a benefit or cost that affects someone who is not directly involved in the production of consumption of a good or service
Externality
Too much of the good or service will be produced at market equilibrium
Negative Externality
Too little of the good or service will be produced at market equilibrium
Positive Externality
The benefit received by the consumer of a good or service
Private Benefit
The cost borne by the producer of a good or service
Private Cost
The total benefit from consuming a good or service, including both the private benefit and any external benefit
Social Benefit
The total cost of producing a good or service, including both the private cost and any external cost
Social Cost
Which of the following is not a characteristic of a perfectly competitive market structure?
A) There are a very large number of firms that are small compared to the market.
B) All firms sell identical products.
C) There are no restrictions to entry by new
D) There are restrictions on exit of firms.
2) A very large number of small sellers who sell identical products imply
A) a multitude of vastly different selling prices.
B) a downward sloping demand for each seller's product.
C) the inability of one seller to influence price.
D) chaos in the market.
C) the inability of one seller to influence price.
3) Both buyers and sellers are price takers in a perfectly competitive market because
A) the price is determined by government intervention and dictated to buyers and sellers.
B) each buyer and seller knows it is illegal to conspire to affect price.
C) bo
D) each buyer and seller is too small relative to others to independently affect the market price.
4) Suppose the equilibrium price in a perfectly competitive industry is $15 and a firm in the industry charges $21. Which of the following will happen?
A) The firm's profits will increase.
B) The firm's revenue will increase.
C) The firm will not sell any
C) The firm will not sell any output.
5) The demand curve for each seller's product in perfect competition is horizontal at the market price because
A) each seller is too small to affect market price.
B) the price is set by the government.
C) all the sellers get together and set the price.
D)
A) each seller is too small to affect market price.
6) In perfect competition
A) the market demand curve and the individual's demand are identical.
B) the market demand curve is perfectly inelastic while demand for an individual seller's product is perfectly elastic.
C) the market demand curve is perfectly
D) the market demand curve is downward sloping while demand for an individual seller's product is perfectly elastic.
7) If the market price is $25 in a perfectly competitive market, the marginal revenue from selling the fifth unit is
A) $5.
B) $12.50.
C) $25.
D) $125.
C) $25.
8) Which of the following is not true for a firm in perfect competition?
A) Profit equals total revenue minus total cost.
B) Price equals average revenue.
C) Average revenue is greater than marginal revenue.
D) Marginal revenue equals the change in total
C) Average revenue is greater than marginal revenue.
13) If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should
A) increase its output.
B) reduce its output.
C) keep output constant and enjoy the above normal profit.
D) lower the price.
A) increase its output.
14) If a perfectly competitive firm's price is above its average total cost, the firm
A) is earning a positive profit.
B) should shut down.
C) is incurring a loss.
D) is breaking even.
A) is earning a positive profit.
1) Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result, CineArts Videos experienced a 16 percent decline in its movie club membership. What is the value of the cross-price elasticity between the two movie
D) 1.6
2) Price elasticity of supply is used to gauge
A) how responsive suppliers are to price changes.
B) how responsive suppliers are to changes in future prices.
C) how responsive suppliers are to a change in demand.
D) how responsive sales are to a change in
A) how responsive suppliers are to price changes.
3) The price elasticity of supply is equal to
A) the value of the slope of the supply curve.
B) the change in quantity supplied divided by the change in price.
C) the percentage change in price divided by the percentage change in quantity supplied.
D) the
D) the percentage change in quantity supplied divided by the percentage change in price.
4) Suppose a 4 percent increase in price results in a 2 percent increase in the quantity supplied of a good. Calculate the price elasticity of supply and characterize the product.
A) 2; The product is elastic.
B) 0.2; The product is inelastic.
C) 0.5; The
C) 0.5; The product is inelastic.
5) Suppose the value of the price elasticity of supply is 4. What does this mean?
A) A 4 percent increase in the price of the good causes quantity supplied to increase by 1 percent.
B) A 1 percent increase in the price of the good causes the supply curve
C) A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent.
6) The price elasticity of supply for umbrellas is 2. Suppose you're told that following a price increase, quantity supplied increased by 30 percent. What was the percentage change in price that brought this about?
A) 60 percent
B) 15 percent
C) 6.7 perce
B) 15 percent
7) Bringing oil to the market is a relatively long and costly process. The whole process from exploration to pumping significant amounts of oil can take years. What does this indicate about the price elasticity of supply for oil in the short term?
A) The
C) The price elasticity of supply is likely to be low and supply is highly inelastic.
8) Marginal utility is the
A) total satisfaction received from consuming a given number of units of a product.
B) average satisfaction received from consuming a product.
C) extra satisfaction received from consuming one more unit of a product.
D) satisfac
C) extra satisfaction received from consuming one more unit of a product.
9) As a consumer consumes more and more of a product in a particular time period, eventually marginal utility
A) rises.
B) is constant.
C) declines.
D) fluctuates.
C) declines.
10) If a consumer receives 20 units of utility from consuming two candy bars, and 25 units of utility from consuming three candy bars, the marginal utility of the third candy bar is
A) 25 utility units.
B) 20 utility units.
C) 5 utility units.
D) unknown
C) 5 utility units.
11) Which of the following is likely to occur as the result of the law of diminishing marginal utility?
A) Petra's utility from her second apple was less than her satisfaction from her first orange.
B) Hudson enjoyed his second slice of pizza more than hi
D) Wesley enjoyed his second bottle of iced tea less than his first bottle, other things
constant.
12) Consumers maximize total utility within their budget constraint by
A) buying the cheapest goods they can find.
B) buying whatever they like the best.
C) buying the goods with the largest marginal utility per dollar spent.
D) spending the same dollar a
C) buying the goods with the largest marginal utility per dollar spent.
13) Suppose Joe is maximizing total utility within his budget constraint. If the price of the last pair of jeans purchased is $25 and it yields 100 units of extra satisfaction and the price of the last shirt purchased is $20, then, using the rule of equal
D) 80 units of utility.
14) If Marlowe obtains 9 units of utility per dollar spent on apples and 6 units of utility per dollar spent on oranges, then Marlowe
A) is maximizing total utility.
B) should buy more apples.
C) should buy more oranges.
D) should buy same amount of orang
B) should buy more apples.
18) In order to derive an individual's demand curve for salmon, we would observe what happens to the utility-maximizing bundle when we change
A) income and hold everything else constant.
B) tastes and preferences and hold everything else constant.
C) the
C) the price of the product and hold everything else constant.
19) What is behavioral economics?
A) the study of how people make wealth-maximizing decisions
B) the study of how people behave in the face of scarcity
C) the study of situations in which people act in ways that are not economically rational
D) the study
C) the study of situations in which people act in ways that are not economically rational
20) The observation that people tend to value something more highly when they own it than when they don't is called the
A) wealth effect.
B) endowment effect.
C) path dependent effect.
D) endorsement effect.
B) endowment effect.
21) Sunk costs
A) are costs associated with repairing something you already own.
B) are important for optimal decision making.
C) are costs that have already been paid and cannot be recaptured in any significant way.
D) are costs that firms sink into mark
C) are costs that have already been paid and cannot be recaptured in any significant way.
22) A firm increased its production and sales because the firm's manager rearranged the layout of his factory floor. This is an example of
A) investment in human capital.
B) economies of scale.
C) positive technological change.
D) inspired management.
C) positive technological change.
23) Which of the following is an example of positive technological change?
A) A firm offers workers a higher wage to work on weekends and at night. As a result, the firm is able to increase its weekly production of surf boards.
B) A firm buys an additiona
D) A firm's workers participate in a training program designed to increase the number of surf boards they can produce per day.
24) A characteristic of the long run is
A) there are fixed inputs.
B) all inputs can be varied.
C) plant capacity cannot be increased or decreased.
D) there are both fixed and variable inputs
B) all inputs can be varied.
25) Which of the following is the best example of a short run adjustment?
A) A local bakery purchases another commercial oven as part of its capacity expansion.
B) Your local Wal-Mart hires two more associates.
C) Smith University completed negotiations t
B) Your local Wal-Mart hires two more associates.
26) Which of the following is an implicit cost of production?
A) interest paid on a loan to a bank
B) wages paid to labor plus the cost of carrying benefits for workers
C) the utility bill paid to water, electricity, and natural gas companies
D) rent that
D) rent that could have been earned on a building owned and used by the firm
27) Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $45,500 (which was earning $1,500 interest per year) to rent a salon, hire a part-t
B) $45,500
28) Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $45,500 (which was earning $1,500 interest per year) to rent a salon, hire a part-t
D) $41,500
29) The production function shows
A) the total cost of producing a given quantity of output.
B) the maximum output that can be produced from each possible quantity of inputs.
C) the technology used to produce output.
D) the incremental output gained by im
B) the maximum output that can be produced from each possible quantity of inputs.
30) If four workers can produce 18 chairs a day and five can produce 20 chairs a day, the marginal product of the fifth worker is
A) 2 chairs.
B) 3 chairs.
C) 4 chairs.
D) 38 chairs.
A) 2 chairs.
31) The law of diminishing marginal returns states
A) that at some point, adding more of a fixed input to a given amount of variable inputs will cause the marginal product of the variable input to decline.
B) that at some point, adding more of a variable
B) that at some point, adding more of a variable input to a given amount of a fixed input will cause the marginal product of the variable input to decline.
32) If 11 workers can produce a total of 54 units of a product and a 12th worker has a marginal product of 6 units, then the average product of 12 workers is
A) 60 units.
B) 54 units.
C) 48 units.
D) 5 units.
D) 5 units.
33) If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output?
A) $65
B) $50
C) $15
D) It is impossible to determine without additional information.
C) $15
1) Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities?
A) Ronald Coase
B) A. C. Pigou
C) Adam Smith
D) David Hume
B) A. C. Pigou
4) A product is considered to be non excludable if
A) you can keep those who did not pay for the item from enjoying its benefits.
B) you cannot keep those who did not pay for the item from enjoying its benefits.
C) your consumption of the product reduces
B) you cannot keep those who did not pay for the item from enjoying its benefits.
5) Which of the following displays these two characteristics: rivalry and nonexcludability?
A) a public good.
B) a private good.
C) a quasi-public good.
D) a common resource.
D) a common resource.
6) Which of the following displays these two characteristics: nonrivalry and nonexcludability in consumption?
A) public goods
B) private goods
C) quasi-public goods
D) common resources
A) public goods
7) Which of the following is an example of a product that is nonexcludable and rivalrous?
A) free concert (with limited seating) in a park
B) national defense
C) automobiles
D) oil
A) free concert (with limited seating)
8) In economics, the term "free rider" refers to
A) a person who evades taxes.
B) a supervisor who delegates menial time-consuming activities to others.
C) one who volunteers her services.
D) one who waits for others to produce a good and then enjoys its
D) one who waits for others to produce a good and then enjoys its benefits without paying for it.
9) How does the construction of a market demand curve for a private good differ from that for a public good?
A) There is no difference; in both cases the demand curve is determined by adding up the price each consumer is willing to pay for each quantity o
C) The market demand curve for a private good is determined by adding up the quantities demanded by each consumer at each price but the market demand curve for a public good is determined by adding up the price each consumer is willing to pay for each qua
10) For certain public projects such as building a dam on a river or a bridge to an island, what procedure is a government is likely to use to determine what quantity of a public good should be supplied?
A) It conducts public surveys to determine if consu
D) It evaluates the costs and benefits of producing the good
11) The "tragedy of the commons" refers to the phenomenon where
A) individuals are free riders.
B) people overuse a common resource.
C) people do not internalize an externality.
D) there is rivalry in consumption.
C) people do not internalize an externality.
12) Price elasticity of demand measures
A) how responsive suppliers are to price changes.
B) how responsive sales are to changes in the price of a related good.
C) how responsive quantity demanded is to a change in price.
D) how responsive sales are to a
C) how responsive quantity demanded is to a change in price.
13) Suppose the value of the price elasticity of demand is -3. What does this mean?
A) A 1 percent increase in the price of the good causes quantity demanded to increase by 3 percent.
B) A 1 percent increase in the price of the good causes quantity demand
B) A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.
14) If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded
A) will increase by 45 percent.
B) will increase by 5 percent.
C) will decrease by 45 percent.
D) will decrease by 5 percen
C) will decrease by 45 percent.
15) The price elasticity of demand for Stork ice cream is -4. Suppose you're told that following a price increase, quantity demanded fell by 10 percent. What was the percentage change in price that brought about this change in quantity demanded?
A) 40 per
C) 2.5 percent
16) If demand is inelastic, the absolute value of the price elasticity of demand is
A) one.
B) less than one.
C) greater than one.
D) greater than the absolute value of the slope of the demand curve.
B) less than one.
18) Which of the following statements about the price elasticity of demand is correct?
A) The elasticity of demand for a good in general is equal to the elasticity of demand for a specific brand of the good.
B) The absolute value of the elasticity of dema
C) Demand is more elastic in the long run than it is in the short run.
19) When there are few close substitutes available for a good, demand tends to be
A) perfectly inelastic.
B) perfectly elastic.
C) relatively inelastic.
D) relatively elastic.
C) relatively inelastic.
20) Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant?
A) Demand is likely to be perfectly inelastic.
B) Demand is l
D) Demand is likely to be relatively inelastic.
21) Income elasticity measures
A) how a good's quantity demanded responds to change in the goods price.
B) how a good's quantity demanded responds to change in the price of another good.
C) how a good's quantity demanded responds to change in buyers' inco
C) how a good's quantity demanded responds to change in buyers' incomes.
22) Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.
A) -0.66
B) 0.5
C) 1.5
D) 2
B) 0.5
23) Studies show that the income elasticity of demand for wine is approximately five. What does this mean?
A) A one percent decrease in the price of wine leads to a five percent increase in wine consumption.
B) A one percent increase in income leads to a
B) A one percent increase in income leads to a five percent increase in wine consumption.
24) Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income increased by 10% and Sefton's quantity demanded of potatoes decreased by 5%. All else constant, Sefton'
A) negative, so Sefton considers potatoes to be an inferior good.
25) If the cross-price elasticity of demand for computers and software is negative, this means the two goods are
A) substitutes.
B) complements.
C) inferior.
D) normal.
B) complements.
1) If, at the profit maximizing output level, a perfectly competitive firm's price is less than its average variable cost, the firm
A) is earning a profit.
B) should shut down.
C) should increase output.
D) should increase price.
B) should shut down.
6) Assume this is a perfectly competitive market. Market supply curve is found by
A) vertically summing the relevant part of each individual producer's marginal cost curve.
B) horizontally summing the relevant part of each individual producer's marginal c
B) horizontally summing the relevant part of each individual producer's marginal cost curve.
8) If a typical firm in a perfectly competitive industry is earning positive profits, then
A) all firms will continue to earn profits.
B) new firms will enter in the long run causing market supply to decrease, market price to rise and profits to increase.
C) new firms will enter in the long run causing market supply to increase, market price to fall and profits to decrease.
9) If a typical firm in a perfectly competitive industry is incurring losses, then
A) all firms will continue to lose money.
B) some firms will exit in the long run, causing market supply to decrease and market price to rise increasing profits for the rem
B) some firms will exit in the long run, causing market supply to decrease and market price to rise increasing profits for the remaining firms.
10) Which of the following characteristics is not common to monopolistic competition and perfect competition?
A) Firms act to maximize profit.
B) Entry barriers into the industry are low.
C) The market demand curve is downward-sloping.
D) Firms take marke
D) Firms take market prices as given.
11) In monopolistic competition there is/are
A) many sellers who each face a downward-sloping demand curve.
B) a few sellers who each face a downward-sloping demand curve.
C) only one seller who faces a downward-sloping demand curve.
D) many sellers who e
A) many sellers who each face a downward-sloping demand curve.
12) A monopolistically competitive firm faces a downward-sloping demand curve because
A) it is able to control price and quantity demanded.
B) there are few substitutes for its product.
C) of product differentiation.
D) its market decisions are affected b
C) of product differentiation.
13) What is the profit-maximizing rule for a monopolistically competitive firm?
A) to produce a quantity that maximizes market share
B) to produce a quantity that maximizes total revenue
C) to produce a quantity such that marginal revenue equals marginal
C) to produce a quantity such that marginal revenue equals marginal cost
18) A monopolistically competitive firm that is earning positive profits will, in the long run, experience all of the following except
A) new rivals entering the market.
B) a decrease in demand for its product.
C) demand for the firm's product becomes mor
D) a decrease in the number of rival products.