2. Consider two goods, books and hamburgers. The slope of the consumer's budget constraint is measured by thea. consumer's income divided by the price of hamburgers.b. relative price of books and hamburgers.c. consumer's marginal rate of substitution.d. number of books purchased divided by the number of hamburgers purchased.ANS: B3. When considering her budget, the highest indifference curve that a consumer can reach is thea. one that is tangent to the budget constraint.b. indifference curve farthest from the originc. indifference curve that intersects the budget constraint in at least two places.d. None of the above is correct; consumer preferences are bounded.ANS: A4. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know thata. Mike has a comparative advantage in tables.b. Sandy has an absolute advantage in chairs.c. Mike has an absolute advantage in tables.d. Sandy has a comparative advantage in tables.ANS: D12. When economists make normative statements, they area. speaking as scientists.b. speaking as policy advisers.c. adhering very strictly to basic economic principles.d. revealing that they are very conservative in their views of how the world works.ANS: B15. A competitive market is a market in whicha. an auctioneer helps set prices and arrange sales.b. there are only a few sellers.c. the forces of supply and demand do not apply.d. no individual buyer or seller has any significant impact on the market price.ANS: D16. The line that relates the price of a good to the quantity demanded of that good is called thea. demand schedule, and it slopes upward only if the good for which the line is drawn fails toconform to the law of demand.b. demand schedule, and it slopes upward only if the demand for the good in question, relativeto the demand for other goods, is increasing over time.c. demand curve, and it slopes upward only if there is a positive relationship between incomeand quantity demanded.d. demand curve, and it slopes downward as long as the good in question conforms to the lawof demand.ANS: D17. Suppose roses are currently selling for $40.00 per dozen, while the equilibrium price of roses isa. shortage to exist and the market price of roses to increase.b. shortage to exist and the market price of roses to decrease.c. surplus to exist and the market price of roses to increase.d. surplus to exist and the market price of roses to decrease.ANS: D19. To say that the quantity demanded of a good is negatively related to the price of the good is to say thata. an increase in the quantity demanded of the good leads to a decrease in the price of thegood.b. an increase in the price of the good leads to a decrease in the quantity demanded of thegood.c. there is a weak relationship between the quantity demanded of a good and the price of thegood.d. there is no relationship between the quantity demanded of a good and the price of the good. ANS: B21. Which of the following events will definitely cause equilibrium quantity to fall?a. demand increases and supply decreasesb. demand and supply both decreasec. demand decreases and supply increasesd. demand and supply both increaseANS: B22. Which of the following statements about the price elasticity of demand is correct?a. The price elasticity of demand for a good measures the willingness of buyers of the good tomove away from the good as its price increases.b. Price elasticity of demand reflects the many economic, psychological, and social forces thatshape consumer tastes.c. Other things equal, if good x has close substitutes and good y does not have close substitutes,then the demand for good x will be more elastic than the demand for good y.d. All of the above are correct.ANS: D23. Which of the following events would cause the price of oranges to fall?a. There is a shortage of oranges.b. An article is published in which it is claimed that tangerines cause a serious disease, andoranges and tangerines are substitutes.c. The price of land throughout Florida decreases, and Florida produces a significantproportion of the nation’s oranges.d. All of the above are correct.ANS: C24. A perfectly elastic demand implies thata. buyers will not respond to any change in price.b. any rise in price above that represented by the demand curve will result in a quantitydemanded of zero.c. quantity demanded and price change by the same percent as we move along the demandcurve.d. price will rise by an infinite amount when there is a change in quantity demanded.25. A price ceiling will be binding only if it is seta. equal to equilibrium price.b. above equilibrium price.c. below equilibrium price.d. none of the above; a price ceiling is never binding.ANS: C28. When demand is inelastic within a certain price range, then within that price range,a. an increase in price would increase total revenue because the decrease in quantity demandedis proportionately less than the increase in price.b. an increase in price would decrease total revenue because the decrease in quantity demandedis proportionately greater than the increase in price.c. a decrease in price would increase total revenue because the increase in quantity demandedis proportionately smaller than the decrease in price.d. a decrease in price would not affect total revenue.ANS: A30. Economists generally believe that rent control isa. an efficient and equitable way to help the poor.b. not efficient, but the best available means of solving a serious social problem.c. a highly inefficient way to help the poor raise their standard of living.d. an efficient way to allocate housing, but not a good way to help the poor.ANS: C37. When an oligopoly market reaches a Nash equilibrium,a. the market price will be different for each firm.b. the firms will not have behaved as profit maximizers.c. a firm will have chosen its best strategy, given the strategies chosen by other firms in themarket.d. a firm will not take into account the strategies of competing firms.ANS: C41. Which of the following is true of markets characterized by positive externalities?a. Social value exceeds private value, and market quantity exceeds the socially optimalquantity.b. Social value is less than private value, and market quantity exceeds the socially optimalquantity.c. Social value exceeds private value, and market quantity is less than the socially optimalquantity.d. Social value seldom exceeds private value; therefore, social quantity is less than privatequantity.ANS: C44. Marginal revenue can become negative fora. both competitive and monopoly firms.b. competitive firms, but not for monopoly firms.c. monopoly firms, but not for competitive firms.d. neither competitive nor monopoly firms.45. According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently as long asa. the externalities that are present are positive, not negative.b. government assigns property rights to the harmed party.c. private parties can bargain with sufficiently low transaction costs.d. businesses determine an appropriate level of production.ANS: C47. Which of these assumptions is often realistic for a firm in the short run?a. The firm can vary both the size of its factory and the number of workers it employs.b. The firm can vary the size of its factory, but not the number of workers it employs.c. The firm can vary the number of workers it employs, but not the size of its factory.d. The firm can vary neither the size of its factory nor the number of workers it employs. ANS: C52. The total cost curve gets steeper as output increases due toa. diseconomies of scale.b. economies of scale.c. diminishing marginal product.d. increasing returns to scale.ANS: C53. When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate willa. decrease tax revenue and decrease the deadweight loss.b. decrease tax revenue and increase the deadweight loss.c. increase tax revenue and decrease the deadweight loss.d. increase tax revenue and increase the deadweight loss.ANS: C54. Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem is an example ofa. an opportunity cost.b. an implicit cost.c. a sunk cost.d. a transaction cost.ANS: D55. Suppose that Martin owns a lighthouse, and Lewis owns a nearby port. Martin's lighthouse benefits only those ships that enter Lewis's port. Which of the following statements is not correct?a. Martin's lighthouse may be considered a private good.b. Martin can reduce the free-rider problem by charging Lewis a usage fee.c. Martin can exclude Lewis's port from benefiting from the lighthouse by simply turning thepower off.d. Martin's lighthouse would be considered a common resource.ANS: D56. Which of the following statements is correct?a. A price ceiling is not binding when the price ceiling is set above the equilibrium price.b. A price floor is not binding when the price floor is set below the equilibrium price.c. A binding price ceiling causes a shortage and a binding price floor causes a surplus.d. All of the above are correct.57. Opponents of the minimum wage point out that the minimum wagea. encourages teenagers to drop out of school.b. prevents some workers from getting needed on-the-job training.c. contributes to the problem of unemployment.d. All of the above are correct.ANS: D58. A tax on the sellers of cell phones willa. reduce the size of the cell phone market.b. place a burden on the sellers of cell phones but not on the buyers of cell phones.c. affect the price paid by buyers of cell phones, but not the size of the market.d. affect the size of the market, but it will have no effect on the effective price received bysellers of cell phones.ANS: A59. Chad is willing to pay $5.00 to get his first cup of morning latté. He buys a cup from a vendor selling latté for $3.75 per cup. Chad's consumer surplus isa. $8.75.b. $5.00.c. $3.75.d. $1.25.ANS: D60. Suppose that in a competitive market the market price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market?a. Less than $2.50.b. More than $2.50.c. $2.50.d. The marginal revenue cannot be determined without knowing the actual quantity sold by thetypical firm.ANS: CFigure 1The figure below depicts the cost structure of a profit-maximizing firm in a competitive market.61. Refer to Figure 1. Which line segment best reflects the short-run supply curve for this firm?a. ABCEb. CDc. DEd. BCDANS: A62. For a profit-maximizing monopolist,a. P > MR = MC.b. P = MR = MC.c. P > MR > MC.d. MR < MC < P.ANS: A63. The midpoint method is used to compute elasticity because ita. automatically computes a positive number instead of a negative number.b. results in an elasticity that is the same as the slope of the demand curve.c. gives the same answer regardless of the direction of change.d. automatically rounds quantities to the nearest whole unit.ANS: C64. Suppose demand is perfectly elastic and the supply of the good in question decreases. As a result,a. the equilibrium quantity decreases and the equilibrium price is unchanged.b. the equilibrium price increases and the equilibrium quantity is unchanged.c. the equilibrium quantity and the equilibrium price both are unchanged.d. buyers’ total expenditure on the good is unchanged.ANS: A65. Which of the following statements is not correct concerning government attempts to reduce the flow of illegal drugs into the country?a. Drug interdiction raises prices and total revenue in the drug market.b. Drug interdiction can increase drug-related crime.c. Drug interdiction shifts the demand curve for drugs to the left.d. Drug interdiction shifts the supply curve of drugs to the left.ANS: C66. In a competitive market with free entry and exit, if all firms have the same cost structure, thena. all firms will operate at efficient scale in the short run.b. all firms will operate at efficient scale in the long run.c. the price of the product will differ across firms.d. the number of sellers in the market will steadily decrease over time.ANS: B67. The equilibrium quantity in markets characterized by oligopoly isa. higher than in monopoly markets and higher than in perfectly competitive markets.b. higher than in monopoly markets and lower than in perfectly competitive markets.c. lower than in monopoly markets and higher than in perfectly competitive markets.d. lower than in monopoly markets and lower than in perfectly competitive markets.ANS: B68. One way in which monopolistic competition differs from oligopoly is thata. there are no barriers to entry in oligopolies.b. in oligopoly markets there are only a few sellers.c. all firms in an oligopoly eventually earn zero economic profits.d. strategic interactions between firms are rarely evident in oligopolies.ANS: B69. The demand curve for hot dogsa. shifts when the price of hot dogs changes, because the price of hot dogs is measured on thevertical axis of the graph.b. shifts when the price of hot dogs changes, because the quantity demanded of hot dogs ismeasured on the horizontal axis of the graph.c. does not shift when the price of hot dogs changes, because the price of hot dogs is measuredon the vertical axis of the graph.d. does not shift when the price of hot dogs changes, because the quantity demanded of hotdogs is measured on the horizontal axis of the graph.ANS: C70. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period becausea. buyers tend to be much less sensitive to a change in price when given more time to react.b. buyers tend to be much more sensitive to a change in price when given more time to react.c. buyers will have substantially more income over a ten-year period.d. the quantity supplied of gasoline increases very little in response to an increase in the priceof gasoline.ANS: B71. For a firm in a perfectly competitive market, the price of the good is alwaysa. equal to marginal revenue.b. equal to total revenue.c. greater than average revenue.d. equal to the firm’s efficient scale of output.ANS: A72. In a long-run equilibrium,a. "excess capacity" applies to monopolistically competitive firms, but not to competitivefirms.b. "zero economic profit" applies to competitive firms, but not to monopolistically competitivefirms.c. "markup over marginal cost" applies to both monopolistically competitive and competitivefirms.d. “product variety externalities” apply to both perfectly competitive firms andmonopolistically competitive firms.ANS: A73. In a market economy,a. supply determines demand and, in turn, demand determines prices.b. demand determines supply and, in turn, supply determines prices.c. the allocation of scarce resources determines prices and, in turn, prices determine supply anddemand.d. supply and demand determine prices and, in turn, prices allocate scarce resources.ANS: D74. Which of the following is not a characteristic of a perfectly competitive market?a. Sellers possess market power.b. There are many sellers.c. Buyers must accept the price the market determines.d. All of the above are characteristics of a perfectly competitive market.ANS: A75. Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December and you will start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs area. a substitute good.b. a normal good.c. an inferior good.d. a law-of-demand good.ANS: C76. What causes the labor demand curve to shift?(i) changes in productivity(ii) c hanges in wages(iii) changes in output pricesa. (i) and (ii)b. (ii) and (iii)c. (i) and (iii)d. All of the above are correct.77. The following diagram shows a budget constraint for a particular consumer.If the price of x is $10, what is the price of y?a. $15b. $25c. $35d. $70ANS: C78. If a good is a Giffen good, thena. the supply curve slopes down.b. the demand curve slopes up.c. the demand curve is horizontal.d. there is no optimal level of consumption for the consumer.ANS: B79．If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they will produce collectively willa. be less than the monopoly quantity.b. be equal to the monopoly quantity.c. be greater than the monopoly quantity.d. Any of the above are possible.ANS: C80. Monopoly firms havea. downward-sloping demand curves and they can sell as much output as they desire at themarket price.b. downward-sloping demand curves and they can sell only a limited quantity of output at eachprice.c. horizontal demand curves and they can sell as much output as they desire at the marketprice.d. horizontal demand curves and they can sell only a limited quantity of output at each price. ANS: B81. The bowed-out shape of the production possibilities frontier can be explained by the fact thata. scarcity is a fact of life.b. economic growth is always occurring.c. the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing.d. an assumption that is made in constructing a production possibilities frontier is that tradeoffs are unimportant.ANS: C82. Absolute advantage is found by comparing different producers’a. opportunity costs.b. payments to land, labor, and capital.c. input requirements per unit of output.d. locational and logistical circumstances.ANS: C83. If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they will produce collectively willa. be less than the monopoly quantity.b. be equal to the monopoly quantity.c. be greater than the monopoly quantity.d. Any of the above are possible.ANS: C84. In which of the following market structures are there a large number of sellers?(i) Monopolistic competition(ii) P erfect competition(iii) Oligopolya. (i) and (ii) onlyb. (ii) and (iii) onlyc. (ii) onlyd. (i), (ii), and (iii)ANS: ATable 1BAUp Down85. Refer to Table 1. This table shows a game played between two players, A and B. The payoffsin the table are shown as (Payoff to A, Payoff to B). Which of the following statements about this game is true?a. Up is a dominant strategy for A and Right is a dominant strategy for B.b. Up is a dominant strategy for A and Left is a dominant strategy for B.c. Down is a dominant strategy for A and Right is a dominant strategy for B.d. Down is a dominant strategy for A and Left is a dominant strategy for B.ANS: Aa. is an externality that is likely to be punished under antitrust laws.b. is the negative externality that occurs when one firm attempts to duplicate exactly theproduct of a different firm.c. is an externality that is considered to be an explicit cost of business in monopolisticallycompetitive markets.d. is the negative externality associated with entry of new firms in a monopolisticallycompetitive market.ANS: D87. Low rates of inflation are generally associated witha. low rates of government spending.b. small or nonexistent government budget deficits.c. low rates of productivity growth.d. low rates of growth of the quantity of money.ANS: D88. The basic principles of economics imply that policymakers shoulda. rely on markets to guide economic activity, except when markets produce inefficient orinequitable outcomes.b. enact policies that discourage people from specializing in particular economic activities.c. enact policies that lead to high rates of growth of the quantity of money.d. All of the above are correct.ANS: A89. Because a firm's demand for a factor of production is derived from its decision to supply a good in the market, it is called aa. differentiated demand.b. secondary demand.c. derived demand.d. hybrid demand-supply.ANS: C90. Consider the labor market for computer programmers, which is in equilibrium. During the late 1990s, the value of the marginal product of all computer programmers increased dramatically. Holding all else equal, what effect did this process have on the labor market for computer programmers?a. The equilibrium wage increased, and the equilibrium quantity of labor increased.b. The equilibrium wage increased, and the equilibrium quantity of labor decreased.c. The equilibrium wage decreased, and the equilibrium quantity of labor increased.d. The equilibrium wage decreased, and the equilibrium quantity of labor decreased.ANS: A1. List and briefly explain each of the four properties of indifference curves.ANS:1: Higher indifference curves are preferred to lower ones, because consumers usually prefer more of something to less of it. 2: Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for another. If the quantity of one good is reduced, the quantity of the other good must increase in order for the consumer to be equally happy. 3: Indifference curves do not cross. If indifference curves did cross, the same point could be on two different curves, thus contradicting the assumption that consumers prefer more of both goods to less. 4: Indifference curves are bowed inward. This is because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have less.2. Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the following would have on demand or supply. Also show how equilibrium price and quantity have changed.a. Winter starts and the weather turns sharply colder.b. The price of tea, a substitute for hot chocolate, falls.c. Producers expect the price of hot chocolate to increase next month.d. Currently, the price of hot chocolate is $0.50 per cup above equilibrium.ANS:3. Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm mustoperate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.ANS:Competitive firms do not face downward-sloping demand. The graph shows the firm choosing a level of production in which the intersection of marginal revenue and marginal cost occurs at an output level where average total cost is decreasing. This profit-maximizing output level is less than the efficient scale (minimum of average total cost) and therefore the firm is said to be operating with excess capacity.4. Using the graph shown, answer the following questions.a. What was the equilibrium price and quantity in this market before the tax?b. What is the amount of the tax?c. How much of the tax will the buyers pay?d. How much of the tax will the sellers pay?e. How much will the buyer pay for the product after the tax is imposed?f. How much will the seller receive after the tax is imposed?g. As a result of the tax, what has happened to the level of market activity?ANS:a. Equilibrium price is $8 and equilibrium is 8,000 units.b. The tax is $3.00.c. Buyers will pay $1.00.d. Sellers will pay $2.00.e. $9.00f. $6.00g. Instead of 8,000 units being bought and sold, only 6,000 will be bought and sold.5. Ford and General Motors are considering expanding into the Vietnamese automobile market.Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.ANS:The answer should present two strategies for each company, such as “Expand” and “Don’t Expand.” To be a prisoner’s dilemma, each firm needs a dominant strategy, but each firm choosing its dominant strategy results in an outcome that is jointly worse than if they both chose their other strategy. A possible payoff table with payoffs (Ford, GM) isGMExpand Don’t ExpandFord Expand (2, 2) (4, 1) Don’t Expand(1, 4) (3, 3)6. Using the graph below, answer the following questions about hammers.a. What is the equilibrium price of hammers before trade?b. What is the equilibrium quantity of hammers before trade?c. What is the price of hammers after trade is allowed?d. What is the quantity of hammers imported after trade is allowed?e. What is the amount of consumer surplus before trade?f. What is the amount of consumer surplus after trade?g. What is the amount of producer surplus before trade?h. What is the amount of producer surplus after trade?i. What is the amount of total surplus before trade?j. What is the amount of total surplus after trade?k. What is the change in total surplus because of trade?ANS:a. $14b.90c.$10d.85e. $360f.$810g.$405h.$125i.$765j. $935 k.$1707. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today?ANS:Whatever must be given up to obtain some item it its opportunity cost. Basically, this would be a person's second choice. The opportunity cost of a person attending college is the value of the best alternative use of that person's time. For most students this would be the income the student gives up by not working. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. (For most students, that seems to be sleep.)8. Describe the source of tension between cooperation and self-interest in a market characterizedby oligopoly. Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.ANS:The source of the tension exists because total profits are maximized when oligopolists cooperate on price and quantity by operating as a monopolist. However, individual profits can be gained by individuals cheating on their cooperative agreement. This is why cooperative agreements among members of a cartel are inherently unstable. This is evident in the problem OPEC experiences in enforcing the cooperative agreement on production and price of crude oil.9. Using the graph shown, answer the following questions.a. What was the equilibrium price in this market before the tax?b. What is the amount of the tax?c. How much of the tax will the buyers pay?d. How much of the tax will the sellers pay?e. How much will the buyer pay for the product after the tax is imposed?f. How much will the seller receive after the tax is imposed?g. As a result of the tax, what has happened to the level of market activity?ANS:a. $10b. $3c.$1d.$2e.$11f.$8g. As a result of the tax, the level of market activity has fallen, from 100 units being boughtand sold to only 90 units being bought and sold.10. Nike and Reebok (athletic shoe companies) are considering whether or not to advertise during theSuper Bowl. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision. Does the repeated game scenario differ from a single period game? Is it possible that a repeated game (without collusive agreements) could lead to an outcome that is better than a single-period game? Explain the circumstances in which this may be true.ANS:The answer should show that if both shoe companies decide to advertise they will both be worse off than if they did not. It should also show that each company has the individual incentive to advertise. The dominant strategy of both companies will be to advertise, regardless of what the other is doing. If the game is repeated more than once it is possible that the shoe companies will decide not to advertise in the hopes that the other company adequately understands the mutually beneficial gains that come from not advertising.11. Answer the following questions based on the graph that represents J.R.'s demand for ribs per week of ribs at Judy's rib shack.a. At the equilibrium price, how many ribs would J.R. be willing to purchase?b. How much is J.R. willing to pay for 20 ribs?c. What is the magnitude of J.R.'s consumer surplus be at the equilibrium price?d. At the equilibrium price, how many ribs would Judy be willing to sell?e. How high must the price of ribs be for Judy to supply 20 ribs to the market?f. At the equilibrium price, what is the magnitude of total surplus in the market?g. If the price of ribs rose to $10, what would happen to J.R.'s consumer surplus?。