Capters 17, 18 & 21 Review a long-run equilibrium, a firm in a monopolistically competitive market...

Capters 17, 18 & 21 Review

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

____ 1. In monopolistically competitive markets, economic losses

a. suggest that some existing firms will exit the market.

b. suggest that new firms will enter the market.

c. are minimized through government-imposed barriers to entry.

d. are never possible.

____ 2. As new firms enter a monopolistically competitive market, profits of existing firms

a. rise and product diversity in the market increases.

b. rise and product diversity in the market decreases.

c. decline and product diversity in the market increases.

d. decline and product diversity in the market decreases.

____ 3. When a profit-maximizing firm in a monopolistically competitive market is producing the long-run

equilibrium quantity,

a. its average revenue will equal its marginal cost.

b. its marginal revenue will exceed its marginal cost.

c. it will be earning positive economic profits.

d. its demand curve will be tangent to its average-total-cost curve.

____ 4. In a long-run equilibrium, a firm in a monopolistically competitive market operates

a. where marginal revenue is zero.

b. where marginal revenue is negative.

c. on the rising portion of its average total cost curve.

d. on the declining portion of its average total cost curve.

____ 5. The deadweight loss that is associated with a monopolistically competitive market is a result of

a. price falling short of marginal cost in order to increase market share.

b. price exceeding marginal cost.

c. the firm operating in a regulated industry.

d. excessive advertising costs.

____ 6. If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,

a. firms would most likely experience economic losses.

b. firms would also operate at their efficient scale.

c. new firms would likely to enter the market.

d. the most efficient firms would not likely to be affected.

____ 7. Before a new firm enters a monopolistically competitive market with a new product, it considers

a. the profit opportunities.

b. the business-stealing externality.

c. the product-variety externality.

d. Both b and c are correct.

Scenario 17-1

Vacation Inns of America (VIA) has recently announced intentions of building a new hotel/resort complex in

Myrtle Beach, South Carolina. Assume that the hotel/resort market in Myrtle Beach is characterized by

monopolistic competition.

____ 8. Refer to Scenario 17-1. Existing hotels, motels, and lodging facilities in Myrtle Beach are likely to

experience what kind of externality as a result of the new VIA hotel/resort?

a. Product-variety

b. Business-stealing

c. Competitive

d. Advertising

____ 9. To maximize its profit, a monopolistically competitive firm

a. takes the price as given and chooses its quantity, just as a competitive firm does.

b. takes the price as given and chooses its quantity, just as a colluding oligopolist does.

c. chooses its quantity and price, just as a competitive firm does.

d. chooses its quantity and price, just as a monopoly does.

____ 10. For a monopolistically competitive firm,

a. marginal revenue and price are the same.

b. average revenue and price are the same.

c. at the profit-maximizing quantity of output, price equals marginal cost.

d. at the profit-maximizing quantity of output, marginal revenue exceeds price.

____ 11. For a monopolistically competitive firm, at the profit-maximizing quantity of output,

a. price exceeds marginal cost.

b. marginal revenue exceeds marginal cost.

c. marginal cost exceeds average revenue.

d. price equals marginal revenue.

____ 12. An important difference between the situation faced by a profit-maximizing monopolistically competitive

firm in the short run and the situation faced by that same firm in the long run is that in the short run,

a. price may exceed marginal revenue, but in the long run, price equals marginal revenue.

b. price may exceed marginal cost, but in the long run, price equals marginal cost.

c. price may exceed average total cost, but in the long run, price equals average total cost.

d. there are many firms in the market, but in the long run, there are only a few firms in the

market.

____ 13. Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the

transition from this initial situation to a long-run equilibrium,

a. the number of firms in the market decreases.

b. each existing firm experiences a decrease in demand for its product.

c. each existing firm experiences a rightward shift of its marginal revenue curve.

d. each existing firm experiences an upward shift in its average total cost curve.

____ 14. When a monopolistically competitive firm is in long-run equilibrium,

a. marginal revenue is equal to marginal cost.

b. marginal revenue is equal to average total cost.

c. marginal revenue is equal to price.

d. price is equal to marginal cost.

____ 15. A monopolistically competitive firm has the following cost structure:

Output 1 2 3 4 5 6 7

Total Cost($) 30 32 36 42 50 63 77

The firm faces the following demand curve:

Price ($) 20 18 15 12 9 7 4

Quantity 1 2 3 4 5 6 7

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

a. 2 units.

b. 3 units.

c. 4 units.

d. 5 units.

Table 17-1

Quantity Price Marginal Cost Average Total Cost

0 10 -- --

1 9 3 14

2 8 6 10

3 7 9 9

4 6 12 10

5 5 15 12

6 4 18 14

7 3 21 17

8 2 24 21

9 1 27 25

10 0 30 29

____ 16. Refer to Table 17-1. This table shows the demand schedule, marginal cost, and average total cost for a

monopolistically competitive firm. How much profit will this firm earn when it chooses its output to

maximize profit?

a. A $4 loss.

b. A $2 loss.

c. A $6 profit.

d. A $16 profit.

Table 17-2

Quantity Price Marginal

Cost

Average

Total Cost

0 20 -- --

1 16 2 21.00

2 12 4 12.00

3 8 6 9.67

4 4 8 9.00

5 0 10 9.00

____ 17. Refer to Table 17-2. Which of the following statements regarding this monopolistically competitive firm is

true?

a. New firms will enter this market in the long run since firm profits are greater than zero.

b. Firms will leave this market in the long run since firm profits are less than zero.

c. This firm is currently in long-run equilibrium.

d. This firm is currently in long-run equilibrium, and the firm is producing its efficient scale

of output.

____ 18. A monopolistically competitive firm is currently producing 10 units of output. At this level of output the firm

is charging a price equal to $10, has marginal revenue equal to $6, has marginal cost equal to $6, and has

average total cost equal to $12. From this information we can infer that

a. the firm is currently maximizing its profit.

b. the profits of the firm are negative.

c. firms are likely to leave this market in the long run.

d. All of the above

____ 19. Monopolistically competitive firms have excess capacity. To maximize profits, firms will

a. increase their output to lower their average total cost of production and eliminate the

excess capacity.

b. produce where price equals marginal cost to eliminate the excess capacity.

c. produce where average revenue equals marginal cost to eliminate the excess capacity.

d. maintain the excess capacity.

____ 20. In which of the following market structures do firms produce the welfare-maximizing level of output?

a. Perfect competition

b. Monopolistic competition

c. Monopoly

d. Both a and b

Table 17-3

Traci’s Hairstyling is one salon among many in the market for hairstyling. The following table presents cost

and revenue data for Traci’s Hairstyling.

COSTS REVENUES Quantity

Produced

Total

Cost

Marginal

Cost

Quantity

Demanded

Price

Total

Revenue

Marginal

Revenue

0 $10 -- 0 $50 --

1 $15 1 $45

2 $21 2 $40

3 $28 3 $35

4 $36 4 $30

5 $45 5 $25

6 $55 6 $20

7 $66 7 $15

8 $78 8 $10

____ 21. Refer to Table 17-3. What is the profit-maximizing output for Traci’s Hairstyling?

a. 3 hair treatments

b. 4 hair treatments

c. 5 hair treatments

d. 6 hair treatments

____ 22. Refer to Table 17-3. If the government forced Traci’s to produce at the efficient scale of output, what is the

maximum profit Traci’s could earn?

a. $77

b. $80

c. $84

d. $96

____ 23. When a monopolistically competitive firm raises its price,

a. quantity demanded falls to zero.

b. quantity demanded declines, but not to zero.

c. the market supply curve shifts outward.

d. quantity demanded remains constant.

____ 24. When firms sell highly differentiated consumer goods, it is likely that a significant cost to the firms will be

a. associated with advertising.

b. associated with the product-variety externality.

c. associated with intermediate materials.

d. associated with taxes and regulation.

____ 25. Advertising that uses celebrity endorsements is most likely intended to

a. increase elasticity of demand for the advertised product.

b. reduce the ability of markets to allocate resources efficiently.

c. provide a signal of product quality.

d. be useful only for psychological effects.

____ 26. Advertisements that appear to convey no information at all

a. are usually associated with "infomercials."

b. are mostly useless to consumers, but valuable to firms.

c. are mostly useless to firms, but valuable to consumers for their entertainment quality

alone.

d. may convey information to consumers by providing them with a signal that firms are

willing to spend significant amounts of money to advertise.

____ 27. A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. This is an example of a case

in which

a. brand name identity increases the effectiveness of markets.

b. brand name identity can be detrimental to the profitability of a firm.

c. advertising is ineffective in salvaging perceptions of product quality.

d. advertising cannot be used to establish brand loyalty.

____ 28. Evidence suggests that, in markets with differentiated products but little advertising,

a. consumers are not confused by conflicting signals.

b. in general, firms are less profitable.

c. markets are less efficient.

d. consumers make better choices.

____ 29. According to the "signaling theory" of advertising, consumers

a. pay little or no attention to which firms advertise and which firms do not advertise.

b. are often more impressed by a firm's willingness to spend money on advertising than they

are by the content of the advertisement.

c. are often more impressed by low-cost advertisements than they are by high-cost

advertisements.

d. gain little or no information about product quality from advertisements.

____ 30. Which of the following statements is false?

a. The typical monopolistically competitive firm could reduce its average total cost if it

produced more output.

b. Monopolistically competitive firms advertise in order to increase the elasticity of the

demand curve they face.

c. Expensive advertising might help consumers if it is a signal that the product is good.

d. Brand names acquired at great cost might help consumers by assuring quality.

____ 31. Critics of advertising argue that advertising

a. creates demand for products that people otherwise do not want or need.

b. lowers barriers to entry into an industry because new firms can more easily establish

themselves as competitors.

c. increases competition by providing information about prices.

d. encourages monopolization of markets by raising entry barriers too high.

____ 32. In the United States economy, which of the following factors of production is considered to be the most

important in terms of the magnitude of income earned by that factor of production?

a. land

b. labor

c. profit

d. capital

____ 33. The term "factor market" applies to the market for

a. labor.

b. capital.

c. land.

d. All of the above are correct.

____ 34. The basic tools of supply and demand apply to

a. markets for goods and services and to markets for labor services.

b. markets for goods and services but not to markets for labor services.

c. markets for goods and services but not to markets for factors of production.

d. all markets except those in which demand is derived demand.

____ 35. For a competitive, profit-maximizing firm, the labor demand curve is the same as the

a. marginal cost curve.

b. value of marginal product curve.

c. production function.

d. profit function.

____ 36. Competitive firms decide how much output to sell by producing output until the price of the good equals

a. marginal product.

b. the value of marginal product.

c. marginal cost.

d. marginal profit.

____ 37. Charles owns one of the many bakeries in New York City. Which of the following events will lead to a

decrease in Charles's demand for the services of bakers?

a. Hollywood glamorization of a new movie about a baker leads hundreds of high-school

students in New York City to apply for a job at Dan's.

b. The price of baked goods falls.

c. The local bakers form a union.


____ 38. The term Luddite is used to describe

a. a person who readily adopts the latest technological advances.

b. a person who fears computers.

c. a person who opposes technological advances.

d. any mythical historical figure.

____ 39. Aurora Custom Cabinets produces and sells custom kitchen cabinets. The firm has determined that if it hires

10 workers, it can produce 4 sets of cabinets per day. If it hires 11 workers, it can produce 4.2 sets of cabinets

per day. It sells each set of cabinets for $2,000, and it pays each of its workers $200 per day.

a. For the 11th worker, the value of the marginal product of labor is $500.

b. For the 11th worker, the marginal revenue product is $400.

c. The firm is maximizing its profit.

d. If the firm is employing 11 workers, then its profit would increase if it cut back to 10

workers.

____ 40. Omega Custom Cabinets produces and sells custom bathroom vanities. The firm has determined that if it hires

10 workers, it can produce 20 vanities per week. If it hires 11 workers, it can produce 22 vanities per week. It

sells each vanity for $800, and it pays each of its workers $1,000 per week.

a. For the 11th worker, the marginal profit is $600.

b. For the 11th worker, the marginal revenue product is $2,000.

c. The firm is maximizing its profit.

d. If the firm is employing 11 workers, then its profit would increase if it cut back to 10

workers.

____ 41. The following table shows the number of calculators that can be assembled per week by various numbers of

workers. If the price per calculator in a perfectly competitive product market is $20, how many workers

would the firm employ if the weekly wage rate is $1000?

Quantity of Number of Calculators

Labor Per Week

0 0

1 60

2 160

3 240

4 280

5 300

a. 1

b. 2

c. 3

d. 4

____ 42. The marginal product of labor is

a. the increase in the amount of output from an additional unit of labor.

b. the total amount of output divided by the total units of labor.

c. total revenue minus total cost.

d. also called the marginal profit.

Table 18-1

Quantity of Number of Baseballs

Labor Per Day

0 0

1 100

2 240

3 360

4 440

5 500

____ 43. Refer to Table 18-1. This table describes the number of baseballs a manufacturer can produce per day with

different quantities of labor. Each baseball sells for $5 in a competitive market. What is the total revenue per

day that the firm will earn if it employs five workers?

a. $500.

b. $300.

c. $2200.

d. $2500.

Table 18-2 Consider the following daily production data for Davis Golf Balls, Inc. Davis Golf Balls, Inc. sells golf balls

for 50 cents each and pays the workers a wage of $30 a day.

Labor (number

of workers)

Quantity (golf

balls per day)

Marginal

Product of

Labor (golf

balls per day)

Value of the

Marginal

Product of

Labor

Wage

(per day)

Marginal

Profit

0 0

1 100

2 250

3 375

4 475

5 550

6 600

____ 44. Refer to Table 18-2. Suppose that there is a technological advance that allows Davis Golf Balls, Inc.

employees to produce more golf balls than they could before. Because of this change,

a. the firm’s demand for labor shifts right.

b. the firm’s demand for labor shifts left.

c. the firm’s supply of labor shifts right.

d. the firm’s supply of labor shifts left.

Table 18-3 Number of

Workers

Output

Marginal Product

of Labor

Value of Marginal

Product of Labor

Wage

Marginal

Profit

0 0

1 100 $1,000 $500 $500

2 80 $ 800 $500

3 60 $500 $100

4 280 $ 400 $500

5 20 $500

____ 45. Refer to Table 18-3. What is the market price of the final good?

a. $5

b. $6

c. $8

d. $10

____ 46. Refer to Table 18-3. It is apparent from this table that increasing marginal product

a. occurs only after the first worker is hired.

b. occurs only after the second worker is hired.

c. occurs only after the third worker is hired.

d. never occurs.

____ 47. Refer to Table 18-3. What is the marginal product of the fourth worker?

a. 30

b. 40

c. 100

d. 400

____ 48. Refer to Table 18-3. To maximize its profit, how many workers will the firm hire?

a. 2

b. 3

c. 4

d. 5

____ 49. Refer to Table 18-3. To maximize its profit, the firm will hire workers as long as the value of the marginal

product of labor equals or exceeds

a. $100.

b. $200.

c. $400.

d. $500.

____ 50. Dave is the owner of Dave's Pizza Palace. Dave is a profit-maximizing owner whose firm operates in a

competitive market. An additional worker costs Dave $200 and has a marginal productivity of 40 pizzas.

Assuming no other variable costs, what is the marginal cost of a pizza?

a. $200

b. $8

c. $5

d. There is insufficient information available to answer this question.

Table 18-5

Labor Output Marginal Product

of Labor

Value of Marginal

Product of Labor

Wage Marginal

Profit

0 0 --- --- --- ---

1 300 300 $600 $300 $300

2 500 200 AA $300 $100

3 600 100 $200 $300 BB

4 650 CC DD $300 -$200

____ 51. Refer to Table 18-5. What is the value for the cell labeled BB?

a. $300

b. $200

c. $100

d. -$100

____ 52. A profit-maximizing, competitive firm for which the marginal product of labor is diminishing also

experiences

a. a perfectly inelastic supply of labor.

b. a perfectly elastic supply of labor.

c. a downward-sloping demand for labor.

d. an upward-sloping demand for labor.

____ 53. Typically, as a firm hires additional workers, the marginal product of labor

a. and the value of the marginal product of labor both decrease.

b. stays constant and the value of the marginal product of labor decreases.

c. decreases and the value of the marginal product of labor stays constant.

d. decreases and the value of the marginal product of labor increases.

____ 54. If the wage exceeds the value of the marginal product of labor, then hiring another worker

a. decreases the firm's total revenue.

b. increases the firm's profit.

c. increases the firm's total cost.


____ 55. A worker's contribution to a firm's revenue is measured directly by the worker's

a. marginal product.

b. value of marginal product.

c. marginal product multiplied by the worker’s wage.

d. value of marginal product multiplied by the output price.

____ 56. Competitive firms that maximize profit will hire workers until the value of the marginal product of labor

a. equals the wage.

b. equals the price of the final good.

c. begins to fall.

d. begins to rise.

____ 57. What happens to the labor supply curves in both countries when Mexican workers leave Mexico and move to

the United States?

a. Labor supply decreases in Mexico and decreases in the United States.

b. Labor supply increases in the United States and increases in Mexico.

c. Labor supply increases in the United States and decreases in Mexico.

d. Labor supply increases in Mexico and decreases in United States.

____ 58. Consider the labor market for computer programmers, which is in equilibrium. Because of the dot.com boom

in the late 1990s, a lot of workers went to school to learn how to write computer code for one of thousands of

new dot.com companies. However, when these computer programming students graduated the dot.com bust

took place. The dot.com bust decreased the value of the marginal product of computer programmers. Holding

all else equal what effect did these two circumstances have on the equilibrium quantity in the labor market for

computer programmers?

a. The equilibrium quantity of labor increased.

b. The equilibrium quantity of labor decreased.

c. The equilibrium quantity of labor did not change.

d. It is not possible to determine what happens to the equilibrium quantity of labor.

Scenario 18-4 Rocchetta Industries manufactures and supplies bottled water in Mexico. As a result of a contamination of

water supplies at many of Mexico's resort communities, the demand for bottled water has increased.

____ 59. Refer to Scenario 18-4. We would expect that, as a result of the contamination, the value of the marginal

product for Rocchetta Industries’ workers would

a. be offset by a decrease in wages.

b. be unaffected by a rise in demand for bottled water.

c. rise.

d. fall.

____ 60. Refer to Scenario 18-4. When the labor market adjusts to its new equilibrium, we would expect the

a. marginal product of labor to be higher than it was before the increase in demand for

bottled water.

b. value of the marginal product of labor to be higher than it was before the increase in

demand for bottled water.

c. price of bottled water to be lower than it was before the increase in demand for bottled

water.

d. wages of Rocchetta workers to be lower than they were before the increase in demand for

bottled water.

____ 61. When firms are able to increase the amount of physical capital available to workers, the

a. marginal product of labor will decrease.

b. value of the marginal product of labor will decrease.

c. value of the marginal product of labor will increase.

d. final product price will increase.

Figure 18-3

____ 62. Refer to Figure 18-3. When the relevant labor supply curve is S1 and the labor market is in equilibrium,

a. the wage is W1.

b. the opportunity cost of leisure to workers is W1.

c. the value of the marginal product of labor to firms is W1.


Figure 18-4

____ 63. Refer to Figure 18-4. The shift of the labor demand curve from D1 to D2 could possibly be explained by

a. a change in workers' attitudes toward the work-leisure tradeoff.

b. decreases in wages in other labor markets.

c. an increase in the price of firms' output.


____ 64. Both theory and history point to a close relationship between increases in

a. labor demand and increases in labor supply.

b. labor demand and decreases in real wages.

c. the productivity of labor and increases in real wages.

d. interest rates and decreases in real wages.

____ 65. For a computer software firm, capital could be thought of as

(i) the firm's computer programmers.

(ii) the wages the firm pays to its computer programmers.

(iii) computer equipment.

a. (i) only

b. (ii) only

c. (iii) only

d. (i) and (iii)

____ 66. Rent, interest, and profit are all forms of income paid to the owners of

a. aggregate stock.

b. aggregate demand.

c. firms and not-for-profit organizations.

d. land and capital.

____ 67. Suppose the government designates certain areas within a community to be "wetlands," making it illegal to

build on the land. What happens to land not classified as "wetlands" within the community?

(i) The price of non-wetland land will rise.

(ii) The marginal product of non-wetland land will fall.

(iii) The marginal product of non-wetland land will rise.

a. (i) and (ii)

b. (ii) and (iii)

c. (i) and (iii)

d. (ii) only

____ 68. Suppose that a rare virus, transmitted by mosquitoes, infects all the people who live in Minnesota. The virus

is fatal to all blondes, but everyone else is unaffected. Assuming that land and labor are complements in a

farming production function, what would happen to the wages earned by workers and the rents earned by

landowners?

a. Both wages and rents would increase.

b. Both wages and rents would decrease.

c. Wages would increase, and rents would decrease.

d. Wages would decrease, and rents would increase.

____ 69. If the relative price of a concert ticket is 3 times the price of a meal at a good restaurant, then the opportunity

cost of a concert ticket can be measured by the

a. slope of the budget constraint.

b. slope of an indifference curve.

c. marginal rate of substitution.

d. income effect.

____ 70. Assume that a college student spends her income on mac-n-cheese and CDs. The price of one box of

mac-n-cheese is $1.00, and the price of one CD is $12.00. If she has $100 of income, she could choose to

consume

a. 15 boxes of mac-n-cheese and 6 CDs.

b. 20 boxes of mac-n-cheese and 7 CDs.

c. 10 boxes of mac-n-cheese and 8 CDs.

d. 30 boxes of mac-n-cheese and 6 CDs.

Figure 21-1

C

A

B

D

E

CDs

Books

____ 71. Refer to Figure 21-1. All of the points identified in the figure represent possible consumption options with

the exception of

a. A

b. E

c. A and E

d. None. All points are possible consumption options.

____ 72. Suppose a consumer spends her income on two goods: music CDs and DVDs. If 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

____ 73. A consumer is currently spending all of her available income on two goods: music CDs and DVDs. At her

current consumption bundle she is spending twice as much on CDs as she is on DVDs. If the consumer has

$120 of income and is consuming 10 CDs and 2 DVDs, what is the price of a CD?

a. $4

b. $8

c. $12

d. $20

____ 74. Budget constraints exist for consumers because

a. their utility from consuming goods eventually reaches a maximum level.

b. even with unlimited incomes they have to pay for each good they consume.

c. they have to pay for goods and they have limited incomes.

d. prices and incomes are inversely related.

____ 75. If two bundles of goods give a consumer the same satisfaction, the consumer must be

a. on her budget constraint.

b. in a position of equilibrium.

c. indifferent between the bundles.

d. Both a and c are correct.

____ 76. A consumer's preferences provide a

a. ranking of the set of bundles that happen to fall on indifference curves.

b. relative ranking of bundles that provide more of all goods.

c. framework for evaluating market equilibriums.

d. complete ranking of all possible consumption bundles.

____ 77. Which of the following is a property of indifference curves?

a. Indifference curves cross to explain higher preferences.

b. Indifference curves have positive slopes.

c. Indifference curves are downward sloping and always linear.

d. Indifference curves are bowed in toward the origin.

____ 78. Indifference curves that cross would suggest that

a. the consumer does not prefer more to less.

b. the consumer is likely to prefer a redistribution of income from rich to poor.

c. different individuals have different preferences for the same goods.

d. the marginal rate of substitution is the same for both indifference curves.

____ 79. When two goods are perfect substitutes, the marginal rate of substitution

a. is constant along the indifference curve.

b. decreases as the scarcity of one good increases.

c. increases as the scarcity of one good increases.

d. changes to reflect the consumer’s changing preferences for the goods.

____ 80. A consumer has preferences over two goods: books and movies. Two bundles, which lie on the same

indifference curve for this consumer, are shown in the table below.

Bundle Books Movies

A 2 3

B 3 2

Which of the following bundles could not lie on the same indifference curve with A and B and satisfy the four

properties of indifference curves?

a. One movie and five books

b. Three movies and three books

c. Five movies and one book

d. One movie and seven books

____ 81. A consumer has preferences over two goods: books and movies. Three bundles, which all lie on the same

indifference curve for this consumer, are shown in the table below.

Bundle Books Movies

A 2 4

B 4 2

C 3 3

Assuming that these goods are neither perfect substitutes nor perfect complements for this consumer, which

of the following properties of indifference curves would this consumer's preferences violate?

a. Indifference curves are downward sloping.

b. Indifference curves do not cross.

c. Indifference curves are bowed inward.

d. These bundles do not violate any of the properties of indifference curves.

____ 82. Indifference curves tend to be bowed inward because of diminishing

a. marginal rates of substitution.

b. demand for the good as prices rise.

c. income.

d. Both a and b are correct.

____ 83. The marginal rate of substitution between two goods always equals the

a. marginal utility of one divided by the marginal utility of the other.

b. marginal utility of one times the marginal utility of the other.

c. price of one good divided by the price of the other.

d. Both a and c are correct.

____ 84. A fall in the price of DVD players leads consumers to buy more DVD players. From this information we can

conclude that DVD players

a. are normal goods.

b. are inferior goods.

c. are Giffen goods.

d. None of the above is correct.

____ 85. The consumer's optimal choice is the one in which the marginal utility per dollar spent on good X

a. is equal to the marginal utility per dollar saved on good X.

b. is greater than the marginal utility per dollar spent on good Y.

c. is equal to the marginal utility per dollar spent on good Y.

d. is less than the marginal utility per dollar spent on good Y.

____ 86. An increase in income will cause a shift in the budget constraint

a. outward.

b. towards the good most consumed.

c. towards the good least consumed.

d. inward.

____ 87. A decrease in income will cause a shift in the budget constraint

a. outward.

b. towards the good most consumed.

c. towards the good least consumed.

d. inward.

Figure 21-7

____ 88. Refer to Figure 21-7. Assume that the consumer depicted in the figure has an income of $20. The price of

Skittles is $2 and the price of M&M's is $4. This consumer will choose a consumption bundle where the

marginal rate of substitution is

a. 2.

b. 2/3.

c. 1/2.

d. 1/3.

____ 89. Assume that a college student purchases only coffee and Snickers. If coffee is an inferior good and Snickers is

a normal good, then the income effect associated with an increase in the price of a Snickers will result in

a. a decrease in the consumption of Snickers and a decrease in the consumption of coffee.

b. a decrease in the consumption of Snickers and an increase in the consumption of coffee.

c. an increase in the consumption of Snickers and an increase in the consumption of coffee.

d. an increase in the consumption of Snickers and a decrease in the consumption of coffee.

Figure 21-8

____ 90. Refer to Figure 21-8. If the consumer was initially at point A in the figure, a movement from point B to point

C as a result of a decrease in the price of potato chips represents the

a. substitution effect.

b. income effect.

c. budget effect.

d. price effect.

____ 91. A way to describe the consumer's optimum other than "the marginal rate of substitution for two goods is equal

to their relative price ratio", is

a. MUx/MUy = Py/Px.

b. MUx/Py = MUy/Px.

c. MUx/Px = MUy/Py.

d. MUy/MUx = Px/Py.

____ 92. The following diagram shows two budget lines: A and B.

Which of the following could explain the change in the budget line from A to B?

a. A decrease in the price of x.

b. An increase in the price of y.

c. A decrease in the price of y.

d. More than one of the above could explain this change.

____ 93. Which of the following statements best describes the substitution effect?

a. The change in consumption resulting from a change in the consumer's income holding the

prices of the goods constant.

b. The change in consumption resulting from a change in the consumer's income holding the

consumer's level of satisfaction constant.

c. The change in consumption resulting from a change in the price of one good holding the

consumer's level of satisfaction constant.

d. The change in consumption resulting from a change in the price of one good allowing the

consumer's level of satisfaction to change.

____ 94. Suppose that for Edwin, DVDs and trips to the movie theater are perfect substitutes. Currently, Edwin is

spending all of his 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 Edwin consumes.

____ 95. The change in consumption that results when a price change moves the consumer along a given indifference

curve to a point with a new marginal rate of substitution is called

a. the income effect.

b. the substitution effect.

c. the Giffen good effect.

d. the inferior good effect.

____ 96. In the work-leisure model, suppose consumption and leisure are both normal goods. The income effect of a

wage increase results in the worker choosing to

a. work less than before.

b. work more than before.

c. possibly work more or less than before.

d. work more than before with a higher level of consumption.

Scenario 21-2

Fred has recently graduated from college with a degree in journalism and economics. He has decided to

pursue a career as a freelance journalist writing for business newspapers and magazines. Fred is typically

awake for 112 hours each week (he sleeps an average of 8 hours each day). For each hour Fred spends

writing, he can earn $75.

____ 97. Refer to Scenario 21-2. If Fred’s wage increases to $90 per hour of writing, which of the following points

would fall on his budget constraint?

a. 75 hours of leisure, $2,775 of consumption

b. 80 hours of leisure, $2,400 of consumption

c. 85 hours of leisure, $2,430 of consumption

d. 90 hours of leisure, $1,650 of consumption

____ 98. If leisure were an inferior good, then labor supply curves

a. would all be negatively sloped.

b. would all be positively sloped.

c. would all be vertical.

d. could still be positively or negatively sloped.

____ 99. A consumer has preferences over consumption and leisure. When the wage decreases, the consumer chooses

to consume less leisure. For this consumer the labor supply curve will

a. slope upward.

b. slope backward.

c. be horizontal.

d. be vertical.

____ 100. If a good is a Giffen good, then

a. the supply curve slopes down.

b. the demand curve slopes up.

c. the demand curve is horizontal.

d. there is no optimal level of consumption for the consumer.

Short Answer

101. Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm must operate at

excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.

102. In a small college town, four microbreweries have opened in the last two years. Demonstrate the effect of

these new market entrants on demand for existing firms (microbreweries) that already served this market.

Assume that the local community now places a moratorium on new liquor licenses for microbreweries. How

will this moratorium affect the long-run profitability of incumbent firms?

103. List five goods that are likely sold in a monopolistically competitive market.

104. Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce the

effectiveness of markets and decrease the social welfare of society.

105. Evaluate the following statement: "Advertisements that use celebrity endorsements are devoid of any value

and do not enhance the efficient functioning of markets."

106. In the 1980s, the dangerous Ebola virus entered the United States through contaminated monkeys that were

imported for use in medical experiments. Suppose this virus had not been contained but had spread to the

general population. Assume that the virus is lethal in half of the people who are exposed to it. Describe the

resulting effect on labor productivity.

107. List and briefly explain each of the four properties of indifference curves.

108. Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and

axes.

109. Assume that a person consumes two goods, Coke and Snickers. Use a graph to demonstrate how the

consumer adjusts his/her optimal consumption bundle when the price of Coke decreases. Carefully label all

curves and axes. What will happen to consumption if Coke is a normal good? What will happen to

consumption if Coke is an inferior good? (Remember to explain the possible change when the income effect

dominates and when the substitution effect dominates.)

110. Using the graph shown, construct a demand curve for M&M's given an income of $10.

111. Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that

would result from a change in the price of a normal good.

112. Janet knows that she will ultimately face retirement. Assume that Janet will experience two periods in her life,

one in which she works and earns income, and one in which she is retired and earns no income. Janet can earn

$250,000 during her working period and nothing in her retirement period. She must both save and consume in

her work period and can earn 10 percent interest on her savings.

a. Use a graph to demonstrate Janet's budget constraint.

b. On your graph, show Janet at an optimal level of consumption in the work period equal

to $150,000. What is the implied optimal level of consumption in her retirement period?

c. Now, using your graph from part b above, demonstrate how Janet will be affected by an

increase in the interest rate on savings to 15 percent. Discuss the role of income and

substitution effects in determining whether Janet will increase, or decrease her savings in

the work period.

Capters 17, 18 & 21 Review

Answer Section

MULTIPLE CHOICE

1. ANS: A DIF: 1 REF: 17-1 TOP: Long-run equilibrium

MSC: Interpretive

2. ANS: C DIF: 2 REF: 17-1 TOP: Long-run equilibrium

MSC: Analytical

3. ANS: D DIF: 2 REF: 17-1 TOP: Long-run equilibrium

MSC: Interpretive

4. ANS: D DIF: 2 REF: 17-1 TOP: Long-run equilibrium

MSC: Interpretive

5. ANS: B DIF: 2 REF: 17-1 TOP: Welfare

MSC: Interpretive

6. ANS: A DIF: 2 REF: 17-1 TOP: Regulation

MSC: Interpretive

7. ANS: A DIF: 2 REF: 17-1 TOP: Welfare

MSC: Interpretive

8. ANS: B DIF: 2 REF: 17-1 TOP: Externalities

MSC: Applicative

9. ANS: D DIF: 2 REF: 17-1 TOP: Markets

MSC: Interpretive

10. ANS: B DIF: 2 REF: 17-1 TOP: Average revenue

MSC: Interpretive

11. ANS: A DIF: 2 REF: 17-1 TOP: Profit maximization

MSC: Interpretive

12. ANS: C DIF: 2 REF: 17-1 TOP: Monopolistic competition

MSC: Interpretive

13. ANS: B DIF: 2 REF: 17-1 TOP: Long-run equilibrium

MSC: Interpretive

14. ANS: A DIF: 2 REF: 17-1 TOP: Long-run equilibrium

MSC: Interpretive

15. ANS: B DIF: 3 REF: 17-1 TOP: Profit maximization

MSC: Applicative

16. ANS: A DIF: 2 REF: 17-1 TOP: Profit

MSC: Applicative

17. ANS: C DIF: 2 REF: 17-1 TOP: Long-run equilibrium

MSC: Applicative

18. ANS: D DIF: 2 REF: 17-1 TOP: Profit

MSC: Analytical

19. ANS: D DIF: 2 REF: 17-1 TOP: Profit

MSC: Interpretive

20. ANS: A DIF: 2 REF: 17-1 TOP: Welfare

MSC: Analytical

21. ANS: B DIF: 2 REF: 17-1 TOP: Profit maximization

MSC: Applicative

22. ANS: C DIF: 2 REF: 17-1 TOP: Profit

MSC: Applicative

23. ANS: B DIF: 2 REF: 17-1 TOP: Monopolistic competition

MSC: Analytical

24. ANS: A DIF: 2 REF: 17-2 TOP: Advertising

MSC: Interpretive

25. ANS: C DIF: 2 REF: 17-2 TOP: Advertising

MSC: Interpretive

26. ANS: D DIF: 2 REF: 17-2 TOP: Advertising

MSC: Interpretive

27. ANS: B DIF: 1 REF: 17-2 TOP: Advertising

MSC: Analytical

28. ANS: C DIF: 2 REF: 17-2 TOP: Advertising

MSC: Interpretive


MSC: Interpretive


MSC: Interpretive

31. ANS: A DIF: 2 REF: 17-2 TOP: Advertising

MSC: Interpretive

32. ANS: B DIF: 1 REF: 18-0 TOP: Factor markets

MSC: Definitional

33. ANS: D DIF: 1 REF: 18-1 TOP: Factor markets

MSC: Definitional

34. ANS: A DIF: 2 REF: 18-1 TOP: Factors of production

MSC: Interpretive

35. ANS: B DIF: 2 REF: 18-1 TOP: Labor demand

MSC: Analytical

36. ANS: C DIF: 2 REF: 18-1 TOP: Labor demand

MSC: Applicative


MSC: Applicative

38. ANS: C DIF: 1 REF: 18-1 TOP: Labor demand

MSC: Definitional


MSC: Analytical

40. ANS: A DIF: 3 REF: 18-1 TOP: Production function

MSC: Analytical

41. ANS: C DIF: 3 REF: 18-1

TOP: Marginal product of labor, Value of the marginal product

MSC: Analytical

42. ANS: A DIF: 1 REF: 18-1 TOP: Marginal product of labor

MSC: Definitional

43. ANS: D DIF: 2 REF: 18-1


MSC: Analytical

44. ANS: A DIF: 2 REF: 18-1 TOP: Labor demand

MSC: Analytical

45. ANS: D DIF: 2 REF: 18-1


MSC: Analytical

46. ANS: D DIF: 2 REF: 18-1 TOP: Marginal product of labor

MSC: Analytical

47. ANS: B DIF: 2 REF: 18-1 TOP: Marginal product of labor

MSC: Analytical

48. ANS: B DIF: 2 REF: 18-1


MSC: Analytical

49. ANS: D DIF: 2 REF: 18-1 TOP: Value of the marginal product

MSC: Analytical

50. ANS: C DIF: 3 REF: 18-1


MSC: Analytical

51. ANS: D DIF: 2 REF: 18-1 TOP: Value of the marginal product

MSC: Analytical

52. ANS: C DIF: 2 REF: 18-1

TOP: Diminishing marginal product, Labor demand MSC: Applicative

53. ANS: A DIF: 2 REF: 18-1

TOP: Diminishing marginal product, Value of the marginal product

MSC: Applicative

54. ANS: C DIF: 2 REF: 18-1 TOP: Value of the marginal product

MSC: Analytical

55. ANS: B DIF: 2 REF: 18-1 TOP: Value of the marginal product

MSC: Interpretive

56. ANS: A DIF: 2 REF: 18-1 TOP: Value of the marginal product

MSC: Analytical

57. ANS: C DIF: 1 REF: 18-2 TOP: Labor supply

MSC: Applicative

58. ANS: D DIF: 2 REF: 18-1,18-2,18-3

TOP: Labor-market equilibrium MSC: Analytical

59. ANS: C DIF: 2 REF: 18-3 TOP: Labor-market equilibrium

MSC: Analytical

60. ANS: B DIF: 2 REF: 18-3 TOP: Labor-market equilibrium

MSC: Analytical


MSC: Analytical

62. ANS: D DIF: 2 REF: 18-3 TOP: Labor-market equilibrium

MSC: Analytical


MSC: Analytical


MSC: Interpretive

65. ANS: C DIF: 1 REF: 18-4 TOP: Capital

MSC: Definitional

66. ANS: D DIF: 1 REF: 18-4 TOP: Factor markets

MSC: Definitional

67. ANS: C DIF: 2 REF: 18-4 TOP: Land markets

MSC: Analytical

68. ANS: C DIF: 3 REF: 18-4 TOP: Land markets

MSC: Analytical

69. ANS: A DIF: 2 REF: 21-1 TOP: Budget constraint

MSC: Analytical


MSC: Applicative

71. ANS: B DIF: 2 REF: 21-1 TOP: Budget constraint

MSC: Applicative


MSC: Applicative


MSC: Analytical

74. ANS: C DIF: 2 REF: 21-1 TOP: Budget constraint

MSC: Interpretive

75. ANS: C DIF: 2 REF: 21-2 TOP: Indifference Curve

MSC: Interpretive

76. ANS: D DIF: 1 REF: 21-2 TOP: Indifference Curve

MSC: Definitional

77. ANS: D DIF: 1 REF: 21-2 TOP: Indifference Curve

MSC: Interpretive

78. ANS: A DIF: 2 REF: 21-2 TOP: Indifference Curve

MSC: Analytical


MSC: Interpretive

80. ANS: B DIF: 2 REF: 21-2 TOP: Indifference Curve

MSC: Analytical

81. ANS: C DIF: 3 REF: 21-2 TOP: Indifference Curve

MSC: Analytical


MSC: Interpretive

83. ANS: A DIF: 2 REF: 21-3 TOP: Marginal rate of substitution

MSC: Interpretive

84. ANS: D DIF: 3 REF: 21-3 TOP: Income effect

MSC: Interpretive

85. ANS: C DIF: 1 REF: 21-3 TOP: Consumer choice

MSC: Interpretive


MSC: Interpretive

87. ANS: D DIF: 1 REF: 21-3 TOP: Budget constraint

MSC: Interpretive


MSC: Applicative

89. ANS: B DIF: 2 REF: 21-3 TOP: Income effect

MSC: Analytical

90. ANS: B DIF: 2 REF: 21-3 TOP: Income effect

MSC: Interpretive


MSC: Interpretive

92. ANS: C DIF: 2 REF: 21-3 TOP: Budget constraint

MSC: Analytical

93. ANS: C DIF: 2 REF: 21-3 TOP: Substitution effect

MSC: Definitional

94. ANS: C DIF: 3 REF: 21-3 TOP: Substitution effect

MSC: Analytical

95. ANS: B DIF: 1 REF: 21-3 TOP: Substitution effect

MSC: Definitional

96. ANS: A DIF: 3 REF: 21-4 TOP: Labor supply

MSC: Analytical

97. ANS: C DIF: 2 REF: 21-4 TOP: Labor supply

MSC: Applicative

98. ANS: B DIF: 3 REF: 21-4 TOP: Labor supply

MSC: Analytical

99. ANS: B DIF: 3 REF: 21-4 TOP: Labor supply

MSC: Analytical

100. ANS: B DIF: 1 REF: 21-4 TOP: Giffen Good

MSC: Definitional

SHORT ANSWER

101. ANS:

Competitive firms do not face downward-sloping demand. The graph shows the firm choosing a level of

production in which the intersection of marginal revenue and marginal cost occurs at an output level where

average total cost is decreasing. This profit-maximizing output level is less than the efficient scale (minimum

of average total cost) and therefore the firm is said to be operating with excess capacity.

DIF: 2 REF: 17-1 TOP: Excess capacity

MSC: Analytical

102. ANS:

The arrival of a new entrant should be graphically depicted by a leftward shift in the demand curves faced by

all incumbent firms. If firms are able to make economic profits, these will be able to be maintained in the long

run if new entrants are not allowed.

DIF: 2 REF: 17-1 TOP: Long-run equilibrium

MSC: Analytical

103. ANS:

Books, CDs, movies, computer games, and piano lessons are some examples.

DIF: 1 REF: 17-1 TOP: Monopolistic competition

MSC: Interpretive

104. ANS:

Advertising manipulates people's tastes and is psychological rather than informational. As a result, advertising

creates a desire that might not otherwise exist. Advertising may also impede competition by convincing

consumers that products that are identical have significant differences.

DIF: 2 REF: 17-2 TOP: Advertising MSC: Interpretive

105. ANS:

Some people argue that celebrity endorsements are a signal of quality due to the high cost of the

advertisement. If so, then these advertisements relay information about product quality and enhance the

effective functioning of markets.

DIF: 2 REF: 17-2 TOP: Advertising MSC: Interpretive

106. ANS:

There are two possible direct effects: One effect would be that people would be absent from work if they

caught the virus (but did not die) and so marginal productivity would be higher for the remaining workers.

The other effect is that people who caught the virus would die, the labor supply would decrease, and the

remaining workers would have a higher marginal product of labor. While the marginal productivity of the

remaining workers increases, total output would still fall.

DIF: 2 REF: 18-3 TOP: Marginal product of labor

MSC: Analytical

107. ANS:

1: Higher indifference curves are preferred to lower ones, because consumers usually prefer more of

something to less of it. 2: Indifference curves are downward sloping. The slope of an indifference curve

reflects the rate at which the consumer is willing to substitute one good for another. If the quantity of one

good is reduced, the quantity of the other good must increase in order for the consumer to be equally happy.

3: Indifference curves do not cross. If indifference curves did cross, the same point could be on two different

curves, thus contradicting the assumption that consumers prefer more of both goods to less. 4: Indifference

curves are bowed inward. This is because people are more willing to trade away goods that they have in

abundance and less willing to trade away goods of which they have less.

DIF: 1 REF: 21-2 TOP: Indifference Curve

MSC: Interpretive

108. ANS:

Where M=Income

M/Py

M/Px

MRS=Px/Py

x

y

DIF: 1 REF: 21-3 TOP: Consumer choice

MSC: Applicative

109. ANS:

If Coke is a normal good, the consumption of Coke will increase. If Coke is an inferior good and the

substitution effect dominates, the consumption of Coke will increase. If Coke is an inferior good and the

income effect dominates, the consumption of Coke will decrease.

DIF: 2 REF: 21-3 TOP: Consumer choice

MSC: Applicative

110. ANS:

DIF: 2 REF: 21-3 TOP: Demand MSC: Applicative

111. ANS:

DIF: 2 REF: 21-3 TOP: Income Effect, Substitution effect

MSC: Applicative

112. ANS:

a. see graph below

b. see graph below

c. see graph below

Substitution effect: Retirement spending becomes less costly, so she should increase saving.

Income effect: As income increases she should increase consumption in both periods (thus reducing her

saving in the work period.)

DIF: 3 REF: 21-4 TOP: Consumption-saving decision

MSC: Applicative

Capters 17, 18 & 21 Review a long-run equilibrium, a firm in a monopolistically competitive market...

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Transcript of Capters 17, 18 & 21 Review a long-run equilibrium, a firm in a monopolistically competitive market...