Final review

Multiple Choice
Identify the choice that best completes the statement or answers the question.
____

1. Suppose the US and Mexico both produce semiconductors and auto parts and the US has a comparative
advantage in semiconductors while Mexico has a comparative advantage in auto parts. If the US exports
semiconductors to Mexico and imports auto parts from Mexico,
a. both countries, as a whole, will be better off.
b. all individuals in both countries will be better off.
c. both countries, as a whole, will be worse off.
d. all individuals in both countries will be worse off.
Figure 5-5
60

Price

54
48
42
36
30
24
18
12
6

Demand
3

____

12

15

18

21

24

27

30

33

Quantity

2. Refer to Figure 5-5. At a price of $48 per unit, sellers' total revenue equals
a. $150.
b. $200.
c. $288.
d. $364.
Figure 9-1
The figure illustrates the market for wool in Scotland.

Price
75
70
65

Domestic supply

60

55

World
price

50

G
D

45

H
F

40
35

Domestic demand

30
25
20
15
10
5
1

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Quantity

____

3. Refer to Figure 9-1. When trade is allowed,

a. Scotland producers of wool become better off and Scotland consumers of wool become
worse off.
b. Scotland consumers of wool become better off and Scotland producers of wool become
worse off.
c. both Scotland producers and consumers of wool become better off.
d. both Scotland producers and consumers of wool become worse off.

____

4. If revenue from a gasoline tax is used to build and maintain public roads, the gasoline tax may be justified on
the basis of
a. the benefits principle.
b. the ability-to-pay principle.
c. vertical equity.
d. horizontal equity.
Figure 17-4. Two companies, Acme and Bilco, are sellers in the same market. Each company decides
whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent
annual profits for the two companies.

Acme's Decision
High price

Low price

Acme's profit = $5 million

Acme's profit = $7 million

High price
Bilco's profit = $5 million

Bilco's
Decision

Bilco's profit = $2 million

Acme's profit = $2 million

Acme's profit = $3.25 million

Low price
Bilco's profit = $7 million

____

Bilco's profit = $3.25 million

5. Refer to Figure 17-4. If the two companies make their pricing decisions independently, then it is likely that
Bilco will
a. charge a low price only if Acme charges a low price.
b. charge a low price only if Acme charges a high price.
c. charge a low price regardless of whether Acme charges a high price or a low price.
d. None of the above are correct.
Table 3-4
Assume that the farmer and the rancher can switch between producing meat and producing potatoes at a
constant rate.

Farmer
Rancher

Labor Hours Needed

to Make 1 Pound of
Meat
Potatoes
8
2
3
6

Pounds Produced
in 24 Hours
Meat
Potatoes
3
12
8
4

____

6. Refer to Table 3-4. The farmer should specialize in the production of

a. meat and the rancher should specialize in the production of potatoes.
b. potatoes and the rancher should specialize in the production of meat.
c. both goods and the rancher should specialize in the production of neither good.
d. neither good and the rancher should specialize in the production of both goods.

____

7. An increase in supply is represented by a

a. movement downward and to the left along a supply curve.
b. movement upward and to the right along a supply curve.
c. rightward shift of a supply curve.
d. leftward shift of a supply curve.
Figure 6-12

price of gasoline
S2

P3

S1

P2
price ceiling
P1

D
Q3

Q1

quantity of gasoline

____

8. Refer to Figure 6-12. When the price ceiling applies in this market, and the supply curve for gasoline shifts
from S1 to S2, the resulting quantity of gasoline that is bought and sold is
a. less than Q3.
b. Q3.
c. between Q1 and Q3.
d. at least Q1.

____

9. The profit-maximizing rule for a firm in a monopolistically competitive market is to always select the
quantity at which
a. marginal revenue is equal to marginal cost.
b. average total cost is equal to marginal revenue.
c. average total cost is equal to price.
d. average revenue exceeds average total cost.
Figure 16-4

____ 10. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will not encourage either the
entry or exit of firms in a monopolistically competitive industry?
a. panel a
b. panel b
c. panel c
d. panel d
Figure 3-9
Uzbekistans Production Possibilities Frontier
100

nails

Azerbaijans Production Possibilities Frontier

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

10

15

20

25

30

35

40

45

50

bolts

nails

10

15

20

25

30

35

40

45

50

bolts

____ 11. Refer to Figure 3-9. Without trade, Uzbekistan produced and consumed 12 bolts and 36 nails and
Azerbaijan produced and consumed 14 bolts and 24 nails. Then, each country agreed to specialize in the
production of the good in which it has a comparative advantage and trade 16 bolts for 38 nails. As a result,
Uzbekistan gained
a. 2 bolts and 2 nails and Azerbaijan gained 2 bolts and 18 nails.
b. 4 bolts and 2 nails and Azerbaijan gained 2 bolts and 14 nails.
c. 14 bolts and 38 nails and Azerbaijan gained 16 bolts and 42 nails.
d. 16 bolts and 38 nails and Azerbaijan gained 16 bolts and 38 nails.
____ 12. Suppose Jack values an ice cream sundae at $4. Dianne values an ice cream sundae at $6. The pre-tax price
of an ice cream sundae is $2. The government imposes a fat tax of $3 on each ice cream sundae, and the
price rises to $5. The deadweight loss from the tax is
a. $1.
b. $2.
c. $3.
d. $4.
____ 13. A monopolistically competitive firm has the following cost structure:
Output
Total Cost($)

1
30

2
32

3
36

4
42

5
50

6
63

7
77

9
5

7
6

4
7

The firm faces the following demand curve:

Price ($)
Quantity

20
1

18
2

15
3

12
4

To maximize profit (or minimize losses), the firm will produce

a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.
Table 17-4. The information in the table below shows the total demand for high-speed Internet subscriptions
in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed
cost of $200,000 (per year) and that the marginal cost of providing an additional subscription is always $80.
Quantity
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000

Price (per year)

$320
$280
$240
$200
$160
$120
$ 80
$ 40
$0

____ 14. Refer to Table 17-4. Assume there are two high-speed Internet service providers that operate in this market.
If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be
charged for subscriptions, then their agreement will stipulate that
a. each firm will charge a price of $120 and each firm will sell 5,000 subscriptions.
b. each firm will charge a price of $160 and each firm will sell 4,000 subscriptions.
c. each firm will charge a price of $100 and each firm will sell 3,000 subscriptions.
d. each firm will charge a price of $200 and each firm will sell 3,000 subscriptions.
____ 15. In the simple circular-flow diagram, households
a. are the only decision makers.
b. own the factors of production.
c. are buyers of inputs.
d. consume only some of the goods and services that firms produce.
____ 16. Suppose that an MBA degree creates no externality because the benefits of an MBA are internalized by the
student in the form of higher wages. If the government offers subsidies for MBAs, then which of the
following statements is correct?
a. The equilibrium quantity of MBAs will equal the socially optimal quantity of MBAs.
b. The equilibrium quantity of MBAs will be greater than the socially optimal quantity of
MBAs.
c. The equilibrium quantity of MBAs will be less than the socially optimal quantity of
MBAs.
d. There is not enough information to answer the question.
____ 17. A free rider is a person who
a. will only purchase a product on sale.
b. receives the benefit of a good but avoids paying for it.
c. can produce a good at no cost.
d. rides public transit regularly.
____ 18. Wiladee used to work as an office manager, earning $25,000 per year. She gave up that job to start a tailoring
business. In calculating the economic profit of her tailoring business, the $25,000 income that she gave up is
counted as part of the tailoring firm's
a. total revenue.
b. opportunity costs.
c. explicit costs.
d. marginal costs.
____ 19. Pete owns a shoe-shine business. Which of the following costs would be implicit costs?
(i) shoe polish
(ii) rent on the shoe stand
(iii) wages Pete could earn delivering newspapers
(iv) interest that Petes money was earning before he spent his savings to set up the
shoe-shine business
a.
b.
c.
d.

(i) and (ii) only

(iv) only
(iii) and (iv) only
(i), (ii), (iii), and (iv)

____ 20. Suppose that the demand for lava lamps is elastic, and the supply of lava lamps is inelastic. A tax of $2 per
lamp levied on lava lamps will increase the price paid by buyers of lava lamps by

a.
b.
c.
d.

less than $1.

$1.
between $1 and $2.
$2.

____ 21. 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.
____ 22. Abraham drinks Mountain Dew. He can buy as many cans of Mountain Dew as he wishes at a price of $0.55
per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the
third can, and $0.40 for the fourth can. Assume Abraham is rational in deciding how many cans to buy. His
consumer surplus is
a. $0.50.
b. $0.60.
c. $0.70.
d. $1.00.
Table 14-12
Bills Birdhouses
COSTS

REVENUES

Quantity
Produced

Total
Cost

Marginal
Cost

Quantity
Demanded

Price

0
1
2
3
4
5
6
7
8

$0
$50
$102
$157
$217
$285
$365
$462
$582

--

0
1
2
3
4
5
6
7
8

$80
$80
$80
$80
$80
$80
$80
$80
$80

____ 23. Refer to Table 14-12. At what quantity does Bill maximize profits?
a. 3
b. 6
c. 7
d. 8
Table 8-1
Market
A
B

Characteristic
Demand is very elastic.
Demand is very inelastic.

Total
Revenue

Marginal
Revenue

--

C
D

Supply is very elastic.

Supply is very inelastic.

____ 24. Refer to Table 8-1. Suppose the government is considering levying a tax in one or more of the markets
described in the table. Which of the markets will allow the government to minimize the deadweight loss(es)
from the tax?
a. market A only
b. markets A and C only
c. markets B and D only
d. market C only
____ 25. Assume that for good X the supply curve for a good is a typical, upward-sloping straight line, and the demand
curve is a typical downward-sloping straight line. If the good is taxed, and the tax is tripled, the
a. base of the triangle that represents the deadweight loss triples.
b. height of the triangle that represents the deadweight loss triples.
c. deadweight loss of the tax increases by a factor of nine.
d. All of the above are correct.
____ 26. An externality arises when a person engages in an activity that influences the well-being of
a. buyers in the market for that activity and yet neither pays nor receives any compensation
for that effect.
b. sellers in the market for that activity and yet neither pays nor receives any compensation
for that effect.
c. bystanders in the market for that activity and yet neither pays nor receives any
compensation for that effect.
d. Both (a) and (b) are correct.
Figure 10-11

Price
42

Supply
(private cost)

28
24

Social value (private value

and external benefit)

16
10

Demand
(private value)

160

280

Quantity

____ 27. Refer to Figure 10-11. Which of the following statements is correct?

a.
b.
c.
d.

The private value of the 280th unit of output is $10.

The social value of the 280th unit of output is $28.
The external benefit of the 280th unit of output is $18.
All of the above are correct.

Scenario 13-16
A certain firm produces and sells staplers. Last year, it produced 7,000 staplers and sold each stapler for $6. In
producing the 7,000 staplers, it incurred variable costs of $28,000 and a total cost of $45,000.
____ 28. Refer to Scenario 13-16. The firm's fixed cost was
a. $7,000.
b. $17,000.
c. $28,000.
d. $42,000.
Figure 7-1

P
350
300
250
200
150
100
50

Demand
1

____ 29. Refer to Figure 7-1. If the price of the good is $150, then consumer surplus amounts to
a. $150.
b. $200.
c. $250.
d. $300.
____ 30. If the price elasticity of demand for a good is 0.4, then a 10 percent increase in price results in a
a. 0.4 percent decrease in the quantity demanded.
b. 2.5 percent decrease in the quantity demanded.
c. 4 percent decrease in the quantity demanded.
d. 40 percent decrease in the quantity demanded.