Sei sulla pagina 1di 138
PRINCIPLESOFMICROECONOMICSTESTBANK Professors,pleaseemail ​ ​ support@mruniversity.com ​​

PRINCIPLESOFMICROECONOMICSTESTBANK

Professors,pleaseemailsupport@mruniversity.com​​ifyouwouldliketheanswerkeytothefollowing

questionsorifyouhaveanyadditionalsuggestions.

TableofContents

Supply,Demand,andEquilibrium

ElasticityandItsApplications

TaxesandSubsidies

ThePriceSystem

PriceCeilingsandPriceFloors

Trade

Externalities

CostsandProfitMaximizationUnderCompetition

CompetitionandtheInvisibleHand

Monopoly

PriceDiscrimination

LaborMarkets

PublicGoodsandtheTragedyoftheCommons

AsymmetricInformation

ConsumerChoice

Supply,Demand,andEquilibrium

Videoname:TheDemandCurve

1.Whenthepriceofagoodincreasesthequantitydemanded

a.decreases

b.increases

c.staysthesame

2.Whenwillpeoplesearchharderforsubstitutesforoil?

a.whenthepriceofoilislow

b.whenthepriceofoilishigh

c.peoplearenotincentivizedtosearchforsubstitutesforoil

Videoname:TheSupplyCurve

1.Alongasupplycurve,ifthepriceofoilfalls,whatwillhappentothequantityofoilsupplied?

a.itwilldecrease

b.itwillincrease

c.itwillnotchange

2.Ifthepriceofcarsfalls,arecarmakerslikelytomake

a.morecars

b.fewercars

c.thesameamountofcars

Videoname:TheEquilibriumPrice

1.Ifthepriceinamarketisabovetheequilibriumprice,thiscreates

a.ashortage

b.asurplus

c.neitherashortagenorasurplus

2.Whenthepriceisabovetheequilibriumprice,greed(inotherwords,self-interest)tendsto

a.pushthepricedown

b.pushthepriceup

c.havenoeffectonprice

3.JonisoneBay,biddingforafirsteditionoftheinfluentialFrankMillergraphicnovelBatman:

TheDarkKnightReturns.Inthismarket,whoisJoncompetingwith?

a.Thesellerofthegraphicnovel

b.Theotherbidders

c.eBay’sstakeholders

4.Now,JonisinJapan,tryingtogetajobasafull-timetranslator;hewantstotranslateEnglish

TVshowsintoJapaneseandviceversa.Henoticesthatthewagefortranslatorsisverylow.

Whoisthe“competition”thatispushingthewagedown?

a.Businesseswhohiretranslators

b.Othertranslators

c.Prospectiveclients

1.YourroommatejustboughtaniPodfor$200.Shewouldhavebeenwillingtopay$500fora

machinethatcouldstoreandreplaythatmuchmusic.Howmuchconsumersurplusdoesyour

roommateenjoyfromtheiPod?

a.$200

b.$300

c.$500

TheeconomistBryanCaplanrecentlyfoundapairof$10archsupportsthatsavedhimfromthe

painofmajorfootsurgery.Ashestatedonhisblog(econlog.econlib.org),hewouldhavebeen

willingtopay$100,000tofixhisfootproblem,butinsteadheonlypaidafewdollars.

2.HowmuchconsumersurplusdidBryanenjoyfromthispurchase?

a.$10

b.$10,000

c.$99,990

3.Ifthesalestaxwas5percentonthisproduct,howmuchrevenuedidthegovernmentraise

whenBryanboughthisarchsupports?

a.50cents

b.$5

c.$50

4.IfthegovernmentcouldhavetaxedBryanbasedonhiswillingnesstopayratherthanonhow

muchheactuallypaid,howmuchsalestaxwouldBryanhavehadtopay?

a.$50

b.$500

c.$5,000

5.Whatshouldhappentothe“demandforspeed”(measuredbytheaveragespeedon

highways)onceairbagsareincludedoncars?

a.Thedemandforspeedincreases

b.Thedemandforspeeddecreases

c.Thedemandforspeedstaysthesame

Videoname:TheDemandCurveShifts

1.WhenthepriceofApplecomputersgoesdown,whatprobablyhappenstothedemandfor

Windows-basedcomputers?

a.ThedemandforWindows-basedcomputersincreases

b.ThedemandforWindow-basedcomputersdecrease

c.AchangeinthepriceofApplecomputershasnoeffectonthedemandforWindows-based

computers

2.Whenthepriceofoliveoilgoesup,whatprobablyhappenstothedemandforcornoil?

a.Thedemandforcornoilincreases

b.Thedemandforcornoildecreases

c.Achangeinthepriceofoliveoilhasnoeffectonthedemandforcornoil

3.Whenthepriceofpetroleumgoesup,whatprobablyhappenstothedemandfornaturalgas?

a.Thedemandfornaturalgasincreases

b.Thedemandfornaturalgasdecreases

c.Achangeinthepriceofpetroleumhasnoeffectonthedemandfornaturalgas

4.Ifeveryonethinksthatthepriceoftomatoeswillgoupnextweek,whatislikelytohappento

demandfortomatoestoday?

a.Thedemandfortomatoesincreases

b.Thedemandfortomatoesdecreases

c.Expectationsaboutthepriceoftomatoeshasnoeffectonthedemandfortomatoestoday

1.Michaelisaneconomist.Helovesbeinganeconomistsomuchthathewoulddoitforaliving

evenifheonlyearned$30,000peryear.Instead,heearns$80,000peryear.(Note:Thisisthe

averagesalaryofneweconomistswithaPh.D.degree.)Howmuchproducersurplusdoes

Michaelenjoy?

a.$30,000

b.$50,000

c.$80,000

2.TheindustrialareasinnortheastWashington,DC,wererelativelydangerousinthe1980s.

Overthelasttwodecades,theareahasbecomeasaferplacetowork(althoughtherearestill

seventimesmoreviolentcrimesperpersonintheseareascomparedwithanotherDC

neighborhood,Georgetown).Whenanareabecomesasaferplacetowork,whatprobably

happenstothe“supplyoflabor”inthatarea?

a.thesupplyoflaborincreases

b.thesupplyoflabordecreases

c.thesupplyoflabordoesnotchange

Videoname:TheSupplyCurveShifts

1.Whenisapharmaceuticalbusinessmorelikelytohirehighlyeducated,cutting-edgeworkers

andusenew,experimentalresearchmethods?

a.Whenthebusinessexpectsthepriceofitsnewdrugtobelow

b.Whenthebusinessexpectsthepriceofitsnewdrugtobehigh

c.Thepharmaceuticalbusinessisunlikelytohirehighlyeducatedworkersunderanyprice.

2.Imaginethatatechnologicalinnovationreducesthecostsofproducinghigh-qualitysteel.

Whathappenstothesupplyofsteel?

a.Thesupplyofsteelincreases

b.Thesupplyofsteeldecreases

c.Reducedproductioncostsforsteelhavenoeffectonthesupplyofsteel

3.Whenoilcompaniesexpectthepriceofoiltobehighernextyear,whathappenstothesupply

ofoiltoday?

a.Thesupplyofoilincreases

b.Thesupplyofoildecreases

c.Expectationsaboutthepriceofoilhavenoeffectonthesupplyofoiltoday

4.Dotaxesusuallyincreasethesupplyofagoodorreducethesupply?

a.Taxesincreasethesupplyofthegood

b.Taxesreducethesupplyofthegood

c.Trickquestion!Taxeshavenoeffectonthesupplyofagood.

Videoname:ExploringEquilibrium

JuleswantstopurchaseaRoyalewithcheesefromVincent.Vincentiswillingtoofferthistasty

burgerfor$3.ThemostJulesiswillingtopayforthetastyburgeris$8(afterall,hisgirlfriendisa

vegetarian,sohedoesn’tgetmanyopportunitiesfortastyburgers).

1.HowlargearethepotentialgainsfromtradeifJulesandVincentagreetomakethistrade?In

otherwords,whatisthesumofproducerandconsumersurplusifthetradehappens?

a.$3

b.$4

c.$5

2.Ifthetradetakesplaceat$4,howmuchproducersurplusgoestoVincent?Howmuch

consumersurplusgoestoJules?

a.$1goestoVincent,$4goestoJules

b.$4goestoVincent,$1goestoJules

c.$2goestoVincent,$3goestoJules

3.Ifthetradetakesplaceat$7,howmuchproducersurplusgoestoVincent?Howmuch

consumersurplusgoestoJules?

a.$1goestoVincent,$4goestoJules

b.$4goestoVincent,$1goestoJules

c.$2goestoVincent,$3goestoJules

1.WhathappenedinVernonSmith’slab?

a.Thepriceandquantitywereclosetoequilibriumbutgainsfromtradewerefarfromthe

maximum.

b.Thepriceandquantitywerefarfromequilibriumandgainsfromtradewerefarfromthe

maximum.

c.Thepriceandquantitywerefarfromequilibriumbutgainsfromtradewereclosetothe

maximum.

d.Thepriceandquantitywereclosetoequilibriumandgainsfromtradewereclosetothe

maximum.

2.Whendemandincreases,whathappenstopriceandquantityinequilibrium?

a.Priceincreasesandquantitydecreases

b.Pricedecreasesandquantityincreases

c.Priceandquantitybothincrease

d.Priceandquantitybothdecrease

3.Whensupplyincreases,whathappenstopriceandquantityinequilibrium?

a.Priceincreasesandquantitydecreases

b.Pricedecreasesandquantityincreases

c.Priceandquantitybothincrease

d.Priceandquantitybothdecrease

4.Whensupplydecreases,whathappenstopriceandquantityinequilibrium?

a.Priceincreasesandquantitydecreases

b.Pricedecreasesandquantityincreases

c.Priceandquantitybothincrease

d.Priceandquantitybothdecrease

5.Whendemanddecreases,whathappenstopriceandquantityinequilibrium?

a.Priceincreasesandquantitydecreases

b.Pricedecreasesandquantityincreases

c.Priceandquantitybothincrease

d.Priceandquantitybothdecrease

6.What’sthebestwaytothinkabouttheriseinoilpricesinthe1970s,whenwarsandoil

embargoeswrackedtheMiddleEast?

a.Ariseindemand

b.Afallindemand

c.Ariseinsupply

d.Afallinsupply

7.What’sthebestwaytothinkabouttheriseinoilpricesinthelast10years,asChinaandIndia

havebecomericher:Wasitariseindemand,afallindemand,ariseinsupply,orafallin

supply?

a.Ariseindemand

b.Afallindemand

c.Ariseinsupply

d.Afallinsupply

1.Whensupplyfalls,whathappenstoquantitydemandedinequilibrium?

a.Quantitydemandedincreases

b.Quantitydemandeddecreases

c.Achangeinsupplyhasnoeffectonquantitydemanded

2.Ifoilexecutivesreadinthenewspaperthatmassivenewoilsupplieshavebeendiscovered

underthePacificOceanbutwilllikelyonlybeusefulin10years,whatislikelytohappentothe

supplyofoiltoday?

a.Thesupplyofoilwillrisetoday

b.Thesupplyofoilwillfalltoday

c.Therewillbenochangeinthesupplyofoil

3.Ifoilexecutivesreadinthenewspaperthatnewsolar-powertechnologieshavebeen

discoveredbutwilllikelyonlybecomeusefulin10years,whatisthelikelyequilibriumimpacton

thepriceandquantityofoiltoday?

a.thepriceofoilwillincrease,thequantityofoilwilldecrease

b.thepriceofoilwilldecrease,thequantityofoilwillincrease

c.thepriceandquantityofoilwilldecrease

d.thepriceandquantityofoilwillincrease

4.Ifwelearntodayaboutpromisingfutureenergysources,today’spriceofenergywill

andtoday’squantityofenergywill

a.rise,fall

b.fall,rise

c.rise,rise

c.rise,rise

ElasticityandItsApplications

Videoname:ElasticityofDemand

1.Whichofthefollowingtwogoodsismorelikelytobeinelasticallydemanded?

a.Demandfortangerines

b.Demandforfruit

2.Whichofthefollowingtwogoodsismorelikelytobeinelasticallydemanded?

a.Demandforbeefnextmonth

b.Demandforbeefoverthenextdecade

3.Whichofthefollowingtwogoodsismorelikelytobeinelasticallydemanded?

a.DemandforExxongasolineatthecornerof7thandGrand

b.Demandforgasolineintheentirecity

4.Whichofthefollowingtwogoodsismorelikelytobeinelasticallydemanded?

a.Demandforinsulin

b.Demandforvitamins

5.Afterapublicinformationcampaignhighlightingthatbacteriaandotherorganismscauseand

spreaddisease,willthedemandcurveforsoapbemoreelasticormoreinelastic?

a.Moreelastic

b.Moreinelastic

6.Aftertheinventionofnuclearpowerplants,willthedemandcurveforcoalpowerplantsbe

moreelasticormoreinelastic?

a.Moreelastic

b.Moreinelastic

7.Aftermoreemployersallowemployeestotelecommute,willthedemandcurveforcarsbe

moreelasticormoreinelastic?

a.Moreelastic

b.Moreinelastic

8.Afteraneconomicboom,willthedemandcurveforTVsbemoreelasticormoreinelastic?

a.Moreelastic

b.Moreinelastic

9.DuringtheMiddleAges,theAfricancityofTaghazaquarriedsaltin200-poundblockstobe

senttothesaltmarketinTimbuktu,inpresent-dayMali.TravelersreportthatTaghazansused

saltinsteadofwoodtoconstructbuildings.Comparedwithothertownswithoutbigsaltmines,

wasthedemandforwoodmoreelasticormoreinelasticinTaghaza?

a.Moreelastic

b.Moreinelastic

1.Iftheelasticityofdemandforcollegetextbooksis-0.1,andthepriceoftextbooksincreasesby

20%,howmuchwillthequantitydemandedchange,andinwhatdirection?

a.Thequantitydemandedincreasesby2%

b.Thequantitydemandeddecreasesby20%

c.Thequantitydemandeddecreasesby2%

d.Thequantitydemandedremainsthesame

2.IftheelasticityofdemandforspringbreakpackagestoCancunis-5,andifyounoticethat

thisyearinCancunthequantityofpackagesdemandedincreasedby10%,thenwhathappened

tothepriceofCancunvacationpackages?

a.Thepricefellby10percent

b.Thepricefellby2percent

c.Thepriceincreasedby2percent

d.Thepriceremainedthesame

3.Inyourcollegetown,realestatedevelopersarebuildingthousandsofnewstudent-friendly

apartmentsclosetocampus.Ifyouwanttopaythelowestrentpossible,shouldyouhopethat

demandforapartmentsiselasticorinelastic?

a.Elastic

b.Inelastic

4.Inyourcollegetown,thelocalgovernmentdecreesthatthousandsofapartmentscloseto

campusareuninhabitableandmustbetorndownnextsemester.Ifyouwanttopaythelowest

rentpossible,shouldyouhopethatdemandforapartmentsiselasticorinelastic?

a.Elastic

b.Inelastic

5.Thelong-runelasticityofoildemandhasbeenestimatedat-0.5.Ifthepriceofoilrisesby10%,

howmuchwillthequantityofoildemandedfall?

a.5%

b.0.5%

c.2%

d.20%

6.Thelong-runelasticityofoildemandhasbeenestimatedat-0.5.Doesa10%riseinoilprices

increaseordecreasetotalrevenuestotheoilproducers?

a.Increase

b.Decrease

7.IntheUnitedStates,thelong-runelasticityofoildemandhasbeenestimatedat-0.5.Some

policymakersandenvironmentalscientistswouldliketoseetheUnitedStatescutbackonits useofoilinthelongrun.Wecanusethiselasticityestimatetogetaroughmeasureofhowhigh thepriceofoilwouldhavetopermanentlyriseinordertogetpeopletomakebigcutsinoil consumption.Howmuchwouldthepriceofoilhavetopermanentlyriseinordertocutoil

consumptionby50%?

a.5%

b.25%

c.50%

d.100%

8.Francehasthelargestlong-runelasticityofoildemand(–0.6)ofanyofthelarge,rich

countries,accordingtoCooper’sestimates.DoesthismeanthatFranceisbetteratresponding

tolong-runpricechangesthanotherrichcountries,ordoesitmeanFranceisworseat

responding?

a.Betteratresponding

b.Worseatresponding

9.Theelasticityofdemandis0.2.Isthedemandcurverelativelysteeporflat?Willafallinprice

raisetotalrevenueorlowerit?Note:wepresenttheelasticityintermsofitsabsolutevalue.

a.Relativelysteep;raisetotalrevenue

b.Relativelyflat;raisetotalrevenue

c.Relativelysteep;lowertotalrevenue

d.Relativelyflat;lowertotalrevenue

10.Theelasticityofdemandis2.0.Isthedemandcurverelativelysteeporflat?Willafallinprice

raisetotalrevenueorlowerit?Note:wepresenttheelasticityintermsofitsabsolutevalue.

a.Relativelysteep;raisetotalrevenue

b.Relativelyflat;raisetotalrevenue

c.Relativelysteep;lowertotalrevenue

d.Relativelyflat;lowertotalrevenue

11.Theelasticityofdemandis1.1.Isthedemandcurverelativelysteeporflat?Willafallinprice

raisetotalrevenueorlowerit?Note:wepresenttheelasticityintermsofitsabsolutevalue.

a.Relativelysteep;raisetotalrevenue

b.Relativelyflat;raisetotalrevenue

c.Relativelysteep;lowertotalrevenue

d.Relativelyflat;lowertotalrevenue

12.Theelasticityofdemandis0.9.Isthedemandcurverelativelysteeporflat?Willafallinprice

raisetotalrevenueorlowerit?Note:wepresenttheelasticityintermsofitsabsolutevalue.

a.Relativelysteep;raisetotalrevenue

b.Relativelyflat;raisetotalrevenue

c.Relativelysteep;lowertotalrevenue

d.Relativelyflat;lowertotalrevenue

13.HenryFordfamouslymass-producedcarsatthebeginningofthetwentiethcentury,starting

FordMotorCompany.Hemademillionsbecausemassproductionmadecarscheaptomake,

andhepassedsomeofthesavingstotheconsumerintheformofalowprice.Carsbecamea

commonsightintheUnitedStatesthereafter.Keepingtotalrevenueanditsrelationshipwith

priceinmind,doyouexpectthedemandforcarstobeelasticorinelasticgiventhestoryof

HenryFord?

a.Elastic

b.Inelastic

Videoname:ElasticityofSupply

1.Whichofthetwogoodsismorelikelytobeelasticallysupplied?

a.Supplyofapplesoverthenextgrowingseason

b.Supplyofapplesoverthenextdecade

2.Whichofthetwogoodsismorelikelytobeelasticallysupplied?

a.SupplyofconstructionworkersinBinghamton,NY

b.SupplyofconstructionworkersinNewYorkState

3.Whichofthetwogoodsismorelikelytobeelasticallysupplied?

a.Supplyofbreakfastcereal

b.Supplyoffood

4.Whichofthetwogoodsismorelikelytobeelasticallysupplied?

a.Supplyofgold

b.Supplyofcomputers

5.Ifanewprocessformanufacturingdiamondsiscreated,willthesupplycurvefordiamonds

becomemoreelasticormoreinelastic?

a.Moreelastic

b.Moreinelastic

6.Ifpesticidesandfertilizersarebanned,willthesupplycurveforfoodbecomemoreelasticor

moreinelastic?

a.Moreelastic

b.Moreinelastic

7.Ifalargershareofoiloutputisrequiredtomakeplastic,willthesupplycurveforplastic

becomemoreelasticormoreinelastic?

a.Moreelastic

b.Moreinelastic

8.In1993,thenPresidentClintonpassedalawraisingincometaxes.Thistaxhikewasfully

expected:Hecampaignedonitin1992.Whatdoyouexpecthappenedtoexecutiveincomein

thefirstyearofthetaxincreases?Whataboutinsubsequentyears?Hint:Topexecutiveshavea

lotofpoweroverwhentheygetpaidfortheirwork:Theycanaskforbonusesabitearlier,or

theycancashouttheirstockoptionsabitearlier.Literally,thisisn’ttheir“laborsupply,”it’smore

liketheir“incomesupply.”

a.Inthefirstyearincomewilldecrease;inthelongrunitwilldecrease

b.Inthefirstyearincomewilldecrease;inthelongrunitwillremainnearlythesame

c.Inthefirstyearincomewillincrease;inthelongrunitwilldecrease

d.Inthefirstyearincomewillincrease;inthelongrunitwillremainnearlythesame

9.EconomistAustenGoolsbeeestimatedthattheshort-runelasticityof“incomesupply”for

theseexecutiveswas1.4,whilethelong-runelasticityof“incomesupply”was0.1.(Note:

Goolsbeeusedavarietyofstatisticalmethodstolookfortheseelasticities,andallcameto

roughlythesameresult.)Iftaxespusheddowntheirtake-homeincomeby10%,howmuchwould

thiscuttheamountofincomesuppliedintheshortrun?Inthelongrun?

a.Shortrunincomewoulddecrease10%;longrunincomewoulddecrease1%

b.Shortrunincomewoulddecrease14%;longrunincomewoulddecrease1%

c.Shortrunincomewoulddecrease10%;longrunincomewoulddecrease2%

d.Shortrunincomewoulddecrease14%;longrunincomewoulddecrease2%

1.Forwhichofthefollowingproductswouldyouexpectthelargestincreaseinpriceforthesame

increaseindemand?

a.Flashlights

b.Pens

c.AfirsteditionofAdamSmith'sTheWealthofNations

d.Jeans

2.Agoodismoreelasticwhen

a.itiseasytoproducemoreatthesamecost

b.itismadefromrubber

c.itisdifficulttoproducemoreatthesamecost

d.themarginalcostisequaltotheprice

3.Intheworldoffashion,thepowertoimitateatrendylookisthepowertomakemoney.Stores

likeH&MandForever21focusonimitatingfashionswhereverpossible:Assoonastheyseethat

anewlookiscomingalong,somethingpeoplearewillingtopayahighpricefor,theystart

crankingoutthatlook.Dotheseimitation-centeredstoresmakethesupplyofclothingmore

elasticormoreinelastic?

a.Moreelastic

b.Lesselastic

4.AlotofAmericanactionmoviesarequeststoeliminateavillain.Ifinreallifevillainsare

elasticallysupplied(likegunsforbuybackprograms),shouldwecarewhethertheherocaptures

aparticularvillain?

a.Yes

b.No

1.Supposethatdrugaddictspayfortheiraddictionbystealing:Sothehigherthetotalrevenue

oftheillegaldrugindustry,thehighertheamountoftheft.Ifagovernmentcrackdownondrug

suppliersleadstoahigherpriceofdrugs,whatwillhappentotheamountofstealingifthe

demandfordrugsiselastic?

a.Theoverallamountofstealingwilldecrease

b.Theoverallamountofstealingwillincrease

c.Theoverallamountofstealingwillremainthesame

2.Supposethatdrugaddictspayfortheiraddictionbystealing:Sothehigherthetotalrevenue

oftheillegaldrugindustry,thehighertheamountoftheft.Ifagovernmentcrackdownondrug

suppliersleadstoahigherpriceofdrugs,whatwillhappentotheamountofstealingifthe

demandfordrugsisinelastic?

a.Theoverallamountofstealingwilldecrease

b.Theoverallamountofstealingwillincrease

c.Theoverallamountofstealingwillremainthesame

3.ImmigrationisafactoflifeintheUnitedStates.Thiswillleadtoabigboostinthelabor

supply.Whatfieldwouldyouratherbein?

a.Afieldwherethedemandforyourkindoflaboriselastic.

b.Afieldwherethedemandforyourkindoflaborisinelastic.

4.WesawthatagunbuybackprogramwasunlikelytoworkinWashington,D.C.Iftheentire

UnitedStatesranagunbuybackprogram,wouldthatbebetterateliminatinggunsorworse?

Hint:Isthesupplyofgunsatanationallevelmoreelasticormoreinelastic?

a.Better

b.Worse

TaxesandSubsidies

Videoname:CommodityTaxes

1.Fillintheblanks:Aslongassupplyanddemandcurveshavetheirnormalshape(thedemand

curveshaveanegativeslopewhilesupplycurveshaveapositiveslope),ifthereisatax,the

equilibriumquantitymust

andthepricethatbuyerspaymust

a.Fall;rise

b.Fall;fall

c.Rise;fall

d.Fall;rise

2.Fillintheblanks:Aslongassupplyanddemandcurveshavetheirnormalshape(thedemand

curvehasanegativeslopewhilesupplycurveshaveappositiveslope),ifthereisatax,the

equilibriumquantitymust

andthepricethatsellersreceivemust

a.Fall;rise

b.Fall;fall

c.Rise;fall

d.Fall;rise

Videoname:WhoPaystheTax?

1.Junkfoodhasbeencriticizedforbeingunhealthyandtoocheap,enticingthepoortoadopt

unhealthylifestyles.SupposethatthestateofOklakansasimposesataxonjunkfood.Forthe

taxtoactuallydeterpeoplefromeatingjunkfood,shouldjunkfooddemandbeelasticor

inelastic?

a.Elastic

b.Inelastic

2.IftheOklakansasgovernmentwantstostronglydiscouragepeoplefromeatingjunkfood,

whenwillitneedtosetahighertaxrate:Whenjunkfooddemandiselasticorwhenitis

inelastic?

a.Elastic

b.Inelastic

3.Let’stakealookatthesupplysideofjunkfood.Ifjunkfoodsupplyishighlyelastic—perhaps

becauseit’snotthathardtostartsellingsaladswithlowfatdressinginsteadofmayonnaise-and

cheese-ladenburgers—willajunkfoodtaxhaveabiggereffectifsupplywereinelasticor

elastic?

a.Elastic

b.Inelastic

4.Ifagovernmentishopingthatasmalltaxcanactuallydiscouragealotofjunkfood

purchases,itshouldhopefor:

a.Elasticsupplyandinelasticdemand

b.Elasticsupplyandelasticdemand

c.Inelasticsupplyandelasticdemand

d.Inelasticsupplyandinelasticdemand

5.Whatdoesitmeanthatelasticityequalsescape?(Thisisworthremembering:Elasticityisone

ofthetoughestideasformosteconomicsstudents.)

a.Peoplewithelasticdemandsdon’tliketopaytaxes

b.Itiseasyformarketparticipantstoescapetoanothermarketiftheyhaveelasticdemandor

supply

c.Resourcesusedtoproducegoodswithelasticsupplycannotbeusedformuchelse

6.Onewaygovernmentshavetriedtocollecttaxesfromthewealthyisthroughtheuseofluxury

taxes,whichareexactlywhattheysoundlike:taxesongoodsthatareconsideredluxuries,like

jewelryorexpensivecarsandrealestate.Whatistrueaboutthedemandforluxuries?

a.Itiselastic

b.Itisinelastic

c.Itisunitelastic

7.Considerjewelry.Isaluxurytaxmorelikelytohurtthebuyersofjewelry,orthesellersof

jewelry?

a.Thebuyers

b.Thesellers

8.Let’sapplytheeconomicsoftaxationtoromanticrelationships.Sometimesrelationshipshave

taxes.Supposethatyouandyourboyfriendorgirlfriendliveonehourapart.Usingthetools

developedinthechapter,howcanyoupredictwhichoneofyouwilldomostofthedriving?That

is,whichoneofyouwillbearthemajorityoftherelationshiptax?

a.Thepersonwithmoreinelasticdemandfortherelationshipwillbearthetax–heorshewilldo

mostofthedriving.

b.Thepersonwithmoreelasticdemandfortherelationshipwillbearthetax–heorshewilldo

mostofthedriving.

9.IntheopeningsceneoftheclassicEddieMurphycomedyBeverlyHillsCop,AxelFoley,a

Detroitpoliceofficer,isstoppingacigarettesmugglingring.Ofcourse,smugglersdon’tpaythe

taxwhenthecigarettescrossstatelines.Whichwaydoyoususpectthesmugglersweremoving

thecigarettes,basedoneconomictheory?

a.Fromthehigh-taxNorthtothelow-costSouth.

b.Fromthelow-costSouthtothehigh-taxNorth.

10.Inourdiscussionoftaxation,we’veactedasifitwereeffortlesstopassandenforcetaxlaws.

But,ofcourse,lawenforcementofficialsincludingtheInternalRevenueServiceputalotofeffort

intoenforcingtaxlaws.Let’sthinkforamomentaboutwhatkindoftaxesareeasiesttocollect,

justbasedonthebasicideaswe’vecovered.Whowillmakethemostefforttoescapeatax?

a.Thepartywhoiselastic

b.Thepartywhoisinelastic

c.Neitherparty

1.Decadesago,Washington,DC,afairlysmallcity,wantedtoraisemorerevenuebyincreasing

thegastax.Washington,DC,sharesborderswithMarylandandVirginia,andit’sveryeasyto

crossthebordersbetweenthesestates.Howelasticisthedemandforgasolinesoldatstations

withinWashington,DC?Inotherwords,ifthepriceofgasinDCrises,butthepriceinMaryland

andVirginiastaysthesame,willgasolinesalesatDCstationsfallalittle,orwilltheyfallalot?"

a.Elastic–gasolinesaleswouldfallalot

b.Inelastic–gasolinesaleswouldfallalittle

2.Givenyouransweronthepreviousquestion,howmuchrevenuediditraisewhenitincreased

itsgasolinetax?

a.Alittlerevenue

b.Alotofrevenue

3.IfDC,Maryland,andVirginiaallagreedtoraisetheirgastaxsimultaneously,howmuch

revenuecouldthegastaxraise?Note:Thesestateshaveheavilypopulatedborderswitheach

other,buttheydon’thaveanyheavilypopulatedborderswithotherstates.

a.Alittlerevenue

b.Alotofrevenue

4.SupposethatMariaiswillingtopay$40forahaircut,andherstylistJuaniswillingtoaccept

aslittleas$25forahaircut.WhatpossiblepriceforthehaircutwouldbebeneficialtobothMaria

andJuan?

a.$20

b.$30

c.$45

GiventhatMariaandJuanfindapricesuitabletobothofthem,howmuchtotalsurplus(i.e.,the

sumofconsumerandproducersurplus)wouldbegenerated?

a.$15

b.$30

c.$10

5.IfthestatewhereMariaandJuanliveinstitutedataxonservicesthatincludeda$5per

haircuttaxonstylistsandbarbers,whatisonepricethatwillmakebothMariaandJuanbetter

off?

a.$28

b.$30

c.$42

d.TherearenopricesthataresuitabletobothMariaandJuan

6.SupposethatMariaiswillingtopay$40forahaircut,andherstylistJuaniswillingtoaccept

aslittleas$25forahaircut.IfthestatewhereMariaandJuanliveinstitutedataxonservices

thatincludeda$5perhaircuttaxonstylistsandbarbers,whatwillhappentothe$15of

economicbenefit?

a.Itwilldecrease

b.Itwillincrease

c.Itwillstaythesame

7.SupposethatMariaiswillingtopay$40forahaircut,andherstylistJuaniswillingtoaccept

aslittleas$25forahaircut.Ifaprevious$5taxincreasesto$20,willthehaircuttransactionstill

happen?

a.Yes

b.No

8.Thecompetitivemarketequilibriummaximizesgainsfromtrade.Taxesandsubsidies,by

alteringthemarketoutcome,reducethegainsfromtrade.Doesthishappenprimarilybecause

oftheimpactoftaxesandsubsidiesonprices,ortheimpactoftaxesandsubsidieson

quantities?

a.Theimpactonprices

b.Theimpactonquantities

Videoname:Subsidies

1.Fillintheblanks:Whenthegovernmentsubsidizesanactivity,resourcessuchaslabor,

machines,andbanklendingwilltendtogravitate

willtendtogravitate

theactivitythatissubsidizedand

activitythatisnotsubsidized.

a.toward;awayfrom

b.toward;toward

c.awayfrom;toward

d.awayfrom;awayfrom

2.Fillintheblanks:Whenthegovernmenttaxesanactivity,resourcessuchaslabor,machines,

andbanklendingwilltendtogravitate

gravitate

theactivitythatistaxedandwilltendto

activitythatisnottaxed.

a.toward;awayfrom

b.toward;toward

c.awayfrom;toward

d.awayfrom;awayfrom

3.Somepeoplewithdiabetesabsolutelyneedtotakeinsulinonaregularbasistosurvive.

Pharmaceuticalcompaniesthatmakeinsulincouldfindalotofotherwaystomakesome

money.IftheU.S.governmentimposesataxoninsulinproducersof$10percubiccentimeterof

insulin,payableeverymonthtotheU.S.Treasury,whowillbearmostoftheburdenofthetax?

a.Insulinproducers

b.Peoplewithdiabetes

c.Notenoughinformationisgiven

4.Supposeinsteadthatbecauseofgovernmentcorruption,theinsulinmanufacturersconvince

theU.S.governmenttopaytheinsulinmakers$10percubiccentimeterofinsulin,payableevery

monthfromtheU.S.Treasury.Whowillgetmostofthebenefitofthissubsidy?

a.Insulinproducers

b.Peoplewithdiabetes

c.Notenoughinformationisgiven

Videoname:WageSubsidies

1.Whateffectdowagesubsidieshaveonemployment?

a.Wagesubsidiesincreaseemployment

b.Wagesubsidiesdecreaseemployment

c.Wagesubsidieshavenoeffectonemployment

2.Whateffectdowagesubsidieshaveonthedemandforwelfarepayments?

a.Wagesubsidiesincreasethedemandforwelfarepayments

b.Wagesubsidiesdecreasethedemandforwelfarepayments

c.Wagesubsidieshavenoeffectonthedemandforwelfarepayments

3.Whichoneofthefollowingoptionsisareallifeexampleofawagesubsidy?

a.Foodstamps(SNAP)

b.Housingassistance

c.TheEarnedIncomeTaxCredit

d.Theminimumwage

4.Fillintheblanks:Wagesubsidies

jobs.Theminimumwagelaws

a.increase;increase

b.increase;decrease

c.decrease;increase

d.decrease;decrease

thedemandforlaborandthenumberoflowskilled

thedemandforlaborandthenumberoflowskilledjobs.

ThePriceSystem

Videoname:I,Rose

Noquestions

1.Circa1200BCE,adecreasingsupplyoftinduetowarsandthebreakdownoftradeledtoa

drasticincreaseinthepriceofbronzeintheMiddleEastandGreece(tinbeingnecessaryforits

production).Itisaroundthistimethatblacksmithsdevelopediron-andsteel-makingtechniques

(assubstitutesforbronze).Whatdoestheincreasingpriceofbronzesignal?

a.Ittellspeoplethatbronzeisgettinghardertofindanditshigherpricewillsignalconsumersto

conserveitmoreorseeksubstitutes.

b.Ittellspeoplethatthereisapricebubbleformingaroundbronzeandthatpeopleare

overvaluingthepriceofbronze.

c.IttellspeoplethatthewarsintheMiddleEastandGreecearecomingclosetobeingresolved

becauseofbronzescarcity.

d.Ittellspeopletobuymorebronzebecauseitisgoingtobemorevaluableinthefuture.

2.Howistheincreasingpriceofbronzeanincentive?

a.Consumerswillsavemoremoneybyconservingbronze.

b.Consumerswhoswitchtosubstitutescansavemoney.

c.Entrepreneurscanprofitbydevelopingnewalternativestobronze.

d.Entrepreneurscanprofitbydevelopingwaystorecyclebronze.

e.Alloftheabove.

3.Whydoyouthinkironandsteelbecamemorecommonaroundthesametimeastheincrease

inpriceofbronze?

a.Anincreaseinthedemandforbronzesignalsthatpeoplearewealthyenoughtoaffordiron

andsteel.

b.Anincreaseinthepriceofbronzeencouragesinnovationtoproducesubstitutes.

c.Anincreaseinthepriceofaresourcessignalsthatitistoocompetitivetomakeaprofit,so

entrepreneursseekotheralternatives.

d.Theintroductionofironandsteeldifferentiatesbronzeforspecificusesandthereforecauses

itspricetoincrease.

4.Afterthedevelopmentofiron,didthesupplyordemandforbronzeshift?Whichwaydidit

shift?Why?

a.Thedemandforbronzeshiftedtotheleft(down)becausetherewasnowagoodsubstitutefor

bronze.

b.Thedemandforbronzeshiftedtotheright(up)becausetherewasnowagoodsubstitutefor

bronze.

c.Thesupplyforbronzeshiftedtotheright(down)becausetherewasnowagoodsubstitutefor

bronze.

d.Thesupplyforbronzeshiftedtotheleft(up)becausethequantitydemandedofbronze

decreased.

5.Onequestionthateconomicsstudentsoftenaskis“Inamarketwithalotofbuyersand

sellers,whosetsthepriceofthegood?”Therearetwopossiblecorrectanswerstothisquestion:

“Everyone”and“Noone.”Whatismeantby“Everyone?”

a.Inamarketoperatinginawesterndemocracy,everyonegetstovoteonpricecontrolsand

restrictionstoensurethemarketoperatesfairly.

b.Inamarketwithmanyparticipants,eachperson’sactionspushthesupplyorthedemandjust

alittlebit,soeveryonehassomesmallinfluence.

c.Inamarketwithmanysuppliersanddemanders,eachperson’sactionshaveanegligible

effectonsupplyorthedemand,soeveryonehastoworktogethertoinfluencethemarket.

d.Everyonehastoconsumesomething.

6.Whatismeantby“Noone?”

a.Nooneperson’sbehaviorcanaffectprices.

b.Noonewantstheequilibriumprice.Everyonewantsthelowestpricepossible.

c.Thereistoomuchinformationforsupplierstoknowhowtosetprices.

d.Nobodyactuallyplansforagivenpricetobetheequilibriumprice.

Videoname:MarketsLinktheWorld

1.SupposeyoulearnedthatgrowingpoliticalinstabilityinChile(thelargestproducerofcopper)

willgreatlyreducetheproductivityofitsminesintwoyears.Ignoringallotherfactors,which

curve(demandorsupply)willshiftwhichwayinthemarketforcoppertwoyearsfromnow?

a.Demandcurvewillincrease,thatis,ashifttotheright(up).

b.Demandcurvewilldecrease,thatis,ashifttotheleft(down).

c.Supplycurvewillincrease,thatis,ashifttotheright(down).

d.Supplycurvewilldecrease,thatis,ashifttotheleft(up).

2.Willthepriceriseorfallasaresultofthiscurveshift?

a.Thepricewillrise.

b.Thepricewillfall.

3.Thevideoexploreshowpricestieallgoodstogether.Toillustratethisidea,supposenew

farmingtechniquesdrasticallyincreasedtheproductivityofgrowingwheat.Giventhischange,

howwouldthepriceofwheatchange?

a.Increase,becausedemandwouldshifttotheright.

b.Increase,becausesupplywouldshifttotheleft.

c.Fall,becausesupplywouldshifttotheright.

d.Fall,becausedemandwouldshifttotheleft.

4.Howwouldthepriceofcookbooksspecializinginrecipesusingwheatflourchange?

a.Increase,becausedemandwouldshifttotheright.

b.Increase,becausesupplywouldshifttotheleft.

c.Fall,becausedemandwouldshifttotheright.

d.Fall,becausedemandwouldshifttotheleft.

5.Givenyouranswertothepreviousquestion,whatwouldhappentothepriceofpaper?

a.Increase,becausedemandwouldshifttotheright.

b.Increase,becausesupplywouldshifttotheleft.

c.Fall,becausedemandwouldshifttotheright.

d.Fall,becausedemandwouldshifttotheleft.

6.Givenyourpredictionaboutthechangeinthepriceofpaper,howwouldthepriceofpencils

change?(Hint:arepaperandpencilscomplementsorsubstitutes?)

a.Rise,becausedemandwouldshifttotheright.

b.Rise,becausesupplywouldshifttotheleft.

c.Fall,becausedemandwouldshifttotheright.

d.Fall,becausedemandwouldshifttotheleft.

1.Let’sseeiftheforcesofthemarketcanbeasefficientasabenevolentdictator.Sincelaptop

computersareincreasinglyeasytobuildandsincetheyallowpeopletousetheircomputers

wherevertheylike,anall-wisebenevolentdictatorwouldprobablydecreethatmostpeoplebuy

laptopsratherthandesktopcomputers.Thisisespeciallytruenowthatlaptopsareaboutas

powerfulasmostdesktops.Sinceit’sbecomemucheasiertobuildbetterlaptopcomputersin

recentyears,laptopsupplyhasincreased.Whatdoesthisdotothepriceoflaptops?

a.Thepriceoflaptopsincreases.

b.Thepriceoflaptopsdecreases.

c.Anincreaseinlaptopsupplywillnotchangeitsprice.

2.Laptopanddesktopcomputersaresubstitutes.Nowthatthepriceoflaptopshaschanged,

whatdoesthisdotothedemandfordesktopcomputers?

a.Thedemandfordesktopsincreases

b.Thedemandfordesktopsdecreases.

c.Achangeinthepriceoflaptopswillnotaffectthepriceofdesktops.

3.Howdoesthechangeindesktopdemandaffectthequantitysuppliedofdesktopcomputers?

a.Thesupplyofdesktopsincreases.

b.Thesupplyofdesktopsdecreases.

c.Thesupplyofdesktopsisunaffected.

4.Onceitbecameeasiertobuildgoodlaptops,did“invisiblehand”forcespushmoreof

society’sresourcesintomakinglaptopandpushresourcesawayfrommakingdesktops?

a.Yes.

b.No.

5.Theprocessofmarketcreationismostsimilartothecreationofacountry’s

a.Constitution

b.Language

c.Defensestrategy

1.Ifanation’sgovernmentmadeitimpossibleforinefficientfirmstofailbygivingthemloans,

cashgrants,andotherbailoutstostayinbusiness,isthatnationlikelytobepoorerorricherasa

resultofthisstrategy?(Hint:StevenDavisandJohnHaltiwanger.1999.“GrossJobFlows.”In

HandbookofLaborEconomics(Amsterdam:North–Holland)foundthanintheUnitedStates,

60%oftheincreaseinU.S.manufacturingefficiencywascausedbypeoplemovingfromweak

firmstostrongfirms.)

a.Richer.

b.Poorer.

2.Supposeanewinventioncomesalongthatmakesiteasierandmuchlessexpensiveto

recycleclothing:perhapsanewdeviceaboutthesizeofawashingmachinecanbleach,

re-weave,andre-dyecottonfabrictocloselyimitateanycottonitemyouseeinafashion

magazine.Headintothelaundryroom,dropinabatchofoldclothes,scaninacoupleofpages

fromVogue,andcomebackinanhour.Ifyouthinkofthe“marketforclothing”asthe“market

fornewclothing,”doesthisshiftthedemandorthesupplyofclothing,andinwhichdirection?

a.Thesupplyofclothingshiftsright:ariseinsupply.

b.Thesupplyofclothingshiftsleft:afallinsupply.

c.Thedemandforclothingshiftsright:ariseindemand.

d.Thedemandforclothingshiftsleft:afallindemand.

3.Ifyouinsteadthinkofthe“marketforclothing”asthe“marketforclothing,whetherit’snewor

used,”doesthisshiftthedemandorsupplyofclothing,andinwhichdirection?

a.Thesupplyofclothingshiftsright:ariseinsupply.

b.Thesupplyofclothingshiftsleft:afallinsupply.

c.Thedemandforclothingshiftsright:ariseindemand.

d.Thedemandforclothingshiftsleft:afallindemand.

4.Whathappenstothepriceofnew,unrecycledclothing?

a.Thepriceofnewclothingincreases.

b.Thepriceofnewclothingdecreases.

c.Thechangeinpricedirectiondependsonthesizeofthesupplycurve’sshift.

d.Thepriceofnewclothingwillnotchange.

5.Afterthisinvention,willsociety’sscarceproductiveresources(machines,workers,retailspace)

flowtowardthe“newclothing”sectororawayfromit?(Note:Youmaythinkthistheoretical

questionisfancifulbutthree-dimensionalprinters,whichcancreateplasticorplasterprototypes

ofsmallitemssuchastoys,cups,etc.,havefallendramaticallyinprice.Everyday,you’regetting

justabitclosertohavingyourownpersonalStarTrekreplicator.)

a.Resourceswillflowtowardthenewclothingsector.

b.Resourceswillflowawayfromthenewclothingsector.

c.Resourceflowswillremainunchanged.

Videoname:Speculation

1.Sometimesspeculatorsgetitwrong.InthemonthsbeforethePersianGulfWar,speculators

droveupthepriceofoil:TheaveragepriceinOctober1990was$36perbarrel,morethan

doubleitspricein1988.Oilspeculators,likemanypeoplearoundtheworld,expectedtheGulf

Wartolastformonths,disruptingtheoilsupplythroughouttheGulfregion.Thus,speculators eitherboughtoilontheopenmarket(almostalwaysatthehighspeculativeprice)orthey alreadyownedoilandkeptitinstorage.Eitherway,theirplanwasthesame:tosellitinthe future,whenpricesmightevenbehigher.Asitturnedout,thewarwasswift:Afteronemonthof

massiveaerialbombardmentofIraqitroopsanda100-hourgroundwar,thenPresidentGeorge

H.W.Bushdeclaredacessationofhostilities.DespitethefactthatSaddamHusseinsetfireto

manyofKuwait’soilfields,thepriceofoilplummetedtoabout$20perbarrel,apriceatwhichit

remainedforyears.Howmuchmoneydidspeculatorsloseormakeoneachbarrel?

a.Speculatorsmadeaprofitof$16perbarrel.

b.Speculatorslost$16perbarrel.

c.Mostoilspeculatorsbrokeeven.

2.Whenspeculatorssoldtheirstoredoilinthemonthsafterthewar,didthismassiveresaletend

toincreasethepriceofoilordecreaseit?

a.Theresaleincreasedthepriceofoil.

b.Theresaledecreasedthepriceofoil.

3.In1980,UniversityofMaryland,JulianSimonbetStanfordentomologistPaulEhrlichthatthe

priceofanyfivemetalsofEhrlich’schoosingwouldfallover10years.Ehrlichbelievedthat

resourceswouldbecomescarcerovertimeasthepopulationgrew,whileSimonbelievedthat peoplewouldfindgoodsubstitutes,justasearlierpeopledevelopedironasasubstitutefor scarcebronze.ThepriceofallfivemetalsthatEhrlichchose(nickel,tin,tungsten,chromium,and

copper)felloverthenext10yearsandSimonwonthebet.Ehrlich,anhonorableman,senta

checkintheappropriateamounttoSimon.Whatdoesthefallingpricetellusabouttherelative

scarcityofthesemetals?

a.Thefallingpriceindicatesthatthemetalsarescarcerthanwhattheywerebefore.

b.Thefallingpriceindicatesthatthemetalsarelessscarcethanwhattheywerebefore.

c.Thefallingpricetellsusnothingaboutscarcity.

4.Whichofthefollowingcouldnothavecausedtheshift?

a.Scientistsdevelopedsubstitutesfortheminerals.

b.Thedemandforthemineralsincreased.

c.Thesupplyofthemineralsincreased.

5.Choosethepairthatbestexpressesarelationshipsimilartothatintheoriginalpair.

Arbitrager:Region::

a.Speculator:Market

b.Speculator:Time

c.Speculator:Forecast

d.Speculator:Bet

Videoname:PredictionMarkets

1.YoumanageadepartmentstoreinFlorida,andonewinteryoureadinthenewspaperthat

orangejuicefutureshavefallendramaticallyinprice.Shouldyourstorestockuponmore

sweatersthanusual,orshouldyourstorestockuponmoreBermudashorts?

a.Sweaters

b.Bermudashorts

2.Andyentersinafuturescontractallowinghimtosell5,000troyouncesofgoldat$1,000per

ouncein36months.Afterthattimepasses,themarketpriceofgoldis$950pertroyounce.How

muchdidAndymakeorlose?

a.Andymade$50.

b.Andylost$50.

c.Andymade$250,000.

d.Andylost$250,000.

3.Twomajor-partypresidentialcandidatesarerunningagainsteachotherinthe2016election.

TheDemocraticPartycandidatepromisesmoremoneyforcorn-basedethanolresearchandthe

RepublicanPartycandidatepromisesmoremoneyfordefensecontractors.Intheweeksbefore

theelection,defensestockstakeanosedive.Whoisprobablygoingtowintheelection:the

pro-ethanolcandidateorthepro-defensespendingcandidate?

a.Pro-ethanolresearch,ortheDemocraticParty,candidate

b.Pro-defensespending,ortheRepublicanParty,candidate

PriceCeilingsandPriceFloors

Videoname:PriceCeilings

1.Howdoesafreemarketeliminateashortage?

a.Bylettingthepricefall.

b.Bylettingthepricerise.

c.Bycreatingquotas.

d.Bycreatingapriceceiling.

2.Businessleadersoftensaythatthereisa“shortage”ofskilledworkers,andsotheyarguethat

immigrantsneedtobebroughtintodothesejobs.Forexample,anAParticleentitled“NewYork farmersfearashortageofskilledworkers,”pointingoutthataspecialU.S.visaprogram,the

H-2Aprogram,“allowsemployerstohireforeignworkerstemporarilyiftheyshowthattheywere

notabletofindU.S.workersforthejobs.”(Source:Thompson,Carolyn.May13,2008.N.Y.

farmersfearashortageofskilledworkersAssociatedPress.)Howdounregulatedmarketscure

a“laborshortage”whentherearenoimmigrantstoboostthelaborsupply?

a.Letthepriceoflaborincrease.

b.Letthepriceoflabordecrease.

c.Contractproduction.

d.Expandproduction.

3.InthetownofFreedonia,thegovernmentdeclaresthatallstreetparkingmustbefree:There

canbenoparkingmeters.InanalmostidenticaltownofMeterville,parkingcosts$5perhour(or

$1.25per15minutes).Wherewillitbeeasiertofindparking:inFreedoniaorMeterville?

a.Freedonia

b.Meterville

c.Indeterminatewiththegiveninformation.

4.Onetownwilltendtoattractshopperswhohatedrivingaroundlookingforparking.Which

one?

a.Freedonia

b.Meterville

5.Whichtownwilllikelyattractshopperswithhigherincomes?

a.Freedonia

b.Meterville

Supposethatthequantitydemandedandquantitysuppliedinthemarketformilkisasfollows:

PriceperGallon

Quantity

Quantity

Demanded

Supplied

$5

1000

5000

$4

2000

4500

$3

3500

3500

$2

4100

2000

$1

6000

1000

1.Whatistheequilibriumpriceandquantityofmilk?

a.price:$4;quantity:4500

b.price:$3;quantity:3500

c.price:$2,quantity:2000

d.Indeterminatefromtheinformationgiven.

2.Ifthegovernmentplacesapriceceilingof$2onmilk,howlargewiththeshortagebe?

a.2300gallons

b.2100gallons

c.3500gallons

d.2000gallons

3.Ifagovernmentdecidestomakehealthinsuranceaffordablebyrequiringallhealthinsurance

companiestocuttheirpricesby30%,whatwillprobablyhappentothenumberofpeople

coveredbyhealthinsurance?

a.Morepeoplewillbecoveredbecauseit’scheaperandmorepeoplecannowaffordit.

b.Fewerpeoplewillbecoveredbecausehealthinsurancecompanieswillsupplyless.

c.Thenumberofinsuredwillnotchange.

d.Indeterminatewiththegiveninformation.

4.Ifthegovernmentforcedallbreadmanufacturerstoselltheirproductsata“fairprice”that

washalfthecurrent,free-marketprice,whatwouldhappentothequantitysuppliedofbread?

a.quantitysupplieddecreases.

b.quantitysuppliedincreases.

c.Indeterminatewiththegiveninformation.

5.Withthesepricecontrolsonbread,wouldyouexpectbreadqualitytoriseorfall?

a.Qualityrises

b.Qualityfalls

c.Indeterminatewiththegiveninformation.

1.Whenapriceceilingisinplacekeepingthepricebelowthemarketprice,what’slarger:

quantitydemandedorquantitysupplied?

a.Quantitydemanded.

b.Quantitysupplied.

c.Indeterminatewiththegiveninformation.

d.Neither.

Supposethatthemarketforcoatscanbedescribedasfollows:

Price

QuantityDemanded

QuantitySupplied(millions)

(millions)

$120

16

21

$100

18

18

$80

20

16

$60

22

14

2.Whatistheequilibriumpriceofcoats?

a.$120

b.$100

c.$80

d.$60

3.Supposethegovernmentsetsapriceceilingof$80.Howlargewilltheshortagebe?

a.5millioncoats

b.4millioncoats

c.3millioncoats

d.Thereisnoshortage

4.Supposeagainthatthegovernmentsetsapriceceilingof$80andthatpeoplelineuptoget

thisgood.Forhowlongwillpeoplewaitinlinetoobtainacoatiftheyvaluetheirtimeat$10an

hour?

a.2hours

b.3hours

c.4hours

d.Indeterminatefromthegiveninformation.

5.Between2000and2008,thepriceofoilincreasedfrom$30perbarrelto$140perbarrel,

andthepriceofgasolineintheUnitedStatesrosefromabout$1.50pergallontoover$4.00per

gallon.Unlikeinthe1970swhenoilpricesspiked,therewerenolonglinesoutsidegasstations.

Why?

a.Governmentintervenedtopreventlines.

b.Governmentintervenedtoenactgasolinerations.

c.Therewasnopricecontrolongasolineatthetime.

6.Pricecontrolsdistributeresourcesinmanyunintendedways.Inthefollowingcasesbelow,

whowillprobablyspendmoretimewaitinginlinetogetscarce,price-controlledgoods?

Chooseonefromeachpair:

a.Workingpeople

b.Retiredpeople

7.Chooseonefromeachpair:

a.Fast-foodemployeeswhoearn$8perhour

b.Lawyerswhocharge$800perhour

8.Chooseonefromeachpair:

a.Peoplewithdeskjobs

b.Peoplewhocandisappearforacoupleofhoursduringtheday

9.Whichjobexistsinpartbecausetime-sensitivewealthyindividualswanttopaysomeoneelse

towaitinlineforthem?

a.Fastfoodemployees

b.Ticketscalpers

c.Constructionworkers

d.Truckdrivers

1.DuringacrisissuchasHurricaneKatrina,governmentsoftenmakeitillegaltoraisethepriceof

emergencyitemslikeflashlightsandbottledwater.Inpractice,thismeansthattheseitemsget

soldonafirst-come,first-servedbasis.Ifapersonhasaflashlightthatshevaluesat$5,butits

priceontheblackmarketis$40,whatgainsfromtradearelostifthegovernmentshutsdown

theblackmarket?

a.$45

b.$40

c.$35

d.$30

e.Indeterminatewiththegiveninformation.

2.Whenwillentrepreneursbemorelikelytofilluptheirpickuptruckswithflashlightsanddrive

intoadisasterarea:whentheycanselltheirflashlightsfor$5eachorwhentheycansellthem

for$40each?

a.$5

b.$40

c.Equalnumbersofentrepreneurswillbepresentatbothprices.

3.Inthelate1990s,thecityofSantaMonica,California,madeitillegalforbankstocharge

peopleATMfees.Asyouprobablyknow,it’salmostalwaysfreetouseyourownbank’sATMs, butthere’susuallyafeechargedwhenyouuseanotherbank’sATM.(Source:TheWaronATM

Fees,Time,November29,1999).AssoonasSantaMonicapassedthislaw,BankofAmerica

stoppedallowingcustomersfromotherbankstousetheirATMs:Inbankjargon,BofAbanned

“out-of-network”ATMusage.Infact,thisbanonlylastedforafewdays,afterwhichajudge

allowedbankstocontinuetochargefeeswhileawaitingafullcourthearingontheissue.

Eventually,thecourtdeclaredthefeebanillegalunderfederallaw.Butlet’simaginetheeffectof

afullbanonout-of-networkfees.Calculatetheexactamountofproducerandconsumersurplus

intheout-of-networkATMmarketinSantaMonicaaftertheban.Howlargeisconsumersurplus?

a.10

b.0

c.15

d.Indeterminatewiththegiveninformation.

4.Supposethegovernmentforcedallbreadmanufacturerstoselltheirproductsata“fairprice”

thatwashalfthecurrent,free-marketprice.Tokeepitsimple,assumethatpeoplemustwaitin

linetogetbreadatthecontrolledprice.Wouldconsumersurplusrise,fall,orcan’tyoutellwith

theinformationgiven?

a.consumersurplusincreases.

b.consumersurplusdecreases.

c.Indeterminatewiththegiveninformation.

1.TheCanadiangovernmenthaswagecontrolsformedicaldoctors.Tokeepthingssimple,let’s

assumethattheysetonewageforalldoctors:$100,000peryear.Ittakesabout6yearsto

becomeageneralpractitionerorapediatrician,butittakesabout8or9yearstobecomea

specialistlikeagynecologist,surgeon,orophthalmologist.Whatkindofdoctorwouldyouwant

tobecomeunderthissystem?(Note:TheactualCanadiansystemdoesallowaspecialisttoearn

abitmorethangeneralpractitioners,butthedifferenceisn’tbigenoughtomatter.)

a.Pediatrician

b.Surgeon

2.Antibioticsareoftengiventopeoplewithcolds(eventhoughtheyarenotusefulforthat

purpose),buttheyarealsousedtotreatlife-threateninginfections.Iftherewasapricecontrolon

antibiotics,whatdoyouthinkwouldhappentotheallocationofantibioticsacrossthesetwo

uses?

a.Itwouldgotothosewhoneeditmost.

b.Itwouldgotothosewhoneeditleast.

c.Itwouldgotoamixofthetwo.

1.Areviewofthejargon:Isrentcontrola“priceceiling”ora“pricefloor?”

a.priceceiling

b.pricefloor

2.Inarent-controlledapartment,alandlordwilllikelydowhichofthefollowingmoreoften:

a.Rentmoreapartments

b.Providemoreunfurnishedapartments

c.Discriminatemoreagainstapplicants

d.Allowmorerentersperroom

3.Harryisluckyenoughtogetarent-controlledapartmentfor$300permonth.Themarketrent

onsuchanapartmentis$3,000permonth.Harryhimselfvaluestheapartmentat$2,000per

month,andhe’dbequitehappywitharegular,$2,000permonthNewYorkapartment.Ifhe

staysintheapartment,howmuchconsumersurplusdoesheenjoy?

a.$1,700permonth

b.$2,100permonth

c.$2,400permonth

d.Indeterminategiventheinformation.

4.IfheillegallysubleaseshisapartmenttoSallyontheblackmarketfor$2,500permonthand

insteadrentsa$2,000apartment,ishebetterofforworseoffthanifheobeyedthelaw?

a.Betteroff

b.Worseoff

c.Indeterminategiventheinformation.

Videoname:PriceFloors:TheMinimumWage

1.Areviewofthejargon:Istheminimumwagea“priceceiling”ora“pricefloor?”

a.priceceiling

b.pricefloor

2.Whoisimpactedmostbyachangeintheminimumwage?

a.unionizedworkers

b.seniorcitizens

c.stay-at-homeparents

d.teenagers

3.Imaginethatyoucanhirefourlow-skilledworkerstomovedirtwithshovelsat$5anhour,or

youcanhireoneskilledworkerat$24anhourtomovethesameamountofdirtwithaskid

loader.Whowillyouhireiftheminimumwageincreasesfrom$5perhourto$6.50perhour?

a.4low-skilledworkers

b.1high-skilledworker

4.Supposeyou’redoingsomehistoryresearchonshoeproductioninancientRome,duringthe

reignofthefamousEmperorDiocletian.Yourrecordstellyouhowmanyshoeswereproduced eachyearintheRomanEmpire,butitdoesn’ttellyouthepriceofshoes.Youfindadocument

thatsaysthatintheyear301,EmperorDiocletianissuedan“edictonprices,”butyoudon’tknow

whetherheimposedpriceceilingsorpricefloors—yourLatinisalittlerusty.However,youcan

clearlytellfromthedocumentsthatthenumberofshoesactuallysoldinmarketsfell

dramatically,andthatbothpotentialshoesellersandpotentialshoebuyerswereunhappywith

theedict.Withtheinformationgiven,canyoutellwhetherDiocletianimposedaceilingora

floor?Ifso,whichisit?(Yes,therereallywasanedictofDiocletian,andWikipediahasexcellent

coverageofancientRomanhistory.)

a.Priceceiling

b.Pricefloor

c.Neither-itwasagovernmentshoeration.

d.Indeterminatewiththegiveninformation.

1.Inthe1970s,AirCalandPacificSouthwestAirlinesflewonlywithinCalifornia.Aswementioned,

thefederalpricefloorsdidn’tapplytoflightswithinjustonestate.Amajorroutefortheseairlines

wasflyingfromSanFranciscotoLosAngeles,adistanceof350miles.Thisisaboutthesame

distanceasfromChicago,Illinois,toCleveland,Ohio.Whichflighthadanicermeal?

a.SanFrancisco-to-LosAngelesflight

b.Chicago-to-Clevelandflight

2.Airlineregulationofthe1970sproducedasimilarresulttowhichofthefollowinggovernment

interventions?

a.Rentcontrollaws

b.Minimumwagelaws

c.Communism

d.TheAffordableCareAct

3.PresidentJimmyCarterdidn’tjustderegulateairlineprices.Healsoderegulatedmuchofthe

truckingindustry,aswell.Truckscarryalmostalloftheconsumergoodsthatyoupurchase,so

almosteverytimeyoupurchasesomething,you’repayingmoneytoatruckingcompany.Based

onwhathappenedintheairlineindustryafterpriceswerederegulated,whatdoyouthink

happenedinthetruckingindustryafterderegulation?Youcanfindsomeanswershere:

http://www.econlib.org/Library/Enc/TruckingDeregulation.html.Foranotherlookthatiscriticalof

truckingderegulation,butcomestobasicallythesameanswers,seeMichaelBelzer,2000.

SweatshopsonWheels:WinnersandLosersinTruckingDeregulation,ThousandOaks,CA:

SAGE.

a.Truckingsalariesincreased

b.Truckingsalariesdecreased

c.Truckingcompaniesincreased

d.Truckingcompaniesdecreased

e.BandC

4.WhodoyouthinkaskedCongressandthepresidenttokeeppricefloorsfortrucking?

a.consumergroups

b.retailshopslikeWal-Mart

c.Republicans

d.truckingcompanies

e.AandD

1.Ifagovernmentdecidedtoimposepricecontrolsongasoline,whatcoulditdotoavoidthe

timewastedwaitinginlines?Thoughthereareseveralsolutionstothisproblem,onlyoneofthe

optionsbelowiscorrect.

a.Restrictgasolineconsumptiontohigh-valueuses.

b.Banlinesforgasoline.

c.Creategasolinerations.

d.Banblackmarketsforgasoline.

1.Onaverage,shouldweexpectbettercustomerservicefromacapitalistoraCommunist

employee?

a.Capitalist

b.Communist

Trade

Videoname:TheBigIdeasofTrade

1.Howisinternationaltradesimilartodomestictrade?

a.Internationaltrademakespeoplebetteroffwhenpreferencesdiffer.

b.Internationaltradeincreasesproductivitythroughspecializationandthedivisionof

knowledge.

c.Tradeincreasesproductivitythroughcomparativeadvantage.

d.AandB

e.Alloftheabove

2.Manypeoplewilltellyouthat,wheneverpossible,youshouldalwaysbuyU.S.-madegoods.If

thisargumentweretakentoitsnaturalconclusion,whereshouldyoubuyallofyourgoodsfrom?

a.Yourstate

b.Yourcounty

c.Yourneighborhood

d.Yourself

Videoname:ComparativeAdvantage

1.TrueorFalse:Everycountryhasatleastonecomparativeadvantageinsomething.

a.True

b.False

2.Thecostofthenextmostvaluableopportunityisknownasa

a.Sunkcost

b.Opportunitycost

c.Comparativeadvantage

d.Absoluteadvantage

1.Whatisasourceofcomparativeadvantage?

a.climate

b.institutions

c.answerchoicesa&b

d.Noneoftheabove.

2.In30minutes,Kanacaneithermakemisosouporshecancleanthekitchen.In15minutes,

Mitchellcanmakemisosoup;ittakesMitchellanhourtocleanthekitchen.

a.Kanahastheabsoluteandcomparativeadvantageatmakingmisosoup.

b.Mitchellhastheabsoluteandcomparativeadvantageatmakingmisosoup.

c.Kanahastheabsoluteandcomparativeadvantageatcleaningthekitchen.

d.Mitchellhastheabsoluteandcomparativeadvantageatcleaningthekitchen.

e.A&D

f.B&C

3.Inonehour,Ethancanbake20cookiesorlaythedrywallfortworooms.Inonehour,Sienna

canbake100cookiesorlaythedrywallforthreerooms.

a.Ethanhastheabsoluteandcomparativeadvantageatbakingcookies.

b.Siennahastheabsoluteandcomparativeadvantageatbakingcookies.

c.Ethanhastheabsoluteandcomparativeadvantageatlayingdrywall.

d.Siennahastheabsoluteandcomparativeadvantageatlayingdrywall.

e.A&D

f.B&C

g.Noneoftheabove.

4.Datacanwrite12excellentpoemsperdayorsolve100difficultphysicsproblemsperday.

Rikercanwriteoneexcellentpoemperdayorsolve0.5difficultphysicsproblemsperday.

a.Datahastheabsoluteandcomparativeadvantageatwritingpoems.

b.Rikerhastheabsoluteandcomparativeadvantageatwritingpoems.

c.Datahastheabsoluteandcomparativeadvantageatsolvingphysicsproblems.

d.Rikerhastheabsoluteandcomparativeadvantageatsolvingphysicsproblems.

e.A&D

f.B&C

g.Noneoftheabove.

Usetheinformationbelowtoanswerthefollowingquestions.AccordingtotheWallStreet

Journal(August30,2007,“IntheBalance”),ittakesabout30hourstoassembleavehicleinthe

UnitedStates.Let’susethatfactplusafewinventednumberstosumuptheglobaldivisionof

laborinautomanufacturing.Ininternationaleconomics,“North”isshorthandforthehigh-tech

developedcountriesofEastAsia,NorthAmerica,andWesternEurope,while“South”is

shorthandfortherestoftheworld.Let’susethatshorthandhere.

Region

NumberofHourstoMake

NumberofHourstoMake

OneHigh-QualityCare

OneLow-QualityCar

North

30

20

South

60

30

1.Whichregionhasanabsoluteadvantageatproducinghigh-qualitycars?

a.North

b.South

2.Whichcountryhasanabsoluteadvantageatproducinglow-qualitycars?

a.North

b.South

3.Whichcountryhasacomparativeadvantageforproducinglow-qualitycars?

a.North

b.South

4.Whichcountryhasacomparativeadvantageforproducinghigh-qualitycars?

a.North

b.South

5.Thereare1millionhoursoflaboravailableformakingcarsintheNorth,andanother1million

hoursoflaboravailableformakingcarsintheSouth.Inano-tradeworld,let’sassumethat

two-thirdsoftheautoindustrylaborineachregionisusedtomakehigh-qualitycarsand

one-thirdisusedtomakelow-qualitycars.Whatwillbetheglobaloutputoflow-qualitycars?

a.17,253

b.22,222

c.11,111

d.27,778

e.Noneoftheabove.

6.Now,allowspecialization.Ifeachregioncompletelyspecializesinthetypeofcarinwhichit

holdsthecomparativeadvantage,whatwillbetheglobaloutputoflow-qualitycars?

a.11,111

b.22,222

c.33,333

d.44,444

e.Noneoftheabove.

1.TheJapanesepeoplecurrentlypayaboutfourtimestheworldpriceforricebecauseoftrade

barriers.Whoismorelikelytomakeagreatereffortlobbyingfororagainstareductionintrade

barriers?

a.Japaneseconsumers.

b.Japanesericefarmers.

2.ThesupplycurveforriceinJapanslopesupward,justlikeanynormalsupplycurve.IfJapan

eliminateditstradebarrierstorice,whatwouldhappentothenumberofworkersemployedin

therice-producingindustryinJapan:Woulditriseorfall?

a.Rise

b.Fall

3.SpendsometimedrivinginDetroit,MI—theMotorCity—andyou’resuretoseebumper

stickerswithmessageslike“BuyAmerican”or“Outofajobyet?Keepbuyingforeign!”or

“Hungry?Eatyourforeigncar!”Explainthesebumperstickersinlightofwhatyou’velearned:

Whoishurtmostbyimportedautomobiles?

a.American(domestic)consumers

b.American(domestic)carmanufacturers

c.Foreignconsumers

d.Foreigncarmanufacturers

4.TraderestrictionsonsugarcauseU.S.consumerstopaymorethantwicethegoingworld

priceforsugar.However,youareveryunlikelytoeverencounterbumperstickersthatsaythings

like“Outofmoneyyet?Keeptaxingforeignsugar!”or“Hungry?It’sprobablybecausedomestic

sugarissoexpensive!”Why?

a.Sugarisunhealthyandthereforeit’sunpopulartoloweritscost.

b.ThesugartariffbenefitsmoreAmericansthanithurts.

c.Thepriceincreaseofsugarperpersonissmall.

d.Noneoftheabove.

5.SugarfarmersinFloridawhouseunusuallylargeamountsoffertilizertoproducetheircrops

dosobecausetheirlandisn’tallthatgreatforsugarproduction.Ifwetranslatethisintothe

languageofthesupplycurve,wherewouldthesesugarfarmersbeonthesupplycurve?

a.Lower-left

b.Upper-right

c.Atequilibriumprice

d.Indeterminatewiththegiveninformation.

6.Therearethreeconditionsthatexplainwhyafreemarketisefficient:1.Thesupplyofgoodsis

soldbythesellerswiththelowestcost.2.Therearenounexploitedgainsorwastefultrades.3.

Thesupplyofgoodsispurchasedbythebuyersthatplacethehighestvalueonthegoods.

Whichconditionorconditionsceasetoholdinthecaseofatariffonimportedgoods?

a.1only

b.2only

c.3only

d.AandBonly.

7.IftheUnitedStatesweretoeliminateatariffon,say,Mexicanshirtstherebyloweringitscost,

whichproductmightbepurchasedmorebyAmericans?

a.computer

b.toothpaste

c.pants

d.Alloftheabove.

1.Somepeopleargueforprotectionismbypointingoutthatothercountrieswithwhomwetrade

engagein“unfairtradepractices,”andthatweshouldretaliatewithourownprotectionist

measures.Onesuchpolicyisthepolicyofsomecountriestosubsidizeexportingindustries.

India,forexample,subsidizesitssteelindustry.Whoishurtbythissubsidy?

a.U.S.steelproducers

b.U.S.steelconsumers

c.Indiansteelproducers

d.A&C

Externalities

1.ThepriceyoupayforaniTunesdownload

a.privatecosts

b.externalcosts

c.privatebenefits

d.externalbenefits

2.Thebenefityourneighborreceivesfromhearingyouplayyourpleasantmusic

a.privatecosts

b.externalcosts

c.privatebenefits

d.externalbenefits

3.Theannoyanceofyourneighborbecauseshedoesn’tlikeyourachinglyconventionalmusic

a.privatecosts

b.externalcosts

c.privatebenefits

d.externalbenefits

4.ThepleasureyoureceivefromlisteningtoyouriTunesdownload

a.privatecosts

b.externalcosts

c.privatebenefits

d.externalbenefits

5.Thepriceyoupayforasecuritysystemforyourhome

a.privatecosts

b.externalcosts

c.privatebenefits

d.externalbenefits

6.Thesafetyyouenjoyasaresultofhavingthesecuritysystem

a.privatecosts

b.externalcosts

c.privatebenefits

d.externalbenefits

7.Thecrimethatismorelikelytooccurtoyourneighboronceacriminalseesa“Protectedby

alarm”stickeronyourwindow.

a.privatecosts

b.externalcosts

c.privatebenefits

d.externalbenefits

8.Theextrasafetyyourneighbormightexperiencebecausecriminalstendtostayawayfrom

neighborhoodsthathavealotofburglaralarms

a.privatecosts

b.externalcosts

c.privatebenefits

d.externalbenefits

9.Culturalinfluencesoftencreateexternalities,forgoodandill.Ahappymoviemightmake

peoplesmilemore,whichimprovesthelivesofpeoplewhodon’tseethemovie.Anewfashion

trendfortight-fittingclothingmighthurtthebodyimageofpeoplewhothinktheywon’tlook

goodinthenewtrendyclothing.Let’sconsiderthemarketforoneculturalgoodthat

unrealisticallyraisesexpectationsabouttheoppositesex:theromancenovel.Inromance

novels,menaredangerousyetsafe,wealthyyetneveratwork,theyridehigh-speed

motorcyclesyetnevergetinterribleaccidents,theylookfantasticeventhoughtheyneverwaste

endlesshoursatthegym,andsoon.(Ofcourse,advertisingthatfocusesonsexyfemalemodels

mayalsounrealisticallyraiseexpectationsabouttheoppositesexsofeelfreetochangeour

exampleasyouseebest.)Romancenovelsimposeanexternalcostonmen,whohavetotryto

liveuptotheseunrealisticexpectations.Supposethegovernmenttaxedtheromancenovelto

reducetheexternality.Howshouldthegovernmentspendthemoney?

a.Efficiently.

b.Subsidizingprogramsencouragingmaleself-esteem.

c.Subsidizingbooksincludingmaleprotagonistswhoareoverweightandseriouslyflawed.

d.B&C.

e.Noneoftheabove.

10.Whenwetaxgoodswithexternalcosts,thisalwayscreates

a.apriceceiling.

b.deadweightloss.

c.apricefloor.

d.Noneoftheabove.

11.Whichofthefollowingjobisattemptingtocorrectforanexternality?

a.tarotcardreader

b.ombudsmen

c.stocktrader

d.homeownerassociation

Videoname:ExternalBenefits

1.Whichactionwouldlikelyreducetheundersupplyofpeoplewhogetflushots?

a.Paypeopletogetaflushot

b.Offertheflushotinmorelocations

c.Publiclyrecognizepeopleforgettingaflushot

d.A&C

e.Alloftheabove.

Forthefollowingquestions,determinewhetherthereisanexternalbenefitorcostandestimate

itssize.Finally,decidebetweenataxorasubsidyasasimplewaytocompensateforthe

externality.

1.Scenario1:Inthemarketforautomobiles,theprivatebenefitofonemoresmallSUVis

$20,000andthesocialcostofonemoresmallSUVis$30,000.Isthisanexternalcostoran

externalbenefit?

a.Externalcost

b.Externalbenefit

c.Neither

2.Whatisthesizeoftheexternality?

a.-30,000

b.-10,000

c.30,000

d.10,000

3.Wouldataxorasubsidybemoreappropriateforthisexternality?

a.Tax

b.Subsidy

c.Neither

4.Isthisanexternalcostoranexternalbenefit?

a.Externalcost

b.Externalbenefit

c.Neither

5.Whatisthesizeoftheexternality?

a.-100,000,000

b.-99,000,000

c.100,000,000

d.99,000,000

6.Wouldataxorasubsidybemoreappropriateforthisexternality?

a.tax

b.subsidy

c.neither

7.Economistshavefoundthatincreasingtheproportionofgirlsinprimaryandsecondaryschool

leadstosignificantimprovementinstudents’cognitiveoutcomes(VictorLavyandAnalia

Schlosser.2007.“MechanismsandImpactsofGenderPeerEffectsatSchool,”NBERWorking

Paper13292).Onekeychannelseemstobethatonaverageboyscreatemoretroubleinclass,

whichmakesitharderforeveryonetolearn.InnewspaperEnglish,we’dsaythat“boysareatax

oneverychild’seducation.”Dogirlsinaclassroomprovideexternalcostsorbenefits?

a.Externalcosts

b.Externalbenefits

c.Neither

8.Fruitfarmerspaybeekeepersfortheirhoneybees’pollinationservices.Honeybeesprovidean

externalbenefittofruitfarmers.However,fruitsprovideanexternalbenefittothebeekeepers

becausetheirhoneybeesneedfruits.Whichexternalbenefitislarger:honeybees’external

benefittofruitfarmersandfruits’externalbenefittobeekeepers?

a.Honeybees’externalbenefittofruitfarmersislarger

b.Fruits’externalbenefittobeekeepersislarger

c.Theexternalbenefitsarethesamesize.

d.Indeterminatefromthegiveninformation.

1.Givenwhatyou’velearnedaboutexternalities,shouldhuman-causedglobalwarmingbe

completelystopped?

a.Yes

b.No

Agovernmentisdecidingbetweencommandandcontrolsolutionsversustaxandsubsidy

solutionstosolveanexternalityproblem.Forthenexttwoquestions,identifythebestsolution.

2.Supposethatwhalesarethreatenedwithextinctionbecausealargenumberofpeopleliketo

eatwhalemeat.Governmentsaretornbetweenbanningallwhalingexceptforcertainreligious

ceremonies,andheavilytaxingallwhalemeat.Assumethereareonlyafewcountriesinthe

worldwhoconsumewhalemeat,andthattheyhavefairlyefficientgovernments.

a.Bantheeatingofwhalemeat.

b.Taxtheeatingofwhalemeat.

c.Subsidizetheeatingofwhalemeat.

d.Noneoftheabove.

3.LoJackisanexampleofavehicletrackingsystemdesignedtohelppolicerecoverstolen

vehicles.SteveLevittfoundevidencethatLojackandothervehicletrackingdevicescreatea

positiveexternalityofdecreasingallcartheftsbecausecarthievesdonotknowwhichcarshave

Lojackinstalled,makingthemmorehesitanttobreakintoanycar.

a.Mandatevehicletrackingdevicesbeinstalledinallcars.

b.Subsidizepurchaseofvehicletrackingdevices.

c.Taxpurchaseofvehicletrackingdevices.

Videoname:TheCoaseTheorem

1.Considerafactory,locatedinthemiddleofnowhere,producinganastysmell.Aslongasno

oneisaroundtoexperiencetheunpleasantodor,whattypeofexternalityisproduced?

a.Negativeexternality

b.Positiveexternality

c.Indeterminatefromthegiveninformation.

d.Noneoftheabove.

2.Supposethatafamilymovesinnextdoortothissmellyfactory.Whoiscausingthe

externalitiesproblem?

a.Thefactory.

b.Thefamily.

c.A&B

d.Noneoftheabove.

3.Supposethatthefamilyclearlypossessestherighttoapleasant-smellingenvironment.What

couldhappen?

a.Thefactorystopsproducingthebadsmell.

b.Thefactorypaysthefamilyfortherighttocontinuethebadsmell.

c.Thefactorypaysthefamilytomove.

e.Alloftheabove.

Forthenextfourquestions,inwhichcaseswilltheCoasetheorem’sassumptionslikelytobe

true?(Inotherwords,whenwillthepartiesbelikelytostrikeanefficientbargain?)

4.Myneighborwantsmetocutdownanuglyshrubinmyfrontyard.Theuglyshrub,ofcourse,

imposesanexternalcostonhimandonhispropertyvalue.

a.Yay,Coase.

b.Notthistime,Coase.

5.Myneighborsallwouldloveformetogetthatbroken-downWilliesJeepoffmyfrontlawn.It’s

beenyearsnow,afterall.Andwoulditbetoomuchformetopaintthehouseandfillupthat

6-footdeepditchinthefrontyard?Thewholeneighborhoodisjustannoyed.

a.YestotheCoase.

b.Coaseisanogo.

6.Acoal-firedelectricityplantdumpsitsleftoverhotwaterintothenearbylake,killingthe

naturallyoccurringfish.Thousandsofhomeslinethebanksofthelake.

a.ThreecheersforCoase.

b.Notgoingtohappen,Coase.

7.Acoal-firedelectricityplantdumpsitsleftoverhotwaterintothenearbyriver,killingthe

naturallyoccurringfishdownstream.Thereisonelargefisheryone-miledownstreamaffectedby

this.Afterthat,thewatercoolsenoughsoit’snotaproblem.

a.CoastingtoCoase.

b.Notso,Coase.

Videoname:TradingPollution

1.Anincreaseinthenumberofpollutionallowancesdoeswhichofthefollowing:

a.Increasesthecostofpolluting

b.Decreasesthecostofpolluting

2.Intheory,onereasonwhytradablepollutionallowancesarepreferabletopollutionregulation

isbecausethey:

a.Makeitmoredifficultforfirmstopollute.

b.Encouragelowest-costpollutionreduction.

c.Decreasegovernmentoversightcosts.

d.Alloftheabove.

3.Ifthepermitswerenottradeable,howwouldthisaffecttheefficiencyoftheprogram?

a.Programefficiencywouldremainunchanged.

b.Programwouldresembleothercommand-and-controlprograms.

c.Programwouldnolongerbeasefficient.

d.B&C

e.Indeterminatewiththegiveninformation.

1.Agovernmentistornbetweensellingannualpollutionallowancesandsettinganannual

pollutiontax.Unlikeinthemessyrealworld,thisgovernmentisquitecertainthatitcanachieve

thesamepriceandquantityeitherway.Itwantstochoosethemethodthatwillpullinmore

governmenttaxrevenue.Whichmethodisbetterfromarevenue-raisingperspective?

a.Pollutionallowances.

b.Pollutiontax.

c.Revenueswillbethesame.

d.Indeterminatefromthegiveninformation.

2.Maxiconisopeninganewcoal-firedpowerplant,butthegovernmentwantstokeeppollution

downusingtradablepollutionpermits.IfacorruptgovernmentjustgrantsMaxiconallofthe

pollutionpermitsintheentirenation(eventhoughtherearemanyenergycompanies),whatdo

wepredictwillhappentopollutionproduction?

a.Maxiconwillpollutemuchmorethanitwouldhaveifitwerenotgivenallofthepermits.

b.PollutionpermitswillnotbetradedbecauseMaxiconhasnoincentivetotradewithother

firms.

c.Thefirmspollutingwilllikelybethosewiththehighestcostsofreducingpollution.

d.A&B

e.Noneoftheabove.

CostsandProfitMaximizationUnderCompetition

1.Acompetitivefirmmaximizesprofitbychoosing

a.Price.

b.Quantity.

c.Bothpriceandquantity.

d.Eitherpriceorquantity,butnotboth.

e.Noneoftheabove.

2.Acompetitivemarkethaswhichofthefollowingcharacteristics?

a.Lotsofsmall-scalesellers

b.Lotsofsmall-scalebuyers

c.Aproductthatissimilaracrosssellers

d.A&Conly

e.Alloftheabove.

3.Inacompetitivemarket,sellersselltheirproduct

a.Attheworldprice.

b.Justbelowtheworldprice.

c.Justabovetheworldprice.

d.Atapricedependentonthequantitychosen.

4.OnJanuary27,2011,thepriceofFordMotorCompanystockhitanalmost10-yearhighat

$18.79pershare.(Twoyearsprior,inJanuary2009,Fordstockwastradingforaboutatenthof

thatprice.)SupposethatonJanuary27,2011,youowned10,000sharesofFordstock(asmall

fractionofthealmost3.8billionshares).Supposeyouofferedtosellyourstockfor$18.85per

share,justslightlyabovethemarketprice.Howmanyshareswouldyousell?

a.10,000

b.7,300

c.1

d.0

5.SupposeinsteadthatonJanuary27,2011,youwantedtosellyour10,000sharesofFordstock

butyoureducedyouraskingpriceto$18.75pershare?Howmanyshareswouldyousell?

a.10,000

b.7,300

c.1

d.0

6.Givenyouranswerto#5,shouldyousellyoursharesat$18.75?

a.Yes

b.No

7.Whichcharacteristicbelowbestdescribesthedemandcurvethatyouasanindividualsellerof

Fordstockface?

a.Aperfectlyelasticdemandcurve

b.Aperfectlyinelasticdemandcurve

c.Noneoftheabove.

1.Theeconomicdefinitionofprofitdiffersfromtheaccountingdefinitionofprofitinthatthe

economicdefinitionincludes

a.Fixedcosts.

b.Variablecosts.

c.Opportunitycosts.

d.Sunkcosts.

e.Noneoftheabove.

2.Whenevermoneyisusedtopurchasecapital,interestcostsareincurred.Sometimesthose

costsareexplicit—likewhenAlexborrowedthemoneyfromthebank—andsometimesthose

costsareimplicit—likewhenTylerhadtoforgotheinteresthecouldhaveearnedhadhelefthis

fundsinasavingsaccount.IfaneconomistandaccountantcalculatedAlexandTyler’scosts,for

whomwouldtheyhaveidenticalnumbersandforwhomwouldthenumbersdiffer?

a.EconomistandaccountantwouldagreeonAlex’scostsanddisagreeonTyler’s.

b.EconomistandaccountantwouldagreeonTyler’scostsanddisagreeonAlex’s.

3.Intheaforementioneddisagreementoncostofoneoftheactivities,whichprofessionwould

calculatealargercost?

a.Economist.

b.Accountant.

4.Whichtypeofcostisdependentontheamountofquantityproducedbyafirm?

a.fixedcosts

b.variablecosts

c.sunkcosts

d.noneoftheabove

5.Acompetitivefirmmaximizesprofitbychoosingalevelofoutputwheretheworldpriceis

equaltothefirm’s

a.Marginalrevolution.

b.Marginalrevenue.

c.Marginalcost.

d.Averagecost.

e.Fixedcosts.

f.Variablecosts.

6.TrueorFalse:Whenacompetitivefirmmaximizesprofit,profitsarealwaysgreaterthan0.

a.True

b.False

Paulette,Camille,andHortenseeachownwineriesinFrance.Theyproduceinexpensive,

mass-marketwines.Overthelastfewyears,suchwinessoldfor7eurosperbottle;butwitha

globalrecession,thepricehasfallento5eurosperbottle.Giventheinformationbelow,let’sfind

outwhichofthesethreewinemakers(ifany)shouldshutdowntemporarilyuntiltimesgetbetter.

Remember:Whetherornottheyshutdown,theystillhavetokeeppayingfixedcostsforatleast

sometime(that’swhatmakesthem“fixed”).Tokeepthingssimple,let’sassumethateach

winemakerhascalculatedtheoptimalquantitytoproduceiftheydecidetostayinbusiness;your

jobissimplytofigureoutifsheshouldproducethatamountorjustshutdown.

Winemaker

FixedCosts

VariableCosts

RecessionRevenues

Paulette

$50,000

$80,000

$120,000

Camille

$100,000

$40,000

$70,000

Hortense

$200,000

$250,000

$200,000

7.Whichofthesewomen,ifany,earnedaprofit?

a.Paulette

b.Camille

c.Hortense

d.A&Bonly.

e.Noneofthewomenearnedaprofit.

8.Whoshouldstayinbusinessintheshortrun?

a.Paulette

b.Camille

c.Hortense

d.A&Bonly

e.Noneofthewineries.

9.Forwhichofthesewineries,ifany,isP>AC?(Hint:Youdon’tneedtocalculateanynew

numberstoanswerthis.)

a.Paulette

b.Camille

c.Hortense

d.A&Bonly

e.Noneofthewineries

10.Fillintheblank:Evenifprofitisnegative,ifrevenuesare

tostayopenintheshortrun.

a.>

b.<

variablecosts,thenit’sbest

11.You’vebeenhiredasamanagementconsultanttoWaffleCo,amakerofgeneric-brandfrozen

waffles.They’reeachtryingtofigureoutiftheyshouldproducealittlemoreoutputoralittlebit lessinordertomaximizetheirprofits.Thefirmsallhavetypicalmarginalcostcurves:Theyrise asthefirmproducesmore.Yourstaffdidallthehardworkforyouoffiguringoutthepriceofthe

firm’soutputis$4perboxandthemarginalcostofproducingonemoreunitofoutputis$2per

boxatitscurrentlevelofoutput.However,theyforgottocollectdataonhowmuchthefirmis

actuallyproducingatthemoment.Fortunately,thatdoesn’tmatter.Inyourfinalreport,youneed

todecideifthefirmshouldproducemore,less,orstayatthecurrentoutputlevel.Whatdoyou

recommend?

a.Producemore.

b.Produceless.

c.Stayatthecurrentlevelofoutput.

1.Foracompetitivefirmsupplyingwheat,iftheworldprice(P)equalsthefirm’sminaveragecost

(minAC),thenprofitswillbe

a.greaterthan0

b.lessthan0

c.0

d.Indeterminatefromthegiveninformation.

GiventhecostfunctionforSimon,ahousepainterinacompetitivelocalmarket,below,answer

thequestionsthatfollow.(Youmaywanttocalculateaveragecost.)

Numberofrooms

TotalCost

paintedperweek

0

$100

1

$120

2

$125

3

$145

4

$200

5

$300

6

$460

2.WhatistheminimumpriceperroomatwhichSimonwouldbeearningpositiveeconomic

profit?

a.$62.50

b.$48.33

c.$60

d.$76.67

e.$35.29

1.Whatistheleastcommoncoststructureforanindustry?

a.Costsdecreaseasindustryoutputincreases.

b.Costsincreaseasindustryoutputincreases.

c.Costsstaythesameasindustryoutputincreases.

2.IntheancientWesternworld,incensewasoneofthefirstcommoditiestransportedlong

distances.ItgrewonlyinthesouthoftheArabianPeninsula(modern-dayYemen,knownthenas

ArabiaFelix)andwastransportedbycameltoAlexandriaandtheMediterraneancivilizations,

notablytheRomanRepublic.Astherepublicexpandedintoaricherandlargerempire,the

demandforincensegrewandplantersinArabiaaddedasecondandthenathirdannualcrop

(thoughthisincensewasnotashighofaquality).CultivationalsocrossedtotheHornofAfrica

(modern-dayOman)eventhoughsuchfieldswerefartherawayfromRome.Thefactthat

additionalannualcropswereoflowerqualityindicatesthatthisindustryhas

a.Increasingcosts.

b.Decreasingcosts.

c.Constantcosts.

d.Indeterminatefromthegiveninformation.

3.It’smorecostlytogrowincenseinEasternAfricathaninArabiaFelix.Whichregionwouldyou

expecttoseemoreincensegrownin?

a.EasternAfrica

b.ArabiaFelix

1.Inthelongrun,constantsupplycurvesare

a.slopingupwards.

b.horizontal.

c.slopingdownwards.

2.Inthecompetitivechildren’spajamaindustry,anewgovernmentsafetyregulationraisesthe

averagecostofchildren’spajamasby$2perpair.Ifthisisaconstantcostindustry,theninthe

longrun,whatexactlyhappenstothepriceofchildren’spajamas?

a.Thepriceofpajamasincreasesbymorethan$2

b.Thepriceofpajamasincreasesbylessthan$2

c.Thepriceofpajamasincreasesbyexactly$2

3.Ifthisisanincreasingcostindustryinstead,willthelong-runpriceofpajamasrisebymore

than$2orless?(Hint:Thelong-runsupplycurvewillbeshapedjustlikeanordinarysupply

curve.Ifyoutreatthislikea$2taxperpair,you’llgettherightanswer.)

a.Thepriceofpajamasincreasesbymorethan$2.

b.Thepriceofpajamasincreasesbylessthan$2.

c.Thepriceofpajamasincreasesbyexactly$2.

1.AsNgoystartedhiringmoreCambodianrefugeestoworkinhisdonutshop,thismadeitmore

likelythat

a.Competitionfromotherdoughnutshopownerswouldincrease.

b.Ngoy’sfixedcostsdecreased.

c.OtherCambodianswouldopendonutshops.

2.Atthispointinthestory,whatsortofcostindustry(constant,increasing,ordecreasing)would

youconsiderdoughnutshopsownedbyCambodianstobe?

a.Constant

b.Increasing

c.Decreasing

3.Fastforward40years:WhatkindofcoststructureareCaliforniandoughnutshopsprobablyin

now?

a.Constant

b.Increasing

c.Decreasing

4.Wementionedthatcarpetmanufacturinglookslikeadecreasingcostindustry.InAmerican

homes,carpetsaremuchlesspopularthantheywereinthe1960sand1970s,when“wall-to-wall

carpeting”wasfashionableinhomes.Supposethatcarpetingbecameevenlesspopularthanit

istoday:Whatwouldthisfallindemandprobablydotothepriceofcarpetinthelongrun?

a.Increasecarpetprices

b.Decreasecarpetprices

c.Nochangetocarpetprices

CompetitionandtheInvisibleHand

1.Entrepreneursshiftcapitalandlaboracrossindustriesinpursuitofprofit.Let’slookatthisa

littlemoreclosely.Supposetherearetwoindustries:ahigh-profitindustry,IndustryH,anda

low-profitindustry,IndustryL.Answerthequestionsbelowaboutthesetwoindustries.Ifthetwo

industrieshavesimilarcosts,thenwhatmustbetrueaboutpricesinthetwoindustries?

a.PricesinIndustryHarehigherthaninIndustryL.

b.PricesinIndustryHarelowerthaninIndustryL.

c.Indeterminatefromthegiveninformation.

2.Supposeinsteadthatthepricesinthetwoindustrieswereidentical.Inthiscase,whatmustbe

trueaboutthecostsinthetwoindustries?

a.CostsinIndustryHarehigherthaninIndustryL.

b.CostsinIndustryHarelowerthaninIndustryL.

c.Indeterminatefromthegiveninformation.

3.Assumingthatpricesinthetwoindustrieswereidentical,iflaborandcapitalaremovedfrom

IndustryLtoIndustryH,aremoreunitsofoutputlostinIndustryLorgainedinIndustryH?

a.MoreunitsofoutputarelostinIndustryLthanaregainedinIndustryH.

b.MoreunitsofoutputaregainedinIndustryHthanarelostinIndustryL.

c.Indeterminatefromthegiveninformation.

4.Supposethattwoindustries,thepizzaindustryandthecalzoneindustry,areequallyrisky,but

ratesofreturnoncapitalinvestmentsare5%inthepizzaindustryand8%inthecalzoneindustry.

Whichwaywillcapitalflow—fromthepizzaindustrytothecalzoneindustry,orfromthecalzone

industrytothepizzaindustry?

a.Frompizzaindustrytocalzoneindustry.

b.Fromcalzoneindustrytopizzaindustry.

c.Indeterminatefromthegiveninformation.

We’veclaimedthattheefficientwaytospreadoutworkacrossfirmsinthesameindustryistoset themarginalcostofproductiontobethesameacrossfirms.Let’sseeifthisworksinanexample. Consideracompetitivemarketforrolledsteel(measuredbytheton)withjusttwofirms:SmallCo

andBigCo.Ifwewantedtobemorerealistic,wecouldsaytherewere100firmslikeSmallCoand

100firmslikeBigCo,butthatwouldjustmakethemathharderwithoutgeneratinganyinsight.

(We’llalsoignorefixedcostsofstartingupthefirmsjusttomakethingsalittlesimpler.)Thetwo

firmshavemarginalcostscheduleslikethis:

Quantity

MarginalCostSmallCo

MarginalCostBigCo

1

$10

$10

2

$20

$10

3

$30

$10

4

$40

$10

5

$50

$20

6

$60

$30

7

$70

$40

8

$80

$50

5.WhatisthetotalcostofSmallCoproducing6unitsofoutput?

a.$60

b.$130

c.$150

d.$210

e.$280

6.WhatisthetotalcostofBigCoproducing6unitsofoutput?

a.$30

b.$60

c.$90

d.$120

e.$130

7.Whatwouldthepricehavetobeinthiscompetitivemarketforthesetwofirmstoproducea

totalof11tonsofsteel?

a.$30

b.$40

c.$50

d.$60

e.Indeterminatefromthegiveninformation.

8.WhatwouldthetotalcostbeifBigCoweretheonlyfirminthemarket,andithadtoproduce7

tonsofrolledsteel?

a.$40

b.$70

c.$130

d.$140

e.$170

9.WhatwouldtotalcostbeifSmallCoandBigColettheinvisiblehanddivvyupthework

betweenthemtoproduce7tonsofrolledsteel?

a.$20

b.$30

c.$70

d.$90

e.$130

10.Woulditmakesensetoshutdownthemoreinefficientofthetwofirms?

a.Yes

b.No

1.Let’sreviewthebasicmechanismoftheeliminationprinciplewiththefollowingquestions.

WhendemandrisesinIndustryX,whathappenstoprofits?Dotheyrise,fall,orremain

unchanged?

a.Rise

b.Fall

c.Remainunchanged

2.Whenthathappens,dofirms,workers,andcapitaltendtoenterIndustryX,ordotheytendto

leave?

a.Enter

b.Exit

c.Nochanges

3.Doesthistendtoincreaseshort-runsupplyinIndustryXorreduceit?

a.Increase

b.Reduce

4.Inthelongrun,afterthisriseindemand,whatwillprofitstypicallybeinIndustryX?

a.Greaterthan0

b.0

c.Lessthan0

d.Indeterminatefromthegiveninformation.

Monopoly

1.Inthetextbook,TheAppliedTheoryofPrice,D.N.McCloskeyreferstotheequationMR=MC

astheruleofrationallife.Whofollowsthisrule:monopolies,competitivefirms,bothorneither?

a.Monopolies

b.Competitivefirms

c.Both

d.Neither

2.Rapido,theshoecompany,issopopularthatithasmonopolypower.It’sselling20million

shoesperyear,andit’shighlyprofitable.Themarginalcostofmakingextrashoesisquitelow, anditdoesn’tchangemuchiftheyproducemoreshoes.Rapido’smarketingexpertstelltheCEO

ofRapidothatifitdecreasedpricesby20%,itwouldsellsomanymoreshoesthatprofitswould

rise.Iftheexpertiscorrect,atitscurrentoutput,isMC=MR,isMC>MR,orisMC

a.MC=MR

b.MC>MR

c.MC<MR

3.IftheexpertiscorrectandRapido’sCEOfollowstheexperts’advice,willRapido’stotal

revenuerise,fall,orbeunchanged?

a.Totalrevenuewillrise.

b.Totalrevenuewillfall.

c.Totalrevenuewillremainunchanged.

4.Apollo,anotherhighlyprofitableshoecompany,alsohasmarketpower.It’sselling15million

shoesperyear,anditfacesmarginalcostsquitesimilartoRapido.Apollo’smarketingexperts

concludethatiftheyincreasedpricesby20%,profitswouldrise.ForApollo,isMC=MR,is

MC>MR,orisMC

a.MC=MR

b.MC>MR

c.MC

5.Whensellinge-books,musiconiTunes,anddownloadablesoftware,themarginalcostof

producingandsellingonemoreunitofoutputisessentiallyzero:MC=0.Let’sthinkabouta

monopolyinthiskindofmarket.Ifthemonopolistisdoingitsbesttomaximizeprofits,whatwill

marginalrevenueequalatafirmlikethis?

a.Greaterthan0

b.Lessthan0

c.0

d.Indeterminatefromthegiveninformation.

6.Allfirmsaretryingtomaximizetheirprofits(profit=TR-TC).Therulefromquestion#5tellsus

thatinthespecialcasewheremarginalcostiszero,“profitmaximization”isequivalenttowhich

ofthefollowingstatements?

a.“Maximizetotalrevenue”

b.“Minimizetotalcost”

c.“Minimizeaveragecost”

d.“Maximizeaveragerevenue”

7.Whichofthefollowingistruewhenamonopolyisproducingtheprofit-maximizingquantityof

output?Morethanonemaybetrue.

a.Marginalrevenue=Averagecost

b.Totalcost=Totalrevenue

c.MonopolyPrice=Marginalcost

d.Marginalrevenue=Marginalcost

e.A&C

f.C&D

8.Forthefollowingstatements,decidewhetheritistrueorfalse.Whenamonopolyis

maximizingitsprofits,priceisgreaterthanmarginalcost.

a.True

b.False

9.Foramonopolyproducingacertainamountofoutput,priceislessthanmarginalrevenue.

a.True

b.False

Videoname:TheMonopolyMarkup

1.What’stherule:Monopolistschargeahighermarkupwhendemandishighlyelasticorwhen

it’shighlyinelastic?

a.Highlyelastic

b.Highlyinelastic

2.What’stherule:Monopolistschargeahighermarkupwhencustomershavemanygood

substitutesorwhentheyhavefewgoodsubstitutes?

a.Customershavemanygoodsubstitutes.

b.Customershavefewgoodsubstitutes.

3.Forthefollowingpairsofgoods,whichproducerismorelikelytochargeabiggermarkup?

a.Someonesellingnewtrendyshoes

b.Someonesellingordinarytennisshoes

4.Forthefollowingpairsofgoods,whichproducerismorelikelytochargeabiggermarkup?

a.Amovietheatersellingpopcorn

b.NewYorkCitystreetvendorsellingpopcorn

5.Forthefollowingpairsofgoods,whichproducerismorelikelytochargeabiggermarkup?

a.Apharmaceuticalcompanysellinganewpowerfulantibiotic

b.Afirmsellinganewpowerfulcurefordandruff

1.Apatentisagovernment-createdmonopoly.

a.True

b.False

2.Justbasedonself-interest,whoismorelikelytosupportstrongpatentsonpharmaceuticals:

Youngpeopleoroldpeople?

a.Youngpeople

b.Oldpeople

3.Whoismorelikelytosupportstrongpatentandcopyrightprotectiononvideogames:People

whoreallylikeold-fashionedvideogamesorpeoplewhowanttoplaythebest,mostadvanced

videogames?

a.Old-fashionedvideo-gamers

b.Cuttingedgevideo-gamers

4.It’sverydifficulttobuildandoperateanewpowerplantlargelybecausenewplantshaveto

complywithalonglistofenvironmentalandsafetyregulations.Comparedwithaworldwith

fewersuchregulations,howdotheseruleschangetheaveragetotalcostofbuildingand

operatingapowerplant?

a.Increaseaveragecost

b.Decreaseaveragecost

c.Doesnotaffectaveragecost

5.Dotheseregulationsmakeitmoreorlesslikelythatyouwillbuildanewpowerplant?

a.Morelikelytobuildanewpowerplant

b.Lesslikelytobuildanewpowerplant

6.Dotheseregulationsincreaseordecreasethemarketpowerofpowerplantsthatalready

exist?

a.Increasesmarketpowerofexistingpowerplants

b.Decreasesmarketpowerofexistingpowerplants

PriceDiscrimination

1.TrueorFalse?Abusinessthatpricediscriminateswillgenerallychargesomecustomersmore

thanmarginalcost,anditwillgenerallychargeothercustomerslessthanmarginalcost.

True