1. Scarcity( sự khan hiếm ) means that there is less of a good or resource available than people wish to have.

ANS: T
18. Suppose one county in Missouri decides it wants to reduce alcohol consumption, so the county passes a law that
raises the price of a bottle of beer by $1. As a result, people drive to other counties to drink alcohol, which results in an
increase in drunk driving. This illustrates the principle that people respond to incentives.
ANS: T
5. Sophia is planning her activities for a hot summer day. She would like to go to the local swimming pool and see
the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she
can only choose one activity. This illustrates the basic principle that
a. people respond to incentives.
b rational people think at the margin.
.
c. people face tradeoffs.
d improvements in efficiency sometimes come at the expense of equality.
.
23. Senator Smith wants to increase taxes on people with high incomes and use the money to help the poor. Senator Jones
argues that such a tax will discourage successful people from working and will therefore make society worse off. An
economist would say that
a. we should agree with Senator Smith.
b. we should agree with Senator Jones.
c. a good decision requires that we recognize both viewpoints.
d. there are no tradeoffs between equity and efficiency.
24. Senator Smith argues that replacing the income tax with a national sales tax would increase the level of output. Senator
Wells objects that this policy would benefit the rich at the expense of the poor.
a. Both Senators’ arguments are primarily about equality.
b Both Senators’ arguments are primarily about efficiency.
.
c. Senator Smith’s argument is primarily about equality, while Senator Well’s argument is primarily about efficiency.
d Senator Smith’s argument is primarily about efficiency, while Senator Well’s argument is primarily about equality.
.
25. Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to
redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth
a. is more efficient and more equal for society.
b is more efficient but less equal for society.
.
c. is more equal but less efficient for society.
d is less equal and less efficient for society.
.
39. Suppose after graduating from college you get a job working at a bank earning $30,000 per year. After two years of
working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate program that
would require you to quit your job at the bank. Which of the following should not be included in a calculation of your
opportunity cost?
a. the cost of tuition and books to attend the graduate program
b. the $30,000 salary that you could have earned if you retained your job at the bank
c. the $45,000 salary that you will be able to earn after having completed your graduate program
d. the value of insurance coverage and other employee benefits you would have received if you retained your job at the bank.
42. Samantha’s college raises the cost of room and board per semester. This increase raises Samantha’s opportunity cost of
attending college
a. even if the amount she would have to pay for room and board if she didn’t attend college rose by the same amount. An
increase in opportunity cost reduces Samantha’s incentive to attend college.
b even if the amount she would have to pay for room and board if she didn’t attend college rose by the same amount. An
. increase in opportunity cost increases Samantha’s incentive to attend college.
c. only if the amount she would have to pay for room and board if she didn’t attend college rose by less than the increase in the
amount her college charges. An increase in opportunity cost reduces Samantha’s incentive to attend college.
d only if the amount she would have to pay for room and board if she didn’t attend college rose by less than the increase in the
. amount her college charges. An increase in opportunity cost increases Samantha’s incentive to attend college.
45. Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot.
a. The cost of the parking permit is not part of the opportunity cost of attending college if you would not have to pay for
parking otherwise.
b The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking
. otherwise.
c. Only half of the cost of the parking permit is part of the opportunity cost of attending college.
 d The cost of the parking permit is not part of the opportunity cost of attending college under any circumstances.
.
64. Sue drinks three sodas during a particular day. The marginal benefit she enjoys from drinking the third soda
a. can be thought of as the total benefit Sue enjoys by drinking three sodas minus the total benefit she would have enjoyed by
drinking just two sodas.
b determines Sue’s willingness to pay for the third soda.
.
c. is likely different from the marginal benefit provided to Sue by the second soda.
d All of the above are correct.
.
69. Stan buys a 1966 Mustang for $2,000, planning to restore and sell the car. He goes on to spend $8,000 restoring the car. At
this point he can sell the car for $9,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a
new engine the car would sell for $12,000. Stan should
a. complete the repairs and sell the car for $12,000.
b sell the car now for $9, 000.
.
c. never try such an expensive project again.
d be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.
.
70. Sarah buys and sells real estate. Two weeks ago, she paid $280,000 for a house on Pine Street, intending to spend $40,000
on repairs sell the house for $350,000. Last week, the city government announced a plan to build a new landfill on Pine
Street just down the street from the house Sarah purchased. As a result of the city’s announced plan, Sarah is weighing
two alternatives: She can go ahead with the $40,000 in repairs and then sell the house for $270,000, or she can forgo the
repairs and sell the house as it is for $240,000. Sarah should
a. keep the house and live in it.
b go ahead with the $40,000 in repairs and sell the house for $270,000.
.
c. forgo the repairs and sell the house as it is for $240,000.
d move the house from Pine Street to a more desirable location, regardless of the cost of doing so.
.
72. Sam and Sadie charge people to park on their lawn while attending a nearby craft fair. At the current price of $10, eight
people park on their lawn. If they raise the price to $15, they know that only six people will want to park on their lawn.
Whether they have eight or six cars parked on their lawn does not affect their costs. From this information it follows that
a. they should leave the price at $10.
b. it does not matter if they charge $10 or $15.
c. they would do better charging $15 than $10.
d. they should raise the price even more.
74. Suppose your management professor has been offered a corporate job with a 30 percent pay increase. He has decided to
take the job. For him, the marginal
a. cost of leaving was greater than the marginal benefit.
b benefit of leaving was greater than the marginal cost.
.
c. benefit of teaching was greater than the marginal cost.
d All of the above are correct.
.
85. Suppose the state of Iowa passes a law that increases the price of cigarettes by $1 per pack. As a result, residents in Iowa
start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate?
a. People respond to incentives
b. Rational people think at the margin
c. Trade can make everyone better off
d. Markets are usually a good way to organize economic activity
86. Suppose the state of Massachusetts passes a law that bans smoking in restaurants. As a result, residents of Rhode Island
who do not like breathing second-hand smoke begin driving across the border to Massachusetts to eat at restaurants
there. Which of the following principles does this best illustrate?
a. People respond to incentives
b. Rational people think at the margin
c. Trade can make everyone better off
d. Markets are usually a good way to organize economic activity
10. Senator Smart, who understands economic principles, is trying to convince workers in her district that trade with other
countries is beneficial. Senator Smart should argue that trade can be beneficial
a. only if it allows us to obtain things that we couldn't make for ourselves.
b. because it allows specialization, which increases total output.
 c. to us if we can gain and the others involved in the trade lose.
d. in only a limited number of circumstances because others are typically self-interested.
11. Suppose that a country that has a high level of output per person agrees to trade with a country that has a low level of
output per person. Which country can benefit?
a. only the one with a low level of output per person.
b. only the one with a high level of output per person.
c. both
d. neither
12. Suppose that a country that has a high average wage level agrees to trade with a country that has a low average wage
level. Which country can benefit?
a. only the one with a low level of output per person.
b. only the one with a high level of output per person.
c. both
d. neither
14. Suppose that the average income of a Kenyan is higher than the average income of a South African. You might conclude
that
a. Kenyan firms are faced with stricter government regulations than South African firms.
b total income is divided among fewer workers in Kenya since it has a smaller labor force than South Africa.
.
c. Kenya's climate allows for longer growing seasons and therefore Kenya can produce large quantities of grain and other
crops.
d productivity in Kenya is higher than in South Africa.
.
16. Suppose a typical worker in France can produce 32 units of product in an eight-hour day, while a typical worker in
Germany can produce 30 units of product in a 10-hour day. We can conclude that
a. worker productivity in Germany is higher than in France.
b. the standard of living will likely be higher in France than in Germany.
c. productivity is 4 units per hour for the German worker and 3 units per hour for the French worker.
d. there will be no difference between the standard of living in France and Germany.
17. Suppose that in Chile total annual output is worth $600 million and people work 70 million hours. In Argentina total
annual output is worth $450 million and people work 40 million hours. Productivity is higher
a. in Chile. Most variation in the standard of living across countries is due to differences in productivity.
b in Chile. Differences in productivity explain very little of the variation in the standard of living across countries.
.
c. in Argentina. Most variation in the standard of living across countries is due to differences in productivity.
d in Argentina. Differences in productivity explain very little of the variation in the standard of living across countries.
.
44. Suppose that the Federal Reserve Bank announces that it will be making a change to a key interest rate to increase the
money supply. This is likely because
a. the Federal Reserve Bank is worried about inflation.
b the Federal Reserve Bank is worried about unemployment.
.
c. the Federal Reserve Bank is hoping to reduce the demand for goods and services.
d the Federal Reserve Bank is worried that the economy is growing too quickly.
.
9.Since economists cannot use natural experiments offered by history, they must use carefully constructed laboratory
experiments instead.ANS:F7.Sir Isaac Newton's development of the theory of gravity after observing an apple fall
from a tree is an example of
a. a controlled experiment that lead to the formulation of a scientific theory.
b being in the right place at the right time.
c. an idea whose time had come.
d the interplay between observation and theory in science.
119.Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that
a. the nation is producing beyond its capacity, so inflation will occur.
b the nation is not using all available resources or is using inferior technology or both.
c. the nation is producing an efficient combination of goods.
d there will be a large opportunity cost if the nation tries to increase production of any good.
140.Suppose an economy produces two goods, food and machines. This economy always operates on its production
possibilities frontier. Last year, it produced 50 units of food and 30 machines. This year, it is producing 55 units of
food and 33 machines. Which of the following events could not explain the increase in output?
a. a reduction in unemployment
 b an increase in available labor
c. an improvement in technology
d Any of these events could explain the increase in output.
141.Suppose an economy produces two goods, food and machines. This economy always operates on its production
possibilities frontier. Last year, it produced 50 units of food and 30 machines. This year it experienced a
technological advance in its machine-making industry. As a result, this year the society wants to produce 55 units of
food and 30 machines. Which of the following statements is correct?
a. Because the technological advance occurred in the machine-making industry, it will not be possible to
increase food production without reducing machine production below 30.
b. Because the technological advance occurred in the machine-making industry, increases in output can only
occur in the machine industry.
c. In order to increase food production in these circumstances without reducing machine production, the
economy must reduce inefficiencies.
d. The technological advance reduced the amount of resources needed to produce 30 machines, so these
resources could be used to produce more food.
90.Since 1946, the president of the United States has received guidance from the Council of Economic
Advisers.ANS:T 47.Some, but not all, government economists are employed within the administrative branch of
government. Which of the following government agencies employs economists outside of the administrative branch?
a. the Department of Labor
b the Department of the Treasury
c. the Congressional Budget Office
d the Council of Economic Advisers
141.Suppose an economy produces two goods, food and machines. This economy always operates on its production
possibilities frontier. Last year, it produced 50 units of food and 30 machines. This year it experienced a
technological advance in its machine-making industry. As a result, this year the society wants to produce 55 units of
food and 30 machines. Which of the following statements is correct?
a. Because the technological advance occurred in the machine-making industry, it will not be possible to
increase food production without reducing machine production below 30.
b. Because the technological advance occurred in the machine-making industry, increases in output can only
occur in the machine industry.
c. In order to increase food production in these circumstances without reducing machine production, the
economy must reduce inefficiencies.
d. The technological advance reduced the amount of resources needed to produce 30 machines, so these
resources could be used to produce more food.
90.Since 1946, the president of the United States has received guidance from the Council of Economic
Advisers.ANS:T
47.Some, but not all, government economists are employed within the administrative branch of government. Which
of the following government agencies employs economists outside of the administrative branch?
a. the Department of Labor
b the Department of the Treasury
c. the Congressional Budget Office
d the Council of Economic Advisers
5.Sometimes economists disagree because their scientific judgments DIFfer. Which of the following instances best
reflects this source of disagreement?
a. One economist believes income tax cuts are unfair to those with low incomes; another economist believes
income tax cuts are not unfair to those with low incomes.
b. One economist believes unemployment causes more human suffering than does inflation; another economist
believes inflation causes more human suffering than does unemployment.
c. One economist believes the policies of the Democratic party offer the best hope for America's future; another
economist believes the policies of the Republican party offer the best hope for America's future.
d One economist believes increases in the minimum wage increase unemployment; another economist believes
increases in the minimum wage do not increase unemployment.
6.Sometimes economists disagree because their values DIFfer. Which of the following instances best reflects this
source of disagreement?
a. One economist believes the North American Free Trade Agreement (NAFTA) has led to a loss of American
jobs; another economist disputes this claim.
b. One economist believes that when income taxes are cut, people will increase their spending; another
economist believes that when income taxes are cut, people will increase their saving.
c. One economist advises against increases in sales taxes because she thinks such increases are unfair to low-
 income people; another economist disputes the idea that increases in sales taxes are unfair to low-income
people.
d. One economist believes that, prior to the Civil War, slavery contributed to economic growth in the South;
another economist believes that slavery held back the South's economic growth.
27.Suppose price is measured along the vertical axis on a graph. When price changes, there will be a

a. rotation of the curve.

b shift of the curve.
c. movement along the curve.
d change in the slope of the curve.
45.Suppose that someone makes the argument that because empty alcohol containers are found at many accidents,
the containers cause accidents. This would be an example of
a. sound logic.
b reverse causality.
c. omitted variables.
d bias.
 87."Society would be better off if the welfare system were abolished" is a normative statement, not a positive
statement.ANS:T

4. Sellers as a group determine the demand for a product, and buyers as a group determine the supply of a
product.ANS: F
60. Supply and demand together determine the price and quantity of a good sold in a market.ANS: T
69. Sellers respond to a surplus by cutting their prices.ANS:T75. Sellers respond to a shortage by cutting their
prices.ANS: F
78. Surpluses drive price up while shortages drive price down.ANS: F
83. Supply refers to the position of the supply curve, whereas the quantity supplied refers to the amount suppliers
wish to sell.ANS: T
22. Suppose Spencer and Kate are the only two demanders of lemonade. Each month, Spencer buys six glasses of
lemonade when the price is $1.00 per glass, and he buys four glasses when the price is $1.50 per glass. Each month, Kate
buys four glasses of lemonade when the price is $1.00 per glass, and she buys two glasses when the price is $1.50 per glass.
Which of the following points is on the market demand curve?
a. (quantity demanded = 2, price = $1.50)
b (quantity demanded = 4, price = $2.50)
c. (quantity demanded = 10, price = $1.00)
d (quantity demanded = 16, price = $2.50)
64. Suppose that when income rises, the demand curve for computers shifts to the right. In this case, we know
computers are
a. inferior goods.
b normal goods.
c. perfectly competitive goods.
d durable goods.
69. Soup is an inferior good if
a. the demand for soup falls when the price of a substitute for soup rises.
b the demand for soup rises when the price of soup falls.
c. the demand curve for soup slopes upward.
d the demand for soup falls when income rises.
70. Suppose that Carolyn receives a pay increase. We would expect
a. to observe Carolyn moving down and to the right along her given demand curve.
b Carolyn's demand for inferior goods to decrease.
c. Carolyn's demand for each of two goods that are complements to increase.
d Carolyn's demand for normal goods to decrease.
72. Suppose that a decrease in the price of good X results in fewer units of good Y being sold. This implies that X
and Y are
a. complementary goods.
b normal goods.
c. inferior goods.
d substitute goods.
87. Suppose the American Medical Association announces that men who shave their heads are less likely to die of
heart failure. We could expect the current demand for
a. hair gel to increase.
b razors to increase.
c. combs to increase.
d shampoo to increase.
88. Suppose scientists provide evidence that chocolate pudding increases the bad cholesterol levels of those who eat
it. We would expect to see
a. no change in the demand for chocolate pudding.
b a decrease in the demand for chocolate pudding.
c. an increase in the demand for chocolate pudding.
d a decrease in the supply of chocolate pudding.
55. Suppose you make jewelry. If the price of gold falls, then we would expect you to
a. be willing and able to produce less jewelry than before at each possible price.
b be willing and able to produce more jewelry than before at each possible price.
c. face a greater demand for your jewelry.
d face a weaker demand for your jewelry.
14. Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We
would expect a
a. shortage to exist and the market price of roses to increase.
b shortage to exist and the market price of roses to decrease.
c. surplus to exist and the market price of roses to increase.
d surplus to exist and the market price of roses to decrease.
24. Suppose roses are currently selling for $20 per dozen, but the equilibrium price of roses is $30 per dozen. We
would expect a
a. shortage to exist and the market price of roses to increase.
b shortage to exist and the market price of roses to decrease.
c. surplus to exist and the market price of roses to increase.
d surplus to exist and the market price of roses to decrease.
27. Step one of the “Three Steps for Analyzing Changes in Equilibrium” is
a. decide which direction the curve shifts.
b decide whether the event shifts the supply or demand curve.
c. use the supply-and-demand diagram to see how the shift changes the equilibrium.
d Any of these could be used first.
99. Suppose buyers of computers and printers regard those two goods as complements. Then an increase in the
price of computers will cause
a. a decrease in the demand for printers and a decrease in the quantity supplied of printers.
b a decrease in the supply of printers and a decrease in the quantity demanded of printers.
c. a decrease in the equilibrium price of printers and an increase in the equilibrium quantity of printers.
d an increase in the equilibrium price of printers and a decrease in the equilibrium quantity of printers.
101. Saddle shoes are not popular right now, so very few are being produced. If saddle shoes become popular, then
how will this affect the market for saddle shoes?
a. The supply curve for saddle shoes will shift right, which will create a shortage at the current price. That will
increase price, which will decrease quantity demanded and increase quantity supplied. The new market
equilibrium will be at a higher price and higher quantity.
b. The supply curve for saddle shoes will shift right, which will create a surplus at the current price. That will
decrease price, which will increase quantity demanded and decrease quantity supplied. The new market
equilibrium will be at a lower price and higher quantity.
c. The demand curve for saddle shoes will shift right, which will create a shortage at the current price. That will
increase price, which will decrease quantity demanded and increase quantity supplied. The new market
equilibrium will be at a higher price and higher quantity.
d The demand curve for saddle shoes will shift right, which will create a surplus at the current price. That will
decrease price, which will increase quantity demanded and decrease quantity supplied. The new market
equilibrium will be at a lower price and higher quantity.
105. Suppose there is an earthquake that destroys several corn canneries. Which of the following would not be a
direct result of this event?
a. Sellers would not be able to produce and sell as much as before at each relevant price.
b The supply would decrease.
c. Buyers would not be willing to buy as much as before at each relevant price.
d The equilibrium price would rise.
109. Suppose that demand for a good increases and, at the same time, supply of the good decreases. What would
happen in the market for the good?
a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
b Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.
d Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
111. Suppose that demand for a good decreases and, at the same time, supply of the good decreases. What would
happen in the market for the good?
a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
b Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.
d Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
112. Suppose the number of buyers in a market increases and a technological advancement occurs also. What would
we expect to happen in the market?
a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
b Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.
d Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
113. Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction
in input prices. What would we expect to occur in this market?
a. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
b Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.
d Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
14. Suppose that when the price rises by 20% for a particular good, the quantity demanded of that good falls by
10%. The price elasticity of demand for this good is equal to 2.0.ANS: F 15. Suppose that when the
price rises by 10% for a particular good, the quantity demanded of that good falls by 20%. The price elasticity of
demand for this good is equal to 2.0.ANS: T43. Supply and demand both tend to be more elastic in the long run
and more inelastic in the short run.ANS: T45. Supply is said to be inelastic if the quantity supplied responds
substantially to changes in the price, and elastic if the quantity supplied responds only slightly to price.ANS: F
46. Supply tends to be more elastic in the short run and more inelastic in the long run.ANS: F32.
Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of
X demanded. Price elasticity of demand for X is
a. 0.
b 1.
c. 6.
d 36.
63. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at
reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the
government policy should have reduced smoking by
a. 30%.
b 40%.
c. 80%.
d 250%.
68. Suppose that quantity demand rises by 10% as a result of a 15% decrease in price. The price elasticity of
demand for this good is
a. inelastic and equal to 0.67.
b elastic and equal to 0.67.
c. inelastic and equal to 1.50.
d elastic and equal to 1.50.
69. Suppose that quantity demand falls by 30% as a result of a 5% increase in price. The price elasticity of demand
for this good is
a. inelastic and equal to 6.
b elastic and equal to 6.
c. inelastic and equal to 0.17.
d elastic and equal to 0.17.
90. Suppose the price of Twinkies decreases from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded
increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Twinkies in the given price
range is
a. 2.00.
b 1.55.
c. 1.00.
d 0.64.
98. Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from that price
by 4 percent, the number of candy bars demanded falls to 46. Using the midpoint approach to calculate the price elasticity
of demand, it follows that the
a. demand for candy bars in this price range is elastic.
b demand for candy bars in this price range is inelastic.
c. demand for candy bars in this price range is unit elastic.
d price elasticity of demand for candy bars in this price range is 0.
134. Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result,
a. the equilibrium quantity decreases, and the equilibrium price is unchanged.
b the equilibrium price increases, and the equilibrium quantity is unchanged.
c. the equilibrium quantity and the equilibrium price both are unchanged.
d buyers’ total expenditure on the good is unchanged.
135. Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result,
a. the equilibrium quantity decreases, and the equilibrium price is unchanged.
b the equilibrium price increases, and the equilibrium quantity is unchanged.
c. the equilibrium quantity and the equilibrium price both are unchanged.
d buyers’ total expenditure on the good is unchanged.
152. Suppose that when the price of corn is $2 per bushel, farmers can sell 10 million bushels. When the price of corn
is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true?
a. The demand for corn is income inelastic, and so an increase in the price of corn will increase the total
revenue of corn farmers.
b. The demand for corn is income elastic, and so an increase in the price of corn will increase the total revenue
of corn farmers.
c. The demand for corn is price inelastic, and so an increase in the price of corn will increase the total revenue
of corn farmers.
d The demand for corn is price elastic, and so an increase in the price of corn will increase the total revenue of
corn farmers.
153. Suppose that when the price of beer is $2 per bottle, firms can sell 4 million bottles. When the price of beer is $3
per bottle, firms can sell 2 million bottles. Which of the following statements is true?
a. The demand for beer is income inelastic, and so an increase in the price of beer will increase the total
revenue of beer producers.
b. The demand for beer is income elastic, and so an increase in the price of beer will increase the total revenue
of beer producers.
c. The demand for beer is price inelastic, and so an increase in the price of beer will increase the total revenue
of beer producers.
d. The demand for beer is price elastic, and so an increase in the price of beer will increase the total revenue of
beer producers.
154. Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from that price
by 5 percent, the number of candy bars demanded falls to 48. Using the midpoint approach to calculate the price elasticity
of demand, it follows that the
a. demand for candy bars in this price range is unit elastic.
b price increase will decrease the total revenue of candy bar sellers.
c. price elasticity of demand for candy bars in this price range is about 1.22.
d price elasticity of demand for candy bars in this price range is about 0.82.
155. Suppose that 500 candy bars are demanded at a particular price. If the price of candy bars rises from that price
by 10 percent, the number of candy bars demanded falls to 480. Using the midpoint approach to calculate the price
elasticity of demand, it follows that the
a. demand for candy bars in this price range is unit elastic.
b price increase will decrease the total revenue of candy bar sellers.
c. price elasticity of demand for candy bars in this price range is about 0.41.
d price elasticity of demand for candy bars in this price range is about 0.24.
200. Suppose you are in charge of setting prices at a local sandwich shop. The business needs to increase its total
revenue and your job is on the line. If the demand for sandwiches is elastic, you
a. should increase the price of sandwiches.
b should decrease the price of sandwiches.
c. should not change the price of sandwiches.
d could not determine what to do with price until you determine whether supply is elastic or inelastic.
201. Suppose a producer is able to separate customers into two groups, one having an inelastic demand and the other
having an elastic demand. If the producer's objective is to increase total revenue, she should
a. increase the price charged to customers with the elastic demand and decrease the price charged to customers
with the inelastic demand.
b. decrease the price charged to customers with the elastic demand and increase the price charged to customers
with the inelastic demand.
c. decrease the price to both groups of customers.
d increase the price for both groups of customers.
209. Suppose the point (Q = 2,000, P = $60) is the midpoint on a certain downward-sloping, linear demand curve.
Then
a. an increase in price from $40 to $42 will increase total revenue.
b a decrease in price from $61 to $59 will leave total revenue unchanged.
c. the maximum value of total revenue is $120,000.
d All of the above are correct.
223. Suppose good X has a negative income elasticity of demand. This implies that good X is
a. a normal good.
b a necessity.
c. an inferior good.
d a luxury.
235. Suppose goods A and B are substitutes for each other. We would expect the cross-price elasticity between these
two goods to be
a. positive.
b negative.
c. either positive or negative. It depends whether A and B are normal goods or inferior goods.
d. either positive or negative. It depends whether the current price level is on the elastic or inelastic portion of
the demand curve.
238. Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units
to 25 units. Using the midpoint method,
a. the cross-price elasticity of demand is -1.0, and X and Y are complements.
b the cross-price elasticity of demand is -1.0, and X and Y are substitutes.
c. the cross-price elasticity of demand is 1.0, and X and Y are complements.
d the cross-price elasticity of demand is 1.0, and X and Y are substitutes.
244. Suppose the cross-price elasticity of demand between hot dogs and mustard is -2.00. This implies that a 20
percent increase in the price of hot dogs will cause the quantity of mustard purchased to
a. fall by 200 percent.
b fall by 40 percent.
c. rise by 200 percent.
d rise by 40 percent.
17. Some firms eventually experience problems with their capacity to produce output as their output levels increase.
For these firms,
a. market power is substantial.
b supply is perfectly inelastic.
c. supply is more elastic at low levels of output and less elastic at high levels of output.
d supply is less elastic at low levels of output and more elastic at high levels of output.
27. Suppose the price elasticity of supply for how-to books is 0.3 in the short run and 1.2 in the long run. If an
increase in the demand for how-to books causes the price of how-to books to increase by 36%, then the quantity supplied
of how-to books will increase by
a. 0.8% in the short run and 3.3% in the long run.
b 1.2% in the short run and 0.3% in the long run.
c. 10.8% in the short run and 43.2% in the long run.
d 120% in the short run and 30% in the long run.
28. Suppose the price elasticity of supply for how-to books is 0.3 in the short run and 1.2 in the long run. If an
increase in the demand for how-to books causes the price of how-to books to increase by 20%, then the quantity supplied
of how-to books will increase by
a. 0.67% in the short run and 0.17% in the long run.
b 3% in the short run and 1.2% in the long run.
c. 6% in the short run and 24% in the long run.
d 66.7% in the short run and 16.7% in the long run.
29. Suppose the price elasticity of supply for how-to books is 0.3 in the short run and 1.2 in the long run. If an
increase in the demand for how-to books causes the price of how-to books to increase by 5%, then the quantity supplied
of how-to books will increase by
a. 1.5% in the short run and 6% in the long run.
b 6% in the short run and 1.5% in the long run.
c. 16.7% in the short run and 4.2% in the long run.
d 4.2% in the short run and 16.7% in the long run.
53. Suppose that an increase in the price of carrots from $1.30 to $1.80 per pound increases the quantity of carrots
that carrot farmers produce from 1.2 million pounds to 1.6 million pounds. Using the midpoint method, what is the
approximate value of the price elasticity of supply?
a. 0.67
b 0.89
c. 1.00
d 1.13
67. Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government
imposes a price floor of $250 per physical. As a result of the price floor,
a. the demand curve for physicals shifts to the left.
b the supply curve for physicals shifts to the right.
c. the quantity demanded of physicals decreases and the quantity of physicals doctors want to give increases.
d the number of physicals performed stays the same.
68. Suppose the government has imposed a price floor on televisions. Which of the following events could transform
the price floor from one that is not binding into one that is binding?
a. Firms expect the price of televisions to rise in the future.
b The number of firms selling televisions decreases.
c. Consumers' income decreases, and televisions are a normal good.
d The number of consumers buying televisions increases.
69. Suppose the government has imposed a price floor on cellular phones. Which of the following events could
transform the price floor from one that is binding to one that is not binding?
a. Cellular phones become less popular.
b Traditional land line phones become more expensive.
c. The components used to produce cellular phones become less expensive.
d Firms expect the price of cellular phones to fall in the future.
95. Studies of the effects of the minimum wage typically find that a 10 percent increase in the minimum wage
depresses teenage employment by about
a. 0 percent.
b 1 to 3 percent.
c. 5 to 7 percent.
d 10 percent.
26. Suppose sellers of liquor are required to send $1.00 to the government for every bottle of liquor they sell.
Further, suppose this tax causes the price paid by buyers of liquor to rise by $0.80 per bottle. Which of the following
statements is correct?
a. This tax causes the supply curve for liquor to shift upward by $1.00 at each quantity of liquor.
b The effective price received by sellers is $0.20 per bottle less than it was before the tax.
c. Eighty percent of the burden of the tax falls on buyers.
d All of the above are correct.
27. Suppose sellers of liquor are required to send $1.00 to the government for every bottle of liquor they sell.
Further, suppose this tax causes the price paid by buyers of liquor to rise by $0.60 per bottle. Which of the following
statements is correct?
a. The effective price received by sellers is $0.40 per bottle less than it was before the tax.
b Sixty percent of the burden of the tax falls on sellers.
c. This tax causes the demand curve for liquor to shift downward by $1.00 at each quantity of liquor.
d All of the above are correct.
28. Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay
the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then
a. the demand curve will shift upward by $20, and the price paid by buyers will decrease by less than $20.
b the demand curve will shift upward by $20, and the price paid by buyers will decrease by $20.
c. the supply curve will shift downward by $20, and the effective price received by sellers will increase by less
than $20.
d. the supply curve will shift downward by $20, and the effective price received by sellers will increase by $20.
29. Suppose there is currently a tax of $50 per ticket on airline tickets. Sellers of airline tickets are required to pay
the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then
a. the demand curve will shift upward by $20, and the effective price received by sellers will increase by $20.
b. the demand curve will shift upward by $20, and the effective price received by sellers will increase by less
than $20.
c. the supply curve will shift downward by $20, and the price paid by buyers will decrease by $20.
d the supply curve will shift downward by $20, and the price paid by buyers will decrease by less than $20.
54. Suppose buyers of liquor are required to send $1.00 to the government for every bottle of liquor they buy.
Further, suppose this tax causes the effective price received by sellers of liquor to fall by $0.80 per bottle. Which of the
following statements is correct?
a. This tax causes the demand curve for liquor to shift downward by $1.00 at each quantity of liquor.
b The price paid by buyers is $0.20 per bottle more than it was before the tax.
c. Eighty percent of the burden of the tax falls on sellers.
d All of the above are correct.
55. Suppose buyers of liquor are required to send $1.00 to the government for every bottle of liquor they buy.
Further, suppose this tax causes the effective price received by sellers of liquor to fall by $0.60 per bottle. Which of the
following statements is correct?
a. This tax causes the supply curve for liquor to shift upward by $1.00 at each quantity of liquor.
b The price paid by buyers is $0.40 per bottle more than it was before the tax.
c. Sixty percent of the burden of the tax falls on buyers.
d All of the above are correct.
56. Suppose there is currently a tax of $50 per ticket on airline tickets. Buyers of airline tickets are required to pay
the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then
a. the demand curve will shift upward by $20, and the price paid by buyers will decrease by less than $20.
b the demand curve will shift upward by $20, and the price paid by buyers will decrease by $20.
c. the supply curve will shift downward by $20, and the effective price received by sellers will increase by less
than $20.
d. the supply curve will shift downward by $20, and the effective price received by sellers will increase by $20.
57. Suppose there is currently a tax of $50 per ticket on airline tickets. Buyers of airline tickets are required to pay
the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then
a. the demand curve will shift upward by $20, and the effective price received by sellers will increase by $20.
b. the demand curve will shift upward by $20, and the effective price received by sellers will increase by less
than $20.
c. the supply curve will shift downward by $20, and the price paid by buyers will decrease by $20.
d. the supply curve will shift downward by $20, and the price paid by buyers will decrease by less than $20.
129. Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic.
If a tax is imposed in this market, then
a. the buyers will bear a greater burden of the tax than the sellers.
b the sellers will bear a greater burden of the tax than the buyers.
c. the buyers and sellers are likely to share the burden of the tax equally.
d the buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the
greater burden of the tax without more information.
131. Suppose that the demand for picture frames is inelastic and the supply of picture frames is elastic. A tax of $1
per frame levied on picture frames will increase the price paid by buyers of picture frames by
a. less than $0.50.
b $0.50.
c. between $0.50 and $1.
d $1.
132. Suppose that the demand for picture frames is inelastic and the supply of picture frames is elastic. A tax of $1
per frame levied on picture frames will decrease the effective price received by sellers of picture frames by
a. less than $0.50.
b $0.50.
c. between $0.50 and $1.
d $1.
135. Suppose that a tax is placed on books. If the buyers pay the majority of the tax, then we know that the
a. demand is more inelastic than the supply.
b supply is more inelastic than the demand.
c. government has required that buyers remit the tax payments.
d government has required that sellers remit the tax payments.
136. Suppose that in a particular market, the demand curve is highly elastic and the supply curve is highly inelastic.
If a tax is imposed in this market, then
a. the buyers will bear a greater burden of the tax than the sellers.
b the sellers will bear a greater burden of the tax than the buyers.
c. the buyers and sellers are likely to share the burden of the tax equally.
d the buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the
greater burden of the tax without more information.
138. Suppose that the demand for picture frames is elastic and the supply of picture frames is inelastic. A tax of $1
per frame levied on picture frames will increase the price paid by buyers of picture frames by
a. less than $0.50.
b $0.50.
c. between $0.50 and $1.
d $1.
139. Suppose that the demand for picture frames is elastic and the supply of picture frames is inelastic. A tax of $1
per frame levied on picture frames will decrease the effective price received by sellers of picture frames by
a. less than $0.50.
b $0.50.
c. between $0.50 and $1.
d $1.
141. Sellers of a good bear the larger share of the tax burden when a tax is placed on a product for which
a. the supply is more elastic than the demand.
b the demand in more elastic than the supply.
c. the tax is placed on the sellers of the product.
d the tax is placed on the buyers of the product.
142. Suppose that a tax is placed on books. If the sellers pay the majority of the tax, then we know that the
a. demand is more inelastic than the supply.
b supply is more inelastic than the demand.
c. government has required that buyers remit the tax payments.
d government has required that sellers remit the tax payments.
144. Suppose the demand for macaroni is inelastic and the supply of macaroni is elastic, and the demand for
cigarettes is inelastic and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities,
we would expect that the
a. burden of both taxes would fall more heavily on the buyers than on the sellers.
b. burden of the macaroni tax would fall more heavily on the sellers than on the buyers, and the burden of the
cigarette tax would fall more heavily on the buyers than on the sellers.
c. burden of the macaroni tax would fall more heavily on the buyers than on the sellers, and the burden of the
cigarette tax would fall more heavily on the sellers than on the buyers.
d burden of both taxes would fall more heavily on the sellers than on the buyers.
68. States in the U.S. may mandate minimum wages above the federal level.ANS: T80. Studies by
economists have found that a 10 percent increase in the minimum wage decreases teenage employment 10 percent.ANS:
F121. Since half of the FICA tax is paid by firms and the other half is paid by workers, the burden of the tax
must fall equally on firms and workers.ANS: F17. Suppose the equilibrium price of a physical examination
("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price
ceiling,
a. the demand curve for physicals shifts to the right.
b the supply curve for physicals shifts to the left.
c. the quantity demanded of physicals increases and the quantity supplied of physicals decreases.
d the number of physicals performed stays the same.
ANS: C
18. Suppose the government has imposed a price ceiling on televisions. Which of the following events could
transform the price ceiling from one that is not binding into one that is binding?
a. Firms expect the price of televisions to fall in the future.
b The number of firms selling televisions decreases.
c. Consumers' income decreases, and televisions are a normal good.
d The number of consumers buying televisions decreases.
19. Suppose the government has imposed a price ceiling on cellular phones. Which of the following events could
transform the price ceiling from one that is binding to one that is not binding?
a. Cellular phones become more popular.
b Traditional land line phones become more expensive.
c. The components used to produce cellular phones become more expensive.
d A technological advance makes cellular phone production less expensive.
 CHAPTER 7
14. Suppose there is an increase in supply that reduces market price. Consumer surplus increases because (1)
consumer surplus received by existing buyers increases and (2) new buyers enter the market.ANS: T2. Suppose
Larry, Moe and Curly are bidding in an auction for a mint-condition video of Charlie Chaplin's first movie. Each has in
mind a maximum amount that he will bid. This maximum is called
a. a resistance price.
b willingness to pay.
c. consumer surplus.
d producer surplus.
3. Suppose Chris and Laura attend a charity benefit and participate in a silent auction. Each has in mind a
maximum amount that he or she will bid for an oil painting by a locally famous artist. This maximum is called
a. deadweight loss.
b willingness to pay.
c. consumer surplus.
d producer surplus.
56. Suppose Lauren, Leslie and Lydia all purchase bulletin boards for their rooms for $15 each. Lauren's
willingness to pay was $35, Leslie's willingness to pay was $25, and Lydia's willingness to pay was $30. Total consumer
surplus for these three would be
a. $15.
b $30.
c. $45.
d $90.
57. Suppose Bart, Benjamin, and Brent each purchase a particular type of electric pencil sharpener at a price of
$20. Bart’s willingness to pay was $22, Benjamin's willingness to pay was $25, and Brent's willingness to pay was $30.
Which of the following statements is correct?
a. Had the price of the pencil sharpener been $26 rather than $20, only Brent would have been a buyer.
b Brent’s consumer surplus is the smallest of the three individual consumer surpluses.
c. For the three individuals together, consumer surplus amounts to $60.
d The fact that all three individuals paid $20 for the same type of pencil sharpener indicates that each one
placed the same value on that pencil sharpener.
58. Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie’s
willingness to pay was $100, Kendra’s willingness to pay was $95, and Kristen's willingness to pay was $80. Which of the
following statements is correct?
a. For the three individuals together, consumer surplus amounts to $35.
b. Having bought the cell phone, Kristen is better off than she would have been had she not bought it.
c. Had the price of the cell phone been $95 rather than $80, Katie and Kendra definitely would have been
buyers and Kristen definitely would not have been a buyer.
d. The fact that all three individuals paid $80 for the same type of cell phone indicates that each one placed the
same value on that cell phone.
59. Sarah buys a new MP3 player for $135. She receives consumer surplus of $25 on her purchase if her willingness
to pay is
a. $25.
b $110.
c. $135.
d $160.
73. Suppose there is an early freeze in California that reduces the size of the lemon crop. What happens to consumer
surplus in the market for lemons?
a. Consumer surplus increases.
b Consumer surplus decreases.
c. Consumer surplus is not affected by this change in market forces.
d. We would have to know whether the demand for lemons is elastic or inelastic to make this determination.
74. Suppose your own demand curve for tomatoes slopes downward. Suppose also that, for the last tomato you bought this
week, you paid a price exactly equal to your willingness to pay. Then
a. you should buy more tomatoes before the end of the week.
b you already have bought too many tomatoes this week.
c. your consumer surplus on the last tomato you bought is zero.
d your consumer surplus on all of the tomatoes you have bought this week is zero.
75. Suppose the market demand curve for a good passes through the point (quantity demanded = 100, price = $25). If there
are five buyers in the market, then
a. the marginal buyer's willingness to pay for the 100th unit of the good is $25.
b the sum of the five buyers' willingness to pay for the 100th unit of the good is $25.
c. the average of the five buyers' willingness to pay for the 100th unit of the good is $25.
d all of the five buyers are willing to pay at least $25 for the 100th unit of the good.
85. Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer
surplus in the television market
a. decreases.
b is unchanged.
c. increases.
d may increase, decrease, or remain unchanged.
74. Suppose the demand for nachos increases. What will happen to producer surplus in the market for nachos?
a. It increases.
b It decreases.
c. It remains unchanged.
d It may increase, decrease, or remain unchanged.
75. Suppose the demand for nachos decreases. What will happen to producer surplus in the market for nachos?
a. It increases.
b It decreases.
c. It remains unchanged.
d It may increase, decrease, or remain unchanged.
80. Suppose consumer income increases. If grass seed is a normal good, the equilibrium price of grass seed will
a. decrease, and producer surplus in the industry will decrease.
b increase, and producer surplus in the industry will increase.
c. decrease, and producer surplus in the industry will increase.
d increase, and producer surplus in the industry will decrease.
94. Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for
widgets to $6, producer surplus
a. would necessarily increase even if the higher price resulted in a surplus of widgets.
b would necessarily decrease because the higher price would create a surplus of widgets.
c. might increase or decrease.
d would be unaffected.
95. Suppose that the equilibrium price in the market for widgets is $5. If a law reduced the maximum legal price for
widgets to $4,
a. any possible increase in consumer surplus would be larger than the loss of producer surplus.
b any possible increase in consumer surplus would be smaller than the loss of producer surplus.
c. the resulting increase in producer surplus would be larger than any possible loss of consumer surplus.
d the resulting increase in producer surplus would be smaller than any possible loss of consumer surplus.
96. Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for
widgets to $6,
a. the resulting increase in consumer surplus would be larger than any possible loss of producer surplus.
b. the resulting increase in consumer surplus would be smaller than any possible loss of producer surplus.
c. any possible increase in producer surplus would be larger than the loss of consumer surplus.
d any possible increase in producer surplus would be smaller than the loss of consumer surplus.
 CHAPTER 13
23. Susan used to work as a telemarketer, earning $25,000 per year. She gave up that job to start a catering business. In
calculating the economic profit of her catering business, the $25,000 income that she gave up is counted as part of the catering
firm's
a. total revenue.
b opportunity costs.
c. explicit costs.
d marginal costs.
54. Suppose that for a particular business there are no implicit opportunity costs. Then
a. accounting profit will be greater than economic profit.
b accounting profit will be the same as economic profit.
c. accounting profit will be less than economic profit.
d the relationship between accounting profit and economic profit cannot be determined without more
information.
28. Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired. The firm is able to
produce 176 units of output per day when 16 workers are hired (holding other inputs fixed). Then the marginal product of the
16th worker is
a. 10 units of output.
b 11 units of output.
c. 16 units of output.
d 176 units of output.
2. Some costs do not vary with the quantity of output produced. Those costs are called
a. marginal costs.
b average costs.
c. fixed costs.
d incurred costs.
9. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero
when no workers are hired. In addition, suppose that when the firm hires 2 workers, the total cost of production is $100. When
the firm hires 3 workers, the total cost of production is $120. In addition, assume that the variable cost per unit of labor is the
same regardless of the number of units of labor that are hired. What is the firm's fixed cost?
a. $40
b $60
c. $80
d $100
35. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero
when no workers are hired. In addition, suppose that when four units of output are produced, the total cost is $175, and the
average variable cost is $33.75. What would the average fixed cost be if ten units were produced?
a. $4
b $10
c. $40
d $135
23. Since the 1980s, Wal-Mart stores have appeared in almost every community in America. Wal-Mart buys its goods in
large quantities and, therefore, at cheaper prices. Wal-Mart also locates its stores where land prices are low, usually outside of the
community business district. Many customers shop at Wal-Mart because of low prices. Local retailers, like the neighborhood
drug store, often go out of business because they lose customers. This story demonstrates that
a. consumers do not react to changing prices.
b there are diseconomies of scale in retail sales.
c. there are economies of scale in retail sales.
d there are diminishing returns to producing and selling retail goods.
37. Some reasons that firms may experience diseconomies of scale include that
a. the firm is too small to take advantage of specialization.
b large management structures may be bureaucratic and inefficient.
c. if there are too few employees, managers do not have enough to do.
d average fixed costs begin to rise again.
11. Suppose Jan started up a small lemonade stand business last month. Variable costs for Jan's lemonade stand now
include the cost of
a. building the lemonade stand.
b hiring an artist to design a logo for her sign.
c. lemons and sugar.
d All of the above are correct.
29. Several related measures of cost can be derived from a firm's total cost.ANS: T12. Suppose Jan started up a
small lemonade stand business last month. Variable costs for Jan's lemonade stand now include the cost of
a. lemons and sugar.
b paper cups.
c. the wages paid to her hourly workers.
d All of the above are correct.
27. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero
when no workers are hired. In addition, suppose that marginal cost of the third worker hired is $40, and the average total cost
when three workers are hired is $50. What is the total cost of production when three workers are hired?
a. $50
b $90
c. $120
d $150
28. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero
when no workers are hired. In addition, suppose that when the firm hires 4 workers, the firm produces 50 units of output. If the
fixed cost of production is $4, the variable cost per unit of labor is $20, and the marginal product of labor for the fifth unit of
labor is 2, what is the average total cost of production when the firm hires 5 workers?
a. $2.00
b $20.00
c. $20.80
d $22.80
31. Suppose that for a particular firm the only variable input into the production process is labor and that output equals zero
when no workers are hired. In addition, suppose that the average total cost when 5 units of output are produced is $30, and the

marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced?
a. $10
b $25
c. $30
d $35
33. Smith Technologies has average variable costs of $1 and average total costs of $3 when it produces 500 units of output.
The firm's total fixed costs equal
a. $2.
b $4.
c. $1,000.
d $2,000.
 CHAPTER 21
32. Susie wins $1 million in her state’s lottery. If Susie keeps working after she wins the money, we can infer that the
income effect is larger than the substitution effect for her.ANS: F36. Some economists have advocated reducing the
taxation of interest and other capital income, arguing that such a policy change would raise the after-tax interest rate that savers
can earn and would thereby encourage people to save more.ANS: T5. Suppose a consumer has an income of $800 per
month and that she spends her entire income each month on beer and bratwurst. The price of a pint of beer is $5, and the price of
a bratwurst is $4. Which of the following combinations of beers and bratwursts represents a point that would lie to the interior of
the consumer’s budget constraint?
a. 160 beers and 200 bratwursts
b 40 beers and 50 bratwursts
c. 80 beers and 100 bratwursts
d 160 beers and 0 bratwursts
6. Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and
bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4. Which of the following combinations of beers and
bratwursts represents a point that would lie to the exterior of the consumer’s budget constraint?
a. 160 beers and 200 bratwursts
b 40 beers and 50 bratwursts
c. 80 beers and 100 bratwursts
d 160 beers and 0 bratwursts
7. Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and
bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4. Which of the following combinations of beers and
bratwursts represents a point that would lie directly on the consumer’s budget constraint?
a. 160 beers and 200 bratwursts
b 40 beers and 50 bratwursts
c. 80 beers and 100 bratwursts
d 80 beers and 0 bratwursts
9. Suppose a consumer spends his income on CDs and DVDs. If his income decreases, the budget constraint for CDs and
DVDs will
a. shift outward, parallel to the original budget constraint.
b shift inward, parallel to the original budget constraint.
c. rotate outward along the CD axis because he can afford more CDs.
d rotate outward along the DVD axis because he can afford more DVDs.
35. Suppose a consumer spends her income on two goods: music CDs and DVDs. The consumer has $200 to allocate to
these two goods, the price of a CD is $10, and the price of a DVD is $20. What is the maximum number of CDs the consumer
can purchase?
a. 10
b 20
c. 40
d 50
36. Suppose a consumer spends her income on two goods: iTunes music downloads and books. The consumer has $100 to
allocate to these two goods, the price of a downloaded song is $1, and the price of a book is $20. What is the maximum number
of books the consumer can purchase?
a. 100
b 20
c. 10
d 5
37. Suppose a consumer spends her income on two goods: music CDs and DVDs. The price of a CD is $8, and the price of
a DVD is $20. If we graph the budget constraint by placing the quantity of CDs purchased on the horizontal axis, what is the
slope of the budget constraint?
a. -5.0
b -2.5
c. -0.4
d The slope of the budget constraint cannot be determined without knowing the income the consumer has
available to spend on the two goods.
38. Suppose a consumer is currently spending all of her available income on two goods: music CDs and DVDs. If the price
of a CD is $9, the price of a DVD is $18, and she is currently consuming 10 CDs and 5 DVDs, what is the consumer's income?
a. $90
b $180
c. $270
d $360
53. Suppose the only two goods that Brett consumes are wine and cheese. When wine sells for $10 a bottle and cheese sell
for $10 a pound, he buys 6 bottles of wine and 4 pounds of cheese — spending his entire income of $100. One day the price of
wine falls to $5 a bottle and the price of cheese increases to $20 a pound, while his income does not change. The bundle of wine
and cheese that he purchased at the old prices now costs
a. the same amount at the new prices.
b less than Brett's income at the new prices.
c. more than Brett's income at the new prices.
d We do not have enough information to answer the question.
54. Suppose the only two goods that Brett consumes are wine and cheese. When wine sells for $10 a bottle and cheese sell
for $10 a pound, he buys 6 bottles of wine and 4 pounds of cheese — spending his entire income of $100. One day the price of
wine falls to $5 a bottle, and the price of cheese increases to $20 a pound, while his income does not change. If you illustrate
wine on the vertical axis and cheese on the horizontal axis, then
a. the slope of Brett's budget has not changed.
b the slope of Brett's budget constraint is flatter at the new prices.
c. the slope of Brett's budget constraint is steeper at the new prices.
d Brett's budget constraint has shifted in a parallel fashion to the budget constraint with the old prices.
69. Suppose Rich always uses two packets of sugar with his coffee. Rich's indifference curves for sugar and coffee are
a. bowed inward.
b bowed outward.
c. straight lines.
d L shaped.
42. Suppose a consumer has preferences over two goods, X and Y, which are perfect substitutes. In particular, two units of
X is equivalent to one unit of Y. If the price of X is $1, the price of Y is $3, and the consumer has $30 of income to allocate to
these two goods, how much of each good should the consumer purchase to maximize satisfaction?
a. 30 units of X and 0 units of Y
b 0 units of X and 10 units of Y
c. 15 units of X and 5 units of Y
d 12 units of X and 6 units of Y
49. Suppose at the consumer’s current consumption bundle the marginal rate of substitution of cheese for wine is 1/2 bottle
of wine per pound of cheese. The price of one pound of cheese is $6, and the price of a bottle of wine is $10. The consumer
should increase his consumption of
a. cheese, decrease his consumption of wine, and move to a lower indifference curve.
b cheese, decrease his consumption of wine, and move to a higher indifference curve.
c. wine, decrease consumption of cheese, and move to a higher indifference curve.
d cheese, decrease consumption of wine, and remain on the same indifference curve.
73. Suppose the price of good X falls. As a result, the quantity demanded for good X increases for a particular consumer.
For this consumer, the substitution effect induced the consumer to purchase more X while the income effect induced the
consumer to purchase less X. We can infer that X is a(n)
a. normal good.
b inferior good.
c. Giffen good.
d luxury good.
101. Suppose that for Emily, DVDs and trips to the movie theater are perfect substitutes. Currently, Emily is spending all of
her income on trips to the movie theater. If the price of DVDs doubles, the substitution effect will
a. be two times the income effect.
b be half the income effect.
c. be zero.
d always increase the number of trips to the movie theater Emily makes.
105. Suppose the price of good X falls and the consumption of good X increases. From this we can infer that X is a(n)
a. normal good.
b inferior good.
c. Giffen good.
d None of the above is correct.
28. Suppose that Stacy’s hourly wage increases, and she decides to work fewer hours. For her, the substitution effect of the
wage change is
a. only partially offset by the income effect.
b more than offset by the income effect.
c. exactly offset by the income effect.
d We do not have enough information with which to answer the question..
45. Suppose Olivia is planning for retirement in a two-period world. In the first period Olivia is young and earns $1
million, and in the second period Olivia is old and retired and earns nothing. The interest rate is initially 10 percent, but then it
falls to 7 percent. Which of the following statements is correct?
a. After the interest rate falls, the substitution effect will induce Olivia to consume more when she is young.
b. After the interest rate falls, the substitution effect will induce Olivia to consume less when she is young.
c. After the interest rate falls, the income effect will induce Olivia to consume more when she is young.
d A change in interest rates affects the substitution effect but not the income effect.
48. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays
an annual interest rate of 25%, and you may borrow money at that interest rate. If you save all your money, how much money
will you have one year from today?
a. $100
b $125
c. $200
d $225
49. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays
an annual interest rate of 25%, and you may borrow money at that interest rate. Suppose that you borrow $60 and spend $160
today. After you repay your loan one year from today, how much money will you have available for consumption one year from
today?
a. $0
b $25
c. $50
d $75
50. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays
an annual interest rate of 25%, and you may borrow money at that interest rate. Consider the budget constraint between
“spending today” on the horizontal axis and “spending a year from today” on the vertical axis. What is the slope of this budget
constraint?
a. -0.75
b -1.00
c. -1.25
d -2.25
62. Suppose Caroline is indifferent between tea and coffee as long as she consumes an equivalent amount of caffeine.
Suppose that coffee has twice as much caffeine as tea. Which graph would illustrate a representative indifference curve?
a.

b.

c.

d.
 CHAPTER 14
29. Suppose a firm is considering producing zero units of output. We call this exiting an industry in the short run and
shutting down in the long run.ANS: F4. Suppose that firms in each of the two markets listed below were to increase
their prices by 20 percent. Which pair represents the example where customers would decrease their quantity purchased
dramatically in one market and only slightly in the other market due to differences in market structure?
a. corn and soybeans
b. gasoline and restaurants
c. water and cable television
d. spiral notebooks and college textbooks
21. Suppose a firm in a competitive market reduces its output by 20 percent. As a result, the price of its output is likely to
a. increase.
b. remain unchanged.
c. decrease by less than 20 percent.
d. decrease by more than 20 percent.
38. Suppose that a firm operating in perfectly competitive market sells 100 units of output. Its total revenues from the sale
are $500. Which of the following statements is correct?
i) Marginal revenue equals $5.
ii) Average revenue equals $5.
iii) Price equals $5.
a. i) only
b. iii) only
c. i) and ii) only
d. i), ii), and iii)
39. Suppose that a firm operating in perfectly competitive market sells 200 units of output at a price of $3 each. Which of
the following statements is correct?
i) Marginal revenue equals $3.
ii) Average revenue equals $600.
iii) Average revenue exceeds marginal revenue, but we don’t know by how much.
 a. i) only
b. iii) only
c. i) and ii) only
d. i), ii), and iii)

40. Suppose that a firm operating in perfectly competitive market sells 300 units of output at a price of $3 each. Which of
the following statements is correct?
i) Marginal revenue equals $3.
ii) Average revenue equals $100.
iii) Total revenue equals $300.

a. i) only
b. iii) only
c. i) and ii) only
d. i), ii), and iii)
41. Suppose that a firm operating in perfectly competitive market sells 400 units of output at a price of $4 each. Which of
the following statements is correct?
i) Marginal revenue equals $4.
ii) Average revenue equals $100.
iii) Total revenue equals $1,600.

a. i) only
b. iii) only
c. i) and iii) only
d. i), ii), and iii)
52. Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by
the typical firm in this market?
a. less than $2.50
b. more than $2.50
c. exactly $2.50
d. The marginal revenue cannot be determined without knowing the actual quantity sold by the typical firm.
ANS: C
49. Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8.00. What
would be the firm's total revenue if it instead produced and sold 4 units of output?
a. $4
b. $8
c. $32
d. $64

50. Suppose a firm in a competitive market received $1,000 in total revenue and had a marginal revenue of $10 for the last
unit produced and sold. What is the average revenue per unit, and how many units were sold?
a. $5 and 50 units
b. $5 and 100 units
c. $10 and 50 units
d. $10 and 100 units
66. Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent
$12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed
$12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent
$1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $4,500 in monthly
revenue.
a. In the short run, Susan should shut down her business, and in the long run she should exit the industry.
b. In the short run, Susan should continue to operate her business, but in the long run she should exit the
industry.
c. In the short run, Susan should continue to operate her business, but in the long run she will probably face
competition from newly entering firms.
d. In the short run, Susan should continue to operate her business, and she is also in long-run equilibrium.
120. Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent
$12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed
$12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent
$1,000 per month on ingredients and other variable costs. Also for the past several months she has taken in $3,500 in monthly
revenue.
a. In the short run, Susan should shut down her business, and in the long run she should exit the industry.
b. In the short run, Susan should continue to operate her business, but in the long run she should exit the
industry.
c. In the short run, Susan should continue to operate her business, but in the long run she will probably face
competition from newly entering firms.
d. In the short run, Susan should continue to operate her business, and she is also in long-run equilibrium.
124. Suppose you value a special watch at $100. You purchase it for $75. On your way home from class one day, you lose
the watch. The store is still selling the same watch, but the price has risen to $85. What should you do?
a. Pay the $85 to buy the watch.
b. Wait to see if the watch goes on sale. If the price drops to $75 or less, buy the watch.
c. Wait to see if the watch goes on sale. If the price drops to $25 or less, buy the watch.
d. Do not buy the watch.
128. Suppose you bought a ticket to a football game for $30 and that you place a $35 value on seeing the game. If you lose
the ticket, then what is the maximum price you should pay for another ticket?
a. $5
b. $30
c. $35
d. $65
79. Suppose a competitive market has a horizontal long-run supply curve and is in long-run equilibrium. If demand
decreases, we can be certain that in the short-run,
a. at least some firms will shut down.
b. price will fall below marginal cost for some firms.
c. price will fall below average total cost for some firms.
d. at least some firms will enter the industry.
87. Suppose a competitive market is comprised of firms that face identical cost curves. The firms experience an increase in
demand that results in positive profits for the firms. Which of the following events are then most likely to occur?
(i) New firms will enter the market.
(ii) In the short run, price will rise; in the long run, price will rise further.
(iii) In the long run, all firms will be producing at their efficient scale.

a. (i) and (ii) only

b. (i) and (iii) only
c. (ii) and (iii) only
d. (i), (ii) and (iii)
28. Suppose a firm is considering producing zero units of output. We call this shutting down in the short run and exiting an
industry in the long run.ANS:T72. Suppose a firm operates in the short run at a price above its average total cost of
production. In the long run the firm should expect
a. new firms to enter the market.
b. the market price to fall.
c. its profits to fall.
d. All of the above are correct.
84. Suppose that a firm is currently maximizing its short-run profit at an output of 50 units. If the current price is $9, the
marginal cost of the 50th unit is $9, and the average total cost of producing 50 units is $4, what is the firm's profit?
a. $0
b. $200
c. $250
d. $450
115. Suppose a profit-maximizing firm in a competitive market produces rubber bands. When the market price for rubber
bands falls below the minimum of its average total cost, but still lies above the minimum of average variable cost, in the short run
the firm will
a. experience losses but will continue to produce rubber bands.
b. shut down.
c. earn both economic and accounting profits.
d. raise the price of its product.
116. Shrimp Galore, a shrimp harvesting business in the Pacific Northwest, has a 30-year loan on its shrimp harvesting boat.
The annual loan payment is $25,000 and the boat has a market (salvage) value that exceeds its outstanding loan balance. Prior to
the 2008 shrimp harvesting season, Shrimp Galore's accountant predicted that at expected market prices for shrimp, Shrimp
Galore would have a net loss of $75,000 dollars after paying all 2008 expenses (including the annual loan payment). In this case,
Shrimp Galore should
a. produce nothing and experience a loss of $25,000.
b. produce nothing and experience a loss of $75,000.
c. continue to operate because expected profits will rise in the future.
d. continue to operate even though it predicts a loss of $75,000.
CHAPTER 15
28 Since natural monopolies have a declining average cost curve, regulating natural monopolies by setting price equal to
marginal cost would
a cause the monopolist to operate at a loss
b result in a less than optimal total surplus
c maximize producer surplus
d result in higher profits for the monopoly
15 Splitting up a monopoly is often justified on the grounds that
a consumers prefer dealing with small firms
b small firms have lower costs
c competition is inherently efficient
d nationalization is a less-preferred option

69 Some prescription drugs sell for more in the United States than they do in other countries Which of the following
statements about this issue is most likely to be true?
a Drug companies are engaging in price discrimination, and this practice certainly reduces global social
welfare
b Global social welfare could be improved if the price in the United States were reduced to the price charged in
other countries
c Global social welfare could be improved if the price in the other countries were increased to the price
charged in the United States
d Drug companies are engaging in price discrimination, but this might improve global social welfare if it gives
more people access to the drugs
29 Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of 100 units,
and charges a price of $50 The socially efficient level of output is 200 units Assume that the demand curve and marginal
revenue curve are the typical downward-sloping straight lines The monopoly deadweight loss equals $4,000
ANS: F
30 Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces an output level of 100 units,
and charges a price of $50 The socially efficient level of output is 200 units Assume that the demand curve and marginal
revenue curve are the typical downward-sloping straight lines The monopoly deadweight loss equals $2,000
ANS: T
31 Suppose a profit-maximizing monopolist faces a constant marginal cost of $20, produces an output level of 100 units,
and charges a price of $50 The socially efficient level of output is 200 units Assume that the demand curve and marginal
revenue curve are the typical downward-sloping straight lines The monopoly deadweight loss equals $1,500
ANS: T
45 Some companies merge in order to lower costs through efficient joint production
ANS: T
45 Suppose that a monopolist produces good A The profit-maximizing quantity is 40 units, the profit-maximizing price is
$160, and the marginal cost of the 40th unit is $120 If good A were produced in a perfectly competitive market, the equilibrium
quantity would be 50, and the equilibrium price would be $150 What is the value of the deadweight loss created by the
monopolist?
a $40
b $100
c $200
d $400

125 Suppose when a monopolist produces 50 units its average revenue is $8 per unit, its marginal revenue is $4 per unit, its
marginal cost is $4 per unit, and its average total cost is $3 per unit What can we conclude about this monopolist?
a The monopolist is currently maximizing profits, and its total profits are $200
b The monopolist is currently maximizing profits, and its total profits are $250
c The monopolist is not currently maximizing its profits; it should produce more units and charge a lower price
to maximize profit
d The monopolist is not currently maximizing its profits; it should produce fewer units and charger a higher
price to maximize profit
19 Sizable economic profits can persist over time under monopoly if the monopolist
a produces that output where average total cost is at a maximum
b is protected by barriers to entry
c operates as a price taker rather than a price maker
d realizes revenues that exceed variable costs
7 Suppose most people regard emeralds, rubies, and sapphires as close substitutes for diamonds Then DeBeers, a large
diamond company, has
a less incentive to advertise than it would otherwise have
b less market power than it would otherwise have
c more control over the price of diamonds than it would otherwise have
d higher profits than it would otherwise have
126 Suppose when a monopolist produces 75 units its average revenue is $10 per unit, its marginal revenue is $5 per unit,
its marginal cost is $6 per unit, and its average total cost is $5 per unit What can we conclude about this monopolist?
a The monopolist is currently maximizing profits, and its total profits are $375
b The monopolist is currently maximizing profits, and its total profits are $300
c The monopolist is not currently maximizing profits; it should produce more units and charge a lower price to
maximize profits
d The monopolist is not currently maximizing profits; it should produce fewer units and charge a higher price
to maximize profits
18 Selling a good at a price determined by the intersection of the demand curve and the marginal cost curve is consistent
with the
(i) socially-optimal level of output
(ii) market solution for profit-maximizing competitive firms
(iii) market solution for a profit-maximizing monopoly

a (i) and (ii) only

b (ii) and (iii) only
c (i) and (iii) only
d (i), (ii), and (iii)
6 Suppose a monopolist chooses the price and production level that maximizes its profit From that point, to increase
society’s economic welfare, output would need to be increased as long as
a average revenue exceeds marginal cost
b average revenue exceeds average total cost
c marginal revenue exceeds marginal cost
d marginal revenue exceeds average total cost