the activity.
86. If resources can't be divided up continuously, e.g., 1 laborer or 2, the efficient allocation of resources across activities
requires that
A) each unit of a resource goes to the activity in which it has the largest marginal benefit.
B) each unit of a resource goes to the activity in which it has the largest average benefit.
C) the marginal benefits of all resources equalize.
D) the last unit of a resource goes to the activity in which it has the highest marginal benefit.
E) the first unit of a resource goes to the activity in which it has the highest marginal benefit.
87. Jim, a student at Southern State University, is enrolled in 15 credit hours this semester. His grade in the Calculus
class is a passing grade, but below his expectations. Fearing that his grade may slip into the failing range, he is
considering withdrawing from the course. He tells a friend, "I would drop the course but I don't want to waste the $500
I paid in tuition for the course." His friend replies, "The $500 tuition you paid for the course is irrelevant to your
decision. Your grade in the course is the only thing that is important, now." The friend is:
A) incorrect, because the tuition will have to be paid again when Jim retakes the course.
B) correct, because the tuition is a fixed cost and fixed costs should never be considered when making decisions.
C) incorrect, because the tuition is a variable cost and variable costs should always be considered when making
decisions.
D) correct, because the tuition is a sunk cost and sunk costs should not be considered when making decisions.
E) incorrect, and obviously so rich that money means nothing to him/her.
David finds he has one hour of time in the evening to allocate on the first day of the new semester. He can do one of two
things. He can watch TV for one hour or he can open his economics textbook and read for an hour. The benefit of watching
TV is 30; the benefit of reading about economics is 20.
88. Suppose that instead of the first day of the semester, it is the night before David's first exam in economics. One
could reasonably predict that the
A) benefit of watching TV will rise.
B) benefit of reading about economics will fall.
C) the cost of watching TV will rise.
D) the cost of reading economics will rise.
E) he will continue to make the same choice.
89. The net benefit of watching TV is

A) 30.
B) 20.
C) 10.
D) 0.
E) -10.
90. The cost of watching TV is __________ and the cost of reading about economics is __________.
A) 20; 30
B) 0; 0
C) 30; 20
D) 20; 3-30
E) indeterminate; indeterminate
91. If David applies the cost-benefit principle accurately, he will

A) read about economics.
B) watch TV.
C) watch TV but fret that he should be reading.
D) read about economics but resent missing TV.
E) flip a coin because the net benefits are the same.

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92. The net benefit of reading about economics is

A) 30.
B) 20.
C) 10.
D) 0.
E) -10.
93. Variable costs are costs that

A) vary directly with the level of activity.
B) do not always vary with the level of activity.
C) are sometimes irrelevant to decision making.
D) vary inversely with the level of activity.
E) only matter as to whether an activity is chosen, but not the level of the activity.
94. Ms. Trimble dabbles in the stock market, investing a portion of her retirement funds in individual stocks. Among her
holdings she has 1,000 shares of XYZ Corp. that she bought at $50 per share. During the last quarter, the company's
profits failed to meet the analysts' predictions and, further, the company indicated that the next quarter would also be
below expectations. As a result, the stock price has fallen to $40 per share. Ms. Trimble is considering selling the
shares in XYZ Corp. in order to purchase shares of ABC, Inc. because she thinks that ABC, Inc.'s future prospects
are better than those of XYZ Corp. Her stockbroker agrees with her evaluation of the future prospects of the two
firms, but recommends that she wait until the price of the XYZ Corp. stock gets back to $50 per share so that she
won't loose money on the investment and she will be able to buy more shares of ABC Inc.. Her stockbroker's advice
is:
A) correct because cost-benefit analysis requires that one not only look at the marginal benefit of owning the
shares but also the marginal cost.
B) incorrect because if she sells the shares of XYC Corp. she will loose money that can never be recovered.
C) incorrect because it does not take into account the cost of buying the shares of ABC, Inc.
D) correct because if she buys more shares of ABC, Inc. she will have a larger fund to live on during her
retirement.
E) incorrect because the $50 per share price she paid for the XYZ Corp. shares is a sunk cost and should not be
consider when making a decision.
95. For many students, the opportunity cost of taking an 8:00 am Monday, Wednesday, and Friday class is the value of
one hour's worth of
A) studying.
B) dental work.
C) cleaning.
D) washing.
E) sleeping.
96. Dividing the total benefit of n units of an activity by n quantifies the

A) average benefit.
B) marginal benefit.
C) average cost.
D) units per benefit.
E) additional benefit.
97. Zale University is an expensive private institution in the Northeast while Texas P&M is a public institution in Texas.
Three semester hours cost $5,000 at Zale and $360 at Texas P&M. If both universities don't refund any tuition after
rd rd
the 3 week of class, then the cost of dropping a class after the 3 week is
A) $5,000 at Zale.
B) $500 at Texas P&M.
C) not dependent on the price of tuition at either institution.
D) higher at Zale.
E) lower at Texas P&M.
98. The average benefit of an activity is the

A) total benefit of the activity times the number of units.
B) total benefit of the activity divided by the number of units.
C) number of units divided by the total benefit of the activity.
D) number of units times the total benefit of the activity.
E) reciprocal of the total benefits of the activity.
99. Jack has a ticket to see Smashmouth which he paid $30 for yesterday. He takes an unpaid day off from work to get
ready for the concert. W hen he arrives at the concert, 5 different people offer him $70 for his ticket. The cost to Jack
of seeing Smashmouth is

lOMoARcPSD|3016397
A) $30.
B) $40.
C) $70.
D) $70 plus his forgone earnings.
E) his forgone earnings.
100. The time value of money means that a promise to be paid $100 one month from now is
A) worth less than $100 today.
B) worth $100 today.
C) not to be believed.
D) worth more than $100 today.
E) worth more or less than $100 depending on one's preferences.

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1. B
2. A
3. A
4. B
5. D
6. C
7. A
8. B
9. E
10. D
11. B
12. C
13. A
14. D
15. D
16. C
17. A
18. A
19. C
20. D
21. C
22. D
23. C
24. C
25. E
26. C
27. C
28. E
29. C
30. B
31. C
32. D
33. C
34. D
35. B
36. B
37. B
38. C
39. A
40. C
41. E
42. C
43. C
44. B
45. B
46. D
47. A
48. C
49. E
50. B
51. D
52. D
53. B
54. D
55. A
56. D
57. A
58. E
59. C
60. D
61. C
62. C
63. D
64. B
65. E
66. B
67. A
68. A
69. B
70. D
71. C
72. E
73. C

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74. B
75. A
76. E
77. D
78. B
79. B
80. D
81. A
82. B
83. C
84. E
85. A
86. A
87. D
88. C
89. C
90. A
91. B
92. E
93. A
94. E
95. E
96. A
97. C
98. B
99. C
100. A

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1. The political concern expressed about the North American Free Trade Agreement (NAFTA) was that
A) prices to U.S. consumers would fall.
B) wages in Mexico would rise.
C) highly skilled workers in the U.S. would lose their jobs.
D) illegal immigration would fall.
E) unskilled workers in the U.S. would lose their jobs.
2. According to the textbook, the largest factor explaining the variance in the performance of the economies of the world
is the
A) degree of specialization.
B) size of government.
C) location of the country.
D) type of government.
E) amount of average rainfall.
3. The reason a family doctor would send one of his patients to a surgeon to remove a tumor is because the surgeon
has
A) an absolute advantage in providing treatment.
B) a comparative advantage in providing treatment due to inborn talent and training.
C) a comparative advantage in providing treatment due to cultural differences.
D) an arrangement with the family doctor to fee split unnecessary surgeries.
E) a better bedside manner.
4. Suppose Ben and Sally are the only laborers and they can produce either good A or good B. Ben has a comparative
advantage in producing good A. One can infer that
A) Ben should divide his time equally between producing goods A and B.
B) Sally should divide her time equally between producing goods A and B.
C) Ben should specialize in producing good B.
D) Sally should specialize in producing good B.
E) Sally should specialize in producing good A.
5. The production possibilities curve is

A) the boundary that divides all production combinations into efficient and inefficient ones.
B) a graph illustrating the production combinations society would like to choose.
C) the boundary that divides all production combinations into attainable ones and unattainable ones.
D) a convex curve illustrating production tradeoffs.
E) the boundary that divides all production combinations into good ones and bad ones.
6. Maria can produce 100 pounds of tomatoes or 25 pounds of squash in her garden each summer, while Tonya can
produce 50 pounds of tomatoes or 25 pounds of squash. The absolute values of the slope of Maria's and Tonya's
production possibility curves, respectively, are:
A) 1/4 and 1/2.
B) 1/2 and 1/4.
C) 4 and 2.
D) 2 and 4.
E) 100 and 50.
7. According to the textbook, VCR's were developed and initially produced in the U.S. but currently are produced
abroad. This is because
A) consumers fail to look for the "Made in the U.S.A" label.
B) the U.S. lost its absolute advantage in VCR's.
C) foreign countries gained an absolute advantage in VCR's.
D) foreign countries encourage the "dumping" of VCR's on the U.S.
E) as VCR design stabilized and production became more automated, countries with low wage workers gained a
comparative advantage.
8. Efforts to lessen restrictions on international trade always encounter hostile and heated opposition from one or more
groups. This is because
A) free trade only benefits the wealthy.
B) the increased output from free trade is a myth perpetuated by economists.
C) the opposition is unfamiliar with the principle of increasing opportunity cost.
D) everyone does not benefit equally from free trade; some groups suffer losses.
E) the opposition is looking out for the interests of the U.S. consumer.
9. A country's production possibilities curve is concave to the origin (i.e., bowed outward) because:
A) of the principle of scarcity.
B) the production of a good is expanded by first employing those resources with an absolute advantage.

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C) the production of a good is expanded by first employing those resources with the lowest opportunity cost.
D) there is a trade off that requires a decrease in the production of one good in order to increase the production of
another good.
E) of the principle of absolute advantage
10. If the world can be roughly divided into first world countries and third world countries, the gains from specialization
and trade would likely be greatest for
A) first world to first world exchanges.
B) third world to third world exchanges.
C) first to third world exchanges.
D) the first world.
E) the third world.
Smith and Jones comprise a two-person economy. Their hourly rates of production are shown below.
Good Smith Jones

Computers 10 6
Calculators 100 120
11. For any efficient point with less than 10 computers and more than 120 calculators, Smith will __________ and Jones
will __________.
A) split his time between the two; only produce calculators
B) split his time between the two; split his time between the two
C) only produce calculators; only produce computers
D) only produce computers; only produce calculators
E) evenly divide his time between the two; evenly divide his time between the two.
12. Based on the data, Smith has a(n) __________ advantage in __________ while Jones has a(n) __________
advantage in __________.
A) comparative; calculators; absolute; calculators
B) absolute; calculators; absolute; computers
C) absolute; computers; comparative; computers
D) comparative; computers; comparative; calculators
E) comparative; calculators; comparative; calculators
13. With respect to computers, __________ represents the __________.

A) Jones; high-hanging fruit
B) Smith; high-hanging fruit
C) Jones; low-hanging fruit
D) Smith; medium-hanging fruit
E) Jones; medium-hanging fruit
14. By coordinating their production decisions, the maximum number of computers Smith and Jones can produce is
A) 120.
B) 100.
C) 16.
D) 10.
E) 6.
15. For any efficient point with at least 10 computers and less than 120 calculators, Smith will __________ and Jones will
__________.
A) only produce computers; only produce calculators
B) only produce computers; split his time between computers and calculators
C) split his time between computers and calculators; only produce computers
D) evenly divide his time between the two; evenly divide his time between the two
E) only produce calculators; only produce computers
16. The opportunity cost of an extra calculator for Smith is __________ and for Jones it is __________.
A) .10 computers; .05 computers
B) 10 computers; 6 computers
C) 1 computer; .5 computers
D) .6 computers; 1.2 computers
E) .05 computers; .10 computers

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17. As Smith and Jones choose to efficiently produce fewer computers and more calculators, __________ devotes more
time to calculators because his __________.
A) Smith; absolute advantage is larger
B) Jones; absolute advantage is smaller
C) Jones; opportunity costs are lower
D) Smith; opportunity costs are lower
E) Jones; comparative advantage is smaller
18. Suppose Smith and Jones begin at the point of 0 computers and 220 calculators. If they wish to have 2 computers
and 200 calculators, then Smith will spend __________ and Jones will spend __________.
A) 30 minutes on each; 30 minutes on each
B) 48 minutes on computers and 12 minutes on calculators; 1 hour on calculators.
C) 1 hour on calculators; 10 minutes on computers and 50 minutes on calculators.
D) 6 minutes on computers and 54 minutes on calculators; 10 minutes on computers and 50 minutes on
calculators.
E) 12 minutes on computers and 48 minutes on calculators; 1 hour on calculators.
19. Suppose Smith and Jones begin at the point of 16 computers and 0 calculators. If they wish to have 14 computers
and 40 calculators, then Smith will spend __________ and Jones will spend __________.
A) 1 hour on computers; 40 minutes on computers and 20 minutes on calculators
B) 1 hour on computers; 20 minutes on computers and 40 minutes on calculators
C) 30 minutes on each; 30 minutes on each
D) 45 minutes on computers and 15 on calculators; 1 hour on calculators
E) 1 hour on computers; 50 minutes on computers and 10 minutes on calculators
20. A reduction in the length of the workday would cause the production possibilities curve to
A) become steeper.
B) shift away from the origin.
C) become flatter.
D) shift towards the origin.
E) change in an unpredictable way.
21. If everyone had the same opportunity cost of producing a good, then
A) everyone would have the same absolute advantage.
B) no one would have an absolute advantage.
C) everyone would have the same comparative advantage.
D) the absolute advantage would be the same for everyone but the comparative advantage would vary.
E) the absolute and comparative advantages would be the same for everyone.
22. The equation for Cartman's production possibilities curve is A = 13 - ½*B, where A and B are the two goods he can
produce. The slope of Cartman's production possibilities curve is __________ and quantifies __________.
A) -.5; the change in A for a unit change in B
B) .5; the change in A for a unit change in B
C) -.5; the change in B for a unit change in A
D) .5; the change in B for a unit change in A
E) -2; the change in A for a unit change in B
23. The following data represents the production values for two goods, M and N, i.e., (M,N): (10,0); (9,2); (8,4); (7,3);
(6,6). This data is
A) consistent with a production possibilities curve.
B) possibly consistent with a production possibilities curve.
C) consistent with a convex production possibilities curve.
D) not consistent with a production possibilities curve.
E) completely resistant to analysis.
24. A point on Joseph's production possibilities curve represents 6 music CDs and 2 videos produced in a week. A
combination of 4 music CDs and 2 videos is a(n):
A) efficient and attainable point.
B) efficient but not attainable point.
C) attainable and inefficient point.
D) unattainable point.
E) unattainable and inefficient point.
25. An inefficient point is

A) necessarily an attainable point.
B) may be an attainable point.
C) necessarily an unattainable point.

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D) possible an unattainable point.

E) one that uses too many resources.
The table represents data for a small, two-person economy that produces paintings and poems. In the international art market,
a painting is worth half a poem. Assume the two-person economy operates at the point of complete specialization.
Painting Poems
Per Hour Per Hour
Andy 15 1
Val 3 12
26. Suppose the small country wants 18 paintings and 6 poems. To achieve this goal,
A) Andy must paint 18 paintings and Val must write 6 poems.
B) Andy and Val must paint 21 paintings and exchange 3 of them for 6 poems.
C) Andy must paint 15 paintings and Val must write 12 poems and exchange 6 of them for 3 paintings.
D) Andy must learn to paint faster.
E) Val must learn to paint faster.
27. Suppose that a government decree declares the writing of poetry to be illegal but trade and consumption of poetry is
still legal. When one painting is worth half a poem, the maximum number of poems Val and Andy can enjoy is
A) 0.
B) 36.
C) 15.
D) 42.
E) 18.
28. Consider the combination of 18 paintings and 6 poems. Without trade, this point is __________ but with trade, it is
__________.
A) attainable; unattainable
B) inefficient; attainable
C) efficient; attainable
D) unattainable; attainable
E) unattainable; unattainable
29. Once the small country promises to reduce animal abuse and is allowed to participate in international trade, the
maximum number of paintings and poems are __________ and __________, respectively.
A) 18; 13
B) 21; 42
C) 13; 18
D) 42; 21
E) 1; 2
30. Suppose the small country wants 14 paintings and 14 poems. Achieving this requires that
A) Andy must learn to write poems faster.
B) Val write 12 poems and Andy paint 15 paintings and exchange one painting for 2 poems.
C) Val write 13 poems and Andy paint 14 paintings and write one poem.
D) Val must learn to write poems faster.
E) Andy must learn to paint faster.
31. The combination of 14 paintings and 14 poems is __________ without trade and __________ with trade.
A) unattainable; attainable
B) attainable; unattainable
C) efficient; inefficient
D) inefficient; attainable
E) efficient; efficient
32. Because of concerns about animal rights abuses, the small country is prohibited from participating in the international
art market. Thus, the maximum number of paintings and the maximum number of poems that could be enjoyed are
__________ and __________, respectively.
A) 18; 13
B) 15; 12
C) 18; 0
D) 0; 13
E) 12; 15

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33. If a given production combination is known to be attainable, then it must be

A) on the production possibilities curve.
B) beyond the production possibilities curve.
C) an efficient point.
D) an inefficient point.
E) either an inefficient or efficient point.
34. As one progresses from a one-person economy to a large, multi-person economy, the shape of production
possibilities curve changes from
A) downward sloping to upwards sloping.
B) linear to convex (bowed in).
C) concave (bowed out) to linear.
D) convex to concave.
E) linear to concave.
35. A positively sloped production possibilities curve

A) is rare.
B) would violate the principle of resource scarcity.
C) would show that production decisions require tradeoffs.
D) is, at least, theoretically possible.
E) is the norm.
36. The U.S. generally has a comparative advantage in the development of technology because of
A) larger amounts of natural resources.
B) higher than world average IQ's of the population.
C) a high concentration of the best research universities.
D) tax incentives.
E) the existence of patent law, which no other country provides.
37. The __________ the difference between domestic opportunity costs and international opportunity costs, the
__________ the potential benefits of trading with other countries.
A) smaller; greater
B) greater; greater
C) greater; smaller
D) larger; more insignificant
E) closer to zero is; more significant
38. Which of the following statements is not true about specialization?

A) Total economic output is larger.
B) Worker skills are better matched with tasks.
C) Specialization focuses experience and increases the comparative advantage.
D) The variety of tasks associated with a particular job grows over time.
E) Down time due to switching tasks is lessened.
39. Joe has an absolute advantage in producing goods X and Y compared to Ted. Moreover, they have the same
opportunity costs. One can predict that the gains from coordinating production and specialization is
A) zero.
B) small.
C) large.
D) negative.
E) indeterminate.
40. When a government reduces the ease with which international trade can occur, it is
A) helping domestic consumers.
B) hurting all domestic producers.
C) reducing the total amount of output available to domestic consumers.
D) keeping all domestic prices artificially high.
E) keeping all domestic prices artificially low.
Figure 3.1

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41. Point G is a(n) __________ point in relation to the production possibilities curve.
A) attainable.
B) efficient.
C) unattainable.
D) inefficient.
E) inefficient and attainable.
42. Of the labeled points, ______________ are efficient.

A) F and G
B) B, C, and D
C) A, C, and E
D) A, B, C, D, E, and F
E) A, B, C, D, and E
43. Of the labeled points, ______________ are attainable

A) F and G
B) B, C, and D
C) A, C, and E
D) A, B, C, D, E, and F
E) A, B, C, D, and E
44. The slope of an individual's production possibilities curve:

A) decreases as more units of a particular good are produced.
B) is negative and constant along the entire curve.
C) is positive and constant along the entire curve.
D) varies as the amount of output changes.
E) is the same for all individuals.
45. A graph that illustrates the maximum amount of one good that can be produced for every possible level of production
of the other good is termed a(n)
A) production possibilities curve.
B) consumption possibilities curve.
C) production impossibilities curve.
D) comparative advantage curve.
E) absolute advantage curve.
46. Jerry's production possibilities curve for goods W and Z is W = 20 -2*Z. The combination of W and Z (11, 5) is a(n)
__________ point
A) unattainable.
B) inefficient.
C) inefficient but attainable.
D) efficient.
E) efficient and unattainable

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47. If a nation has an absolute advantage in the production of toilet paper, then it
A) must also have a comparative advantage.
B) will always produce enough for domestic consumption.
C) will never produce toilet paper.
D) may or may not have a comparative advantage.
E) must also have an absolute advantage for other paper products.
48. Teddy's production possibilities curve for goods M and N is described by the following equation: M = 21 - 3*N. The
maximum amount of N Teddy can produce is
A) 63.
B) 21.
C) 14.
D) 7.
E) 0.
49. Professor N. Gregory Mankiw has a comparative advantage in the production of economics textbook and a
neighbor's child has a comparative advantage in mowing the lawn. Professor Mankiw:
A) should never mow his own lawn.
B) should only write economics textbooks.
C) may be better off mowing his lawn if he felt like taking a break from writing textbooks.
D) will always be better off hiring the neighbor's child to mow his lawn.
E) may be better off hiring the neighbor's child to write his economics textbook if his lawn needs mowing.
50. Karl Marx, the intellectual father of communism, objected to capitalism generally and specialization specifically,
because
A) it resulted in too much output.
B) insufficient attention was paid to pollution and worker safety.
C) it generated a class of wealthy, idle capitalists.
D) it reduced the worker to a machine.
E) it resulted in low quality goods.
51. By specializing in accordance with its comparative advantage and trading with other nations, the small nation of
Islandia will benefit:
A) less than that of larger nations.
B) more than that larger nations.
C) only if its trading partners suffer losses.
D) more or less, depending on the combination of goods it chooses to consume.
E) regardless of the combination of goods it chooses to consume.
52. The following data represents the production values for two goods, F and G, i.e., (F,G): (5,0); (4,1); (3,2); (2,3); (1,4);
(0,5). This data is
A) consistent with a concave production possibilities curve.
B) not consistent with a production possibilities curve.
C) consistent with an upward sloping production possibilities curve.
D) consistent with a convex production possibilities curve.
E) consistent with a linear production possibilities curve.
53. Concave (bowed out) production possibilities curve would indicate

A) decreasing opportunity costs.
B) the slope is getting smaller in absolute value.
C) a large economy with many workers.
D) a small economy with a handful of workers.
E) constant opportunity costs.
54. In general, individuals and nations should specialize in producing those goods for which they
A) can produce more quickly than others.
B) can produce less quickly than others.
C) have the lowest opportunity cost compared to others.
D) have the highest opportunity cost compared to others.
E) have an average opportunity cost.
55. That Saudi Arabia has a comparative advantage in the production of crude oil stems from
A) a difference in natural resources.
B) cultural differences.
C) non-economic factors.

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D) technical knowledge differences.

E) educational differences.
56. Specialization of labor not only results in the ability to produce a larger amount of goods due to innate differences in
people's skills, but also by:
A) rigidly segmenting work.
B) switching back and forth among numerous tasks.
C) breaking a task down into mind-numbing repetitive tasks.
D) deepening skills through practice and experience.
E) eliminating the need to train and educate the workers to perform different tasks.
57. Application of the Principle of Comparative Advantage leads to

A) greater and greater specialization of labor and other factors of production.
B) lesser and lesser specialization of labor.
C) societies where everyone can do a little of everything.
D) lower total output.
E) misallocation of resources.
58. When each individual concentrates on performing the tasks and producing the goods for which he or she has the
lowest opportunity cost, they are producing in accordance with the Principle of:
A) increasing opportunity cost.
B) decreasing opportunity cost.
C) comparative advantage.
D) scarcity
E) low-hanging-fruit.
59. The fundamental reason the production possibilities curve has a negative slope is
A) workers are inefficient.
B) resources are of low quality.
C) resources are fixed and therefore tradeoff must be made.
D) it has empirical support but why it is so is still a mystery.
E) of comparative advantage.
60. Stripped to its essential, the benefit of specialization is

A) greater total output.
B) greater interest in work.
C) less job related stress.
D) less diversity in output.
E) less detailed knowledge.
61. Suppose that a further increase in specialization allows a country to increase total output by 10% but afterward it was
discovered that work absenteeism increased by 30%. This is likely an example of
A) modern production.
B) too much specialization.
C) too little specialization.
D) inefficiencies caused by labor unions.
E) worker laziness.
The following data describe Buffy's abilities to produce either weapons or food per hour.
Weapons Food Units

Per Hour Per Hour
6 0
4 6
2 12
0 18
62. Buffy's production possibilities curve has a __________ slope because producing 6 extra units of food means
__________ weapons can be produced.
A) positive; two more
B) negative; two fewer
C) negative; three fewer
D) negative; six fewer
E) negative; .333 fewer

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63. The data indicate it takes Buffy __________ minutes to produce a weapon and __________ minutes to produce a
unit of food.
A) 3.33; 10
B) 10; 3.33
C) 6; 18
D) 1; 33.3
E) 100; .333
64. The slope of Buffy's production possibilities curve (weapons are on the vertical axis) is
A) .333.
B) -3.
C) 6.
D) -2.
E) -.333.
65. The opportunity cost of an extra unit of food is

A) .333 fewer weapons.
B) 3.33 fewer weapons.
C) 33.3 fewer weapons.
D) fewer weapons but the exact number can't be calculated.
E) 18 fewer weapons.
66. If weapons were on the vertical axis and food on the horizontal, the y-intercept would be __________ and the x-
intercept would be __________.
A) 6; 0
B) 0; 18
C) 6; 18
D) 0; 0
E) 24; 12
67. According to the textbook, the evidence indicates that NAFTA has
A) reduced the wages of skilled workers in the U.S.
B) reduced the employment of unskilled workers in the U.S. significantly.
C) made unskilled workers in Mexico very wealthy.
D) stopped illegal immigration from Mexico.
E) not reduced the employment unskilled workers in the U.S.
Electric Guitars Acoustic Guitars

Employee Per Hour Per Hour
Mark 16 1
Glenn 8 8
Dennis 2 14
68. The opportunity cost of an extra acoustic guitar for Glenn is

A) .8 fewer electric guitars.
B) 7 fewer electric guitars.
C) 1 more electric guitar.
D) equal to Glenn's opportunity cost of an extra electric guitar.
E) 8 fewer electric guitars.
69. Suppose the guitar store received an ASAP order for 26 electric guitars. The efficient allocation of labor resources
would be to have __________ work on electric guitars.
A) all three.
B) Mark and Glenn.
C) only Mark.
D) Glenn and Dennis.
E) only Dennis.
70. The opportunity cost of an extra acoustic guitar for Mark is

A) .0625 fewer electric guitars.
B) 8 fewer electric guitars.
C) 16 fewer electric guitars.

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D) 20 fewer electric guitars.

E) 30 fewer electric guitars.
71. The absolute advantage for electric guitars belongs to __________ ; for acoustic guitars it belongs to __________.
A) Mark; Dennis
B) Mark; Glenn
C) Glenn; Dennis
D) Dennis; Mark
E) Dennis; Glenn
72. Suppose Mark and Dennis each have 20 years experience in producing guitars. Their absolute and comparative
advantages likely come from
A) inborn talent only.
B) experience only.
C) cultural influences.
D) both inborn talent and experience.
E) social pressure.
73. Point A on a production possibilities curve represents a combination of 10 bicycles and 4 tricycles, and point B
represents 6 bicycles and 6 tricycles. The absolute value of the slope of the production possibilities curve between
points A and B equals:
A) 2
B) 4
C) 1/2
D) 1/4
E) 6
74. In a two-person economy, Little Joe can trap a maximum of 6 rabbits or catch 10 fish a week, while his father can
trap 12 rabbits or catch 15 fish per week. If their family wants to consume 20 fish per week while maximizing their
joint production:
A) the father should specialize in producing only fish, and Little Joe should produce both fish and rabbits.
B) Little Joe should specialize in producing only fish, and his father should produce both fish and rabbits.
C) Little Joe should specialize in producing fish, and his father should produce rabbits.
D) Little Joe should specialize in producing only rabbits, and his father should produce fish.
E) each should produce both fish and rabbits.
75. Failure to apply the Principle of Comparative Advantage will result in

A) greater total output.
B) a greater variety of goods and services.
C) greater total income.
D) more trade between individuals.
E) smaller total output.
76. Good W is on the vertical axis and good Z is on the horizontal. A technological innovation that improved labor's
productivity for W but had zero effect on the productivity of Z would cause the production possibilities curve to
A) become steeper.
B) shift away from the origin.
C) become flatter.
D) shift towards the origin.
E) change in an unknowable way.
77. If the production possibilities curve is smoothly bowed out (concave), the underlying economy is probably a(n)
A) single-person model.
B) two-person model.
C) half-person model.
D) three-person model.
E) multi-person model.
78. If a nation has the lowest opportunity cost of producing a good, that nation has a(n)
A) comparative advantage.
B) absolute advantage.
C) comparative and absolute advantage.
D) absolute advantage and possible a comparative advantage.
E) relative advantage.
79. Any combination of goods that can be produced with currently available resources defines a(n)

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A) unattainable point.
B) efficient point.
C) inefficient point.
D) attainable and efficient point.
E) attainable point.
80. The Principle of Increasing Opportunity Cost indicates the proper sequence of resource usage to expand production
is to
A) randomly choose the resources.
B) start with the highest opportunity cost resource and progress to the lower opportunity cost resources.
C) start with a low opportunity cost resource, then a higher cost one, then a lower cost, etc.
D) start with the lowest opportunity cost resource and proceed to the higher opportunity cost resources.
E) start with the mean opportunity cost resource and progress to lower opportunity cost resources.
81. For individuals, comparative advantage springs from

A) inborn talent exclusively.
B) education, training and experience exclusively.
C) social customs.
D) non-economic factors exclusively.
E) a combination of inborn talent, education, training, and experience.
82. Suppose that Penn's opportunity cost of producing an extra Pepsi is 3 cheeseburgers while Teller's opportunity cost
is .14 cheeseburgers. One could predict that
A) Penn must have an absolute advantage in producing cheeseburgers.
B) Teller must have an absolute advantage in producing Pepsi's.
C) they have little to gain from specialization and coordinating production.
D) Teller has a comparative advantage in cheeseburger production.
E) they have a potentially large gain to specialization and coordinating production.
83. In one 8 hour workday, Hector can produce 25 court appeals or 5 new lawsuits. If appeals are on the vertical axis,
the slope of his production possibilities curve is
A) -5.
B) 5.
C) -2.
D) .2.
E) -1.
Shoes Pants
Per Hour Per Hour
Jenny 3 2
Craig 4 3
84. The comparative advantage for shoes belongs to __________ and the comparative advantage for pants belongs to
__________.
A) Craig; Jenny
B) Craig; Craig
C) Jenny; Craig
D) Jenny; Jenny
E) both; Craig
85. According to data, Jenny has an absolute advantage in

A) the production of shoes.
B) neither shoe nor pants production.
C) the production of pants.
D) both shoe and pants production.
E) pants and possibly shoe production.
86. Jenny's opportunity cost of producing an extra pair of pants is

A) 1 pair of shoes.
B) 1.5 pairs of shoes.
C) 2 pairs of shoes.
D) 2.5 pairs of shoes.
E) 3 pairs of shoes.

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87. Craig's opportunity cost of producing an extra pair of pants is

A) 1 pair of shoes.
B) 1.25 pairs of shoes.
C) 1.30 pairs of shoes.
D) 1.33 pairs of shoes.
E) 1.5 pairs of shoes.
88. Jenny's opportunity cost of producing an extra pair of shoes is

A) .33 pairs of pants.
B) .50 pairs of pants.
C) .67 pairs of pants.
D) 1 pair of pants.
E) 1.5 pairs of pants.
89. Increased specialization in the production of goods:

A) always increases net benefits.
B) never increases net benefits.
C) has benefits, but no costs.
D) has costs, but no benefits.
E) has costs and benefits.
90. Which of the following statements is true?

A) An unattainable point is inefficient.
B) An efficient point may or may not be attainable.
C) An inefficient point must be unattainable.
D) An efficient point must be attainable.
E) An attainable point must be efficient.
91. To say that an individual possesses an absolute advantage in the production of software means that
A) he has a lower opportunity cost of producing software.
B) he can produce more and/or higher quality software in a given amount of time.
C) he was the first to create the software.
D) he charges the lowest price for software.
E) he has the most venture capital.
92. To say some person has a comparative advantage in the writing of an economics textbook means
A) he can write a textbook faster than anyone else.
B) he has the best word processing technology.
C) his book will have more features.
D) his book will be the easiest to read.
E) he has a low opportunity cost for writing an economics textbook.
93. The gains from specialization and exchange are greatest when individuals or nations:
A) have a comparative and absolute advantage in the goods they produce, and the differences in opportunity costs
are minimal.
B) have a comparative and absolute advantage in the goods they produce, and the differences in opportunity costs
are large.
C) have only a comparative advantage in the goods they produce, and the differences in opportunity costs are
minimal.
D) have only an absolute advantage in the goods they produce, and the differences in opportunity costs are large.
E) have neither a comparative nor absolute advantage in the goods they produce, but the differences in
opportunity costs are large.
94. Jerry's production possibilities curve for goods W and Z is W = 20 -2*Z. The combination of W and Z (14,3) is a(n)
__________ point.
A) unattainable.
B) inefficient.
C) inefficient but attainable.
D) efficient.
E) efficient and unattainable.
95. Which of the following factors would not make actual comparative advantages larger than the examples discussed in
the textbook?
A) Productivity improvements from greater experience.
B) Less time lost by switching tasks.
C) Import restrictions.

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D) Less time lost in starting a new task.

E) Efficiency improvements due to learning.
Jugs of Moonshine Bales of Hemp

Per Hour Per Hour
Bobby Jo 9 3
Mary Lou 2 7
96. Access to international markets (where one jug equals one bale) __________ the maximum amount of moonshine
Bobby Jo and Mary Lou can consume by __________ units.
A) decreases; 5
B) increases; 5
C) increases; 6
D) decreases; 1
E) increases; 2
97. Bobby Jo's opportunity cost of an extra bale of hemp is __________ and Mary Lou's is __________.
A) .33 fewer jugs; .29 fewer jugs
B) 3 fewer jugs; 3.5 fewer jugs
C) 3 fewer jugs; .29 fewer jugs
D) .33 fewer jugs; 3.5 fewer jugs
E) 27 fewer jugs; 14 fewer jugs
98. If the international market exchanges one jug of moonshine for one bale of hemp, the maximum amounts of
moonshine and hemp Bobby Jo and Mary Lou can enjoy if they can trade internationally are __________,
respectively.
A) 11 and 10.
B) 10 and 11.
C) 9 and 7.
D) 2 and 3.
E) 16 and 16.
99. When individuals or groups specialize in producing those goods for which they have a comparative advantage and
exchange those goods with one another:
A) those with an absolute advantage will gain the most, while those without an absolute advantage will lose.
B) those with an comparative advantage will gain the most, while those without an comparative advantage will
lose.
C) total production will be greater than it would be without specialization, but would be the greatest if they
produced those goods in which they only have an absolute advantage.
D) total production will be less than it would be without specialization.
E) total production will be the greatest that they can achieve given the available resources.
100. At the individual level, comparative advantage results from:

A) differences in natural resources.
B) cultural differences.
C) language differences.
D) amount of resources available.
E) differences in education or training.

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1. E
2. A
3. B
4. D
5. C
6. C
7. E
8. D
9. C
10. C
11. A
12. D
13. A
14. C
15. B
16. A
17. C
18. E
19. A
20. D
21. C
22. A
23. D
24. C
25. A
26. C
27. B
28. D
29. B
30. B
31. A
32. A
33. E
34. E
35. B
36. C
37. B
38. D
39. B
40. C
41. C
42. E
43. D
44. B
45. A
46. A
47. D
48. D
49. C
50. D
51. D
52. E
53. C
54. C
55. A
56. D
57. A
58. C
59. C
60. A
61. B
62. B
63. B
64. E
65. A
66. C
67. E
68. D
69. A
70. C
71. A
72. D
73. A

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74. B
75. E
76. A
77. E
78. A
79. E
80. D
81. E
82. E
83. A
84. C
85. B
86. B
87. D
88. C
89. E
90. D
91. B
92. E
93. B
94. D
95. C
96. B
97. C
98. E
99. E
100. E

lOMoARcPSD|3016397
1. As the price of flour (an input into the cookie production process) increases, firms that produce cookies will
A) increase the supply of cookies.
B) increase the quantity of cookies supplied.
C) decrease the supply of cookies.
D) decrease the quantity of cookies supplied.
E) leave their production unchanged.
2. Assume that government imposes a price control on butter, i.e., the price of butter cannot rise above a certain
amount. The most likely outcome of this policy is
A) the quality of butter will rise.
B) farmers and ranchers will increase their holdings of dairy cows.
C) more individuals will be motivated to enter diary farming.
D) the butter market will exhibit chronic excess demand.
E) the butter market will exhibit chronic excess supply.
3. If the market for coffee has excess supply, then one can say that
A) supply is greater than demand.
B) quantity supplied is greater than quantity demanded.
C) demand is greater than supply.
D) supply is greater than quantity demanded.
E) quantity demanded is greater than quantity supplied.
4. Which of the following is not true of a supply curve?

A) It relates the price of an item to the quantity supplied of that item.
B) It shows the amount producers are willing and able to produce at various prices, holding other factors constant.
C) It has positive slope.
D) It shows that producers tend to produce more of a good as its price rises
E) It relates the price of an item to the supply of that item.
5. If a market is in equilibrium and then demand increases while supply decreases, the change in the equilibrium price
is ________ and the change in the equilibrium quantity is _________.
A) positive; positive
B) positive; negative
C) positive; indeterminate
D) indeterminate; positive
E) negative; negative
6. A shortage occurs when

A) demand is greater than supply.
B) the equilibrium price is too high.
C) quantity demanded exceeds quantity supplied.
D) quantity supplied exceeds quantity demanded.
E) price is above the equilibrium.
7. Buyers and sellers of a particular good comprise the

A) market for the good.
B) demand for the good.
C) supply for the good.
D) production possibilities curve for the good.
E) ownership of the good.
8. According to the text, government price controls fail because

A) they are not enforced.
B) legislation can not repeal basic economic motives.
C) bureaucrats lack accurate market data.
D) firms ignore the restrictions.
E) the penalties for violations are not large enough.
9. If the demand for a good increases as consumers' incomes rise, the good is termed a(n)
A) inferior good.
B) complement good.
C) normal good.
D) substitute good.
E) typical good.
10. Without the aid of a graph, one can say definitively that if supply increases while demand decreases simultaneously,

lOMoARcPSD|3016397
the new equilibrium price is ___________ and the new equilibrium quantity is _________________.
A) lower; lower
B) lower; indeterminate
C) indeterminate; higher
D) indeterminate; lower
E) higher; indeterminate.
Use the following to answer question 11:
Figure 4.7
11. Assume that in this market a discrepancy exists between the private costs and the social costs of production; that
production generates a large amount of noise pollution. Supply curve _____ accounts for the private cost while
supply curve ______ measures the full cost of production (both private and social).
A) S2; S1
B) S2; S2
C) S1; S2
D) S1; S1
E) insufficient information to make a judgment.
12. A market in disequilibrium would feature

A) a stable price.
B) consumers able to purchase all they wish at the market price.
C) a stable quantity.
D) either excess supply or excess demand.
E) firms able to sell all they wish at the market price.
13. If a good or service is labeled normal, then

A) as income falls, demand for the item increases.
B) as income rises, quantity demanded for the item decreases.
C) as income rises, quantity demanded for the item increases.
D) as income rises, demand for the item increases.
E) as income falls, quantity demanded for the item increases.
14. In a free market, if the price of a good is above the equilibrium price, then
A) government needs to set a higher price.
B) suppliers, dissatisfied with growing inventories, will raise the price.
C) demanders, wanting to ensure they acquire the good, will bid the price lower.
D) government needs to set a lower price.
E) suppliers, dissatisfied with growing inventories, will lower the price.
15. In a free market, if the price of a good is below the equilibrium price, then
A) government needs to set a higher price.

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B) suppliers, dissatisfied with growing inventories, will raise the price.

C) demanders, wanting to ensure they acquire the good, will bid the price higher.
D) government needs to set a lower price.
E) suppliers, dissatisfied with growing inventories, will lower the price.
16. A decrease in supply, holding demand constant, will always result in a(n)
A) higher equilibrium price.
B) lower equilibrium price.
C) larger equilibrium quantity.
D) larger quantity demanded.
E) indeterminate change in the equilibrium quantity.
17. A graph with price on the vertical axis and quantity on the horizontal axis depicting a positive relationship between
price and quantity is a
A) demand curve.
B) production possibilities curve.
C) supply curve.
D) equilibrium curve.
E) shortage curve.
18. Suppose one observes that when the price of peanut butter increases, the demand for jelly increases. One must
conclude that
A) peanut butter and jelly are complements.
B) peanut butter and jelly are substitutes.
C) peanut butter and jelly are normal goods.
D) peanut butter and jelly are inferior goods.
E) peanut butter and jelly are superior goods.
19. When a market is not in equilibrium then

A) it is always possible to identify unexploited opportunities.
B) demanders are dissatisfied with the market.
C) suppliers are dissatisfied with the market.
D) government intervention is necessary.
E) it will have a tendency to remain in disequilibrium.
20. Nineteenth century economist Stanley Jevons argued the price of a good was determined by
A) its value to the consumer.
B) its value to the supplier.
C) the expense involved in producing it.
D) custom and tradition.
E) government decree.
21. Suppose that the equilibrium price of french fries rises while the equilibrium quantity falls. The most consistent
explanation for these observations is
A) a decrease in demand for french fries with no change in supply.
B) an increase in demand for french fries with no change in supply.
C) a increase in the supply of french fries and a increase in the demand for french fries.
D) a decrease in the supply of french fries with no change in demand.
E) an increase in the supply of french fries with no change in demand.
22. Which of the following will not cause a shift in the demand curve for Athlon processors?
A) An increase in the price of memory.
B) A decrease in the price of Pentium III processors.
C) A decrease in the price of motherboards.
D) A decrease in the price of Athlon processors.
E) An increase in consumers' incomes.
23. Which of the following is not a characteristic of governmental rent controls?

A) Equitable distribution of apartments.
B) Excess demand for apartments.
C) Fewer newly built apartment building.
D) Deteriorating quality of existing apartment buildings.
E) Very low vacancy rates.
24. Which of the following is not a characteristic of a market in equilibrium?

A) Quantity demanded equals quantity supplied.

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B) Excess supply is zero.

C) All consumers are able to purchases as much as they wish.
D) Excess demand is zero.
E) The equilibrium price is stable, i.e., there is no pressure for it to change.
25. In general, when the demand curve shifts to the right and supply remains constant then
A) quantity demanded will rise.
B) the equilibrium price will fall.
C) the equilibrium quantity will rise.
D) the market cannot reestablish an equilibrium.
E) quantity supplied falls.
Figure 4.4
Price
100
S1 S2
80
60
40
20
D1 D2
0
20 40 60 80 100
Quantity
26. Assume that D1 and S1 are the initial demand and supply curves. The equilibrium occurs at a price of _______ and
________ units exchanged.
A) $90; 50
B) $60; 20
C) $60; 40
D) $30; 30
E) $30; 70
27. The demand curve illustrates that consumers

A) tend to purchase more of a good as its price rises.
B) purchase name brand products more frequently than generic products.
C) tend to purchase more of a good as its price falls.
D) purchase more of a good as their incomes fall.
E) purchase more of a good as their incomes rise.
28. For two goods, X and Y, to be classified as substitutes, it must be the case that
A) X and Y are identical.
B) consumers tend to purchase both items.
C) when the price of X rises, the demand for Y decreases.
D) when the price of X rises, the demand for Y increases.
E) X and Y taste alike.
29. Suppose that both the equilibrium price and quantity of ketchup fall. The most consistent explanation for these
observations is
A) a decrease in demand for ketchup with no change in supply.
B) an increase in demand for ketchup with no change in supply.
C) an increase in demand for ketchup and a decrease in the supply of ketchup.

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D) an increase in the supply of ketchup with no change in demand.

E) an decrease in the supply of ketchup with no change in demand.
Market Equilibrium and Shifts in Demand and Supply
Price A B C D
$20 100 110 50 40
$30 85 95 60 50
$40 70 80 70 60
$50 55 65 80 70
$60 40 50 90 80
30. Assume that column B and column D are the initial demand and supply curves. At a price of $30, the market would
experience
A) an equilibrium.
B) excess demand of -45 units.
C) excess supply of 45 units.
D) excess demand of 45 units.
E) excess supply of -45 units.
31. Assume that column A and column C are the initial demand and supply curves. At a price of $50, the market would
experience
A) an equilibrium.
B) excess demand of 25 units
C) excess supply of -25 units.
D) excess demand of -25 units.
E) excess supply of 25 units.
32. Assume that column A and column C are the initial demand and supply curves. If demand changes to column B, one
can infer the new equilibrium
A) price will be less than $40.
B) quantity will more than 80 units.
C) price will be greater than $40 but less than $50.
D) quantity will be less than 70 units.
E) price will be greater than $50.
33. Comparing column B with column A, it appears that a(n) __________ has occurred.
A) an increase in quantity demanded
B) an increase in demand
C) a decrease in quantity demanded
D) a decrease in demand
E) a change in supply
34. Assume that column A and column C are the initial demand and supply curves. If supply and demand both change
so that column B and column D are now the relevant curves, one can infer the new equilibrium
A) price can be either greater than or less than $40.
B) price must be less than $40.
C) quantity must be greater than 70 units.
D) price must be greater than $40.
E) quantity must be less than 60 units.
35. An increase in the quantity of tea demanded occurs whenever

A) the population of tea drinkers grows.
B) the price of coffee rise.
C) tea drinkers receive an increase in their incomes.
D) the price of lemons falls.
E) the price of the tea falls.
36. If, when the price of X increases, the demand for Y decreases one can conclude that
A) X and Y are complements.
B) X and Y are substitutes.
C) X and Y are normal.
D) X and Y are inferior.
E) X and Y are superior.

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37. At the beginning of the fall semester, college towns experience large increases in their populations, causing a(n)
A) increase in the quantity of apartments demanded.
B) increase in the supply of apartments.
C) increase in the demand for apartments.
D) decrease in the quantity of apartments supplied.
E) decrease in the supply of apartments.
38. Suppose that the equilibrium price of pickles falls while the equilibrium quantity rises. The most consistent
explanation for these observations is
A) a decrease in demand for pickles with no change in supply.
B) an increase in demand for pickles with no change in supply.
C) a decrease in the supply of pickles and a decrease in the demand for pickles.
D) a decrease in the supply of pickles with no change in demand.
E) an increase in the supply of pickles with no change in demand.
39. For two goods, X and Y, to be classified as complements, it must be the case that
A) X and Y are indistinguishable.
B) consumers tend to purchase either X or Y.
C) when the price of X rises, the demand for Y decreases.
D) when the price of X rises, the demand for Y increases.
E) X and Y look alike.
40. A movement along a demand curve from one price-quantity combination to another is called
A) a change in quantity demanded.
B) a shift in the demand curve.
C) a change in demand.
D) a change in quantity supplied.
E) a change in supply.
41. An increase in the price of Tomko toothpaste, a substitute for Durrell toothpaste, will cause
A) the quantity of Durrell toothpaste demanded to increase.
B) the quantity of Tomko toothpaste demanded to increase.
C) the demand for Tomko toothpaste to decrease.
D) the demand for Tomko toothpaste to increase.
E) the demand for Durrell toothpaste to increase.
42. Without the aid of a graph, one can say definitively that if supply decreases while demand increases simultaneously,
the new equilibrium price is ___________ and the new equilibrium quantity is _________________.
A) lower; lower
43. The most likely explanation for the continued rise in the price of Pokemon trading cards is
A) a decrease in the price of baseball trading cards.
B) an increase in the price of Pokemon cups.
C) an increase in children's preferences for Pokemon.
D) a decrease in the incomes of parents.
E) a reduction in the amount of Pokemon advertising.
44. Which of the following would cause an increase in quantity supplied?

A) The price farmers receive for their crops rises.
B) The United Auto Workers negotiates a wage increase for its union members.
C) The price firms pay for liability insurance falls.
D) New, faster computer processors are introduced.
E) OPEC limits the production of crude oil.
45. The essential difference between a change in quantity demanded and a change in demand is
A) the first is a shift of the curve while the second is a movement along the curve.
B) nothing; the terms are interchangeable.
C) the first is a movement along the curve while the second is a shift of the curve.
D) the first is caused by changes in income while the second is caused by a change in price.
E) the first is caused by a change in price and the second is caused by a change in price.

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46. In the 1970's, OPEC increased the price of crude oil significantly. This should have caused
A) a decrease in the demand for gasoline
B) an increase in the demand for automobiles with V8 engines.
C) the supply curves of firms using crude oil as an input to shift to the left.
D) the price of gasoline to fall.
E) the price of fuel efficient cars to fall.
47. Assume the demand for 16 MB graphics cards decreases while the supply increases. Which of the following
outcomes is certain to occur?
A) The equilibrium price of 16 MB graphics cards will rise.
B) The equilibrium quantity of 16 MB graphics cards will rise.
C) The equilibrium price of 16 MB graphics cards will fall.
D) The equilibrium quantity of 16 MB graphics cards will fall.
E) Neither the equilibrium price nor the equilibrium quantity of 16 MB graphics cards can be predicted.
48. "Improvements in personal computer technology and its widespread adoption in the workplace have served to
increase productivity." Assuming the statement is true, one would expect this to cause
A) an increase in supply.
B) an increase in quantity supplied.
C) a decrease in supply.
D) a decrease in quantity supplied.
E) no change in the marketplace.
49. Which of the following is not a determinant of demand for gasoline?

A) The price of gasoline.
B) The price of diesel.
C) The price of automobiles.
D) The quantity of gasoline supplied.
E) Consumers' incomes.
50. The essential difference between a change in supply and a change in quantity supplied is
A) the first is caused by changes in input prices and the second is caused by a change in price.
B) the first is a movement along the curve and the second is a shift of the curve.
C) the first is caused by a change in price while the second is caused by changes in input prices.
D) nothing; the terms are interchangeable.
E) the first is caused by an increase in input prices while the second is caused by a decrease in input prices.
Figure 4.2
51. Which of the following changes could cause the demand curve to shift from D1 to D2?

lOMoARcPSD|3016397
A) A decrease in the price of a substitute good.

B) An increase in the price of a complementary good.
C) An increase in consumers' incomes.
D) A decrease in the size of the population.
E) An expectation that the price will be lower in the future.
52. Given that demand shifts from D1 to D2, the equilibrium quantity will
A) rise to 6 units.
B) fall to 6 units.
C) rise to 9 units.
D) fall to 5 units.
E) remain unchanged.
53. Which of the following could never be a feature of an unregulated market in a state of disequilibrium?
A) Excess supply.
B) A stable price.
C) Excess demand.
D) Changes in the equilibrium quantity.
E) A rising price.
Figure 4.3
Price
100
S1 S2
80
60
40
20
D
0
20 40 60 80 100
Quantity
54. If supply shifts from S2 to S1, the market adjusts to the new equilibrium price and quantity through
A) an increase in demand.
B) a decrease in quantity demanded.
C) an increase in quantity demanded.
D) a decrease in demand.
E) a decrease in quantity supplied.
55. Which of following is not true of an equilibrium price?

A) Consumers who are willing to pay the equilibrium price can acquire the good.
B) It measures the value of the last unit sold to consumers.
C) It is always a fair and just price.
D) Firms who are willing to accept the equilibrium price can sell what they produce.
E) It measures the cost of resources required to produce the last unit.
56. A shift to either the left or right of a demand curve is called

A) a change in quantity demanded.
B) a movement along a demand curve.
C) a change in demand.
D) a change in quantity supplied.

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E) a change in supply.
57. The most important determinant of the demand for dental floss is
A) the price of toothpaste.
B) the price of toothbrushes.
C) consumer income.
D) the price of dental floss.
E) consumer preferences for healthy gums.
Figure 4.8
58. Assume the market is originally at point W. Movement to point Y is a combination of

A) an increase in quantity supplied and an increase in demand.
B) an increase in supply and an increase in demand.
C) an increase in supply and an increase in quantity demanded.
D) a decrease in supply and an increase in quantity demanded.
E) an increase in supply and a decrease in quantity demanded.
59. Assume the market is originally at point Z. Movement to point Y is a combination of

A) a decrease in quantity supplied and an increase in demand.
B) a decrease in supply and an increase in demand.
D) a decrease in quantity supplied and a decrease in demand.
E) a decrease in supply and a decrease in quantity demanded.
60. Assume the market is originally at point Z. Movement to point W is a combination of

A) a decrease in quantity supplied and an increase in demand.
B) a decrease in supply and a decrease in demand.
D) a decrease in quantity supplied and a decrease in demand.
E) a decrease in supply and a decrease in quantity demanded.
61. Eighteenth century economist Adam Smith believed the price of a good was determined by
A) its value to the consumer.
B) its value to the supplier.
C) the expense involved in producing it.
D) custom and tradition.
E) government decree.
62. An increase in the price of an input will cause the

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A) quantity supplied to decrease.

B) demand curve to decrease.
C) supply curve to decrease.
D) quantity supplied to increase.
E) demand curve to increase.
63. A market is comprised of

A) just demanders.
B) just suppliers.
C) both suppliers and demanders.
D) workers.
E) owners.
64. Suppose the price of gasoline increases. One would expect

A) the demand for gasoline to decrease.
B) the demand for sport utility vehicles to decrease.
C) the demand for sport utility vehicles to increase.
D) the quantity of gasoline demanded to increase.
E) the quantity of sport utility vehicles demanded to decrease.
65. If price is above the equilibrium value, then

A) producers will hope that buyers want more in the future.
B) buyers are unhappy because they are unable to find the good for sale.
C) producers find their inventories growing and will start to cut price.
D) both buyers and sellers have no incentive to alter their behavior.
E) government must enforce a price control.
66. When the demand for a good increases, firms respond by

A) increasing their supply.
B) decreasing their costs.
C) leaving their production decisions alone.
D) increasing their quantity supplied.
E) decreasing their supply.
67. When supply for a good decreases, consumers respond by

A) decreasing their demand.
B) increasing their preferences for the good.
C) decreasing their quantity demanded.
D) increasing their quantity demanded.
E) purchasing more complementary goods.
68. If the price of an item falls, then one would expect to see a(n)
A) increase in demand.
B) increase in quantity demanded.
C) decrease in quantity supplied.
D) decrease in supply.
E) fewer consumers.
69. Which of the following is not required for total economic surplus in a particular market to be maximized?
A) All private costs of production must be included.
B) All social costs of production must be included.
C) All private benefits of consumption must be included.
D) All social benefits of consumption must be included.
E) Government regulation of the market is needed.
70. A surplus exists when

A) quantity supplied exceeds quantity demanded.
B) the equilibrium price is too low.
C) supply is greater than demand.
D) price is below the equilibrium value.
E) demand is weak.
71. Suppose government chooses to impose price control in some sectors of the economy. Which of the following is not
a potential consequence of the restrictions on price?
A) Excess supply may occur.
B) No unexploited opportunities will exist.

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C) Excess demand may occur.

D) A lot of time may be spent waiting in line to acquire the good.
E) Underground markets may emerge.
72. Assume both the demand and the supply of Athlon 700 Mhz processors increase. Which of the following outcomes is
certain to occur?
A) The equilibrium price of Athlon 700 Mhz processors will rise.
B) The equilibrium quantity of Athlon 700 Mhz processors will rise.
C) The equilibrium price of Athlon 700 Mhz processors will fall.
D) The equilibrium quantity of Athlon 700 Mhz processors will fall.
E) Neither the equilibrium price nor the equilibrium quantity of Athlon 700 Mhz processors can be predicted.
73. When the price of a good is below its equilibrium value,

A) consumers will bid the price up.
B) excess supply will occur.
C) it will tend to stay below the equilibrium value.
D) suppliers will notice their inventories are growing.
E) suppliers will lower the price.
74. An increase in the demand for GM automobiles results in

A) a lower equilibrium price for GM automobiles.
B) an increase in the quantity of GM automobiles supplied.
C) an increase in the supply of GM automobiles.
D) a lower equilibrium quantity of GM automobiles.
E) an increase in the quantity of GM automobiles demanded.
75. In a market where government has set the price artificially low, one would expect
A) quantity demanded to equal quantity supplied.
B) excess supply.
C) a black market to develop as individuals try to take advantage of unexploited opportunities.
D) quantity supplied to surpass quantity demanded.
E) suppliers and demanders are content.
Market Effect of a Change in Demand
Price Column 1 Column 2

$12.50 30 70
$10.00 40 60
$7.50 50 50
$5.00 60 40
$2.50 70 30
76. At a price of $10, the market experiences ______________ equal to _________ units.
A) excess demand, -20
B) excess demand, 20
C) excess supply, 0
D) excess supply, 20
E) excess supply, -20
77. At a price of $7.50, the market experiences ________________.

A) a shortage.
B) excess supply.
C) a surplus.
D) excess demand.
E) an equilibrium.
78. The market reaches an equilibrium at a price of

A) $12.50.
B) $10.
C) $7.50.
D) $5.
E) $2.50.

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79. The most important determinant of the supply of good X is

A) the price of good X.
B) the price of labor used in the production of good X.
C) the amount of technology used in the production good X.
D) the cost of the plant used to produce good X.
E) the price of fuel used in the production of good X.
80. In general, when the supply curve shifts to the left and demand is constant then
A) the market cannot reestablish an equilibrium.
B) the equilibrium price will fall.
C) the equilibrium quantity will rise.
D) the equilibrium price will rise.
E) quantity supplied falls.
81. Which of the following would result in an increase in supply?

A) A reduction in the premiums firms pay for liability insurance.
B) A reduction in the quality of technology used by firms.
C) An increase in demand.
D) An increase in consumers' incomes.
E) An increase in the population of consumers.
82. Assume the demand for 7200 RPM hard disks increases while the supply decreases. Which of the following
outcomes is certain to occur?
A) The equilibrium price of 7200 RPM hard disks will rise.
B) The equilibrium quantity of 7200 RPM hard disks will rise.
C) The equilibrium price of 7200 RPM hard disks will fall.
D) The equilibrium quantity of 7200 RPM hard disks will fall.
E) Neither the equilibrium price nor the equilibrium quantity of 7200 RPM hard disks can be predicted.
83. Which of the following is not true of a demand curve?

A) It has negative slope.
B) It shows the amount consumers are willing and able to purchase at various prices, holding other factors
constant.
C) It relates the price of an item to the quantity demanded of that item.
D) It relates the price of an item to the demand for that item.
E) It shows that consumers tend to purchase less of a good as its price rises.
84. Suppose that both the equilibrium price and quantity of mustard rise. The most consistent explanation for these
observations is
A) a decrease in demand for mustard with no change in supply.
B) a decrease in the supply of mustard with no change in demand.
C) a decrease in demand for mustard and a decrease in the supply of mustard.
D) an increase in demand for mustard with no change in supply.
E) an increase in the supply of mustard with no change in demand.
Figure 4.1

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Price
10
S
D
2
0 2 4 6 8 10
Quantity
85. The equilibrium price and quantity for this market is

A) $10, 0.
B) $8, 6.
C) $6, 4.
D) $4, 6.
E) $2, 8.
86. At a price of $9, the market will experience ______________ in the amount of __________ units.
A) excess demand, -5
B) excess supply, -5
C) equilibrium, 0
D) excess demand, 5
E) excess supply, 5
87. At a price of $10, quantity demanded will be

A) 0.
B) 2.
C) 4.
D) 6.
E) 8.
88. "As the price of personal computers continue to fall, demand increases." This headline is inaccurate because
A) a change in the price of personal computers shifts the demand curve.
B) a change in the price of personal computers shifts the supply curve.
C) the statement is backwards: increased demand leads to lower prices.
D) falling prices for personal computers increases quantity demanded, not demand.
E) falling prices for personal computers increases quantity supplied.
Figure 4.6

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89. An increase in supply is represented by shifting from

A) curve A to curve B.
B) curve B to curve A.
C) curve C to curve D.
D) curve D to curve C.
E) curve C to curve B.
90. A decrease in supply is represented by shifting from

91. A decrease in demand is represented by shifting from

92. An increase in demand is represented by shifting from

93. A market comprised of a downward sloping demand curve and an upward sloping supply curve is said to be stable
because
A) price will never change.
B) quantity will never change.
C) demand will never change.
D) supply will never change.
E) at any price other than equilibrium, forces in the market move price towards the equilibrium.
94. Which of the following would not shift the supply curve for Pentium III processors?
A) A decrease in the price of silicon wafers.
B) An increase in the demand for Pentium III processors.
C) An improvement in the technology used to make processors.
D) An increase in the wage rate paid to "clean room" workers.
E) An earthquake centered in Silicon Valley.

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Figure 4.5
95. Moving from demand curve D1 to demand curve D2 illustrates a(n)

A) increase in quantity demanded.
B) increase in demand.
C) decrease in demand.
D) increase in quantity supplied.
E) decrease in quantity demanded.
96. Moving from supply curve S1 to supply curve S2 could be caused by a(n)
A) decrease in consumers' incomes.
B) decrease in quantity demanded.
C) improvements in the technology the firms use to produce the good.
D) increase in the price of raw materials.
E) increase in the wages of laborers.
97. Assume demand remains unchanged at D1. If supply shifts from S1 to S2 then the equilibrium price will ________
and the equilibrium quantity will __________.
A) rise; fall
B) rise; rise
C) fall; fall
D) fall; rise
E) rise; be indeterminate
98. Moving from supply curve S1 to supply curve S2 illustrates a(n)

A) increase in quantity demanded.
B) increase in supply.
C) decrease in supply.
D) increase in quantity supplied.
E) decrease in quantity supplied.
99. As consumers' incomes increase, the demand for some goods decreases. These types of goods are called
A) normal goods.
B) complement goods.
C) substitute goods.
D) defective goods.
E) inferior goods.
100. Without the aid of a graph, one can say definitively that if both supply and demand decrease simultaneously, the new
equilibrium price is ___________ and the new equilibrium quantity is _________________.

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A) lower; lower

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1. C
2. D
3. B
4. E
5. C
6. C
7. A
8. B
9. C
10. B
11. C
12. D
13. D
14. E
15. C
16. A
17. C
18. B
19. A
20. A
21. D
22. D
23. A
24. C
25. C
26. B
27. C
28. D
29. A
30. D
31. E
32. C
33. B
34. D
35. E
36. A
37. C
38. E
39. C
40. A
41. E
42. E
43. C
44. A
45. C
46. C
47. C
48. A
49. D
50. A
51. C
52. A
53. B
54. B
55. C
56. C
57. D
58. C
59. D
60. B
61. C
62. C
63. C
64. B
65. C
66. D
67. C
68. B
69. E
70. A
71. B
72. B
73. A

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74. B
75. C
76. D
77. E
78. C
79. A
80. D
81. A
82. A
83. D
84. D
85. C
86. E
87. A
88. D
89. A
90. B
91. D
92. C
93. E
94. B
95. B
96. C
97. D
98. B
99. E
100. D

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1. The price elasticity of demand is the

A) change in price divided by the change in quantity demanded.
B) percent change in quantity demanded divided by the percent change in price.
C) change in quantity demanded divided by the change in price.
D) percent change in price divided by the percent change in quantity demanded.
E) percent change in quantity demanded divided by the change in price.
2. From 1981, when IBM introduced the PC standard computer, to today the price elasticity of demand for IBM
computers has
A) fallen due to the growth of substitutes.
B) increased due to the lower price of IBM computers.
C) increased due to the growth of substitutes.
D) fallen because the timeframe is now long.
E) increased due to greater consumer acceptance of computers.
3. If the absolute value of the percent change in quantity demanded is larger than the absolute value of the percent
change in price, demand is classified as
A) inelastic.
B) perfectly inelastic.
C) unit elastic.
D) perfectly elastic.
E) elastic.
4. In general, the law of demand asserts that a negative relationship exists between
A) only the list price and quantity demanded.
B) the total monetary and non-monetary price and quantity demanded.
C) only the final price paid and quantity demanded.
D) only the non-monetary price and quantity demanded.
E) only the sale price and quantity demanded.
5. Which of the following is not true of total expenditures?

A) They are calculated as per unit price times units consumed.
B) They are identical to total revenues.
C) They measure the entire amount consumers are spending on a good or service.
D) They are a good measure of social welfare.
E) They may increase or decrease as price rises or falls.
6. If one receives 100 units of utility from consuming 5 pairs of pants and 5 belts, one can infer that
A) utility will remain unchanged if one acquires 1 more belt.
B) utility will decrease if one acquires 1 more pair of pants and loses 1 belt.
C) utility will increase if one acquires 1 more pair of pants and 1 more belt.
D) utility will remain unchanged if one loses 1 pair of pants but acquires 1 more belt.
E) it is impossible to predict the direction of changes in utility.
7. According to the textbook, the distinction among necessities, wants, and luxuries is
A) clear and objective.
B) clear for necessities versus wants.
C) clear for necessities versus luxuries.
D) false; the vast majority of goods and services are wants.
E) true; it is easy to reach agreement on how to classify items.
8. The total utility for the first five hamburgers consumed are 4, 10, 15, 18, and 19 respectively. The marginal utility of
rd
the 3 hamburger is
A) 15.
B) 10.
C) 5.
D) 3.
E) -3.
9. A cross price elasticity of -1.2 indicates the two goods are

A) inferior.
B) elastic.
C) complements.
D) substitutes.
E) normal.

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10. If the producers of a particular brand of beer wanted to raise revenues, they should _______ their price because
demand for their brand of beer is likely to be ________.
A) lower; inelastic
B) raise; elastic
C) lower; elastic
D) raise; inelastic
E) lower; perfectly inelastic
11. If the slope of the demand curve is infinity, the price elasticity of demand will be
A) perfectly inelastic.
B) inelastic.
C) unit elastic.
D) elastic.
E) perfectly elastic.
12. The development of small satellite TV units in the 1990's caused the price elasticity of demand for cable TV to
A) grow more inelastic.
B) become less elastic.
C) grow more elastic.
D) become smaller in absolute value.
E) shift to the left.
13. The tendency for consumers to purchase more of a good or service as its price falls is called
A) the law of supply.
B) the law of increasing cost.
C) the Low-Hanging Fruit principle.
D) the law of demand.
E) the law of diminishing marginal utility.
14. Which of the following statements is false?

A) Goods and services are valuable to consumers because they generate utility.
B) Four hamburgers generate more total utility than three hamburgers.
C) Utility cannot be quantified.
D) The fourth hamburger increases total utility by more than the third hamburger.
E) The marginal utility of a movie is likely to be different than the marginal utility of an automobile.
15. Purchasing goods such that the ratio of marginal utility to price is equal across all goods results in the
A) greatest total utility.
B) lowest expenditure on goods.
C) greatest average utility.
D) greatest expenditure on goods.
E) expenditures for all goods being the same.
16. During recessions, when workers lose their jobs and experience reduced incomes, sales of durable goods (goods
with a life expectancy of 3 years or more) decline. Apparently, durables are
A) substitutes.
B) normal goods.
C) complements.
D) inferior goods.
E) elastic.
17. The introduction of the AMD Athlon microprocessor has caused the demand for Intel Pentium III processors to
become
A) more inelastic.
B) a smaller number in absolute value.
C) less elastic.
D) more elastic.
E) steeper.
18. According to the textbook, the homes of the wealthy in Seattle average in excess of 10,000 square feet while the
homes of the wealthy in New York City average less than 5,000 square feet. The difference is primarily due to
A) greater "tastes" for space in Seattle.
B) a ban on construction of new homes in excess of 5,000 square feet in NYC.
C) a significantly higher price for land and construction in NYC.
D) greater "tastes" for crowding in NYC.
E) property tax abatements granted to new homes with at least 10,000 square feet in Seattle.

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19. Assume that consumers in both Texas and Montana have identical incomes and preferences but the price of ice
cream is higher in Montana. The rational spending rule would predict
A) consumers in Texas will eat more ice cream.
B) consumers in Montana will eat more ice cream.
C) consumers in both Texas and Montana will eat less ice cream.
D) consumers in both Texas and Montana will eat more ice cream.
E) consumers in Texas will eat less ice cream.
20. The time one spends researching the performance and fuel economy of new cars on the Internet is an example of
a(n)
A) monetary cost.
B) direct cost.
C) information cost.
D) implied cost.
E) non-monetary cost.
21. Which of the following goods or services is not a "want"?

A) Electricity.
B) Gasoline.
C) Air conditioning.
D) Subsistence levels of food, shelter, and clothing.
E) Automobile.
22. After subsistence levels of food, shelter, and clothing are provided,
A) all other goods and services are "needs."
B) many goods and services are "needs."
C) all other goods and services are "wants."
D) a few goods and services are "needs."
E) all other goods and services are "luxuries."
Marginal Utility Marginal Utility

Units of Good A of Good B
1 30 40
2 27 33
3 15 24
4 8 14
23. If the price of Good A is $2 and the price of Good B is $6, then the rational spending rule predicts _____ units of
Good A and ______ units of Good B will be purchased.
A) 1;1
B) 2;1
C) 4;2
D) 3;2
E) 4;3
24. When the price of Good B decreases from $2 to $1, the extra utility from spending an extra dollar on Good B
associated with 1 unit of consumption
A) falls from 33 to 16.5.
B) rises from 20 to 40.
C) rises from 33 to 40.
D) falls from 20 to 13.3.
E) remains constant.
25. If the price of Good B is $2 and the consumer purchases 4 units, then the extra utility from spending an extra dollar
on Good B is
A) 14.
B) 4.
C) 7.
D) 21.
E) 6.
26. If the price of Good A is $1 and the price of Good B is $3, then the rational spending rule predicts _____ units of

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Good A and ______ units of Good B will be purchased.

A) 4;3
B) 3;4
C) 4;4
D) 3;3
E) 1;2
27. The law of diminishing marginal utility

A) applies to Good A but not Good B.
B) does not apply to either Good A or Good B.
C) applies to Good B but not Good A.
D) applies to both Good A and Good B.
E) only applies at extremely large units of consumption.
28. When the price of Good A increases from $5 to $6, the extra utility from spending an extra dollar on Good A
associated with 2 units of consumption
A) falls from 27 to 15.
B) rises from 5.4 to 6.8.
C) rises from 6.8 to 9.
D) falls from 5.4 to 4.5.
E) remains constant.
29. If the price of Good A is $3 and the consumer purchases 3 units, then the extra utility from spending an extra dollar
on Good A is
A) 15.
B) 5.
C) 45.
D) 3.
E) 9.
30. The ratio of the percent change in the quantity of tea demanded to the percent change in the price of lemons is
A) the price elasticity of demand for tea.
B) a measure of the responsiveness of lemon demand to a change in the price of tea.
C) a measure of the responsiveness of the price of tea to a change in the price of lemons.
D) a measure of the responsiveness of tea demand to a change in the price of lemons.
E) the price elasticity of demand for lemons.
31. The total utility to a person from owning 9 cars is ______ the total utility from owning 10 cars.
A) greater than
B) greater than or equal to
C) less than
D) less than or equal to
E) equal to
32. Which of the following statements about total utility is false?

A) Total utility can't be measured.
B) The increase in total utility from the first unit consumed exceeds the increase from the second unit consumed.
C) Total utility increases as more units of a good are consumed.
D) The increase in total utility from the second unit consumed exceeds the increase from the first unit consumed.
E) At some point, the increase in total utility from consuming an extra unit begins to get smaller.
33. Goods with few substitutes

A) are classified as necessities.
B) have, in absolute value, large price elasticities.
C) have relatively inelastic demand.
D) have relatively elastic demand.
E) are usually expensive.
34. The price elasticity of demand for apartments (in absolute value) is 1.3 while the price elasticity of demand for
toothpicks is 0.4. The likely reason for the difference is because
A) there are few substitutes for toothpicks.
B) apartments are chosen over a long period of time.
C) the fraction of income spent on toothpicks is minuscule.
D) toothpicks are a necessity.
E) apartments are a luxury.

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35. The fact that the average price of a gallon of gasoline in England is much higher than the price in the U.S. would lead
to which of the following predictions?
A) Average miles per gallon for new cars will be lower in England.
B) English drivers will tend to drive a greater average number of miles.
C) American drivers will tend to make fewer trips with more stops.
D) Sport Utility Vehicles will be less popular with consumers in England.
E) Air pollution from automobiles will be worse in England.
36. Taking a limousine to a five star restaurant in New York is a

A) necessity to Donald Trump but a luxury to Joe Average.
B) necessity to both Joe Average and Donald Trump.
C) luxury to both Joe Average and Donald Trump.
D) want to Donald Trump and a luxury to Joe Average.
E) want to both Joe Average and Donald Trump.
37. Which of the following factors is not relevant in applying the rational spending rule?
A) The real price of the items.
B) The consumer's income.
C) The availability of the items.
D) The marginal utility of the items.
E) The relative price of the items.
38. The responsiveness of quantity demanded for good M when the price of good N changes is measured by the
A) price elasticity of demand.
B) income elasticity of demand.
C) price elasticity of supply.
D) preference elasticity of demand.
E) cross price elasticity of demand.
39. Assume the consumer is correctly applying the rational spending rule for goods X and Z. The proper sequence of
events is
A) the price of X falls, purchases of X increase, MUX/PX falls.
B) purchase of X increases, the price of X falls, MUX/PX falls.
C) MUX/PX falls, the price of X falls, purchases of X increase.
D) the price of X falls, MUX/PX falls, purchases of X increase.
E) purchase of X increase, MUX/PX falls, the price of X falls.
40. For which of the demand elasticities is the sign (positive or negative) important in interpreting the meaning?
A) Only the price elasticity of demand.
B) Both the price elasticity of demand and the income elasticity of demand.
C) Both the income elasticity of demand and the cross price elasticity of demand.
D) Only the cross price elasticity of demand.
E) All three elasticities (price, income, and cross price).
41. The income elasticity of demand for the BMW Z3 is found to be 0.9. This means the BMW Z3
A) is a normal good.
B) has inelastic demand.
C) is a superior good.
D) has elastic demand.
E) is an inferior good.
Price of Mark’s quantity Bob’s quantity Joe’s quantity

Coffee per lb demanded demanded demanded
$3 6 10 19
$4 4 7 15
$5 2 6 11
$6 1 4 9
$7 0 3 8
42. If the price of coffee increases from $5 to $6,

A) producers will sell more.
B) total expenditures for coffee rise.

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C) total revenues to coffee producers fall.

D) consumers purchase more coffee.
E) total expenditures on coffee do not change.
43. Market demand for coffee at a price of $6 is

A) 11 units.
B) 14 units.
C) 19 units.
D) 26 units.
E) 35 units.
44. At a price of $7,

A) Mark exits the coffee market.
B) a shortage of coffee will develop.
C) Joe's share of market demand declines.
D) Bob enters the coffee market.
E) coffee is "too expensive."
45. If the price of coffee increases from $6 to $7, total revenues _________, suggesting market demand is ________.
A) increase; elastic
B) decrease; elastic
C) increase; inelastic
D) decrease; inelastic
E) remain constant; unit elastic
46. Based on the data in the table, it is clear that

A) Mark, Bob, and Joe don't adhere to the law of demand.
B) Joe has weaker demand for coffee than Mark.
C) Mark, Bob, and Joe have identical demand for coffee.
D) Mark, Bob, and Joe all obey the law of demand.
E) Bob has stronger demand for coffee than Joe.
47. Market demand for coffee at a price of $5 is

A) 11 units.
B) 14 units.
C) 19 units.
D) 26 units.
E) 35 units.
48. If the demand for computers is elastic, this means that

A) the price elasticity of demand for computers is greater than 1 in absolute value.
B) a 1% increase in the price of computers results in a less than 1% decrease in computer sales.
C) few substitutes exist for computers.
D) computers are not a necessity.
E) computers are a common appliance.
49. Total revenues are

A) what the firm seeks to maximize.
B) greater than total expenditures.
C) less than total expenditures.
D) calculated as sales divided by quantity.
E) calculated as price times quantity.
50. Assume the consumer is correctly applying the rational spending rule for goods X and Z. If the consumer's income
increases, purchases of X and Z rises because
A) the marginal utility of X decreases.
B) the price of Z falls.
C) the marginal utility of Z decreases.
D) combinations of X and Z that could not be considered before now become available.
E) the price of X increases.
51. Assume one has $30 in income and the price of a loaf of bread is $1.50 and the price of a jar of peanut butter is $3.
If one's income rises to $45, one can now buy a maximum of _____ loaves of bread or a maximum of _____ jars of
peanut butter.
A) 5; 25
B) 10; 40

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C) 15; 30
D) 20; 20
E) 30; 15
52. For the two goods, A and B, the ratio of the marginal utility of A to the marginal utility of B is 5 and the ratio of the
price of A to the price of B is 4. The consumer should
A) leave their choices as they are.
B) purchase less of A and more of B.
C) purchase more of A and B.
D) purchase less of A and B.
E) purchase more of A and less of B.
53. If the local electricity utility wants to raise revenues, it should _______ its price because demand for electricity is
likely to be ________.
A) lower; inelastic
B) raise; elastic
C) lower; elastic
D) raise; inelastic
E) lower; perfectly inelastic
54. If the slope of the demand curve is -1.4, price is $5 and quantity demanded is 13 units, the absolute value of the price
elasticity of demand is
A) 0.27.
B) 0.38.
C) 1.4.
D) 1.8.
E) 2.6.
55. A price elasticity of demand of -0.3 means a

A) 10 percent increase in the price results in a 3 percent increase in quantity demanded.
B) 3 percent increase in the price results in a 3 percent decrease in quantity demanded.
C) 10 percent increase in the price results in a 3 percent decrease in demand.
D) 10 percent increase in the price results in a 3 percent decrease in quantity demanded.
E) 10 percent increase in the price results in a 3 percent increase in demand.
th th
56. If Karen's marginal utility from her 13 pair of shoes is 15, then the marginal utility from her 14 pair would be
A) more than 15.
B) exactly 15.
C) less than 15.
D) exactly 14.
E) less than 14.
57. Jake applies the rational spending rule and purchases 5 units of good M and 3 units of good N. Suppose the price of
N increases. One can predict that Jake will
A) cease purchasing N.
B) reduce purchases of N and increase purchases of M.
C) continue to make the same purchases.
D) reduce purchases of M.
E) increase purchases of N.
58. The extra utility gained from consuming an extra unit of a good measures the
A) total utility.
B) average utility.
C) marginal utility.
D) total satisfaction.
E) diminishing utility.
59. Suppose the demand curve for coffee is P = 10 - 2*Q and P is given as $6. Calculate the absolute value of the price
elasticity of demand at the $6 price.
A) 6.0.
B) 1.5.
C) 1.0.
D) 0.66.
E) 0.16.
60. Which of the following is not true of the law of demand?

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A) It is based on the cost-benefit principle.

B) It predicts a negative relationship between costs and benefits.
C) It applies only to monetary costs
D) It is rarely violated.
E) It requires demand curves to be downward sloping.
61. The reason firms that face elastic demand should lower price to increase total revenues is
A) demand curves are downward sloping.
B) consumers prefer lower prices.
C) the percentage increase in sales will be larger than the percentage decrease in price.
D) more consumers will try their products.
E) the percentage increase in sales will be smaller than the percentage decrease in price.
62. The cross price elasticity for bread and butter is estimated to be 0.5. This implies bread and butter are
A) normal goods.
B) substitutes.
C) elastic goods.
D) complements.
E) unrelated.
63. The cross price elasticity for cable TV and satellite TV is estimated to be -0.3. This implies cable TV and satellite TV
are
A) normal goods.
B) substitutes.
C) elastic goods.
D) complements.
E) unrelated.
64. Summing the quantities of butter all consumers are willing and able to purchase at different prices results in
A) total expenditures for butter.
B) total revenues.
C) the market demand curve for butter.
D) the market supply curve for butter.
E) an upward sloping relationship.
65. If the absolute value of the percent change in quantity demanded is smaller than the absolute value of the percent
change in price, demand is classified as
A) inelastic.
C) unit elastic.
D) perfectly elastic.
E) elastic.
66. The percentage change in quantity demanded divided the percentage change in price is
A) the income elasticity of demand.
B) always greater than 1.
C) the price elasticity of demand.
D) always less than 1.
E) the cross price elasticity of demand.
67. The correct mathematical statement of the price elasticity of demand is

A) ( P/P)/( Q/Q).
B) ( Q/Q)/( P/P).
C) P/ Q.
D) Q/ P.
E) P/P)/ Q.
68. The local electricity utility wants to increase their total revenues. Their economist suggests that they
A) advertise the usefulness of electricity.
B) lower the price of electricity.
C) give away attractive coffee mugs to new customers.
D) raise the price of electricity.
E) encourage the adoption of solar heating.
69. The relationship between the cost of an activity and the amount of the activity consumers want is
A) positive.

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B) negative.
C) direct.
D) upward sloping.
E) nonexistent.
70. The price elasticity of demand measures the responsiveness of quantity demanded to a(n)
A) price change.
B) income change.
C) price change of a related good.
D) expectations change.
E) taste change.
th
71. In general, if the marginal utility of the n unit of a good is X, then the marginal utility of the n-1 unit is
A) less than X.
B) equal to X.
C) equal to X/n-1.
D) greater than X.
E) impossible to gauge without numbers.
72. A cross price elasticity of 0.83 indicates the two goods are
A) substitutes.
B) inelastic.
C) complements.
D) normal.
E) elastic.
rd th
73. If the marginal utility of the 3 cup of coffee is 23 and the marginal utility of the 4 cup is 15, then
A) it is optimal for the consumer to have 3 cups of coffee.
B) the price of a cup of coffee must be relatively low.
C) it is optimal for the consumer to have 4 cups of coffee.
D) the law of diminishing marginal utility is evident.
E) the price of a cup of coffee must be relatively high.
74. The reason a brand name item (e.g., Budweiser) has a larger price elasticity than the item class (e.g., beer), is
because
A) there are fewer substitutes for Budweiser.
B) there is more time for adjustments to be made for Budweiser.
C) beer's share of income is larger than Budweiser's.
D) there are fewer substitutes for beer.
E) wine is a better substitute for beer than Miller is for Budweiser.
75. The per unit price of a good times the quantity of units sold measures
A) total utility.
B) total costs.
C) total expenditures.
D) average revenues.
E) marginal expenditures.
76. Laura's total utility from consuming 8, 9, and 10 bonbons is 35, 42, and 45, perspectively. Her marginal utility from
th
the 9 bonbon is
A) 42.
B) 9.
C) 7.
D) 4.67
E) 77
77. If most consumer goods and services are ______, then most income elasticities are ______.
A) normal; negative
B) inferior; positive
C) normal; greater than one
D) inferior; between zero and one
E) normal; positive
78. Suppose the equilibrium price of a good is $7.50 and equilibrium quantity is 20 units. Thus,
A) total revenues are $150 and total expenditures are less than $150.
B) total revenues and total expenditures are equal at $150.

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C) total expenditures are $150 and total revenues are less than $150.
D) total revenues are $150 but total expenditures can't be calculated.
E) total expenditures are $150 but total revenues can't be calculated.
Laura’s Chris’ Mallory’s

Price of quantity quantity quantity
hamburger per lb demanded demanded demanded
$1.00 12 17 7
$1.50 11 16 6
$2.00 9 14 5
$2.50 6 10 3
$3.00 5 7 0
79. At a price of $2.50, total expenditures on hamburger will be

A) $47.50.
B) $40.
C) $25.
D) $15.
E) $7.50.
80. At a price of $3.00,

A) market demand is 15 units.
B) Mallory exits the market.
C) market demand is 19 units.
D) total revenues are $45.
E) total expenditures are $57.
81. On the basis of the above table, it appears that __________ has the strongest demand for hamburger and ________
has the weakest.
A) Chris; Mallory
B) Chris; Laura
C) Laura; Mallory
D) Mallory; Chris
E) Laura; Chris
82. At a price of $1.50, total revenues for hamburger will be

A) $36.
B) $47.50.
C) $49.50.
D) $56.
E) $60.
83. The introduction of the AMD Athlon microprocessor has ______ the price elasticity of demand for Intel PIII
microprocessors and hence ______ Intel's ability to raise revenues through price increases.
A) increased; reduced
B) increased; increased
C) lower; reduced
D) lower; increased
E) had no effect; reduced
Number of Total Marginal

Music CD's Utility Utility
1 100
2 75
3 235
4 250
5

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84. Which of the following statements is not consistent with the data for music CD's?
A) Total utility increases with each additional CD.
B) Marginal utility decreases with each additional CD.
C) The first CD provides the largest increase in utility.
D) The law of diminishing marginal utility is evident for CD's.
th
E) The marginal utility of the 5 CD is greater than 15.
th
85. The marginal utility of the 4 music CD is
A) 75.
B) 60.
C) 295.
D) 15.
E) 250.
86. The total utility of consuming 2 music CD's is

A) less than 100.
B) more than 235.
C) 175.
D) 160.
E) 75.
st nd
87. Given that Chris' marginal utility from his 1 taco is 15 and his marginal utility for the 2 taco is 12, one can infer that
Chris'
A) total utility of 2 tacos is 27.
rd
B) marginal utility for the 3 taco will exceed 12.
C) should not eat 2 tacos.
D) average utility for 2 tacos is 24.
E) should eat 2 tacos.
88. The demand for electricity has been found to be inelastic. The most likely explanation for this finding is
A) electricity is a necessity.
B) the fraction of income spent on electricity is trivial.
C) few substitutes exist for electricity.
D) electricity is a monopoly market.
E) air pollution regulation has made electricity expensive.
89. The correct relationship between the price elasticity of demand and total revenues is if demand is ___________, a
price increase will ______________ total revenues.
A) elastic; increase
B) inelastic; increase
C) unit elastic; decrease
D) unit elastic; decrease
E) inelastic; decrease
90. If the demand curve for espresso is P = 20 - 5Q, what are total revenues when P = $5?
A) $15.
B) $25.
C) $30.
D) $35.
E) $50.
91. In general, demand for a good will be less elastic if

A) the timeframe for adjustment is long.
B) the good is a necessity.
C) the fraction of income spent on the good is large.
D) many substitutes exist.
E) the timeframe for adjustment is short.
92. Firms that produce goods with many substitutes will find that
A) lowering price increases total revenues.
B) lowering price decreases total revenues.
C) raising price increases total revenues.
D) lowering price leaves total revenues unchanged.
E) raising price leaves total revenues unchanged.

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93. The time spent researching the quality and reliability of VCR's
A) is not part of the total cost of a VCR.
B) has risen due to the Internet and hence the total cost of purchasing a VCR has also risen.
C) has not been affected by the Internet.
D) has fallen due to the Internet and hence the total cost of purchasing a VCR has also fallen.
E) is only a cost if you don't purchase a VCR.
94. As discussed in the textbook, the chronic shortage of water in southern California is due to the
A) necessity of water.
B) lack of prohibition of lawn watering.
C) extensive agricultural production.
D) artificially low price of water.
E) a greater than average taste for bathing.
95. Assume the price of gasoline doubles tonight and remains there for the next two years. The price elasticity of
demand for gasoline measured tomorrow when compared with the price elasticity of demand for gasoline measured
two years from now will be
A) more elastic.
B) larger in absolute value.
C) the same.
D) more inelastic.
E) less inelastic.
96. John, Don, and Mary are willing and able to purchase 5, 7, and 3 units of canned cat food, respectively, when the
price is $1.50. If they are the only consumers, the market quantity demanded at a price of $1.50 is
A) 15.
B) 10.
C) 7.
D) 5.
E) 3.
97. A firm wishes to increase its total revenues by changing the price it charges. To be successful, the firm must
____________ price if demand for their product is _________.
A) decrease; inelastic
B) increase; elastic
C) decrease; elastic
D) increase; unit elastic
E) decrease; unit elastic
98. When the price of a good rises, the ratio of the marginal utility of that good divided by its price _______ and as a
result, consumers purchase _______.
A) rises; more
B) falls; more
C) rises; less
D) falls; less
E) does not change; the same quantity
99. Which of the following is a non-monetary cost of seeing your favorite band in concert?
A) The new outfit you bought just for the concert.
B) Transportation to the arena.
C) The 3 hours you waited in line to get tickets.
D) The price paid for the concert tickets.
E) Refreshments you purchase in between the opening act and the headliner.
100. Given the following demand curve, P = 55 - .048*Q, the absolute value of price elasticity of demand when P = $20 is
A) 1.22.
B) 1.01.
C) 0.97.
D) 0.57.
E) 0.33.

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1. B
2. C
3. E
4. B
5. D
6. C
7. D
8. C
9. C
10. C
11. A
12. C
13. D
14. D
15. A
16. B
17. D
18. C
19. A
20. E
21. D
22. C
23. E
24. B
25. C
26. A
27. D
28. D
29. B
30. D
31. C
32. D
33. C
34. C
35. D
36. E
37. C
38. E
39. D
40. C
41. A
42. C
43. B
44. A
45. B
46. D
47. C
48. A
49. E
50. D
51. E
52. E
53. D
54. A
55. D
56. C
57. B
58. C
59. B
60. C
61. C
62. B
63. D
64. C
65. A
66. C
67. B
68. D
69. B
70. A
71. D
72. A
73. D

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74. D
75. C
76. C
77. E
78. B
79. A
80. B
81. A
82. C
83. A
84. E
85. D
86. C
87. A
88. C
89. B
90. A
91. E
92. A
93. D
94. D
95. D
96. A
97. C
98. D
99. C
100. D

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1. For a linear supply curve with a positive y-intercept, if the price elasticity of supply is 1.2 at a price of $7, then at a
price of $5 the elasticity must be
A) greater than 1.2.
B) less than 1.2.
C) more inelastic.
D) less elastic.
E) indeterminate; insufficient information to evaluate.
2. Suppose a 1% decrease in the price of a good results in a 5 % decrease in the quantity supplied. Supply would be
categorized as being
B) perfectly elastic.
C) inelastic.
D) elastic.
E) unit elastic.
3. Suppose a firm is collecting $1999 in total revenues and the total cost of its fixed factors of production fall from $500
to $400. One can speculate that the firm will
A) expand output.
B) lower price.
C) earn greater profits or smaller losses.
D) contract output.
E) earn smaller profits or greater losses.
4. Given supply is P = 20 + 10*Q and P =$22, the price elasticity of supply is

A) 22.
B) 11.
C) 1.1.
D) .11.
E) .011.
5. To produce 150 units of output, the firm must use 3 employee-hours. To produce 300 units of output the firm must
use 8 employee-hours. Apparently, the firm is
A) more profitable.
B) in the long run.
C) experiencing diminishing marginal returns.
D) not using any fixed factors of production.
E) failing to profit maximize.
6. Of the following characteristics, which one applies exclusively to a perfectly competitive firm?
A) It always earns a profit.
B) It seeks only to minimize costs.
C) It can sell all it wants to at the market price.
D) It will never earn a profit.
E) It has a narrow range of prices it can charge for its output.
Employee- Output Hourly

hours Output Price wage rate Rent
0 0 $2 $14 $50
1 40 $2 $14 $50
4 80 $2 $14 $50
9 120 $2 $14 $50
15 160 $2 $14 $50
23 200 $2 $14 $50
7. Which of the output levels in the table allow the firm to earn the largest profit?
A) 40 units.
B) 80 units.
C) 120 units.
D) 160 units.
E) 200 units.
8. When the firm uses 9 employee-hours, it will collect total revenues of

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A) $240.
B) $160.
C) $80.
D) $18.
E) $2.
9. The total cost of producing 120 units of output is

A) $50.
B) $54.
C) $56.
D) $106.
E) $176.
10. When the firm uses 23 employee-hours, it will experience _______ in labor costs.
A) $322
B) $260
C) $180
D) $112
E) $46
11. The total cost of producing 200 units of output is

A) $440.
B) $372.
C) $280.
D) $240.
E) $190.
12. Assume that the amount the firm pays for rent increases from $50 to $60. The profit maximizing level of output is
_______ and the firm will earn a _________.
A) 40; profit of $15
B) 80; loss of -$30
C) 80; profit of $10
D) 120; profit of $44
E) 120; profit of $54
13. Assume that the wage rate increases from $14 to $17. The profit maximizing level of output is _______ and the firm
will earn a _________.
A) 40; profit of $13
B) 80; profit of $42
C) 80; loss of $36
D) 120; profit of $39
E) 160; profit of $15
14. When the firm uses 23 employee-hours, it will collect total revenues of
A) $46.
B) $200.
C) $225
D) $400.
E) $450.
15. The firm earns a ___________ of __________ when it produces 200 units of output.
A) loss; -$28
B) profit; $78
C) loss; -$78
D) profit; $28
E) profit; $10
16. The firm earns a ___________ of __________ when it produces 120 units of output.
A) loss; -$64
B) profit; $64
C) loss; -$114
D) profit; $114
E) profit; $54
17. If the firm experiences an increase in the cost of a fixed factor of production it will
A) increase output.

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B) raise its price

C) decrease output.
D) lower its price.
E) leave its output decision unchanged.
18. Suppose a firm has marginal costs of $8 when producing 550 units of output. In order for this to be a point of profit
maximization,
A) total revenues must exceed total costs.
B) price must be less than $8.
C) total costs must exceed total revenues.
D) price must be equal to $8.
E) total revenues must exceed $4400.
19. Which of the following firms best represents a price taker?

A) Microsoft.
B) General Motors.
C) The local Taco Bell.
D) A corn farmer in Iowa.
E) The Gap.
20. Which of the following is most likely to be a fixed factor of production at a university?
A) The number of personal computers.
B) The number of books in the library.
C) The number of professors and lecturers.
D) The amount of chalk.
E) The size of the business or liberal arts buildings.
21. If the numerical value of the price elasticity of supply is zero, supply is categorized as being
A) perfectly elastic.
B) elastic.
C) unit elastic.
D) inelastic.
E) perfectly inelastic.
22. The fewer the number of alternative factors of production that can be used to produce a good, the ________ will be.
A) more elastic supply
B) less inelastic supply
C) more elastic demand
D) less elastic demand
E) less elastic supply
23. Which of the following would cause supply to shift to the left?
A) Wages rise.
B) Demand for the good falls.
C) The price of the good falls.
D) Expectations about future demand improve.
E) The number of firms in the industry rises.
24. Total revenue minus total explicit and implicit costs defines
A) gross earnings.
B) profit.
C) net earnings.
D) net worth.
E) retained earnings.
25. If not for the existence of unique or essential factors of production, supply curves would be
A) highly inelastic.
C) highly elastic.
D) downward sloping.
E) vertical
26. If the percentage change in quantity supplied is smaller than the percentage change in price, supply is classified as
B) inelastic.
C) unit elastic.

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D) elastic.
27. Suppose 30 employee-hours can produce 50 units of output. Assuming the law of diminishing marginal returns is
present, to produce 100 units of output will require
A) an additional 30 employee-hours.
B) more than 30 additional employee-hours.
C) a total of 60 or less employee-hours.
D) less than 30 additional employee-hours.
E) a total of 90 or more employee-hours.
28. The location of a firm will be a _________ factor of production in ________ run.
A) variable; the short
B) variable; both the short and long
C) variable; the long
D) fixed; the long
E) fixed; both the short and long
29. Profit is the

A) difference between total revenues and total explicit costs.
B) ratio of total revenues to total costs.
C) difference between total costs and total revenues.
D) goal of only large firms.
E) difference between total revenues and total explicit and implicit costs.
30. The firm's output price is $5 and the firm is producing 37 units with a marginal cost of $3. The firm should
A) lower its price.
B) decrease production.
C) increase production.
D) raise its price.
E) layoff workers.
31. Suppose the firm knows that it is not going to shutdown but it is going to earn a loss. It should pick the output level
where
A) total costs are minimized.
B) price equals marginal costs.
C) total revenues are maximized.
D) the costs of the variable factors of production are minimized.
E) price is greater than marginal costs.
32. If an industry experiences an increase in the number of firms, then

A) the original firms will produce more.
B) the new firms will produce more than the original firms.
C) the industry supply curve will shift left.
D) the new firms will produce the same amount as the original firms.
E) the industry supply curve will shift right.
33. Which of the following factors of production is likely to be variable in the short run?
A) The location of the firm.
B) The number of employee-hours.
C) The size of the firm's plant or office.
D) The amount of specialized machinery.
E) The number of features in a custom designed software application the firm uses.
34. If the firm produces an output level where price is greater than marginal costs, then the firm should
A) pay more to its variable factors of production.
B) pay more to its fixed factors of production.
C) contract output to earn greater profits or smaller losses.
D) expand output to earn greater profits or smaller losses.
E) leave its output decision unchanged.
35. In order for a firm to choose to produce a positive amount of output, it must be the case that
A) total revenues are greater than total costs.
B) total revenues are greater than fixed costs.
C) total revenues equal total costs.
D) total revenues are greater than or equal to variable costs.

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E) total revenues minus total costs are greater than variable costs.
36. The common goal shared by most all private firm is to

A) be a responsible member of the community.
B) provide the minimum amount of customer service possible.
C) profit maximize.
D) treat workers fairly.
E) be environmental friendly.
37. The short run is define as

A) one year or less.
B) a period in which all factors of production are variable.
C) three years or less.
D) a period in which at least one factor of production is fixed.
E) a period in which at most one factor of production is fixed.
38. A price taker confronts a demand curve that is

A) vertical at the market price.
B) upward sloping.
C) downward sloping.
D) horizontal at the market price.
E) elastic.
39. The firm's output price is $8 and the firm is producing 77 units with a marginal cost of $11. The firm should
A) lower its price.
B) decrease production.
C) increase production.
D) raise its price.
E) hire more workers.
40. Supply curves of the form P = a + b*Q, where (a, b) >0, will always have a price elasticity of supply
A) equal to 0.
B) that becomes more elastic at higher levels of output.
C) equal to 1.
D) that becomes more inelastic at higher levels of output.
E) equal to "1/b."
41. Suppose a firm is collecting $1700 in total revenues and the total costs of its variable factors of production are $1900
at its current level of output. One can predict that the firm
A) will shutdown.
B) earn a profit.
C) earn a loss.
D) continue to operate.
E) raise its price.
42. The day-to-day decisions made by management are

A) short sided.
B) made in the short run.
C) random.
D) made in the long run.
E) reversed the following day.
43. Suppose a firm is collecting $1250 in total revenues and the total costs of its variable factors of production are $1000
at its current level of output. One can predict that the firm
A) will shutdown.
B) earn a profit.
C) earn a loss.
D) continue to operate.
E) raise its price.
44. Which of the following is not true of a perfectly competitive firm?

A) It faces a perfectly elastic demand curve.
B) It is unable to influence the market price of the good it sells.
C) It seeks to maximize revenue.
D) Relative to the size of the market, the firm is small.
E) The firm's only decision is how much output to produce.

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45. If the percentage change in quantity supplied is greater than the percentage change in price, supply is classified as
B) inelastic.
C) unit elastic.
D) elastic.
46. A reduction in the interest rate will cause the firm's

A) supply curve to shift left.
B) quantity supplied to increase.
C) supply curve to shift right.
D) quantity supplied to decrease.
E) profit to fall.
47. The reason for the existence of the law of diminishing marginal returns is
A) as production expands, the firm is forced to hire low quality workers.
B) firms become less efficient as they produce more.
C) workers become fatigued as they are required to produce more.
D) equipment breaks down more frequently as production expands.
E) the production facility becomes congested.
48. A variable factor of production is

A) fixed in the long run but variable in the short run.
B) plays no role in the law of diminishing marginal returns.
C) variable in both the short run and the long run.
D) is irrelevant to profit maximization decisions.
E) variable only in the short run.
49. If the firm's demand curve is perfectly elastic, the firm must be
A) a monopoly.
B) an imperfect competitor.
C) an oligopoly.
D) a perfect competitor.
E) a revenue maximizer.
50. If factors of production are relatively immobile, then the price elasticity of supply will tend to be
A) larger.
B) perfectly elastic.
C) smaller.
D) elastic.
E) unaffected.
51. The most important factor influencing the size of the price elastic of supply is
A) the price elasticity of demand.
B) the number of firms.
C) the number of consumers.
D) the easy with which additional units of factors of production can be acquired.
E) the age of the industry.
52. Assume that the firm uses 13 employee-hours and an office to produce 100 units of output. The price of output is $5,
the wage rate is $10, and rent is $200. The firm will collect _____ in total revenues.
A) $500
B) $300
C) $170
D) $100
E) $5
53. Given P =$5 and supply is P = 2*Q, the price elasticity of supply is
B) elastic.
C) 1.
D) inelastic.

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54. When Texaco makes a donation to Public Broadcast Service (PBS), the expenditure is an example of
A) a violation of profit maximization.
B) a goal of Texaco that is secondary to profit maximization.
C) an implicit cost.
D) corporate greed.
E) revenue maximization.
55. In general, if the price of a fixed factor of production decreases,

A) the profit maximizing level of output falls.
B) profits of the firm become larger or losses become smaller.
C) the profit maximizing level of output rises.
D) marginal costs fall.
E) price falls.
56. A fixed factor of production is

A) fixed in the long run but variable in the short run.
B) plays no role in the law of diminishing marginal returns.
C) fixed in both the short run and the long run.
D) common in large firms but rare in small firms.
E) fixed only in the short run.
57. The law of diminishing marginal returns

A) is a long run concept.
B) applies only to small and medium sized firms.
C) is a short and long run concept.
D) applies only to large firms.
E) is a short run concept.
58. An increase the number of firms producing espresso would lead to a(n)
A) decrease in quantity supplied.
B) decrease in supply.
C) increase in quantity supplied.
D) increase in supply.
E) increase in the price of espresso.
59. Suppose a firm is collecting $1345 in total revenues and the total cost of its fixed factors of production rise from $200
to $300. One can speculate that the firm will
A) expand output.
B) raise price.
C) earn greater profits or smaller losses.
D) contract output.
E) earn smaller profits or greater losses.
60. The easier it is for the firm to acquire additional amounts of the factors of production they use, the
A) smaller the numerical value of the price elasticity of supply.
B) less elastic supply will be.
C) greater the opportunity for earning profits.
D) more elastic supply will be.
E) more inelastic supply will be.
61. Suppose a firm confronts a price of $6 and produces 650 units. For this to be a point of profit maximization,
A) total costs must exceed total revenues.
B) the marginal cost of producing 650 units must be $6.
C) total revenues must exceed total costs.
D) the marginal cost of producing 650 units must be less than $6.
E) total revenues must equal total costs.
62. A horizontal supply curve has a price elasticity of supply equal to

A) -1.
B) 0.
C) 1
D) 10
E) infinity.
63. The long run price elasticity of supply for a particular good will be __________ its short run elasticity.
A) smaller than

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B) more inelastic than

C) larger than
D) less elastic than
E) equal to
64. For firms that use crude oil as an input, an increase in the price of crude oil will cause the firm's
A) supply curve to shift left.
B) quantity supplied to increase.
C) supply curve to shift right.
D) quantity supplied to decrease.
E) output price to rise.
Output Employee- Hourly

per day hours wage rate
0 0 $5
33 1 $5
66 2 $5
99 4 $5
132 7 $5
165 11 $5
65. To increase output from 33 to 66 units requires ______ extra employee-hours; to increase output from 66 to 99 units
requires _____ extra employee-hours.
A) 1;1
B) 1;2
C) 2;1
D) 2;4
E) 3;7
66. The total labor cost of 99 units of output is

A) $5.
B) $10.
C) $20.
D) $35
E) $55.
67. The law of diminishing marginal returns becomes evident at ______ units of output.
A) 33
B) 66
C) 99
D) 132
E) 165
68. The general relationship between employee-hours and output is

A) negative.
B) reciprocal.
C) positive.
D) inverse.
E) declining.
69. In order for a firm to continue to operate and produce output it must be the case that
A) it earns a profit.
B) total revenues are greater than or equal to the total cost of fixed and variable factors of production.
C) total revenues are greater than or equal to the cost of fixed factors of production.
D) total revenues are greater than or equal to the cost of variable factors of production.
E) it avoids a loss.
70. If the numerical value of the price elasticity of supply is infinity, supply is categorized as being
B) elastic.
C) unit elastic.
D) inelastic.

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71. A profit maximizing perfectly competitive firm must decide

A) only on what price to charge, taking output as fixed.
B) both what price to charge and how much to produce.
C) only on how much to produce, taking price as fixed.
D) only on which industry to join, taking price and output as fixed.
E) only on how much revenue it wishes to collect.
72. A vertical supply curve has a price elasticity of supply equal to

A) -1.
B) 0.
C) 1
D) 10
E) infinity.
73. Marginal cost is calculated as

A) total revenue minus total costs.
B) the change in output divided by the change in total costs.
C) the percentage change in total costs divided by the percentage change in output.
D) the change in total costs divided by the change in output.
E) total revenue minus fixed costs.
74. A decrease in the price the firm receives for its output will cause the firm to
A) expand output and earn smaller profits.
B) shutdown and leave the industry.
C) leave output unchanged and earn smaller profits.
D) contract output and earn smaller profits or larger losses.
E) contract output and earn smaller profits.
75. If the firm spends $400 to produce 20 units of output and spends $880 to produce 40 units, then the marginal cost of
increasing production from 20 to 40 units is
A) $20.
B) $12.
C) $24.
D) $22.
E) impossible to calculate due to a lack of information.
76. An increase in consumer demand for espresso would lead to a(n)

A) decrease in quantity supplied.
B) decrease in supply.
C) increase in quantity supplied.
D) increase in supply.
E) decrease in the price of espresso.
77. Improvement in production technology causes an increase in

A) the quantity supplied by firms and an increase in market supply.
B) supply by firms and an increase in the market quantity supplied.
C) the quantity supplied by firms and an increase in the market quantity supplied.
D) supply by firms and an increase in market supply.
E) supply by firms and no change in market supply.
78. Assume that the production technology required to produce goods X and Y are very similar. If a firm that is
producing good X notices that the market price of good Y is rising, it will
A) intensify its production of good X.
B) shift into producing good Y.
C) anticipate a price increase for good X.
D) leave its production decisions unchanged.
E) charge a higher price for good X.
79. Along a linear supply with a positive y-intercept, as quantity increases, the price elasticity of supply becomes
A) more elastic.
B) larger.
C) negative.
D) less inelastic.
E) more inelastic.

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80. Suppose a firm collects total revenues of $1000 when it produces 200 units; the marginal costs of producing 200
units is $5. The firm should
A) expand production because price is greater than marginal costs.
B) contract production because price is greater than marginal costs.
C) expand production because price is less than marginal costs.
D) contract production because price is less than marginal costs.
E) leave production unchanged because price equals marginal costs.
81. An increase in the price the firm receives for its output will cause the firm to
A) expand output and earn greater profits or smaller losses.
B) expand output and earn greater profits.
C) leave output unchanged and earn greater profits.
D) leave output unchanged and earn greater profits or smaller losses.
E) contract output and earn greater profits.
82. The price of output to a firm is $9 and the marginal cost of the last unit produced is $8.50. This means the
A) extra benefit of the last unit produced is less than the extra cost.
B) firm should lower its output to increase profits.
C) firm is earning an average profit of $0.50.
D) extra benefit of the last unit produced is greater than the extra cost.
E) firm is earning profits.
83. Which of the following factors of production is likely to be fixed in the short run?
A) The location of the firm.
B) The number of employee-hours.
C) The amount of electricity consumed.
D) The amount of paper used.
E) The amount of RAM installed in the network server.
84. Assume that the firm uses 13 employee-hours and an office to produce 100 units of output. The price of output is $5,
the wage rate is $10, and rent is $200. The firm has total costs of _____.
A) $500
B) $330
C) $230
D) $200
E) $3.30
85. A perfectly competitive firm finds that it

A) can sell exactly the same amount at any price.
B) must raise its price to sell less.
C) can sell all it wants to at the market price.
D) must lower its price to sell more.
E) must deal with inelastic demand for its product.
86. If the price elasticity of supply is less than one, this means the
A) change in quantity supplied is greater than the change in price.
B) percentage change in quantity supplied is greater than the percentage change in price.
C) change in quantity supplied is less than the change in price.
D) percentage change in quantity supplied is less than the percentage change in price.
E) percentage change in quantity supplied is less than the change in price.
Employee - Hourly
hours Output wage rate Rent
0 0 $7 $75
1 45 $7 $75
3 90 $7 $75
6 135 $7 $75
10 180 $7 $75
15 225 $7 $75
87. As the law of diminishing marginal returns becomes more evident, marginal costs
A) fall.

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B) become negative.
C) rise.
D) remain constant.
E) become positive.
88. If the output price for this good is 50 cents, the firm should produce
A) more than 225 units.
B) more than 135 units but less than 180 units.
C) between 90 and 45 units.
D) more than 180 units but less than 225.
E) between 0 and 45 units.
89. The marginal cost of increasing output from 135 units to 180 units is
A) $1.55.
B) 93 cents.
C) 62 cents.
D) 34 cents.
E) 22 cents.
90. Assuming the output price is 50 cents and rent increases from $75 to $100, the firm will
A) reduce output because marginal costs have fallen.
B) increase output because marginal costs have fallen.
C) reduce output because marginal costs have risen.
D) increase output because marginal costs have risen.
E) leave output unchanged because marginal costs are unchanged.
91. The marginal cost of increasing output from 45 units to 90 units is

A) $1.07
B) 94 cents.
C) 53 cents.
D) 44 cents.
E) 31 cents.
92. If rent increases from $75 to $100, the marginal cost of increasing output from 135 units to 180 units
A) remains constant at 62 cents.
B) rises to 81 cents.
C) rises to $1.03.
D) remains constant at 67 cents.
E) rises to 94 cents.
93. Assuming the output price is 50 cents and rent decreases from $75 to $50, the firm will
A) reduce output because marginal costs have fallen.
B) increase output because marginal costs have fallen.
C) leave output unchanged because marginal costs are unchanged.
D) reduce output because marginal costs have risen.
E) increase output because marginal costs have risen.
94. If rent decreases from $75 to $50, the marginal cost of increasing output from 45 units to 90 units
A) remains constant at 44 cents.
B) falls to 16 cents.
C) falls to 8 cents.
D) remains constant at 31 cents.
E) falls to 26 cents.
B) less than 45 units.
C) less than 225 units.
D) between 90 and 135 units.
E) less than 90 units.
B) less than 45 units.
C) more than 45 units but less than 90 units.
D) more than 90 units but less than 135 units.

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E) less than 135 units.
97. The upward sloping portion of the marginal cost curve is the firm's
A) production function.
B) total cost curve.
C) supply curve.
D) diminishing marginal returns curve.
E) profit curve.
98. When the marginal return to variable factors of production are ___________ then marginal costs are _________.
A) negative; negative
B) diminishing; rising
C) increasing; rising
D) decreasing; falling
E) positive; negative
99. The correct mathematical statement of the price elasticity of supply is

A) ( P/P)/( Q/Q).
B) ( Q/Q)/( P/P).
C) P/ Q.
D) Q/ P.
E) P/P)/ Q.
100. A period in which at least some factors of production are unchangeable defines
A) the long run.
B) one year or less.
C) the medium run.
D) two years or less.
E) the short run.

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1. A
2. D
3. C
4. B
5. C
6. C
7. C
8. A
9. E
10. A
11. B
12. E
13. B
14. D
15. D
16. B
17. E
18. D
19. D
20. E
21. E
22. E
23. A
24. B
25. C
26. B
27. B
28. C
29. E
30. C
31. B
32. E
33. B
34. D
35. D
36. C
37. D
38. D
39. B
40. D
41. A
42. B
43. D
44. C
45. D
46. C
47. E
48. C
49. D
50. C
51. D
52. A
53. C
54. B
55. B
56. E
57. E
58. D
59. E
60. D
61. B
62. E
63. C
64. A
65. B
66. C
67. C
68. C
69. D
70. A
71. C
72. B
73. D

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74. D
75. C
76. C
77. D
78. B
79. E
80. E
81. A
82. D
83. A
84. B
85. C
86. D
87. C
88. B
89. C
90. E
91. E
92. A
93. C
94. D
95. A
96. C
97. C
98. B
99. B
100. E

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1. Congress is concerned that the incomes of farm families are too low and fluctuate wildly. Two proposals are
suggested: a price floor on agricultural goods and an income subsidy to farm families. By the criteria of ______,
Congress should pass______.
A) efficiency; a price floor
B) efficiency; income subsidies
C) equity; a price floor
D) equity; income subsidies
E) efficiency; neither
2. Choosing efficiency as the first social goal and equity as the second means
A) when equity is considered, the surplus available is as large as possible.
B) society is unconcerned with the problems of the underprivileged.
C) society will become more materialistic.
D) greater income inequality.
E) the rich get richer and the poor get poorer.
Figure 7.4
3. The deadweight loss due to the price floor is represented by the points
A) XMN.
B) VYT.
C) LTW.
D) WRP.
E) NLW.
4. Assume that a price floor is imposed at point V, i.e., the price is now represented by the distance 0V. The distance
______ measures the extent of the __________.
A) QbQc; surplus
B) VR; surplus
C) TR; shortage
D) MN; shortage
E) ZW; deadweight loss
5. When the market is unregulated, consumer surplus equals

A) (YZ)*(ZW).
B) ½*(TL)*(LW).
C) YZLT.
D) ½*(YZ)*(ZW).
E) YZWT.
6. The value of the deadweight loss due to the price floor measures the
A) trades that would have occurred but don't because of the price floor.
B) extra profit firms earn because of the price floor.

lOMoARcPSD|3016397
C) extent to which the costs of producing QaQc units exceed the benefits of consuming QaQc units.
D) extra revenues firm receive because of the price floor.
E) extent to which the costs of producing QaQc units are exceeded by the benefits of consuming QaQc units.
7. Given the relationship between the price elasticity of demand and the deadweight loss of a per unit tax, it is best to
tax items that
A) only the rich can afford.
B) are expensive.
C) have few substitutes.
D) are luxuries.
E) have many substitutes.
8. A price ceiling exists when price is set

A) above the equilibrium value.
B) at the equilibrium value.
C) too high.
D) too low.
E) below the equilibrium value.
9. When price is set by law or regulation above the equilibrium value

A) a shortage develops.
B) it is called a price ceiling.
C) the legal price is the maximum price allowable.
D) it is termed a price floor.
E) quantity demanded exceeds quantity supplied.
10. As discussed in the textbook, agricultural price supports are an example of

A) market equilibrium.
B) a price floor.
C) a price ceiling.
D) market efficiency.
E) an effective way of protecting an important American way of life.
11. The more elastic demand is, the ______ the burden of the tax borne by ______.
A) smaller; consumers
B) larger; consumers
C) smaller; consumers and producers
D) smaller; producers
E) larger; consumer and producers
12. Except in the extreme cases of perfectly inelastic or elastic demand and/or supply curves, the burden of a per unit tax
imposed on sellers falls
A) equally on consumers and producers.
B) partially on consumers and partially on producers.
C) entirely on producers.
D) entirely on consumers.
E) mostly on producers.
13. Which of the following statements expresses the justification for making efficiency the first goal of economic
interaction?
A) Efficiency give the poor an incentive to improve their economic status.
B) Since 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) It is too difficult to pursue more than one goal at a time.
E) Efficiency maximizes total economic surplus and thereby allows other goals to be more fully achieved.
14. 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.
E) making bulk purchases.
Figure 7.9

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Price
S + Tax
12
S
9.20
8.80
8.20
5
D
4
0 7 8 Quantity
15. Suppose a $1 per unit tax is imposed on sellers. The share of the tax burden borne by producers is
A) $1.
B) 60 cents.
C) 50 cents.
D) 40 cents.
E) 20 cents.
16. Suppose a $1 per unit tax is imposed on sellers. The total tax revenue raised is
A) $7.
B) $5.60.
C) $4.80.
D) $2.80.
E) $1.
17. Suppose a $1 per unit tax is imposed on sellers. The new equilibrium price is ______ and the new equilibrium
quantity is ______.
A) $9.20; 7
B) $8.88; 8
C) $8.80; 7
D) $8.20; 7
E) $8.20; 8
18. Suppose a $1 per unit tax is imposed on sellers. The share of the tax burden borne by consumers is
A) $1.
B) 80 cents.
C) 60 cents
D) 40 cents.
E) 20 cents.
19. Suppose a $1 per unit tax is imposed on sellers. The distribution of the tax burden between consumers and
producers is
A) 100% - 0%.
B) 60% - 40%.
C) 50% - 50%.
D) 40% - 60%.
E) 0% - 100%.
20. A tax of $1 on each unit a producer sells will

A) shift supply to the right.
B) decrease quantity supplied.
C) shift supply to the left.
D) increase quantity supplied.
E) decrease demand.

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21. If a per unit tax is imposed, the more elastic the supply curve, the
A) more likely the deadweight loss is to be affected.
B) larger the deadweight loss.
C) larger the deadweight loss to producers.
D) smaller the deadweight loss to consumers.
E) smaller the deadweight loss.
22. The market for new automobiles is likely to be inefficient because

A) of price ceilings on automobiles.
B) the market is not perfectly competitive.
C) of price floors on automobiles.
D) automobiles are allocated on first come, first served basis.
E) consumers negotiate price.
23. The sum of the economic surpluses accruing to buyers and sellers is
A) producer surplus.
B) deadweight loss.
C) total economics surplus.
D) conspicuous consumption.
E) consumer surplus.
24. The concept of efficiency is illustrated by which of the following statements?

A) The production of the good generates very little pollution.
B) At equilibrium, no mutually beneficial transactions remain.
C) The production of the good generates very few by products.
D) The consumption of the good produces very little waste.
E) At disequilibrium, no mutually beneficial transactions have occurred.
25. Pareto efficiency is a situation where

A) no one is made better off.
B) trades that make some better off without harming others exist.
C) trades have benefited some and harmed others.
D) any further trades will harm someone.
E) all trades have harmed someone.
26. Which of the following in not true when market distortions (e.g., price ceilings, price floors, or taxes) are introduced
into the market?
A) Total economic surplus is reduced.
B) A deadweight loss of some magnitude occurs.
C) Trades that should occur do not or trades that should not occur do.
D) Equity is always improved.
E) Efficiency is retarded.
27. The reason for the existence of ticket scalpers at concerts of popular entertainers is because
A) some states allow them.
B) someone will always try to exploit a situation for financial gain.
C) scalpers have very high opportunity costs.
D) some consumers will value a ticket for a front row seat at more than its face value.
E) ticket prices are too high.
28. If a per unit tax is imposed, the more elastic demand is, the
A) less likely the deadweight loss will be affected.
B) smaller the deadweight loss.
C) larger the deadweight loss to consumers.
D) smaller the deadweight loss to producers.
E) larger the deadweight loss.
29. If a market is in equilibrium then

A) supply equals demand.
B) the price is "too high."
C) all mutually beneficial transactions between consumers and producers have taken place.
D) the price is "too low."
E) some mutually beneficial transactions between consumers and producers have not taken place.
30. Price floors always cause

A) deadweight loss.

lOMoARcPSD|3016397
B) a shortage.
C) too much consumption.
D) too little production.
E) quantity demanded to exceed quantity supplied.
31. Suppose one knows two facts: the market for automobile tires experiences chronic shortages and the government
sets the price of automobile tires. One can infer
A) government has established a price ceiling for tires.
B) the quantity of tires supplied exceeds the quantity of tires demanded.
C) government has established a price floor for tires.
D) demand for tires exceeds the supply of tires.
E) government is trying to protect the incomes of tire manufacturers.
32. The more inelastic demand is, the ______ the burden of the tax borne by ______.
B) larger; producers
C) larger; consumers and producers
D) smaller; consumers and producers
E) smaller; producers
33. If the supply curve fails to capture all of the costs of production, then the
A) equilibrium price is efficient but the quantity will be too large.
B) equilibrium price and quantity are still efficient.
C) government needs to impose regulations on the industry.
D) the equilibrium price is inefficiently low.
E) the equilibrium price is inefficiently high.
34. If a per unit tax is imposed, the less elastic the supply curve, the
A) smaller the deadweight loss.
B) larger the deadweight loss.
C) smaller the deadweight loss to consumers.
D) larger the deadweight loss to producers.
E) more likely the deadweight loss is to be affected.
Figure 7.2
35. Based on demand curve D and supply curve S, the dollar value of the consumer surplus is
A) $240.
B) $200.
C) $180.
D) $160.
E) $120.

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36. Based on demand curve D1 and supply curve S, the dollar value of the total economic surplus is
A) $600.
B) $607.50
C) $630.
D) $643.50.
E) $700.
37. Based on demand curve D and supply curve S, the dollar value of the producer surplus is
A) $180.
B) $160.
C) $150.
D) $130.
E) $75.
38. Based on demand curve D1 and supply curve S, the dollar value of the consumer surplus is
A) $550.
B) $525.50.
C) $500.
D) $472.50.
E) $450.
39. A first come, first served allocation mechanism results in a(n)

A) efficient equilibrium.
B) efficient equilibrium if you get served.
C) inefficient equilibrium.
D) inefficient equilibrium if you don't get served.
E) efficient equilibrium if you don't get served.
40. Suppose a local internet service provider (ISP) can support 100 simultaneous connections and has sold unlimited
usage subscriptions to 400 families for $20 a piece. To avoid consumer dissatisfaction with busy signals, the local
ISP could
A) implement a day of the week usage policy; i.e., families 1-99 can use the internet on Monday, 100-199 on
Tuesday, etc.
B) randomly disconnect users.
C) randomly disconnect infrequent users.
D) let families with a last name starting with A-F dialing in from 7-9 a.m., G-L from 9-11 a.m., etc.
E) sell 50 subscriptions at $50 to 50 families with guaranteed access and sell 350 subscriptions at $10 with no
guaranteed access.
41. Suppose one knows two facts: the market for toothpaste experiences chronic surpluses and the government sets the
price of toothpaste. One can infer
A) government has established a price ceiling for toothpaste.
B) the quantity of toothpaste demanded exceeds the quantity of toothpaste supplied.
C) government has established a price floor for toothpaste.
D) the supply of toothpaste exceeds the demand for toothpaste.
E) government is trying reduce the incident of cavities in children from poor families.
42. As discussed in the textbook, rent controls in New York City are an example of
A) market equilibrium.
B) a price floor.
C) an effective way of providing the poor with access to housing.
D) market efficiency.
E) a price ceiling.
43. The more inelastic demand is, the ______ the burden of the tax borne by ______.
B) larger; consumers
C) larger; producers
D) larger; consumers and producers
E) smaller; consumers and producers
Figure 7.8

lOMoARcPSD|3016397
th th
44. The cost to producers of producing the 12 unit through the 20 unit is
A) $8.
B) $10.64.
C) $18.64.
D) $48.
E) $56.
45. The value of the deadweight loss caused by the price floor is
A) $8.
B) $10.64.
C) $18.64.
D) $48.
E) $64.
46. The more elastic supply is, the ______ the burden of the tax borne by ______.
A) larger; consumers
B) larger; producers
C) smaller; consumers
D) smaller; consumers and producers
E) larger; consumers and producers
47. Market equilibrium is considered efficient because

A) quantity supplied equals quantity demanded.
B) the price consumers pay equals the amount producers receive.
C) no more trades remain that benefit some without harming others.
D) excess supply is zero.
E) excess demand is zero.
Figure 7.3

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48. Assume that the market is initially unregulated. The efficient outcome is represented by the distances ______ for
price and ______ for quantity.
A) 0B; 0Q1
B) 0D; 0Q1
C) 0G; 0Q3
D) 0J; 0Q2
E) 0A; 0Q2
49. When the market is unregulated, producer surplus equals

A) (DB)*(BC).
B) ½*(DG)*(GF).
C) ½*(DB)*(BC).
D) GBHF.
E) ½*(FH)*(HC).
50. After the price ceiling is imposed, consumer surplus _________ and is represented by the points _______.
A) decreases; BJEH
B) increases; BAEH
C) decreases; JAE
D) increases; GAEF
E) does not change; BAC
51. The consumer surplus after the price ceiling is imposed equals
A) ½*(AJ)*(JE).
B) GJEF.
C) ½*(AB)*(BC) + BHFG.
D) ½*(AJ)*(JE) + JEFG.
E) unknown; can't be calculated without values.
52. Assume that a price ceiling is imposed at point G, i.e., the price is now represented by the distance 0G. The distance
______ measures the extent of the __________.
A) Q2Q1; surplus
B) GF; shortage
C) FI; surplus
D) GF; shortage
E) FI; shortage
53. When the market is unregulated, consumer surplus equals

A) ½ *(AJ)*(JE).
B) ½*(AB)*(BC).
C) ½*(AG)*(GI).
D) JEHB.
E) ½*(EH)*(HC).

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54. The reason consumer surplus changes when a price ceiling is imposed is
A) as designed, more consumers have access to the good.
B) consumers from 0 to Q2 are able to purchase the good for 0G instead of 0B.
C) firms are forced to provide the good at a fair price to all consumers from 0 to Q3.
D) the value of the good to consumers rises because fewer units are available.
E) consumers can now spend more for other goods and services.
55. The reduction in quantity supplied from Q1 to Q2 represents

A) a reduction in the demand for the good.
B) the goal of the price ceiling: reduced production.
C) production that, in an unregulated market, was available but after the price ceiling is no longer beneficial.
D) the reduced producer surplus.
E) the increased consumer surplus.
56. After the price ceiling is imposed, producer surplus _________ and is represented by the points _______.
A) increases; DBC
B) decreases; DGF
C) increases; 0GFQ2
D) decreases; 0DFQ2
E) does not change; DGF
57. The deadweight loss due to the price ceiling is represented by the points
A) FEC.
B) DAC.
C) GJECF.
D) GJEF.
E) JAE + DGF.
58. The value of the deadweight loss equals

A) ½*(EH)*(HC).
B) ½*(FH)*(HC).
C) ½*(EH)*(HC) + ½*(FH)*(HC).
D) ½*(EH)*(HC) + ½*(FH)*(HC) + GJEF.
E) unknown; can't be calculated without values.
59. Total economic surplus is

A) the ratio of consumer surplus to producer surplus.
B) the difference between consumer surplus and producer surplus.
C) the difference between tax revenues and government expenditures.
D) the sum of consumer and producer surpluses.
E) minimized at the point of market equilibrium.
60. Which of the following statements best characterizes the inefficiency induced by a price floor?
A) Consumers are encouraged to consume too much.
B) The extra cost of the last unit produced is greater than the extra benefit of the last unit consumed.
C) Producers are encouraged to produce too little.
D) Firms will spent too much on political contributions to maintain the price floor.
E) The enforcement of the price floor is extremely costly.
61. 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) equilibrium price and quantity are still efficient.
C) government needs to impose regulations that require more consumption.
D) the equilibrium price is inefficiently high.
E) the equilibrium price is inefficiently low.
62. 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 are pleased.
B) all remaining producers require less than $5 to produce coffee.
C) all consumers who want to buy coffee are satisfied.
D) all remaining consumers value a pound of coffee at less than $5.
E) many trades between consumers and producers remain.
63. A price floor exists when price is set

A) below the equilibrium value.
B) too high.

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C) at the equilibrium value.

D) above the equilibrium value.
E) too low.
Figure 7.5
64. Under the What'sAMatterU administration's first come, first served policy, instead of price determining who gets a
parking space, ______ determines who gets a space.
A) income
B) car size
C) willingness to get to campus early.
D) subject matter
E) SAT score
65. The supply and demand for parking spaces on the campus of What'sAMatterU is illustrated in the figure. Suppose
the administration chooses to "price" spaces on a first come first served basis (i.e., parking permits are free) in the
interests of poor students. Quantity demanded will be______ and quantity supplied will be_____.
A) Q4, Q1
B) Q1, Q1
C) Q2, Q1
D) Q1, Q2
E) Q4, Q4
66. The administration at What'sAMatterU rejected charging a price for parking spaces on the grounds it would favor the
wealthier student. Which of the following types of students does the first come, first served allocation favor?
A) Students with midday classes.
B) Students who take two classes in the morning, drive to work, and then return to campus for a lab.
C) Students with 8:00 a.m. classes.
D) Students with 11:00 a.m. classes.
E) Students who could walk to campus.
67. Suppose the What'sAMatterU administration bows to student protests that a free market solution causes price to be
"too high" and sets the price at P2. Now the price of a parking space at What'sAMatterU is
A) P2.
B) P2 plus the extra time spent leaving early to ensure getting a space.
C) P2 minus the extra time spent leaving early to ensure getting a space.
D) P1-P2.
E) P1/P2.
68. Deadweight loss is

A) present in all markets.
B) the difference between consumer surplus and producer surplus.
C) positive in markets where equilibrium is distorted by price controls or taxes.

lOMoARcPSD|3016397
D) always larger than consumer surplus.

E) always smaller than producer surplus.
69. If a per unit tax is imposed, the more inelastic demand is, the
A) smaller the deadweight loss.
B) larger the deadweight loss to producers.
C) smaller the deadweight loss to consumers.
D) larger the deadweight loss.
E) less likely the deadweight loss will be affected.
Figure 7.1
70. In the diagram, consumer surplus is represented by the points

A) BAF.
B) BCF.
C) 0AFE.
D) 0CFE.
E) AFC.
71. In the diagram, producer surplus is represented by the points

A) BAF.
B) BCF.
C) 0AFE.
D) 0CFE.
E) AFC.
72. In general, a tax placed on each unit a producer sells results in

A) economic efficiency.
B) more production.
C) increased demand for the taxed good.
D) a decrease in demand for the taxed good.
E) a deadweight loss.
73. The best explanation for placing taxes on tobacco products and alcohol is because
A) smoking and drinking are sinful behaviors.
B) they punish producers of tobacco and alcohol.
C) the public supports taxing these items.
D) demand for tobacco and alcohol tends to be inelastic.
E) demand for tobacco and alcohol tends to be elastic.
74. Which of the following statements best characterizes the inefficiency induced by a price ceiling?
A) Trades that would have occurred in an unregulated market aren't made.
B) The extra benefit from the last unit consumed is less than the extra cost.
C) The enforcement of the price ceiling is extremely costly.

lOMoARcPSD|3016397
D) Producers are encouraged to produce too much.

E) A "fair" price for any good can not be established.
75. Price ceilings result in

A) increased total economic surplus.
B) shortages.
C) surpluses.
D) quantity supplied exceeding quantity demanded.
E) the same sized total economic surplus with a reallocation from producers to consumers.
76. Compared to the first come, first served allocation scheme airlines used in the past, the voluntary comparison
scheme now in place
A) discriminates against the poor.
B) improves efficiency for only the wealth.
C) tricks the poor into unnecessarily delaying their travel.
D) improves efficiency for all travelers.
E) encourages passengers to show up early.
77. Suppose that the market price for rent is rising rapidly and political concern is expressed for the ability of the poor to
afford apartments. Which of following statements is inconsistent with the use of efficiency as the first social goal?
A) By allowing rents to rise, landlords will have incentives to maintain their existing apartments.
B) In an unregulated apartment market, some of total economic surplus could be allocated to subsidizing rent
payments of the poor.
C) Allowing rents to rise only serves to line the pockets of landlords with excessive profits and ignores the needs of
the poor.
D) By allowing rents to rise, some consumers will choose to rent elsewhere.
E) The increase in rents will entice builders to construct new apartment complexes.
78. The reason an efficiency market outcome may not be considered a "good" outcome is
A) demand may not include all the benefits of consumption.
B) incomes of consumers are taken as given.
C) supply may not include all the costs of production.
D) the market is less than perfectly competitive.
E) consumers and producers lack information.
Figure 7.6
79. The loss in efficiency due to the tax is represented by the area______ and stems from______.
A) IJC; the trades that do not occur because of the tax
B) IHC; consumer unrest about higher prices
C) HJC; producer dissatisfaction with lower revenues
D) EGJI; wasteful use of the tax revenue by government
E) EAHI; consumer resentment over taxation

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80. The extent of total economic surplus with supply and demand curves S and D is represented by the points
A) MLI.
B) AKC.
C) MAC.
D) MKC.
E) IJC.
81. The burden of the tax to consumers is measured by the distance

A) EA.
B) AG.
C) HJ.
D) 0E.
E) 0A.
82. After the tax is imposed, the equilibrium quantity is the distance
A) FB.
B) 0B.
C) 0F.
D) 0F + 0B.
E) 0F - FB.
83. The burden of the tax to producers is measured by the distance

A) GL.
B) GK.
C) EG.
D) AG.
E) AK.
84. Consumer surplus after the tax is imposed is represented by the area
A) MAC.
B) MEI.
C) MAHI.
D) EAHI.
E) EACI.
85. The total dollar value of the burden of the tax on producers is equal to
A) (AG)*(GJ)+ ½ *(JH)*(HC).
B) (AG)*(GJ).
C) ½*(JH)*(HC).
D) ½*(LE)*(EI).
E) ½*(AG)*(GJ).
86. The total costs of the trades that do not occur after the tax is represented by the area
A) IFBC.
B) 0KCB
C) JFBC.
D) 0LIF.
E) 0GJF.
87. The amount of tax revenue raised by this tax is equal to the area represented by the points
A) EGJCI.
B) AGJH.
C) EAHI.
D) IJC.
E) EGJI.
88. The total dollar value of the burden of the tax on consumers is equal to
A) ½*(IH)*HC).
B) (EA)*(AH)+ ½ *(ME)*(EI).
C) ½*(ME)*(EI).
D) ½*(EA)*(AH).
E) (EA)*(AH).
89. After the tax is imposed, the equilibrium price is the distance
A) 0M.

lOMoARcPSD|3016397
B) 0E.
C) 0A.
D) 0G.
E) GE.
90. Suppose a tax is imposed on sellers. The distance that represents the per unit amount of the tax is
A) 0G.
B) 0A.
C) HJ.
D) IH.
E) EG.
91. If the original supply and demand curves are D and S, then the efficient outcome is a price equal to the
distance______ and a quantity equal to the distance______.
A) 0A; 0B
B) 0G; 0F
C) 0E; 0F
D) AG; 0B
E) AE; 0F
92. In general, a $1 tax place on each unit a producer sells will be

A) entirely borne by the producers.
B) split 50/50 between producers and consumers.
C) entirely borne by the consumers.
D) shared between producers and consumers.
E) entirely shifted to consumers.
Figure 7.7
93. Suppose a price ceiling is imposed at $4. The value of the producers surplus is
A) $24.
B) $16.
C) $8.
D) $4.
E) $2.
94. If the market is unregulated, the value of the total economic surplus is
A) $42.
B) $48.
C) $72.
D) $80.
E) $120.

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95. The total economic surplus after the $4 price ceiling is imposed is
A) $18.68.
B) $21.34.
C) $23.34.
D) $34.68.
E) $37.33.
96. The deadweight loss due to the $4 price ceiling is

A) $18.68.
B) $21.34.
C) $23.34.
D) $34.68.
E) $37.33.
97. If the market is unregulated, the value of producer surplus is

A) $6.
B) $18.
C) $36.
D) $48.
E) $72.
98. Suppose a price ceiling is imposed at $4. The value of the consumer surplus is
A) $2.66.
B) $10.68.
C) $18.68.
D) $21.34.
E) $34.68.
99. If the market is unregulated, the value of consumer surplus is

A) $120.
B) $72.
C) $48.
D) $24.
E) $12.
100. Suppose a local internet service provider (ISP) can support 100 simultaneous connections and has sold unlimited
usage subscriptions to 400 families for $20 a piece. Access to the internet is being allocated by
A) price.
B) quality of phone line.
C) a first come, first served scheme.
D) quality of modem.
E) price and a first come, first served scheme.

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1. B
2. A
3. D
4. A
5. D
6. C
7. C
8. E
9. D
10. B
11. A
12. B
13. E
14. B
15. B
16. A
17. A
18. D
19. D
20. C
21. B
22. B
23. C
24. B
25. D
26. D
27. D
28. E
29. C
30. A
31. A
32. E
33. D
34. A
35. C
36. B
37. E
38. D
39. C
40. E
41. C
42. E
43. B
44. E
45. C
46. A
47. C
48. A
49. C
50. D
51. D
52. E
53. B
54. B
55. C
56. B
57. A
58. C
59. D
60. B
61. E
62. D
63. D
64. C
65. A
66. C
67. B
68. C
69. A
70. A
71. B
72. E
73. D

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74. A
75. B
76. D
77. C
78. B
79. A
80. D
81. A
82. C
83. D
84. B
85. B
86. C
87. E
88. E
89. B
90. E
91. A
92. D
93. E
94. A
95. C
96. A
97. B
98. D
99. D
100. E

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1. According to the textbook, the awarding of damages to lung cancer patients caused the price of tobacco companies
stock to
A) fall by 20% over the following week.
B) fall by 20% over the following month.
C) fall by 100%.
D) fall by 20% within minutes.
E) rise by 10%.
2. Unlike economic profits, economic rents

A) can be less than zero.
B) can't be (or, at least, not easily) driven to zero.
C) don't involve the idea of opportunity costs.
D) only apply to land.
E) can be positive when accounting profits are zero.
3. e-commerce and an Internet presence are important projects to many firms, requiring employees with specialized
skills that are in short supply. The invisible hand solves the employment problem by
A) having the government announce the shortage.
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.
E) encouraging the government to set up new training programs.
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) Fees paid for maintenance of the firm's website.
E) Office space rent.
5. As concern over Y2k computer problems grew, programmers who coded software applications in the '60's and '70's
found they could earn
A) economic profits.
B) accounting rents.
C) economic rents.
D) accounting profits.
E) normal rents.
6. The efficient-markets hypothesis suggests

A) newsletters with stock tips and recommendations are helpful to investors.
B) a significant lag exists between new information and changes in stock price.
C) there is little incentive for insider trading.
D) newsletters with stock tips and recommendations are virtually useless.
E) some stock tip newsletters are helpful, others are useless.
7. The rationing and allocative functions of price

A) work in opposition to each other.
B) are mutually exclusive.
C) work together to guide resources to their highest value.
D) produce disequilibrium in the market.
E) work together to guide resources to their average value.
8. If all firms in a perfectly competitive industry are earning a normal profit, then
A) firms will be entering the industry.
B) the number of firms is stable.
C) firms will be exiting the industry.
D) firms are doing better than their next best alternative.
E) firms are doing worse than their next best alternative.
9. Accounting profits minus implicit costs equals

A) total revenues.
B) economic profits.
C) explicit costs.
D) fixed and variable costs.
E) the value of not operating this business.

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10. Economic profits

A) include only explicit costs.
B) have no relationship to accounting profits.
C) serve to motivate entry or exit.
D) are always greater than accounting profits.
E) equal accounting profits plus implicit costs.
11. 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) the number of firms in an industry shrinks.
E) economic profits and losses are driven towards zero by entry and exit.
12. Suppose all firms in a perfectly competitive industry are experiencing economic profits. One can hypothesize that
A) market supply will decrease.
B) the number of firms will rise.
C) market demand will increase.
D) market price will rise.
E) quantity supplied will increase.
13. Supposes a remote community in Montana lacks broadband access to the Internet. A proponent of the invisible hand
view would argue that
A) government regulation is necessary to ensure access.
B) the selfish pursuit of profit by Internet service providers will bring access to those willing to pay for it.
C) the selfish pursuit of pleasure by consumers will cause them to want another unnecessary service.
D) the consumers need to move to a large city.
E) the lack of access is the efficient allocation.
14. During the era of regulated airfares,

A) economic profits were substantial.
B) airfares and number of flights were efficient.
C) economic profits were efficiently driven towards zero.
D) economic profits were inefficiently driven towards zero.
E) consumer satisfaction was very high.
15. According to the textbook, most markets in the U.S.

A) have significant barriers to entry.
B) possess a high degree of free entry.
C) have minor barriers to entry.
D) are close to monopolies.
E) inefficiently allocate resources.
16. Harvard University charges very high tuition while other private universities charge less. This illustrates the ______
function of price.
A) allocative
B) distributive
C) communicative
D) rationing
E) transitive
17. The rationing function of price means price

A) directs resources across different sectors of the economy.
B) distributes goods and services to the wealthiest.
C) distributes goods and services across different sectors of the economy.
D) and rationing coupons are the same.
E) distributes goods and services to those who value them the most.
18. Cost saving developments, e.g., a new production procedure that saves two steps, in a perfectly competitive industry
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) higher consumer prices in the long run.
E) a leftward shift of the supply curve.

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19. Which one of the following statements is possibly, but not necessarily, true? (Note: possibly true and false are not the
same)
A) Economic profits are positive.
B) Accounting profits exceed economic profits.
C) Economic profits exceed accounting profits.
D) Economic profits equal accounting profits minus implicit costs.
E) Accounting profits equal economic profits plus implicit costs.
20. Michael Jordan's economic rent from playing basketball in the NBA was equal to the difference between his
A) initial offer and his final salary.
B) initial offer and the Chicago Bulls' initial offer.
C) final salary and the least he would be willing to accept to play in the NBA.
D) final salary and the average for guards in the NBA.
E) final salary and the Chicago Bulls' initial offer.
21. Suppose the Internet company, e-mu, will earn $250,000 in accounting profits for the foreseeable future, 10,000
shares in accounting profits of stock have been issued and the interest rate is 4%. If the interest rate rises to 6%, the
price of one share of e-mu will
A) remain unchanged.
B) rise but the exact price can't be calculated.
C) rise to $734.
D) fall but the exact price can't be calculated.
E) fall to $417.
22. In practice, the price of a share of stock for a particular company is influenced by
A) only current accounting profits.
B) only future accounting profits.
C) current accounting profits and future accounting profits.
D) current and future accounting profits and the interest rate.
E) current and future accounting profits, the interest rate, the state of the economy, and a host of other factors.
23. Suppose Robert is willing to work for $10 per hour and receives an offer of $15 per hour. Robert's ______ is
_______.
A) economic profit; $5
B) economic rent; $5
C) economic rent; $15
D) economic profit; $15
E) economic rent; $10
At your local bank, two line are open, One and Two, and four customers are in the bank: A,B,C, and D. Suppose that all
customers take exactly 5 minutes to conduct their business. The time is 9:59:59 am. Line Three will open up at 10:05 am.
Notes: 1) Conducting your business is not waiting time to you and 2) It may prove useful to illustrate the positions of new
customers in the table.
Line One Line Two Line Three

A B
C D
24. After Jane enters the bank at 10:00 am, Howard enters the bank at 10:03 am. His wait time is
A) 10 minutes in the line with Jane.
B) 5 minutes in the line without Jane.
C) 7 minutes in the line without Jane.
D) 12 minutes in either line.
E) 7 minutes in either line.
25. In this example, doing better than one's next best alternative means shortening the wait time by switching lines rather
than staying in the line one started in. By this criteria,
A) bank customers A, B, C, D, Jane and Howard all experienced economic profit.
B) Jane and Howard both received economic profit.
C) Howard received economic profit.
D) Jane received economic profit.
E) no one received economic profit.
26. At 10:05 am, Line Three is opened and Jane moves into it while Howard remains in his current line. As a result,
Jane's wait time

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A) remains 5 minutes.
B) falls to 5 minutes.
C) remains zero.
D) falls to zero.
E) can't be computed.
27. 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.
E) Choosing to skip class and hang out.
28. Economic profits are

A) the same as accounting profits.
B) equal to total revenue minus the sum of fixed and variable costs.
C) equal to total revenue minus both explicit and implicit costs.
D) greater than accounting profits.
E) only important to economists.
29. 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) they are greedy and spoiled.
D) if their current team does not pay, they can take their unique talents to another team willing to pay.
E) their opportunity costs of playing are high.
30. Economic rent

A) is always positive.
B) is driven towards zero.
C) can never be zero.
D) can never be negative.
E) can be positive, zero, or negative.
31. Suppose the government grants grain subsidies to poor farmers to raise farm family incomes. Overtime,
A) poor farm families are made permanently better off.
B) as the profits of farming increase, new farmers will emerge from other sectors and drive down the recent profits
to zero.
C) as new farmers enter, government will lessen the size of the subsidy.
D) the quality of grains will fall.
E) the quality of grains will rise.
32. To calculate accounting profits, one takes the difference between

A) total revenues and explicit costs.
B) total revenues and fixed costs.
C) implicit total revenues and the sum of fixed and variable costs.
D) total revenues and the sum of fixed and variable costs.
E) total revenues and the sum of explicit and implicit costs.
33. In regulated markets, the invisible hand

A) is irrelevant.
B) will guide resources on some basis other than the price that is regulated.
C) serves to allocate resources on the basis of price as in unregulated markets.
D) becomes truly invisible.
E) may or may not influence the market outcome.
34. In general, failure to use present values when calculating the price of a stock leads to
A) undervalued share prices.
B) overvalued share prices.
C) selling off shares when it would be better to keep them.
D) accurate share prices.
E) possibly over or under valued share prices.

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Quantity Total Revenues Explicit Costs Implicit Costs

10 50 36 5
15 75 63 6
20 100 93 7
25 125 125 8
30 150 161 9
35. The normal profit of producing 10 units of output is

A) $14.
B) $11.
C) $9.
D) $5.
E) $4.
36. The behavior of implicit costs suggest they are

A) fixed.
B) small.
C) variable.
D) large.
E) non linear.
37. An accountant would put the total cost of producing 15 units of output at
A) $36.
B) $63.
C) $93.
D) $125.
E) $161.
38. From the table, it is clear that

A) accounting for opportunity costs increases profitability.
B) if accounting profits are positive, economic profits will also be positive.
C) if economic profits are negative, accounting profits will also be negative.
D) if accounting profits are zero, economic profits must be negative.
E) if accounting profits are positive, economic profits will be negative.
39. At what output level or levels are the business owners doing 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.
E) 10, 15, 20, 25, and 30 units.
40. That price directs resources across different sectors of the economy is the ______ function of price.
A) allocative
B) store of value
C) rationing
D) transitivity
E) associative
41. The correct definition of economic profits is

A) total revenues minus explicit and implicit costs.
B) total revenues minus implicit costs.
C) total revenues minus fixed and variable costs.
D) accounting profits plus implicit costs.
E) total revenues minus accounting profits.
42. 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) what a landlord receives from his tenants.
D) the difference between the payment made to the supplier of an input and the supplier's reservation price.
E) the same as the input supplier's reservation price.
43. Assume all firms in a particular perfectly competitive industry are earning economic profits. This will cause firms to

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______ the industry, which will continue until ______.

A) exit; economic losses occur.
B) enter; economic profits are zero.
C) enter; accounting profits are zero.
D) exit; economic profits are zero.
E) enter; economic profits are negative.
44. 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) their firm will lower price to drive the rest of the industry out of business.
E) the firm will not implement the new method fearing a price war with the rest of the industry.
45. The Smart for One, Dumb for All principle indicates that
A) pursuing selfish interests always promotes social welfare.
B) smart individuals will profit at the expense of dumb ones.
C) pursuing selfish interests always lessens social welfare.
D) pursuing selfish interests sometimes conflicts with social welfare.
E) if everyone is doing it, you should not.
46. In a perfectly competitive industry, the firm's only path to increased profitability is to
A) change price.
B) advertise more.
C) reduce production costs.
D) exit the industry.
E) increase revenues.
47. Payments to an input above the supplier's reservation price is termed

A) economic rent.
B) economic profit.
C) accounting rent.
D) implicit rent.
E) input surplus.
48. 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.
E) determine accounting profits but not economic profits
49. The efficient-market hypothesis indicates the stock price of

A) well managed companies will rise faster than the average.
B) poorly managed companies will rise more slowly than the average.
C) well managed companies will not necessarily rise faster than poorly managed companies.
D) well managed companies must rise faster than poorly managed companies.
E) poorly managed companies are usually undervalued.
50. Which of the following would not have been predicted to occur upon deregulation of the airline industry?
A) The number of flights from city A to city B offered by a particular airline would fall.
B) Airfares would fall.
C) Accident rates would soar.
D) Airline meals would be less elaborate.
E) The number of airlines would increase.
51. The idea of free entry and exit suggests that queues (waiting in line) at banks should be
A) of unequal length.
B) segregated by type of transaction (withdrawal, deposit, etc. . .).
C) of approximately equal length.
D) segregated by type of account (checking, savings, etc. . .).
E) of equal height.
52. According to the textbook, when airlines were regulated with respect to airfares, they competed with each other on
the basis of

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A) price.
B) safety record.
C) holiday travel discounts.
D) number of flights to and from a particular city.
E) frequent flyer miles.
53. Suppose an economics' professor offers the following deal before his next to last exam: The highest score on the
exam will receive an A in the course, regardless of their current average and they will be excused from taking the
final. The result of this proposal is
A) students will not change their behavior.
B) students under allocate study time for the next to last exam.
C) students will pay less attention in class.
D) students will over allocate study time for the next to last exam.
E) student challenges to know how the exam was graded will decline.
54. The present value of $13,000 paid three years from today with an interest rate of 5% is
A) $13,000.
B) $11,230.
C) $8,667.
D) $4,127.
E) $3,852.
55. If all firms in a perfectly competitive industry are experiencing economic losses, then firms will
A) enter the industry, seeking new opportunities.
B) exit the industry, stopping when accounting profits equal zero.
C) continue in the industry, hoping for better times.
D) exit the industry, stopping when economic profits equal zero.
E) exit the industry, stopping when economic profits are positive.
56. If all firms in a perfectly competitive industry earn a normal profit, then
A) new firms will enter the industry.
B) old firms will exit the industry.
C) the number of firms in the industry is stable.
D) market supply will shift to the left.
E) market supply will shift to the right.
Suppose the city of Austin, TX chooses to regulate the number of street vendors operating on "the Drag," near the University of
Texas. Prior to regulation, the costs (including implicit costs) of operating was $85,000 and revenues were $150,000. The city
ordinance allows the permits to be bought and sold without restriction and permits were issued to all current vendors. The
interest rate is 10 percent.
57. Max, one of the current street vendors, has gone from earning an economic profit to earning a normal profit because
A) fewer people come to shop.
B) his explicit costs have risen by $65,000.
C) his revenues have fallen by $65,000.
D) his implicit costs have risen by $65,000.
E) his implicit costs have risen by $650,000.
58. Prior to the option of the ordinance, street vendors were earning
A) economic profits of zero.
B) accounting profits of $65,000.
C) a normal profit.
D) economic losses.
E) economic profits of $65,000.
59. If the regulation requiring permits had not been passed, one could predict
A) entry would have driven economic profits to zero.
B) street congestion would have fallen.
C) exit would have driven economic profits higher.
D) entry would have driven accounting profits to zero.
E) street congestion would have remained constant.
60. After regulation, street vendors earn

A) accounting profit of zero.

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B) economic profit.
C) economic rent of $65,000.
D) economic loss.
E) amount in excess of a normal profit.
61. Suppose the interest rate falls from 10% to 9%. The price of a permit is now
A) $6.5 million.
B) $722,222.
C) $650,000.
D) $65,000.
E) $58,500.
62. After the permits are issues and required,

A) no one will express interest in purchasing a permit.
B) nothing changes because the number of permits equals the previous number of vendors.
C) a market for the permits will rapidly develop.
D) a market for the permits will not develop.
E) street congestion will improve.
63. When the interest rate rises, the calculated price of a share of company stock
A) rises.
B) remains unchanged.
C) should not change but speculation by investors tends to drive it up.
D) falls.
E) rises or falls, depending on investor confidence.
64. If economic profits are negative but accounting profits are positive, then
A) accounting profits are less than implicit costs.
B) total revenues are greater than the sum of explicit and implicit costs.
C) explicit costs exceed total revenues.
D) normal profits are zero.
E) explicit costs equal implicit costs.
65. The No Cash on the Table principle means unexploited opportunities

A) never exist.
B) never exist in equilibrium.
C) always exist.
D) always exist in equilibrium.
E) can exist in equilibrium but rarely do.
66. Suppose all firms in a perfectly competitive industry are experiencing economic profits. One can hypothesize that
A) market price will fall.
B) market supply will decrease.
C) market demand will increase.
D) the number of firms will not change.
E) market demand will decrease.
67. The costs of inputs supplied to the firm by the owners of the firm are
A) fixed costs.
B) explicit costs.
C) variable costs.
D) implicit costs.
E) economist costs.
68. Suppose that AMD announces that yields and sales of Athlon microprocessors were much better than expected. The
efficient-markets hypothesis suggests
A) the price of a share of AMD stock will rise but very slowly.
B) that this information had already been incorporated into AMD's stock price.
C) the price of AMD stock would rise quickly as investors try to profit.
D) the price of Intel stock would be unchanged.
E) the stock price of companies using Athlon in their pc's would be unchanged.
69. Barriers to entry

A) will be established by firms earning economic losses.
B) are forces that limit new firms from joining an industry.
C) have little impact on the ability of the invisible hand to allocate resources efficiently.

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D) are always illegal.

E) are uncommon today due to antitrust enforcement.
70. The ability of the invisible hand to allocate resources efficiently is

A) improved by the existence of barriers to entry.
B) rarely observed in practice.
C) undamaged by the existence of barriers to entry.
D) a fiction of the economist's mind.
E) severely reduced by the presence of barriers to entry.
71. The price of one share of a company's stock is

A) current accounting profits divided by the number of shares.
B) driven by speculation, not economic reality.
C) dependent on the company's current and future accounting profits and the interest rate.
D) determined by the latest remarks of Alan Greenspan.
E) current and future accounting profits divided by the number of shares
72. If buyers and sellers were 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) poor consumers service.
E) an efficient allocation of resources.
73. If a single firm, belonging to a perfectly competitive industry in long run equilibrium, discovers a significant cost
saving methodology, then the
A) firm will enjoy economic profits forever.
B) rest of the industry will be force to exit, resulting in a monopoly.
C) firm will enjoy economic profits for a short period of time.
D) rest of the industry will experience economic losses.
E) rest of the industry will refuse to adopt the new methodology.
74. For entry into a particular perfectly competitive industry to occur, which of the following must be true?
A) Economic profits > Accounting profits > 0.
B) Accounting profits > Economic profits > 0.
C) Accounting profits > 0 > Economic profits.
D) Accounting profits > Economic profits = 0.
E) Accounting profits = Economic profits = 0.
75. Publicly held corporations commonly

A) distribute all their accounting profits to stockholders.
B) reinvest current accounting profits to enlarge future accounting profits.
C) ignore the interests of stockholders.
D) try to buy up all outstanding shares of stock.
E) are worth less than privately held corporations.
76. Economic losses are

A) very common.
B) less important than accounting losses.
C) encountered when total revenues minus explicit costs is negative.
D) a signal that reallocation of resources out of the industry needs to occur.
E) present if firms just earn a normal profit.
77. Suppose a Ph.D. mathematician from MIT discovers "the formula" for picking stocks, using well known statistical
models and publicly available data. One can predict that
A) he will become the wealthiest man in the world.
B) he will always outperform the market.
C) other investors will ignore his behavior.
D) as his success becomes well known, other investors will mimic his choices and thereby drive his return down.
E) he can sustain his success forever.
78. If government began to set a relatively high price for personal computers based solely on the speed of the processor,
(i.e., all 500 Mhz PC's would sell for the same price) one could predict
A) consumers would be better off.
B) PC manufacturers would soon start offering extras (more RAM, bigger hard disks).

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C) PC manufacturers would earn sustained economic profits.

D) entry would occur.
E) exit would occur.
79. Normal profits occur when

A) accounting profits are positive.
B) economic profits are positive.
C) accounting profits are positive and economic profits are negative.
D) economic profits are zero.
E) total revenues are greater than explicit and implicit costs.
80. If accounting profits are positive, then

A) economic profits are also positive.
B) economic profits are either zero or positive.
C) the firm is receiving a normal profit.
D) economic profits can be negative, zero, or positive.
E) new firms must be entering the industry.
81. The enormous growth in the number of Internet based companies in 1998 and 1999 reflects
A) the greed among Gen-Xers.
B) an optimism that is unwarranted.
C) a waste of talent.
D) the "hipness" of being in e-commerce.
E) a movement to resources in search of economic profits.
82. When either the costs of production or the benefits of consumption to individuals differ from those of society,
A) government regulation is the only solution.
B) the equilibrium is still efficient.
C) the allocation of resources remains correct.
D) the invisible had had completely failed.
E) the equilibrium is not efficient.
83. The efficient-markets hypothesis states that

A) all markets produce an efficient outcome.
B) production is always technically efficient.
C) all relevant information about a company's current and future earnings prospects is embodied in its stock price.
D) most of the relevant information about a company's current and future earnings prospects is embodied in its
stock price.
E) it is efficient to buy low and sell high.
84. If owners of a business are receiving total revenues sufficient to cover all their explicit and implicit costs, they are
A) earning economic profits.
B) enjoying a normal profit.
C) earning economic losses.
D) doing better than their next best alternative.
E) doing worse than their next best alternative.
85. Smith is a corn farmer earning economic profits and Wesson is a wheat farmer receiving a normal profit. Wesson
has an incentive to become a corn farmer because
A) his accounting profits are negative.
B) he is not currently covering his opportunity costs.
C) he could earn more than his next best alternative.
D) his accounting profits are zero.
E) it is easy to switch from wheat to corn production.
86. For exit from a particular industry to occur, which of the following must be true?
A) Accounting profits < Economic profits < 0.
B) Economic profits < Accounting profits < 0.
C) 0 < Economic profits < Accounting profits.
D) Economic profits < 0 < Accounting profits.
E) Economic profits < 0.
87. In regulated markets,

A) efficiency is easily achieved.
B) the invisible had has no role.
C) market outcomes are equitable.

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D) the invisible hand continues to influence resource allocation.

E) the interests of consumers are always protected.
88. Suppose all firms in a perfectly competitive industry are experiencing economic losses to varying degrees. One can
predict that
A) market price will fall.
B) market supply will increases.
C) market demand will decrease.
D) market supply will decrease.
E) the number of firms remain the same.
Suppose e-mu, an Internet company, will post accounting profits of $750,000 one year from today and $1.5 million two years
hence. The interest rate is 8 percent, inflation will be zero for the next two years and 50,000 shares have been issued. Tim
and Joe are trying to calculate the price of a share of e-mu stock. Joe argues that since inflation is zero and e-mu's profits are
certain, the time value of money concept is irrelevant. Tim argues that the time value of money concept is still relevant because
consumption today is always preferred to consumption tomorrow.
89. Suppose that Tim and Joe believe their respective calculations of the share price of e-mu to be correct. The ticker
tape scrolling across Tim's computer screen shows e-mu is currently at $502. As a result
A) Joe buys but Tim passes.
B) Joe passes but Tim buys.
C) both buy.
D) both pass.
E) Tim wonders why the stock is so undervalued.
90. Joe calculates the share price of e-mu to be

A) $42.
B) $45.
C) $187.50.
D) $375.
E) $562.50.
91. Suppose that Tim and Joe believe their respective calculations of the share price of e-mu to be correct. The ticker
tape scrolling across Tim's computer screen shows e-mu is currently at $456. As a result
A) Joe buys but Tim passes.
B) Joe passes but Tim buys.
C) both buy.
D) both pass.
E) Joe waits to see if it will go lower.
92. By ignoring the time value of money concept,

A) Joe has correctly identified the price of e-mu shares.
B) Tim can profit b purchasing shares of e-mu from Joe for his price.
C) Joe has undervalued the price of e-mu shares.
D) Tim can profit by selling shares of e-mu to Joe for slightly less than Joe's calculated price.
E) Joe proves he is an excellent candidate for managing a stock portfolio.
93. Tim calculates the share price of e-mu to be

A) $37.67.
B) $39.61.
C) $42.78.
D) $495.
E) $521.
94. It is always true that

A) accounting profits are positive.
B) economic profits are zero.
C) economic profits exceed accounting profits.
D) economic profits are positive.
E) accounting profits exceed economic profits.
95. If firms are exiting a perfectly competitive industry, this suggests

A) economic profits are zero.
B) accounting profits are zero.

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C) accounting profits are negative.

D) normal profits.
E) economic profits are negative.
96. Barriers to entry are

A) always legal in nature.
B) advantageous to firms but always harm consumers.
C) always economic in nature.
D) advantageous to consumers but always harm firms.
E) constraints, legal, economic, or otherwise that limit the movement of resources.
97. Adam Smith claimed that an efficient allocation of resources was the byproduct of
A) random error.
B) selfish interests of sellers pursuing profit.
C) well intentioned government regulation.
D) selfish interests of buyers pursuing pleasure.
E) the involvement of self interested sellers seeking profits with self interested buyers seeking pleasure.
98. If the present value of $1000 next month is $970.87, the interest rate is
A) impossible to calculate.
B) 1%.
C) 3%.
D) 4%.
E) 5%.
99. The allocative function of price means price

A) guides resources to the same market.
B) allocates Porches to the wealthy.
C) guides resource across different sectors of the economy.
D) ensures that sometimes those who value the good the most are able to acquire it.
E) allocates low quality goods and services to the poor.
100. Efforts to raise the incomes of those in a particular industry fail because of
A) poor management of the program.
B) cheating and corruption.
C) a lack of motivation among the workers.
D) the invisible hand moving workers out of other industries and into the government supported one.
E) unwise purchasing decisions by the workers.

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1. D
2. B
3. B
4. B
5. C
6. D
7. C
8. B
9. B
10. C
11. E
12. B
13. B
14. D
15. B
16. D
17. E
18. C
19. A
20. C
21. E
22. E
23. B
24. C
25. D
26. D
27. B
28. C
29. D
30. D
31. B
32. A
33. B
34. B
35. D
36. C
37. B
38. D
39. B
40. A
41. A
42. D
43. B
44. B
45. D
46. C
47. A
48. C
49. C
50. C
51. C
52. D
53. D
54. B
55. D
56. C
57. D
58. E
59. A
60. C
61. B
62. C
63. D
64. A
65. B
66. A
67. D
68. C
69. B
70. E
71. C
72. E
73. C

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74. B
75. B
76. D
77. D
78. B
79. D
80. D
81. E
82. E
83. C
84. B
85. C
86. E
87. D
88. D
89. A
90. E
91. C
92. D
93. D
94. E
95. E
96. E
97. E
98. C
99. C
100. D

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1. Industries with large fixed costs and small, constant marginal costs will, overtime,
A) have more and more small firms.
B) see one or a few large firms emerge.
C) see no change in the average size of firms.
D) see no change in the average number of firms.
E) see the size of their market decline.
2. Constant returns to scale occur when a doubling of all inputs

A) doubles the price of outputs.
B) more than doubles output.
C) less than doubles the price of the inputs.
D) exactly doubles output.
E) less than doubles output.
3. Suppose a firm increases its labor usage and office space (the only inputs used) by 10% and observes a 13%
increase in output. If the price of both labor and office space remain constant, then
A) constant returns to scale are present.
B) average costs have fallen.
C) total costs have fallen.
D) average costs are unchanged.
E) average costs could be higher or lower.
4. For all firms, the extra revenue collected from the sale of one extra unit of output is
A) price.
B) average revenue.
C) marginal profit.
D) marginal revenue.
E) marginal price.
5. The monopolist's profit maximizing price is $25 and his marginal costs are $13. Consumers exist with reservation
prices between $24 and $13. The monopolist is
A) uninterested in the desires of these consumers.
B) unwilling to sell to these consumers under any circumstance.
C) willing to sell to these consumers at less than $25 if his original customers continue to pay $25.
D) willing to lower the price to everyone.
E) worse off he charges lower prices to these consumers while maintaining the higher price to the original
consumers.
6. A monopolist calculates her marginal revenues to be $15 and her marginal costs to be $16. One can infer that she
A) is loss minimizing.
B) should expand output.
C) is profits maximizing.
D) should contract output.
E) should raise her price.
7. If a monopolist's demand curve is P=55-5*Q, the marginal revenue of the fourth unit of output is
A) $50.
B) $35.
C) $15.
D) $5.
E) can't be calculated.
8. If the monopolist's marginal revenue curve is MR=30-6*Q, the marginal revenue of the third unit of output is
A) $6.
B) $12.
C) $18.
D) $30.
E) can't be calculated.
9. Suppose a monopolist is considering two different pricing schemes: offering the good $100 per unit with a $10 rebate
coupon or just charging a flat $90. His economic consultant would advise him to
A) charge the $90 price.
B) charge the $100 price and "misplace" most of the rebate coupons.
C) charge the $100 price because less than 100% of the buyers will mail in the rebate.
D) do either, the impact will be the same.
E) charge the $90 price because most consumers ignore rebate offers.

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10. The price elasticity of demand for an imperfectly competitive firm is

A) infinity.
B) greater than zero and less than infinity.
C) zero.
D) greater than zero and less than one.
E) greater than one.
11. Patents and copyrights, which confer market power, exist to

A) protect the consumer from imitations.
B) ensure excessive profits to the holders.
C) protect research and development and creative expression.
D) reduce competition in all sectors of the economy.
E) magnify the dominance of large firms.
12. A total cost function of the form TC = a + b*Q with (a,b) > 0, best describes a firm that has
A) small fixed costs and increasing marginal costs.
B) significant fixed costs and increasing marginal costs.
C) small fixed costs and decreasing marginal costs.
D) significant fixed costs and small constant marginal costs.
E) significant fixed costs and decreasing marginal costs.
13. Both the perfectly competitive firm and the monopolist find that
A) price and marginal revenue are the same.
B) they can sell all they want to at the market price.
C) it is best to expand production until the benefits and costs of the last unit produced are equal.
D) price is less than marginal revenue.
E) demand is less than perfectly elastic.
14. A firm that exercises some control over the price it charges is termed a(n)
A) perfect competitor.
B) perfect non-competitor.
C) monopsonist.
D) polyopoloist.
E) imperfect competitor.
15. Market power measures the firm's ability to

A) under cut its competitors.
B) resist union wage demands.
C) raise its price without losing its sales.
D) influence the price its competitors charge.
E) force consumers to pay higher prices.
16. Suppose monopolist M charges a uniform price of $10 based on profit maximization and has constant marginal costs
of $3. Beth is willing to pay $6 for the monopolist's output. Therefore,
A) the monopolist should lower his price to $6 for all consumers.
B) the monopolist should ignore Beth's want; he is already profit maximizing.
C) if resale of the output is impossible, the monopolist should lower his price to $6 just for Beth.
D) if resale of the output is possible, he should lower his price to $6 just for Beth.
E) the monopolist will not be better off if he lowers his price to $6 just for Beth.
17. An imperfectly competitive firm is one

A) that attempts but fails to compete perfectly.
B) with complete control over how much it produces.
C) with the ability to set price at any level it wishes.
D) that possesses some degree of control over its price.
E) that faces perfectly inelastic demand.
18. If a firm collects $100 in revenues when it sells 5 units and $120 when it sells 6 units, one can infer the firm is
A) a perfect competitor.
B) probably a monopolist.
C) either a perfect competitor or a monopolist.
D) a monopolist.
E) a oligopolist.
19. The correct sequence of market structures from most to least competitive is

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A) pure monopoly, oligopoly, perfect competition, monopolistic competition.

B) oligopoly, pure monopoly, perfect competition, imperfect competition.
C) perfect competition, monopolistic competition, oligopoly, pure monopoly.
D) perfect competition, imperfect competition, pure monopoly.
E) perfect competition, monopolistic competition, pure monopoly, oligopoly.
20. If the monopolist's demand curve is P=70-14*Q, then the slope of her marginal revenue curve is
A) -28.
B) -14.
C) -7.
D) -1.
E) insufficient information is provided to determine the slope.
21. Suppose a firm increases its labor usage and office space (the only inputs used) by 10% and observes a 13%
increase in output. The firm has
A) increasing returns to scale.
B) constant returns to scale.
C) violated the law of diminishing marginal returns.
D) increased its average costs.
E) reduced its total costs.
22. If the market price is $7 and a perfect competitor increases output from 150 units to 200 units, he will collect
__________ additional dollars in revenue.
A) $7
B) $50
C) $350
D) $1,050
E) $1,400
Output Price Marginal Costs

1 $10 $6
2 $9 $6
3 $8 $6
4 $7 $6
5 $6 $6
6 $5 $6
7 $4 $6
8 $3 $6
23. The deadweight loss due to monopoly in the market stems from the fact that
A) this monopolist will earn a large profit.
B) the value of units 4 and 5 exceed or equal the cost of producing them.
C) the cost of producing units 4 and 5 exceed their value.
D) monopolist's price is "too high."
E) the monopolist's output is "too large."
24. The marginal revenue of the fifth unit of output is

A) 0.
B) $2.
C) $4.
D) $6.
E) $8.
25. The exact value of the deadweight loss due to monopoly is

A) $8.
B) $6.
C) $4.
D) $2.
E) insufficient information to calculate.
26. The profit maximizing monopolist will produce where __________, which in this example means the price, quantity
combination __________.
A) P=MC; $8 & 3 units

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B) MR=MC; $6 & 5 units

C) P=MR; $7 & 4 units
D) MR=MC; $8 & 3 units
E) P=MC; $6 & 5 units
27. Suppose a firm is collecting $100 in total revenues when it sells 10 units and it receives $110 in total revenues when
it sells 11 units. The firm is a(n)
A) pure monopolist.
B) oligopolist.
C) monopolistic competitor.
D) monopsonist.
E) perfect competitor.
28. If a monopolist finds that her marginal revenue exceeds her marginal costs at the current level of output, she should
A) do nothing; she has maximized profits.
B) contract production until the difference between marginal revenues and marginal costs is larger.
C) expand output until marginal revenue equals marginal costs.
D) expand output until price equals marginal costs.
E) raise her price.
29. When a monopolist sells additional units,

A) total revenues always rise.
B) marginal revenues are constant.
C) total revenues always fall.
D) marginal revenues rise.
E) total revenues may rise, fall, or remain unchanged.
30. A monopolist sets its price at $100 and offers a 10% rebate. For this to be a perfect hurdle, it must be the case that
A) everyone takes advantage of the rebate.
B) those with a reservation price of $90 don't make a purchase.
C) no one takes advantage of the rebate.
D) those with a reservation price of $100 make the purchase and claim the rebate.
E) those with a reservation price of $100 or more purchase and ignore the rebate while those with a reservation
price between $99 and $90 purchase and use the rebate.
31. If a firm collects $100 in revenues when it sells 5 units and $114 when it sells 6 units, one can infer the firm is
A) a perfect competitor.
B) probably a perfect competitor.
C) either a perfect competitor or a monopolist.
D) a monopolist.
E) unknown; insufficient information.
Figure 9.2

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32. A perfectly competitive equilibrium would have resulted in a price equal to the distance __________ and a quantity
equal to the distance __________.
A) 0B; 0A
B) 0G; 0H
C) 0C; BK
D) 0J; CE
E) 0G; AH
33. The distance representing the profit maximizing level of output to the monopolist is
A) 0H.
B) GI.
C) 0B.
D) 0A.
E) 0C.
34. The distance representing the profit maximizing price to the monopolist is
A) 0H.
B) GI.
C) 0B.
D) 0A.
E) 0C.
35. At the point of monopoly profit maximization, consumer surplus is represented by the area
A) CJE.
B) GJI.
C) BJEK.
D) BCEK.
E) GCEI.
36. A consumer has a reservation price of $90 for a blender. If the local store is offering the blender for $100 with a $10
rebate and he does not make the purchase, one can surmise
A) his reservation price was too high.
B) his reservation price was too low.
C) in this case, the hurdle failed to work.
D) the hurdle was too low.
E) the hurdle was too high.
37. If the monopolist's demand curve is P=90-3*Q, then the price at which marginal revenues are zero is
A) $90.
B) $45.
C) $30.
D) $15.
E) $3.
38. Which of the following statements is false?

A) To sell more, a price setter must lower price.
B) A price taker must charge the market price.
C) If a price setter raises price, they will sell less.
D) A price taker's revenues will rise if they sell more.
E) Price setters can sell any quantity at any price.
39. Of the sources of market power, the most common and enduring is
A) a patent.
B) a copyright.
C) exclusive ownership of an input.
D) a government franchise.
E) economies of scale.
40. A firm that emerges as the only seller in an industry with economies of scale is termed a(n)
A) monopoly.
B) oligopoly.
C) monopsony.
D) natural oligopoly.
E) natural monopoly.

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Figure 9.1
41. The gain in revenues to the monopolist as he moves from Q1 output to Q2 is represented by the area
A) E.
B) D.
C) C.
D) B.
E) A.
42. The monopolist will see his total revenues rise if

A) A is greater than E.
B) A is less than E.
C) B is greater than E.
D) C is greater than A.
E) A equals E.
43. If both the perfectly competitive firm and the monopolist expand production form Q1 to Q2, their respective total
revenues are __________ and __________.
A) A+B+C+E; A+B+C+E
B) A+B+C+D+E; B+E
C) C+D+E; C+E
D) A+B+E; C+D+E
E) A+B+C+E; B+E
44. The loss in revenues to the monopolist as he moves from Q1 output to Q2 is represented by the area
A) E.
B) D.
C) C.
D) B.
E) A.
45. An oligopolist is a firm which finds it is

A) the only supplier
B) the only supplier of a good with no close substitutes.
C) one of many suppliers of a good with perfect substitutes.
D) one of a few firms.
E) one of a few firms that produce close substitutes.
46. Which of the following statements about perfect price discrimination is false?
A) Perfect price discrimination will lessen losses or raise profits for the monopolist.
B) Buyers pay their reservation price for the good.
C) Total economic surplus is maximized.
D) Practicing perfect price discrimination means the monopolist is no longer setting marginal revenue equal to
marginal costs.
E) Consumer surplus is zero.
47. Compared to charging a single price to everyone, perfect price discrimination makes

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A) the monopolist better off and consumers worse off.

B) society worse off.
C) the monopolist worse off and consumers better off.
D) the monopolist and consumers better off.
E) the monopolist and consumers worse off.
Output Price Total Revenue

1 $10 $10
2 $9 $18
3 $8 $24
4 $7 $28
5 $6 $30
6 $5 $30
7 $4 $28
48. When the firm lowers price from $8 to $7, marginal revenue is less than $7 because
A) marginal cost is greater than $3.
B) the consumer only pays $4 for the fourth unit.
C) the firm is charging $1 less for each of the first three units of output.
D) demand is perfectly elastic.
E) the firm only collects $4 for the fourth unit.
49. Any hurdle method of price discrimination is an attempt to

A) separate consumers on the basis of their reservation prices.
B) inconvenience all consumers.
C) separate consumers on the basis of their incomes.
D) encourage consumers with high reservation prices to make a purchase they were not going to make.
E) encourage consumers with low reservation prices to refrain from buying.
50. When a perfect competitor sells additional units,

A) total revenues always rise.
B) marginal revenues fall.
C) total revenues always fall.
D) total revenues remain unchanged.
E) total revenues may rise or fall.
51. The profit maximizing rule MR=MC applies to

A) all firms.
B) monopolists only.
C) perfect competitors only.
D) monopolistic competitors only.
E) both pure monopolists and perfect competitors.
52. Discounts extended to children and senior citizens by movie theaters are examples of
A) perfect price discrimination.
B) uniform pricing.
C) discrimination.
D) imperfect price discrimination.
E) fair and reasonable pricing policies.
53. The primary objective of a monopolist is to

A) charge the highest possible price.
B) maximize total revenues.
C) minimize total costs.
D) maximize profits.
E) maximize the deadweight loss to society.
54. A price setter finds that it has

A) to accept the price the market sets.
B) some control over the price it charges.
C) the ability to set the price wherever it wants.
D) the ability to always earn an economic profit.
E) few competitors.

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Quantity Price Marginal Costs Total Costs

0 $20 $1
1 $17 $2 $3
2 $14 $2 $5
3 $11 $2 $7
4 $8 $2 $9
5 $5 $2 $11
6 $2 $2 $13
55. Comparing the nonprice discriminating monopoly outcome to the perfectly price discriminating monopoly outcome,
profits are
A) the same.
B) less when price discriminating.
C) greater when price discriminating.
D) greater when changing a uniform price.
E) either higher of lower; one can't generalize.
56. When the perfectly price discriminating monopolist profit maximizes, consumer surplus is
A) 0.
B) maximized.
C) $9.
D) $45.
E) $36.
57. At the point of profit maximization, a perfectly price discriminating monopolist would collect total revenues of
A) $17.
B) $33.
C) $42.
D) $55.
E) $57.
58. When the nonprice discriminating monopolist profit maximizes, consumer surplus is
A) 0.
B) $1.
C) $3.
D) $9.
E) $13.50.
59. Assuming the monopolist does not price discriminate, he will produce __________ units and charge a price of
__________.
A) 1; $17
B) 2; $14
C) 3; $11
D) 4; $5
E) 6; $2
60. At the point of profit maximization, a perfectly price discriminating monopolist would earn a profit of
A) $26.
B) $35.
C) $41.
D) $44.
E) $67.
61. A perfectly price discriminating monopolist would produce __________ units.

A) 1
B) 3
C) 4
D) 5
E) 6
62. If the monopolist were able to perfectly price discriminate, he would charge __________ for the first unit and

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__________ for the fifth unit.

A) $5; $5
B) $17; $5
C) $5; $17
D) $15; $3
E) $17; $17
63. When a consumer must take some sort of additional action to receive a lower price, the consumer is being subjected
to
A) the what-a-hassle method of price discrimination.
B) perfect price discrimination.
C) the hurdle method of price discrimination.
D) the rebate and wait method of price discrimination.
E) the long jump method of price discrimination.
64. Given the total cost function, TC=531+14*Q, marginal costs are
A) $531/Q.
B) $14/Q.
C) $531.
D) $14.
E) impossible to calculate with information provided.
65. An industry that features a few firms which produce close substitutes is termed
A) pure monopoly.
B) imperfect monopoly.
C) monopolistic competition.
D) oligopoly.
E) competitive monopoly.
66. Suppose monopolist N produces good X. He sells one version of X to consumers and another version to businesses.
The marginal cost of the consumer version is $5 per unit while the business version has marginal costs of $5.75.
One can infer that
A) the monopolist will charge two different prices and is not practicing price discrimination.
B) the monopolist will charge one uniform price to both consumers and businesses.
C) the monopolist will charge two different prices and is perfectly price discriminating.
D) the monopolist will charge two different prices and is imperfectly price discriminating.
E) businesses will try to sell their units to consumers for a profit.
Figure 9.3
67. At the socially efficient level of output, the monopolist would earn
A) a profit of $100.10.
B) a loss of $100.10.
C) a loss of $50.05.
D) a profit of $50.05.
E) a loss of $61.25.

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68. The firm illustrated in the graph is a(n)

A) oligopolist.
B) monopolistic competitor.
C) perfect competitor.
D) natural monopolist.
E) insufficient information to classify.
69. To profit maximize, the firm will choose to produce __________ units and charge a price of __________.
A) 3.5; $33.50
B) 7; $19.30
C) 7; $5
D) 3.5; $5
E) 3.5; $22.50
70. Economies of scale exist when

A) constant returns to scale are present.
B) input prices are falling.
C) average costs fall as the scale of production grows.
D) a 10% increase in all inputs causes a 9% increase in output.
E) firms become extremely large.
71. The demand curve to a perfectly competitive firm is __________ while the demand curve to a monopolist is
__________.
A) perfectly elastic; downward sloping
B) vertical; downward sloping
C) perfectly elastic; perfectly inelastic
D) perfectly inelastic; perfectly elastic
E) perfectly elastic; elastic
72. When a firm with constant returns to scale uses 30% more of all inputs and input prices remain unchanged, then
A) total costs rice by less than 30%.
B) average costs fall by 30%.
C) total costs rise by more than 30%.
D) average costs remain unchanged.
E) average costs rise by 30%.
73. A consumer goes to purchase a TV advertised for $300. As he is checking out, the clerk informs him of a $20 rebate
offer for the TV, which he fills out and receives in 3 months. One can infer that the consumer had
A) a reservation price of at least $300 but jumped the hurdle anyway.
B) a reservation price of at most $280.
C) a reservation price of exactly $300.
D) a reservation price of at least $280.
E) obviously not done enough research on the price of the TV.
74. A perfect hurdle is one that

A) more or less separates buyers by their reservation prices.
B) precisely separates buyers by their reservation prices and imposes large costs on those who jump.
C) precisely separates buyers by their reservation prices and imposes no costs on those who jump.
D) precisely separates buyers by their incomes.
E) precisely separates buyers by their willingness to jump.
75. Suppose a monopolist is charging $12 for output. One can infer that
A) marginal revenues are greater than $12.
B) average revenues are less than $12.
C) marginal revenues are $12.
D) marginal revenues are less than $12.
E) insufficient information to infer.
76. A monopolistically competitive firm is one

A) that behaves like a monopolist.
B) of many firms that produce slightly different but very similar goods.
C) of many firms that produce goods with no close substitutes.
D) that behaves like a perfect competitor.
E) that is competitive but wants to be a monopolist.

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77. Perfect competition is efficient and monopoly in not because in perfect competition __________ while in monopoly
__________.
A) P=MC; P>MC
B) P<MR; P=MR
C) P=MR; P<MR
D) P=MC; P<MC
E) P=MR; P=MC
78. Which of the following situations will come closest to perfect price discrimination?
A) Charging a different price on different days.
B) Charging a different price at the end of the year.
C) Negotiating a price with a group of consumers.
D) Negotiating a price with each individual consumer.
E) Offering instant, in store rebates.
79. The reason a monopolist has an incentive to price discriminate is because

A) some consumers who are unwilling to pay the uniform monopoly price, are willing to pay more than the marginal
cost.
B) he can always use his market power to charge different price.
C) his marginal costs will be lower when he price discriminates.
D) it causes demand to become more inelastic.
E) some consumers, who are willing to pay the uniform monopoly price, are unwilling to pay more than the
marginal costs.
80. The nature of the social loss from monopoly is that

A) the marginal costs of the last unit the monopolist produces is greater than the marginal benefit.
B) the marginal benefit of the last unit the monopolist produces is greater than the marginal cost.
C) through the use of his market power, the monopolist can force consumers to pay higher prices.
D) the monopolist produces too much output.
E) the monopolist earns huge profits at the expense of the consumer, who has few alternatives.
81. A price taker __________ and a price setter __________.

A) equates price to marginal revenues; equates price to marginal costs.
B) seeks to maximize revenues; seeks to maximize profits.
C) never earns a profit; always earns a profit.
D) must accept the market price; may charge any price he wants.
E) equates price to marginal revenues; finds that price is greater than marginal revenue.
82. The common feature in pure monopoly, oligopoly, and monopolistic competition is
A) the absence of close substitutes.
B) blocked entry.
C) interdependent decision making by firms.
D) price discrimination.
E) downward sloping demand.
83. A firm has production function of Q=L*K, where L is labor and K is capital. If L and K can take whole values (i.e., 1.,
2, 3), then the firm has
A) increasing returns to scale.
B) constant returns to scale.
C) diseconomies of scale.
D) decreasing returns to scale.
E) rising average total costs.
84. Which of the following statements about perfect price discrimination is false?
A) Consumer surplus is zero.
B) Total economic surplus is maximized.
C) Some consumers are paying less than their reservation price.
D) The monopolist will capture all consumer surplus.
E) The monopolist will always be better off.
85. When marginal revenues are zero,

A) profits are maximized.
B) total costs are minimized.
C) elasticity of demand is zero.
D) total revenues are maximized.
E) total revenues are minimized.

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86. One would expect to see more mail in rebate coupons being offered at
th
A) Sax 5 Avenue.
B) a Rolls Royce Dealership.
C) Wal-Mart or Target.
D) 7-11.
E) businesses along Rodeo Drive in LA.
87. The justification for having a list price and offering a mail in rebate coupon is to
A) separate the market into the less price sensitive and the more price sensitive.
B) discourage all consumers from filling out the rebate form.
C) make the consumer wait 6 months for the 50 cent check.
D) appeal to those consumers who enjoy corresponding with large corporations.
E) appeal to those consumers who dislike corresponding with large corporations.
88. An industry that features many relatively small firms which produce close substitutes is termed
A) pure monopoly.
B) imperfect oligopoly.
C) monopolistic competition.
D) oligopoly.
E) competitive oligopoly.
89. As described in the textbook, price discrimination means charging

A) the same consumers the same price.
B) different prices to different consumers because production costs are different.
C) the same price to all consumers because production costs are different.
D) different prices to different consumers when production costs are the same.
E) higher prices to women and minorities.
90. Suppose monopolist Z has constant marginal costs of $7 and 25 consumers have reservation prices of at least $7.
Under perfect price discrimination, one can infer that there will be
A) at least 25 different prices.
B) 25 different prices.
C) 2 different prices.
D) at most 25 different prices.
E) an indeterminate number of prices.
91. If the monopolist's demand curve is P=50-10*Q, then marginal revenues are zero when Q equals
A) 50 units.
B) 10 units.
C) 5 units.
D) 2.5 units.
E) 0 units.
Firm M Firm N Firm L

Output 150,000 200,000 175,000
Fixed Costs $8,000,000 $9,000,000 $13,000,000
Marginal Costs $100 $105 $110
92. Assume that firm L loses sales of 75,000 units, with 40,000 units going to firm N and 35,000 units going to firm M.
Firm N now has average total costs of
A) $240.
B) $184.
C) $153.
D) $150.
E) $143.
93. According to the data, firm __________ has the lowest average total costs while firm __________ has the highest.
A) M; L
B) M; N
C) N; M
D) N; L

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E) L; N
94. Assume that firm L loses sales of 75,000 units, with 40,000 units going to firm N and 35,000 units going to firm M.
Firm L now has average total costs of
A) $240.
B) $184.
C) $153.
D) $150.
E) $143.
95. If a firm triples all its inputs and output triples as a result, then the firm
A) has increasing returns to scale.
B) has economies of scale.
C) has constant returns to scale.
D) will have lower total costs.
E) will have lower average total costs.
96. The reason a nondiscriminating monopolist chooses to produce where P > MC rather than P=MC and therefore
causes a deadweight loss, is he
A) ensures himself of a profit at P >MC.
B) does not value the sales that don't occur.
C) will not profit maximize at P=MC.
D) prefers to charge a higher price.
E) will experience a loss at P=MC.
97. The monopolist will maximize profits if she produces where

A) price equals marginal costs.
B) price equals the minimum average total cost.
C) marginal revenue equals marginal cost.
D) marginal revenue equals average total cost.
E) elasticity of demand is zero.
98. A single firm producing an item with no close substitutes is termed a(n)
A) pure monopolist.
B) oligopolist.
C) monopolistic competitor.
D) monopsonist.
E) dominant firm.
99. If a monopolist's price is $7 when he sells 150 units of output, then his total revenues will __________ if he sells 200
units.
A) rise
B) fall
C) not change
D) rise, fall, or not change
E) rise or fall.
100. The profit maximizing rule, P = MC, applies to

A) all firms.
B) monopolists only.
C) monopolists and perfect competitors.
D) perfect competitors only.
E) monopolistic competitors only.

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1. B
2. D
3. B
4. D
5. C
6. D
7. C
8. B
9. C
10. B
11. C
12. D
13. C
14. E
15. C
16. C
17. D
18. A
19. C
20. A
21. A
22. C
23. B
24. B
25. D
26. D
27. E
28. C
29. E
30. E
31. D
32. B
33. D
34. E
35. A
36. C
37. B
38. E
39. E
40. E
41. A
42. B
43. B
44. E
45. E
46. D
47. D
48. C
49. A
50. A
51. A
52. D
53. D
54. B
55. C
56. A
57. E
58. E
59. C
60. D
61. E
62. B
63. C
64. D
65. D
66. A
67. B
68. D
69. E
70. C
71. A
72. D
73. A

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74. C
75. D
76. B
77. A
78. D
79. A
80. B
81. E
82. E
83. A
84. C
85. D
86. C
87. A
88. C
89. D
90. D
91. D
92. E
93. D
94. A
95. C
96. C
97. C
98. A
99. D
100. D

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1. According to the textbook, in the game where player A divides a sum of money and then player B accepts or rejects
the division, the most common distribution for A to propose is
A) 99% for A and 1% for B.
B) 1% for A and 99% for B.
C) 50% for A and 50% for B.
D) 60% for A and 40% for B.
E) 80% for A and 20% for B.
The table below show the payoff matrix for players A and B to strategies X and Z.
A
X Z
$300 A $500 A
X $700 B $400 B
B
$200 A $1000 A
Z $300 B $600 B
2. This game has

A) no Nash equilibrium.
B) a Nash equilibrium because both players pick strategy X.
C) a Nash equilibrium because A picks strategy Z and B picks strategy X.
D) a Nash equilibrium because both players have made the best choice available to them.
E) a Nash equilibrium if both players pick strategy Z.
3. Strategy X is
A) dominated for player A.
B) dominated for player B.
C) dominant for both players.
D) dominated for both players.
E) dominate for player B.
4. Player A finds that

A) strategy Z is a dominated strategy.
B) strategy X is a dominant strategy.
C) strategy Z is a dominant strategy.
D) he has no dominant strategy.
E) his best strategy depends on what player B chooses.
5. This game results in player A __________ and player B __________.

A) choosing strategy X; choosing strategy Z.
B) choosing strategy Z; choosing strategy Z.
C) choosing strategy Z; choosing strategy X.
D) choosing strategy X; choosing strategy X.
E) choosing strategy Z; refusing to play the game.
Figure 10.3

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Intel is ready to introduce its new 64 bit microprocessor. In chip manufacturing, as more chips are produced, production yields
rise. Thus, Intel can choose between a below cost pricing strategy (upper branch) to reach the higher yield zone more quickly
or an above cost pricing strategy (lower branch) and move to the higher yield zone more slowly. AMD will introduce its 64 bit
microprocessor 2 months after Intel and face the same upper branches below cost and lower branch above cost. W riting out
the outcomes on the decision tree might prove helpful as you answer the following questions.
6. In the game,
A) Intel is the only player.
B) AMD is the only player.
C) AMD is the first player and Intel is the second player.
D) Intel is first player and AMD is the second player.
E) Intel and AMD play simultaneously.
7. Point X represents
A) AMD choosing to price below cost.
B) Intel choosing to price above cost.
C) Intel choosing to price below cost.
D) AMD choosing between above and below cost pricing.
E) Intel choosing between above and below cost pricing.
8. The key feature that requires the use of game theory to comprehend behavior is
A) profit maximization.
B) limited information.
C) time.
D) utility maximization.
E) interdependency.
9. Mary has just finished eating at an out of town restaurant she knows she will never visit again. The food and service
were excellent. She leaves a 20% tip. Mary's behavior is
A) a psychological solution to a commitment problem.
B) a material solution to a commitment problem.
C) consistent with narrowly defined self interest.
D) quite uncommon.
E) naïve.
10. When players cannot achieve their goals because they are unable to make credible threats or promises, the situation
is called
A) the prisoner's dilemma.
B) a Nash equilibrium.
C) a failure of dominant strategies.
D) a commitment problem.
E) a failure of dominated strategies.
The table below show the payoff matrix for players A and B to strategies X and Z.

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A
X Z
$100 A $50 A
X $75 B $400 B
B
$200 A $150 A
Z $50 B $300 B
11. Player A finds that strategy X is __________ and player B finds that strategy X is __________.
A) dominant; dominated
B) dominated; dominant
C) dominant; dominant
D) dominated; dominated
E) dominate; neither dominant or dominated
12. This game results in which of the following outcomes?

A) A Nash equilibrium with player A choosing strategy Z and player B choosing strategy X.
B) A Nash equilibrium with player A choosing strategy X and B choosing strategy Z.
C) There is no equilibrium with both players choosing strategy Z.
D) A Nash equilibrium with both players choosing strategy Z.
E) A Nash equilibrium with both players choosing strategy X.
Mexico and OPEC both produce crude oil. Realizing that it would be in their best interest to form an agreement on production
goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC stick to the agreement
OPEC will earn profits of $200 million and Mexico will earn profits of $100 million. If both Mexico and OPEC cheat then OPEC
will earn $175 million and Mexico will earn $80 million. If only OPEC cheats, then OPEC earns $185 million and Mexico $60
million. If only Mexico cheats, then Mexico earns $110 million and OPEC $150 million.
OPEC
Cheat Abide
Cheat
Mexico
Abide
13. The strategies in this game are

A) to increase output.
B) to cheat.
C) to stick to the agreement.
D) to either stick to the agreement or cheat.
E) to stick to the agreement and cheat.
14. To OPEC, the payoff to not cheating is

A) $150 million or $200 million.
B) $175 million or $185 million.
C) $185 million.
D) $200 million.
E) $200 million or $185 million.
15. The outcome of this game is

A) unknown.
B) a Nash equilibrium with both Mexico and OPEC cheating.
C) a Nash equilibrium with Mexico cheating and OPEC not cheating.
D) a Nash equilibrium with Mexico not cheating and OPEC cheating.
E) a Nash equilibrium with both Mexico and OPEC not cheating.
16. To Mexico, the payoff to cheating is

A) $60 million.
B) $80 million.
C) $80 million or $110 million.
D) $100 million or $110 million.
E) $110 million.

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17. OPEC finds that it has

A) a dominant strategy of cheating.
B) a dominated strategy of cheating.
C) a dominant strategy of not cheating.
D) a dominated strategy of not cheating.
E) no dominant strategy.
18. Game theory was developed in order to understand

A) how to win more at gambling.
B) why agreement to fix output between firms fail.
C) how the police can get suspects to confess.
D) why the U.S. and the Soviet Union would continue to build more nuclear weapons.
E) how choices affect outcomes when the players are interdependent.
19. A Nash equilibrium must result in

A) both players being made better off.
B) both players being made worse off.
C) one payer being worse off and one being better off.
D) dominate strategies for both players.
E) neither player wishing to change their strategy.
20. The basic source of instability in all cartel agreements stems from
A) the incentive to cheat by the members.
B) legal judgment outlawing the cartel.
C) mergers by the members.
D) members expanding into new industries.
E) inelastic demand for the member's output.
21. Cheating by firms that belong to a cartel is an example of

A) profit maximization.
B) need for stronger antitrust legislation.
C) perfect competition.
D) the prisoner's dilemma.
E) the smart for all, dumb for one principle.
22. In a mostly dishonest world, it would

A) never pay to be honest.
B) always pay to be dishonest.
C) pay to be honest with honest people.
D) pay to be honest with dishonest people.
E) always pay to be honest
The market for bagels in San Marcos, TX contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). For simplicity, assume
the cost of bagel production is zero so that total revenues and profits are identical. The owners of the two firms decide to fix the
price of bagels. The table shows the total revenues the firms will collect if the abide by the price setting agreement or if they
cheat on the agreement.
BagelWorld
Cheat Abide
$40 BW 0 BW
Cheat $40 BRU $80 BRU
Bagels’R
’Us $80 BW $45 BW
Abide 0 BRU $45 BRU
23. Based on the payoff matrix, Bagels 'R' Us finds that __________ is its __________.
A) abiding by the agreement; dominated strategy
B) cheating on the agreement; dominated strategy
C) abiding by the agreement; dominant strategy
D) either cheating or abiding; dominant strategy
E) neither cheating or abiding; dominant strategy

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24. This game is __________ because __________.

A) not a prisoner's dilemma; both firms cheating has the highest payoff
B) a prisoner's dilemma; both firms abiding has the highest payoff
C) a prisoner's dilemma; both firms cheating has the highest payoff
D) not a prisoner's dilemma; neither firm has a dominant strategy
E) not a prisoner's dilemma; neither firm has a dominated strategy
25. The total cost to both firms of playing this game is

A) $80.
B) $45.
C) $40.
D) $10.
E) $5.
26. Given the payoff matrix, this game has __________ with __________.
A) a Nash equilibrium; both firms abiding by the agreement
B) no equilibrium; no prediction about which strategy will be chosen
C) a Nash equilibrium; both firms cheating
D) a Nash equilibrium; Bagel World cheating and Bagels 'R' Us abiding
E) a Nash equilibrium; Bagel World abiding and Bagels 'R' Us cheating
27. Suppose a new element was introduced into the agreement: if one firm cheats today, the other firm will cheat
tomorrow but if both abide today, both will abide tomorrow (this is known as tit-for-tat). The likely effect would be
A) to increase the probability that both firms would cheat.
B) to increase the probability that Bagel World would cheat.
C) to increase the probability that both firms would abide.
D) to increase the probability that Bagels 'R' Us would cheat.
E) to change nothing about the game.
28. The prisoner's dilemma refers to games

A) involving criminals.
B) without dominant strategies.
C) without a Nash equilibrium.
D) with one dominant strategy.
E) where the playing of dominant strategies leads to a less desirable equilibrium.
29. Committing an illegal act and allowing the kidnapper to record it solves the commitment problem because
A) the kidnapper will now consider the victim a member of the crime club.
B) the kidnapper's threat to kill the victim if he goes to the police is now credible.
C) the monetary gain from the crime committed by the victim is greater than the ransom demand.
D) the victim's promise to remain silent is now credible.
E) the victim's threat to pay a bounty for the capture of the kidnapper is now credible.
30. The study of how the choices of one individual affect the choices of others is called
A) monopoly theory.
B) utility maximization.
C) game theory.
D) perfect competition.
E) choice theory.
The table below shows the extra profits firms X and Z will earn from two different strategies A and B.
Firm X
A B
$300 X $100 X
A $300 Z $600 Z
Firm Z
$400 X $200 X
B $500 Z $800 Z
31. Suppose firm Z offered to pay firm X $201 to choose strategy B. Firm X would
A) reject the offer.
B) demand more before agreeing.
C) accept the offer.

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D) reject the offer and pursue strategy B.

E) counter offer to pay firm Z $50 to pick strategy A.
32. Firm X concludes that strategy

A) B is its dominated strategy.
B) A is its dominated strategy.
C) B is its dominant strategy.
D) B and strategy A are both dominant.
E) B and strategy A are both dominated.
33. Suppose all the payoffs to strategies A and B double for both firms. The outcome of the game
A) remains the same.
B) reverses itself.
C) is now a prisoner's dilemma.
D) now suffers from a commitment problem.
E) may or may not change.
34. How much would firm Z have to pay firm X to get it to choose strategy B?
A) 0.
B) $100.
C) $200.
D) $300.
E) $400.
35. The outcome of the game is that

A) both firms choose strategy B.
B) firm X chooses strategy B and firm Z picks A.
C) both firms choose strategy A.
D) firm X picks B and firm Z refuses to play.
E) firm X picks A and firm Z picks B.
36. Strategy B is
A) dominated for firm Z.
B) dominant for firm X.
C) dominated for both firms.
D) dominant for both firms.
E) dominant for firm Z.
37. A cartel is
A) another name for pure monopoly.
B) a coalition of consumers.
C) a highly stable arrangement.
D) a coalition of firms that agree to restrict output in an effort to earn economic profits.
E) an agreement between countries to reduce trade.
38. A dominant strategy occurs when

A) one player has a strategy that yields the highest payoff independent of the other player's choice.
B) both players have a strategy that yields the highest payoff independent of the other's choice.
C) both players make the same choice.
D) the payoff to a strategy depends on the choice made by the other player.
E) each player has a single strategy.
39. In the Scarlet Letter, the punishment for adultery was to always wear a large, red letter "A". This was an example of
A) unenlightened punishment.
B) using public ridicule to solve the commitment problem in marriage.
C) overbearing control by the church.
D) using material incentive to solve the commitment problem in marriage.
E) narrow self interest.
40. A decision tree is used when modeling

A) any type of game.
B) simultaneous decisions.
C) games played once.
D) games in which timing matters.
E) a Nash equilibrium.

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41. An agreement among firms to restrict production with the goal of earning economic profits is a(n)
A) pure monopoly.
B) oligopoly.
C) cartel.
D) duopoly.
E) imperfect competition.
42. The distinguishing feature of a cartel is

A) two firms are involved.
B) firms agree to restrict output to earn economic profit.
C) inelastic consumer demand.
D) a formal, written document.
E) firms agree to restrict membership in the cartel.
43. Juan needs to hire an honest manager to run his new store. Jesus is an honest person and wants the job. To
convince Juan of his honesty, Jesus should
A) repeatedly claim his honest nature.
B) point out other's dishonesty.
C) decry the dishonesty of politicians.
D) behave honestly.
E) associate with dishonest people in order to stand out.
Figure 10.1
In the above decision tree, Matthew picks first and Dean picks second. Matthew knows Dean's payoffs to each choice and
Dean knows Matthew's payoffs.
44. Suppose Dean promises Mathew that he will always select the upper branch of either Y or Z. Dean offers to sign a
legally binding contract that penalizes him if he fails to choose the upper branch of Y or Z. The penalty is $250. The
outcome of the game is
A) Mathew picks Z and Dean pays the fine.
B) Mathew picks Y and Dean does not pay the fine.
C) Mathew picks Z and Dean does not pay the fine.
D) Mathew picks Y and Dean pays the fine.
E) Mathew picks Z and Dean selects the upper branch.
45. The outcome of this game will be

A) Mathew and Dean both get $1,000.
B) Mathew gets $500 and Dean gets $1,500.
C) Mathew gets $1.5 million and Dean gets $1 million.
D) Mathew gets $400 and Dean gets $1.5 million.
E) unpredictable.
46. From the decision tree, one can predict that

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A) Mathew will pick Y.

B) Dean will pick the upper branch of Y.
C) Mathew will pick Z.
D) Dean will pick the lower branch of Z.
E) Mathew does not know whether to pick Y or Z.
47. Suppose Dean indicates to Mathew that he will always select the upper branch of either Y or Z. One would classify
the offer as a
A) credible threat.
B) promise that is not credible.
C) threat that is not credible.
D) credible promise.
E) commitment device.
48. If Mathew did not know Dean's payoffs, i.e., the values for Dean in the decision tree were missing, one could predict
that
A) Mathew would pick Y.
B) Mathew would pick Z.
C) Mathew prefers Y to Z.
D) Mathew prefers Z to Y.
E) Mathew's preference is unknown.
49. The equilibrium to the game results in relatively low payoffs for Dean and Mathew. This is because of a(n)
A) prisoner's dilemma.
B) lack of equilibrium.
C) commitment problem.
D) credible threat.
E) incredible threat.
50. Suppose Dean promises Mathew that he will always select the upper branch of either Y or Z. Dean offers to sign a
legally binding contract that penalizes him if he fails to choose the upper branch of Y or Z. For the contract to make
Dean's promise credible, the value of the penalty must be
A) any positive number.
B) more than $1.5 million.
C) less than $100.
D) more than $500,000.
E) more than $500.
51. When parents encourage their children to be honest and punish them when they are not is an example of
A) child abuse.
B) using material incentives to solve commitment problems.
C) old fashioned parenting.
D) using preferences to solve commitment problems.
E) a Nash equilibrium.
Suppose Jim and Celia, a married couple, are trying to decide what to do on a Friday. Jim would prefer to see Rambo X while
Celia would prefer to see Das Auto, an arty foreign film. Both films are showing at the local Megaplex. The joy they receive
from the films and seeing them together or separately is shown in the payoff matrix. Both Jim and Celia know the information
contained in the payoff matrix. They purchase their ticket simultaneously, ignorant of the other's choice.
Jim
Das Auto Rambo X
3 Jim 1 Jim
Das Auto 5 Celia 1 Celia
Celia
2 Jim 5 Jim
Rambo X 2 Celia 3 Celia
52. Assuming Celia is self interested and believes Jim is as well, after Jim buys his ticket first, Celia will
A) go home.
B) buy a ticket to Das Auto.
C) flip a coin.
D) buy a ticket to Rambo X.
E) still not know which ticket to purchase.

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53. When Jim picks first and chooses Rambo X, the reason Celia also selects Rambo X is because
A) her value of togetherness exceeds her distaste for Rambo X.
B) her value of togetherness is less than her taste for Das Auto.
C) Jim always gets his way.
D) she can just wait and catch Das Auto on cable.
E) Jim will now owe her big time.
54. For Jim, seeing

A) Rambo X is a dominant strategy.
B) movies alone is better.
C) Das Auto is a dominant strategy.
D) movies with Celia is worse.
E) movies alone is worse.
55. Assuming Jim is self interested and knows Celia is as well, one can predict that after Celia buys her ticket first, Jim
will
A) buy a ticket to Rambo X anyway.
B) flip a coin.
C) go home.
D) buy a ticket to Das Auto.
E) still be clueless.
56. Suppose a timing element is added to the game: assume that Jim buys his ticket first. While Celia did not see which
ticket Jim bought, she still know the values in the payoff matrix. Predictably, Jim buys a ticket to see
A) Das Auto.
B) Whichever movie he thinks Celia will select.
C) Rambo X.
D) indeterminate; insufficient information to make a prediction.
E) both movies.
57. This game has __________ potential equilibria.

A) 0.
B) 1.
C) 2.
D) 3.
E) 4.
58. Suppose a timing element is added to the game: assume Celia buys her ticket first. While Jim did not see which
ticket Celia bought, he still knows the values in the payoff matrix. Acting on the basis of self interest, Celia will
A) buy a ticket to both movies.
B) buy a ticket to Das Auto.
C) flip a coin and let fate decide.
D) buy a ticket to Rambo X.
E) go home.
59. By letting either Jim or Celia buy a ticket first, the game is now
A) a prisoner's dilemma.
B) no longer a prisoner's dilemma.
C) unfair.
D) without an equilibrium.
E) an ultimatum bargaining game.
60. Celia finds that

A) she has no dominant strategy.
B) seeing Das Auto is her dominant strategy.
C) seeing movies with Jim makes her worse off.
D) seeing Rambo X is her dominant strategy.
E) seeing Rambo X is her dominated strategy.
61. This game is

A) a prisoner's dilemma.
B) not a prisoner's dilemma.
C) an ultimatum bargaining game.
D) a Nash equilibrium with Jim and Celia seeing Das Auto.
E) a Nash equilibrium with Jim seeing Das Auto and Celia seeing Rambo X.

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62. For a game involving players A and B with strategies X and Z, which of the following is not a requirement for a
prisoner's dilemma?
A) Player A must have a dominant strategy.
B) Player B must have a dominant strategy.
C) The payoff to playing their dominated strategies must be more than the payoff to their dominant strategies.
D) The payoff to playing their dominant strategies must be more than the payoff to their dominated strategies.
E) An Nash equilibrium must exist.
Figure 10.2
63. Peter's best choice is to

A) remain faithful.
B) cheat.
C) cheat and hope Anita remains faithful.
D) remain faithful but fear that Anita will cheat.
E) cheat and assume that Anita will as well.
64. For Anita, it is better to

A) always cheat.
B) cheat if Peter cheats.
C) always remain faithful.
D) cheat if Peter is faithful.
E) remain faithful if Peter cheats.
65. Psychological incentives to commitment problems would work best

A) with complete strangers.
B) when the game is played once and never again.
C) when the game is played once and maybe again.
D) with coworkers.
E) with immediate family members playing the game everyday.
Joe is the owner of the Texaco Mini Mart, Sam is the owner of the Exxon Mini Mart and together they are the only gas stations
in town. At the current price of $1 per gallon both receive total revenues of $1,000. Joe is considering cutting his price to 90
cents, which would increase his total revenue to $1,350. If Sam's price remains $1 after Joe cuts his price, Sam will collect
$500 in revenues. If Sam cuts his price to 90 cents, his total revenues would also rise to $1,350 if Joe continues to charge $1.
Joe will collect $500 in revenues if he keeps his price at $1 while Sam lowers his to 90 cents. Joe and Sam will receive $900
each in total revenue if they both lower their price to 90 cents. You may find it easier to answer the following questions if you fill
in the payoff matrix below.

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66. In this game, the strategies available to Joe are

A) cut price to 90 cents.
B) leave price at $1.
C) cut price to 85 cents.
D) cut price to some extent or leave price at $1.
E) cut price to 90 cents or leave price at $1.
67. The total cost of playing this game to both Joe and Sam is
A) 0.
B) $150.
C) $200.
D) $350.
E) indeterminate.
68. To Joe, leaving his price at $1 is a(n)

A) submissive strategy.
B) dominant strategy.
C) dominated strategy.
D) equilibrium.
E) profit maximization strategy.
69. In this game, the strategies available to Sam are

A) the same as those available to Joe.
B) cut price to 90 cents.
C) leave price at $1.
D) raise price to $1.10.
E) cut price by some amount or leave it unchanged.
70. The player(s) in this game is (are)

A) Joe.
B) Sam.
C) Joe and Sam.
D) Joe, Sam, and the rest of the gas retailer within 15 miles.
E) Joe, Sam, and any potential entrants into the local gasoline market.
71. The clear outcome of this game is that

A) Joe will cut his price and Sam won't.
B) Joe will cut his price and Sam might.
C) Sam will cut his price and Joe won't.
D) both won't cut their price.
E) both will cut price to 90 cents.
72. If both players of a game choose the best strategy available given the other player's strategies, the game is a(n)
A) dominant strategy.
B) dominated strategy.
C) Nash equilibrium.
D) ultimatum equilibrium.
E) Rambler equilibrium
73. According to the textbook, the assumption of self interested players in game theory is
A) rarely found in practice.
B) the only motivation for daily behavior.
C) violated infrequently.
D) extremely accurate.
E) inconsistent with some choices individuals make.

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74. A payoff matrix

A) shows only the players of the game.
B) shows only the possible strategies of the game.
C) summarizes most of the elements of a game.
D) shows only the payoffs to each of the strategies.
E) completely summarizes the three elements of a game.
75. Game theory is not useful in understanding perfect competition because

A) by assumption, the firms are so small as to be unable to influence price and thus are not interdependent.
B) perfectly competitive firms are honest.
C) the players can't be identified.
D) the payoffs to their choices are unknown.
E) their strategies can't be discerned.
76. Which of the following would not serve to solve a commitment problem?
A) A credible threat.
B) Custom and tradition.
C) A credible promise.
D) An empty ultimatum.
E) Moral education.
77. A game consists of

A) the players, the possible strategies, and the payoffs to each strategy.
B) the players and the possible strategies.
C) the possible strategies and the payoffs to each strategy.
D) the players and the payoffs to each strategy.
E) the payoffs to each strategy.
78. According to the textbook, cigarette manufacturers

A) supported the ban on cigarette advertising on TV due to their concern over health effects of smoking.
B) would have been better off without the ban on TV advertising.
C) were made worse off by the ban on TV advertising.
D) had their prisoner's dilemma solved by the ban on TV advertising.
E) saw their profits fall after the ban on TV advertising.
79. A credible promise is an action that

A) is in the promiser's interest to keep.
B) is legally enforceable.
C) is not in the promiser's interest to keep.
D) is not in the promisee's interest to keep.
E) seems believable.
80. The textbook reports that, in the game where player A divides a sum of money and then player B accepts or rejects
the division, when the propose distribution greatly favors player A, player B
A) accepts it all of the time.
B) accepts it most of the time.
C) accepts it half of the time.
D) rarely rejects it.
E) almost always rejects it.
The table below shows the payoffs to the running of negative and clean political ads by two presidential candidates. The
payoffs are the increase or decrease in the number of voters willing to vote for the candidate.
Bush
Negative Ads Clean Ads
Negative -2% Bush -5% Bush
Ads -2% McCain +5% McCain
McCain
Clean Ads +3% Bush 0% Bush
-3% McCain 0% McCain
81. Given the payoff matrix, the Nash equilibrium will be

A) both Bush and McCain run clean ads.

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B) Bush runs clean ads and McCain runs negative ads.

C) indeterminate.
D) Bush runs negative ads and McCain runs clean ads.
E) both Bush and McCain run negative ads.
82. Which of the following core principles applies to the prisoner's dilemma?
A) No cash on the table.
B) Smart for one, dumb for all.
C) Low hanging fruit.
D) All for one, one for all.
E) Scarcity.
83. A commitment problem exists when

A) players cannot make credible threats or promises.
B) players cannot make threats.
C) players decide whether to play the game.
D) players cannot make promises.
E) players are playing games where timing does not matter.
84. The solution to a commitment problem

A) must be a change in the material incentives.
B) is never a change in the psychological incentives.
C) must be a change in the psychological incentives.
D) can be a change in the material incentives, the psychological incentives or both.
E) is either a change in the material incentives or the psychological incentives but never both.
85. An action that makes otherwise empty threats or promises credible is called a(n)
A) Nash equilibrium.
B) commitment device.
C) strategic device.
D) dominant strategy.
E) prisoner's dilemma.
86. Which of the following problems would not require decision tree analysis?
A) A free agent NBA player negotiating a new contract.
B) A manager of a rural, isolated gas station considering a price cut.
C) A couple deciding between his job offer in Austin, Texas and hers in San Jose, California.
D) Choosing a college to attend and major to pursue.
E) Negotiating the price of a new car.
87. The statement "If you do X, then I will kill you" is a credible
A) threat when spoken by someone's mother.
B) promise when spoken by someone's loan shark.
C) threat when spoken by someone's significant other.
D) threat when spoken by someone's mafia partners.
E) promise when spoken by someone's paperboy.
88. As described in the textbook, which of the following is not characteristic of an ultimatum bargaining game?
A) The first player establishes the terms.
B) The second player either accepts or rejects the terms.
C) The offer is a take it or leave it offer.
D) The second player may accept the terms.
E) The second player will always reject the terms.
89. A description of the possible move in a game in sequence and the payoffs to each possible combination of moves is
called a(n)
A) decision tree.
B) payoff matrix.
C) decision leaf.
D) multi-period game.
E) indecision tree.
90. Game theory is important in understanding

A) how perfectly competitive firms behave.
B) production decisions by firms.
C) consumer demand.

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D) interdependency and choice.

E) the behavior of a pure monopolist.
The table below shows the payoff matrix in the form of short term profits for two firms, A and B, for two different strategies,
investing in new capital or not.
Firm A
Invest Not Invest
$20 A $5 A
Invest $20 B $70 B
Firm B
$70 A $50 A
Not Invest $5 B $50 B
91. The game is an example of a(n)

A) cartel.
B) indeterminate game.
C) prisoner's dilemma.
D) credible promise.
E) multiple equilibria game.
92. The outcome of the game is __________ with __________.

A) not a Nash equilibrium; both firms not investing
B) a Nash equilibrium; both firms not investing
C) a Nash equilibrium; firm A investing and B not
D) not a Nash equilibrium; two possible equilibria
E) a Nash equilibrium; both firms investing
93. During the Iran-Iraq war, both countries needed revenues to fund their war efforts. They accomplished this by
A) asking the other members of OPEC to loan them money.
B) requesting that OPEC raise the official price of crude oil.
C) over producing crude oil and selling it below the official price, i.e., cheating.
D) increasing their exports of sand.
E) asking the World Bank for additional loans.
94. If someone informs the clerk that he was given $20 of change when he was only owed $10, one can conclude,
A) the individual is irrational.
B) preferences to be honest altered his motivation and choice.
C) the individual is wealthy.
D) somebody else must have witnessed the error.
E) the clerk seemed dishonest.
95. The assumption that individuals act out of narrow self interest is
A) a reasonable first approximation.
B) offensive.
C) rarely justified.
D) only justified for monetary decisions.
E) less justified today than 100 years ago.
96. According to the textbook, one possible way of solving the commitment problem in the kidnapping game is for the
victim to
A) give the kidnapper a blank check.
B) promise never to reveal the kidnapper's identity.
C) offer to cut off one finger to show his sincerity.
D) give the kidnapper a credit card.
E) do something illegal and allow the kidnapper to record it.
97. According to the textbook, owners of restaurants have solved the commitment problem with their wait staff by
A) paying very high wages.
B) asking for comments from customers.
C) paying low wages.
D) scheduling frequent motivational seminars.
E) paying low wages and encouraging tipping by customers.

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98. The use of psychological incentives to solve commitment problems would be least effective in games played
A) repeatedly between strangers.
B) once between family members.
C) repeatedly between family members.
D) once between strangers.
E) repeatedly between friends.
99. OPEC is an example of a(n)

A) oligopoly.
B) cartel.
C) monopoly.
D) duopoly.
E) monopsony.
100. Interdependency is an important consideration when modeling the behavior of

A) consumers.
B) strangers.
C) perfectly competitive firms.
D) monopolists.
E) oligopolies.

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1. C
2. D
3. A
4. C
5. B
6. D
7. E
8. E
9. A
10. D
11. C
12. E
13. D
14. A
15. B
16. C
17. E
18. E
19. E
20. A
21. D
22. C
23. A
24. B
25. D
26. C
27. C
28. E
29. D
30. C
31. C
32. A
33. A
34. C
35. E
36. E
37. D
38. A
39. B
40. D
41. C
42. B
43. D
44. D
45. B
46. A
47. B
48. E
49. C
50. D
51. D
52. D
53. A
54. E
55. D
56. C
57. C
58. B
59. E
60. A
61. B
62. D
63. A
64. B
65. E
66. E
67. C
68. C
69. A
70. C
71. E
72. C
73. E

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74. E
75. A
76. D
77. A
78. D
79. A
80. E
81. E
82. B
83. A
84. D
85. B
86. B
87. D
88. E
89. A
90. D
91. C
92. E
93. C
94. B
95. A
96. E
97. E
98. D
99. B
100. E

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1. When some fraction of the benefit of an activity is received by people not participating in the activity, it is called a(n)
A) winner's curse.
B) positive externality.
C) external cost.
D) negative externality.
E) efficient allocation.
Susan and Bonnie are considering living alone or being roommates for the next twelve months. A one bedroom, one bath
apartment is $500 per month while a two bedroom, one bath apartment is $800. The one difficulty they have is that Bonnie
snores very loudly. Susan estimates the cost of poor sleep due to Bonnie's snoring at $150 per month. Bonnie estimates that
the cost of eliminating her snoring is $50 per month.
2. The potential combined gain to Bonnie and Susan from living together is
A) $200.
B) $150.
C) $100.
D) $50.
E) 0.
3. For Bonnie and Susan, the external cost is

A) the extra rent Bonnie and Susan pay if the live alone.
B) having to live with a snorer.
C) having to take steps not to snore.
D) imposed on Bonnie if she must stop snoring.
E) imposed only on Susan.
4. Suppose that Bonnie demands 90% of the gain in the surplus, which she wants to apply to her monthly rent payment.
The division of rent payments would be __________ for Bonnie and __________ for Susan.
A) $265; $535
B) $315; $485
C) $400; $400
D) $375; $425
E) Both amounts are indeterminate.
5. Assume that Bonnie and Susan choose to divide the gain in the surplus equally and apply it to their monthly rent
payments. As a result, Bonnie will pay __________ per month and Susan will pay __________ per month.
A) $425; $425
B) $400; $400
C) $350; $450
D) $375; $425
E) Both amounts are indeterminate.
6. The most Susan would pay to avoid the discomfort of someone snoring is
A) $50.
B) $150.
C) $200.
D) $400.
E) $500.
7. Which of the following is not an example of an activity with an external cost?

A) Noise pollution from a steel mill.
B) Keeping junk in the front yard.
C) A car burning oil.
D) Having to buy batteries for the new remote that came with the new TV.
E) Speeding on the Interstate.
8. If an unregulated activity produces a negative externality, one can infer that

A) the equilibrium price is greater than the socially optimal price.
B) demand for the activity is greater than the socially optimal demand.
C) the equilibrium quantity is greater than the socially optimal quantity.
D) the equilibrium quantity is less than the socially optimal quantity.
E) supply of the activity is less than the socially optimal supply.
9. Limits on the extent of private property rights, e.g., zoning laws, are

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A) an infringement on personal liberty.

B) generally unnecessary.
C) an attempt to protect or enlarge the total economic surplus.
D) unconstitutional.
E) designed to help one group and harm another.
Steve and Don are neighbors that work at the same firm and hold the same title. Steve finds that when Don's consumption
rises, he feels worse off. Don feels the same way towards Steve's consumption.
10. Suppose that after offering the first hour of overtime, the firm that employs Steve and Don begins to offer a second
hour of overtime. One can predict that
A) Don will work even more but not Steve.
B) both Don and Steve will work even less.
C) both Don and Steve will not change their work hours.
D) both Don and Steve will work even more.
E) Steve will work even more but not Don.
11. For both Steve and Don,

A) their own consumption is positional externality.
B) consumption in general is a positional externality.
C) consumption in general has external benefits.
D) each other's consumption is positional externality.
E) each other's consumption is a common property issue.
12. The existence of externalities results in

A) harm to those directly involved.
B) a misallocation of resources.
C) a greater than optional level of production.
D) a less than optimal level of production.
E) harm to those indirectly involved.
13. Both Presidents Roosevelt and Kennedy had extramarital affairs that the press was aware of but did not report when
they were in office. President Clinton's sexual relationships have been well documented and publicized. The
difference can be understood as
A) a greater need for the public today to know about the sexual behavior of the president.
B) less tolerance today for marital affairs.
C) a positional arms race by the media.
D) the general decay of the moral fabric of the US.
E) an apparent characteristic of Democratic presidents.
14. From the perspective of an externality, speed limits on highways exist

A) to raise revenues for state and local governments.
B) to increase the smooth flow of traffic.
C) because negotiating compensation with each speeder is impractical.
D) because insurance companies demand them.
E) to conserve gasoline consumption.
15. The reason public restrooms on the Interstate are generally less clean than restrooms at gas stations along the
Interstate is because
A) gas stations only allow paying customers to use the restroom.
B) state employees don't work as hard as private sector employees.
C) the public restrooms lack clear ownership.
D) people just don't care as much as they once did.
E) gas station restrooms lack clear ownership.
16. Which of the following is not an example of a positional arms control agreement?
A) Speed limits on the Interstate.
B) A ban on beauty contestants with cosmetic surgery.
C) School dress codes that ban baggy pants.
D) Major league baseball's regulation of the size and construction of baseballs.
E) A proposal to limit the number of violent acts depicted on TV during prime time.
17. By the mid 1970's, the US and the USSR had sufficient nuclear weapons to destroy the entire world several times yet
both countries continued to build more. The plausible explanation for this behavior is

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A) the influence of the military industrial complex in the two counties.

B) a positional arms race.
C) a need to replace old, small nuclear weapons with new, big ones.
D) paranoid political leaders.
E) that the US continued only because the USSR continued.
The following payoff matrix shows the outcomes for the US and the USSR from relying on conventional weapons or atomic
weapons. The percentages refer to the fraction of the population that would die if a war occurred under the two weapons
strategies. Assume the payoff matrix is for 1945, shortly after the US had demonstrated the effectiveness of the atomic bomb in
World War II, i.e., the example begins in the lower left cell.
United States
Atomic
Weapons Conventional
Atomic 60% US 90% US
USSR Weapons 60% USSR 5% USSR
Conventional 5% US 10% US
90% USSR 10% USSR
18. When the US was the only atomic power, the outcome of war with the USSR
A) increased US deaths from 5% to 60%.
B) reduced US deaths form 90% to 10%.
C) increased USSR deaths from 60% to 90%.
D) reduced US deaths from 10% to 5%.
E) increased USSR deaths from 10% to 60%.
19. When the US demonstrated its nuclear capability (the "H-bomb") in the 1950's, the predictable result was
A) the arms race ended.
B) the USSR responded by developing chemical weapons.
C) the USSR developed its nuclear capability.
D) the US decided to refrain from development.
E) it had no effect on the behavior of the USSR.
20. When only the US has atomic capabilities, the outcome of war with the US for the USSR
A) changed only slightly.
B) increased USSR deaths from 10% to 60%.
C) increased USSR deaths from 60% to 90%.
D) increased USSR deaths from 5% to 90%.
E) increased USSR deaths from 10% to 90%.
21. Given the starting point and ending points in the payoff matrix, the probability of war between the US and USSR
A) increased.
B) decreased.
C) did not change.
D) increased because the USSR had a smaller negative outcome.
E) increased because the US had a smaller negative outcome.
Glen is considering whether to paint his house and if so, what color to choose. He settles on three options: leave it "as is",
paint it brown, or paint it neon purple. Glen's neighbors are able to easily see his house. The following table shows the
monetary values of utility for Glen and his neighbors under the three possibilities.
Leave as is Brown paint Neon Purple paint

Glenn -1 5 20
Neighbors 1 4 -10
22. The ranking of choices from highest to lowest for Glen is

A) brown, no change, neon purple.
B) neon purple, no change, brown.
C) neon purple, brown, no change.
D) no change, brown, neon purple.
E) brown, neon purple, no change.

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23. Assume that Glen and his neighbors both know the payoffs to the three choices. If maintaining relations with his
neighbors is valuable, Glen will likely choose
A) brown.
B) neon purple.
C) no change.
D) to consider different colors.
E) to move.
24. Given a goal of maximizing total economic surplus, a Coase Theorem solution would result in
A) no change in the color of Glen's house.
B) Glen painting his house neon purple and paying his neighbors $10.
C) Glen's neighbors paying him $20.
D) Glen painting his house brown.
E) Glen painting the front of his house brown and the back neon purple.
25. Suppose an additional rule was adopted: maximize total economic surplus but no outcome with a negative value for
either Glenn or his neighbors can be chosen. The outcome now is that Glen's house will be
A) not painted.
B) painted neon purple.
C) painted brown.
D) either not painted or brown.
E) of indeterminate color.
26. If one major league pitcher were to develop a new, highly effective pitch called the "slipper," this would be
A) a positional externality.
B) a positive externality.
C) efficient.
D) an asset to the game.
E) an example of the Coase Theorem.
27. The economist's view that complete elimination of pollution is undesirable stems from
A) indifference to social problems.
B) too much emphasis on profit maximization.
C) an inability to model the problem.
D) comparison of the marginal benefits and the marginal costs.
E) a belief that pollution is desirable.
Suppose four land owners A, B, C, and D own adjacent lots. Recently, a pool of oil was discovered under all four lots but does
not extend beyond the four lots. Below is data on the relationship between number of oil wells, output per well and revenues
per well. It is an engineering reality that the more quickly a pool is depleted, the smaller the total amount of oil extracted.
Total number of Average gallons of oil Average revenue

wells on the pool produced per day per well per day
4 100 $100
8 95 $95
12 93 $93
16 75 $75
20 67 $67
24 51 $51
28 40 $40
32 37 $37
28. The effect on society of having this pool of oil owned by four different people is
A) to be worse off because the size of the pool is reduced.
B) to be better off with more oil.
C) to be better off because a single owner is a monopoly.
D) zero.
E) indeterminate.
29. The entire pool of oil is

A) private property, owned by four different people.
B) common property in that no one individual owns it entirely.

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C) common property in that A, B, C, and D view the oil as not having a cost.
D) private property, commonly owned.
E) common property, owned by four different people.
30. Suppose that the marginal cost of drilling a well is $94 but the entire pool of oil is under one plot of land owned by E.
He will drill a total of __________ wells.
A) 32.
B) 24.
C) 16.
D) 12.
E) 8.
31. The difference in the outcome when the entire pool is spread out over four different owners verses a single owner is
A) the four different owners are simply greedy.
B) the single owner has no incentive to produce a lot.
C) the four different owners aren't profit maximizers.
D) the four different owners see the pool as common property while the single owner sees it as purely private
property.
E) the single owner is not a profit maximizer.
32. Given that marginal cost of drilling a well is $94 and the total number of wells each landowner will therefore drill, each
well will
A) earn a profit of $2.
B) breakeven.
C) earn a loss of $57.
D) earn a profit of an indeterminate amount.
E) earn a loss of an indeterminate amount.
33. Presume that the marginal cost of drilling a well is $94. The optimal number of wells to drill is
A) 32.
B) 24.
C) 16.
D) 8.
E) 4.
34. If the marginal cost of drilling a well is $94, then each land owner will drill __________ wells apiece for a total of
__________.
A) 2; 8
B) between 1 and 8 between 4 and 32
C) 4; 16
D) between 4 and 8; between 16 and 32
E) 8; 32
35. Which of the following is not a characteristic of a positional arms race?

A) The benefit of the performance enhancing investments is offset.
B) The investments are costly.
st nd
C) The rank ordering (1 place, 2 place, etc.) before and after the investment is the same.
D) Efficiency is necessarily improved.
E) In theory, the race will continue forever.
Bob lives in a residential neighborhood that prides itself on well groomed lawns. Bob's neighbors find that the marginal benefit
of someone else's well groomed lawn is $10. Bob, however, receives the same net benefit from an unkempt lawn as a well
groomed lawn: zero (an unkempt lawn looks bad but costs nothing; a well groomed lawn looks nice but is costly).
Unkempt lawn Well groomed lawn

Net Value to Bob 0 0
Net Value to Bob's neighbors 0 10
36. Suppose Bob knows that his neighbors value his lawn being well groomed more than he does and demands $15
from them. The neighbors will
A) choose to pay him $15.
B) stop the negotiations.
C) choose to pay him the $15: $10 now and $5 after.

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D) offer $9 as a final offer.

E) hope that he moves.
37. The issue of Bob, his neighbors, and the state of his lawn is an example of a(n)
A) positive externality.
B) external cost.
C) negative externality.
D) positional externality
E) prisoner's dilemma.
38. The largest whole number Bob's neighbors would pay him to keep a well groomed lawn is
A) $1.
B) $2.
C) $5.
D) $9.
E) $10.
39. The smallest whole number Bob would accept from his neighbors to keep a well groomed lawn is
A) $1.
B) $2.
C) $5.
D) $9.
E) $10.
40. The Coase Theorem suggests that

A) the rest of the neighborhood will have to live with Bob.
B) Bob's neighbors should pass a law requiring well groomed lawns.
C) Bob's neighbors could pay Bob to have a well groomed lawn and be better off.
D) Bob's neighbors could pay Bob to have a well groomed lawn and be no better off.
E) Bob has undervalued a well groomed lawn.
41. In the case of either an external cost or an external benefit, the invisible hand fails to generate the efficient outcome
because
A) the model is not capable of incorporating externalities.
B) buyers and sellers only take their self interests into account.
C) too much is produced.
D) too little is produced.
E) the environment is treated as a common property.
42. Suppose coal mining produces a negative externality in the form of polluted streams. One can deduce that the
unregulated
A) price of coal is too high.
B) quantity is too small.
C) quantity is too large.
D) supply is too low.
E) demand is too great.
43. The motivation for private solutions to externalities is that

A) resources are misallocated and thus cash is on the table.
B) individuals are today more concerned about pollution.
C) of profit maximization.
D) of utility maximization.
E) individuals mistrust governmental solutions.
Figure 11.2

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44. The reason the invisible hand does not allocate resources efficiently in the market is because
A) there is too much demand.
B) the private supply curve, S1, does not include the external cost of production.
C) the social supply curve, S, includes the external cost of production.
D) the private supply curve, S, does not include the external cost of production.
E) equilibrium can't be achieved.
45. When the external cost is included, the efficient equilibrium is

A) P1, Q1.
B) P2, Q3.
C) P2, Q2.
D) P4, Q2.
E) P3, Q3.
46. Generally speaking, most remedies for external costs due to pollution in the US have not been through taxation but
regulations requiring firms to use a specific type of pollution reduction technology. For the regulation to be efficient,
one must assume that
A) firms will simply choose to go out of business and eliminate externality.
B) requiring the technology will increase costs such that the private supply, S, shifts to S1.
C) it is easier to regulate than to tax.
D) requiring the technology will shift the social supply curve, S1, to S.
E) the best way to reduce pollution is to force firms to use a particular technology.
47. The distance __________ measures the __________.

A) 0P1; external cost
B) 0P2; external cost
C) P1P2; external cost
D) P1P3; external cost
E) P1P2; external benefit
48. Taxing the production of this good by an amount equal to the external cost would
A) place the entire burden of the external cost on suppliers.
B) be ineffective because the external cost is not eliminated.
C) place the entire burden of the external cost on consumers.
D) not achieve an efficient solution.
E) split the burden of the external cost between suppliers and demanders.
49. Since the cost of obtaining more of any resource is __________, viewing any resource's price as zero leads to
__________.
A) positive; underutilization
B) negative; overutilization
C) zero; an efficient allocation
D) positive; overutilization
E) positive; a surplus
50. For the sake of argument assume that Republican voters are both wealthier and more likely to make campaign

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contributions than Democratic voters. One could then predict that

A) Republicans will favor campaign spending limits more than Democrats.
B) Republicans and Democrats will favor campaign spending limits equally because it is the right thing to do.
C) Democrats will be more likely to favor campaign spending limits.
D) both Republicans and Democrats will oppose campaign spending limits on First Amendment grounds.
E) Democrats will be more aligned with the interests of their party.
51. The major implication of the Coase Theorem is that

A) government regulation is necessary to solve externalities.
B) competitive pressures will eliminate externalities.
C) resolving externalities is more costly than allowing them.
D) individuals can solve many externalities if then can buy and sell the right to commit the externality.
E) governmental solutions to externalities can only fail.
52. Assume that the town of Pleasantville has two local TV stations. If one of them invests in the newest Doppler radar
technology, one can predict that
A) the other station will continue to use its current technology.
B) to maintain its relative standing, the other station will upgrade its radar technology.
C) the outcome for the other station is indeterminate.
D) to maintain its absolute standing, the other station will upgrade its radar technology.
E) the quality of forecasts will remain unchanged.
53. If the external cost of an activity is added to the private costs, then the
A) supply curve shifts right.
B) quantity supplied rises.
C) supply curve shifts left.
D) quantity supplied falls.
E) demand curve shifts left.
Paul owns a home on the top of a hill and enjoys an unobstructed view of a large wooded area. The view was a large factor in
his decision to buy the house and Paul values his view at $5,000 per month. Sid purchases the undeveloped wooded area with
plans to build a retail shopping center. Sid expects to earn $10,000 a month from the shopping center, which is $3,000 more
than his next best alternative.
54. The reciprocal nature of externalities expressed by Professor Coase is illustrated by noting that
A) Paul is the only one harmed.
B) Sid is the only on benefited.
C) Sid does not have to build the shopping center.
D) if Paul is successful in legally stopping construction of the shopping center, Sid will be harmed.
E) Paul could move elsewhere.
55. The least Sid would accept to cease construction of the shopping center is
A) $10,000.
B) $5,000.
C) $3,001.
D) $2,000.
E) 0.
56. The most Paul would offer Sid to prevent construction of the shopping center is
A) 0.
B) $2,000.
C) $3,000.
D) $4,999.
E) $10,000.
57. Suppose that building the shopping center and receiving $10,000 per month was $6,000 more than Sid's next best
alternative. As a result,
A) Sid and Paul can still reach a monetary arrangement.
B) Paul can't pay Sid enough to stop construction.
C) Sid will be willing to pay Paul $1,000 for his loss.
D) Paul has less incentive to seek a legal remedy.
E) Paul will revaluate his value of the view.
58. Assuming development of the land reduces the value of Paul's view to zero, then

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A) Paul's consumer surplus will not change.

B) Paul will be worse off.
C) Sid will offer to compensate Paul for his loss.
D) Paul will be better off.
E) Paul's consumer surplus will rises.
59. The view of the underdeveloped area Paul has been enjoying is a(n)
A) common property right.
B) private property right.
C) positional externality.
D) external cost.
E) positional arms race.
60. When evaluation of one's performance is based on a comparison with how others performed,
A) the evaluation is less accurate.
B) the quality of performance necessarily increases.
C) one will overinvest in performance enhancing activities.
D) the quality of performance necessarily decreases.
E) one will underinvest in performance enhancing activities.
61. Dustin owns a very powerful stereo system. Dustin's private property rights allow him to do all of the following except
A) sell it for a price he finds reasonable.
B) choosing not to play it.
C) playing whatever type of music he likes.
D) open his windows at 3:00 am and turn the volume to its maximum.
E) give it to a friend.
Adam and Jon are the only players playing in a local golf tournament. They can either practice for 5 hours or not practice at all.
Practice has both direct monetary costs and opportunity costs. Their scores for an 18 hole round of golf with and without
practice are shown in the table. Total prize money is $12,000. Two possible reward structures exist: Plan A in which low score
wins $10,000, second place wins $2,000 and a tie results in $6,000 each. Plan B requires a player to score 71 or less for first
place, 72 to 80 is considered second place. The $10,000 will be split between those with a 71 or lower score with a guaranteed
minimum of $2,000. The $2,000 for second will be split between those with a score between 72 and 80.
Adam
No
Practice 5 Hours
No 78 Adam 72 Adam
Jon Practice 78 Jon 78 Jon
5 Hours 78 Adam 72 Adam
72 Jon 78 Jon
62. If the tournament adopts Plan A as its reward structure, then

A) Jon and Adam will not practice.
B) a positional externality will exist.
C) Jon will not practice but Adam will.
D) Adam will not practice but Jon will.
E) Adam will only practice if Jon does, otherwise not.
63. Since Plan A causes __________, this is an example of a(n) __________.

A) neither Jon nor Adam to practice; positional arms race
B) neither Jon nor Adam to practice; prisoner's dilemma
C) both Jon and Adam to practice; absolute performance judgment
D) Jon to practice and Adam to not; positional externality
E) both Jon and Adam to practice; positional arms race
64. If Plan A is chosen as the reward structure, Jon and Adam might try to solve their positional arms race by
A) lying about their strokes.
B) practicing in secret.
C) agreeing to split the prize money.
D) buying expensive golf clubs.
E) buying premium golf balls.

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65. If the quality of play is measured by low scores and a close finish, then
A) Plan B should be adopted.
B) Plan A should be adopted.
C) it does not matter which plan is chosen for the outcomes are the same.
D) players should be required to practice.
E) players should be barred from practicing.
66. If the tournament adopts Plan B as its reward structure, then

A) neither Jon nor Adam will practice.
B) Jon will practice and Adam won't.
C) Adam will practice and Jon won't.
D) a positional externality exists.
E) both Jon and Adam will practice.
67. Plan A rewards

A) absolute performance.
B) excellent performance.
C) relative performance.
D) average performance.
E) poor performance.
68. Under the reward structure of Plan B,

A) a positional arms race will develop.
B) a positional externality exist.
C) the prisoner's dilemma is eliminated.
D) a positional arms race might develop.
E) the quality of play, as measured by scores, is improved.
69. If the tournament adopts Plan A as its reward structure, then

A) neither Jon nor Adam will practice and they will collect $6,000 each.
B) Jon will practice and win $10,000 while Adam doesn't practice and get$2,000.
C) Adam will practice and win $10,000 while Jon doesn't practice and gets $2,000.
D) both Jon and Adam will practice and they will collect $6,000.
E) the outcome is indeterminate.
70. Assume that reading produces a positive externality. It will be the case that the __________ than the socially optimal
amount.
A) supply of reading will be greater
B) price of reading will be greater
C) supply of reading will be less
D) demand for reading will be greater
E) demand for reading will be less
The following data show the relationship between the number of drivers who leave for work at 8:00 am, their average commute
times, and their marginal benefit associated with the commute times.
Number of drivers Average commute Marginal

that leave at 8:00am time to downtown Benefit
100 30 minutes $10
200 65 minutes $8
300 110 minutes $4
400 170 minutes $3
500 260 minutes $1
71. Assuming that a 260 minute commute results in citizens complaining to the local traffic control authorities, the most
cost-beneficial solution to reduce commute time would be to
A) build more roads.
B) increase the speed limit.
C) increase the availability of broadband Internet access.
D) impose a toll on using the highway.
E) build a light rail system.
72. Suppose a toll is imposed in the following way: leaving between 8am and 9 am costs $5 per driver, after 9 am the toll

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is zero. One can predict that __________ drivers will be on the road between 8:00 and 9:00 am.
A) 100
B) 200
C) 300
D) 400
E) 500
73. Suppose a toll is imposed in the following way: leaving between 8am and 9am cost $5 per driver, after 9am the toll is
zero. One can predict that __________ drivers will be on the road after 9am.
A) 100
B) 200
C) 300
D) 400
E) 500
74. It is likely that if a $5 toll from 8:00 am to 9:00 am was proposed, objections from the drivers would be loud and
vigorous. Assume the drivers propose building more roads, the impact of which would be to
A) reduce commute times immediately and permanently.
B) reduce commute times immediately but not permanently.
C) reduce commute times after construction ended buy ultimately lead back to overutilization.
D) discourage people from driving to work.
E) encourage alternatives to driving to work.
75. The highway to downtown is currently treated as __________, with the price of __________.
A) private property; $1
B) common property; 0
C) common property; it depends on the number of drivers
D) private property; indeterminate size
E) public property; indeterminate size
76. The reason drivers would prefer building new roads to a $5 toll to reduce commute times is because
A) building roads is the only solution.
B) they know a toll would not alter commuting behavior.
C) cities always need new roads.
D) the cost of new roads falls on all taxpayers; the toll only falls on those who use the existing road.
E) they own stock in a highway construction firm.
77. Imposing a toll of $5 if one leaves between 8 and 9 am __________ because __________.
A) reduces efficiency; citizens are paying for the highway more than once
B) improves efficiency; government now has more tax revenue
C) reduces efficiency; drivers don't change their behavior and pay $5
D) improves efficiency; the highway is no longer treated as having a price of zero
E) reduces efficiency; government now has more tax revenue
78. An external cost of an activity is one that is

A) borne by those not directly involved.
B) borne only by those directly involved.
C) included in the private marginal cost curve.
D) present only if the activity yields pollution.
E) transferred from consumers to producers.
79. Which of the following investments is not an example of a positional arms race?
A) Strength training by NBA players.
B) Plastic surgery by movie stars.
C) Nuclear weapons stockpiling by nations.
D) Vocabulary training of children by parents.
E) Grocery shopping by families.
80. When part of the cost of an activity falls on people not pursuing the activity, it is call a(n)
A) external benefit.
B) prisoner's dilemma.
C) negative externality.
D) positive externality.
E) efficient allocation.
81. When one's performance is judged relative to others' performance and not by an absolute standard,

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A) players will over invest in performance enhancements.

B) players will under invest in performance enhancements.
C) the incentive to sabotage the other players is lessened.
D) a positional externality is not possible.
E) the incentive to "play fair" is maximized.
82. Investments in a child's education by his parents are

A) an external benefit.
B) productive only if all other parents do the same.
C) beneficial to society.
D) positional externalities.
E) signs of a poor educational system.
83. Which of the following is not an example of an activity with external benefits?
A) Eating a sandwich.
B) Planting flowers in the front yard.
C) Getting a haircut.
D) Washing and waxing the car.
E) Practicing safe sex.
Figure 11.1
84. Suppose the EPA requires that all automobiles have a certain air pollution technology that costs $700 per
automobile. The reduction in air pollution will be
A) 0%.
B) 45%.
C) 50%.
D) 70%.
E) 100%.
85. The socially optimal reduction in air pollution due to automobiles is

A) 0%.
B) 45%.
C) 50%.
D) 70%.
E) 100%.
86. An EPA requirement for a $700 air pollution control device for all autos would be __________ because __________.
A) efficient; any and all reductions in pollution are warranted
B) inefficient; the marginal costs exceed the marginal benefits
C) inefficient; the reduction is less than 100%
D) inefficient; the marginal benefits exceed the marginal costs
E) efficient; there is no other way to force the auto industry to reduce emissions

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87. Based on the discussion in the textbook, which of the following does not fit the pattern of a positional arms race?
A) Growth in the number of tattoos.
B) Increased nudity in perfume advertisements.
C) The decline in smoking.
D) Growth in the amount of cosmetic surgery.
E) Increased expenditures for the phonics game for children.
st nd rd
88. According to the textbook, if all linemen in the NFL took anabolic steroids, the rank ordering of linemen (1 , 2 , 3 ,
etc) would be unchanged. This assumes that
A) anabolic steroids have no effect on performance.
B) anabolic steroids improve the performance of all NFL linemen by the same amount.
C) steroid usage is widespread.
D) anabolic steroids produce unequal improvements in performance.
E) steroids have no health consequences.
89. According to the textbook, social norms can be viewed as a

A) way to lessen the question of "Who am I?"
B) tool of the government.
C) an informal solution to a positional arms race.
D) useful way to organize marketing campaigns.
E) irrelevant to positional externalities.
90. A series of escalating mutually offsetting investments designed to enhance performance is a(n)
A) positional externality.
B) prisoner's dilemma.
C) external benefit.
D) positional arms race.
E) example of the Coase Theorem.
91. Brady owns a beachfront lot with a small house. During hurricanes, he refuses to leave and afterward he applies for
federal assistance to rebuild and files insurance claims for damages. By doing so, Brady is
A) pursuing life, liberty and happiness without harm to others.
B) imposing an external cost on himself.
C) imposing an external cost on rescue workers, taxpayers, and insurance policy holders.
D) treating his property as common property.
E) in a positional arms race.
92. Which of the following is not a factor limiting a private property rights solution to over hunting of whales?
A) The behavior of whales is difficult to monitor.
B) The natural "owners", those who would receive the property rights, would be difficult to establish.
C) International enforcement of the property rights would be necessary.
D) Whales have little economic value.
E) Incentives to cheat on the agreement would be large.
93. Which of the following would not be subject to the tragedy of the commons?
A) Whales in the ocean.
B) Timber on public lands.
C) Cattle on a ranch.
D) Buffalo roaming free in the West.
E) The atmosphere.
94. From the individual's standpoint, a positional arms race is __________ while from society's point of view, it is
__________.
A) efficient; efficient
B) inefficient; inefficient
C) inefficient; efficient
D) efficient; inefficient
E) necessary; efficient
95. If the external benefit of an activity is added to the private benefits, then the
A) demand curve shifts left.
B) quantity demanded rises.
C) supply curve shifts right.
D) demand curve shifts right.
E) quantity demanded falls.

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96. Suppose there is a "dirtiness index" for apartments with a value of 1 meaning completely dirty and 0 meaning
completely clean. The optimal value of the index is
A) 1.
B) .90.
C) .50.
D) 0.
E) greater than 0 and less than 1.
97. Which of the following is not an example of a positional arms control agreement?
A) Campaign spending limits.
B) Roster limits for professional sports teams.
C) Contracts containing a binding arbitration clause in case of breach.
D) Air pollution limits.
E) A ban on more than three visible body piercing at a high school.
98. According to Professor Coase, when thinking about solutions to externalities, it is important to remember that
A) only those indirectly involved need by considered.
B) government regulation in nearly always necessary.
C) only those directly involved need be considered.
D) externalities are reciprocal.
E) those who generate external costs must be forced to stop.
99. A resource that has common property rights is

A) owned by someone.
B) one that benefits everyone equally.
C) one that has no marginal benefit.
D) underutilized.
E) treated as though it has a price of zero.
100. Assume that to be labeled a nerd (someone who studies a lot and has high grades) in high school or college is a
social negative. According to the textbook,
A) this is a cruel and unfair stereotype.
B) those who study hard would be better off it this negative stereotype was eliminated.
C) the negative stereotype serves to discourage many from studying hard thus increasing the payoff to those who
do.
D) the negative stereotype serves to comfort those who don't study and make poor grades.
E) being labeled a nerd has no impact on studying or GPA.

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1. B
2. A
3. D
4. B
5. D
6. E
7. D
8. C
9. C
10. D
11. D
12. B
13. C
14. C
15. C
16. A
17. B
18. D
19. C
20. E
21. B
22. C
23. A
24. B
25. C
26. A
27. D
28. A
29. B
30. E
31. D
32. C
33. D
34. E
35. D
36. D
37. A
38. D
39. A
40. C
41. B
42. C
43. A
44. D
45. E
46. B
47. C
48. E
49. D
50. C
51. D
52. B
53. C
54. D
55. C
56. D
57. B
58. B
59. A
60. C
61. D
62. B
63. E
64. C
65. B
66. A
67. C
68. C
69. D
70. E
71. D
72. B
73. C

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74. C
75. B
76. D
77. D
78. A
79. E
80. C
81. A
82. D
83. A
84. D
85. C
86. B
87. C
88. B
89. C
90. D
91. C
92. D
93. C
94. D
95. D
96. E
97. D
98. D
99. E
100. C

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1. Seka and Jill mover to LA at the same time and both wish to find apartments to rent. Seka is staying with her Aunt
while Jill is at the Best Western motel. One can predict that
A) Seka and Jill will spend the same amount of time searching.
B) Jill will search more than Seka.
C) Seka will search more than Jill.
D) Jill will have better information.
E) the magnitude of their search times is indeterminate.
2. Bob is risk averse and needs to hire an attorney. If the cost of searching is zero, Bob should
A) interview all attorneys.
B) hire the first attorney interviewed.
C) hire the attorney with ill fitting clothes.
D) continue searching if the expected value of another interview is nonnegative.
E) continue searching if the expected value of another interview is positive.
Vinnie is looking for an apartment in Dayton, Ohio. In Dayton, 75% of the two bedroom, one bath apartments are $800 a month
and 25% are $600. The marginal cost of his search is $15 per search, i.e., the marginal cost of looking at the first apartment is
$15, the marginal cost of looking at the second apartment is $30, and so on.
3. At most, Vinnie will be willing to look at _____ apartments.

A) 4
B) 3
C) 2
D) 1
E) an indeterminate number of
4. The optimal amount of information to obtain for any purchase is

A) zero.
B) the amount where the marginal benefits and marginal costs of additional information are equal.
C) independent of the size of the expenditure.
D) to get advice from friends and family.
E) to read Consumer's Report
5. Calculating the expected value of an outcome is necessary when

A) the outcome is deterministic.
B) the outcome is harmful.
C) the outcome is beneficial.
D) the outcome is uncertain.
E) the outcome depends on outside forces.
6. The lemons model is used to explain

A) the market for citrus products.
B) markets with asymmetric information.
C) just the market for used cars.
D) how not to buy a lemon in the first place.
E) markets with symmetric information.
7. Which of following would not increase the optimal amount of searching for information about a product?
A) The cost of searching is low.
B) The price of the product varies greatly.
C) The quality of the product varies greatly.
D) The product is highly standardized.
E) Some retailers are offering rebates.
8. Given the typical shapes of the marginal costs and marginal benefits of collecting information,
A) there is no equilibrium amount.
B) consumers tend to become experts about most goods.
C) consumers remain completely ignorant about most goods.
D) the equilibrium is somewhere between complete ignorance and becoming an expert.
E) it always pays to get more information.
9. The major prediction of the lemons model is that

A) the presence of asymmetric information reduces the average quality of goods for sale.
B) most used cars are worthless.

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C) if one sells a used car in good condition, one will not be penalized.
D) if one buys a used car, one can expect it to be in good condition.
E) the presence of asymmetric information increases the average quality of goods for sale.
10. The costly-to-fake principle indicates that

A) counterfeiting art objects is difficult.
B) for a seller to have credibility, he must over state a lot.
C) for a buyer to have credibility, he must offer a price that is difficult to fake.
D) for information to be seen as credible, it must be costly to fake.
E) being fake is a costly strategy.
11. According to the textbook, middlemen

A) add no value to economic activity.
B) only add value if the consumer gets a good deal.
C) only add value to themselves.
D) provide value through information and coordination.
E) exist for no reason.
12. An event with an expected value greater than zero is called a(n)
A) better than fair gamble.
B) worse than fair gamble.
C) fair gamble.
D) very fair gamble.
E) significantly better than fair gamble.
13. Identical furnished one bedroom apartments can be rented either for one week for $100 or a month for $375. Is this
rational?
A) No, everyone will pick the one month option.
B) No, the landlord is not profit maximizing.
C) Yes, it lessens the amount of searching the landlord does for tenants.
D) Yes, it lessen the amount of searching the tenant does for living space.
E) Yes, it lessen the amount of searching for both landlord and tenant.
Two types of existing houses are for sale: ones with a cracked foundation and ones without. In all other respects, they are
identical. Houses without cracked foundations are worth $200,000 while those with cracked foundations are worth $200,000
minus the $20,000 to fix the crack or $180,000. The frequency of solid foundations is 80%. Sellers know which type of house
they have but buyers cannot detect a crack. No seller "must" sell his house in order to move and thus no one accepts anything
less than its value.
14. The long run equilibrium in the housing market is

A) 80% homes with solid foundations, 20% cracked foundations, and a reservation price of $180,000.
B) 100% cracked foundation homes and a reservation price of $180,000.
C) 100% solid foundation homes and a reservation price of $200,000.
D) 100% cracked foundation homes and a reservation price between $200,000 and $180,000.
E) indeterminate.
15. Owners of houses with solid foundations will find that

A) buyers are offering more than $200,000.
B) buyers are offering exactly $200,000.
C) buyers are offering exactly $180,000.
D) it is not worth it to sell their house.
E) some buyers offer $200,000 and some offer $180,000.
16. Clearly, not all owners of solid foundation homes will be happy with the choice of removing their home from the
market. Instead, they may
A) simply keep it on the market indefinitely at $200,000.
B) lower their price to $180,000.
C) lower their price to $196,000.
D) offer a warranty to fix any slab problems that develop in the next 12 months.
E) lower their price.
17. As some of the owners with solid foundations remove their homes from the market because they can't get their price,
A) the buyers' reservation price rises.
B) the owners of cracked slabs also begin to remove their homes from the market.

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C) the proportion of homes for sale with a cracked slab rises.

D) the buyers become more willing to believe the owners' claim of a solid foundation.
E) the buyers' reservation price is unchanged.
18. Consumers are unsophisticated and assume that houses with cracked and solid foundations are offered for sale in
their true proportion. The consumer's reservation price is thus
A) $200,000.
B) $196,000.
C) $180,000.
D) $160,000.
E) indeterminate.
19. If the expected value of the next apartment in a search is zero, then
A) all persons will consider seeing the next apartment.
B) only risk adverse persons will consider seeing the next apartment.
C) only risk neutral persons will consider seeing the next apartment.
D) no one will consider seeing the next apartment.
E) only risk loving persons will consider seeing the next apartment.
20. The marginal benefit of additional information

A) rises as more information is collected.
B) is independent of the size of the expenditure.
C) tend to be smaller for big ticket items, e.g., a car.
D) is constant.
E) falls as more information is collected.
21. The lesson for consumers to learn from the lemons model is
A) never buy a used car.
B) never sell a used car.
C) never expect a used car for sale to be of average or better quality.
D) above average quality used cars are never for sale.
E) always expect a used car for sale to be of average quality.
22. If a gamble is taken by a risk averse person, then one can infer that
A) all risk neutral persons will also take the gamble.
B) no risk neutral persons will take the gamble.
C) no other risk averse person will take the gamble.
D) some, but not all, risk neutral persons will take the gamble.
E) some, but not all, risk averse persons will take the gamble.
23. The optional amount of information to acquire before making a purchase is

A) zero.
B) as much as technically possible.
C) the amount where the total cost of acquiring information equals the total benefit.
D) independent of the expenditure to be made.
E) the amount where the marginal cost of acquiring information equals the marginal benefit.
24. To solve the problem of the lemons model in the used car market,
A) all sellers should offer warranties.
B) sellers of below average quality cars should offer warranties.
C) sellers of above average quality cars should offer warranties..
D) buyers should interpret the offer of a warranty as evidence of a lower than average quality car.
E) buyers should interpret the offer of a warranty as evidence of an average quality car.
25. For the following gamble with a probability of 20% that one wins $100 and a 80% probability of losing $25, Regis
takes the gamble and Bryan rejects it. One can infer that
A) both Regis and Bryan are risk averse.
B) neither Regis nor Bryan are risk averse.
C) Regis is risk averse and Bryan is risk neutral.
D) Bryan is risk averse and Regis is risk neutral.
E) both Regis and Bryan are risk neutral.
26. According to the textbook, national advertising campaigns

A) persuade people to buy bad products.
B) are a credible signal of the company's belief that its product is superior.
C) and their slogans are the credible signal.

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D) are a waste of resources.

E) contribute no information.
27. Using conspicuous consumption as a signal for ability produces a social inefficiency because
A) consumption and ability are very poorly correlated.
B) conspicuous consumption is, by definition, inefficient.
C) a positional arms race ensues, with greater and greater amounts being spent on conspicuous consumption.
D) earnings and ability are very poorly correlated.
E) $5,000 suits are simply unnecessary.
28. In general, the presence of insurance against the negative outcome of an event (e.g., fire insurance) tends to
A) lessen the likelihood of the event.
B) have no effect on the likelihood of the event.
C) raise awareness of the event.
D) decrease the incentive to prevent the event.
E) increase the incentive to prevent the event.
29. The theory of the disappearing political discourse is an application of

A) the lemons model.
B) adverse selection.
C) risk averse voters.
D) the free rider problem.
E) statistical discrimination.
30. The expected value of an event is

A) the value of the best outcome.
B) the sum of the possible outcomes divided by the number of possible outcomes.
C) the value one hopes will occur.
D) the value of the worst outcome.
E) the sum of the possible outcomes times the probability of the possible outcomes.
31. Given that those with a greater likelihood of filing a claim do in fact insure more frequently, then
A) they will let their coverage lapse.
B) they will file claims and average premiums will rise.
C) they will file claims but average premiums will be unchanged.
D) those who did not purchase insurance before will find it to be more attractive.
E) they will purchase less insurance in the future.
32. Searching should continue until

A) all options have been explored.
B) the marginal benefits of further searching equal the marginal costs.
C) the marginal benefit of searching is zero.
D) the marginal cost of searching is zero.
E) the lowest price is found.
33. Goods X and Y both have an average quality index of 50. For good X, the lowest quality is 45 and highest quality is
55. For good Z, the lowest quality is 25 and the highest quality is 75. One would predict that
A) the lemons model will operate only for good Z.
B) the lemons model will operate only for good X.
C) the lemons model will apply equally to both markets.
D) the lemons model will apply more to good X than to good Z.
E) the lemons model will apply more to good Z than good X.
34. In any situation where searching is required it is likely that

A) consumers will search too much.
B) all consumers will tend to search about the same amount.
C) agreements, formal or informal, will develop to solve the commitment problem.
D) producers will provide too much information.
E) consumers will examine each and every one of their alternatives.
35. A 1% chance of winning $700 and a 99% chance of losing $7.07 would be classified as a(n)
A) better than fair gamble.
B) expected value.
C) fair gamble.
D) one that a risk averse person would take.
E) unfair gamble.

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36. When someone supports a view but remains silent during debate to minimize the risk of being misunderstood, this is
known as
A) adverse selection.
B) risk neutrality.
C) statistical discrimination.
D) the disappearing political discourse theory.
E) game theory.
37. One implication of the lemons model as applied to the used car market is that
A) one should never sell one's car.
B) a below blue book price for a used car is necessarily a good deal.
C) one will never pay more than the blue book price.
D) a car with a price equal to its blue book value, without additional information, is a below average quality car.
E) a car with a price above its blue book value, without additional information, is necessarily a better than average
quality car.
38. Suppose Ginger is going to buy a house and a dishwasher. Assuming the cost of searching for both is the same, one
can predict that Ginger will
A) spend more time searching for the house than the dishwasher.
B) spend more time searching for the dishwasher than the house.
C) spend equal amounts of time searching for the dishwasher and the house.
D) buy the first house and first dishwasher she encounters.
E) buy the first house she encounters and the third dishwasher.
39. A costly to fake solution to the commitment problem in searching is to

A) not search.
B) search endlessly.
C) never make a commitment.
D) make a non binding, verbal commitment.
E) sign a contractual agreement binding both parties to each other.
40. According to the textbook, an opponent of the death penalty has an incentive to remain silent on the issue because
A) his opposition is insincere.
B) voicing his opposition might be taken to mean he is unconcerned about crime.
C) remaining silent is taken to mean he favors the death penalty.
D) he lacks political courage.
E) he has a "don't ask, don't tell" policy.
41. The second link in the lemons model when applied to used cars is that because most used cars offered for sale are
of less than average quality, then
A) those with a better than average quality car have a greater incentive to sell.
B) the amount of overstatement by sellers of the car's condition declines.
C) those with a better than average quality car have a greater incentive not to sell.
D) the extent of buyer's understatement of their reservation price declines.
E) those with a better than average quality car have smaller incentive to keep their car.
42. Insurance companies practice statistical discrimination because

A) this type of judgment is not yet illegal.
B) demand for insurance is very inelastic.
C) it provides at least imperfect information about the likelihood of a claim.
D) it provides perfect information about the likelihood of a claim.
E) they can.
43. Phil is offered the following gamble: a 60% chance of winning $1,000 and a 40% chance of losing $1,500. This
gamble is a(n)
A) unfair gamble.
B) fair gamble.
C) better than fair gamble.
D) worse than fair gamble.
E) almost fair gamble.
44. The equilibrium allocation of any good in the presence of free riders will be
A) more than optimal.
B) optimal but not all revenue will be collected.
C) optimal.

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D) less than optimal.

E) indeterminate.
45. If a gamble has an expected value of $10, then one can predict that
A) only risk averse persons will take the gamble.
B) only risk neutral persons will take the gamble.
C) all risk neutral persons and a few risk averse persons will take the gamble.
D) some risk neutral persons will take the gamble.
E) all risk neutral and risk averse persons will take the gamble.
46. Suppose Linus purchased a new Lexus in 1993. Overtime, he comes to discover it is of better than average quality.
Therefore,
A) his incentive to sell it declines.
B) his incentive to sell it rises.
C) his incentive to sell it is unchanged.
D) potential buyers will believe his claim that the car is of above average quality.
E) because of the reputation of Lexus, the lemons model does not apply.
47. The disappearing political discourse theory predicts that

A) most politicians will voice their opinions on highly controversial issues.
B) most politicians will remain silent on trivial issues.
C) many politicians with a position counter to popular opinion on a highly controversial issue will remain silent.
D) politicians with a position counter to popular opinion on a trivial issue will remain silent.
E) political debate on all issues, controversial or trivial, will decline.
48. Frank is considering moving to Denver. There is a 70% chance that he will find a job that pays $1,000 more than
what he currently earns and a 30% chance he will find one that pays $3,000 less. The expected value of moving to
Denver is
A) -$200.
B) $200.
C) $700.
D) $900.
E) $1,000.
49. When an individual is judged by the characteristics of the groups he belongs to rather than on his own
characteristics, it is called
B) statistical discrimination.
C) the lemons model.
D) illegal.
E) a fair gamble.
50. Terri decides to play the lottery. She has a 1% probability of winning $1,000 and a 99% probability of winning zero.
The expected value of her decision to play is
A) $1,000.
B) $100.
C) $10.
D) $1.
E) zero.
Two types of used Fender Stratocasters guitars are available for sale: those made in the US and those made in Mexico. It is
impossible for the buyer to know which is which but the seller does. The value of a US Stratocaster is $900 and a Mexican
Stratocaster is $400. The US Stratocasters are 30% of Fender's production and the Mexican Stratocasters are 70%. No seller
"must" sell for less than the guitar's value.
51. As time goes on, the buyers' reservation price will __________ and __________ US made Stratocasters will be
offered for sale.
A) rise; more
B) fall; more
C) rise; fewer
D) fall; fewer
E) fall; the same number of
52. Suppose that Fender discloses that a small stamp on the back of the guitar neck identifies its country of origin.

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Sellers of US made Stratocasters will now receive __________ because their claim of a US made Stratocaster is
__________.
A) between $900 and $400; not credible
B) between $900 and $550; credible
C) at least $900; credible
D) at most $550; not credible
E) at least $550; credible
53. Suppose that Fender discloses that a small stamp on the back of the guitar neck identifies its country of origin. As a
result,
A) sellers with Mexican made Stratocasters will receive larger bids.
B) sellers with US made Stratocasters receive will smaller bids.
C) used Mexican made Stratocasters will not be available for purchase.
D) used US made Stratocasters will be available for purchase.
E) nothing changes.
54. The reservation price of a used Fender Stratocaster will be

A) $900.
B) $550.
C) $400.
D) $280.
E) $270.
55. Which of the following used goods would the lemons model apply to the least?
A) Stereo equipment.
B) Refrigerators.
C) Computers.
D) Dishwashers.
E) Furniture.
56. The presence of asymmetric information means that

A) the average quality of the used good is low.
B) the quality of the used good not offered for sale is below average.
C) the quality of the used good offered for sale is below average.
D) the quality of the used good offered for sale is above average.
E) there is no relationship between being offered for sale and average quality.
57. Assume that the local CPU World is charging $200 for 750 Mhz AMD Athlon microprocessors while on the Internet
they can be had for $180. Part of this price difference is due to
A) the information one can get at the local store.
B) higher quality CPU.
C) differences in the wholesale price to brick and mortar stores.
D) random chance.
E) lower costs of the local store.
58. The difference between the price of electronic equipment in a retail store and at an Internet store reflects in part
A) the extent to which middlemen drive the price up for extra profit.
B) the lack of competition between brick and mortar stores and online stores.
C) the value of personal attention and support at the retail store.
D) excessive markup.
E) that online stores do not profit maximize.
59. In the absence of legal requirements, insurance is most attractive to

A) the wealthy.
B) those with lowest likelihood of filing a claim.
C) the poor.
D) those with the highest likelihood of filing a claim.
E) those with an average likelihood of filing a claim
60. Dave is risk averse while Scott is risk neutral. Both are confronted with the following gamble: win $5,000 with the
probability of 65% or lose $9,000 with a probability of 35%. One can predict that
A) both will accept the gamble.
B) only Scott will accept the gamble.
C) only Dave will accept the gamble.
D) neither will accept the gamble.
E) Scott will accept the gamble and Dave might.

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61. The "personals" section in the local newspaper is an attempt to

A) increase the marginal benefit of searching for love.
B) reduce the marginal benefit of searching for love.
C) reduce the marginal cost of searching for love.
D) increase the marginal cost of searching for love.
E) help the chronically lonely.
62. Several Internet web sites, like Pricewatch.com, allow the consumer to input a product and a list of suppliers with
their price for the product is displayed. This
A) increases the benefits of searching.
B) increases the free rider problem.
C) harms the Internet sellers.
D) reduces the costs of searching.
E) reduces the benefits of searching.
63. Which of the following is not true about the Internet's impact on the market for information?
A) The Internet has reduced the time spent searching for the lowest price.
B) The Internet has greatly expanded the number of sellers that can be searched.
C) It is easy to conduct repeated searches.
D) The quality of information available online is uniformly good.
E) The quantity of information available online is voluminous.
64. Carl has two choices: a 50% chance of winning $20 and a 50% chance of losing $20 verses a 20% chance of
winning $100 and an 80% chance of losing $20. Which choice has the larger expected value?
A) Both choices have the same expected value.
B) The 50%-50% chance
C) Both choices have negative expected values and neither should be selected.
D) The 20%-80% choice.
E) Both choices have the same expected value but the 50%-50% is better because the chance of payoff is greater.
65. For which of the following occupations is the kind of car a person drives likely to be a good indication of their
abilities?
A) High school teacher.
B) College professor.
C) Analyst for a state agency.
D) Doctor working for the military.
E) Doctor in private practice in L.A.
66. A risk averse individual will

A) never accept any gamble.
B) accept a fair gamble.
C) reject all gambles.
D) accept only better than fair gambles.
E) only choose certain events.
67. In order for the predictions of the lemons model to hold, it must be the case that
A) sellers misrepresent the quality of the good they are selling.
B) most of the used goods initially put up for sale are, for one reason or another, of below average quality.
C) buyers are gullible.
D) most of the used goods put up for sale are of average quality.
E) most of the used goods put up for sale are of above average quality.
68. Statistical discrimination

A) causes observable differences in behavior.
B) has little relation to observable behavior.
C) influences, but does not cause, behavior.
D) influences future behavior.
E) is the result of differences in observable behavior.
69. The reason insurance companies, universities, and employers use statistical discrimination in decision making is
because
A) it has not been made completely illegal to do so.
B) imperfect information is better than no information.
C) inaccurate information is better than perfect information.
D) imperfect information is as good as perfect information.
E) it favors the majority.

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70. Tim and Larry are both thrill seekers. Tim has life insurance and Larry does not. One can predict that
A) Larry will engage in fewer life threatening activities.
B) Tim will engage in fewer life threatening activities.
C) Tim and Larry will have the same frequency of participation in life threatening activities.
D) Larry will engage in more life threatening activities.
E) Tim's life insurance has no bearing on his behavior.
Alex, a risk neutral woman, is looking for an apartment. The distribution of apartments is as follows: 70% rent for $700 per
month, 20% rent for $600 per month, and 10% rent for $500 per month. Alex's costs of searching rise by $10 with each search.
71. The expected value of rent in this apartment market is

A) $700.
B) $660.
C) $600.
D) $500.
E) indeterminate.
72. Suppose the cost of searching for Alex changes from $10 per search to $20 per search. Her optimal number of
searches now is
A) 5.
B) 4.
C) 3.
D) 2.
E) 1.
73. Alex's optimal number of searches is

A) 5.
B) 4.
C) 3.
D) 2.
E) 1.
74. The expected values of Alex's first 5 searches are, in order from first to fifth,
A) 40, 40, 40, 40, 40.
B) 30, 30, 30, 30, 30.
C) 80, 70, 60, 50, 40.
D) 30, 20, 10, 0, -10.
E) indeterminate.
75. The growth in the number of divorces over the last 100 years is because
A) searching for a new partner is more difficult.
B) individuals are more self absorbed.
C) TV soap operas have desensitized viewers to extramarital affairs.
D) the social and legal costs of divorce have fallen.
E) the moral fabric of America is decaying.
76. As an illustration of the free rider problem, the textbook indicated that when the small, specialized bookstore had a
poetry reading, the owner overheard
A) customers discussing that they purchased the poet's book at Amazon.com.
B) the poet complain that no one understood his work, they just wanted autographs.
C) customers discussing plans to never buy from Amazon.com again.
D) customers expressing disappointment with the poet.
E) customers expressing hope that the owner would never do this again.
77. As applied to the market for used cars, the first link in the lemons model is that
A) sellers will always over state the condition of their cars.
B) buyers will always over state their reservation price.
C) more lower quality cars will be offered for sale in the used car market.
D) sellers will always understate the condition of their cars.
E) buyers will always understate their reservation price.
78. Tom goes to the local stereo store to learn about high-end equipment. The salesperson spends an hour talking with

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Tom and demonstrating equipment. Tom then leaves and orders the system he liked from an Internet store and
saves $250. Tom is a(n)
A) smart shopper.
B) jerk.
C) free rider.
D) example of adverse selection.
E) example of statistical discrimination.
79. Using conspicuous consumption as an ability signal would work

A) less well in large cities.
B) less well for those who charge fees for their services, e.g., lawyers
C) better for those who work for a flat salary.
D) better in small towns and cities.
E) better in large cities.
80. The marginal cost of collecting information

A) rises as more information is collected.
B) falls as more information is collected.
C) is now zero because of the Internet.
D) is independent of the size of the expenditure.
E) is so small that many consumers are experts on most of what they buy.
81. The free rider problem occurs when

A) buyers pay less than their reservation price.
B) sellers receive more than their reservation.
C) nonpaying buyers cannot be excluded from consuming a good or service.
D) paying buyers are excluded from consuming a good or service.
E) someone steals.
82. The probability of making a 90 on this test is 20%, the probability of making an 80 is 60%, and the probability of
making a 70 is 20%. The correct formula for the expected value of this test is thus
A) (.2)(90)+(.6)(80)+(.2)(70).
B) (20)(90)+(60)(80)+(20)(70).
C) (90+80+70)/3.
D) (.33)(90)+(.33)(80)+(.33)(70).
E) indeterminate.
83. The relevance of expected value to the search decision of the consumer is
A) the outcome of a particular search is certain.
B) one may not be able to purchase the good after it is found.
C) the outcome of a particular search is uncertain.
D) one always knows the value of the next search.
E) one only continues to search if the expected value is positive.
84. Adverse selection refers to the idea that insurance is

A) frequently purchased by those who cannot pay for it.
B) purchased by those least likely to file a claim.
C) only a good deal if a claim is never filed.
D) more frequently purchased by those more likely to make a claim.
E) only a good deal if a claim is filed.
85. The optimal number of searches

A) increases for those goods with high search costs.
B) decreases for goods with large price variations.
C) increases for goods where feature variation is low.
D) increases for goods with large price variations.
E) is unrelated to the cost of searching.
86. Assume that all professors give midterm exams on the day of the midterm. One would expect the optimal number of
searches for a parking space on the day of midterms to __________ because __________.
A) decrease; the marginal benefits are lower.
B) increase; the marginal costs are lower.
C) increase; the marginal benefits are higher.
D) decrease; the marginal costs are lower.
E) be unchanged; neither the costs or benefits have changed.

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87. Jim and Dylan are both applying for the same job. To the employer, both seem identical except for one feature: Jim
has a college GPA of 2.75 and Dylan's is 3.5. The employer will likely
A) flip a coin to decide who to hire.
B) pick Dylan because he is the better worker.
C) pick Dylan because the employer believes a higher GPA means a better worker.
D) ignore the difference in GPA's when deciding.
E) not hire either.
88. Growing technological sophistication of consumer goods would tend to

A) shift the marginal cost of information curve to the right.
B) shift the marginal cost of information curve to the left.
C) shift the marginal benefit of information curve to the right.
D) shift the marginal benefit of information curve to the left.
E) have no effect on the marginal cost or benefit of information.
89. Supporters of legalizing drug usage in the US

A) remain silent so as not to be considered crazy.
B) are crazy.
C) have no evidence from other countries to support their view.
D) are frequently drug abusers.
E) are funded by those who produce and export drugs today.
90. When buyers and sellers are not equally informed about some or all characteristics of the good they seek to
exchange, the information is
A) of no value.
B) asymmetric.
C) of less value than if the information was equal.
D) symmetric.
E) false.
91. Summing the product of a gamble's outcome and the probability of its occurrence for all possible outcomes is
A) a fair gamble.
B) the variance of the gamble.
C) a better than fair gamble.
D) the mode of the gamble.
E) the expected value of the gamble.
92. Which of the following behaviors is not based on statistical discrimination?

A) A 60 year old paying more for life insurance than a 30 year old.
B) Taking a cab home at night rather than walking.
C) A 45 year old married female paying less for auto insurance than an 18 year old male.
D) A BMW having a higher price than a Buick.
E) A coach designing a play for his best 3 point shooter when the team is down by 3 points.
93. A risk neutral individual will

A) accept only better than fair gambles.
B) accepts fair gambles but rejects better than fair ones.
C) accepts any gamble with an expected value of zero or greater.
D) accepts only gambles with an expected value of one or greater.
E) sees risk as neither good or bad.
94. When the costs of searching increase,

A) fewer searches occur.
B) the number of searches remain constant.
C) more searches occur.
D) worse searches occur.
E) the benefits of searching fall.
95. The probability that Juanita will like the movie she is going to see is 90% and has a value of $40. Not liking the
movie has a value of -$10. The expected value of going to the movie is
A) $40.
B) $36.
C) $35.
D) $30.
E) $27.

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96. The idea that insurance is purchased more frequently by those who are more costly for companies to insure is called
C) risk aversion.
D) the expected value.
E) a fair gamble.
97. Dan owns an autographed copy of a Brittany Spears CD. If he sells it locally, he can get $100. If he puts it on eBay,
he can get $500, of which he will pay $50 to eBay. eBay has therefore caused total economic surplus to be
A) unchanged.
B) $500 higher.
C) $50 higher.
D) $350 higher.
E) $400 higher.
98. Many successful professionals, e.g., attorneys and accountants, wear very expensive clothing. This is because
A) tastes change.
B) expensive clothes are a costly to fake signal of wealth.
C) they have exhausted their spending on what people need to live.
D) expensive clothes are a costly to fake signal of ability.
E) they wish to differentiate themselves from other successful professionals.
99. Drew is taking an economics class where two tests and a final will be given. The two tests are worth 25% each while
the final exam counts for 50%. If Drew wants to calculate the expected value of her grade, she should use which of
the following formulas?
A) (.25)(Test 1)+(.25)(Test 2)+(.50)(Final Exam).
B) (Test 1+Test 2+Final Exam)/3.
C) (.33)(Test 1)+(.33)(Test 2)+(.33)(Final Exam).
D) (25)(Test 1)+(25)(Test 2)+(50)(Final Exam).
E) Impossible to determine.
Figure 12.1
100. If the original curves are MB and MC, the equilibrium value of information and quantity is
A) V2, I2.
B) V3, I2.
C) V1, I1.
D) V2, I1.
E) V3, I1.

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1. C
2. E
3. B
4. B
5. D
6. B
7. D
8. D
9. A
10. D
11. D
12. A
13. E
14. B
15. D
16. D
17. C
18. B
19. C
20. E
21. C
22. A
23. E
24. C
25. D
26. B
27. C
28. D
29. E
30. E
31. B
32. B
33. E
34. C
35. C
36. D
37. D
38. A
39. E
40. B
41. C
42. C
43. B
44. D
45. E
46. A
47. C
48. A
49. B
50. C
51. D
52. C
53. D
54. B
55. E
56. C
57. A
58. C
59. D
60. A
61. C
62. D
63. D
64. D
65. E
66. D
67. B
68. E
69. B
70. A
71. B
72. D
73. B

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74. D
75. D
76. A
77. C
78. C
79. E
80. A
81. C
82. A
83. C
84. D
85. D
86. C
87. C
88. C
89. A
90. B
91. E
92. D
93. C
94. A
95. C
96. A
97. E
98. D
99. A
100. C

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1. Data on the hiring of CEO's show that

A) promotion from within the company is nearly universal.
B) hiring an outsider is the most frequent choice.
C) while within promotions are the majority, outside hires have grown dramatically.
D) CEO salaries have gone beyond excessive.
E) little to no change has occurred.
2. The amount by which labor costs rise when an additional worker is hired is termed
A) marginal product.
B) the value of marginal product.
C) the cost of marginal product.
D) marginal labor costs.
E) marginal costs.
Figure 13.1
3. Suppose a labor union forms in market 1 and succeeds in raising the wage to W1. The effect on workers in market 2
is to make
A) all workers better off.
B) all workers worse off.
C) workers from 0 to L2 better off.
D) workers from 0 to L2 worse off and workers from L2 to L4 better off.
E) workers from L2 to L4 better off.
4. In the absence of a labor union in either labor market, the equilibrium wage is __________ with __________
employment in market 1 and __________ employment in market 2.
A) W; L1; L2
B) W1; L3; L2
C) W2; L1; L4
D) W; L1; L4
E) W; L3; L4
5. Suppose a labor union forms in market 1 and succeeds in raising the wage to W1. In market 2, the wage rate
__________ because __________.
A) falls; workers are less productive
B) rises; workers are more productive
C) falls; the supply of workers increases
D) falls; demand for the output falls
E) rises; the union may come there next
Assume that workers are of the same race and either male or female. Male and female workers possess the same stock of

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human capital and hence they are equally productive. The male wage rate is $10 per hour and the female wage rate is $9 per
hour.
6. Firms that do not practice employer discrimination, i.e., hire females, will
A) suffer lower productivity.
B) be as profitable as the all male firms.
C) earn larger profits or smaller losses compared to the all male firms.
D) earn smaller profits or larger losses compared to the all male firms.
E) enjoy greater productivity.
7. Instead of assuming of that males and females have the same stock of human capital, suppose males have a larger
stock: precisely a $1 worth. Then one would predict
A) the female wage rate will rise.
B) the firms that hire females will drive the male firms out of business.
C) the wage gap will narrow.
D) the firms that hire males have lower profits or larger losses.
E) no change in either wage because hiring males no longer expresses an arbitrary preference.
8. Suppose a representative group of males and female college graduates was surveyed about their salaries. It is
found that the males earn an average of $48,000 and the females earn an average of $37,000. The $11,000
difference is __________ of discrimination because __________.
A) not evidence; field of study, GPA and other factors are not held constant
B) evidence; level of education is held constant
C) evidence; field of study, GPA and other factors are not held constant
D) not evidence; level of education is held constant
E) evidence; no other interpretation is possible
9. In a particular labor market, the equilibrium wage rate is $15. From this information, one can infer that
A) the value of the marginal product is $15.
B) the marginal labor cost is $15.
C) the market is socially efficient.
D) the value of the marginal product is greater than or equal to $15.
E) the market is perfectly competitive.
10. The inefficiency caused by a labor union is

A) restricted to the lower wages in the nonunion sector.
B) non existent.
C) restricted to the transfer between the union workers and nonunion workers.
D) due to the workplace rules they put in place.
E) from driving a wedge between the marginal benefit of allocation resources between the union and nonunion
sectors.
11. When calculating the worthiness of a college education, one must use __________ values because the costs and
benefits __________.
A) nominal; are estimated
B) discounted; accumulate over time
C) real; cannot keep pace with inflation
D) future; are estimates
E) non-monetary; are largely non-monetary
12. A compensating wage differential based on social approval would explain the difference in salaries between
A) doctors and nurses.
B) public school teachers and private school teachers.
C) English professors and Finance professors.
D) male book editors and female book editors.
E) tobacco industry marketers and American Cancer Society marketers.
Figure 13.3

lOMoARcPSD|3016397
13. Starting at D, an increase in demand for the industry's output causes a(n) __________, which drives the equilibrium
wage __________ and the equilibrium employment level __________.
A) increase in the quantity of labor demanded; up; up
B) increase in labor demand; up; down
C) decrease in labor demand; down; down
D) increase in labor demand; down; down
E) increase in labor demand; up; up
14. Assume that D is the initial labor demand curve. The labor market equilibrium outcome is
A) W1; L3.
B) W2; L1.
C) W3; L3.
D) W1; L1.
E) W1; L2.
15. Starting at D, a reduction in worker productivity causes a(n) __________, which moves the equilibrium wage
_________ and the equilibrium employment level __________.
A) decrease in the quantity of labor demanded; down; down
B) decrease in labor demand; down; down
C) decrease in labor demand; up; down
D) increase in labor demand; up; up
E) decrease in labor demand; down; up
16. At firm K, labor costs increased from $158 to $170 when the last worker was hired. If the wage rate is __________
then firm K must be a(n) __________.
A) more than $12; monopsonist
B) less than $12; monopsonist
C) less than $12; perfect competitor
D) more than $12; perfect competitor
E) exactly $12; monopsonist
17. The benefit of hiring an extra worker is termed

A) marginal product.
B) the value of marginal product.
C) the value of total product.
D) average product.
E) output.
18. According to the textbook, union membership has

A) remained constant since the 1950's.
B) expanded into white collar professions.
C) declined by approximately 50% since the 1950's.
D) become common in the South.

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E) increased rapidly since the 1950's.
19. To a perfectly competitive firm in the labor market, the labor supply curve is __________ and to the monopsonist it is
__________.
A) upward sloping; upward sloping
B) horizontal; upward sloping
C) upward sloping; horizontal
D) horizontal; vertical
E) vertical; upward sloping
20. A monopsonist is able to

A) pay the same wage independent of the number of workers he hires.
B) pay whatever wage he wants.
C) hire more workers only if he pays them more.
D) pay each worker his reservation wage.
E) always make a profit because of low labor costs.
21. Jobs with undesirable working conditions will have a __________ compensating wage differential and jobs with
desirable working conditions will have a __________ compensating wage differential.
A) larger; smaller
B) positive; negative
C) negative; positive
D) negative; negative
E) smaller; larger
22. According to the textbook, after adjusting for differences in human capital stocks between union and nonunion
workers, the union wage premium is approximately
A) 50%.
B) 40%.
C) 30%.
D) 20%.
E) 10%.
23. The general rule governing the hiring of workers is to

A) minimize labor costs.
B) minimize labor costs per unit.
C) equate total labor costs to total labor benefits.
D) maximize marginal product.
E) equate marginal labor costs to marginal labor benefits.
24. Which of the following is not true of labor unions?

A) They seek to increase members wages.
B) They seek to increase medical benefits paid to members.
C) They bargain for safer working conditions.
D) They bargain for shorter work weeks.
E) They encourage management to adopt labor saving technology.
25. The best explanation for the difference in real earnings between popular singers at the turn of the century and today
is that
A) singers today are more talented.
B) singers today can reach a much larger audience.
C) singers of yesteryear did not have aggressive agents.
D) labor unions for singers were formed.
E) the elasticity of demand for singers is much smaller today.
26. The inefficiency that results from monopsony is that it

A) ignores the concerns of workers.
B) produces too much output.
C) frequently produces goods with negative externalities.
D) hires too few workers and therefore produces too little output.
E) hires too few workers but still produces the efficient level of output.
27. If females have inherent and systematic preferences for less exposure to the risk of injury or death on the job and
risky jobs pay more,
A) this makes no difference in their wages.
B) then males would tend to earn less.

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C) then females would tend to earn more.

D) then males would tend to earn more.
E) then females would favor fewer safety regulations.
28. A monopsonist finds that if he hires Zeke, he will pay Zeke a wage rate of $10 and see his labor costs rise by $15.
One can predict that Zeke will be hired if his
A) value of marginal product is greater than $10.
B) marginal product is greater than $15.
C) value of marginal product is at least $10.
D) marginal product is greater than $10.
E) value of marginal product is greater than or equal to $15.
The relationship between labor usage and output at the local Starduck's is summarized in the table below. The price of a cup
of espresso is $1.25 and no other inputs are required.
Labor Cups of
Input espresso
0 0
1 25
2 45
3 60
4 70
5 75
29. The benefit to Starduck's of hiring the fifth worker is

A) 5 extra cups of espresso.
B) 75 total cups of espresso.
C) $93.75.
D) $6.25.
E) indeterminate.
30. The marginal product of the third worker is __________ the marginal product of the second worker which means
__________.
A) greater than; diminishing returns are absent
B) less than; diminishing returns are present
C) equal to; the third worker will be hired
D) less than; diminishing returns are absent
E) greater than; diminishing returns are present
31. The most Starduck's would pay the third worker is

A) $75.
B) $60.
C) $18.75.
D) $15.
E) The minimum wage.
32. The value of marginal product for the first worker is

A) 25 extra cups of espresso.
B) equal to total revenue at $31.25.
C) 25 total cups of espresso.
D) $1.25.
E) indeterminate.
33. Compensating wage differentials measure

A) the amount a worker gains when switching employers.
B) the positive or negative premium placed on a job's working conditions.
C) the amount a worker gains when switching occupations.
D) the social approval of a job.
E) the amount a worker gains when switching industries.
34. An increase in the supply of labor coupled with an increase in the demand for labor will result in a(n) __________
wage rate and a(n) __________ employment level.
A) higher; higher
B) indeterminate change is the; higher

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C) higher; lower
D) higher; indeterminate change in the
E) indeterminate change in the; lower
35. Differences in wage rates associated with differences in working conditions are called
A) compensating income differentials.
B) equalizing wage ratios.
C) conditional differentials.
D) compensating wage differentials.
E) equilibrium differentials.
36. To derive the labor demand curve for a particular market, one
A) adds up the value of marginal product curves at all labor usage levels.
B) adds up the marginal product curves at the various wage rates.
C) adds up the value of marginal product curves at the various wage rates.
D) multiplies the marginal product curves.
E) multiplies the value of marginal product curves.
37. Firms and individuals do not technically buy and sell the labor input; renting is a more accurate description.
Therefore,
A) entirely new models of market behavior must be developed.
B) the basic model of supply and demand can simply be applied to labor markets.
C) equilibrium will never occur.
D) wages will always underpay workers.
E) workers and employers are less committed to each other.
38. Assume that the average male wage rate is 20% higher than the average female wage rate. One can infer that
A) labor market discrimination is rampant.
B) employers undervalue female employees.
C) customers overvalue male employers.
D) this is evidence of discrimination only if all factors affecting productivity are equal.
E) employers overvalue male employees.
39. Suppose males place less importance on the social approval of their job and more on the income they receive. The
wage gap would therefore be __________ because of __________.
A) smaller; customer discrimination
B) larger; choices made by workers
C) larger; employer discrimination
D) smaller; employee discrimination
E) unchanged; a smaller importance assigned to social approval
Josie has an undergraduate degree in economics and has been working as a utility rate analyst at the local electricity utility. If
she continues on her present career path, the present value of her lifetime earnings is $250,000. If she takes two years off and
gets an MS degree in economics, the present value of her lifetime earnings is $275,000. The annual cost of an MS degree in
economics is $15,000 and the interest rate is 8%.
40. The discounted (present value) benefit of Josie's benefits to getting a graduate degree is
A) $275,000.
B) $250,000.
C) $25,000.
D) -$5,000.
E) indeterminate.
41. Based on the discounted (present value) benefit and cost of acquiring a MS degree in economics, Josie should
A) get the MS degree.
B) get an MS degree but in a different field.
C) get a different undergraduate degree.
D) not get the MS degree.
E) skip the MS degree and go directly to a PhD.
42. Suppose the present value of Josie's earnings with the MS degree in economics rise to $290,000 and the interest
rate rises to 12%. Josie will choose to
A) get the MS degree.
B) get an MS degree in some other field.

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C) get another undergraduate degree in some other field.

D) not get the MS degree.
E) go to law school, like everybody else.
43. The discounted (present value) cost of Josie's graduate degree in economics is
A) $30,000.
B) $28,889.
C) $26,532.
D) $25,000.
E) $15,000.
Figure 13.4
44. In the above labor market, the equilibrium outcome for a monopsonist is
A) W3, L2.
B) W1, L1.
C) W2, L2.
D) W2, L3.
E) W3, L3.
45. In the graph, the distance 0W2 measures

A) the marginal labor cost of L2 workers.
B) the value of the marginal product of L2 workers.
C) the perfectly competitive wage rate.
D) the wage rate the monopsonist pays to the L2 workers.
E) the wage rate necessary to ensure L3 workers will come to work.

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46. A labor union in the labor market is similar to a __________ in the output market.
A) monopsony
B) tax
C) cartel
D) perfect competitor
E) oligopoly
47. In the labor market, a competitive firm must pay __________ wage to hire more workers whereas a monopsonist
must pay __________ wage.
A) the same; a higher
B) a lower; a higher
C) a higher; a lower
D) a higher; a higher
E) the same; the same
Labor Wage VMP

1 $2 $14
2 $4 $12
3 $6 $10
4 $8 $8
5 $10 $6
48. The deadweight loss in the labor market due to monopsony is

A) $5.
B) $4.
C) $3.
D) $2.
E) $1.
49. Comparing the monopsony and perfectly competitive outcomes, one finds that __________ worker(s) is hired and
the wage rate is __________.
A) one less; one dollar less
B) one less; two dollars less
C) the same number of; two dollars less
D) one less; the same
E) two less; the same
50. A monopsonist would profit maximize by hiring __________ workers and paying a wage of __________.
A) 3; $6.
B) 3; $8.
C) 4; $8.
D) 2; $4.
E) 3; $4.
51. If the labor market were perfectly competitive, the wage rate would be __________ and the number of workers hired
would be __________.
A) $2; 1
B) $4; 2
C) $6; 3
D) $8; 4
E) $10; 5
52. According to the textbook, the reason a firm might offer a potential employer the use of Audi TT coupe (cost:
$10,000) instead of just offering $10,000 more in salary is because
A) of tax incentives for the employer.
B) the employee is relieved of the decision to purchase an expensive car.
C) of tax incentives for the employee.
D) the employer is concerned about the status of his employees.
E) it does not matter; they both have the same value.
53. If the value of marginal product of the last worker hired is $10 and the wage rate is $12, then
A) the firm is experiencing an economic loss.
B) the firm can do better by reducing employment and output.

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C) the firm needs to lower the wage rate.

D) the firm needs to expand production.
E) the firm is earning an economic profit.
54. What is the extra output received from the hiring of an extra worker?
A) Total product.
B) The value of marginal product.
C) Marginal product.
D) Average product.
E) The value of average product.
55. Which of the following statements is false in a perfectly competitive labor market?
A) The equilibrium wage rate occurs where labor demand equals labor supply.
B) Firms can hire all the workers they wish to at the going wage rate.
C) The last worker hired is paid the value of his marginal product.
D) The equilibrium outcome is efficient.
E) All workers willing to work for the going wage rate are able to find work.
56. In the labor market, a perfectly competitive firm and a monopsonist are similar in that both
A) take the wage rate as their marginal labor costs.
B) hire the same number of workers.
C) hire up to the point where the extra revenues and the extra costs of the last worker are the same.
D) face an upward sloping labor supply curve.
E) determine the wage rate they pay.
Figure 13.2
__The above markets are for publicists.

On the left is the market for Common Cause, a consumer advocacy nonprofit organization. On the right is the market for the
National Rifle Association, also nonprofit.
57. In the absence of regulation, publicists for the NRA will earn __________ and publicists for Common Cause will earn
__________.
A) $90,000; $50,000
B) $90,000; $90,000
C) $70,000; $50,000
D) $50,000; $70,000
E) $50,000; $90,000
th th
58. The marginal product of the 14 worker is 8 and the firm sells its output for $4 per unit. The value of the 14 worker's
marginal product is
A) $4.
B) $8.
C) $12.
D) $24.
E) $32.
59. According to the textbook, the incidence of winner-take-all labor markets is

A) shrinking.

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B) growing into new industries.

C) shrinking in the entertainment industry.
D) growing only in the entertainment and sports industries.
E) roughly constant.
60. Given identical demand, a monopsonist will hire __________ workers than a competitive firm and produce
__________ output.
A) less; less
B) more; the same
C) more; less
D) more; more
E) less; more
61. When firm J hires 10 workers, its labor cost rose by $20. For firm J to be classified as a monopsonist, it must be the
th
case that hiring the 11 worker would
A) increase labor costs by $20.
B) cause labor costs to rise.
C) increase labor cost by less than $20.
D) decrease average costs.
E) increase labor costs by more than $20.
62. Taking a class in economics during college is an example of a(n)

A) well balanced education.
B) administrative requirement.
C) entirely new way of thinking.
D) investment in human capital.
E) improvement in Graphical Problem drawing.
63. Suppose one knows that firm A is profit maximizing and is paying a wage rate of $10 to its workers. It must therefore
be true that
A) the firm is a perfect competitor in the labor market.
B) the value of the marginal product of the last worker is greater than $10.
C) the firm is a monopsonist.
D) the value of the marginal product of the last worker is less than $10.
E) the extra cost of hiring the last worker is greater than or equal to $10.
64. Primary and secondary school teachers earn less than others with similar educational requirements. Part of the
difference is due to
A) a work schedule that coincides with their children's schedule.
B) a lack of union representation.
C) discrimination.
D) society's devaluing of education.
E) poor human capital.
65. In a competitive labor market, the equilibrium wage rate is determined by

A) custom and tradition.
B) employers.
C) the intersection of labor demand and labor supply.
D) employees.
E) government regulation.
66. Comparable worth legislation would pay workers according to

A) their productivity.
B) the risk of injury in their occupation.
C) the social value of their occupation.
D) their education.
E) the private value of their occupation.
67. The growth of the Internet sites devoted to employment search should
A) increase the influence of monopsonists.
B) result in less competitive labor markets.
C) increase the degree of competition in labor markets.
D) increases the costs of searching for a new job.
E) increases the costs of searching for a new employer.

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Susan is a labor market monopsonist. The labor supply curve she faces is given below.
Labor
Supply Wage
1 $5.00
2 $5.50
3 $6.00
4 $6.50
5 $7.00
68. The marginal labor cost of the fourth worker is

A) $11.
B) $8.
C) $7.
D) $6.
E) $5.
69. If Susan was magically transformed into a perfectly competitive firm in the labor market with an equilibrium wage rate
of $6, then the marginal labor costs of the fifth worker would __________ from __________.
A) fall; $9 to $6
B) fall; $7 to $6
C) not change; $7 to $7
D) fall; $35 to $30
E) rise; $5 to $6
70. The total labor costs of hiring three workers is

A) $5.
B) $11.
C) $18.
D) $26.
E) $35.
71. The value of the marginal product curve is downward sloping because
A) firms must lower price to sell more.
B) at lower wages, only less qualified workers are available.
C) of the law of diminishing marginal product.
D) profits decline as mover workers are hired.
E) productivity rises as more workers are hired.
72. A reduction in the workers' marginal productivity would result in

A) an increase in labor supply.
B) an increase in equilibrium employment level.
C) a reduction int he equilibrium wage rate.
D) a decrease in labor supply.
E) no change.
Carl and Julia are a married, two career couple. They have three possible job/location options. The first option, city A, means
that Carl will earn $100,000 and Julia will earn $30,000. City B, the second option, means $75,000 for Carl and $50,000 for
Julia. The final option, city C, means Carl will earn $25,000 and Julia $80,000. Assume that Carl and Julia like all three cities
equally.
73. Picking city B, which improves Julia's earnings compared to city A, means the household is
A) striking a blow for equality.
B) equalizing earnings completely.
C) giving up $5,000 in family income.
D) making the best choice.
E) gaining $20,000 in family income.
74. If Carl and Julia choose strictly on the basis of family income, they will pick
A) city A or city B.
B) city A.
C) city B.
D) city C.

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E) city B or city C.
75. If Carl and Julia pick city A, then household income is __________ and Julia's earnings are __________.
A) maximized; maximized
B) maximized; average
C) average; minimized
D) minimized; maximized
E) maximized; minimized
76. Assuming that Carl and Julia pick city A, Julia's earnings are
A) adequate.
B) 37.5% of her best option.
C) 60% of her best option.
D) 62.5 of her best option.
E) 70% of her best option.
77. The union wage premium refers to

A) the dues one must pay in order to join a union.
B) the union wage rate minus union membership dues.
C) the deduction for union insurance.
D) the amount by which union wages exceed nonunion wages.
E) the amount by which union wages are exceeded by nonunion wage.
78. In the labor market, the wage rate __________ marginal labor costs for a __________.
A) is less than; perfect competitor
B) is less than; monopsonist
C) equals; monopsonist
D) is greater than; monopsonist
E) equals; monopolist
79. The optimal number of workers for a perfectly competitive firm to hire occurs when
A) total labor costs equal total revenues.
B) the lowest possible wage is accepted by workers.
C) the wage rate equals the marginal product of the last worker.
D) the wage rate equals the value of marginal product of the last worker.
E) the largest output is achieved.
80. Compared to a perfectly competitive firm, the monopsonist's marginal labor costs are __________, resulting is a
__________ socially optimal level of output.
A) greater; less than
B) greater; greater than
C) smaller; less than
D) smaller; greater than
E) the same; less than
81. Monopsony is
A) a market structure with a single seller.
B) a market structure with a single seller and a single buyer.
C) a market structure with a single buyer.
D) a market structure that exists only in labor markets.
E) a common feature of contemporary labor markets.
82. According to the textbook, labor market discrimination stems from

A) employers only.
B) customers only.
C) tradition.
D) a lack of information.
E) employers and/or customers.
83. Human capital theory proposes that

A) a worker's wage is independent of his stock of human capital.
B) physical capital has human like qualities.
C) a worker's wage is inversely related to his stock of human capital.
D) humans have machine like qualities.
E) a worker's wage is directly related to his stock of human capital.

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84. Adopting comparable worth doctrine would result in

A) economic efficiency.
B) labor market equilibrium.
C) inefficient labor market allocations.
D) equal wages for all workers.
E) a more sensible distribution of wages.
85. A group of workers who collectively bargain with employers for higher wages and better working conditions is called
a(n)
A) labor monopsony.
B) labor union.
C) labor collective.
D) open shop.
E) closed shop.
86. A single buyer is called a(n) __________ market.

A) monopoly.
B) monopsonistically competitive.
C) noncompetitive.
D) monopsony.
E) monopolistically competitive.
87. If a perfectly competitive firm finds that the productivity of its workers has increased, then
A) the wage rate increases.
B) labor demand decreases.
C) the wage rate decreases.
D) labor demand increases.
E) labor supply increases.
88. Decisions to pursue higher education or graduate school are best thought of as __________ decisions.
A) unwise
B) costly
C) consumption
D) investment
E) parental
89. An arbitrary preference by an employer for one group of workers over another is termed
A) customer discrimination.
C) employer discrimination.
D) employer discrimination.
E) economic discrimination.
90. When relatively small differences in human capital result in large differences in compensation, one has a(n)
A) loser-take-nothing labor market.
B) winner-take-all labor market.
C) efficient market.
D) greedy market.
E) everybody-gets-the-same labor market.
91. The last worker hired at a competitive firm M has a value of marginal product of $17 and he is paid the market wage
of $15. Firm M could __________ by __________.
A) reduce losses; using fewer workers
B) increase profits; using more workers
C) reduce losses; using more workers
D) increase profits; using fewer workers
E) more fully profit maximize; using more workers
92. All else remaining the same, an increase in the price firms receive for their output will
A) lower the equilibrium wage.
B) decrease labor demand.
C) increase labor supply.
D) increase labor demand.
E) lower the equilibrium employment level.

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93. Marginal product is a measure of the __________ output associated with __________.
A) extra; the total employment level
B) average; the average worker
C) extra; hiring an extra worker
D) average; hiring an extra worker
E) extra; the average worker
94. For a given occupation, jobs with a large social approval factor will pay _________ the average salary while jobs with
a large social disapproval factor will pay __________.
A) more than; the average
B) the same as; less
C) less than; more
D) more than; less than
E) less than; the average
95. The value of marginal product

A) equals marginal product.
B) describes the costs of hiring an extra worker.
C) equals marginal product divided by price.
D) generally increases.
E) equals marginal product times price.
96. Males major in engineering much more frequently than females and starting salaries for engineers (male or female)
are very high. As a result, the wage gap is __________ because of __________.
A) larger; employer discrimination
B) smaller; academic discrimination
C) larger; customer discrimination
D) smaller; choices made by male and female students
E) larger; choices made by male and female students
97. Using cars or other non-wage benefits as a recruiting inducement is

A) growing in all sectors of the economy.
B) restricted to labor markets in equilibrium.
C) a passing fad.
D) growing in the labor markets for highly skilled workers.
E) common in labor markets with excess supply.
98. Which of the following is not a reason why union firms can successfully compete with nonunion firms?
A) Employee morale is possibly higher at union firms.
B) Communication between management and workers is more formal and hence improved at union firms.
C) Labor turnover is lower at union firms.
D) Union firms are legally protected from price competition from nonunion firms.
E) Union employees tend to have higher productivity.
99. The reason nonunion firms do not always drive the union firms out of business is
A) markets are not competitive
B) consumers look for the union label.
C) union firms hire more selectively, employing workers with greater human capital.
D) union firms cut corners in other areas.
E) nonunion firms produce significantly lower quality goods.
100. In professional baseball, some players earn over $6 million per year while the average salary is $1.2 million. The
explanation for this rests with
A) a winner-take-all labor market.
B) the best players being nearly six times better than average players.
C) undisciplined owners overspending on players' salaries.
D) racial discrimination.
E) unreasonable salary demands by players.

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1. C
2. D
3. B
4. A
5. C
6. C
7. E
8. A
9. D
10. E
11. B
12. E
13. E
14. D
15. B
16. B
17. B
18. C
19. B
20. C
21. B
22. E
23. E
24. E
25. B
26. D
27. D
28. E
29. D
30. B
31. C
32. B
33. B
34. B
35. D
36. C
37. B
38. D
39. B
40. C
41. D
42. A
43. B
44. C
45. D
46. C
47. A
48. D
49. B
50. A
51. D
52. B
53. B
54. C
55. A
56. C
57. A
58. E
59. B
60. A
61. E
62. D
63. E
64. A
65. C
66. C
67. C
68. B
69. A
70. C
71. C
72. C
73. C

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74. B
75. E
76. B
77. D
78. B
79. D
80. A
81. C
82. E
83. E
84. C
85. B
86. D
87. D
88. D
89. C
90. B
91. E
92. D
93. C
94. C
95. E
96. E
97. D
98. D
99. C
100. A

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A police department is trying to allocate crime control resources between murder and burglary. Detectives cost $40,000 each.
The marginal benefit of one less murder is $20,000 while the marginal benefit of one less burglary is $1,000. The productivity
of detectives in reducing murders and burglaries is shown in the table.
Number of Number of Number of

Detectives Assigned Murders Burglaries
0 20 100
1 16 60
2 13 30
3 11 10
4 10 0
1. Suppose the police department has $160,000 to spend on detectives. The allocation of detectives which results in
the greatest social benefit is to assign
A) all four detectives to murder prevention.
B) two detectives to murder prevention and two to burglary.
C) all four detectives to burglary prevention.
D) one detective to murder prevention and three to burglary.
E) three detectives to murder prevention and one to burglary.
2. Suppose the police department has $160,000 to spend on detectives but because of political pressures all four are
assigned to murder prevention and none to burglary prevention. As a result, social benefits are
A) $220,000.
B) $20,000 more than the efficient level.
C) $40,000 less than the efficient level.
D) $20,000 less than the efficient level.
E) $14,000 more than the efficient level.
3. The marginal benefits of 1, 2, 3, and 4 detectives being assigned to burglary prevention are
A) $40,000, $30,000, $20,000, and $10,000.
B) $60,000, $30,000, $10,000, and 0.
C) $40,000, $70,000, $90,000 and $100,000.
D) 40, 30, 20, and 10.
E) impossible to calculate.
4. According to the textbook, the primary source of the monopolist's economic profit comes from
A) consumers that buy at the discounted price.
B) charging unfairly high prices to all consumers.
C) the selling of basic necessities.
D) consumers that buy at the list price.
E) charging less than marginal costs.
Figure 14.4

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5. Starting with MC and MB, suppose the Supreme Court chooses to relax the standards for police searches and the
admissibility of confessions. This would shift __________ and __________ the optimal reduction in the murder rate.
A) MC to MC1; increase
B) MC to MC2; increase
C) MB to MB1; decrease
D) MB1 to MB; increase
E) neither curve; leave unchanged
6. If the curves MB and MC represent the marginal benefits and costs of reducing the murder rate, the optimal reduction
is
A) 100%.
B) 50%.
C) 40%.
D) 30%.
E) 25%.
7. When a city finds that to meet demand it must buy from two different suppliers, the reason the marginal cost to all
consumers is the higher priced supplier is because
A) demand is inelastic.
B) city owned monopolies have no constraints on their behavior.
C) securing an extra unit means buying from the higher priced supplier.
D) securing an extra unit might require buying it from the higher priced supplier.
E) it is easier to charge one price rather than two.
Figure 14.1

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8. The firm illustrated in the graph is a(n)

A) natural monopoly.
B) monopoly.
C) perfect competitor.
D) oligopoly.
E) monopolistic competitor.
9. Presume that any cost the cost-plus regulated monopolist incurs is included in AC and hence the price he can
charge. An increase in fixed costs, e.g., expensive leather chairs, would cause
A) AC to shift down.
B) MC to shift up.
C) MC to shift down.
D) the market to move closer to efficiency.
E) the market to move further away from efficiency.
10. The socially efficient output is __________ with a price of __________.

A) Q1; P1.
B) Q2; P2.
C) Q3; P3.
D) Q1; P3.
E) Q4; P1.
11. If left unregulated, the firm would produce __________ units and charge a price of __________.
A) Q2; P2.
B) Q1; P1.
C) Q3; P3.
D) Q1; P3.
E) Q4; P1.
12. The use of pollution permits by the government to reduce pollution is

A) untried in the US.
B) unworkable.
C) a serious mistake, which will cause more pollution.
D) common in the third world.
E) common in several parts of the US.
13. Producing at the point where price equals marginal costs will always result in
A) economic losses for a natural monopoly.
B) economic losses for a monopoly.
C) economic profits for a natural monopoly.
D) economic profits for a perfectly competitive firm.
E) socially inefficient outcome.

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14. According to the textbook, the objection to selling pollution permits - that rich firms can pollute to their hearts content -
is based on the mistaken belief that firms
A) pollute because it is cheaper to do so.
B) are profit maximizers.
C) enjoy polluting the environment.
D) must be treated individually.
E) won't reduce pollution voluntarily.
15. The textbook notes that some would criticize the use of cost-benefit analysis when applied to the prevention of
murder. To say that any expenditure that results in an additional human life being saved is justified is equivalent to
arguing that
A) resources are unlimited.
B) the marginal cost of saving an extra life is zero.
C) the marginal benefit of saving an extra life is nearly infinite.
D) the marginal benefit of saving an extra life is nearly zero.
E) the marginal cost of saving an extra life is nearly infinite.
16. The basic rule for allocating crime control resources states that the optimal amount of crime control is where
A) the incidence of crime is reduced by 50%.
B) the total benefits from reduced crime equal the total costs of crime reduction.
C) the incidence of crime is nearly zero.
D) prisons are completely full.
E) the marginal benefits of reduced crime equals the marginal cost of crime reduction.
The three firms can choose among three workplace safety alternatives: continue with the status quo, provide safety training or
purchase new safety equipment. The injury rates for the firms under the three alternatives as well as the costs of the
alternatives are shown in the table. The cost of treating an injury is $200.
Status Quo Safety Training New Safety Equipment

Firm 7 injuries 6 injuries 5 injuries
A 0 $100 $700
B 0 $50 $600
C 0 $200 $500
17. The marginal costs of all three firms providing safety training to their workers is
A) $350.
B) $300.
C) $200.
D) $100.
18. Using the criteria of cost benefit analysis, safety training is

A) not justified.
B) possible justified.
C) justified.
D) in need of a government requirement.
E) insufficient to ensure worker safety.
19. Suppose the government requires all three firms to install the new safety equipment. The marginal cost to the three
firms is __________ and the marginal benefit is __________ when compared to the status quo.
A) $2150; $1200
B) $1450; $600
C) $1800; six fewer injuries
D) $1800; $1200
E) impossible to calculate either
20. In the end, the problem of natural monopoly should be solved by

A) doing nothing.
B) cost-plus regulation.
C) exclusive contracting.
D) government ownership.
E) weighing the costs and benefits of each of the regulatory alternatives.

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21. A private regulated monopolist that is allowed to charge a price equal to his average costs plus a normal rate of
return is experiencing
A) cost minus regulation.
B) cost regulation.
C) economic profits.
D) cost-plus regulation.
E) economic regulation.
Suppose that all workers value a 1% reduction in the workplace injury rate at $1,000. The cost of a 1% injury rate reduction is
$200 per worker. Firms currently pay $20,000 per year to workers.
22. The exploitation view of workplace safety would conclude that

A) only government regulation requiring a 1% reduction in the injury rate will succeed.
B) workers and firms can negotiate a mutually beneficial reduction in the injury rate.
C) new firms could offer more attractive conditions and compete workers away.
D) workers could offer wage reductions in exchange for the injury rate reduction.
E) since cash is on the table, workers and firms can make each other better off.
23. Suppose new firms began to offer workers $19,500 and a 1% reduction in the injury rate. The total cost of hiring a
worker to the existing firms is __________ and to the new firms it is __________.
A) $20,000; $19,500
B) $20,000; $18,500
C) $19,800; $19,500
D) $20,200; $19,700
E) $20,000; $19,700
24. Suppose new firms began to offer workers $19,500 and a 1% reduction in the injury rate. The new firms would find
that
A) no workers are applying for their jobs.
B) their costs of wages and injury reduction exceed the costs of the existing firms.
C) workers would be very willing to take up their offer.
D) only lower quality workers would apply for their jobs.
E) only injury prone workers would apply.
25. The most efficient distribution of pollution abatement among polluters is

A) a 10% reduction for all.
B) a fixed percent reduction for all.
C) for large reductions from the largest polluters.
D) for large reductions from the smallest polluters.
E) when the marginal cost of abatement is the same across all polluters.
26. The advantage to selling pollution permits rather than using a fixed percent reduction for all firms is
A) government raises additional revenue.
B) reductions in pollution are accomplished by those firms that can do so at least cost.
C) enforcement costs are eliminated.
D) pollution is driven to zero.
E) an increase in the benefits to pollution reduction.
27. The major characteristic of an HMO is

A) emphasis on acute medical treatment.
B) medical treatment is provided for a fixed annual payment.
C) freedom to see nonmember physicians.
D) medical treatment is provided on a fee-for-service basis.
E) a lack of profit maximization motives.
28. The growth of lawsuits seeking compensation from firms when a worker is injured should serve to
A) simply line the pockets of opportunistic lawyers.
B) increase the worker's incentive to get injured.
C) increase the firm's incentive to improve safety.
D) encourage outrageous settlements.
E) reduce the firm's incentive to improve safety.

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Figure 14.2
29. The welfare loss due to a first-dollar insurance plan for the medical treatment is represented by the area
A) ABQ2.
B) Q1ABQ2.
C) Q1AQ2.
D) 0DAQ2.
E) 0DBQ2.
30. If all consumers had first-dollar medical insurance for the medical treatment, they would choose
A) treatment between Q1 and Q2.
B) 0 treatment.
C) Q1 treatment.
D) treatment between 0 and Q1.
E) Q2 treatment.
31. To reduce the social loss due to first-dollar insurance coverage of the medical treatment,
A) the marginal benefit should be reduced.
B) the marginal cost should be reduced.
C) the consumer must bear some of the marginal cost.
D) the marginal benefit should be increased.
E) the marginal cost should be increased.
32. If the marginal cost of treating an illness is zero, the optimal amount of treatment to receive is the amount
A) where the marginal benefit is zero.
B) that cures the illness.
C) that the doctor recommends.
D) where the total benefit is zero.
E) that might cure the illness.
33. When Dale visits his doctor, he does not pay for either the visit or any tests his doctor may order. Dale must
therefore
A) be a member of an HMO.
B) have a medical insurance policy with a deductible.
C) have first-dollar medical insurance.
D) be underutilizing medical care.
E) be a relative of the doctor.

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The three firms have five choices for pollution control: no controls or four different technologies, W, X, Y and Z. The amount of
pollution emitted and the cost of the technologies are shown in the table.
No Controls W X Y Z
Firm 8 tons 7 tons 6 tons 5 tons 4 tons
Axxon 0 $400 $900 $1300 $1500
Immobil 0 $600 $700 $800 $1000
Cexaco 0 $1700 $1900 $2100 $2300
34. Comparing a 25% pollution reduction for all firms to a $1400 per ton tax starting with the fourth ton, total pollution is
__________ and the private costs are __________.
A) lower; lower
B) lower; higher
C) higher; lower
D) the same; lower
E) higher; higher
35. Suppose that the government imposes a tax of $1400 per ton of pollution above 3 tons, i.e., the first three tons are
tax free. As a result, Axxon picks __________, Immobil picks __________, and Cexaco picks __________.
A) Y; Z; no controls
B) Z; Z; Z
C) X; Y; W
D) W; X; X
E) X; Y; Z
36. Suppose the government requires the three firms to reduce pollution by 25% from the no control level. Pollution
reduction process __________ will be chosen and will result in a total cost of __________.
A) W; $2700.
B) Y; $4200.
C) Z; $4800.
D) X; $3500.
E) W; $3400.
37. In the absence of either government regulation or private negotiation, the 3 firms will pick __________ and pollution
will be __________.
A) no controls; 8 tons
B) no controls; 24 tons
C) W; 21 tons
D) X; 18 tons
E) Y; 15 tons
38. Suppose the single firm supplying a particular good has a cost function of the form TC = a + b*Q, where both a and
b are positive constants, a is large and Q is output. This firm would be classified as a(n)
A) regulated monopoly.
B) oligopoly.
C) monopoly.
D) natural monopoly.
E) insufficient information to make a judgment.
39. Suppose a regulated natural monopolist has $1 million in physical assets, produces 10,000 units and experiences
total costs of $100,000. If the monopolist is allowed a 10% return on his investment in capital, his cost-plus price will
be
A) $10.00.
B) $10.10.
C) $11.00.
D) $20.00.
E) $20.20.
40. Compared to an unregulated firm, a cost-plus regulated firm has a smaller incentive to pursue cost saving
innovations because
A) few cost saving innovations exist for natural monopolies.
B) the reduction in costs never improve profitability.
C) the regulators refuse to allow the firm to adopt the innovation.
D) regulated firms do not seek to maximize profits.
E) the reduction in costs ultimately results in a reduction in the regulated price.

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A city owns the natural gas monopoly and has four different firms it can buy natural gas from to supply the city. The table
shows the firms and their marginal costs.
Quantity of Natural Gas Marginal Cost

(Cubic Feet) Source Per Cubic Foot
10,000 Firm A 5 cents
10,000 Firm B 4 cents
20,000 Firm C 2 cents
5,000 Firm D 7 cents
41. If the city needs to supply 35,000 cubic feet of natural gas, it will buy from firm(s) __________ and the marginal cost
of natural gas will be __________.
A) C, B, and A; 3.6 cents.
B) C, B, and D; 7 cents.
C) C, B, and D; 4.3 cents.
D) C, B, and A; 2 cents.
E) C, B, and A; 5 cents.
42. The correct sequence of suppliers and hence marginal costs from lowest to highest is
A) firm C, firm B, firm A, firm D.
B) firm A, firm B, firm C, firm D.
C) firm D, firm A, firm B, firm C.
D) firm D, firm C, firm B, firm A.
E) firm B, firm A, firm D, firm C.
43. If the city needs to supply 18,000 cubic feet of natural gas, it will buy from firm(s) __________ and the marginal cost
of natural gas will be __________.
A) A and B; 4.5 cents.
B) C; 2 cents.
C) A and D; 7 cents.
D) B; 4 cents.
E) A; 5 cents.
44. Suppose that the city finds that during the summer natural gas consumption is 15,000 cubic feet and in the winter it is
40,000. The city should therefore charge a price of
A) 2 cents in the summer and 5 cents in the winter.
B) 3.5 cents year round.
C) 5 cents year round.
D) 2 cents year round.
E) 5 cents in the summer and 2 cents in the winter.
45. Suppose that natural gas demand is 25,000 cubic feet and that households know which firm supplies their gas and
the marginal costs. A consumer who receives gas from firm C claims she is being overcharged at 4 cents per cubic
foot. She is
A) correct and should only pay 2 cents per cubic foot.
B) correct which proves monopolies exploit consumers.
C) correct and should pay 3 cents per cubic foot.
D) incorrect because a 1 unit reduction in consumption reduces costs by 4 cents not 2 cents.
E) incorrect because consumers always want lower prices.
46. For the city to make use of firm D, demand for natural gas must be
A) greater than 5,000 cubic feet.
B) less than 40,000 cubic feet.
C) greater than 40,000 cubic feet.
D) at least 20,000 cubic feet.
E) at most 5,000 cubic feet.
47. If a city owns and operates the local electricity utility where price equals marginal costs, one can infer that
A) some fraction of the tax revenues raised by the city will pay for the losses of the electricity utility.
B) service will, necessarily, be poor.
C) the utility will generate "profits" for the city.
D) service will, necessarily, be good.
E) electricity prices will rise more quickly when compared to private ownership.

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48. As a general rule, failure to equalize the marginal benefits and costs of any publicly approved activity, e.g., crime
control, results in
A) a less costly solution.
B) too much of the activity.
C) too little of the activity.
D) the wrong activities.
E) an inefficient level of the activity; either too little or too much.
49. Today gambling is

A) a criminal activity.
B) legal in a handful of states.
C) legal in all states.
D) legal in most states.
E) considered a moral failing.
50. Compared to a government owned monopoly, a cost-plus regulated monopoly has a(n)
A) smaller incentive to implement cost saving innovations.
B) identical incentive to adopt cost saving innovations.
C) significantly greater incentive to adopt cost saving innovations.
D) a slightly greater incentive to apply cost saving innovations.
E) complete absence of incentive to employ cost saving innovations.
51. The textbook cites a study comparing a group of consumers with first-dollar coverage and a group with a $1000
deductible. The study results indicate that those with the deductible used __________ amount of medical services
and had __________ health outcomes.
A) a smaller; the same
B) a larger; better
C) a larger; the same
D) a smaller; worse
E) the same; the same
The two firms have five different technologies for pollution control to choose from: 1,2,3,4 and 5. The amount of pollution
emitted and the cost of the technologies are shown in the table. In the absence of government oversight, the firms will pick
technology 1 and emit 4 tons apiece. The government is considering two plans to reduce pollution: a 50% reduction by both
firms or selling pollution permits. One permit entitles the owner to emit one ton of pollution. Without a permit, no pollution can
be emitted.
1 2 3 4 5
Firm 4 tons 3 tons 2 tons 1 ton 0 tons
Dewpoint $350 $400 $500 $700 $1000
Disunion Carbonated $225 $250 $290 $400 $600
52. Suppose the government decides to sell 4 permits, i.e., 4 tons of total pollution and start the bidding with an opening
price of $30. The ultimate equilibrium price of permits is __________ with Dewpoint buying __________ and
Disunion Carbonated buying __________.
A) $100; 3; 1
B) $100; 1; 3
C) $200; 2; 1
D) $300; 1; 0
E) $50; 4; 2
53. Suppose the government decides to sell 4 permits and an environmental group is determined to only allow 3 tons of
pollution to be emitted. To accomplish its goal, the environmental group should bid __________ for the permit.
A) $500
B) $300
C) $250
D) $200
E) $100
54. A major drawback to government ownership of natural monopolies is

A) a reduced incentive to expand when the population grows.
B) a reduced incentive to adopt cost cutting measures.
C) an inability to estimate demand.
D) the lower quality of government employees.

lOMoARcPSD|3016397
E) political gridlock.
55. If all firms were to pay the same premium per worker into the workers' compensation system, then
A) all firms would experience the same burden.
B) firms with low injury rates would benefit.
C) service sector firms would benefit.
D) the socially optimal injury rate would result.
E) firms with high injury rates would benefit.
56. A group of physicians that provide healthcare services to members for a fixed annual fee is termed a(n)
A) first-dollar treatment plan.
B) fee-for-service plan.
C) cartel.
D) health mmaintainence organization.
E) hospital.
57. As evidence of the growth in problem gambling, the textbook notes that
A) revenues from gambling are enormous.
B) formation of new chapters of Gamblers Anonymous is growing at a record pace.
C) per capita expenditures on gambling have fallen.
D) property crimes have risen.
E) 55% of adults that live in states with lotteries have purchased at least one ticket.
58. Under exclusive contracting, the incentive to adopt cost saving innovations is
A) the same for cost-plus regulation.
B) the same as for government owned natural monopolies.
C) destroyed.
D) greater than under cost-plus regulation but still less than a private firm.
E) the same as for a private firm.
59. Under a first-dollar medical insurance plan, the marginal cost of treating a covered illness is
A) positive.
B) zero.
C) negative.
D) a percentage of the total cost.
E) increasing.
60. It must always be true that if a natural monopolist produces where __________, he will earn __________.
A) MR=MC; an economic profit
B) MR=MC; an economic loss
C) P=MC; zero economic profits
D) P=MC; an economic loss
E) P=AC; an economic loss
61. When government seeks bids from private firms to provide a service like garbage collection, this is called
A) government ownership.
B) cost-plus regulation.
C) a natural monopoly.
D) exclusive contracting.
E) inclusive contracting.
62. If a cost-plus regulated firm is allowed to count purchases of new personal computers in its rate base but is not
allowed to count computer hardware purchases to upgrade existing computers, one would expect to see the
regulated firm
A) upgrading its existing computers.
B) upgrade half of its computers and replace half.
C) always replacing computers and replacing them very quickly.
D) under utilizing new computers.
E) over utilizing upgraded computers.
63. When a government owned natural monopoly supplies the service from different sources, the marginal cost for all
consumers is
A) the marginal cost of the cheapest source.
B) the marginal cost of the source from which the consumer receives his service.
C) an average of the marginal costs from the different sources.
D) the marginal cost of the most expensive source needed to meet demand.

lOMoARcPSD|3016397
E) the marginal cost of the most expensive source.
64. The concern that HMO's will provide less than the efficient amount of medical care stems from
A) higher costs for HMO's.
B) recruiting doctors that are more interested in money than patient care.
C) government regulation.
D) the incentive that ordering fewer medical procedures means greater profits for the HMO.
E) a lack of peer review.
65. According to the textbook, approximately __________ percent of the monopolist's economic profit ultimately funds
services provided by various levels of government.
A) 90
B) 66
C) 50
D) 35
E) 20
66. In contrast to first-dollar insurance coverage, the efficiency concern for HMO's is that
A) too much medical treatment will be provided.
B) acute treatment will be overemphasized.
C) too little medical treatment will be provided.
D) preventative treatment will be underemphasized.
E) price will be too low.
67. According to the textbook, prior to 1970, gambling was

A) illegal but rarely was the law enforced.
B) legal.
C) illegal and vigorously enforced.
D) limited to church bingo.
E) exclusively controlled by state governments.
68. First-dollar insurance coverage means that

A) most of the insured's expenses are covered.
B) some of the insured's expenses are covered.
C) all of the insured's expenses are covered.
D) 10% of the insured's expenses are covered.
E) 50% of the insured's expenses are covered.
69. Assume that a natural monopoly is producing where marginal revenues equal marginal costs. If the monopoly is
broken up into several smaller firms that face the same demand and the same cost structure then,
A) prices to consumers must fall.
B) quantity must rise.
C) the average costs of the newly created firms will be higher than the monopolist's average costs.
D) profits will be smaller.
E) the average costs of the newly created firms will be identical to the monopolists average costs.
70. According to the textbook, exclusive contracting by government has been successfully applied to
A) electricity.
B) fire protection and garbage collection.
C) sewage treatment.
D) cable TV.
E) natural gas.
71. For a fixed percent reduction in pollution emissions to be economically efficient, it would have to be the case that
A) the marginal cost of pollution control is the same across all firms.
B) enforcement is vigorous.
C) the marginal cost of pollution control varies wildly across firms.
D) large polluters reduce emissions by more than small polluters.
E) small polluters reduce emissions by more than large polluters.
72. According to the textbook, approximately __________ million Americans lack any form of health coverage.
A) 1
B) 5
C) 25
D) 40
E) 45

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73. Since 1970, gambling in the US has

A) remained an illegal activity.
B) become legal and is widely available.
C) remained a legal activity in a few places, e.g., Las Vegas, Reno.
D) remained an illegal activity but receives little enforcement effort.
E) become legal in very limited ways, e.g., church bingo.
74. According to the textbook, the proper sequence of events that are causing the decline in medical insurance coverage
is
A) medical insurance is inexpensive, too many people seek medical care, quality of treatment falls, people cancel
their insurance.
B) medical insurance is expensive, social pressure to be covered is less, only those with good health purchase
insurance, premiums increase.
C) medical insurance is expensive, employers don't offer coverage as a benefit, more people buy individual
policies, premiums rise.
D) medical insurance is expensive, social pressure to be covered is less, those with poor health make up a larger
percent of those covered, premiums rise.
E) treating illness is expensive, insurance companies deny coverage to the ill, premiums fall.
75. A firm would be classified as a natural monopoly if

A) there are few substitutes.
B) it were the only supplier of all natural products.
C) its marginal costs are always less than its average costs.
D) it is the only producer.
E) it were regulated by the government.
76. Demands for greater government regulations of workplace safety rests on the belief that
A) labor market competition is great.
B) firms will adopt safety devices on their own.
C) left on their own, firms will exploit workers and subject them to unreasonable risks.
D) workers mobility is significant.
E) workers know which industries and firms are relatively safe and which are not.
77. The addictive nature of gambling is

A) a highly disputed view in the medical profession.
B) the justification for making gambling legal.
C) a myth.
D) the justification used for making gambling illegal.
E) present in most people that buy lottery tickets.
78. The textbook notes that states currently offering gambling would find it difficult to return a ban on gambling because
A) voters would object.
B) they would lose tax revenues and problem gamblers could still gamble in nearby states with legal gambling.
C) the public would not believe the claim that gambling is a moral failing.
D) enforcement of a ban would be costly.
E) people would simply move to states that continue to allow gambling.
79. Natural monopolies that required large expenditures on fixed capital equipment are
A) well suited to exclusive contracting.
B) always owned by the state or city government.
C) never subjected to cost-plus regulation.
D) very profitable.
E) poorly suited to exclusive contracting.
80. As fewer families choose to purchase medical insurance,

A) the frequency of illness in the general population rises.
B) the remaining insured families tend to have higher than average rates of illness.
C) the frequency of illness in the general population falls.
D) the remaining insured families tend to have lower than average rates of illness.
E) the remaining insured families experience the same rate of illness as those who don't purchase insurance.
81. According to the textbook, as gambling has gone from an illegal activity to a state sponsored legal activity,
A) the moral fiber of the public has declined.
B) most people now have a gambling problem.
C) those with a gambling problem have fewer restraints on their behavior.

lOMoARcPSD|3016397
D) organized crime has suffered a significant loss in revenues.

E) the appeal of gambling has lessoned.
82. Assume that larger firms can reduce pollution emissions more cheaply than smaller firms. A fixed percent reduction
in pollution emissions would therefore
A) penalize large and small firms equally.
B) penalize large firms more.
C) ensure the reduction in pollution was achieved at the lowest cost.
D) penalize smaller firms more.
E) ensure that for the costs expended, the largest reduction in pollution was gained.
83. Direct regulation of workplace safety by the Occupational Safety and Health Administration (OSHA) will result in
A) inefficient outcomes.
B) too much safety.
C) too little safety.
D) the optimal amount of safety.
E) clear and easily understood safety guidelines.
84. If a 2% reduction in workplace injuries is valued at $1000 and can be achieved by having workers wear large, heavy
goggles, then
A) it would be efficient to buy and required them if the costs are $1000 or less.
B) the goggles should be required by the government.
C) injuries will be unchanged because workers will refuse to wear them.
D) it would be inefficient to not require them.
E) the government should provide the goggles to those workers who can't afford them.
85. If the marginal costs of pollution abatement are different across firms, then regulations that require fixed percentage
reductions in pollution will be
A) inefficient.
B) fair to all polluters.
C) advantageous to small firms.
D) efficient.
E) ineffective.
86. The textbook argues that having the government pay for everyone's medical insurance (say, $4000 per family per
year) would be less expensive than the current system because
A) additional tax revenue would no be required.
B) of economies of scale in medical treatment.
C) the currently uninsured would have fewer major illnesses.
D) insurance companies would not make a profit.
E) doctors would charge less to treat patients.
87. The optimal amount of workplace safety is the amount

A) where the total benefits equal the total costs.
B) that results in zero injuries.
C) that results in a 50% reduction in injuries.
D) where the marginal benefits equal the marginal costs.
E) that results in zero deaths.
88. Reduced incentives to adopt cost saving innovations is a concern

A) only for state owned natural monopolies.
B) only for cost-plus regulated firms.
C) for all monopolies.
D) only for exclusive contracting.
E) for both state owned and cost-plus regulated natural monopolies.
89. The cause of the potentially lower levels of medical treatment by HMO's is due to
A) legal protection from malpractice lawsuits.
B) lower quality doctors.
C) the payment for medical services being fixed.
D) lower quality medical equipment.
E) excessive malpractice lawsuits.
90. The application of exclusive contracting by governments is best suited to services that
A) are extremely complex.
B) require large expenditures on fixed investments.

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C) are relatively simple to provide.

D) have highly uncertain costs.
E) are localized.
91. According to the textbook, one of the difficulties with cost-plus pricing involves
A) establishing the rate of return.
B) the administrative costs of deciding which of the firm's costs should be included.
C) estimating the firm's marginal costs.
D) separating the firm's fixed and variable costs.
E) estimating the elasticity of demand.
92. According to the textbook, the percentage of gross domestic product devoted to healthcare between the years 1940
and 2000
A) declined from 4% to 2%.
B) increased slightly from 4% to 6%.
C) increased sharply from 4% to 14%.
D) increased exponentially from 4% to 40%.
E) remained unchanged at 4%.
93. The view that firms emit pollution because they like to or because they don't value the environment is held by
A) everyone.
B) those that reject proposals for a pollution tax or pollution permits.
C) economists.
D) those who favor proposals for a pollution tax or pollution permits.
E) businessmen.
94. Which of the following would not be a consequence of switching entirely from fixed percent pollution reduction
regulations to either a pollution tax or pollution permits?
A) The total cost of achieving a given reduction in pollution would fall.
B) The distribution of pollution reduction effort among firms would change.
C) Government revenues would rise.
D) The total amount of pollution emitted would, necessarily, rise.
E) The largest reductions in pollution emissions would come from those firms best able to reduce pollution.
95. Insurance that pays for all expenses generated by the insured's activity is known as
A) all dollar insurance coverage.
B) last dollar insurance coverage.
C) cradle to grave insurance coverage.
D) first-dollar insurance coverage.
E) total dollar insurance coverage.
96. Workers' compensation is

A) another term for wages.
B) a private insurance plan for workers.
C) an optional benefit available to a few workers.
D) a government insurance plan that provides benefits to workers injured on the job.
E) the total amount workers are paid, counting both wages and benefits.
97. According to the textbook, public concern with under treatment by HMO's has led to proposals that would
A) outlaw HMO's.
B) grant patients the right of appeal when denied treatment.
C) limit medical malpractice settlements.
D) provide prescription drugs for free.
E) require more training for doctors.
98. The reluctance of an individual state to return to a ban on gambling is an example of a(n)
A) prisoner's dilemma.
B) externality.
C) tragedy of the commons.
D) inefficiency.
E) Nash equilibrium.
99. For the socially efficient workplace injury rate to be zero, it would have to be the case that
A) the marginal benefit of reduced injuries is zero.
B) the marginal cost of reduced injuries is zero.
C) the marginal cost of reduced injuries is large.

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D) government increases its role in regulating workplace safety.

E) production technology becomes more labor intensive.
100. The __________ the elasticity of demand for medical care, the __________ the extent of over consumption of
medical treatment.
A) larger; smaller
B) smaller; larger
C) larger; larger
D) more inelastic; larger
E) more elastic; smaller

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1. E
2. D
3. A
4. D
5. A
6. E
7. C
8. A
9. E
10. C
11. B
12. E
13. A
14. C
15. C
16. E
17. A
18. C
19. D
20. E
21. D
22. A
23. E
24. C
25. E
26. B
27. B
28. C
29. A
30. E
31. C
32. A
33. C
34. A
35. A
36. D
37. B
38. D
39. D
40. E
41. E
42. A
43. B
44. A
45. D
46. C
47. A
48. E
49. D
50. D
51. A
52. A
53. D
54. B
55. E
56. D
57. B
58. E
59. B
60. D
61. D
62. C
63. D
64. D
65. B
66. C
67. A
68. C
69. C
70. B
71. A
72. E
73. B

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74. D
75. C
76. C
77. D
78. B
79. E
80. B
81. C
82. D
83. A
84. A
85. A
86. C
87. D
88. E
89. C
90. C
91. B
92. C
93. B
94. D
95. D
96. D
97. B
98. A
99. B
100. C

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1. If a good can be consumed by one person and the availability of the good to others is not reduced, this good would
be classified as a(n) __________ good.
A) nonexcludable
B) pure public
C) private
D) nonrival
E) common
2. The textbook asserts that if, as income rises, consumers want __________, then it is likely that they will also want
__________.
A) more or better jointly consumed private goods; more or better public goods
B) more pure private goods; fewer public goods
C) more commons goods; more property rights
D) more or better jointly consumed private goods; fewer public goods
E) to pay less in taxes; fewer public goods
3. When dealing with pure public goods,

A) the government must always provide them.
B) private firms will always provide them.
C) the government frequently provides them although private firms provide some.
D) the government must legally compel private firms to provide them.
E) private firms provide nearly all of them and the government provides the few remaining ones.
4. If all taxpayers pay the same amount of tax, the tax is termed a(n)
A) proportional tax.
B) progressive tax.
C) head tax.
D) flat tax.
E) per unit tax.
5. The development of pay-per-view technology

A) converted a collective good into a private good.
B) allows consumers to see movies that were previously unavailable for several years.
C) converted a public good into a collective good.
D) has made all consumers worse off.
E) converted a private good into a public good.
6. Mandy pays $12,000 in taxes and earns $150,000. Moe pays $7,000 in taxes. If the tax system is proportional, then
Moe's income is
A) less than $87,500.
B) more than $30,000.
C) $87,500.
D) more than $87,500.
7. Suppose Scott's demand for a public good is P=7-.3Q and Mike's demand is P=10-1.5Q. The equation for social
demand for the public good is
A) Q=17-1.8P.
B) P=17-1.8Q.
C) P=3-1.2Q.
D) P=14-.6Q.
E) P=20-3.0Q.
The city of Dustin is going to grant an exclusive contract to provide cable TV for the next year. The economic profit of the
contract is thought to be $5 million. Firm 1 and firm 2 are competing for the contract. The firm that spends the most on
lobbying will be awarded the contract.
8. The reason firm 1 and firm 2 will continue to escalate spending on lobbying efforts is because
A) those making the decision demand "gifts."
B) the CEO's of the two firms are rivals.
C) spending $1 more than your opponent means winning the contract.
D) the firms can pass the costs along to consumers.
E) it serves to maximize profits.

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9. If both firms refrain from spending anything on lobbying efforts, the expected profit of the contract is
A) $5 million.
B) $2.5 million.
C) $2 million.
D) $1 million.
10. If firm 1 spends $2,000,002 on lobbying while firm 2 spends $2,000,001, the expected profit to firm 1 is __________
and to firm 2 it is __________.
A) $5 million; 0
B) $0; $5 million
C) $2.5 million; $2.5 million
D) $499,998; -$2,000,001
E) $2,999,998; -$2,000,001
11. If firm 1 spends $2 on lobbying and firm 2 spends $1 on lobbying, the expected profit to firm 1 is __________ and to
firm 2 it is __________.
A) $4,999,998; -$1
B) $5 million; 0
C) $2.5 million; $2.5 million
D) 0; $5 million
E) $5 million; -$1
12. Radio is an example of a good that is

A) only nonrival.
B) only nonexcludable.
C) neither nonrival nor nonexcludable.
D) both nonrival and nonexcludable.
E) private.
13. One justification for the creation of a federal level of government is

A) the ability to deficit spend.
B) economies of scale in the provision of military defense.
C) to encourage local diversity in the types of public goods provided.
D) greater responsiveness to the will of the voters.
E) better decision making.
Quantity of the Citizen A’s Citizen B’s Citizen C’s Citizen D’s
Public Good Reservation Price Reservation Price Reservation Price Reservation Price
40 $1 $2 $3 $4
30 $2 $3 $4 $6
20 $3 $4 $6 $8
10 $4 $6 $8 $10
14. If the good in the table is a public good, __________ units are demanded when price is $21 and if the good in the
table is a private good, __________ units are demanded when price is $21.
A) 0; 0
B) 20; 0
C) 20; 20
D) 10; 20
E) 30; 40
15. If the good is private, the total value of 10 units of output is __________ while if the good is public, the total value of
10 units is __________.
A) $100; $280
B) $100; $100
C) dependent on what the price is; $280
D) $100; $25
E) $10; $280
16. Assume that the good in the table is a public good. Market demand is __________ units when the total benefit is
$10.
A) 0

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B) 10
C) 20
D) 30
E) 40
17. Logrolling refers to

A) legislation that affects the timber industry.
B) the practice whereby legislators support each other's pork barrel spending.
C) the practice of introducing many similar bills hoping that one of the versions will become law.
D) a recreational activity of mountain men.
E) the practice of attaching a controversial bill to a large appropriations bill.
Marginal Benefits to Bill A Bill B

District Voters $100. $5.00
Non District Voters $3.00 $5.00
Marginal Costs to All Voters $5.00 $4.00
18. Bill B would be described as

A) logrolling.
B) a private good.
C) a collective good.
D) pork barrel spending.
E) efficient.
19. The outcome of the $20 bill auction example in the textbook occurs because
A) undergraduates and MBA students are irrational.
B) the $20 bill is worth more than $20.
C) of peer pressure.
D) the bidder with the second place bid can always raise the bid and hope the other bidder quits.
E) the setup of the auction is absurd with no application in the real world.
20. If all voters in a particular political district have reservation prices less than the cost of a public good (a park), then
A) the government should build the park.
B) some sort of collective action by voters will be necessary to fund the park.
C) a private firm will appear with the proposal to build the park.
D) the park will never be built.
E) by definition, the benefits of the park are less than the costs and thus the park should not be built.
A public good that would benefit Karen, Tammy, and Max has a one time installation cost of $900. These three voters must
approve any tax plan by simple majority and all three will cast a vote
Reservation
Voter Price Income
Karen $100 $1,000
Tammy $200 $5,000
Max $700 $6,000
21. The net social benefit of providing the public good is

A) $100.
B) $700.
C) $900.
D) $1,000.
E) can't be determined.
22. Since the government does not know and cannot discover the voters' reservation prices, it proposes a head tax of
$300 per voter. The result of the referendum is
A) the tax passes and the public good is provided.
B) Max votes for the tax but Karen and Tammy vote against it and it fails.
C) Max votes for the tax, Karen votes against it but Tammy's vote is uncertain.
D) all three voters vote against the tax.
E) only Max casts a vote and the tax passes.

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23. Suppose that government accurately knew the three reservation prices and the cost of the public good. To achieve
the ideal tax structure and collect no more in tax revenue than $900, each voter should be charged __________
percent of their __________.
A) 100; reservation price
B) 70; reservation price
C) 20; income
D) 90; reservation price
E) 10; income
24. If the government proposes a head tax of $300, the relationship between the percentage of income paid in taxes and
the voters' reservation prices is
A) positive.
B) linear.
C) increasing.
D) progressive.
E) negative.
25. Under an 8% proportional income tax, the relationship between the percentage of income paid in tax and the voters'
reservation price is
A) constant.
B) positive.
C) negative.
D) progressive.
E) regressive.
26. One source of friction in the governmental provision of a pure public good is that voters receive __________ of the
public good and have __________ for the public good.
A) different amounts; different reservation prices
B) different amounts; the same reservation price
C) the same amount; different reservation prices
D) the same amount; the same reservation price
E) different amounts; the same desire
27. A family decides to vacation at Disney World and agree that everyone will be free to go on any of the rides as much
as they want. Thus, going to Disney World is a __________ and the rides are __________.
A) collective good; public good
B) pure private good; pure private good
C) jointly consumed public good; jointly consumed private good
D) pure public good; commons good
E) jointly consumed private good; pure private good
Public Park Size Voter X’s Voter Y’s Voter Z’s

(Acres) Reservation Price Reservation Price Reservation Price
8 $2 $3 $3
6 $3 $6 $5
4 $4 $9 $7
2 $5 $12 $9
28. Suppose that the city receives a grant that pays one half of the cost of each acre the city buys. If the cost of land is
$28 per acre, the optimal park size is
A) 0.
B) 2.
C) 4.
D) 6.
E) 8.
29. The sequence of market reservation prices, starting with a 2 acre park through an 8 acre park is
A) $8, $14, $26, $20.
B) $8, $14, $20, $26.
C) $14, $8, $20, $26.
D) $26, $8, $14, $20.
E) $26, $20, $14, $8.

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30. Aaron's neighbor Cliff keeps his front yard well manicured and plants beautiful flowers which Aaron finds pleasing.
The attractiveness of Cliff's front yard is
A) nonrival.
B) a private good.
C) nonexcludable.
D) both nonrival and nonexcludable.
E) a commons good.
31. Which of the following reasons does not help explain the presence of pork barrel legislation?
A) The benefits to the voters of the district are large.
B) The increased tax payments to voters outside of the district are small.
C) Voters tend to reelect politicians that secure benefits for the district.
D) The ideology of the political party in power.
E) The increased tax payments to voters inside the district are small.
32. Allowing the government to assess and collect tax revenues to fund a voter approved public good is
A) likely to be the least expensive method of raising the necessary revenue.
B) a further abdication of power by voters.
C) never the optimal way of raising revenues.
D) relatively uncommon in the U.S.
E) fair only if all voters pay the same amount of tax.
33. If market demand for a public good is given by P=10-3Q, the elasticity of demand when Q=2 is, in absolute value
A) .67.
B) 6.
C) 1.
D) .06.
E) 3.
34. According to the textbook, collective goods tend to be

A) provided only by the government.
B) over consumed.
C) provided only by private government.
D) provided by the government in some cases, by private firms in other cases.
E) provided by government if the costs exceed the benefits.
35. __________ is an externality that requires a solution above the level of state or local governments.
A) Zoning
B) Speed limits
C) Education
D) Air pollution
E) Recreational parks
36. National Public Radio and The Public Broadcast System rely, in part, on which of the following private methods of
raising revenues?
A) Scrambling their signal to exclude nonpayers.
B) Donations from private citizens and corporations.
C) Contracting with private firms.
D) Selling ads.
E) Lobbying Congress for additional tax revenues.
37. Pay-per-view television programming is __________ because __________.

A) efficient; the marginal cost is zero
B) inefficient; TV should be free
C) inefficient; consumers can express their preferences
D) inefficient; the marginal cost is zero
E) efficient; otherwise wrestling specials would never be seen
38. If taxpayers pay a smaller fraction of their income to taxes as their incomes rise, the tax is known as a(n)
A) proportional tax.
B) progressive tax.
C) head tax.
D) flat tax.
E) regressive tax.

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39. A collective good is one that is

A) to a degree nonrival but is excludable.
B) rival but to a degree nonexcludable.
C) consumed by more than one person.
D) to a degree both nonrival and nonexcludable.
E) designed to benefit society collectively.
40. The primary factor that limits the ability of private firms to supply public goods is
A) the nonrival characteristic of public goods.
B) the lack of well defined demand.
C) custom and tradition.
D) the nonexcludable characteristic of public goods.
E) diseconomies of scale.
41. Beyond the provision of public goods, government exists to address

A) the redistribution of wealth.
B) the problem of declining moral values.
C) limiting personal freedom.
D) externalities and property rights.
E) national defense.
42. The public restrooms along with the Interstate are

A) nonrival.
B) a collective good.
C) both nonrival and nonexcludable.
D) a pure public good.
E) nonexcludable.
43. If all relevant private and social costs and benefits are included in the demand and supply curves for a particular
good, then imposing a tax will
A) only increase the price paid by consumers.
B) only reduce the price received by producers.
C) reduce production and consumption below the efficient level.
D) have no significant effect on price or quantity.
E) increase demand.
44. According to the textbook, in repeated experiments when a $20 bill is auctioned such that two top bids pay the
auctioneer and then the top bid receives the $20 bill, the
A) top bid is $1.
B) top bid is $10.
C) sum of the top two bids frequently exceed $50.
D) top bid is $20.
E) sum of the top two bids is $20.
45. The judicial system is an example of government

A) providing a pure public good.
B) encouraging a positive externality.
C) defining and enforcing property rights.
D) discouraging a negative externality.
E) claiming more power at the expense of the individual.
46. Jointly consumed private goods and public goods are similar in that
A) individuals are free to consume as much or as little as they wish.
B) individuals are free to consume a higher or lower quality of the good ad they wish.
C) government is frequently called upon to provide them.
D) the same quantity and quality is provided to all persons.
E) both suffer from the problem of free riders.
47. Pork barrel spending is

A) any government spending that involves agriculture.
B) legislation that costs less than the total benefits but lacks political support.
C) another name for all spending by the government.
D) smaller in election years.
E) legislation that significantly benefits a particular group of voters but costs more than the benefits to all voters.

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48. The problems of externalities and poorly formed property rights are
A) minor in modern economies.
B) additional rationales for the existence of government.
C) better solved by private rather than government action.
D) the only two legitimate reasons for creating government.
E) easily solved by individuals.
49. HBO shows movies without commercial interruption. This is because HBO
A) can exclude nonpaying viewers.
B) executives decided to differentiate themselves from other networks.
C) shows only movies that are very inexpensive to rent.
D) is prohibited from showing commercials.
E) is subsidized by the government.
50. Taxing a negative externality is

A) the least effective way of correcting the problem.
B) doubly advantageous in that output is reduced towards the socially optimal level and tax revenues are gained.
C) merely a way to reduce output.
D) merely a way to raise tax revenues.
E) never justified.
51. When a negative externality is present in a market, the government

A) must regulate it
B) should regulate it if the public supports regulation.
C) should never regulated it.
D) need only regulate it if loss of life is involved.
E) should regulate it if the benefits of regulation exceed the costs.
52. If the percentage of income paid in taxes falls as income rises, the tax is called
A) progressive.
B) proportional.
C) liberal.
D) conservative.
E) regressive.
The very small city of Pleasantville is considering building a public swimming pool that costs $1,000. The five voters in the city
and their marginal benefit of a swimming pool are listed above. It takes a 4/5 majority to pass any tax measure and all voters
must vote.
Voter Marginal Benefit

Kyle $420
Dylan $360
Linus $350
T.D. $190
Delta Jet $170
53. Linus proposes that the city build the pool and finance it with a $200 tax from each voter. The outcome of this
proposal will be __________ votes in favor and __________ votes opposed and the measure will __________.
A) 5; 0; pass
B) 4; 1; pass
C) 2; 3; fail
D) 3; 2; pass
E) 3; 2; fail
54. Building the swimming pool would __________ total economic surplus because __________.
A) reduce; the costs exceed the benefits
B) reduce; taxes would have to be collected to build it
C) increase; the benefits exceed the costs
D) increase; every city needs a public pool
E) not effect; the costs and benefits are equal
55. Suppose the marginal benefit values in the table are indeed accurate. Kyle proposes that all voters pay 68% of their
marginal benefit in taxes to pay for the pool. The outcome of this proposal is __________ votes in favor,
__________ votes opposed and the measure will __________.

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A) 4; 1; pass
B) 5; 0; pass
C) 0; 5; fail
D) 3; 2; pass
E) 2; 3; fail
56. Suppose that Delta Jet proposes allowing a private firm to build the pool that would charge the same one time fee to
everyone for unlimited access to the pool. The outcome would be that the pool would
A) be built and the fee would be $200.
B) not be built.
C) be built and the fee would be $250.
D) be built and the fee would be $333.
E) be built and the fee would be $500.
57. To say that a particular good is nonrival means that

A) it has no substitutes.
B) consumers can enjoy it without paying for it.
C) consumption of the good by one person does not diminish the availability of the good to others.
D) it is the best good, i.e., it has no rivals.
E) consumption of the good by one person reduces the availability of the good to others.
58. A good or service that is rival but is to some extent nonexcludable is called a(n)
A) public good.
B) pure public good.
C) collective good.
D) commons good.
E) private good.
59. Suppose that a private firm is supplying a collective good (nonrival but excludable) to a market with demand of P=24-
3Q. If the marginal cost of providing this good is zero but the firm charges $18, the actual equilibrium output is
__________ units while the social efficient output is __________ units.
A) 2; 8
B) 6; 8
C) 2; 2
D) 4; 2
E) 2; 4
60. Karl earns $25,000 while Angel earns $40,000. If they are subject to a regressive tax structure,
A) Karl and Angel will pay the same amount in taxes.
B) Karl will pay a larger amount in taxes.
C) Angel will pay a larger amount in taxes.
D) Karl will pay a larger percentage of his income in taxes.
E) Karl and Angel will pay the same percentage of income in taxes.
61. According to the textbook, the best way to stop rent-seeking by firms competing for government contracts is to
A) impose significant criminal penalties for lobbying activities.
B) required complete disclosure of amounts spent by firms on lobbying.
C) require complete disclosure by politicians and bureaucrats of gifts from lobbyists.
D) award the contract on the basis of price, quality of service, or other performance related measures.
E) award the contract through a lottery.
ICM, a major manufacturer of computers announces it will build a large manufacturing facility in Texas, and choose either
Midland or El Paso. The following data summarize the economic impact to the two cities.
Midland El Paso
Private Economic Benefits
(higher incomes, more spending) $300 million $300 million
Additional Tax Revenue
Direct (property taxes for the plant) $60 million $30 million
Indirect (additional sales tax) $50 million $50 million
62. If wages and construction costs are identical in Midland and El Paso, ICM will choose to
A) locate in El Paso.
B) locate in Midland.

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C) reconsider other cities.

D) reconsider building the plant.
E) flip a coin.
63. Mr. Wu finds that he is unable to secure a loan to expand this business because interest rates have just risen due to
heavy borrowing by the federal government. Mr. Wu is experiencing the __________ effect.
A) pork barrel.
B) logrolling.
C) prisoner's dilemma.
D) externality.
E) crowding out.
64. Crowding out refers to

A) insufficient public spending on housing for the poor.
B) the inability of consumers to find hotel rooms at national parks during summer.
C) government spending that replaces charity.
D) investment expenditures cancelled due to higher interest rates brought on by government borrowing.
E) a lack of adequate restroom facilities at public arenas.
65. Federal government spending that benefits a particular district or state greatly but costs more than the total benefits
to the whole of U.S. is called
A) logrolling.
B) pork barrel spending.
C) a public good.
D) a collective good.
E) beef bucket spending.
66. Excessive government spending is the result of

A) liberals controlling the Congress.
B) a lack of a balanced budget amendment.
C) pork barrel spending and logrolling.
D) a lack of conservative leadership in Congress.
E) having a federal government.
67. The most appropriate level of government to provide public goods is

A) local.
B) state.
C) federal.
D) county.
E) dependent on the specific public good in question.
68. If government needs to raise revenues to pay for a public good, the ideal tax structure would be to tax
A) all citizens by the same amount.
B) all citizens in proportion to their willingness to pay for the public good.
C) all citizens by the same proportion of their income.
D) only the citizens that use the public good.
E) only the citizens that are willing to pay for the public good.
69. The deadweight loss from imposing a tax on a market without an externality is
A) always justified.
B) quite large.
C) never justified.
D) trivial in size.
E) justified if the tax revenue creates a larger surplus gain from the provision of a public good.
70. Private radio and television stations can provide a pure public good to consumers by
A) selling time to advertisers.
B) relying on government subsidizers.
C) charging consumers who listen or watch.
D) requiring consumers to buy signal descramblers.
E) soliciting voluntary donations.
71. The major drawback to large across the board cuts in government spending is
A) it has never been tried.
B) some programs will not be cut.
C) some programs will be reduced to zero.

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D) it completely ignores the cost-benefit principle.

E) taxes will not be cut.
72. The best example of a pure public good is

A) cable TV.
B) a national park.
C) national defense.
D) social security.
E) education.
73. The textbook states that empirical studies have found that the demand for public goods
A) is quite price inelastic.
B) has a small, positive income elasticity.
C) is price elastic.
D) has an income elasticity in excess of 1.
E) is perfectly elastic.
Quantity of the Sam’s Dylan’s Linus’

Public Good Reservation Price Reservation Price Reservation Price
35 0 $1 $4
20 0 $3 $7
15 $3 $4 $8
10 $4 $7 $9
74. In order to receive 20 units of the public good, the total willingness to pay is __________ with __________ 3 voters
willing to pay.
A) $5; 2 of the
B) $3; 1 of the
C) $7; 1 of the
D) $10; 2 of the
E) $10; all
75. If government is considering providing 10 units of the public good, the most the project can cost and be efficient is
A) $20.
B) $16.
C) $9.
D) $7.
76. Suppose that the marginal cost of providing the public good is constant at $15. The optimal amount of public good to
provide is
A) 10.
B) 15.
C) 20.
D) 35.
E) unknown.
77. A sales tax applied to all consumer purchases would be considered a __________ tax because __________.
A) proportional; the percentage of income spend on consumption is constant as income rises.
B) regressive; the percentage of income spent on consumption declines as income rises.
C) regressive; the sales tax percentage is the same for all consumers.
D) progressive; the percentage of income spent on consumption rises as income rises.
E) progressive; the amount paid in sales tax rises with income.
78. Supporting another politician's pork barrel spending in exchange for his support of your pork barrel spending is called
A) corruption.
B) an impure public good.
C) an externality.
D) logrolling.
E) crowding out.
79. The presence of an unregulated negative externality means that the equilibrium output is

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A) efficient.
B) too small.
C) too large.
D) greater than demand.
E) consistent with the greatest total economic surplus.
80. A tax that results in a larger fraction of income being paid in taxes as income rises is a ________ tax.
A) regressive
B) head
C) progressive
D) proportional
E) flat
81. Which of the following is not an advantage of local government?

A) Better matching of voters and the level of public goods provided.
B) Economies of scale in the provision of military defense.
C) The distance between voter and office holder is short.
D) Greater diversity of solutions to a given social problem.
E) More opportunity for direct communication between voter and politician.
82. To derive the market demand curve for a private good one sums the __________. For a public good, one sums the
__________.
A) individual quantities at various prices; individual quantities at various prices
B) individual prices at various quantities; individual quantities at various prices
C) individual quantities at various prices; individual prices at various quantities
D) individual prices at various quantities; individual prices at various quantities
E) demand vertically; demand horizontally
83. The demand curve for public goods is constructed by

A) horizontally summing each voter's desired quantity of the public good at various reservation prices.
B) surveying voters on how much of a particular public good at various reservation prices.
C) vertically summing each voter's reservation price for a given level of public good.
D) magic, i.e., a demand curve cannot be constructed for public goods because of their nonrival and
nonexcludable nature.
E) with drawing the public good and measuring the public outcry.
Marginal Marginal Total Spending

Benefit Cost on the Public Good
Public Good 1 $20 $20 $1,500
Public Good 2 $15 $25 $800
Public Good 3 $10 $5 $700
84. Total economic surplus could be enhanced by reallocating total spending from
A) public good 2 to public good 3.
B) public good 3 to public good 1.
C) public good 2 to public good 1.
D) public good 1 to public good 3.
E) public good 1 to public good 2.
85. Suppose a 10% reduction in spending for all public goods is mandated. This means that the level of
A) public good 1 will become optimal.
B) public good 2 will move towards the optimal level.
C) public good 3 will move towards the optimal level.
D) public good 2 will move away from the optimal level.
E) public good 1 will move towards the optimal level.
86. Suppose a 10% reduction in spending for all public goods is mandated. This means that
A) two of the three public goods will be above their optimal levels.
B) there will be less government which is always socially beneficial.
C) two of the three public goods will be below their optimal levels.
D) all three public goods will be at their optimal levels.
E) all three public goods will be above their optimal levels.

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87. From the data, one can infer that spending on __________ is __________.
A) public good 1; too large
B) public good 3; too large
C) public good 2; too small
D) public good 1; optimal
E) public good 3; optimal
88. In general, if a good or service has zero marginal costs but has a positive price, the social outcome is
A) efficient.
B) uncertain; it may or may not be efficient.
C) that too much will be consumed.
D) inefficient.
E) that too much will be provided.
89. The incentives for pork barrel spending are strong because the benefits to the politician's voters are __________, the
extra tax paid is __________ and the chances of reelection are __________.
A) large; small; increased
B) large; large; decreased
C) small; large; decreased
D) small; small; increased
E) large; small; decreased
90. The size of the deadweight loss due to taxing a market without an externality can be minimized by choosing to tax
A) goods that are sinful.
B) all goods equally.
C) goods that are luxuries.
D) goods with inelastic demand or supply.
E) goods with elastic demand or supply.
91. Which of the following items is an example of a nonrival but excludable good?
A) Pay-per-view movies.
B) Corn.
C) National defense.
D) Broadcast TV.
E) Access to the Internet.
92. Rent-seeking describes

A) the consequences of high mortgage rates.
B) spending by the government that is unproductive.
C) the reason for the existence of lease agreements.
D) the socially inefficient efforts to win a prize.
E) the market for apartments.
93. Relying on a regressive tax structure to fund public goods would

A) result in overprovision of public goods.
B) be favored by the wealthy.
C) come closest to the ideal tax structure.
D) result in large amounts of tax revenues.
E) result in a gross under provision of public goods.
94. Some would agree that reducing taxes on all goods and services would reduce economic inefficiency. This view is
true
A) always.
B) never.
C) if all goods and services have a negative externality.
D) if all goods and services have no negative externality.
E) only if the tax savings is returned to the voters.
95. Government subsidizes education because

A) it is a pure public good.
B) private firms will not provide education.
C) of custom and tradition.
D) education is thought to have positive externalities.
E) it wants to advance its agenda.

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96. The combination of pork barrel spending and logrolling leads to

A) inefficiently large government spending.
B) the largest net benefit for society.
C) the quick termination of projects that are wasteful of irrelevant.
D) relatively short careers for politicians.
E) under provision of public goods.
97. A good or service that is nonrival but is excludable is referred to as a(n)

A) public good.
B) pure public good.
C) collective good.
D) commons good.
E) private good.
98. A nonexcludable good is one for which

A) the availability of the good does not depend on the number of consumers.
B) consumers can consume the good without paying for it.
C) consumers can't remove from their budget.
D) consumers must pay for before they can consume it.
E) consumption continues despite serious health risks, e.g., cigarettes.
99. According to the textbook, the private provision of radio and television may not achieve a socially efficient outcome
because
A) consumers don't pay for the entertainment.
B) the government strictly regulates the market.
C) increasingly, radio and television stations are monopolies.
D) programs are chosen on the basis of audience size rather than the value to the audience.
E) programs are dull and uncreative.
100. A pure public good is one that is

A) nonrival only.
B) slightly nonrival and nonexcludable.
C) nonexcludable.
D) highly nonrival but only slightly nonexcludable.
E) highly nonrival and nonexcludable.

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1. D
2. A
3. C
4. C
5. C
6. C
7. B
8. C
9. B
10. E
11. A
12. D
13. B
14. B
15. A
16. E
17. B
18. E
19. D
20. B
21. A
22. B
23. D
24. E
25. A
26. C
27. E
28. D
29. E
30. D
31. D
32. A
33. A
34. D
35. D
36. B
37. D
38. E
39. A
40. D
41. D
42. E
43. C
44. C
45. C
46. D
47. E
48. B
49. A
50. B
51. E
52. E
53. E
54. C
55. B
56. D
57. C
58. D
59. A
60. D
61. D
62. A
63. E
64. D
65. B
66. C
67. E
68. B
69. E
70. A
71. D
72. C
73. D

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74. D
75. A
76. B
77. B
78. D
79. C
80. C
81. B
82. C
83. C
84. A
85. B
86. C
87. D
88. D
89. A
90. D
91. A
92. D
93. E
94. D
95. D
96. A
97. C
98. B
99. D
100. E

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1. Which of the following is not true of the free enterprise system as it relates to income distribution?
A) The system rewards effort.
B) It encourages risk taking.
C) It naturally results in a fair distribution of wealth.
D) Those that succeed receive a handsome payoff.
E) Hard and effective work results in higher pay.
2. The moral theory in which the best income distribution is the one that maximizes total utility is called
A) uniformitarianism.
B) totalism.
C) utilitarianism.
D) communism.
E) capitalism.
3. According to the textbook, allowing the states to determine the level of welfare benefits creates a __________,
resulting in a race to the __________.
A) prisoners' dilemma; highest level of benefits
B) nation of inequality; courts
C) prisoners' dilemma; lowest level of benefits
D) prisoners' dilemma; the highest level of taxes
E) prisoners' dilemma; median level of benefits
4. Given that the mix of public goods provided by government favors the wealthy, the textbook claims that
A) this is another reason not to be poor.
B) the poor can and should demand compensation for any resulting injury.
C) this justifies discarding willingness-to-pay as a measure of benefits.
D) this justifies a ban on the use of cost-benefit analysis.
E) this is an outcome about which nothing can be done.
5. Unlike the minimum wage, the Earned Income Tax Credit does not
A) cause low wage workers to be laid off.
B) cost anything.
C) improve the status of the working poor.
D) maintain the proper incentives to work.
E) discourage welfare dependency.
6. To prevent people from exploiting a negative income tax by pooling their lump sum payments while ensuring a
minimum living standard, the textbook proposes a(n)
A) NIT with a small lump sum combined with a below minimum wage public employment program.
B) pure NIT.
C) pure public employment program.
D) lump sum transfer of $10,000, no strings attached.
E) elimination of all efforts to use tax revenues to assist the poor.
7. Suppose the elasticity of labor demand is less than 1 in absolute value. Imposing a minimum wage in the labor
market will
A) increase the incomes of all current workers.
B) result in no unemployment.
C) increase the size of the total wage bill.
D) make few workers better off.
E) decrease the size of the wage bill.
8. Which of the following does not contribute to the "market failure" of the current political process?
A) Voters want lower taxes.
B) Politicians want to be reelected.
C) Once in place, bureaucracies are difficult to eliminate.
D) It is impossible to gauge the size of market distortions caused by government policies.
E) The costs of economic inefficiency do not appear on the voters tax bill.
9. In terms of occupational choice, the "Lake Wobegan Effect" causes people to

A) overestimate the odds they will win one of the superstar positions.
B) not choose careers that are centered in Minnesota.
C) become hosts on National Public Radio.
D) underestimate the odds they will win one of the superstar positions.
E) select productive occupations in traditional labor markets.

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10. According to the textbook, the 50% increase in the size of an average new home is the result of
A) new tax deductions for mortgage interest payments.
B) increased income inequality.
C) pressure from home builders.
D) increased family size.
E) "square foot" envy.
11. One of the advantages of state level administration of welfare payments is

A) the freedom to experiment with different solution.
B) uniformity in the size of the benefits.
C) consistency in the eligibility requirements.
D) there is no incentive for the poor to move to high benefit states.
E) there is no incentive for the wealthy to move to low benefits states.
12. In the view of the textbook, the reason the current system has not been replace with a combined negative income tax
and public employment program is
A) the poor oppose it.
B) it takes time for radically different solutions to gain support.
C) the wealthy oppose it.
D) the middle class oppose it.
E) it would cost less.
13. Among the shortcomings of capitalism with respect to the distribution of income is it
A) encourages risk taking.
B) rewards innovation.
C) allows for economic mobility.
D) fails to provide for those who try and fail or those unable to try.
E) produces the largest amount of income.
The table below shows three different income distributions and the total income for the economy.
Share of Income
Quintile Distribution A Distribution B Distribution C
Bottom 20% 20% 1% 14%
Second 20% 20% 2% 16%
Middle 20% 20% 3% 20%
Fourth 20% 20% 14% 23%
Top 20% 20% 80% 27%
Total Income $10,000 $25,000 $15,000
14. The ranking of the three income distributions (based only on the shares) from most to least equitable is
A) A, C, B.
B) A, B, C.
C) B, C, A.
D) B, A, C
E) C, A, B.
15. The extra total income under distribution C compared to distribution A can be thought of as the
A) exploitation of the poor.
B) cost of inequality.
C) greed of the wealthy.
D) exploitation by the wealthy.
E) justification for mandatory income redistribution.
16. The story of Wendy Williams in the textbook makes clear that the lack of investment in human capital by the poor is
A) merely a financial issue.
B) the consequence of difference in tastes.
C) caused by both financial and psychological issues.
D) an information problem.
E) the result of not receiving encouragement from teachers and administrators.
17. A(n) __________ involves giving all citizens a substantial lump sum payment that is reduced at a rate of less than
100% as income is earned.
A) earned income tax credit.

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B) in-kind transfer.
C) unearned income tax credit.
D) negative income tax.
E) positive income tax.
18. According to the textbook, the reason more young adults are pursing careers in winner-take-all labor markets is
A) they have watched too much L.A. Law and The Practice.
B) the growth in the overall wage structures of these occupations.
C) they are seeking one of the limited number of extremely high paying positions.
D) these occupations are relatively cool.
E) a significant increase in the number of law and business schools.
19. The psychological costs of poverty

A) have declined overtime.
B) relate to an absolute standard of consumption.
C) are non-monetary and hence non-important.
D) stem from a relative standard of consumption.
E) are overstated.
20. In general, a means-tested welfare benefit will

A) retard the incentive to work.
B) have no effect positive or negative on the incentive to work.
C) enhance the incentive to work.
D) ensure that only the truly needy get benefits.
E) encourage honesty about earnings.
21. Based on the data presented in the textbook, between 1945 and the early 1970's, the growth in income in the U.S.
was
A) approximately 3% for all income groups.
B) approximately 7% for all income groups.
C) much larger for the low income groups.
D) much larger for the high income groups.
E) negative for most of the period.
22. The textbook cites evidence that a doubling in enrollments in engineering would __________ while a doubling of
enrollments in law would __________.
A) increase national income; increase national income
B) decrease national income; increase national income
C) decrease national income; decrease national income
D) increase national income; decrease national income
E) increase national income; leave national income unchanged
23. Suppose that a combined negative income tax and public employment program as outlined in the textbook was
estimated to have direct costs equal to the current welfare system. One could then infer that
A) the choice between the two involves flipping a coin.
B) the current system should be retained.
C) the combined program would cost less as the market distortions of the current system were eliminated.
D) the opportunity costs of the alternatives are also the same.
E) politicians would eagerly voice their support for the new plan.
24. The most likely explanation for the sizable increase in reported income and therefore tax payments after the Tax
Reform Act of 1986 is
A) expenditures on tax avoidance fell.
B) the wealthy became more honest about reported income.
C) the reduction in the tax rates spurred very large increases in hours of work.
D) the influence of President Reagan.
E) the elimination of many exemptions and deductions.
25. To completely eliminate the concern about public assistance reducing the poor's incentive to work, the government
could
A) eliminate all welfare programs.
B) give churches and nonprofit organization the responsibility for administering the programs.
C) give everyone a fixed cash transfer.
D) give the assistance as wages in exchange for public sector employment.
E) provide training assistance rather than cash or in-kind transfers.

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26. Means-tested welfare benefits provide an incentive to

A) leave welfare.
B) earn unreported and illegal income.
C) work.
D) accurately disclose earnings.
E) take part-time minimum wage employment.
27. Surveys consistent report that over 90% of drivers claim to be better than average drivers. This finding is consistent
with
A) the "Defensive Driving Effect."
B) actual rates of auto accidents.
C) the "It is always the other guy's fault" hypothesis.
D) the "Lake Wobegan Effect."
E) the level of auto insurance premiums.
28. The idea of a negative income tax was originally proposed by

A) Richard Nixon.
B) Lyndon B. Johnson.
C) Milton Friedman.
D) John Rawls.
E) Garrison Keillor.
29. The textbook indicates that the empirical evidence suggests a modest increase in the income tax rates would
A) result in at least a 10% reduction in hours worked.
B) not seriously erode the incentive to work.
C) eliminate the current income inequality in the U.S.
D) actually reduce tax revenues.
E) cause the wealthy to move to other countries.
30. According to the textbook, expenditures on private security are __________ and __________.
A) small; declining
B) large; productive
C) large; efficient
D) large; wasteful
E) small; wasteful
31. The existence of poverty can reduce the size of the economic pie because
A) of the progressive nature of income taxes.
B) the quality of the workforce is reduced through a lack of investment in human capital.
C) of welfare transfers to the poor.
D) the effort expended on the administration of welfare programs is unproductive.
E) the poor do not save.
32. Suppose Allen cares only about income and receives one welfare benefit of $100 and for each dollar he earns, the
benefit is reduced by one dollar. If Allen can earn __________, he will choose to __________.
A) less than $100; work
B) $100; work
C) $100; not work and receive the benefit
D) more than $100; not work and receive the benefit
E) $200; not work and receive the benefit
33. That the poor are less well-nourished, receive less preventative medical care and experience more psychological
stress
A) imposes costs only on the poor.
B) serves as an incentive to escape poverty.
C) imposes costs only on society as a whole.
D) is the result of rampant discrimination.
E) imposes costs on both the poor as well as society as a whole.
34. A minimum wage law

A) sets the legal wage rate below the equilibrium.
B) results in a labor shortage.
C) is the most efficient way to assist the working poor.
D) results in a labor surplus.
E) is an example of a price ceiling.

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35. The justification made by utilitarianism for redistributing income is based on the idea that
A) wealthy people provide society with less utility than those of modest means.
B) it is morally fair.
C) the gains of the wealthy are frequently undeserved.
D) the marginal utility of income declines with income.
E) the marginal utility of income rises with income.
36. The effect of a progressive consumption tax would be to

A) leave the consumption patterns of the wealthiest taxpayers unchanged.
B) reduce the incentive to earn income.
C) reduce the incentive to save.
D) reduce the consumption of the wealthiest taxpayers.
E) generate greater after tax income inequality.
37. An advocate of utilitarianism would argue that an extra $1,000

A) provides a greater increase in utility to a poor person than a wealthy person.
B) is of no value to the truly wealthy.
C) provides the same increase in utility for both the wealthy and the poor.
D) provides the same decrease in utility for both the wealthy and the poor.
E) is taxed so heavily that the wealthy have little incentive to earn it.
38. The empirical evidence on labor supply supports the view that a modest increase in the progressiveness of the
income tax would
A) significantly reduce economic output.
B) cause hours of work to fall dramatically.
C) reduce the amount of tax revenue collected.
D) have a minor impact on the incentive to work.
E) encourage government to spend even more on wasteful programs.
The following data are for a low wage labor market.
Labor Labor
Wage Demand Supply
$15.00 0 750
$12.00 150 600
$9.00 300 450
$7.50 375 375
$5.00 500 250
$3.00 600 150
0 750 0
39. After the imposition of the minimum wage, the employer's surplus is __________ and the worker's surplus is
__________.
A) $225; $225
B) $1,575; $1,575
C) $1,575; $225
D) $225; $1,575
E) $1,800; $1,800
40. Suppose a minimum wage of $12 is imposed in this labor market to improve the wages of low wage workers. This
results in
A) 225 workers losing their jobs.
B) 375 workers receiving $12 an hour.
C) the total wage bill rising.
D) a new equilibrium at $12 and 150 workers.
E) an improvement in the economic status of all the original 375 workers.
41. The imposition of the minimum wage caused the total economic surplus in the labor market to __________ by
__________.
A) rise; $1,012.50
B) fall; $1,237.50
C) rise; $225.00
D) fall; $1,350.00
E) fall; $1,012.50

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42. Under the Personal Responsibility Act, one can

A) enjoy welfare benefits without limits.
B) must work in order to receive benefits, i.e., it is a public employment program.
C) receive 5 years worth of benefits over one's lifetime.
D) receive 5 years worth of benefits, withdraw for 1 year, then get another 5 years.
E) work without one's benefits being reduced.
43. Which of the following is not true when comparing a minimum wage to an earned-income tax credit?
A) The earned-income tax credit does not cause the working poor to be laid off.
B) The minimum wage reduces total economic surplus.
C) A minimum wage only benefits the workers who retain their jobs.
D) An earned-income tax credit benefits all working poor.
E) An earned-income tax credit requires less tax revenue.
44. To ensure fairness, a progressive consumption tax would need to

A) have approximately the same tax rates as the current income tax system.
B) only include consumption spending on luxuries.
C) excluded consumption spending on necessities.
D) apply the same tax rate to all levels of consumption.
E) have significantly higher tax rates on the highest spenders compared with current tax rates on income.
45. Since the mid 1970's, the pattern of income growth has been one of
A) much larger gains for all income groups.
B) negative rates for low income groups and enormous gains for high income groups.
C) smaller growth for all groups compared to the period of 1945 to the early 1970's.
D) large gains for the middle class and stagnate growth for low and high income groups.
E) randomness.
46. The official definition of the poverty threshold is

A) $20,000.
B) one fourth of the median U.S. income.
C) the cost of the economy food plan designed by the Department of Agriculture times three.
D) one fourth of the mean U.S. income.
E) ten percent of per capita GDP.
47. A welfare payment that is reduced when the recipient earns more income is a(n)
A) fair benefit.
B) inducement for the poor to find employment.
C) unconditional benefit.
D) means-tested benefit.
E) effort-tested benefit.
48. The reason people in Professor Rawls' thought experiment would choose a uniform distribution of income is
A) concern for the welfare of their fellows.
B) Karl Marx was right.
C) people are risk seeking.
D) it is the easiest distribution to implement.
E) people are risk averse.
49. Balanced, across the board income growth characterizes the period of the
A) 1980's.
B) 1999's.
C) 1960's to 1990's.
D) mid 1940's to the early 1970's.
th
E) entire 20 century.
50. The solution outlined in the textbook to the misallocation of resources due to winner-take-all occupations involves
A) government capping the number of people that can enter the occupations.
B) a sizeable tax on the output of the occupations.
C) a salary cap in the occupations.
D) a more progressive income tax system.
E) a less progressive income tax system.
51. The real earnings of the top one percent of U.S. workers from 1979 to 1998 has
A) remained constant.

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B) tripled.
C) doubled.
D) increased by 50%.
E) increased by 350%.
52. The exempting of savings from taxation under a progressive consumption tax would
A) increase the amount of savings done by individuals.
B) reduce economic activity.
C) increase interest rates.
D) have no effect on the amount of savings.
E) be similar to the way savings are treated under the current income tax system.
53. The recent increases in wealth accumulation are

A) restricted to households with "old money."
B) artificial, paper increases.
C) the consequence of government intervention.
D) causing more households to become millionaires and billionaires.
E) obscene.
54. According to figures presented in the textbook, the current wealth holdings of the top 1% of Americans
A) exceed the GDP of China and India combined.
th
B) exceed the wealth holdings of all Americans below the 95 percentile.
th
C) exceed the wealth holdings of all Americans below the 80 percentile.
D) were unchanged from 1978.
E) have fallen.
55. To say that a given welfare program is means-tested indicates that

A) in order to qualify, one must have the means.
B) the size of the payment reflects the mean value of consumption based on family size.
C) in order to qualify, one must show that one means to find a job.
D) the more income one earns, the smaller the size of the benefit.
E) the government has the means to cover the expenditure.
56. Under a progressive consumption tax,

A) the incentive to save is lessened.
B) the complexity of filing a tax return is increased.
C) the incentives to avoid and evade taxes is reduced.
D) expenditures on tax avoidance is increased.
E) the poor are unfairly penalized.
57. Expenditures by the wealthy on tax avoidance and tax evasion

A) are negatively correlated with the size of the tax rate.
B) improve economic efficiency.
C) fell dramatically after the Tax Reform Act of 1986.
D) are unproductive and hence economic inefficient.
E) have remained constant over the last century.
Under the tax structure below, taxable consumption is income minus savings minus $8,000 times the total number of
dependents.
Tax Rate on Each Extra

Consumption Dollar of Taxable Consumption
0-$29,999 18%
$30,000-$49,999 24%
$50,000-$69,999 27%
$70,000-$89,999 30%
$90,000-$149,999 40%
$150,000 or more 50%
58. A family of three with $63,000 of income and $10,000 of savings would have a taxable consumption of
A) $63,000.
B) $53,000.
C) $45,000.
D) $37,000.

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E) $29,000.
59. A family of five with $500,000 of income and $150,000 of savings would pay taxes of
A) $155,000.
B) $150,000.
C) $142,000.
D) $137,800.
E) $125,600.
60. A family of four with $88,000 of income and $17,000 of savings would have a tax bill of
A) $21,300.
B) $10,530.
C) $9,360.
D) $7,560.
E) $6,927.
61. The source of inefficiency in the winner-take-all occupations is that

A) a winner-takes-all is an inherently unfair reward system.
B) risk aversion causes too few individuals to enter.
C) as more people enter the occupation, everyone's chance of winning is reduced.
D) the payoffs to society are larger then the payoffs to the individual.
E) the payoffs to both society and the individual are negative.
62. The inefficiency caused by a relative performance labor market is

A) too many individuals choose to enter.
B) that workers never receive adequate compensation.
C) too few individuals choose to enter.
D) the output of the occupations is useless.
E) too much demand.
63. An efficiency loss due to higher income tax rates would occur if the well compensated choose to
A) take a salary cut.
B) take more of their compensation in forms not subject to the income tax, e.g., perks.
C) work longer hours.
D) work harder.
E) work the same amount.
64. According to Professor Rawls, if income was given to a group of people and those people had no idea of their talents,
they would likely prefer an income distribution that rewarded
A) sloth.
B) high IQ.
C) artistic gifts.
D) everyone with an equal share of income.
E) innovation.
65. The negative consequence of growing inequality in the income distribution on the middle class is that
A) median income is real terms has fallen.
B) the percentage of income required to achieve an acceptable living standard has grown.
C) their tax burden has risen.
D) government benefits have been reduced.
E) society becomes more segregated.
66. The structure of a progressive consumption tax would involve

A) only taxing well defined luxury goods.
B) taxing the difference between annual income and annual savings.
C) applying the same tax rate to all families.
D) taxing the sum of consumption spending and savings.
E) have taxpayers keep and submit all their receipts for purchases and taxing that amount.
Program to Help Social Administrative & Economic

the Working Poor Benefits Payment Costs Inefficiency Costs
Price Ceiling $25 $5 $70
Cash Payment $100 $60 0

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67. The net benefit of the price control is __________ and the benefit of the cash payment is __________.
A) $20; $40.
B) $25; $100.
C) -$45; $35.
D) -$50; $40.
E) -$75; $60.
68. It is more likely that the __________ will be chosen as the political solution because __________.
A) price control; it has the lowest true cost.
B) cash payment; it requires greater tax revenues.
C) price control; it requires less tax revenues.
D) cash payment; it has the greatest net benefit.
E) price control; it has the greatest net benefit.
69. Even if all politicians were convinced that all the data in the table was accurate, they would likely vote for the
A) cash payment because it is more efficient.
B) price control because it requires less taxation.
C) cash payment because it requires more taxation.
D) price control because it is less efficient.
E) cash payment because price controls have not worked in the past.
70. The widespread breakup of poor families is thought to be the result of

A) the inherent instability of the poor.
B) declining moral standards.
C) a lack of marriage counseling for the poor.
D) welfare cheating.
E) the incentives contained in the Aid to Families with Dependent Children program.
Household Income Quintile Mean Income Share of Income

1 $500 Bottom 20%
2 $1,000 Second 20%
3 $20,000 Middle 20%
4 $43,000 Fourth 20%
5 $19,000 Top 20%
6 $17,000
7 $75,000
8 $5,000
9 $90,000
10 $100,000
Total $370,500
71. The mean income of the bottom (lowest) quintile is __________ and the mean income of the top (highest) quintile is
__________.
A) $11,000; $95,000.
B) $750; $95,000.
C) $750; $59,000.
D) $500; $100,000.
E) $1,000; $95,000.
72. The mean or average income of the ten households is

A) $370,500.
B) $71,400.
C) $42,600.
D) $39,100.
E) $37,050.
73. The income distribution for the 10 households

A) is uniform.
B) is equitable.
C) has a low degree of inequality.
D) has a high degree of inequality.

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E) is optimal.
74. Exactly __________ households earn less than the mean level of income.
A) 7
B) 6
C) 5
D) 4
E) 3
75. The bottom quintile has a share of income equal to

A) .02.
B) .04.
C) .004.
D) .01.
E) .001.
76. The top two quintiles' combined share of income is

A) .32.
B) .67.
C) .73.
D) .83.
E) .96.
77. When states are free to determine the level of welfare benefits they will provide
A) low benefit states will attract the poor.
B) high benefit states will attract the poor.
C) high benefit states will enjoy an inflow of high income taxpayers.
D) low benefit states will see high income taxpayers leaving.
E) high benefit states will repel the poor.
78. Among the advantages of capitalism with respect to the distribution of income is it
A) is always a fair distribution.
B) maximizes total utility.
C) rewards effort and risk taking.
D) ensures that everyone will be provided with at least a subsistence level of income.
E) naturally redistributes income from the wealthy to the poor.
79. Under a progressive consumption tax, an extra dollar of savings

A) reduces taxable consumption by less than one dollar.
B) reduces taxes by one dollar.
C) reduces taxable consumption by one dollar.
D) reduces taxes by more than one dollar.
E) has no impact on the amount of taxes paid.
80. An in-kind transfer payment to the poor is

A) made out of kindness.
B) a cash payment.
C) a benefit in the form of a good or service.
D) necessary to ensure the poor buy food and other essentials.
E) less costly to provide compared to a cash payment.
81. As more and more people over estimate their chances of winning in a winner-take-all occupation and enter, the
provability of actually winning
A) rises.
B) rises if you have less than average talent.
C) falls if you have greater than average talent.
D) falls.
E) is unaffected.
82. When the government transfers resources to the poor in the form of a good or service, it is called
A) the Earned Income Tax Credit.
B) Aid to Families with Dependent Children.
C) an in-kind transfer.
D) public assistance.
E) a means-tested benefit.

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83. The use of willingness-to-pay in cost-benefit analysis will result in a(n)

A) mix of public programs that are income neutral.
B) inefficient number of programs.
C) mix of public programs that favor low income persons.
D) mix of public programs that favor high income persons.
E) mix of public programs that favor low and middle income persons.
84. The level of income the federal government uses to define being poor is called the
A) relative measure of poverty.
B) absolute measure of poverty.
C) poverty threshold.
D) PWT line.
E) necessity income.
85. If a negative income tax replaced all welfare programs and the lump sum payment was set at the poverty threshold,
then
A) the problem of poverty would be solved.
B) individuals could choose to pool their lump sum payments and not work, leading to a breakdown of the system.
C) the incentive to work would be maximized.
D) the incentive to work would be zero.
E) the disincentive to work would be the same as under the current system.
86. Which of the following is not part of the structure of a combined negative income tax and public employment program
advocated by the textbook?
A) The size of tax credit would be relatively small.
B) The wage rate of the public employment program would be less than the minimum wage.
C) The government could obtain bids from private firms to administrate the employment program.
D) All able bodied adults would be required to accept public employment.
E) Public employment tasks could provide services that otherwise go under or unprovided.
87. A progressive consumption tax would

A) reduce the incentive to work.
B) increase the incentive of the wealthy to build larger and larger homes.
C) encourage greater expenditures on tax avoidance.
D) impose serious hardship on the wealthiest individuals.
E) reduce or eliminate the majority of concerns associated with the progressive income tax.
Leo is a welfare recipient who qualifies for two means-tested cash benefits. If he does not earn any income, he receives $225
from each benefit. For each dollar he earns (which his employer is required to report to the welfare agency), each benefit is
reduced by 75 cents until the benefit equals zero.
88. If Leo earns $250, his total income (earnings and benefits) will be
A) $325.
B) $375.
C) $450.
D) $250.
E) $350.
89. Beyond the "Lake Wobegan Effect", another reason for the increased choice of winner-take-all occupations is
A) naked greed.
B) tax incentives.
C) the Tragedy of the Commons.
D) risk seeking preferences.
E) a large amount of debt from student loans.
90. Today, in order for a current family to send its children to an average quality school, it must carry a(n) __________
mortgage compared to a family in 1970 because __________.
A) smaller; the average house size has declined
B) equal size; construction costs have fallen
C) larger; the average lot size has increased
D) larger; the average house size has increased
E) smaller; interest rates are lower

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91. Suppose a negative income tax has the following features: the tax rate on earnings is 50% and the breakeven
income level is $30,000. The lump sum amount is
A) $10,000.
B) $12,000.
C) $13,000.
D) $14,000.
E) $15,000.
92. Compared to 1975, the 20% of families with the lowest incomes in the U.S. in 1998 have
A) less purchasing power.
B) fallen to 15%.
C) more purchasing power.
D) smaller nominal incomes.
E) the same purchasing power.
93. According to Professor Rawls, individuals would accept some degree of income inequality if
A) it resulted in a significantly larger amount of total income.
B) they would benefit from the inequality.
C) it resulted in a slightly larger amount of total income.
D) it were redistributed from those with more to those with less.
E) they were realistic.
94. According to the textbook, the best possible solution to the problem of poverty would seem to be
A) a combination of a negative income tax and public employment.
B) maintaining the current system.
C) a negative income tax with the tax credit equal to the poverty threshold.
D) a massive public employment program.
E) complete elimination of all efforts to assist the poor.
95. The justification for means-tested welfare benefits is to

A) lessen the incentive to work.
B) ensure benefits go to the truly needy.
C) reduce the expense of the program.
D) lessen the incentive to choose welfare over work.
E) make sure the poor don't profit from welfare.
96. According to the textbook, the Personal Responsibility Act impact on the poor
A) can't be judged fully until the next recession.
B) is an unqualified success.
C) has resulted in large migrations of the poor to high benefits states.
D) is an unqualified failure.
E) has given them a renewed sense of pride and self reliance.
97. To the extent a progressive consumption tax would slow the rate at which mansions grow larger,
A) the rate at which the size of middle income homes grows would remain constant.
B) the rate at which the size of middle income homes grow would increase.
C) a great hardship would then be endured by the wealthy.
D) the rate at which the size of middle income homes grow would also slow.
E) the wealthy would simply buy more expensive accessories.
Suppose the current welfare system is completely eliminated and replaced with a negative income tax. The tax credit granted to
everyone is $10,000 and the tax on earnings is 25%.
98. Under the negative income tax, each extra dollar earned causes total income to
A) remain constant.
B) fall by 25 cents.
C) rise by 25 cents.
D) rise by 75 cents.
E) rise or fall; it depends on whether one is above or below the breakeven income.
99. The breakeven level of income under the negative income tax is
A) $10,000.
B) $13,333.
C) $25,000.

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D) $40,000.
E) $50,000.
100. The equation that describes the relationship between the benefit (B, a negative number for a tax payment), the tax
rate (.25) and earnings (E) is
A) B=(10,000 - .25*E) + E.
B) B=10,000 - .25*E.
C) B=10,000 - .75*E.
D) B=10,000 - E.
E) B=(10,000-.25*E) - E.

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1. C
2. C
3. C
4. B
5. A
6. A
7. C
8. D
9. A
10. B
11. A
12. B
13. D
14. A
15. B
16. C
17. D
18. C
19. D
20. A
21. A
22. D
23. C
24. E
25. D
26. B
27. D
28. C
29. B
30. D
31. B
32. C
33. E
34. D
35. D
36. D
37. A
38. D
39. D
40. A
41. E
42. C
43. E
44. E
45. B
46. C
47. D
48. E
49. D
50. D
51. C
52. A
53. D
54. B
55. D
56. C
57. D
58. E
59. E
60. D
61. C
62. A
63. B
64. D
65. B
66. B
67. D
68. C
69. B
70. E
71. B
72. E
73. D

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74. B
75. C
76. D
77. B
78. C
79. C
80. C
81. D
82. C
83. D
84. C
85. B
86. D
87. E
88. A
89. C
90. D
91. E
92. A
93. A
94. A
95. B
96. A
97. D
98. D
99. D
100. B
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248 multiple choice questions in Business Economics

Economics and Business (Maastricht University)

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2. The marginal benefit of an activity is the

3. The distinguishing feature of microeconomics is studying

5. Economic models claim to be a(n)

6. The existence of the cost-benefit principle stems from

8. The economic surplus of a particular action is

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15. Another name for the marginal benefit of an activity is the:

17. Economics is conventionally divided into two subjects called:

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Use the following to answer questions 18-24:

CPU Total Marginal Total Marginal

19. Choosing the 1,000 Mhz computer would be inefficient because

20. The total benefit of an 800 Mhz computer is

24. The total cost of a 700 Mhz computer is

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28. An economic naturalist is described as someone who

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33. Which of the following questions would not be part of macroeconomics?

36. Economics is best defined as the study of

37. A rational person is one that

39. The marginal cost of an activity is the

41. In applying the cost-benefit principle one should calculate the:

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47. The scarcity principle indicates that

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53. According to the textbook, the incentive to save M dollars on a product is

56. The logical implication of the scarcity principle is that

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61. The cost-benefit principle indicates that an action should be taken

62. The opportunity cost of an activity is the value of

65. In order for an economic model to be valid,

Use the following to answer questions 66-70:

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68. The best number of shirts to own is

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E) not study economics nor biology.

74. The principle of scarcity applies to

79. The scarcity principle applies to

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84. The cost-benefit principle:

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92. The reservation price of a particular good or service is the

94. Which of the following decisions would not be part of microeconomics?

97. Macroeconomics differs from microeconomics in that:

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with the results of those choices for society.

98. Macroeconomics is distinguished by its concentration on

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Answer Key -- test01

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Use the following to answer questions 5-11:

Hours Spent Studying Economics

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10. The cost of spending an extra hour studying economics is

11. The benefit of spending an extra hour studying economics is

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15. Dividing the total cost of n units of an activity by n reveals the

20. Benefits and costs are reciprocal in the sense that

21. The opportunity cost of any activity is defined as

13. With respect to computers, represents the .