If there are no transaction costs, and there are clearly defined property rights, then it is possible for

people to solve the problem of externalities on their own.

a. True
b. False

2.

Tradeable pollution permits have the same effect on output and the level of pollution as a Pigovian tax
on polluters.
a. True
b. False

3.

The most efficient way to clean up pollution is direct regulation.

a. True
b. False

4.

Internalising the cost of pollution means that all pollution will be removed.
a. True
b. False

5.

For pollution permits to be efficient for society, they need to be tradeable.

a. True
b. False

6.

A Pigovian tax is used to internalise the effects of a negative externality.

a. True
b. False

7.

An advantage of market-based policies is that they put a price on a scarce resource that had previously
been treated as a free good.
a. True
b. False

8.
Market-based policies provide no incentive for polluters to develop new technology to clean up
pollution.
a. True
b. False

9.

If off-road vehicles, such as four-wheel-drives, do an estimated $500 damage to forest tracks per vehicle
each year, then the most efficient outcome for society would be to ban their use.
a. True
b. False

10.

Economic efficiency suggests that once we determine the optimal level of pollution cleanup, all firms
should share equally in that cleanup.
a. True
b. False

11.

Tradeable pollution permits will internalise negative externalities efficiently only if the government
auctions off the permits.
a. True
b. False

12.

The Coase theorem suggests that interested parties can bargain among themselves and agree on an
efficient solution.
a. True
b. False

13.

A negative externality in consumption results in a private demand curve that overstates the true value
of a product.
a. True
b. False

14.

A negative production externality results in a supply curve that understates the true cost of a product.
a. True
b. False

15.

It would be more efficient for government to stay out of the business of environmental cleanup because
government policies will inevitably distort the market.
a. True
b. False

CHAPTER 13
If there are implicit costs of production, accounting profits will exceed economic profits.
a. True
b. False

2.

The opportunity cost of financial capital is an important implicit cost.

a. True
b. False

3.

Explicit costs are costs for which there is an actual money outlay.
a. True
b. False

4.

Average total cost plus average variable cost equals average fixed cost.
a. True
b. False

5.

Wages and salaries paid to workers are an example of implicit costs of production.
a. True
b. False

6.

All costs are variable in the short run.

a. True
b. False
7.

A production function shows the relationship between quantity of inputs used to make a good and the
cost to make that good.
a. True
b. False

8.

When output equals zero, total cost equals fixed cost.

a. True
b. False

9.

Variable cost equals total cost minus fixed cost.

a. True
b. False

10.

Marginal cost equals total cost divided by output.

a. True
b. False

11.

If a firm continues to employ more workers within the same size of factory, it will eventually experience
diminishing marginal product.
a. True
b. False

12.

Marginal cost intersects the average total cost and average variable cost curves at their minimum
points.
a. True
b. False

13.

The average-fixed-cost curve is U-shaped.

a. True
b. False

14.

Profit equals price multiplied by quantity.

a. True
b. False

15.

Marginal cost rises because of diminishing marginal product.

a. True
b. False

Chapter 14:
A firm earning zero economic profit will exit the industry in the long run.
a. True
b. False

2.

'Exit' refers to a short-run decision by a firm to leave the market.

a. True
b. False

3.

A firm facing a price that is less than average total cost but greater than average variable cost will shut
down temporarily until the situation improves.
a. True
b. False

4.

Sunk costs are not part of opportunity cost.

a. True
b. False

5.

For a firm in perfect competition P = MR as the demand curve is perfectly elastic.

a. True
b. False
6.

A firm producing where MR > MC is producing more than the profit-maximising quantity.
a. True
b. False

7.

Long-run supply is always horizontal for competitive industries.

a. True
b. False

8.

In the long run, a perfectly competitive firm will produce at efficient scale.
a. True
b. False

9.

In perfect competition, the sellers are price takers and the buyers are price setters.
a. True
b. False

10.

The market demand curve for a competitive industry is downward sloping.

a. True
b. False

11.

A competitive industry includes many buyers and sellers of a standardised product.

a. True
b. False

12.

A firm that is not covering its variable cost should shut down unless it is at least covering fixed cost.
a. True
b. False

13.
The industry supply curve is the summation of all of the individual firms' supply curves.
a. True
b. False

14.

The short run market supply curve is more elastic than the long run market supply curve.
a. True
b. False

15.

If MC = MR, and P = ATC, then the firm is in long-run equilibrium.

a. True
b. False

CHAPTER 15
Unlike competitive producers, a monopolist restricts output below the level at which MR = MC.
a. True
b. False

2.

The efficiency problem of monopoly is that monopolists tend to underproduce goods that would have
social value greater than the cost of producing them.
a. True
b. False

3.

For a monopolist, marginal revenue is always greater than the price of its good.
a. True
b. False

4.

A monopolist's profit is calculated as (P-ATC) * Q.

a. True
b. False

5.

A natural monopoly is a firm with decreasing average total cost throughout its whole range of
production.
a. True
b. False

6.

In the long run, a monopolist is guaranteed a positive economic profit.

a. True
b. False

7.

In the short run, a monopolist would never produce where P < ATC.
a. True
b. False

8.

When a monopolist increases the quantity of output it sells, there will be a price effect and an output
effect on total revenue.
a. True
b. False

9.

For price discrimination to be effective, a monopolist must be able to prevent arbitrage.

a. True
b. False

10.

Price discrimination means charging different prices to different customers for the same good.
a. True
b. False

11.

Monopolists will always produce in the inelastic range of the demand curve.
a. True
b. False

12.

The demand curve facing a monopolist is the market demand curve for its product.
a. True
b. False

13.

A monopoly firm does not have a supply curve.

a. True
b. False

14.

Perfect price discrimination is efficient, but the entire surplus is received by the consumer.
a. True
b. False

15.

Using regulations to force a natural monopoly to charge a price equal to its marginal cost of production
will cause the monopoly to lose money and exit the industry.
a. True
b. False

CHAPTER 16:
Firms in monopolistically competitive markets can enter and exit the market without restriction so
profits are driven to zero in the long run.
a. True
b. False

2.

Monopolistic competition is an example of imperfect competition.

a. True
b. False

3.

Monopolistic competitors in the long run produce at minimum average total cost due to free entry into
the industry.
a. True
b. False

4.

Excess capacity is one source of inefficiency in monopolistic competition.

a. True
b. False

5.

Monopolistic competitors set output and price at the point where marginal revenue equals marginal
cost.
a. True
b. False

6.

Brand names can be advantageous to society by providing an incentive for firms to maintain quality.
a. True
b. False

7.

Both monopolistic competition and perfect competition produce an identical product.

a. True
b. False

8.

Both monopolists and monopolistically competitive firms produce the quantity at which MR = MC and
then use the demand curve facing the firm to determine the price consistent with that quantity.
a. True
b. False

9.

Monopolistic competitors are able to differentiate their products enough to maintain modest long-run
economic profit.
a. True
b. False

10.

The best example of imperfect competition is monopoly, which is the opposite of perfect competition.
a. True
b. False

11.
Critics of advertising argue that advertising creates a desire for a product that would otherwise not exist,
while defenders of advertising argue that advertising can provide important information to consumers.
a. True
b. False

12.

Bans on advertising of goods such as orthotic footwear may be harmful to the seller, but they are useful
in protecting the consumer.
a. True
b. False

13.

To determine whether or not monopolistic competition is detrimental to society's wellbeing, the excess
capacity it creates must be weighed up against the additional variety available to consumers.
a. True
b. False

14.

Firms that sell highly differentiated consumer products are less likely to spend a large percentage of
their revenue on advertising.
a. True
b. False

15.

Authors of novels are not true monopolistic competitors because they do not sell a truly differentiated
product: novels are essentially all the same -- they are all books.
a. True
b. False

CHAPTER 17:
The prisoners' dilemma shows that people do not always behave rationally.
a. True
b. False

2.

A unique feature of an oligopoly market is that the actions of one seller have a significant impact on the
profits of all of the other sellers in the market.
a. True
b. False
3.

When firms cooperate with each other, it is generally good for society as a whole.
a. True
b. False

4.

The telecommunications market in Australia is an example of an oligopolistic market.

a. True
b. False

5.

As the number of firms increases in an oligopoly, the price effect increases.

a. True
b. False

6.

When a Nash equilibrium is reached, economic actors maximise their self-interest given the strategies
others have chosen.
a. True
b. False

7.

Oligopolists maximise profit by holding output below the point at which marginal revenue equals
marginal cost.
a. True
b. False

8.

Under oligopoly, price tends to be equal to marginal cost.

a. True
b. False

9.

Although it is not always attainable, a Nash equilibrium maximises the wellbeing of the group.
a. True
b. False
10.

A Nash equilibrium may result in increased output relative to the case with cooperation, but will not
move the market all the way to the competitive equilibrium.
a. True
b. False

11.

If a prisoners' dilemma game is repeated, the participants are less likely to independently maximise their
profits and reach a Nash equilibrium.
a. True
b. False

12.

The output effect of an increase in production tends to increase profit.

a. True
b. False

13.

As the number of firms in an oligopoly rises, price approaches MC.

a. True
b. False

14.

Collusion among oligopolists is more likely to be effective in the long run than in the short run.
a. True
b. False

15.

Overutilisation of common resources would never occur if people were rational and had full information
about resource availability.
a. True
b. False

CHAPTER 18:
A natural monopoly is a firm with an average total cost curve that continually declines at least to the
quantity that satisfies the entire market.
a. True
b. False

2.

Government ownership of a natural monopoly may reduce incentives to reduce costs.

a. True
b. False

3.

The Competition and Consumer Act makes it illegal for corporations to make a contract that would
substantially increase competition.
a. True
b. False

4.

The proper level of government intervention is ambiguous when dealing with a monopoly.
a. True
b. False

5.

Price cap regulation is used to control market power in the electricity market in Australia.
a. True
b. False

6.

When a monopoly charges a price that exceeds marginal cost, it produces the socially optimal output.
a. True
b. False

7.

Agreements among competitors that raise prices are deemed to be contrary to the public good.
a. True
b. False

8.

All mergers reduce social welfare.

a. True
b. False
9.

Competition and consumer laws require manufacturers to engage in resale price maintenance.
a. True
b. False

10.

If the government imposes average cost pricing on a natural monopoly, the government may have to
subside the monopoly to keep it in business.
a. True
b. False

11.

Private owners have an incentive to abuse market power.

a. True
b. False

12.

Most economists argue that the most efficient solution to the problem of monopoly is that the
monopoly should be publicly owned.
a. True
b. False

13.

Predatory pricing occurs when a firm cuts prices with the intention of driving competitors out of the
market.
a. True
b. False

14.

Resale price maintenance prevents retailers from competing on price.

a. True
b. False

15.
Transparent pricing encourages competition.
a. True
b. False
CHAPTER 19:
The demand for labour is derived from the demand for capital and land.
a. True
b. False

2.

A decrease in the demand for vinyl records will decrease the value of the marginal product of labour
used to produce vinyl records.
a. True
b. False

3.

Labour-saving technological changes increase the demand for labour, while labour-augmenting
technological changes reduce the demand for labour.
a. True
b. False

4.

When diminishing marginal product occurs, the production function will become flatter as output
increases.
a. True
b. False

5.

When a firm hires labour up to the point at which the wage equals the value of the marginal revenue
product, it is producing up to the point at which price exceeds marginal cost by the greatest amount.
a. True
b. False

6.

The demand curve for a resource tends to be perfectly inelastic.

a. True
b. False

7.

The term 'derived demand for labour' means that the demand for labour stems from the demand for
the product.
a. True
b. False

8.

A decrease in the supply of plumbers will lead to an increase in the value of the marginal product of
plumbers.
a. True
b. False

9.

A factor exhibits diminishing marginal productivity if employing additional units of the factor increases
total output.
a. True
b. False

10.

An increase in capital leads to an increase in the value of the marginal product of both capital and
labour.
a. True
b. False

11.

The demand for labour is dependent of the price of the product and the marginal product of labour.
a. True
b. False

12.

A profit-maximising employer will hire labour up to the point that maximises the difference between the
value of the marginal product and the wage rate.
a. True
b. False

13.

An increase in the supply of labour reduces the value of the marginal product of labour, increases the
wage and decreases employment.
a. True
b. False

14.
The production function is the relationship between quantity of input and profit.
a. True
b. False

15.

The value of the marginal product of labour is the wage multiplied by the quantity of labour hired.
a. True
b. False
CHAPTER 20:
A compensating differential is the difference in wages paid to workers who are discriminated against
and those who are not discriminated against.
a. True
b. False

2.

Employer discrimination is hard to eliminate, because if one employer discriminates, competition forces
others to follow suit.
a. True
b. False

3.

If the signalling view of education is true, a policy of increasing the education of workers will increase
the wage of all workers.
a. True
b. False

4.

The best evidence of continuing discrimination against women by employers is the wage gap in the
market – women still earn approximately 85 per cent of what men earn.
a. True
b. False

5.

Ability, effort and chance are all reasons why some people earn higher wages than others.
a. True
b. False

6.
Paying different wage rates to workers with different levels of skill is an example of wage discrimination.
a. True
b. False

7.

Even if employers do not discriminate, the wage gap between men and women will not disappear as
long as women carry most of the child-rearing responsibilities.
a. True
b. False

8.

At least some of the differences in pay between men and women can be explained by the fact that, on
average, men have attained more and better schooling, have more job experience and may do more
unpleasant jobs.
a. True
b. False

9.

Changes in the relative demand and relative supply of skilled and unskilled workers will alter the size of
the wage premium earned by skilled workers.
a. True
b. False

10.

If a union successfully bargains for better conditions rather than wage increases there is no impact on
employment levels.
a. True
b. False

11.

When people get a university degree, they are signalling their high ability to prospective employers.
a. True
b. False

12.

A monopsony is a single seller of an input.

a. True
b. False

13.

It is in the best interests of both parties in a bilateral monopoly to reach an agreement that will
maximise industry profits (after considering labour costs).
a. True
b. False

14.

One reason for firms to pay efficiency wages is to increase worker productivity.
a. True
b. False

15.

Henry Ford's introduction of the $5 workday in 1914 is an example of an efficiency wage.

a. True
b. False