eko-

Chapter 1
Ten Principles of Economics
Multiple Choice
1. The word that comes from the Greek word for "one who manages a household" is
a. market.
b. consumer.
c. producer.
d. economy.
ANS: D
DIF: 1
REF: 1-0
TOP: Economy MSC: Definitional
2. The word “economy” comes from the Greek word oikonomos, which means
a. “environment.”
b. “production.”
c. “one who manages a household.”
d. “one who makes decisions.”
ANS: C
DIF: 1
REF: 1-0
TOP: Economy MSC: Definitional
3. Resources are
a. scarce for households but plentiful for economies.
b. plentiful for households but scarce for economies.
c. scarce for households and scarce for economies.
d. plentiful for households and plentiful for economies.
ANS: C
DIF: 1
REF: 1-0
TOP: Resources, Scarcity
MSC: Interpretive
4. Economics deals primarily with the concept of
a. scarcity.
b. poverty.
c. change.
d. power.
ANS: A
DIF: 1
REF: 1-0
TOP: Scarcity
MSC: Definitional
5. Which of the following questions is not answered by the decisions that every society must make?
a. What determines consumer preferences?
b. What goods will be produced?
c. Who will produce the goods?
d. Who will consume the goods?
ANS: A
DIF: 2
REF: 1-0
TOP: Economies MSC: Interpretive
6. The overriding reason as to why households and societies face many decisions is that
a. resources are scarce.
b. goods and services are not scarce.
c. incomes fluctuate with business cycles.
d. people, by nature, tend to disagree.
ANS: A
DIF: 2
REF: 1-0
TOP: Scarcity
MSC: Interpretive
1
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
2  Chapter 1/Ten Principles of Economics
7. The phenomenon of scarcity stems from the fact that
a. most economies’ production methods are not very good.
b. in most economies, wealthy people consume disproportionate quantities of goods and services.
c. governments restricts production of too many goods and services.
d. resources are limited.
ANS: D
DIF: 2
REF: 1-0
TOP: Scarcity
MSC: Interpretive
8. Approximately what percentage of the world's economies experience scarcity?
a. 25%
b. 50%
c. 75%
d. 100%
ANS: D
DIF: 1
REF: 1-0
TOP: Scarcity
MSC: Interpretive
9. When a society cannot produce all the goods and services people wish to have, it is said that the economy is
experiencing
a. scarcity.
b. shortages.
c. inefficiencies.
d. inequities.
ANS: A
DIF: 2
REF: 1-0
TOP: Scarcity
MSC: Interpretive
10. For society, a good is not scarce if
a. at least one individual in society can obtain all he or she wants of the good.
b. firms are producing the good at full capacity.
c. all members of society can have all they want of the good.
d. those who have enough income can buy all they want of the good.
ANS: C
DIF: 1
REF: 1-0
TOP: Scarcity
MSC: Interpretive
11. Which of the following products would be considered scarce?
a. golf clubs
b. Picasso paintings
c. apples
d. All of the above are correct.
ANS: D
DIF: 2
REF: 1-0
TOP: Scarcity
MSC: Interpretive
12. Economics is the study of
a. production methods.
b. how society manages its scarce resources.
c. how households decide who performs which tasks.
d. the interaction of business and government.
ANS: B
DIF: 1
REF: 1-0
TOP: Economies, Scarcity
MSC: Definitional
13. Economics is the study of
a. how society manages its scarce resources.
b. the government's role in society.
c. how a market system functions.
d. how to increase production.
ANS: A
DIF: 1
REF: 1-0
TOP: Economies, Scarcity
MSC: Definitional
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  3
14. In most societies, resources are allocated by
a. a single central planner.
b. a small number of central planners.
c. those firms that use resources to provide goods and services.
d. the combined actions of millions of households and firms.
ANS: D
DIF: 1
REF: 1-0
TOP: Resource allocation
MSC: Interpretive
15. The adage, "There is no such thing as a free lunch," is used to illustrate the principle that
a. goods are scarce.
b. people face tradeoffs.
c. income must be earned.
d. households face many decisions.
ANS: B
DIF: 2
REF: 1-1
TOP: Tradeoffs MSC: Interpretive
16. The adage, "There is no such thing as a free lunch," means
a. even people on welfare have to pay for food.
b. the cost of living is always increasing.
c. to get something we like, we usually have to give up another thing we like.
d. all costs are included in the price of a product.
ANS: C
DIF: 1
REF: 1-1
TOP: Tradeoffs MSC: Definitional
17. Economists use the phrase "There is no such thing as a free lunch," to illustrate the principle that
a. inflation almost always results in higher prices over time.
b. nothing is free in a market economy.
c. making decisions requires trading off one goal against another.
d. if something looks too good to be true, it probably is not worth pursuing.
ANS: C
DIF: 2
REF: 1-1
TOP: Tradeoffs MSC: Interpretive
18. Which of the following statements best represents the principle represented by the adage, "There is no such thing
as a free lunch"?
a. Melissa can attend the concert only if she takes her sister with her.
b. Greg is hungry and homeless.
c. Brian must repair the tire on his bike before he can ride it to class.
d. Kendra must decide between going to Colorado or Cancun for spring break.
ANS: D
DIF: 3
REF: 1-1
TOP: Tradeoffs MSC: Applicative
19. The principle that "people face tradeoffs" applies to
a. individuals.
b. families.
c. societies.
d. All of the above are correct.
ANS: D
DIF: 1
REF: 1-1
TOP: Tradeoffs MSC: Applicative
20. A typical society strives to get the most it can from its scarce resources. At the same time, the society attempts to
distribute the benefits of those resources to the members of the society in a fair manner. In other words, the society
faces a tradeoff between
a. guns and butter.
b. efficiency and equity.
c. inflation and unemployment.
d. work and leisure.
ANS: B
DIF: 1
REF: 1-1
TOP: Efficiency, Equity
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
4  Chapter 1/Ten Principles of Economics
21. Guns and butter are used to represent the classic societal tradeoff between spending on
a. durable and nondurable goods.
b. imports and exports.
c. national defense and consumer goods.
d. law enforcement and agriculture.
ANS: C
DIF: 1
REF: 1-1
TOP: Tradeoffs MSC: Interpretive
22. When society requires that firms reduce pollution, there is
a. a tradeoff because of reduced incomes to the firms' owners and workers.
b. a tradeoff only if some firms are forced to close.
c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements.
d. no tradeoff, since everyone benefits from reduced pollution.
ANS: A
DIF: 3
REF: 1-1
TOP: Tradeoffs MSC: Applicative
23. A tradeoff exists between a clean environment and a higher level of income in that
a. studies show that individuals with higher levels of income actually pollute less than low-income individuals.
b. efforts to reduce pollution typically are not completely successful.
c. laws that reduce pollution raise costs of production and reduce incomes.
d. by employing individuals to clean up pollution, employment and income both rise.
ANS: C
DIF: 2
REF: 1-1
TOP: Tradeoffs MSC: Applicative
24. Which of the following phrases best captures the notion of efficiency?
a. absolute fairness
b. equal distribution
c. minimum waste
d. equitable outcome
ANS: C
DIF: 1
REF: 1-1
TOP: Efficiency MSC: Interpretive
25. Which of the following is true?
a. Efficiency refers to the size of the economic pie; equity refers to how the pie is divided.
b. Government policies usually improve upon both equity and efficiency.
c. As long as the economic pie continually gets larger, no one will have to go hungry.
d. Efficiency and equity can both be achieved if the economic pie is cut into equal pieces.
ANS: A
DIF: 2
REF: 1-1
TOP: Efficiency, Equity
MSC: Interpretive
26. Efficiency means that
a. society is conserving resources in order to save them for the future.
b. society's goods and services are distributed equally among society's members.
c. society's goods and services are distributed fairly, though not necessarily equally, among society's members.
d. society is getting the maximum benefits from its scarce resources.
ANS: D
DIF: 1
REF: 1-1
TOP: Efficiency MSC: Definitional
27. Economists use the word equity to describe a situation in which
a. each member of society has the same income.
b. each member of society has access to abundant quantities of goods and services, regardless of his or her
income.
c. society is getting the maximum benefits from its scarce resources.
d. the benefits of society's resources are distributed fairly among society's members.
ANS: D
DIF: 2
REF: 1-1
TOP: Equity
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  5
28. 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.
ANS: C
DIF: 2
REF: 1-1
TOP: Efficiency, Equity
MSC: Applicative
29. Which of the following words and phrases best captures the notion of equity?
a. minimum waste
b. maximum benefit
c. sameness
d. fairness
ANS: D
DIF: 1
REF: 1-1
TOP: Equity
MSC: Definitional
30. When government policies are enacted,
a. equity can usually be enhanced without an efficiency loss, but efficiency can never be enhanced without an
equity loss.
b. efficiency can usually be enhanced without an equity loss, but equity can never be enhanced without an
efficiency loss.
c. it is always the case that either efficiency and fairness are both enhanced, or efficiency and equity are both
diminished.
d. None of the above are correct.
ANS: D
DIF: 2
REF: 1-1
TOP: Government, Efficiency, Equity
MSC: Applicative
31. A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is that those
policies
a. enhance equity.
b. reduce efficiency.
c. reduce the reward for working hard.
d. All of the above are correct.
ANS: D
DIF: 2
REF: 1-1
TOP: Government, Efficiency, Equity
MSC: Interpretive
32. When the government implements programs such as progressive income tax rates, which of the following is likely
to occur?
a. Equity is increased and efficiency is increased.
b. Equity is increased and efficiency is decreased.
c. Equity is decreased and efficiency is increased.
d. Equity is decreased and efficiency is decreased.
ANS: B
DIF: 2
REF: 1-1
TOP: Government, Efficiency, Equity
MSC: Interpretive
33. As a result of a successful attempt by government to cut the economic pie into more equal slices,
a. it is easier to cut the pie, and therefore the economy can produce a larger pie.
b. the government can more easily allocate the pie to those most in need.
c. the pie gets smaller, and there will be less pie overall.
d. government will spend too much time cutting and it causes the economy to lose the ability to produce enough
pie for everyone.
ANS: C
DIF: 3
REF: 1-1
TOP: Government, Efficiency, Equity
MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
6  Chapter 1/Ten Principles of Economics
34. When the government attempts to improve equity in an economy the result is often
a. an increase in overall output in the economy.
b. additional government revenue since overall income will increase.
c. a reduction in equity.
d. a reduction in efficiency.
ANS: D
DIF: 2
REF: 1-1
TOP: Government, Efficiency, Equity
MSC: Interpretive
35. When the government redistributes income from the wealthy to the poor,
a. efficiency is improved, but equity is not.
b. both wealthy people and poor people benefit directly.
c. people work less and produce fewer goods and services.
d. wealthy people consume fewer goods, but poor people consume more goods, resulting in no real change.
ANS: C
DIF: 2
REF: 1-1
TOP: Government, Efficiency, Equity
MSC: Interpretive
36. In economics, the cost of something is
a. the dollar amount of obtaining it.
b. always measured in units of time given up to get it.
c. what you give up to get it.
d. often impossible to quantify, even in principle.
ANS: C
DIF: 1
REF: 1-1
TOP: Opportunity cost
MSC: Definitional
37. What you give up to obtain an item is called your
a. opportunity cost.
b. explicit cost.
c. true cost.
d. direct cost.
ANS: A
DIF: 1
REF: 1-1
TOP: Opportunity cost
MSC: Definitional
38. The opportunity cost of going to college is
a. the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
b. the value of the best opportunity a student gives up to attend college.
c. zero for students who are fortunate enough to have all of their college expenses paid by someone else.
d. zero, since a college education will allow a student to earn a larger income after graduation.
ANS: B
DIF: 2
REF: 1-1
TOP: Opportunity cost
MSC: Interpretive
39. Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four
choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he decides on Option B.
The opportunity cost of this decision is
a. the value to Maurice of the option he would have chosen had Option B not been available.
b. the value to Maurice of Options A, C and D combined.
c. $100.
d. $300.
ANS: A
DIF: 2
REF: 1-1
TOP: Opportunity cost
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  7
40. A furniture maker currently produces 100 tables per week and sells them for a profit. She is considering expanding
her operation in order to make more tables. Should she expand?
a. Yes, because making tables is profitable.
b. No, because she may not be able to sell the additional tables.
c. It depends on the marginal cost of producing more tables and the marginal revenue she will earn from selling
more tables.
d. It depends on the average cost of producing more tables and the average revenue she will earn from selling
more tables.
ANS: C
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Applicative
41. For most students, the largest single cost of a college education is
a. the wages given up to attend school.
b. tuition, fees, and books.
c. room and board.
d. transportation, parking, and entertainment.
ANS: A
DIF: 2
REF: 1-1
TOP: Opportunity cost
MSC: Interpretive
42. For a college student who wishes to calculate the true costs of going to college, the costs of room and board
a. should be counted in full, regardless of the costs of eating and sleeping elsewhere.
b. should be counted only to the extent that they are more expensive at college than elsewhere.
c. usually exceed the opportunity cost of going to college.
d. plus the cost of tuition, equals the opportunity cost of going to college.
ANS: B
DIF: 2
REF: 1-1
TOP: Opportunity cost
MSC: Applicative
43. For which of the following individuals would the opportunity cost of going to college be highest?
a. a promising young mathematician who will command a high salary once she earns her college degree
b. a student with average grades who has never held a job
c. a famous, highly-paid actor who wants to take time away from show business to finish college and earn a
degree
d. a student who is the best player on his college basketball team, but who lacks the skills necessary to play
professional basketball
ANS: C
DIF: 2
REF: 1-1
TOP: Opportunity cost
MSC: Applicative
44. When you calculate your true costs of going to college, what portion of your room-and-board expenses should be
included?
a. Your full room-and-board expenses should always be included.
b. None of your room-and-board expenses should ever be included.
c. You should include only the amount by which your room-and-board expenses exceed the income you earn
while attending college.
d. You should include only the amount by which your room-and-board expenses exceed the expenses for rent and
food if you were not in college.
ANS: D
DIF: 2
REF: 1-1
TOP: Opportunity cost
MSC: Applicative
45. The opportunity cost of an item is
a. the number of hours needed to earn money to buy the item.
b. what you give up to get that item.
c. usually less than the dollar value of the item.
d. the dollar value of the item.
ANS: B
DIF: 1
REF: 1-1
TOP: Opportunity cost
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
8  Chapter 1/Ten Principles of Economics
46. Mallory decides to spend three hours working overtime rather than watching a video with her friends. She earns $8
an hour. Her opportunity cost of working is
a. the $24 she earns working.
b. the $24 minus the enjoyment she would have received from watching the video.
c. the enjoyment she would have received had she watched the video.
d. nothing, since she would have received less than $24 of enjoyment from the video.
ANS: C
DIF: 3
REF: 1-1
TOP: Opportunity cost
MSC: Applicative
47. Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is
a. the improvement in his grades from studying for the hour.
b. the improvement in his grades from studying minus the enjoyment of playing tennis.
c. the enjoyment and exercise he would have received had he played tennis.
d. zero. Since Russell chose to study rather than to play tennis, the value of studying must have been greater than
the value of playing tennis.
ANS: C
DIF: 3
REF: 1-1
TOP: Opportunity cost
MSC: Applicative
48. College-age athletes who drop out of college to play professional sports
a. are not rational decision makers.
b. are well aware that their opportunity cost of attending college is very high.
c. are concerned more about present circumstances than their future.
d. underestimate the value of a college education.
ANS: B
DIF: 2
REF: 1-1
TOP: Opportunity cost
MSC: Interpretive
49. A rational decisionmaker
a. ignores marginal changes and focuses instead on “the big picture.”
b. ignores the likely effects of government policies when he or she makes choices.
c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.
d. takes an action only if the combined benefits of that action and previous actions exceed the combined costs of
that action and previous actions.
ANS: C
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
50. Rational people make decisions at the margin by
a. following marginal traditions.
b. behaving in a random fashion.
c. thinking in black-and-white terms.
d. comparing marginal costs and marginal benefits.
ANS: D
DIF: 1
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
51. The word "margin" means
a. edge.
b. distance.
c. space.
d. measure.
ANS: A
DIF: 1
TOP: Marginal changes
REF: 1-1
MSC: Definitional
52. Making rational decisions "at the margin" means that people
a. make those decisions that do not impose a marginal cost.
b. evaluate how easily a decision can be reversed if problems arise.
c. compare the marginal costs and marginal benefits of each decision.
d. always calculate the marginal dollar costs for each decision.
ANS: C
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  9
53. A person’s willingness to pay for a good is based on
a. the availability of the good.
b. the marginal benefit that an extra unit of the good would provide for that person.
c. the marginal cost of producing an extra unit of the good.
d. esoteric factors, the study of which lies beyond the boundaries of economics.
ANS: B
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
54. To say that "people respond to incentives" is to say that
a. changes in costs (but not changes in benefits) influence people's decisions and their behavior.
b. changes in benefits (but not changes in costs) influence people's decisions and their behavior.
c. changes in benefits or changes in costs influence people's decisions and their behavior.
d. tradeoffs can be eliminated by rational people who think at the margin.
ANS: C
DIF: 1
REF: 1-1
TOP: Incentives MSC: Definitional
55. A marginal change is a
a. change that involves little, if anything, that is important.
b. large, significant adjustment.
c. change for the worse, and so it is usually a short-term change.
d. small, incremental adjustment.
ANS: D
DIF: 1
REF: 1-1
TOP: Marginal changes
MSC: Definitional
56. Which of the following is the best example of a marginal change?
a. After graduating college, Audrey's income increases from $500 per month to $3,000 per month.
b. Morgan gets a raise at her part-time job and is now paid $7.25 per hour instead of $7.00.
c. Housing prices in an area increase by 40 percent when a new interstate is built that passes nearby.
d. A hard freeze wipes out half of the orange crop in Florida and the price of orange juice doubles.
ANS: B
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Applicative
57. Which of the following is the best example of a marginal change?
a. The price of housing in Denver increased by 6 percent last year.
b. Kim gets a big promotion at work. She also gets a raise from $35,000 per year to $55,000 per year.
c. Mark graduates from college and takes a job. His income increases from $10,000 per year to $35,000 per year.
d. A drought hits the upper Midwest and the price of wheat increases from $4.00 per bushel to $6.50 per bushel.
ANS: A
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Applicative
58. A marginal change is best illustrated by which of the following?
a. Nancy retires and takes a part-time job. She was working 40 hours per week and now works 15 hours per week.
b. A large, state-supported university has announced that due to state budget deficits, tuition must rise by 20
percent next year.
c. Ryan moved to a new apartment and now pays 40 percent more rent than before.
d. Arizona, which usually receives 10 inches of rain per year, received 11 inches last year.
ANS: D
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
59. Teresa eats three oranges during a particular day. The marginal benefit she enjoys from eating the third orange
a. can be thought of as the total benefit Teresa enjoys by eating three oranges minus the total benefit she would
have enjoyed by eating just the first two oranges.
b. determines Teresa’s willingness to pay for the first, second, and third oranges.
c. does not depend on how many oranges Teresa has already eaten.
d. All of the above are correct.
ANS: A
DIF: 3
REF: 1-1
TOP: Marginal changes
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
10  Chapter 1/Ten Principles of Economics
60. A rational decisionmaker takes an action if and only if
a. the marginal benefit of the action exceeds the marginal cost of the action.
b. the marginal cost of the action exceeds the marginal benefit of the action.
c. the marginal cost of the action is zero.
d. the opportunity cost of the action is zero.
ANS: A
DIF: 1
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
61. After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year.
However, Spring Break is still months away, and you may reverse this decision. Which of the following events
would prompt you to reverse this decision?
a. The marginal benefit of going to Cancun increases.
b. The marginal cost of going to Cancun decreases.
c. The marginal benefit of going to Ft. Lauderdale decreases.
d. The marginal cost of going to Ft. Lauderdale decreases.
ANS: D
DIF: 3
REF: 1-1
TOP: Marginal changes
MSC: Applicative
62. The average cost per seat on the 50-passenger Floating-On-Air Bus company's trip from Kansas City to St. Louis,
on which no refreshments are served, is $45. In advance of a particular trip, three seats remain unsold. The bus
company could increase its profit only if it
a. charged any ticket price above $0 for the three remaining seats.
b. charged at least $15 for each of the three remaining seats.
c. charged at least $45 for each of the three remaining seats.
d. paid three people to occupy the three remaining seats.
ANS: A
DIF: 2
REF: 1-1
TOP: Marginal cost
MSC: Applicative
63. Warren drinks four cups of coffee during a particular day. The marginal benefit he enjoys from drinking the fourth
cup
a. can be thought of as the total benefit Warren enjoys by drinking four cups minus the total benefit he would
have enjoyed by drinking just three cups.
b. determines Warren’s willingness to pay for the fourth cup.
c. is likely different from the marginal benefit provided to Warren by the third cup.
d. All of the above are correct.
ANS: D
DIF: 3
REF: 1-1
TOP: Marginal changes
MSC: Applicative
64. A rational decision maker takes an action only if the
a. marginal benefit is less than the marginal cost.
b. marginal benefit is greater than the marginal cost.
c. average benefit is greater than the average cost.
d. marginal benefit is greater than both the average cost and the marginal cost.
ANS: B
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
65. A construction company has built 50 houses so far this year at a total cost to the company of $8 million. If the
company builds a 51st house, its total cost will increase to $8.18 million. Which of the following statements is
correct?
a. For the first 50 houses, the average cost per house was $160,000.
b. The marginal cost of the 51st house, if it is built, will be $180,000.
c. If the company can experience a marginal benefit of $190,000 by building the 51 st house, then the company
should build it.
d. All of the above are correct.
ANS: D
DIF: 3
REF: 1-1
TOP: Marginal cost, Marginal benefit
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  11
66. Mike has spent $500 purchasing and repairing an old fishing boat, which he expects to sell for $800 once the
repairs are complete. Mike discovers that, in addition to the $500 he has already spent, he needs to make an
additional repair, which will cost another $400, in order to make the boat worth $800 to potential buyers. He can
sell the boat as it is now for $300. What should he do?
a. He should sell the boat as it is now for $300.
b. He should keep the boat since it would not be rational to spend $900 on repairs and then sell the boat for $800.
c. He should complete the repairs and sell the boat for $800.
d. It does not matter which action he takes; the outcome is the same either way.
ANS: C
DIF: 3
REF: 1-1
TOP: Marginal cost
MSC: Analytical
67. A donut shop sells fresh baked donuts from 5 a.m. until 3 p.m. every day. The shop does not sell day-old donuts, so
all unsold donuts are thrown away at 3 p.m. each day. The cost of making and selling a dozen donuts is $1.50;
there are no costs associated with throwing donuts away. If the manager has 10 dozen donuts left at 2:30 p.m. on a
particular day, which of the following alternatives is most attractive?
a. Lower the price of the remaining donuts, even if the price falls below $1.50 per dozen.
b. Lower the price of the remaining donuts, but under no circumstances should the price fall below $1.50 per
dozen.
c. Throw the donuts away and produce 10 fewer dozen donuts tomorrow.
d. Starting tomorrow, lower the price on all donuts so they will all be sold earlier in the day.
ANS: A
DIF: 3
REF: 1-1
TOP: Marginal changes
MSC: Analytical
68. 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.
ANS: D
DIF: 3
REF: 1-1
TOP: Marginal cost
MSC: Analytical
69. Sarah buys and sells real estate. Two weeks ago, she paid $140,000 for a house on Oak Street, intending to spend
$20,000 on repairs sell the house for $175,000. Last week, the city government announced a plan to build a
“halfway house” for convicted criminals on Oak Street. As a result of the city’s announced plan, Sarah is weighing
two alternatives: She can go ahead with the $20,000 in repairs and then sell the house for $135,000, or she can
forgo the repairs and sell the house as it is for $120,000. Sarah should
a. keep the house and live in it.
b. go ahead with the $20,000 in repairs and sell the house for $135,000.
c. forgo the repairs and sell the house as it is for $120,000.
d. move the house from Oak Street to a more desirable location, irrespective of the cost of doing so.
ANS: C
DIF: 3
REF: 1-1
TOP: Marginal cost
MSC: Analytical
70. People are willing to pay more for a diamond than for a bottle of water because
a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of
water.
b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.
c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have
to manipulate water prices.
d. water prices are held artificially low by governments, since water is necessary for life.
ANS: B
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
12  Chapter 1/Ten Principles of Economics
71. Economists are particularly adept at understanding that people respond to
a. laws.
b. incentives.
c. punishments more than rewards.
d. rewards more than punishments.
ANS: B
DIF: 1
REF: 1-1
TOP: Incentives MSC: Interpretive
72. Government policies can change the costs and benefits that people face. Those policies have the potential to
a. alter people’s behavior.
b. alter people’s decisions at the margin.
c. produce results that policymakers did not intend.
d. All of the above are correct.
ANS: D
DIF: 2
REF: 1-1
TOP: Incentives MSC: Interpretive
73. Ralph Nader's book Unsafe at Any Speed caused Congress to require
a. safety glass in all new cars.
b. seat belts in all new cars.
c. air bags in all new cars.
d. stricter drunk driving laws in all states.
ANS: B
DIF: 1
REF: 1-1
TOP: Incentives MSC: Interpretive
74. U.S. laws requiring that drivers wear seat belts have resulted in
a. a reduction in both driver deaths and pedestrian deaths.
b. fewer accidents and fewer deaths per accident.
c. fewer driver deaths, fewer accidents and fewer pedestrian deaths.
d. little change in the number of driver deaths, but more accidents and more pedestrian deaths.
ANS: D
DIF: 2
REF: 1-1
TOP: Incentives MSC: Interpretive
75. Evidence indicates that seat belt laws have led to
a. fewer pedestrian deaths.
b. fewer automobile accidents.
c. fewer deaths per automobile accident.
d. All of the above are correct.
ANS: C
DIF: 1
REF: 1-1
TOP: Seat belt laws
MSC: Definitional
76. One effect of the government-imposed seat belt law in the U.S. has been
a. a dramatic decrease in the number of pedestrian deaths.
b. safer driving.
c. an increase in the number of accidents.
d. a dramatic decrease in the number of driver deaths.
ANS: C
DIF: 2
REF: 1-1
TOP: Incentives MSC: Interpretive
77. Based on what we know about the effects of mandatory seat belt laws, which of the following groups would be
most likely to mount a campaign to repeal those laws?
a. Owners of collision-repair shops.
b. People who walk rather than drive.
c. Policemen who have better things to do than investigate collisions.
d. All of the above are correct.
ANS: B
DIF: 3
REF: 1-1
TOP: Incentives MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  13
78. Based on the available evidence, which of the following groups benefits most from mandatory seat belt laws?
a. automakers
b. pedestrians
c. drivers
d. owners of collision-repair shops
ANS: D
DIF: 3
REF: 1-1
TOP: Incentives MSC: Analytical
79. In the former Soviet Union, producers were paid for meeting output targets, not for selling products. Under those
circumstances, what were the economic incentives for producers?
a. to produce good quality products so that society would benefit from the resources used
b. to conserve on costs, so as to maintain efficiency in the economy
c. to produce enough to meet the output target, without regard for quality or cost
d. to produce those products that society desires most
ANS: C
DIF: 2
REF: 1-1
TOP: Incentives MSC: Interpretive
80. Your professor loves her work, teaching economics. She has been offered other positions in the corporate world
that would increase her income by 25 percent, but she has decided to continue working as a professor. Her decision
would not change unless the marginal
a. cost of teaching increased.
b. benefit of teaching increased.
c. cost of teaching decreased.
d. cost of a corporate job increased.
ANS: A
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
81. 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.
ANS: B
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
82. When policymakers implement policies that alter incentives, they usually
a. have carefully weighed the direct and indirect effects of the policy.
b. do not observe the intended result of the policies.
c. have considered all possible effects of the incentive changes when they developed the policy, which will make
the policy effective.
d. correctly anticipate the indirect effects, but often miss the direct effects.
ANS: B
DIF: 2
REF: 1-1
TOP: Incentives MSC: Interpretive
83. Which of the following principles is not one of the four principles of individual decisionmaking?
a. People face tradeoffs.
b. Trade can make everyone better off.
c. People respond to incentives.
d. Rational people think at the margin.
ANS: B
DIF: 1
REF: 1-1, 1-2
TOP: Tradeoffs, Trade, Marginal changes
MSC: Definitional
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14  Chapter 1/Ten Principles of Economics
84. Which of the following is a principle concerning how people interact?
a. Markets are usually a good way to organize economic activity.
b. Rational people think at the margin.
c. People respond to incentives.
d. All of the above are correct.
ANS: A
DIF: 2
REF: 1-1, 1-2
TOP: Markets
MSC: Interpretive
85. Which of the following statements exemplifies a principle of individual decisionmaking?
a. Trade can make everyone better off.
b. Governments can sometimes improve market outcomes.
c. The cost of something is what you give up to get it.
d. All of the above are correct.
ANS: C
DIF: 2
REF: 1-1, 1-2
TOP: Opportunity cost
MSC: Interpretive
86. Which is the most accurate statement about trade?
a. Trade can make every nation better off.
b. Trade makes some nations better off and others worse off.
c. Trading for a good can make a nation better off only if the nation cannot produce that good itself.
d. Trade helps rich nations and hurts poor nations.
ANS: A
DIF: 2
REF: 1-2
TOP: Trade
MSC: Interpretive
87. The principle that "trade can make everyone better off" applies to interactions and trade between
a. families.
b. states within the United States.
c. nations.
d. All of the above are correct.
ANS: D
DIF: 1
REF: 1-2
TOP: Trade
MSC: Applicative
88. Which of the following statements about trade is false?
a. Trade increases competition.
b. With trade, one country wins and one country loses.
c. Bulgaria can benefit, potentially, from trade with any other country.
d. Trade allows people to buy a greater variety of goods and services at lower cost.
ANS: B
DIF: 2
REF: 1-2
TOP: Trade
MSC: Interpretive
89. 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.
ANS: B
DIF: 2
REF: 1-2
TOP: Trade
MSC: Interpretive
90. Benefits from trade would not include
a. the ability of people and nations to specialize.
b. a greater variety of goods and services becoming available.
c. less competition.
d. lower prices.
ANS: C
DIF: 2
REF: 1-2
TOP: Trade
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  15
91. Trade between the United States and India
a. benefits both the United States and India.
b. is a losing proposition for the United States because India has cheaper labor.
c. is a losing proposition for India because capital is much more abundant in the U.S. than in India.
d. is a losing proposition for India because U.S. workers are more productive.
ANS: A
DIF: 2
REF: 1-2
TOP: Trade
MSC: Interpretive
92. Canada can benefit from trade
a. only with nations that can produce goods Canada cannot produce.
b. only with less developed nations.
c. only with nations outside of North America.
d. with any nation.
ANS: D
DIF: 2
REF: 1-2
TOP: Trade
MSC: Interpretive
93. If Japan chooses to engage in trade, it
a. will only benefit if it trades with countries that produce goods Japan cannot produce.
b. cannot benefit if it trades with less developed countries.
c. should first attempt to produce the good itself.
d. can benefit by trading with any other country.
ANS: D
DIF: 2
REF: 1-2
TOP: Trade
MSC: Interpretive
94. If the United States decides to trade with Mexico, we know that
a. Mexico will benefit, but trade with a less developed country could not benefit the United States.
b. it will not benefit Mexico because workers in the United States are more productive.
c. Mexico and the United States can both benefit.
d. it will not benefit either country because their cultural differences are too vast.
ANS: C
DIF: 2
REF: 1-2
TOP: Trade
MSC: Interpretive
95. Which of the following statements about markets is most accurate?
a. Markets are usually a good way to organize economic activity.
b. Markets are usually inferior to central planning as a way to organize economic activity.
c. Markets fail and are therefore not an acceptable way to organize economic activity.
d. Markets are a good way to organize economic activity in developed nations, but not in less developed nations.
ANS: A
DIF: 1
REF: 1-2
TOP: Markets
MSC: Interpretive
96. Which of the following statements does not apply to a market economy?
a. Firms decide whom to hire and what to produce.
b. No one is looking out for the economic well-being of society as a whole.
c. Households decide which firms to work for and what to buy with their incomes.
d. Government policies are the primary forces that guide the decisions of firms and households.
ANS: D
DIF: 2
REF: 1-2
TOP: Market economy
MSC: Interpretive
97. In a market economy, who makes the decisions that guide most economic activity?
a. firms only
b. households only
c. firms and households
d. government
ANS: C
DIF: 1
REF: 1-2
TOP: Markets
MSC: Definitional
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16  Chapter 1/Ten Principles of Economics
98. The decisions of firms and households are guided by prices and self-interest in a
a. command economy.
b. centrally-planned economy.
c. market economy.
d. All of the above are correct.
ANS: C
DIF: 1
REF: 1-2
TOP: Market economy
MSC: Definitional
99. In a market economy, economic activity is guided by
a. the government.
b. corporations.
c. central planners.
d. self-interest and prices.
ANS: D
DIF: 1
REF: 1-2
TOP: Market economy
MSC: Definitional
100. The term used to describe a situation in which markets fail to allocate resources efficiently is called
a. economic meltdown.
b. market failure.
c. disequilibrium.
d. the effect of the invisible hand.
ANS: B
DIF: 1
REF: 1-2
TOP: Market failure
MSC: Definitional
101. In an economy in which decisions are guided by prices and individual self-interest, there is
a. the potential to achieve efficiency in production.
b. a strong need for government intervention in the market.
c. less efficiency than would be observed in a centrally-planned economy.
d. more need for a strong legal system to control individual greed than would be needed in a centrally-planned
economy.
ANS: A
DIF: 2
REF: 1-2
TOP: Market economy
MSC: Interpretive
102. Prices direct economic activity in a market economy by
a. influencing the actions of buyers and sellers.
b. reducing scarcity of the goods and services produced.
c. eliminating the need for government intervention.
d. allocating goods and services in the most equitable way.
ANS: A
DIF: 2
REF: 1-2
TOP: Market economy
MSC: Interpretive
103. A friend of yours asks you why market prices are better than government-determined prices. Because you
understand economic principles, you say that market-determined prices are better because they generally reflect
a. the value of a good to society, but not the cost of making it.
b. the cost of making a good to society, but not its value.
c. both the value of a good to society and the cost of making it.
d. neither the value of a good to society nor the cost of making it.
ANS: C
DIF: 2
REF: 1-2
TOP: Markets, Prices
MSC: Interpretive
104. Which of the following firms is most likely to have market power?
a. a fast food restaurant in a college town
b. a wheat farm in Kansas
c. the last gas station in New Mexico for 100 miles
d. a shoe store in Kentucky
ANS: C
DIF: 2
REF: 1-2
TOP: Market power
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  17
105. An example of a firm with market power is a
a. delicatessen in New York.
b. cable TV provider in St. Louis.
c. clothing store in Los Angeles.
d. family farm in Illinois.
ANS: B
DIF: 2
REF: 1-2
TOP: Market power
MSC: Interpretive
106. One advantage market economies have over centrally-planned economies is that market economies
a. provide an equal distribution of goods and services to households.
b. establish a significant role for government in the allocation of resources.
c. solve the problem of scarcity.
d. are more efficient.
ANS: D
DIF: 2
REF: 1-2
TOP: Market economy
MSC: Interpretive
107. Which of the following statements best characterizes a basic difference between market economies and centrallyplanned economies?
a. Society relies more upon prices to allocate resources when the economy is centrally-planned than when it is
market-based.
b. The self-interest of households is reflected more fully in the outcome of a centrally-planned economy than in
the outcome of a market economy.
c. Government plays a larger role in the economic affairs of a market economy than in the economic affairs of a
centrally-planned economy.
d. None of the above are correct.
ANS: D
DIF: 2
REF: 1-2
TOP: Market economy
MSC: Interpretive
108. The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the
a. 1960s.
b. 1970s.
c. 1980s.
d. 1990s.
ANS: C
DIF: 1
REF: 1-2
TOP: Communism
MSC: Definitional
109. The economy of the former Soviet Union is best described as a
a. primitive economy.
b. market economy.
c. hybrid economy.
d. centrally-planned economy.
ANS: D
DIF: 1
REF: 1-2
TOP: Market economy
MSC: Definitional
110. Prior to the collapse of communism, communist countries worked on the premise that economic well-being could
be best attained by
a. a market economy.
b. a strong reliance on prices and individuals’ self-interests.
c. a system of large, government-operated, privately-owned firms.
d. the actions of government central planners.
ANS: D
DIF: 2
REF: 1-2
TOP: Communism
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
18  Chapter 1/Ten Principles of Economics
111. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
a. There is no such thing as a free lunch.
b. People buy more when prices are low than when prices are high.
c. No matter how much people earn, they tend to spend more than they earn.
d. Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable
market outcomes.
ANS: D
DIF: 1
REF: 1-2
TOP: Invisible hand
MSC: Definitional
112. The term "invisible hand" was coined by
a. Adam Smith.
b. David Ricardo.
c. Karl Marx.
d. Benjamin Franklin.
ANS: A
DIF: 1
REF: 1-2
TOP: Invisible hand
MSC: Definitional
113. The "invisible hand" directs economic activity through
a. advertising.
b. prices.
c. central planning.
d. government regulations.
ANS: B
DIF: 2
REF: 1-2
TOP: Invisible hand
MSC: Interpretive
114. The idea that only the government can organize economic activity in a way that promotes economic well-being for
a country as a whole
a. is a basic principle regarding individual decisionmaking.
b. amounts to a denial of one of the basic principles regarding interactions among people.
c. supports the idea that the "invisible hand" should guide economic activity.
d. was promoted by the economist Adam Smith in a well-known 1776 book.
ANS: B
DIF: 2
REF: 1-2
TOP: Markets
MSC: Interpretive
115. Adam Smith argued that in a market system, when people act in their own self-interest, they typically
a. help only themselves.
b. harm others.
c. help others, but not as much as they would have if they were not self-interested.
d. help others even more than when they deliberately try to help others.
ANS: D
DIF: 2
REF: 1-2
TOP: Invisible hand
MSC: Interpretive
116. The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered
by
a. government actions that distort prices.
b. increased competition in markets.
c. enforcement of property rights.
d. too much attention paid to efficiency.
ANS: A
DIF: 2
REF: 1-2
TOP: Invisible hand
MSC: Interpretive
117. When the "invisible hand" guides economic activity, prices of products reflect
a. only the values that society places on those products.
b. only the costs to society of producing those products.
c. both the values that society places on those products and the costs to society of producing those products.
d. none of the above; when the "invisible hand" guides economic activity, prices of products are set by the
government in a manner that is thought to be "fair."
ANS: C
DIF: 2
REF: 1-2
TOP: Invisible hand, Markets
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  19
118. Adam Smith's book The Wealth of Nations was published in
a. 1692.
b. 1776.
c. 1816.
d. 1936.
ANS: B
DIF: 1
REF: 1-2
TOP: Invisible hand
MSC: Definitional
119. Both The Wealth of Nations and the Declaration of Independence share the point of view that
a. every person is entitled to life, liberty, and the pursuit of happiness.
b. individuals are best left to their own devices without the government guiding their actions.
c. the government plays a central role in organizing a market economy.
d. because of human nature a strong legal system is necessary for a market system to survive.
ANS: B
DIF: 2
REF: 1-2
TOP: Invisible hand
MSC: Interpretive
120. The invisible hand works to promote general well-being in the economy primarily through
a. government intervention.
b. the political process.
c. people’s pursuit of self-interest.
d. altruism.
ANS: C
DIF: 1
REF: 1-2
TOP: Invisible hand
MSC: Interpretive
121. Taxes adversely affect the allocation of resources in society because
a. they do not always fall more heavily on the rich than on the poor.
b. the taxes collected are not enough to finance government spending.
c. not everyone pays taxes.
d. they distort prices and thus distort the decisions of households and firms.
ANS: D
DIF: 2
REF: 1-2
TOP: Taxes
MSC: Interpretive
122. A primary function of prices in a market economy is to provide participants with
a. relevant economic information.
b. relevant spending limits.
c. an equitable distribution of goods and services.
d. All of the above are correct.
ANS: A
DIF: 2
REF: 1-2
TOP: Market economy, Prices
MSC: Interpretive
123. When the government prevents prices from adjusting naturally to supply and demand,
a. it stabilizes the economy by reducing market uncertainties.
b. it adversely affects the allocation of resources.
c. the improvement in equity justifies the reduction in efficiency.
d. the improvement in efficiency justifies the reduction in equity.
ANS: B
DIF: 2
REF: 1-2
TOP: Prices, Government
MSC: Applicative
124. With respect to the attainment of an efficient allocation of resources, which of the following statements is correct?
a. Markets are always a good way to organize economic activity.
b. Markets are often a good way to organize economic activity.
c. Markets are seldom a good way to organize economic activity.
d. Markets are never a good way to organize economic activity.
ANS: B
DIF: 1
REF: 1-2
TOP: Markets
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
20  Chapter 1/Ten Principles of Economics
125. For markets to work well, there must be
a. market power.
b. a central planner.
c. property rights.
d. abundant, not scarce, resources.
ANS: C
DIF: 2
REF: 1-2
TOP: Markets, Property rights
MSC: Interpretive
126. One reason we need government, even in a market economy, is that
a. there are insufficient quantities of externalities in the absence of government.
b. property rights become too entrenched in the absence of government.
c. the invisible hand seldom leads to an efficient allocation of resources in any market.
d. the invisible hand, while powerful, is not perfect.
ANS: D
DIF: 2
REF: 1-2
TOP: Market economy, Government
MSC: Interpretive
127. The basic principles of economics suggest that
a. markets are seldom, if ever, a good way to organize economic activity.
b. government should become involved in markets when trade between countries is involved.
c. government should become involved in markets when those markets fail to produce efficient or equitable
outcomes.
d. All of the above are correct.
ANS: C
DIF: 1
REF: 1-2
TOP: Markets, Government, Trade MSC: Interpretive
128. One necessary role of government in a market economy is to
a. impose taxes on those goods and services that are most desired by consumers.
b. maintain welfare programs for the poor.
c. provide services such as mail delivery and garbage collection.
d. enforce property rights.
ANS: D
DIF: 2
REF: 1-2
TOP: Government, Property rights MSC: Interpretive
129. The government enforces property rights by
a. requiring property owners to pay property taxes.
b. providing police and courts.
c. forcing people to own property.
d. providing public parks and recreation facilities.
ANS: B
DIF: 2
REF: 1-2
TOP: Government, Property rights MSC: Interpretive
130. To say that government intervenes in the economy to promote efficiency is to say that government is attempting to
a. create a more fair distribution of income.
b. change the way in which the economic pie is divided.
c. enlarge the economic pie.
d. All of the above are correct.
ANS: C
DIF: 2
REF: 1-2
TOP: Efficiency, Government
MSC: Interpretive
131. A company that formerly produced software went out of business because too many potential customers bought
illegally-produced copies of the software instead of buying the product directly from the company. This instance
serves as an example of
a. market power.
b. market failure.
c. inadequate enforcement of property rights.
d. the invisible hand at work.
ANS: C
DIF: 2
REF: 1-2
TOP: Property rights
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  21
132. A rationale for government involvement in a market economy is as follows:
a. Markets sometimes fail to produce a fair distribution of economic well-being.
b. Markets sometimes fail to produce an efficient allocation of resources.
c. Property rights have to be enforced.
d. All of the above are correct.
ANS: D
DIF: 1
REF: 1-2
TOP: Government, Markets
MSC: Interpretive
133. The term market failure refers to
a. a situation in which the market on its own fails to allocate resources efficiently.
b. an unsuccessful advertising campaign which reduces demand for a product.
c. a situation in which competition among firms becomes ruthless.
d. a firm which is forced out of business because of losses.
ANS: A
DIF: 1
REF: 1-2
TOP: Market failure
MSC: Definitional
134. Which of the following is not generally regarded as a legitimate reason for the government to intervene in a
market?
a. to promote efficiency
b. to promote equity
c. to enforce property rights
d. to protect an industry from foreign competition
ANS: D
DIF: 2
REF: 1-2
TOP: Government, Markets
MSC: Interpretive
135. Causes of market failure include
a. externalities and market power.
b. market power and incorrect forecasts of consumer demand.
c. externalities and foreign competition.
d. incorrect forecasts of consumer demand and foreign competition.
ANS: A
DIF: 2
REF: 1-2
TOP: Market failure
MSC: Interpretive
136. Which of the following statements is not true?
a. In the presence of a market failure, government action will always improve on the market outcome.
b. In the presence of a market failure, government action can sometimes improve on the market outcome.
c. In the presence of a market failure, government action might not improve on the market outcome because some
leaders are not fully informed about the effects of their actions.
d. In the presence of a market failure, government action might not improve on the market outcome because
sometimes public policies simply reward the politically powerful.
ANS: A
DIF: 2
REF: 1-2
TOP: Market failure, Government MSC: Interpretive
137. Market failure can be caused by
a. low consumer demand.
b. government intervention and price controls.
c. externalities and market power.
d. high prices and foreign competition.
ANS: C
DIF: 2
REF: 1-2
TOP: Market failure
MSC: Interpretive
138. The term "market failure"
a. means the same thing as "market power."
b. refers to the dissolution of a market when firms decide to quit producing a certain product.
c. refers to the failure of a market to produce an efficient allocation of resources.
d. refers to government's failure to enforce the property rights of households or firms that participate in a certain
market.
ANS: C
DIF: 2
REF: 1-2
TOP: Market failure
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
22  Chapter 1/Ten Principles of Economics
139. An example of an externality is the impact of
a. John’s actions on Jane’s well-being.
b. John’s actions on John’s own well-being.
c. society's decisions on society’s well-being.
d. society's decisions on John’s well-being.
ANS: A
DIF: 1
REF: 1-2
TOP: Externalities
MSC: Definitional
140. An example of an externality is the impact of
a. bad weather on the income of farmers.
b. the personal income tax on a person's ability to purchase goods and services.
c. pollution from a factory on the health of people in the vicinity of the factory.
d. increases in health care costs on the health of individuals in society.
ANS: C
DIF: 2
REF: 1-2
TOP: Externalities
MSC: Interpretive
141. If an externality is present in a market, economic efficiency may be enhanced by
a. government intervention.
b. increased competition.
c. better informed market participants.
d. weaker property rights.
ANS: A
DIF: 2
REF: 1-2
TOP: Externalities, Efficiency
MSC: Interpretive
142. Which of these statements concerning externalities is correct?
a. There would be no justification for government involvement in the economy if it were not for externalities.
b. An externality can only arise when one person (or a small group of persons) has the ability to unduly influence
market prices.
c. An externality can arise only when two or more countries are engaged in trade with one another.
d. An externality arises when one person's actions have an impact on the well-being of others.
ANS: D
DIF: 2
REF: 1-2
TOP: Government, Markets
MSC: Interpretive
143. If a copper refinery does not bear the entire cost of the smoke it emits, it will
a. not emit any smoke so as to avoid the entire cost of the smoke.
b. emit lower levels of smoke.
c. emit an acceptable level of smoke.
d. emit too much smoke.
ANS: D
DIF: 2
REF: 1-2
TOP: Externalities
MSC: Interpretive
144. Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is
intended to reduce
a. the influence of the invisible hand.
b. trade.
c. externalities.
d. market power.
ANS: C
DIF: 2
REF: 1-2
TOP: Externalities, Government MSC: Applicative
145. A market economy rewards people according to their
a. need for goods and services.
b. willingness to work.
c. ability to produce things that other people are willing to pay for.
d. ability to produce things of cultural importance.
ANS: C
DIF: 2
REF: 1-2
TOP: Market economy
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  23
146. Market economies are distinguished from other types of economies largely on the basis of
a. the political affiliations of government officials.
b. the process by which government officials are elected or appointed.
c. the ways in which scarce resources are allocated.
d. the number of retail outlets available to consumers.
ANS: C
DIF: 2
REF: 1-2
TOP: Market economy
MSC: Interpretive
147. Which of these consumption activities will most likely impose an external cost?
a. An executive plays a vigorous game of golf.
b. A student in a dorm plays her CDs at 120 decibels late at night.
c. A young mother exercises to an aerobics video.
d. A construction worker eats a sandwich during his lunch break.
ANS: B
DIF: 2
REF: 1-2
TOP: Externalities
MSC: Interpretive
148. Which of these activities will most likely result in an external benefit?
a. A college student buys a deck of cards to play solitaire in her dorm room.
b. An elderly woman plants a flower garden on the vacant lot next to her house.
c. An executive purchases a book to read on a business trip.
d. A ten-year-old uses his allowance to buy new Nike shoes.
ANS: B
DIF: 2
REF: 1-2
TOP: Externalities
MSC: Interpretive
149. If education produces external benefits for society, which of the following might NOT be an appropriate policy for
society to adopt regarding education?
a. tax incentives for schooling
b. mandatory minimum levels of education
c. programs which promote the hiring of high school dropouts
d. public subsidies of education
ANS: C
DIF: 2
REF: 1-2
TOP: Externalities
MSC: Applicative
150. When a single person (or small group) has the ability to influence market prices, there is
a. competition.
b. market power.
c. an externality.
d. a lack of property rights.
ANS: B
DIF: 1
REF: 1-2
TOP: Market power
MSC: Definitional
151. Market power refers to the
a. power of a single person or small group to influence market prices.
b. ability of a person or small group to successfully market new products.
c. power of the government to regulate a market.
d. importance of a certain market in relation to the overall economy.
ANS: A
DIF: 1
REF: 1-2
TOP: Market power
MSC: Definitional
152. Which is the most correct statement about the invisible hand?
a. The invisible hand always ensures both equity and efficiency.
b. The invisible hand is more effective at ensuring equity than it is at ensuring efficiency.
c. The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.
d. Market power is the instrument with which the invisible hand directs economic activity.
ANS: C
DIF: 2
REF: 1-2
TOP: Invisible hand
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
24  Chapter 1/Ten Principles of Economics
153. According to Adam Smith, the success of decentralized market economies is primarily due to
a. the basic benevolence of society.
b. society's legal system.
c. individuals' pursuit of self-interest.
d. partnerships that are forged between business and government.
ANS: C
DIF: 2
REF: 1-2
TOP: Invisible hand
MSC: Interpretive
154. The self-interest of the participants in an economy is guided into promoting general economic self-interest by
a. the invisible hand.
b. market power.
c. government intervention.
d. oikonomos.
ANS: A
DIF: 1
REF: 1-2
TOP: Invisible hand
MSC: Interpretive
155. In the United States, higher income tax rates on rich people could be justified on the basis of
a. superior decision-making by market participants.
b. superior resource allocation.
c. enhanced market efficiency.
d. enhanced equity for society.
ANS: D
DIF: 2
REF: 1-2
TOP: Taxes
MSC: Applicative
156. The basic principles of economics imply that policymakers should
a. rely on markets to guide economic activity, except when markets produce inefficient or inequitable outcomes.
b. enact policies that discourage people from specializing in particular economic activities.
c. enact policies that lead to high rates of growth of the quantity of money.
d. All of the above are correct.
ANS: A
DIF: 2
REF: 1-2, 1-3
TOP: Efficiency, Specialization, Inflation
MSC: Analytical
157. The primary determinant of a country's standard of living is
a. the country’s ability to prevail over foreign competition.
b. the country’s ability to produce goods and services.
c. the total supply of money in the economy.
d. the average age of the country's labor force.
ANS: B
DIF: 2
REF: 1-3
TOP: Standard of living
MSC: Interpretive
158. In 2000 the average American had an income of about
a. $28,400.
b. $34,100.
c. $39,800.
d. $44,500.
ANS: B
DIF: 1
REF: 1-3
TOP: Income
MSC: Definitional
159. In the United States, incomes historically have grown about 2 percent per year. At this rate, average income
doubles every
a. 10 years.
b. 25 years.
c. 35 years.
d. 50 years.
ANS: C
DIF: 2
REF: 1-3
TOP: Income
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  25
160. The income of a typical worker in a country is most closely linked to which of the following?
a. population
b. productivity
c. market power
d. government policies
ANS: B
DIF: 2
REF: 1-3
TOP: Producitvity, Income
MSC: Interpretive
161. The term "productivity"
a. means the same thing as "efficiency."
b. is seldom used by economists, as its meaning is not precise.
c. refers to the quantity of goods and services produced from each hour of a worker's time.
d. refers to the variety of goods and services from which households can choose when they shop.
ANS: C
DIF: 1
REF: 1-3
TOP: Productivity
MSC: Definitional
162. If the average income of an Australian is higher than the average income of a Russian, it is most likely because
a. productivity is higher in Australia than in Russia.
b. Australia has a more industrial economy than Russia.
c. there is more competition in Australia than in Russia.
d. labor unions are more powerful in Australia than in Russia.
ANS: A
DIF: 2
REF: 1-3
TOP: Productivity, Income
MSC: Interpretive
163. Suppose that the average income of a Kenyan is higher than the average income of a South African. You might
conclude that
a. South African firms are faced with stricter government regulations than Kenyan 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.
ANS: D
DIF: 2
REF: 1-3
TOP: Productivity, Income
MSC: Applicative
164. A typical worker in Italy can produce 24 units of product in an eight-hour day, while a typical worker in Poland
can produce 25 units of product in a 10-hour day. We can conclude that
a. worker productivity in Poland is higher than in Italy.
b. the standard of living will likely be higher in Italy than in Poland.
c. productivity is 3 units per hour for the Polish worker and 21/2 units per hour for the Italian worker.
d. there will be no difference between the standard of living in Italy and Poland.
ANS: B
DIF: 3
REF: 1-3
TOP: Productivity, Standard of living
MSC: Applicative
165. A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States
can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?
a. U.S. textile workers belong to a union.
b. There is little demand for cotton cloth in Bangladesh and great demand in the U.S.
c. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.
d. Bangladesh has a low-wage policy to make its textile industry more competitive in world markets.
ANS: C
DIF: 3
REF: 1-3
TOP: Productivity
MSC: Applicative
166. Over the past century, the average income in the United States has risen about
a. twofold.
b. fivefold.
c. eightfold.
d. tenfold.
ANS: C
DIF: 1
REF: 1-3
TOP: Income
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
26  Chapter 1/Ten Principles of Economics
167. In the United States, incomes have historically grown
a. about 10 percent per year.
b. about 5 percent per year.
c. about 2 percent per year.
d. about 0.5 percent per year.
ANS: C
DIF: 1
REF: 1-3
TOP: Income
MSC: Definitional
168. Almost all variation in living standards is attributable to differences in countries'
a. population growth rates.
b. productivity.
c. systems of public education.
d. taxes.
ANS: B
DIF: 2
REF: 1-3
TOP: Standard of living
MSC: Interpretive
169. Productivity is defined as the
a. amount of goods and services produced from each hour of a worker's time.
b. number of workers required to produce a given amount of goods and services.
c. amount of labor which can be saved by replacing workers with machines.
d. actual amount of effort workers put into an hour of working time.
ANS: A
DIF: 2
REF: 1-3
TOP: Productivity
MSC: Definitional
170. The amount of goods and services produced from each hour of a worker's time is called
a. total output.
b. productivity.
c. marginal product.
d. efficiency.
ANS: B
DIF: 1
REF: 1-3
TOP: Productivity
MSC: Definitional
171. A direct or positive relationship exists between a country's
a. productivity and its standard of living.
b. amount of government spending and its productivity.
c. total population and its average citizen’s income.
d. rate of population growth and the extent of its trade with other countries.
ANS: A
DIF: 2
REF: 1-3
TOP: Productivity, Standard of living
MSC: Interpretive
172. The historical rise in living standards of American workers is primarily a result of
a. the influence of labor unions in America.
b. tariff protection imposed by the American government.
c. the enactment of minimum-wage laws in America.
d. the rise in American productivity.
ANS: D
DIF: 2
REF: 1-3
TOP: Productivity, Standard of living
MSC: Interpretive
173. The fact that different countries experience different standards of living is largely explained by differences in those
countries'
a. populations.
b. productivity levels.
c. locations.
d. none of the above; economists are puzzled by differences in standards of living around the world.
ANS: B
DIF: 1
REF: 1-3
TOP: Standard of living, Productivity
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  27
174. The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by
a. unstable economic conditions in Eastern Europe.
b. increased competition from abroad.
c. a decline in the rate of increase in U.S. productivity.
d. a strong U.S. dollar abroad, hurting U.S. exports.
ANS: C
DIF: 3
REF: 1-3
TOP: Productivity, Income
MSC: Applicative
175. Incomes of U.S. households in the 1970s and 1980s
a. grew rapidly, due to the widespread success of labor unions in pushing up wages during those decades.
b. grew rapidly, due to several increases in the minimum wage during those decades.
c. grew rapidly, due to government policies that discouraged the importation of foreign products during those
decades.
d. grew slowly, due to slow growth of the output of goods and services per hour of U.S. workers' time during
those decades.
ANS: D
DIF: 2
REF: 1-3
TOP: Productivity, Income
MSC: Applicative
176. To improve living standards, policymakers should
a. impose restriction on foreign competition.
b. formulate policies designed to increase productivity.
c. impose tougher immigration policies.
d. provide tax breaks for the middle class.
ANS: B
DIF: 2
REF: 1-3
TOP: Productivity, Standard of living
MSC: Applicative
177. Policies to enhance living standards should be designed to ensure that workers
a. have access to the best available methods of producing goods and services.
b. have the appropriate equipment to produce goods and services.
c. receive good educations.
d. All of the above are correct.
ANS: D
DIF: 2
REF: 1-3
TOP: Productivity
MSC: Interpretive
178. To increase living standards, public policy should
a. ensure that workers are well educated and have the necessary tools and technology.
b. make unemployment benefits more generous.
c. move workers into jobs directly from high school.
d. ensure a greater degree of equity, taking all income-earners into account.
ANS: A
DIF: 2
REF: 1-3
TOP: Productivity, Standard of living
MSC: Applicative
179. To raise productivity, policymakers could
a. increase spending on education.
b. provide tax credits to firms for capital improvements.
c. fund research and development.
d. All of the above are correct.
ANS: D
DIF: 3
REF: 1-3
TOP: Productivity, Government
MSC: Applicative
180. An increase in the overall level of prices in an economy is referred to as
a. economic growth.
b. inflation.
c. the price effect.
d. the demand effect.
ANS: B
DIF: 1
REF: 1-3
TOP: Inflation MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
28  Chapter 1/Ten Principles of Economics
181. Inflation is defined as
a. a period of rising productivity in the economy.
b. a period of rising income in the economy.
c. an increase in the overall level of output in the economy.
d. an increase in the overall level of prices in the economy.
ANS: D
DIF: 1
REF: 1-3
TOP: Inflation MSC: Definitional
182. In the early 1920s,
a. Germany experienced a very high rate of inflation.
b. the quantity of German money was declining rapidly.
c. the value of German money remained almost constant.
d. All of the above are correct.
ANS: A
DIF: 2
REF: 1-3
TOP: Inflation, Money
MSC: Interpretive
183. In Germany in the early 1920s, on average,
a. prices were rising 50 percent every month, while the quantity of money was rising 20 percent every month.
b. prices were doubling every month, while the quantity of money fell 10 percent every month.
c. prices were tripling every month, while the quantity of money remained almost constant every month.
d. prices and the quantity of money both tripled every month.
ANS: D
DIF: 2
REF: 1-3
TOP: Inflation, Money
MSC: Interpretive
184. During the early 1920s in Germany, prices
a. doubled annually.
b. doubled monthly.
c. tripled monthly.
d. tripled annually.
ANS: C
DIF: 2
REF: 1-3
TOP: Inflation MSC: Definitional
185. One of the 20th century’s worst episodes of inflation occurred in
a. the United States in the 1960s.
b. Italy in the 1950s.
c. Russia in the 1930s.
d. Germany in the 1920s.
ANS: D
DIF: 1
REF: 1-3
TOP: Inflation MSC: Definitional
186. In the United States, the overall level of prices more than doubled during the
a. 1950s.
b. 1960s.
c. 1970s.
d. 1980s.
ANS: C
DIF: 1
REF: 1-3
TOP: Inflation MSC: Definitional
187. Large or persistent inflation is almost always caused by
a. excessive government spending.
b. excessive growth in the quantity of money.
c. foreign competition.
d. higher-than-normal levels of productivity.
ANS: B
DIF: 2
REF: 1-3
TOP: Inflation MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  29
188. President Gerald Ford referred to inflation as
a. a blight on our nation's economy.
b. a necessary evil to combat high unemployment.
c. public enemy number one.
d. a fly in the ointment.
ANS: C
DIF: 2
REF: 1-3
TOP: Inflation MSC: Interpretive
189. The U.S. president who referred to inflation as “public enemy number one” was
a. Richard Nixon.
b. Gerald Ford.
c. Jimmy Carter.
d. Ronald Reagan.
ANS: B
DIF: 1
REF: 1-3
TOP: Inflation MSC: Interpretive
190. In the 1990s, inflation in the United States was
a. very close to zero.
b. about 3 percent per year.
c. about 6 percent per year.
d. commonly referred to as “public enemy number one.”
ANS: B
DIF: 2
REF: 1-3
TOP: Inflation MSC: Interpretive
191. Low rates of inflation are generally associated with
a. low rates of government spending.
b. small or nonexistent government budget deficits.
c. low rates of productivity growth.
d. low rates of growth of the quantity of money.
ANS: D
DIF: 2
REF: 1-3
TOP: Inflation MSC: Interpretive
192. Which of the following is the most correct statement about the relationship between inflation and unemployment?
a. In the short run, falling inflation is associated with falling unemployment.
b. In the short run, falling inflation is associated with rising unemployment.
c. In the long run, falling inflation is associated with falling unemployment.
d. In the long run, falling inflation is associated with rising unemployment.
ANS: B
DIF: 2
REF: 1-3
TOP: Inflation, Unemployment, Tradeoffs
MSC: Applicative
193. The mainstream view among economists is that
a. society faces a tradeoff between unemployment and inflation, but only in the short run.
b. society faces a tradeoff between unemployment and inflation, but only in the long run.
c. society faces a tradeoff between unemployment and inflation, both in the short run and in the long run.
d. no tradeoff exists between unemployment and inflation, either in the short run or in the long run.
ANS: A
DIF: 2
REF: 1-3
TOP: Inflation, Unemployment, Tradeoffs
MSC: Applicative
194. In the early 1980s, U.S. economic policy was directed toward reducing inflation. What would you have expected to
observe during this short period of time?
a. Inflation fell and unemployment fell.
b. Inflation and unemployment were both unaffected.
c. Inflation fell and unemployment increased.
d. Inflation fell and unemployment was unchanged.
ANS: C
DIF: 2
REF: 1-3
TOP: Inflation, Unemployment, Tradeoffs
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
30  Chapter 1/Ten Principles of Economics
195. Between 1929 and 1933, the U.S. economy went from a situation of full employment to one of 25 percent
unemployment. Which of the following events would you have expected to observe over this relatively short period
of time?
a. The overall price level remained unchanged.
b. The overall price level decreased.
c. The overall price level increased.
d. It is impossible to speculate on what happened to the overall level of prices from the information given.
ANS: B
DIF: 2
REF: 1-3
TOP: Inflation, Unemployment, Tradeoffs
MSC: Applicative
196. The business cycle is the
a. relationship between unemployment and inflation.
b. irregular fluctuations in economic activity.
c. positive relationship between the quantity of money in an economy and inflation.
d. predictable changes in economic activity due to changes in government spending and taxes.
ANS: B
DIF: 1
REF: 1-3
TOP: Business cycle
MSC: Definitional
197. Which of the following is most likely to raise the average material standard of living in the United States?
a. an increase in investment in new capital
b. a continuation of the economic problems experienced by China, with whom the United States competes in
world markets
c. an increase in the minimum legal wage
d. a shortening of the average work week
ANS: A
DIF: 2
REF: 1-3
TOP: Standard of living
MSC: Applicative
198. During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of
inflation. A likely explanation of these facts is that
a. the United Kingdom is more industrialized than Turkey.
b. the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey.
c. workers in the United Kingdom are less productive than workers in Turkey.
d. there were more cases of market failure in Turkey than in the United Kingdom.
ANS: B
DIF: 2
REF: 1-3
TOP: Inflation, Money
MSC: Interpretive
199. Which of the following claims is consistent with the views of mainstream economists?
a. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily
fall.
b. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily
rise.
c. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently
fall.
d. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently
rise.
ANS: A
DIF: 2
REF: 1-3
TOP: Inflation, Unemployment, Tradeoffs
MSC: Applicative
200. To promote good economic outcomes, policymakers should strive to enact policies that
a. enhance productivity.
b. enhance individuals' market power.
c. result in a rapidly-growing quantity of money.
d. All of the above are correct.
ANS: A
DIF: 2
REF: 1-2, 1-3
TOP: Productivity, Market power, Inflation
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 1/Ten Principles of Economics  31
201. The tradeoff between inflation and unemployment
a. implies that policies designed to reduce unemployment also reduce inflation.
b. was eliminated by improved economic policies in the 1900s.
c. is a long-run tradeoff, persisting for decades, according to most economists.
d. None of the above are correct.
ANS: D
DIF: 2
REF: 1-3
TOP: Inflation, Unemployment, Tradeoffs
MSC: Interpretive
202. One of history's most severe episodes of inflation occurred
a. in the U.S. in the 1920s.
b. in Germany in the 1920s.
c. in the U.S. in the 1970s.
d. in Germany in the 1970s.
ANS: B
DIF: 1
REF: 1-3
TOP: Inflation MSC: Definitional
203. During which decade did the United States experience an inflationary episode similar to that experienced by
Germany during the 1920s?
a. the 1880s
b. the 1930s
c. the 1970s
d. None of the above are correct.
ANS: D
DIF: 2
REF: 1-3
TOP: Inflation MSC: Interpretive
204. The relatively low inflation experienced in the United States in the 1990s is attributable to
a. slow growth of U.S. productivity during the 1990s.
b. slow growth of the quantity of money in the U.S. in the 1990s.
c. low levels of government spending in the U.S. in the 1980s and 1990s.
d. the eight-year presidency of William Jefferson Clinton during the 1990s.
ANS: B
DIF: 2
REF: 1-3
TOP: Inflation, Money
MSC: Interpretive
205. Germany could have avoided the high inflation that it experienced in the 1920s by
a. not directing so many of its resources toward preparation for World War II.
b. not increasing taxes so much on the German middle class.
c. not allowing the quantity of money to increase so rapidly.
d. using government policies to stimulate the economy more so than what was done.
ANS: C
DIF: 2
REF: 1-3
TOP: Inflation, Money
MSC: Applicative
206. In a particular country in 1995, the average worker needed to work 25 hours to produce 40 units of output. In that
same country in 2005, the average worker needed to work 40 hours to produce 68 units of output. In that country,
the productivity of the average worker
a. decreased by 1.7 percent between 1995 and 2005.
b. remained unchanged between 1995 and 2005.
c. increased by 4.75 percent between 1995 and 2005.
d. increased by 6.25 percent between 1995 and 2005.
ANS: D
DIF: 3
REF: 1-3
TOP: Productivity
MSC: Analytical
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32  Chapter 1/Ten Principles of Economics
207. In a particular country in 1995, the average worker needed to work 30 hours to produce 40 units of output. In that
same country in 2005, the average worker needed to work 20 hours to produce 29 units of output. In that country,
the productivity of the average worker
a. decreased between 1995 and 2005, so we would expect the standard of living to have decreased accordingly.
b. increased between 1995 and 2005, so we would expect the standard of living to have increased accordingly.
c. decreased between 1995 and 2005, so we would expect inflation to have decreased accordingly.
d. increased between 1995 and 2005, so we would expect inflation to have increased accordingly.
ANS: B
DIF: 3
REF: 1-3
TOP: Productivity, Standard of living
MSC: Analytical
208. In the imaginary country of Countriana, in 1996, the average worker had to work 10 hours to produce 20 units of
output. In that same country in 2006, the average worker needed to work 18 hours to produce 36 units of output. In
that country, the productivity of the average worker
a. increased by 2 percent between 1996 and 2006.
b. increased by 5 percent between 1996 and 2006.
c. remained unchanged between 1996 and 2006.
d. decreased by 3 percent between 1996 and 2006.
ANS: C
DIF: 3
REF: 1-3
TOP: Productivity
MSC: Analytical
209. Which of the following statements is correct about how economists view the effects of increases in the quantity of
money?
a. The short-run effects are well understood, but the long-run effects are still the subject of controversy among
economists.
b. The long-run effects are well understood, but the short-run effects are still the subject of controversy among
economists.
c. Both the short-run effects and the long-run effects are well understood.
d. Neither the short-run effects nor the long-run effects are well understood.
ANS: B
DIF: 2
REF: 1-3
TOP: Money, Short run, Long run MSC: Interpretive
210. Most economists believe that an increase in the quantity of money results in
a. an increase in the demand for goods and services.
b. lower unemployment in the short run.
c. higher inflation in the long run.
d. All of the above are correct.
ANS: D
DIF: 3
REF: 1-3
TOP: Money, Inflation, Unemployment
MSC: Applicative
211. The short-run tradeoff between inflation and unemployment implies that, in the short run,
a. a decrease in the growth rate of the quantity of money will be accompanied by an increase in the
unemployment rate.
b. an increase in the growth rate of the quantity of money will be accompanied by an increase in the
unemployment rate.
c. policymakers are able to reduce the inflation rate and, at the same time, reduce the unemployment rate.
d. policymakers can influence the inflation rate, but not the unemployment rate.
ANS: A
DIF: 3
REF: 1-3
TOP: Inflation, Unemployment, Tradeoffs
MSC: Applicative
True/False
1. Scarcity means that there is less of a good or resource available than people wish to have.
ANS: T
PTS: 1
DIF: 1
REF: 1-1
TOP: Scarcity
MSC: Definitional
2. Economics is the study of how fairly goods and services are distributed within society.
ANS: F
PTS: 1
DIF: 1
REF: 1-1
TOP: Economics MSC: Definitional
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Chapter 1/Ten Principles of Economics  33
3. With careful planning, we can usually get something that we like without having to give up something else that we
like.
ANS: F
PTS: 1
DIF: 2
REF: 1-1
TOP: Tradeoffs MSC: Interpretive
4. Equity means everyone in the economy should receive an equal share of the goods and services produced.
ANS: F
PTS: 1
DIF: 2
REF: 1-1
TOP: Equity
MSC: Definitional
5. Equity refers to how the pie is divided, and efficiency refers to the size of the economic pie.
ANS: T
PTS: 1
DIF: 2
REF: 1-1
TOP: Equity | Efficiency
MSC: Definitional
6. Tuition is the single-largest cost of attending college for most students.
ANS: F
PTS: 1
DIF: 1
REF: 1-1
TOP: Opportunity cost
MSC: Interpretive
7. The cost of an action is measured in terms of foregone opportunities.
ANS: T
PTS: 1
DIF: 1
REF: 1-1
TOP: Opportunity cost
MSC: Interpretive
8. A marginal change is a small incremental adjustment to an existing plan of action.
ANS: T
PTS: 1
DIF: 1
REF: 1-1
TOP: Marginal changes
MSC: Definitional
9. If the average cost of transporting a passenger on the train from Chicago to St. Louis is $75, it would be irrational
for the railroad to allow any passenger to ride for less than $75.
ANS: F
PTS: 1
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Applicative
10. A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.
ANS: F
PTS: 1
DIF: 2
REF: 1-1
TOP: Marginal changes
MSC: Interpretive
11. Trade allows each person to specialize in the activities he or she does best, thus increasing each individual's
productivity.
ANS: T
PTS: 1
DIF: 2
REF: 1-2
TOP: Trade | Productivity
MSC: Interpretive
12. Trade with any nation can be mutually beneficial.
ANS: T
PTS: 1
DIF: 2
REF: 1-2
TOP: Trade
MSC: Interpretive
13. A market economy cannot produce a socially desirable outcome because individuals are motivated by their own
selfish interests.
ANS: F
PTS: 1
DIF: 2
REF: 1-2
TOP: Market economy
MSC: Interpretive
14. The government can potentially improve market outcomes if market inequalities or market failure exists.
ANS: T
PTS: 1
DIF: 2
REF: 1-2
TOP: Government | Market economy
MSC: Interpretive
15. Market failure refers to a situation in which the market does not allocate resources efficiently.
ANS: T
PTS: 1
DIF: 1
REF: 1-2
TOP: Market failure
MSC: Definitional
16. Since taxes affect only the price paid by the buyer, they cannot have an adverse impact on the allocation of
society's resources.
ANS: F
PTS: 1
DIF: 2
REF: 1-2
TOP: Taxes
MSC: Interpretive
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34  Chapter 1/Ten Principles of Economics
17. Productivity is defined as the quantity of goods and services produced from each hour of a worker's time.
ANS: T
PTS: 1
DIF: 1
REF: 1-3
TOP: Productivity
MSC: Definitional
18. Productivity is the primary determinant of a country's living standards.
ANS: T
PTS: 1
DIF: 2
REF: 1-3
TOP: Productivity | Standard of living
MSC: Interpretive
19. Inflation increases the value of money.
ANS: F
PTS: 1
DIF: 2
TOP: Inflation MSC: Interpretive
REF: 1-3
20. Government spending is the ultimate source of inflation.
ANS: F
PTS: 1
DIF: 2
REF: 1-3
TOP: Inflation | Government
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 2
Thinking Like an Economist
Multiple Choice
1. Which of the following terms are most closely associated with the study of economics?
a. force and acceleration
b. torts and venues
c. ego and cognitive dissonance
d. comparative advantage and deadweight loss
ANS: D
PTS: 1
DIF: 2
REF: 2-0
TOP: Economists
MSC: Interpretive
2. Economists, like mathematicians, physicists, and psychologists,
a. make use of the scientific method.
b. make use of their own language.
c. devise theories, and collect and analyze data.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Economists | Scientific method
MSC: Interpretive
3. With respect to how economists study the economy, which of the following statements is most accurate?
a. Economists study the past, but they do not try to predict the future.
b. Economists use “rules of thumb” to predict the future.
c. Economists devise theories, collect data, and analyze the data to test the theories.
d. Economists use controlled experiments in much the same way that biologists and physicists do.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Economists
MSC: Interpretive
4. By scientific method we mean
a. the use of modern electronic testing equipment to understand the world.
b. the dispassionate development and testing of theories about how the world works.
c. the use of controlled laboratory experiments to understand the way the world works.
d. finding evidence to support preconceived theories about how the world works.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Scientific method
MSC: Definitional
5. Who said, "The whole of science is nothing more than the refinement of everyday thinking?"
a. Isaac Newton
b. Albert Einstein
c. Sigmund Freud
d. Benjamin Franklin
ANS: B
PTS: 1
DIF: 1
REF: 2-1
TOP: Scientific method
MSC: Definitional
6. Albert Einstein once made the following observation about science:
a. "The whole of science is nothing more than the refinement of everyday thinking."
b. "The whole of science is nothing more than an interesting intellectual exercise."
c. "In order to understand science, one must rely solely on abstraction."
d. "In order to understand science, one must transcend everyday thinking."
ANS: A
PTS: 1
DIF: 1
REF: 2-1
TOP: Scientific method
MSC: Definitional
36
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  37
7. Sir Isaac Newton's development of the theory of gravity after observing an apple fall from a tree is an example of
a. controlled experiments that lead to the formulation of scientific theories.
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.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Scientific method
MSC: Interpretive
8. Which of the following statements applies to economics, as well as to other sciences such as physics?
a. Experiments are considered valid only when they are conducted in a laboratory.
b. Good theories do not need to be tested.
c. Real-world observations often lead to theories.
d. Economics, as well as other sciences, are concerned primarily with abstract concepts.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Scientific method
MSC: Interpretive
9. The use of theory and observation is more difficult in economics than in sciences such as physics due to the
difficulty in
a. performing an experiment in an economic system.
b. applying mathematical methods to economic analysis.
c. analyzing available data.
d. formulating theories about economic events.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Scientific method
MSC: Interpretive
10. Which of the following statements is true?
a. Economists almost always find it easy to conduct experiments in order to test their theories.
b. Economics is not a true science because economists are not usually allowed to conduct experiments to test their
theories.
c. Economics is a social science rather than a true science because it cannot employ the scientific method.
d. Economists are usually not allowed to conduct experiments, and so they must rely on natural experiments
offered by history.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Scientific method
MSC: Interpretive
11. Because it is difficult for economists to use experiments to generate data, they generally must
a. do without data.
b. substitute assumptions for data when data are unavailable.
c. rely upon hypothetical data that were previously concocted by other economists.
d. use whatever data the world gives them.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Scientific method
MSC: Interpretive
12. Economists regard events from the past as
a. irrelevant, since history is unlikely to repeat itself.
b. of limited interest, since those events seldom provide any useful economic data.
c. interesting but not particularly valuable, since those events cannot be used to evaluate present-day economic
theories.
d. interesting and valuable, because those events are capable of helping us to understand the past, the present, and
the future.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Economists | Scientific method
MSC: Interpretive
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38  Chapter 2/Thinking Like an Economist
13. Which of the following statements is (are) correct?
a. Relative to other scientists, economists find it more difficult to generate useful data.
b. Theory and observation are important in economics as well as in other sciences.
c. To obtain data, economists often rely upon the natural experiments offered by history.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Scientific method
MSC: Interpretive
14. The most common data for testing economic theories come from
a. carefully controlled and conducted laboratory experiments.
b. traditional economies.
c. historical episodes of economic change.
d. centrally planned economies.
ANS: C
PTS: 1
DIF: 1
REF: 2-1
TOP: Scientific method
MSC: Interpretive
15. In conducting their research, economists face an obstacle that not all scientists face; specifically, in economics, it is
difficult to
a. make use of theory and observation.
b. rely upon the scientific method.
c. conduct laboratory experiments.
d. find articles or books that were written before 1900.
ANS: C
PTS: 1
DIF: 1
REF: 2-1
TOP: Scientific method
MSC: Definitional
16. In conducting their research, economists often substitute historical events and historical episodes for
a. theories and observations.
b. laboratory experiments.
c. models.
d. assumptions.
ANS: B
PTS: 1
DIF: 1
REF: 2-1
TOP: Scientific method
MSC: Definitional
17. For economists, substitutes for laboratory experiments often come in the form of
a. natural experiments offered by history.
b. untested theories.
c. “rules of thumb” and other such conveniences.
d. reliance upon the wisdom of elders in the economics profession.
ANS: A
PTS: 1
DIF: 1
REF: 2-1
TOP: Scientific method
MSC: Interpretive
18. Economists make assumptions in order to
a. mimic the methodologies employed by other scientists.
b. minimize the number of experiments that yield no useful data.
c. minimize the likelihood that some aspect of the problem at hand is being overlooked.
d. focus their thinking on the essence of the problem at hand.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Assumptions
MSC: Interpretive
19. The art in scientific thinking—whether in chemistry, economics, or psychology—is
a. the design and implementation of laboratory experiments.
b. knowing when to stop collecting data and when to start analyzing the data.
c. deciding which assumptions to make.
d. being able to mathematically model natural phenomena.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Assumptions | Scientific method
MSC: Interpretive
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Chapter 2/Thinking Like an Economist  39
20. An economic theory about international trade that is based on the assumption that there are only two countries and
two goods
a. can be useful in helping economists understand the complex world of international trade involving many
countries and many goods.
b. is useless, since the real world has many countries trading many goods.
c. can be useful only in situations involving two countries and two goods.
d. can be useful in the classroom, but is useless in the real world.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Assumptions
MSC: Interpretive
21. The 1973 war in the Middle East provided economists with the opportunity to observe the negative relationship
between
a. oil prices and living standards.
b. military buildups and government spending.
c. the flow of crude oil and living standards.
d. the flow of crude oil and political power.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Scientific method
MSC: Interpretive
22. Historical episodes are
a. valuable to economists, primarily because they allow economists to see how the science of economics has
evolved.
b. valuable to economists, primarily because they allow economists to evaluate economic theories of the present.
c. not of concern to economists, since economics is about predicting the future; economics is not about dwelling
on the past.
d. not of concern to economists, since the exact circumstances of historical episodes are unlikely to be observed
again.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Scientific method
MSC: Interpretive
23. The goal of an economist who formulates new theories is to
a. provide an interesting framework of analysis, whether or not the framework turns out to be of much use in
understanding how the world works.
b. provoke stimulating debate in scientific journals.
c. demonstrate that economists, like other scientists, can formulate testable theories.
d. contribute to an understanding of how the world works.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Scientific method
MSC: Interpretive
24. One thing economists do to help them understand how the real world works is as follows:
a. They make assumptions.
b. They ignore the past.
c. They try to capture every aspect of the real world in the models they construct.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Assumptions | Scientific method
MSC: Interpretive
25. For an economist, the idea of making assumptions is regarded generally as a
a. bad idea, since doing so leads to the omission of important ideas and variables from economic models.
b. bad idea, since doing so invariably leads to data-collection problems.
c. good idea, since doing so helps to simplify the complex world and make it easier to understand.
d. good idea, since economic analysis without assumptions leads to complicated results that the general public
finds hard to understand.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Assumptions
MSC: Interpretive
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40  Chapter 2/Thinking Like an Economist
26. Which of the following statements is true?
a. Few economic models incorporate assumptions.
b. Different economic models employ different sets of assumptions.
c. Good economic models should attempt to mimic reality as closely as possible.
d. Economic models, to be accepted, must be tested by conducting experiments.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Economic models | Assumptions
MSC: Interpretive
27. The decision of which assumptions to make is
a. an easy decision for an economist, but a difficult decision for a physicist or a chemist.
b. not a particularly important decision for an economist.
c. usually regarded as an art in scientific thinking.
d. usually regarded as the easiest part of the scientific method.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Assumptions
MSC: Interpretive
28. The art in scientific thinking is
a. finding the right problem to study.
b. deciding which assumptions to make.
c. the ability to make an abstract subject easy to understand.
d. not something in which economists have to be skilled.
ANS: B
PTS: 1
DIF: 1
REF: 2-1
TOP: Assumptions | Scientific method
MSC: Interpretive
29. Economists make use of assumptions, some of which are unrealistic, for the purpose of
a. teaching economics to people who have never before studied economics.
b. advancing their political agendas.
c. developing models when the scientific method cannot be used.
d. focusing their thinking.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Assumptions
MSC: Interpretive
30. An example of a price that changes only infrequently is the price of
a. stocks on the New York Stock Exchange.
b. crude oil.
c. residential real estate.
d. magazines sold at newsstands.
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Assumptions | Prices
MSC: Definitional
31. When studying the effects of changes in public policy, economists believe that
a. it is important to distinguish between the short run and the long run.
b. the assumptions used in studying those effects should be the same for the short run as for the long run.
c. the short-run effects of those changes are always more beneficial to society than are the long-run effects.
d. the long-run effects of those changes are always more beneficial to society than are the short-run effects.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Public policy | Short run | Long run
MSC: Interpretive
32. When studying the effects of public policy changes, economists
a. always refrain from making assumptions.
b. sometimes make different assumptions about the short run and the long run.
c. consider only the direct effects of those policy changes and not the indirect effects.
d. consider only the short-run effects of those policy changes and not the long-run effects.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Public policy | Assumptions | Short run | Long run
MSC: Interpretive
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Chapter 2/Thinking Like an Economist  41
33. Economic models
a. cannot be useful if they are based on false assumptions.
b. were once thought to be useful, but that is no longer true.
c. must incorporate all aspects of the economy if those models are to be useful.
d. can be useful, even if they are not particularly realistic.
ANS: D
PTS: 1
DIF: 3
REF: 2-1
TOP: Economic models
MSC: Applicative
34. Just like models constructed in other areas of science, economic models
a. incorporate assumptions that contradict reality.
b. incorporate all details about the real world.
c. complicate reality.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Economic models
MSC: Interpretive
35. In building economic models, economists often omit
a. assumptions.
b. theories.
c. details.
d. equations.
ANS: C
PTS: 1
DIF: 1
REF: 2-1
TOP: Economic models
MSC: Interpretive
36. Which types of models are built with assumptions?
a. economic models, but not models in other disciplines such as physics and sociology
b. economic models as well as models in other disciplines such as physics and sociology
c. models that are built for teaching purposes but not for research purposes
d. No models are built with assumptions.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Economic models | Assumptions
MSC: Interpretive
37. Economists build economic models by
a. generating data.
b. conducting controlled experiments in a lab.
c. making assumptions.
d. reviewing statistical forecasts.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Economic models | Assumptions
MSC: Interpretive
38. A model can be accurately described as a
a. theoretical abstraction with very little value.
b. device that is useful only to the persons who created it.
c. realistic and carefully constructed theory.
d. simplification of reality.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Economic models
MSC: Interpretive
39. Which of the following statements about models is correct?
a. The more details a model includes, the better the model.
b. Models assume away irrelevant details.
c. Models cannot be used to explain how the economy functions.
d. Models cannot be used to make predictions.
ANS: B
PTS: 1
DIF: 1
REF: 2-1
TOP: Economic models
MSC: Interpretive
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42  Chapter 2/Thinking Like an Economist
40. Which of the following is not true about most economic models?
a. They are composed of equations and diagrams.
b. They contribute very little to economists’ understanding of the real world.
c. They omit many features of the real-world economy.
d. In constructing models, economists make assumptions.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Economic models
MSC: Interpretive
41. Which of the following statements about economic models is valid?
a. Economic models are built to mirror reality exactly.
b. Economic models are useful, but they should not be used for the purpose of improving public policies.
c. Because economic models omit many details, they allow us to see what is truly important.
d. Economic models seldom incorporate equations or diagrams.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Economic models
MSC: Interpretive
42. Which of these statements about economic models is correct?
a. For economists, economic models provide insights about the world.
b. Economic models are built with assumptions.
c. Economic models are often composed of equations and diagrams.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Economic models
MSC: Definitional
43. In constructing models, economists
a. leave out equations, since equations and models tend to contradict one another.
b. ignore the long run, since models are useful only for short-run analysis.
c. make assumptions that are contrary to features of the real world.
d. try to include every feature of the economy.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Economic models
MSC: Interpretive
44. Economic models are built with
a. recommendations concerning public policies.
b. facts about the legal system.
c. assumptions.
d. statistical forecasts.
ANS: C
PTS: 1
DIF: 1
REF: 2-1
TOP: Economic models
MSC: Definitional
45. The circular-flow diagram is a
a. visual model of how the economy is organized.
b. visual model of the relationships among money, prices, and businesses.
c. model that shows the effects of government on the economy.
d. mathematical model of how the economy works.
ANS: A
PTS: 1
DIF: 1
REF: 2-1
TOP: Circular-flow diagram
MSC: Definitional
46. A circular-flow diagram is a model that
a. helps to explain how participants in the economy interact with one another.
b. helps to explain how the economy is organized.
c. incorporates the markets for the factors of production.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Circular-flow diagram
MSC: Definitional
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Chapter 2/Thinking Like an Economist  43
47. Factors of production are
a. the mathematical calculations firms make in determining their optimal production levels.
b. social and political conditions that affect production.
c. the physical relationships between economic inputs and outputs.
d. inputs into the production process.
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Factors of production
MSC: Definitional
48. In the simple circular-flow diagram, the participants in the economy are
a. firms and government.
b. households and firms.
c. households and government.
d. elected officials and ordinary citizens.
ANS: B
PTS: 1
DIF: 1
REF: 2-1
TOP: Circular-flow diagram
MSC: Definitional
49. The two loops in the circular-flow diagram represent
a. (i) the flow of goods and (ii) the flow of services.
b. (i) the flow of dollars and (ii) other financial flows.
c. (i) inputs into production processes and (ii) outputs from production processes.
d. (i) the flows of inputs and outputs and (ii) the flow of dollars.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
50. In a circular-flow diagram,
a. taxes flow from households to firms, and transfer payments flow from firms to households.
b. income payments flow from firms to households, and sales revenue flows from households to firms.
c. resources flow from firms to households, and goods and services flow from households to firms.
d. inputs and outputs flow in the same direction as the flow of dollars, from firms to households.
ANS: B
PTS: 1
DIF: 3
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
51. In the circular-flow diagram,
a. firms are buyers in the markets for goods and services.
b. households are sellers in the markets for the factors of production.
c. firms are sellers in the markets for factors of production and in the markets for goods and services.
d. dollars that are spent on goods and services flow directly from firms to households.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
52. In the circular-flow diagram,
a. factors of production flow from government to firms.
b. goods and services flow from households to firms.
c. income paid to the factors of production flows from firms to households.
d. spending on goods and services flows from firms to households.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
53. Which of the following items is not a factor of production?
a. labor
b. land
c. capital
d. money
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Factors of production
MSC: Definitional
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44  Chapter 2/Thinking Like an Economist
54. Another name for goods and services produced by firms is
a. factors of production.
b. output.
c. inputs.
d. resources.
ANS: B
PTS: 1
DIF: 1
REF: 2-1
TOP: Output
MSC: Definitional
55. Factors of production are
a. used to produce goods and services.
b. also called output.
c. abundant in most economies.
d. assumed to be owned by firms in the circular-flow diagram.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Factors of production
MSC: Interpretive
56. Which of these terms are used interchangeably?
a. "goods and services" and "inputs"
b. "goods and services" and "factors of production"
c. "inputs" and "factors of production"
d. "land, labor and capital" and "goods and services"
ANS: C
PTS: 1
DIF: 1
REF: 2-1
TOP: Factors of production | Goods and services | Circular-flow diagram
MSC: Definitional
57. Another term for factors of production is
a. inputs.
b. output.
c. goods.
d. services.
ANS: A
PTS: 1
DIF: 1
REF: 2-1
TOP: Factors of production
MSC: Definitional
58. In the simple circular-flow diagram, households
a. are represented, but firms are not represented.
b. own the factors of production.
c. are buyers of inputs.
d. directly receive revenue from the sale of goods and services.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
59. Which two groups of decisionmakers are included in the simple circular-flow diagram?
a. markets and government
b. households and government
c. firms and government
d. households and firms
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Circular-flow diagram
MSC: Definitional
60. In the simple circular-flow diagram,
a. households own the factors of production.
b. households buy all the goods and services that firms produce.
c. land, labor, and capital flow from households to firms.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  45
61. Which of the following statements about the circular-flow diagram is correct?
a. One must imagine that the economy operates without money in order to make sense of the diagram.
b. The diagram leaves out details that are not essential for understanding the economic transactions that occur
between households and firms.
c. In the diagram, households use the factors of production to produce goods and services.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
62. Which markets are represented in the simple circular-flow diagram?
a. markets for goods and services and markets for financial assets
b. markets for factors of production and markets for financial assets
c. markets for goods and services and markets for factors of production
d. markets for goods and services and markets for imports and exports
ANS: C
PTS: 1
DIF: 1
REF: 2-1
TOP: Circular-flow diagram
MSC: Definitional
63. In the markets for goods and services,
a. households and firms are both buyers.
b. households and firms are both sellers.
c. households are buyers and firms are sellers.
d. households are sellers and firms are buyers.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
64. In the markets for the factors of production,
a. households are sellers and firms are buyers.
b. households are buyers and firms are sellers.
c. households and firms are both buyers.
d. households and firms are both sellers.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
Figure 2-1
65. Refer to Figure 2-1. Which arrow represents the flow of goods and services?
a. A
b. B
c. C
d. D
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
46  Chapter 2/Thinking Like an Economist
66. Refer to Figure 2-1. Which arrow represents the flow of spending by households?
a. A
b. B
c. C
d. D
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
67. Refer to Figure 2-1. Which arrow shows the flow of land, labor, and capital?
a. A
b. B
c. C
d. D
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
68. Refer to Figure 2-1. Which arrow shows the flow of income payments?
a. A
b. B
c. C
d. D
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
69. Refer to Figure 2-1. Juan buys a new pair of shoes at a shoe store. To which of the arrows does this purchase
directly contribute?
a. A only
b. A and B
c. C only
d. C and D
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
70. Refer to Figure 2-1. Michelle completes her first week of employment working as a hairdresser at a salon. On
Friday of that week she receives her first paycheck. To which of the arrows does this activity contribute directly?
a. B only
b. A and B
c. C only
d. C and D
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
71. Among economic models, the circular-flow diagram is unusual in that it
a. drastically simplifies the real world.
b. features more than one type of market.
c. features flows of dollars.
d. does not involve mathematics.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram | Economic models
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  47
Figure 2-2
72. Refer to Figure 2-2. The figure represents a circular-flow diagram. Boxes A and B represent
a. firms and households.
b. households and government.
c. the markets for goods and services and the financial markets.
d. the markets for goods and the markets for services.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
73. Refer to Figure 2-2. The figure represents a circular-flow diagram. Boxes C and D represent
a. households and government.
b. firms and government.
c. the markets for goods and services and the financial markets.
d. None of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
74. Refer to Figure 2-2. The figure represents a circular-flow diagram. If Box A represents firms, then which box
represents households?
a. Box B
b. Box C
c. Box D
d. Any one of the other boxes (B, C, or D) could represent households.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
75. Refer to Figure 2-2. The figure represents a circular-flow diagram. If households are sellers in the markets
represented by Box D, then
a. Box D must represent the markets for factors of production.
b. Box C must represent the markets for goods and services.
c. firms are buyers in the markets represented by Box D.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 3
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
48  Chapter 2/Thinking Like an Economist
76. Refer to Figure 2-2. The figure represents a circular-flow diagram. If households are buyers in the markets
represented by Box C, then
a. Box C must represent the markets for the factors of production.
b. Box D must represent the markets for goods and services.
c. firms are sellers in the markets represented by Box C.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 3
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
77. Refer to Figure 2-2. The figure represents a circular-flow diagram. If the owners of land, labor, and capital are
represented by Box B, then
a. the government is represented by Box A.
b. firms are represented by Box C.
c. firms are represented by Box A.
d. firms are sellers in Box B.
ANS: C
PTS: 1
DIF: 3
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
78. Refer to Figure 2-2. The figure represents a circular-flow diagram. If the outer loop represents flows of dollars,
then the inner loop includes
a. flows of goods and services, of which households are sellers.
b. flows of inputs, of which firms are buyers.
c. flows of rent payments paid to owners of land.
d. flows of wages and salaries paid to workers.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
79. Refer to Figure 2-2. The figure represents a circular-flow diagram. If the flow of goods and services is part of
what is represented by the inner loop, then
a. the flow of factors of production is also part of what is represented by the inner loop.
b. the flow of income paid to households is also part of what is represented by the inner loop.
c. Box C must represent households and Box D must represent firms.
d. households must be sellers of output.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
80. Refer to Figure 2-2. The figure represents a circular-flow diagram. Marsha works as an attorney for a corporation
and is paid a salary in exchange for the legal services she performs. James owns office buildings and rents his
buildings to companies in exchange for rent payments. If Marsha’s income is represented by a flow of dollars from
Box D to Box B, then James’s income is represented by a flow of dollars
a. from Box A to Box C.
b. from Box C to Box A.
c. from Box C to Box B.
d. from Box D to Box B.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
81. Refer to Figure 2-2. The figure represents a circular-flow diagram. Andrea regularly buys fruits and vegetables at
a grocery store. Michael regularly pays a lawn-care company to mow his lawn. If the flow of fruits and vegetables
from the grocery store to Andrea is represented by an arrow from Box C to Box B, then the money paid by Michael
to the lawn-care company is represented by an arrow
a. from Box A to Box C.
b. from Box B to Box C.
c. from Box C to Box B.
d. from Box D to Box B.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  49
82. In the markets for factors of production,
a. households provide firms with labor, land, and capital.
b. households provide firms with savings for investment.
c. firms provide households with goods and services.
d. the government provides firms with inputs for the production process.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Factor markets
MSC: Interpretive
83. In the markets for goods and services,
a. households provide firms with savings for investment.
b. households provide firms with labor, land, and capital.
c. firms provide households with output.
d. the government provides firms with inputs for the production process.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Output
MSC: Interpretive
84. Which of the following transactions does not take place in a market for a factor of production?
a. Karl provides plumbing services for a plumbing company and receives an hourly wage from the company for
his services.
b. Juanita works as a marriage counselor and her clients pay her on a per-hour basis for her services.
c. Trish owns several shopping malls and receives rent payments from the companies that operate those malls.
d. Ben sells advertising for a newspaper and receives a commission from the newspaper company for each
advertisement that he sells.
ANS: B
PTS: 1
DIF: 3
REF: 2-1
TOP: Factor markets
MSC: Applicative
85. In economics, capital refers to
a. the finances necessary for firms to produce their products.
b. buildings and machines used in the production process.
c. the money households use to purchase firms' output.
d. goods, but not to services.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Capital
MSC: Definitional
86. The amount by which firms’ sales revenue exceeds their payments to factors of production is called
a. rent.
b. capital.
c. profit.
d. interest.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Profit
MSC: Definitional
87. Any point on a country's production possibilities frontier represents a combination of two goods that an economy
a. will never be able to produce.
b. can produce using all available resources and technology.
c. can produce using some portion, but not all, of its resources and technology.
d. may be able to produce in the future with more resources and/or superior technology.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
88. Which of the following is the most accurate statement about production possibilities?
a. An economy can produce only on the production possibilities frontier.
b. An economy can produce at any point inside or outside a production possibilities frontier.
c. An economy can produce at any point on or inside the production possibilities frontier, but not outside the
frontier.
d. An economy can produce at any point inside the production possibilities frontier, but not on or outside the
frontier.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
50  Chapter 2/Thinking Like an Economist
89. An economic outcome is said to be efficient if the economy is
a. using all of the resources it has available.
b. conserving on resources, rather than using all available resources.
c. getting all it can get from the scarce resources it has available.
d. able to produce more than what is currently being produced without additional resources.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Efficiency MSC: Definitional
90. When constructing a production possibilities frontier, which of the following assumptions is not made?
a. The economy produces only two goods or two types of goods.
b. Firms produce goods using factors of production.
c. The technology available to firms is given.
d. The quantities of the factors of production that are available are increasing over the relevant time period.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
91. Production is efficient if the economy is producing at a point
a. on the production possibilities frontier.
b. outside the production possibilities frontier.
c. on or inside the production possibilities frontier.
d. inside the production possibilities frontier.
ANS: A
PTS: 1
DIF: 1
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
92. If an economy is producing efficiently, then
a. there is no way to produce more of one good without producing less of another good.
b. it is possible to produce more of both goods without increasing the quantities of inputs that are being used.
c. it is possible to produce more of one good without producing less of the other.
d. it is not possible to produce more of any good at any cost.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Efficiency MSC: Interpretive
93. Which of the following concepts can not be illustrated by the production possibilities frontier?
a. efficiency
b. opportunity cost
c. equity
d. tradeoffs
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
94. The bowed-out shape of the production possibilities frontier can be explained by the fact that
a. scarcity is a fact of life.
b. economic growth is always occurring.
c. the opportunity cost of one good in terms of the other depends on how much of each good the economy is
producing.
d. an assumption that is made in constructing a production possibilities frontier is that tradeoffs are unimportant.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
95. Production possibilities frontiers are usually bowed outward. This is because
a. the more resources a society uses to produce one good, the fewer resources it has available to produce another
good.
b. it reflects the fact that the opportunity cost of producing a good decreases as more and more of that good is
produced.
c. of the effects of technological change.
d. resources are specialized, that is, some are better at producing particular goods rather than other goods.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  51
96. A production possibilities frontier that is a straight line shows
a. a truer picture of the real world than does a bowed-out production possibilities frontier.
b. that resources can be shifted easily and seamlessly from the production of one good to the production of a
different good.
c. that the opportunity cost of one good in terms of another good depends on the quantities of the two goods that
the economy is producing.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
97. Here are some production possibilities for an imaginary economy for a given year.
Cars
10
12
14
Newspapers
400
360
?
If the production possibilities frontier is bowed outward, then in place of "?" we might have
a. 340.
b. 330.
c. 320.
d. 310.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
98. A certain production possibilities frontier shows production possibilities for two goods: wheat and shirts. Which of
the following concepts can not be illustrated in this model?
a. the flow of dollars between (i) sellers of wheat and shirts and (ii) buyers of wheat and shirts
b. the tradeoff between production of wheat and production of shirts
c. the opportunity cost of shirts in terms of wheat
d. the effect of economic growth on production possibilities involving wheat and shirts
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
99. 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, and 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.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
52  Chapter 2/Thinking Like an Economist
Figure 2-3
100. Refer to Figure 2-3. The economy has the ability to produce at which point or points?
a. B, D, E
b. A, B, D, E
c. D, C
d. D
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
101. Refer to Figure 2-3. Which point represents the situation in which the economy is producing its maximum
possible quantity of tubas?
a. A
b. B
c. D
d. E
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
102. Refer to Figure 2-3. At which point or points can the economy not currently produce?
a. A
b. C
c. A, C
d. A, C, D
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
103. Refer to Figure 2-3. Efficient production is represented by which point or points?
a. B, E
b. A, B, E
c. D
d. C
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
104. Refer to Figure 2-3. Inefficient production is represented by which point or points?
a. D
b. D, E
c. A, C
d. A, B
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  53
105. The opportunity cost of obtaining more of one good is shown on the production possibilities frontier as the
a. amount of the other good that must be given up.
b. market price of the additional amount produced.
c. amount of resources that must be devoted to its production.
d. number of dollars that must be spent to produce it.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier | Opportunity cost
MSC: Interpretive
Figure 2-4
106. Refer to Figure 2-4. If the economy moves from point A to point D, the opportunity cost is
a. 10 toasters.
b. 20 toasters.
c. 30 toasters.
d. 30 toothbrushes.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier | Opportunity cost
MSC: Interpretive
107. Refer to Figure 2-4. The opportunity cost of obtaining 15 additional toasters by moving from point D to point C is
a. 10 toothbrushes.
b. 20 toothbrushes.
c. 30 toothbrushes.
d. none of the above; the economy cannot move from point D to point C.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier | Opportunity cost
MSC: Interpretive
108. Refer to Figure 2-4. The opportunity cost of obtaining 10 additional toasters by moving from point B to point A is
a. 10 toothbrushes.
b. 20 toothbrushes.
c. 30 toothbrushes.
d. zero, since the economy has the additional resources to produce 10 additional toasters.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier | Opportunity cost
MSC: Interpretive
109. Refer to Figure 2-4. Suppose the economy is producing at point B. Which of the following statements would best
explain this situation?
a. The economy lacks the resources to produce at a more desirable point.
b. The economy’s available technology prevents it from producing at a more desirable point.
c. There is widespread unemployment in the economy.
d. Any of the above statements would be a legitimate explanation for this situation.
ANS: C
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
54  Chapter 2/Thinking Like an Economist
Figure 2-5
110. Refer to Figure 2-5. Which of the following events would explain the shift of the production possibilities frontier
from A to B?
a. The economy experienced a technological advance in the production of batteries.
b. The economy’s citizens developed an enhanced taste for batteries.
c. More capital became available in the economy.
d. More labor became available in the economy.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
111. Refer to Figure 2-5. The shift of the production possibilities frontier from A to B illustrates
a. simultaneous technological advances in the battery and bagel industries.
b. a reallocation of resources away from the production of bagels and toward the production of batteries.
c. economic growth.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
Figure 2-6
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  55
112. Refer to Figure 2-6. What is the opportunity cost to society of the movement from point A to point C?
a. 50 baseballs
b. 100 baseballs
c. 100 bananas
d. 300 bananas
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier | Opportunity cost
MSC: Interpretive
113. Refer to Figure 2-6. A movement from point C to point D could be caused by
a. unemployment.
b. a decrease in society's preference for bananas.
c. fewer resources available for production of bananas.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
114. Refer to Figure 2-6. If this economy put all available resources into the production of bananas, it could produce
a. 200 bananas and also 150 baseballs.
b. 300 bananas and also 100 baseballs.
c. 400 bananas and no baseballs.
d. It is impossible to know unless we know the quantity of resources available.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
115. Refer to Figure 2-6. If this economy put one-half of its available resources into the production of baseballs and the
other half into the production of bananas, it could produce
a. 100 baseballs and 200 bananas.
b. 100 baseballs and 300 bananas.
c. 150 baseballs and 200 bananas.
d. We would have to know the details of the economy’s technology in order to determine this.
ANS: D
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Analytical
116. Refer to Figure 2-6. If the economy moves from point C to point B, then which of the following statements is
correct?
a. The economy benefited from a technological advance in the production of baseballs.
b. The opportunity cost of each additional baseball is 2 bananas.
c. The opportunity cost of each additional banana is 2 baseballs.
d. The move involves no opportunity cost; it simply reflects the desires of the economy’s citizens.
ANS: B
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
117. Refer to Figure 2-6. If the economy moves from point A to point B, then which of the following statements is
correct?
a. The economy has moved from a point of inefficient production to a point of efficient production.
b. The economy has experienced economic growth.
c. The opportunity cost of each additional banana produced is 50 baseballs.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
118. Unemployment would cause an economy to
a. produce inside its production possibilities frontier.
b. produce on its production possibilities frontier.
c. produce outside its production possibilities frontier.
d. experience an inward shift of its production possibilities frontier.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
56  Chapter 2/Thinking Like an Economist
119. When an economy is operating at a point on (rather than inside) its production possibilities frontier, then
a. consumers are content with the mix of goods and services that is being produced.
b. there is no way to produce more of one good without producing less of the other.
c. equal amounts of the two goods (measured along the two axes) are being produced.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Analytical
120. It is possible for an economy to increase its production of computers and, at the same time, to increase its
production of cars if the economy
a. moves downward and to the right along its production possibilities frontier and the frontier is bowed outward.
b. moves upward and to the left along its production possibilities frontier and the frontier is bowed outward.
c. moves in either direction along its production possibilities frontier and the frontier is a straight line.
d. moves from a situation of inefficient production to a situation of efficient production.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
121. A production possibilities frontier can shift outward if
a. government increases the amount of money in the economy.
b. there is a technological improvement.
c. resources are shifted from the production of one good to the production of the other good.
d. the economy abandons inefficient production methods in favor of efficient production methods.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
122. A production possibilities frontier shifts outward when
a. the economy experiences economic growth.
b. the desires of the economy’s citizens change.
c. at least one of the basic principles of economics is violated.
d. opportunity costs are lessened.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
123. When an economy is operating inside its production possibilities frontier we know that
a. there are unused resources or inefficiencies in the economy.
b. all of the economy’s resources are fully employed.
c. economic growth would have to occur in order for the economy to move to a point on the frontier.
d. in order to produce more of one good, the economy would have to give up some of the other good.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
124. In a certain economy, peanuts and books are produced, and the economy currently operates on its production
possibilities frontier. Which of the following events would allow the economy to produce more peanuts and more
books, relative to the quantities of those goods that are being produced now?
a. Unemployed labor is put to work producing peanuts and books.
b. The economy puts its idle capital to work producing peanuts and books.
c. The economy experiences economic growth.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  57
125. In a certain economy, brooms and radios are produced, and the economy currently operates on its production
possibilities frontier. Which of the following events would allow the economy to produce more brooms and more
radios, relative to the quantities of those goods that are being produced now?
a. The economy experiences economic growth.
b. There is a technological advance in the broom industry, but the radio industry experiences no such advance.
c. There is a technological advance in the radio industry, but the broom industry experiences no such advance.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
126. Which of the following is an example of an economic model?
a. the production possibilities frontier
b. the concept of opportunity cost
c. the concept of capital
d. All of the above are economic models.
ANS: A
PTS: 1
DIF: 1
REF: 2-1
TOP: Economic models | Production possibilities frontier
MSC: Interpretive
Figure 2-7
127. Refer to Figure 2-7. Which of the following would most likely have caused the production possibilities frontier to
shift outward from A to B?
a. an increase in the availability of capital-producing resources
b. a technological advance in the consumer-goods industries
c. a general technological advance
d. a decrease in unemployment
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier | Technology MSC: Applicative
128. Refer to Figure 2-7. The shift of the production possibilities frontier from A to B can best be described as
a. a downturn in the economy.
b. economic growth.
c. an enhancement of equity.
d. an improvement in the allocation of resources.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
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58  Chapter 2/Thinking Like an Economist
Table 2-1. Production Possibilities for Toyland
Dolls
400
300
200
100
0
Fire Trucks
0
200
350
450
500
129. Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of dolls from 200 to 300?
a. 200 fire trucks
b. 150 fire trucks
c. 100 fire trucks
d. It is impossible to tell what the opportunity cost is since in this example costs are not constant.
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Opportunity cost
MSC: Interpretive
130. Refer to Table 2-1. Which of the following statements accurately describes the production possibilities for
Toyland?
a. The opportunity cost of an additional 100 dolls is 50 fire trucks.
b. The opportunity cost of an additional 100 dolls is 100 fire trucks.
c. Toyland’s production possibilities frontier is a straight, downward-sloping line.
d. The opportunity cost of an additional 100 dolls increases as more dolls are produced.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Opportunity cost | Production possibilities frontier
MSC: Applicative
Figure 2-8
131. Refer to Figure 2-8. Production is efficient if the economy is producing
a. 30 barrels and 6 bathtubs.
b. 20 barrels and 8 bathtubs.
c. 25 barrels and 12 bathtubs.
d. 15 barrels and 12 bathtubs.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  59
132. Refer to Figure 2-8. What is the opportunity cost of moving from point A to point B?
a. 8 bathtubs
b. 20 barrels
c. the gain in well-being that the society experiences as a result of the move
d. the loss of well-being that the society experiences as a result of the move
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier | Opportunity cost
MSC: Interpretive
133. Refer to Figure 2-8. If this economy puts all of its resources into the production of bathtubs it could produce
a. 20 barrels and 12 bathtubs.
b. no barrels and 14 bathtubs.
c. no barrels and 16 bathtubs.
d. More information is required in order to make this determination.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
134. Refer to Figure 2-8. Which of the following combinations can this economy not produce?
a. 30 barrels and 6 bathtubs
b. 25 barrels and 12 bathtubs
c. 20 barrels and 8 bathtubs
d. 10 barrels and 14 bathtubs
ANS: B
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
135. Refer to Figure 2-8. If this economy moved from point C to point E,
a. it still would not be producing efficiently.
b. there would be no gain in either bathtubs or barrels.
c. it would be producing more barrels and more bathtubs than at point C.
d. It is not possible for this economy to move from point C to point E without additional resources.
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
136. 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.
ANS: A
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
137. 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 true?
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. These resources
could be used to produce more food.
ANS: D
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier
MSC: Analytical
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60  Chapter 2/Thinking Like an Economist
138. The country of Econoland produces two goods, textbooks and widgets. Last year it produced 200 textbooks and
500 widgets. This year it produced 250 textbooks and 600 widgets. Given no other information, which of the
following events could not explain this change?
a. Econoland experienced a reduction in unemployment.
b. Econoland experienced an improvement in widget-making technology.
c. Econoland acquired more resources.
d. Any of these events could, in fact, explain the change.
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
139. The field of economics is traditionally divided into two broad subfields,
a. national economics and international economics.
b. consumer economics and producer economics.
c. private sector economics and public sector economics.
d. microeconomics and macroeconomics.
ANS: D
PTS: 1
DIF: 1
REF: 2-1
TOP: Microeconomics | Macroeconomics
MSC: Definitional
140. Microeconomics is the study of
a. the behavior of consumers.
b. how individual households and firms make decisions.
c. how government affects the economy.
d. how the economy as a whole works.
ANS: B
PTS: 1
DIF: 1
REF: 2-1
TOP: Microeconomics | Macroeconomics
MSC: Definitional
141. Macroeconomics is the study of
a. individual decisionmakers.
b. international trade.
c. economy-wide phenomena.
d. markets for large products.
ANS: C
PTS: 1
DIF: 1
TOP: Microeconomics | Macroeconomics
REF: 2-1
MSC: Definitional
142. Which of the following would be considered a topic of study in macroeconomics?
a. the effect of agricultural price support programs on the cotton industry
b. the effect on U.S. steel producers of an import quota imposed on foreign steel
c. the effect of an increasing inflation rate on national living standards
d. the effect of an increase in the price of imported coffee beans on the U.S. coffee industry
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Microeconomics | Macroeconomics
MSC: Interpretive
143. Which of the following statements best captures the relationship between microeconomics and macroeconomics?
a. For the most part, microeconomists are unconcerned with macroeconomics, and macroeconomists are
unconcerned with microeconomics.
b. Microeconomists study markets for small products, whereas macroeconomists study markets for large products.
c. Microeconomics and macroeconomics are distinct from one another, yet they are closely related.
d. Microeconomics is oriented toward policy studies, whereas macroeconomics is oriented toward theoretical
studies.
ANS: C
PTS: 1
DIF: 1
REF: 2-1
TOP: Microeconomics | Macroeconomics
MSC: Definitional
144. Microeconomics is best described as the study of
a. economy-wide phenomena.
b. how households and firms make decisions and how they interact in specific markets.
c. the flows of dollars between households and firms.
d. markets for land, labor, and capital.
ANS: B
PTS: 1
DIF: 1
REF: 2-1
TOP: Microeconomics
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  61
145. Which of the following areas of study typifies macroeconomics as opposed to microeconomics?
a. the effects of rent control on the availability of housing in New York City
b. the economic impact of tornadoes on cities and towns in Oklahoma
c. how tariffs on shoes affects the shoe industry
d. the effect on the economy of changes in the nation’s unemployment rate
ANS: D
PTS: 1
DIF: 2
REF: 2-1
TOP: Microeconomics | Macroeconomics
MSC: Interpretive
146. Which of the following areas of study typifies microeconomics as opposed to macroeconomics?
a. the impact of minimum-wage laws on employment in the fast food industry
b. the effect of changes in household saving rates on the growth rate of national income
c. the impact of faster money growth on the rate of inflation
d. a comparison of alternative tax policies and their respective impacts on the rate of the nation’s economic
growth
ANS: A
PTS: 1
DIF: 2
REF: 2-1
TOP: Microeconomics | Macroeconomics
MSC: Interpretive
147. Which of the following statements is correct?
a. Microeconomics and macroeconomics are two separate divisions of economics, completely independent of
each other.
b. Microeconomists focus their attention on markets for small products, while macroeconomics focus their
attention on markets for large products.
c. Microeconomics and macroeconomics are two distinct but closely intertwined fields of economics.
d. It is possible to understand macroeconomics without understanding microeconomics, but not vice versa.
ANS: C
PTS: 1
DIF: 2
REF: 2-1
TOP: Microeconomics | Macroeconomics
MSC: Interpretive
148. When economists are trying to explain the world, they are
a. scientists.
b. policy advisers.
c. in the realm of microeconomics rather than macroeconomics.
d. in the realm of normative economics rather than positive economics.
ANS: A
PTS: 1
DIF: 1
REF: 2-2
TOP: Economists MSC: Interpretive
149. When economists are trying to help improve the world they are
a. concerned with positive economics rather than normative economics.
b. concerned with macroeconomics rather than microeconomics.
c. scientists.
d. policy advisers.
ANS: D
PTS: 1
DIF: 1
REF: 2-2
TOP: Economists MSC: Interpretive
150. Which is the best statement about the roles of economists?
a. Economists are best viewed as policymakers.
b. Economists are best viewed as scientists.
c. In trying to explain the world, economists are policymakers; in trying to improve the world, they are scientists.
d. In trying to explain the world, economists are scientists; in trying to improve the world, they are policymakers.
ANS: D
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Interpretive
151. Who among the following individuals majored in economics as a college student?
a. Arnold Schwartzenegger, governor of California
b. Ronald Reagan, president of the United States
c. Tiger Woods, golfer
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
62  Chapter 2/Thinking Like an Economist
152. Who among the following individuals majored in economics as a college student?
a. Mick Jagger, singer
b. John Elway, National Football League quarterback
c. Kofi Annan, United Nations Secretary General
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Definitional
153. For economists, statements about the world are of two types:
a. assumptions and theories.
b. true statements and false statements.
c. specific statements and general statements.
d. positive statements and normative statements.
ANS: D
PTS: 1
DIF: 1
REF: 2-2
TOP: Positive statements | Normative statements
MSC: Definitional
154. Economists view positive statements as
a. affirmative, justifying existing economic policy.
b. optimistic, putting the best possible interpretation on things.
c. descriptive, making a claim about how the world is.
d. prescriptive, making a claim about how the world ought to be.
ANS: C
PTS: 1
DIF: 1
REF: 2-2
TOP: Positive statements
MSC: Definitional
155. Economists consider normative statements to be
a. descriptive, making a claim about how the world is.
b. statements about the normal condition of the world.
c. prescriptive, making a claim about how the world ought to be.
d. statements which establish production goals for the economy.
ANS: C
PTS: 1
DIF: 1
REF: 2-2
TOP: Normative statements
MSC: Definitional
156. Which of the following is an example of a positive statement?
a. Prices rise when the government prints too much money.
b. If welfare payments increase, the world will be a better place.
c. Inflation is more harmful to the economy than is unemployment.
d. When public policies are evaluated, the benefits to the economy of improved equity should be considered more
important than the costs of reduced efficiency.
ANS: A
PTS: 1
DIF: 2
REF: 2-2
TOP: Positive statements | Normative statements
MSC: Applicative
157. Which of these statements is a normative statement (as opposed to a positive statement)?
a. Gasoline prices ought to be lower than they are now.
b. The federal government should raise taxes on wealthy people.
c. The social security system is a good system and it deserves to be preserved as it is.
d. All of the above are normative statements.
ANS: D
PTS: 1
DIF: 2
REF: 2-2
TOP: Normative statements | Positive statements
MSC: Interpretive
158. Which of the following is not a positive statement?
a. Higher gasoline prices will reduce gasoline consumption.
b. Equity is more important than efficiency.
c. Trade restrictions lower our standard of living.
d. If a nation wants to avoid inflation, it will restrict the growth rate of the quantity of money.
ANS: B
PTS: 1
DIF: 2
REF: 2-2
TOP: Positive statements
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  63
159. A normative statement describes how the world
a. was in the past.
b. is in the present.
c. will be in the future.
d. ought to be.
ANS: D
PTS: 1
DIF: 1
REF: 2-2
TOP: Normative statements
MSC: Definitional
160. Which of the following is an example of a normative statement?
a. If the price of a product decreases, people’s willingness to buy that product will increase.
b. Reducing tax rates on the wealthy would benefit the nation.
c. If the national saving rate were to increase, so would the rate of economic growth.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 2-2
TOP: Normative statements
MSC: Applicative
161. Which of these statements is a positive statement (as opposed to a normative statement)?
a. Income tax rates should not have been cut as they were a few years ago.
b. The quantity of money has grown too slowly in recent years.
c. When the quantity of money grows rapidly, inflation is a predictable consequence.
d. All of the above are positive statements.
ANS: C
PTS: 1
DIF: 2
REF: 2-2
TOP: Normative statements | Positive statements
MSC: Interpretive
162. “Prices rise when the quantity of money rises rapidly” is an example of a
a. negative economic statement.
b. positive economic statement.
c. normative economic statement.
d. statement that contradicts one of the basic principles of economics.
ANS: B
PTS: 1
DIF: 2
REF: 2-2
TOP: Positive statements | Normative statements
MSC: Applicative
163. In principle, we can
a. ignore positive statements when choosing among various public-policy alternatives.
b. ignore normative statements when choosing among various public-policy alternatives.
c. confirm or refute positive statements by examining evidence.
d. confirm or refute normative statements by examining evidence.
ANS: C
PTS: 1
DIF: 2
REF: 2-2
TOP: Positive statements | Normative statements
MSC: Interpretive
164. When economists make normative statements, they are
a. speaking as scientists.
b. speaking as policy advisers.
c. adhering very strictly to basic economic principles.
d. revealing that they are very conservative in their views of how the world works.
ANS: B
PTS: 1
DIF: 2
REF: 2-2
TOP: Normative statements
MSC: Interpretive
165. One way to characterize the difference between positive statements and normative statements is as follows:
a. Positive statements tend to reflect optimism about the economy and its future, whereas normative statements
tend to reflect pessimism about the economy and its future.
b. Positive statements offer descriptions of the way things are, whereas normative statements offer opinions on
how things ought to be.
c. Positive statements involve advice on policy matters, whereas normative statements are supported by scientific
theory and observation.
d. Economists outside of government tend to make normative statements, whereas government-employed
economists tend to make positive statements.
ANS: B
PTS: 1
DIF: 2
REF: 2-2
TOP: Normative statements | Positive statements
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
64  Chapter 2/Thinking Like an Economist
166. When an economist evaluates a positive statement, he or she is primarily
a. examining evidence.
b. evaluating values as well as facts.
c. acting as a policy adviser.
d. concerned with making a sound decision on how the world ought to be.
ANS: A
PTS: 1
DIF: 2
REF: 2-2
TOP: Positive statements
MSC: Interpretive
167. Normative conclusions
a. are derived directly from positive analysis.
b. are based on ignorance of positive analysis.
c. involve value judgments.
d. reflect the economist’s role as scientist.
ANS: C
PTS: 1
DIF: 2
REF: 2-2
TOP: Positive statements | Normative statements
MSC: Interpretive
168. You know an economist has crossed the line from scientist to policy adviser when he or she
a. claims that the problem at hand is widely misunderstood by non-economists.
b. talks about the evidence.
c. makes normative statements.
d. makes positive statements.
ANS: C
PTS: 1
DIF: 1
REF: 2-2
TOP: Positive statements | Normative statements
MSC: Interpretive
169. A few years ago, economist David Romer wrote a paper in which he analyzed whether professional football teams
a. should be exempt from antitrust laws.
b. earned higher profits than those earned by professional baseball or basketball teams.
c. priced their admission tickets in a rational manner.
d. punted more often than is rational.
ANS: D
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Interpretive
170. A few years ago, Bill Belichick, the coach of the New England Patriots football team, acknowledged that he had
recently read an article written by a professional economist concerning
a. the tendency of professional football teams to pass more often than is rational.
b. the tendency of professional football teams to punt more often than is rational.
c. the tendency of professional football team owners to fire their coaches more often than is rational.
d. the overinflated salaries of professional athletes in all sports, including football.
ANS: B
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Interpretive
171. Bill Belichick, coach of the New England Patriots football team,
a. majored in sports management when he was a college student.
b. has been credited with adapting the methods of a social scientist to the coaching of football.
c. has been described as a coach who uses his knowledge of business to keep the salaries of his players artificially
low.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Interpretive
172. Economists at the Treasury Department
a. write the annual Economic Report of the President.
b. provide Congress with the annual budget.
c. enforce the U.S. antitrust laws.
d. provide advice on tax policy to the President.
ANS: D
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  65
173. In addition to advising the president, one duty of the Council of Economic Advisors is to
a. prepare the federal budget.
b. write government regulations.
c. advise Congress on economic matters.
d. write the annual Economic Report of the President.
ANS: D
PTS: 1
DIF: 2
REF: 2-2
TOP: Council of Economic Advisers
MSC: Definitional
174. The Council of Economic Advisors
a. was created in 1913 and consists of three members and a staff of several dozen economists.
b. was created in 1913 and consists of three members and a staff of six economists.
c. was created in 1946 and consists of three members and a staff of several dozen economists.
d. was created in 1946 and consists of several dozen members and a staff of several hundred economists.
ANS: C
PTS: 1
DIF: 2
REF: 2-2
TOP: Council of Economic Advisers
MSC: Definitional
175. The President of the United States receives tax policy advice from economists in the
a. Federal Reserve.
b. Department of Justice.
c. Department of Treasury.
d. Congressional Budget Office.
ANS: C
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Interpretive
176. Economists in which cabinet-level department help enforce antitrust laws?
a. Department of Labor
b. Department of Justice
c. Department of Treasury
d. Department of Commerce
ANS: B
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Interpretive
177. Economists who are primarily responsible for advising Congress on economic matters work in which agency?
a. the Federal Reserve
b. the Congressional Budget Office
c. the Department of Treasury
d. the Department of Commerce
ANS: B
PTS: 1
DIF: 1
REF: 2-2
TOP: Economists MSC: Interpretive
178. The Council of Economic Advisers
a. was created in 1946.
b. advises the president of the United States on economic policy matters.
c. writes the annual Economic Report of the President.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 2-2
TOP: Economists MSC: Definitional
179. The Council of Economic Advisers has
a. three members and a staff of economists.
b. five members and a staff of economists.
c. seven members and a staff of economists.
d. nine members and no staff of economists.
ANS: A
PTS: 1
DIF: 1
REF: 2-2
TOP: Council of Economic Advisers
MSC: Definitional
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
66  Chapter 2/Thinking Like an Economist
180. Duties of the Council of Economic Advisers include
a. advising the president and writing the annual Economic Report of the President.
b. implementing the president’s tax policies.
c. tracking the behavior of the nation’s money supply.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 2-2
TOP: Council of Economic Advisers
MSC: Interpretive
181. The design of tax policy is one of the responsibilities of economists who work at the
a. Council of Economic Advisers.
b. Federal Reserve.
c. Department of Treasury.
d. Department of Labor.
ANS: C
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Interpretive
182. The nation's antitrust laws are enforced by the Department of
a. Labor.
b. Health and Human Services.
c. Justice.
d. Treasury.
ANS: C
PTS: 1
DIF: 2
REF: 2-2
TOP: Antitrust MSC: Interpretive
183. A duty of economists at the Department of Labor is to
a. analyze data on workers.
b. schedule federal holidays.
c. enforce the nation's antitrust laws.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 1
REF: 2-2
TOP: Economists MSC: Interpretive
184. The Federal Reserve
a. designs tax policy.
b. enforces the nation's antitrust laws.
c. sets the nation's monetary policy.
d. analyzes data on workers.
ANS: C
PTS: 1
DIF: 1
REF: 2-2
TOP: Federal Reserve system
MSC: Definitional
185. Congress relies on economists at the Congressional Budget Office to
a. enforce the nation's antitrust laws.
b. set the nation’s monetary policy.
c. provide evidence that incumbent members of Congress are performing well in their jobs.
d. provide independent evaluations of policy proposals.
ANS: D
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Interpretive
186. 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 U.S. Department of Labor
b. the U.S. Department of Treasury
c. the Congressional Budget Office
d. All of the above agencies employ economists outside of the administrative branch.
ANS: C
PTS: 1
DIF: 1
REF: 2-2
TOP: Economists MSC: Definitional
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  67
187. The author of your textbook for this course, N. Gregory Mankiw, worked in the administration of President George
W. Bush from 2003 to 2005. Specifically, he served as the
a. Secretary of Commerce.
b. Secretary of the Treasury.
c. Chairman of the Council of Economic Advisers.
d. Chairman of the Federal Reserve System.
ANS: C
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Definitional
188. John Maynard Keynes believed the ideas of economists to be
a. generally incorrect.
b. powerful.
c. pie-in-the-sky ideals.
d. rantings of madmen.
ANS: B
PTS: 1
DIF: 1
REF: 2-2
TOP: Economists MSC: Interpretive
189. “If all economists were laid end to end, they would not reach a conclusion.” Who made this whimsical
observation?
a. Harry Truman
b. George Bernard Shaw
c. John Maynard Keynes
d. Ronald Reagan
ANS: B
PTS: 1
DIF: 1
REF: 2-3
TOP: Economists MSC: Interpretive
190. President Ronald Reagan once joked that a Trivial Pursuit game for economists would
a. have no questions but hundreds of answers.
b. have 100 questions and 3,000 answers.
c. have 1,000 questions but no answers.
d. never produce a winner.
ANS: B
PTS: 1
DIF: 1
REF: 2-3
TOP: Economists MSC: Interpretive
191. The two basic reasons why economists often appear to give conflicting advice to policymakers are differences in
a. opinions and education.
b. opinions and values.
c. scientific judgments and education.
d. scientific judgments and values.
ANS: D
PTS: 1
DIF: 2
REF: 2-3
TOP: Economists MSC: Interpretive
192. In 2002, the Bush administration imposed temporary tariffs to protect domestic
a. steel producers.
b. shoe producers.
c. wine producers.
d. clothing producers.
ANS: A
PTS: 1
DIF: 1
REF: 2-3
TOP: Tariffs
MSC: Definitional
193. A survey which sought the opinion of academic, business, and government economists on ten propositions about
economic policy found that
a. the respondents were almost equally divided on the propositions.
b. the respondents favored the propositions by a slight margin.
c. the respondents disagreed with the propositions by a slight margin.
d. there was overwhelming endorsement of the propositions among the respondents.
ANS: D
PTS: 1
DIF: 1
REF: 2-3
TOP: Economists MSC: Interpretive
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68  Chapter 2/Thinking Like an Economist
194. Almost all economists agree that rent control
a. has no effect on the rental income of landlords.
b. allows the market for housing to work more efficiently.
c. adversely affects the availability and quality of housing.
d. is a very inexpensive way to help the most needy members of society.
ANS: C
PTS: 1
DIF: 2
REF: 2-3
TOP: Rent control
MSC: Interpretive
195. A survey of economists revealed that more than three-fourths of them agreed with a number of statements,
including which of the following?
a. Tariffs and import quotas usually reduce general economic well-being.
b. A large federal budget deficit has an adverse effect on the economy.
c. A minimum wage increases unemployment among young and unskilled workers.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 2-3
TOP: Economists MSC: Definitional
196. 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.
ANS: D
PTS: 1
DIF: 2
REF: 2-3
TOP: Economists MSC: Interpretive
197. 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 lowincome 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.
ANS: C
PTS: 1
DIF: 2
REF: 2-3
TOP: Economists MSC: Interpretive
198. Which of the following statements is correct about the extent of disagreement among economists?
a. There is a great deal of agreement among economists on virtually every economic issue.
b. There is a great deal of agreement among economists on many important economic issues.
c. All disagreements among economists are attributable to differences in their values.
d. All disagreements among economists are attributable to the fact that different economists have different
degrees of faith in the validity of alternative economic theories.
ANS: B
PTS: 1
DIF: 2
REF: 2-3
TOP: Economists MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  69
199. Policies such as rent control and import quotas persist in spite of the fact that economists are virtually united in
their opposition to such policies, probably because
a. economists have not yet convinced the general public that the policies are undesirable.
b. economists engage in positive analysis, not normative analysis.
c. economists have values that are different from the values of most non-economists.
d. economists’ theories are not easily confirmed or refuted in laboratory analysis.
ANS: A
PTS: 1
DIF: 2
REF: 2-3
TOP: Economists | Public policy MSC: Interpretive
200. Robert McTeer, the former President of the Federal Reserve Bank of Dallas, asserted in a commencement address
that the study of economics
a. is more beneficial to those who are just starting their careers than to those who have moved up the career
ladder.
b. helps students understand fallacies and unintended consequences.
c. has an unintended consequence itself, and it is that even serious students of economics usually fall for the
broken window fallacy.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 2-3
TOP: Economists MSC: Interpretive
201. A person who has fallen for the broken window fallacy might make which of the following claims?
a. To break a window is to ask for seven years of bad luck.
b. Scientific thinking would never advance if it were not for the inadvertent breaking down of old ways of
thinking.
c. Any activity which entails an unintended consequence is not worth pursuing.
d. The construction boom in the Gulf Coast states following the catastrophic Hurricane Katrina of 2005 proves
that hurricanes eventually increase incomes in affected regions.
ANS: D
PTS: 1
DIF: 3
REF: 2-3
TOP: Economists | Income
MSC: Applicative
202. How did the influential economist John Maynard Keynes explain his remark that although economics is an easy
subject compared with the higher branches of philosophy or pure science, it is a subject at which few excel?
a. Most people who study economics are not very bright.
b. Good economists must possess a rare combination of gifts.
c. Economics is quite boring; hence, people tend to lose interest in it before mastering it.
d. Good thinkers become frustrated with economics because it does not make use of the scientific method.
ANS: B
PTS: 1
DIF: 2
REF: 2-4
TOP: Economists MSC: Interpretive
203. John Maynard Keynes referred to economics as an easy subject,
a. at which very few excel.
b. but not as easy as philosophy or the pure sciences.
c. which very few can enjoy.
d. which deals primarily with common sense.
ANS: A
PTS: 1
DIF: 1
REF: 2-4
TOP: Economists MSC: Interpretive
204. A type of graph that can be used to display the relationship between two variables is
a. a pie chart.
b. a bar graph.
c. a time-series graph.
d. the coordinate system.
ANS: D
PTS: 1
DIF: 1
REF: 2-5
TOP: Graphs
MSC: Interpretive
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70  Chapter 2/Thinking Like an Economist
205. The use of the coordinate system allows
a. for the display of the flows of income, goods, and factors of production in an economic system.
b. for the display of how labor and other resources are organized in the production process.
c. economists to show two variables on a single graph.
d. students of economics to become proficient with pie charts and bar graphs.
ANS: C
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
206. An ordered pair is
a. the process of checking calculations twice before placing them on a graph.
b. two numbers that can be represented by a single point on a graph.
c. two numbers that are represented by side-by-side points on a graph.
d. two points on a graph that are of equal distance from the origin.
ANS: B
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
207. The ordered pair that represents the origin on a graph is
a. (1, 1).
b. (0, 0).
c. (0, 1).
d. (1, 0).
ANS: B
PTS: 1
DIF: 1
REF: 2-5
TOP: Graphs
MSC: Interpretive
208. The x-coordinate is the
a. first number of an ordered pair and represents the point's horizontal location.
b. second number of an ordered pair and represents the point's horizontal location.
c. first number of an ordered pair and represents the point's vertical location.
d. second number of an ordered pair and represents the point's vertical location.
ANS: A
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
209. The y-coordinate is the
a. first number of an ordered pair and represents the point's horizontal location.
b. second number of an ordered pair and represents the point's horizontal location.
c. first number of an ordered pair and represents the point's vertical location.
d. second number of an ordered pair and represents the point's vertical location.
ANS: D
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  71
Figure 2-9
210. Refer to Figure 2-9. The graph shown is known as a
a. time series.
b. bar graph.
c. scatterplot.
d. pie chart.
ANS: C
PTS: 1
DIF: 1
REF: 2-5
TOP: Graphs
MSC: Definitional
211. Refer to Figure 2-9. Cups of coffee per day and the hours that someone can go without sleep appear to have
a. a positive correlation.
b. a negative correlation.
c. a random correlation.
d. no correlation.
ANS: A
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
212. Refer to Figure 2-9. Taking cause and effect into account, which of the following interpretations would be most
reasonable regarding the relationship between coffee and hours without sleep?
a. The less coffee a person drinks per day, the more time he can go without sleep.
b. There is no relationship between how much coffee per day a person drinks and how long he can go without
sleep.
c. The more coffee a person drinks per day, the longer he can go without sleep.
d. The relationship between cups of coffee per day and time without sleep is too unpredictable to consider.
ANS: C
PTS: 1
DIF: 3
REF: 2-5
TOP: Graphs
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
72  Chapter 2/Thinking Like an Economist
Figure 2-10
213. Refer to Figure 2-10. The movement from point A to point B is a(n)
a. shift of the curve.
b. indication of a change in preferences for roses.
c. movement along the curve.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Definitional
214. Refer to Figure 2-10. The movement from point B to point C is a(n)
a. shift of the curve.
b. movement along the curve.
c. indication that the price of roses has changed.
d. indication that the costs incurred by firms that produce roses have changed.
ANS: A
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
215. Refer to Figure 2-10. The slope of the curve between points A and B is
a. 5/2
b. 2/5
c. -2/5
d. -5/2
ANS: D
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
216. Refer to Figure 2-10. The movement from point B to point C could have been caused by
a. inflation.
b. a change in income.
c. a change in the price of roses.
d. a change in the cost of producing roses.
ANS: B
PTS: 1
DIF: 3
REF: 2-5
TOP: Graphs
MSC: Applicative
217. Refer to Figure 2-10. The curves shown are
a. supply curves.
b. demand curves.
c. preference curves.
d. income-consumption curves.
ANS: B
PTS: 1
DIF: 2
TOP: Graphs
MSC: Interpretive
REF: 2-5
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  73
218. The slope of a straight line is calculated by
a. rise divided by run.
b. run divided by rise.
c. rise minus run.
d. rise plus run.
ANS: A
PTS: 1
DIF: 2
TOP: Graphs
MSC: Interpretive
REF: 2-5
219. The slope of a line is calculated by the
a. change in the value of x divided by the change in the value of y.
b. change in the value of y divided by the change in the value of x.
c. horizontal distance divided by the vertical distance.
d. value of y divided by value of x.
ANS: B
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
220. Which of the following is a correct statement about slope?
a. A horizontal line has an infinite slope, and a vertical line has a zero slope.
b. A horizontal line has a slope of 1, and a vertical line has a slope of -1.
c. A horizontal line has a zero slope, and a vertical line has an infinite slope.
d. None of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
221. The slope of a fairly flat, upward-sloping line will be a
a. small positive number.
b. large positive number.
c. small negative number.
d. large negative number.
ANS: A
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
222. Graphs such as bar graphs are limited in that they
a. can only show variables that are positively related.
b. can only show variables that have a negative correlation.
c. provide information on only one variable.
d. provide information on no more than two variables.
ANS: C
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
223. In order to provide information on two variables, an economist must use
a. a bar graph.
b. pie chart.
c. the coordinate system.
d. a time-series graph.
ANS: C
PTS: 1
DIF: 1
REF: 2-5
TOP: Graphs
MSC: Interpretive
224. The second number in any ordered pair is
a. the x-coordinate.
b. the y-coordinate.
c. quantity demanded.
d. price.
ANS: B
PTS: 1
DIF: 1
TOP: Graphs
MSC: Definitional
REF: 2-5
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copied, or distributed without the prior consent of the publisher.
74  Chapter 2/Thinking Like an Economist
225. The x-coordinate in an ordered pair specifies the
a. diagonal location of the point.
b. vertical location of the point.
c. horizontal location of the point.
d. quadrant location in which the point is located.
ANS: C
PTS: 1
DIF: 1
REF: 2-5
TOP: Graphs
MSC: Interpretive
226. The point where both x and y are zero is known as the
a. origin.
b. null.
c. zero coordinate.
d. center.
ANS: A
PTS: 1
DIF: 1
REF: 2-5
TOP: Graphs
MSC: Definitional
227. When two variables have a negative correlation,
a. they tend to move in opposite directions.
b. they tend to move in the same direction.
c. one variable will move while the other remains constant.
d. the movement of the two variables is unpredictable.
ANS: A
PTS: 1
DIF: 1
REF: 2-5
TOP: Graphs
MSC: Definitional
228. A demand curve shows the relationship
a. between income and quantity demanded.
b. between price and income.
c. between price and quantity demanded.
d. among income, price, and quantity demanded.
ANS: C
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
229. If Steven’s income decreases and, as a result, he chooses to buy fewer bagels per month at each price his demand
curve will
a. shift inward.
b. shift outward.
c. not shift; instead, Steven will move along his demand curve downward and to the right.
d. not shift; instead, Steven will move along his demand curve upward and to the left.
ANS: A
PTS: 1
DIF: 3
REF: 2-5
TOP: Graphs
MSC: Applicative
230. A relatively steep demand curve indicates that
a. quantity demanded will adjust only slightly to a price change.
b. quantity demanded will adjust significantly to a price change.
c. quantity demanded will not adjust to a price change.
d. the change in quantity demanded will exactly equal a change in price.
ANS: A
PTS: 1
DIF: 3
REF: 2-5
TOP: Graphs
MSC: Applicative
231. When a relevant variable that is not named on either axis changes,
a. there will be a movement along the curve.
b. the curve will rotate clockwise about the original point.
c. the curve will be unaffected since only the variables on the axis affect the curve.
d. the curve will shift.
ANS: D
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 2/Thinking Like an Economist  75
232. Suppose the variable y is measured along the vertical axis on a graph. When the value of y changes, the curve will
a. rotate.
b. shift.
c. become irrelevant.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Interpretive
233. 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. slope.
ANS: C
PTS: 1
DIF: 2
REF: 2-5
TOP: Graphs
MSC: Applicative
234. In the early 19th century, the Russian government sent doctors to southern Russian villages to provide assistance
during a cholera epidemic. The villagers noticed that wherever doctors appeared, people died. Therefore, many
doctors were chased away from villages, and some were even killed. This reaction to the correlation between
doctors and deaths is most likely a problem of
a. omitted variables.
b. reverse causality.
c. government propaganda.
d. medical incompetence.
ANS: B
PTS: 1
DIF: 2
REF: 2-5
TOP: Reverse causality
MSC: Applicative
235. When examining two variables, one way to determine the direction of causality is to
a. assume the two variables move in the same direction.
b. assume the two variables move in opposite directions.
c. determine which variable moves first.
d. determine which variable should be omitted.
ANS: C
PTS: 1
DIF: 2
REF: 2-5
TOP: Cause and effect
MSC: Interpretive
236. Bill has noticed that increases in unemployment insurance claims are associated with recessions, and therefore he
advocates limits on unemployment insurance so as to prevent recessions. Martha has noticed that most drug addicts
once attended schools, and therefore she advocates getting rid of schools so as to prevent drug addiction.
a. The reasoning of both Bill and Martha suffers from the omitted variable problem.
b. The reasoning of both Bill and Martha suffers from the reverse causality problem.
c. Bill's reasoning suffers from the reverse causality problem and Martha's reasoning suffers from the omitted
variable problem.
d. Martha's reasoning suffers from the reverse causality problem and Bill's reasoning suffers from the omitted
variable problem.
ANS: A
PTS: 1
DIF: 3
REF: 2-5
TOP: Graphs
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
76  Chapter 2/Thinking Like an Economist
True/False
1. While the scientific method is applicable to studying natural sciences, it is not useful in studying an economic
system.
ANS: F
PTS: 1
DIF: 1
REF: 2-1
TOP: Scientific method
MSC: Interpretive
2. Since natural experiments offered by history cannot be used in economics, carefully constructed laboratory
experiments must be used.
ANS: F
PTS: 1
DIF: 1
REF: 2-1
TOP: Scientific method
MSC: Interpretive
3. An economic model can accurately explain how the economy is organized because it is designed to include, to the
extent possible, all features of the real world.
ANS: F
PTS: 1
DIF: 1
REF: 2-1
TOP: Economic models
MSC: Interpretive
4. All scientific models, including economic models, simplify reality in order to improve our understanding of it.
ANS: T
PTS: 1
DIF: 1
REF: 2-1
TOP: Economic models
MSC: Interpretive
5. A circular-flow diagram is a visual model of how an economy is organized.
ANS: T
PTS: 1
DIF: 1
REF: 2-1
TOP: Economic models
MSC: Interpretive
6. In a simple circular-flow diagram, firms own the factors of production and use them to produce goods and services.
ANS: F
PTS: 1
DIF: 2
REF: 2-1
TOP: Economic models
MSC: Interpretive
7. In a simple circular-flow diagram, the two types of markets in which households and firms interact are the markets
for goods and services and the markets for factors of production.
ANS: T
PTS: 1
DIF: 1
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
8. In the markets for goods and services, as in the markets for the factors of production, households are buyers and
firms are sellers.
ANS: F
PTS: 1
DIF: 2
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
9. In a circular-flow diagram, one loop shows the flow of goods, services and factors of production, and the other
loop shows the corresponding flow of dollars.
ANS: T
PTS: 1
DIF: 1
REF: 2-1
TOP: Circular-flow diagram
MSC: Interpretive
10. A production possibilities frontier is a graph that shows the various combinations of outputs the economy can
produce given its factors of production and its technology.
ANS: T
PTS: 1
DIF: 1
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
11. An economy can produce at any point on or outside the production possibilities frontier, but it cannot produce at
points inside the frontier.
ANS: F
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
12. An efficient outcome is one in which the economy is conserving the largest possible amount of resources, while
still meeting the basic needs of society.
ANS: F
PTS: 1
DIF: 2
REF: 2-1
TOP: Efficiency MSC: Definitional
13. An economy is being efficient if it is impossible to produce more of one good without producing less of another.
ANS: T
PTS: 1
DIF: 2
REF: 2-1
TOP: Efficiency MSC: Definitional
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Chapter 2/Thinking Like an Economist  77
Figure 2-11
14. Refer to Figure 2-11. Points A, B, and D represent feasible or attainable outcomes for society.
ANS: T
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Interpretive
15. Refer to Figure 2-11. The opportunity cost of more doghouses increases as more doghouses are produced.
ANS: T
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier | Opportunity cost
MSC: Applicative
16. The extent of the tradeoff between the production of one good and the production of another good can change
because of technological advances over time.
ANS: T
PTS: 1
DIF: 3
REF: 2-1
TOP: Production possibilities frontier | Tradeoffs
MSC: Analytical
17. Economic growth causes a production possibilities frontier to shift outward.
ANS: T
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier | Economic growth
MSC: Interpretive
18. If government regulations designed to protect wetlands removed very productive farmland from production, the
production possibilities would shift inward.
ANS: T
PTS: 1
DIF: 2
REF: 2-1
TOP: Production possibilities frontier
MSC: Applicative
19. The field of economics is divided into two subfields: microeconomics and macroeconomics.
ANS: T
PTS: 1
DIF: 1
REF: 2-1
TOP: Microeconomics | Macroeconomics
MSC: Definitional
20. Normative statements describe how the world is, while positive statements prescribe how the world should be.
ANS: F
PTS: 1
DIF: 1
REF: 2-2
TOP: Positive statements | Normative statements
MSC: Definitional
21. "Society would be better if the welfare system were abolished" is a normative statement, not a positive statement.
ANS: T
PTS: 1
DIF: 2
REF: 2-2
TOP: Positive statements | Normative statements
MSC: Applicative
22. When economists are trying to explain the world they are acting as scientists, and when they are trying to improve
it, they are policymakers.
ANS: T
PTS: 1
DIF: 1
REF: 2-2
TOP: Economists MSC: Interpretive
23. The Council of Economic Advisors has as its duties both advising the President of the United States and
formulating monetary policy.
ANS: F
PTS: 1
DIF: 2
REF: 2-2
TOP: Economists MSC: Definitional
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78  Chapter 2/Thinking Like an Economist
24. A survey of business, government, and academic economists revealed widespread disagreement on ten propositions
about economic policy.
ANS: F
PTS: 1
DIF: 2
REF: 2-3
TOP: Economists MSC: Interpretive
25. Two variables that are negatively related will move in opposite directions.
ANS: T
PTS: 1
DIF: 1
REF: 2-5
TOP: Graphs
MSC: Interpretive
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Chapter 2/Thinking Like an Economist  79
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copied, or distributed without the prior consent of the publisher.
Chapter 3
Interdependence and the Gains from Trade
Multiple Choice
1. People who provide you with goods and services
a. are acting out of generosity.
b. do so because they have no other choice.
c. do so because they get something in return.
d. are required to do so by government.
ANS: C
PTS: 1
DIF: 1
REF: 3-0
TOP: Trade
MSC: Interpretive
2. When an economist points out that you and millions of other people are interdependent, he or she is referring to the
fact that we all
a. rely upon government to provide us with the basic necessities of life.
b. rely upon one another for the goods and services we all consume.
c. have similar tastes and abilities.
d. are concerned about one another’s well-being.
ANS: B
PTS: 1
DIF: 1
REF: 3-0
TOP: Trade
MSC: Interpretive
3. People generally choose to depend upon others for goods and services. Economists view this interdependence as
a. a good thing, since it fosters friendships and bonds that otherwise would never develop.
b. a good thing, since it allows people to consume more goods and services than they would otherwise be able to
consume.
c. a bad thing, since self-sufficiency may become necessary in the future.
d. a bad thing, since interdependence reduces people’s self-esteem and causes various social problems.
ANS: B
PTS: 1
DIF: 1
REF: 3-1
TOP: Trade
MSC: Interpretive
4. Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes vases, but Regan is better at
producing both. In this case, trade could
a. benefit both Jayson and Regan.
b. benefit Jayson, but not Regan.
c. benefit Regan, but not Jayson.
d. benefit neither Jayson nor Regan.
ANS: A
PTS: 1
DIF: 2
REF: 3-1
TOP: Trade
MSC: Interpretive
5. Ben bakes bread and Shawna knits sweaters. Ben likes to eat bread and wear sweaters, and the same is true for
Shawna. In which of the following cases is it impossible for both Ben and Shawna to benefit from trade?
a. Ben cannot knit sweaters and Shawna cannot bake bread.
b. Ben is better than Shawna at baking bread and Shawna is better than Ben at knitting sweaters.
c. Ben is better than Shawna at baking bread and at knitting sweaters.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 2
REF: 3-1
TOP: Trade
MSC: Applicative
6. Shannon bakes cookies and Justin grows vegetables. In which of the following cases is it impossible for both
Shannon and Justin to benefit from trade?
a. Shannon does not like vegetables and Justin does not like cookies.
b. Shannon is better than Justin at baking cookies and Justin is better than Shannon at growing vegetables.
c. Justin is better than Shannon at baking cookies and at growing vegetables.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 3-1
TOP: Trade
MSC: Applicative
84
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  85
7. Consider a shoemaker and a vegetable farmer. Potentially, trade could benefit both individuals if
a. the shoemaker can produce only shoes and the vegetable farmer can produce only vegetables.
b. the shoemaker is capable of growing vegetables, but he is not very good at it.
c. the vegetable farmer is better at growing vegetables and better at making shoes than the shoemaker.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 3-1
TOP: Trade
MSC: Interpretive
8. Without trade,
a. a country is better off because it will have to learn to be self-sufficient without trade.
b. a country's production possibilities frontier is also its consumption possibilities frontier.
c. a country can still benefit from international specialization.
d. interdependence is more extensive than it would be with trade.
ANS: B
PTS: 1
DIF: 2
REF: 3-1
TOP: Trade
MSC: Interpretive
9. A country's consumption possibilities frontier can be outside its production possibilities frontier if
a. the country’s technology is superior to the technologies of other countries.
b. the citizens of the country have a greater desire to consume goods and services than do the citizens of other
countries.
c. the country engages in trade.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 3-1
TOP: Trade | Production possibilities frontier
MSC: Interpretive
10. A production possibilities frontier will be a straight line if
a. increasing the production of one good by x units entails no opportunity cost in terms of the other good.
b. increasing the production of one good by x units entails a constant opportunity cost in terms of the other good.
c. the economy is producing efficiently.
d. the economy is engaged in trade with at least one other economy.
ANS: B
PTS: 1
DIF: 3
REF: 3-1
TOP: Production possibilities frontier
MSC: Applicative
11. The difference between production possibilities frontiers that are bowed out and those that are straight lines is that
a. bowed-out production possibilities frontiers apply to economies that face tradeoffs, whereas straight-line
production possibilities frontiers apply to economies that do not face tradeoffs.
b. bowed-out production possibilities frontiers apply to economies in which resources are not specialized, whereas
straight-line production possibilities frontiers apply to economies in which resources are specialized.
c. bowed-out production possibilities frontiers illustrate increasing opportunity cost, whereas straight-line
production possibilities frontiers illustrate constant opportunity cost.
d. straight-line production possibilities frontiers illustrate real-world conditions, whereas bowed-out production
possibilities frontiers illustrate more simplistic assumptions.
ANS: C
PTS: 1
DIF: 3
REF: 3-1
TOP: Production possibilities frontier | Opportunity cost
MSC: Applicative
12. Which of the following statements is not correct?
a. Trade allows for specialization.
b. Trade has the potential to benefit all nations.
c. Trade allows nations to consume outside of their production possibilities curves.
d. Absolute advantage is the driving force of specialization.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Specialization | Trade
MSC: Interpretive
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86  Chapter 3/Interdependence and the Gains from Trade
13. If labor in Mexico is less productive than labor in the United States in all areas of production,
a. neither nation can benefit from trade.
b. Mexico can benefit from trade but the United States cannot.
c. the United States will have a comparative advantage relative to Mexico in the production of all goods.
d. both Mexico and the United States still can benefit from trade.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage | Trade
MSC: Interpretive
14. The production possibilities frontier is a downward-sloping straight line when
a. it is possible to switch between one good and the other good at a constant rate.
b. there is no tradeoff involved in switching between one good and the other good.
c. the same amount of time is required to produce a unit of one good as is required to produce a unit of the other
good.
d. the person for whom the frontier is drawn wishes to consume equal amounts of the two goods.
ANS: A
PTS: 1
DIF: 2
REF: 3-1
TOP: Production possibilities frontier
MSC: Interpretive
Table 3-1
Farmer
Rancher
Labor Hours Needed to Make 1
Pound of:
Meat
Potatoes
8
2
4
5
Pounds produced in 40 hours:
Meat
Potatoes
5
20
10
8
15. Refer to Table 3-1. The opportunity cost of 1 pound of meat for the farmer is
a. 1/4 hour of labor.
b. 4 hours of labor.
c. 4 pounds of potatoes.
d. 1/4 pound of potatoes.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
16. Refer to Table 3-1. The opportunity cost of 1 pound of meat for the rancher is
a. 4 hours of labor.
b. 5 hours of labor.
c. 4/5 pounds of potatoes.
d. 5/4 pounds of potatoes.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
17. Refer to Table 3-1. The opportunity cost of 1 pound of potatoes for the farmer is
a. 8 hours of labor.
b. 2 hours of labor.
c. 4 pounds of meat.
d. 1/4 pound of meat.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
18. Refer to Table 3-1. The opportunity cost of 1 pound of potatoes for the rancher is
a. 5 hours of labor.
b. 4 hours of labor.
c. 5/4 pounds of meat.
d. 4/5 pound of meat.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
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Chapter 3/Interdependence and the Gains from Trade  87
19. Refer to Table 3-1. The farmer has an absolute advantage in
a. meat, and the rancher has an absolute advantage in potatoes.
b. potatoes, and the rancher has an absolute advantage in meat.
c. meat, and the rancher has an absolute advantage in meat.
d. neither good, and the rancher has an absolute advantage in both goods.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage
MSC: Applicative
20. Refer to Table 3-1. The rancher has an absolute advantage in
a. both goods, and the farmer has a comparative advantage in meat.
b. both goods, and the farmer has a comparative advantage in potatoes.
c. meat, and the farmer has a comparative advantage in potatoes.
d. meat, and the farmer has a comparative advantage in neither good.
ANS: C
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
21. Refer to Table 3-1. The farmer has an absolute advantage in
a. potatoes, and the rancher has a comparative advantage in meat.
b. meat, and the rancher has a comparative advantage in potatoes.
c. neither good, and the rancher has a comparative advantage in potatoes.
d. neither good, and the rancher has a comparative advantage in meat.
ANS: A
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
22. Refer to Table 3-1. The rancher has a comparative advantage in
a. neither good, and the farmer has a comparative advantage in both goods.
b. both goods, and the farmer has a comparative advantage in neither good.
c. potatoes, and the farmer has a comparative advantage in meat.
d. meat, and the farmer has a comparative advantage in potatoes.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Applicative
23. Refer to Table 3-1. The farmer and the rancher both could benefit if the farmer were to specialize in
a. meat and the rancher were to specialize in potatoes.
b. potatoes and the rancher were to specialize in meat.
c. neither good and the rancher were to specialize in both goods.
d. none of the above; they cannot both benefit by specialization and trade.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Specialization | Trade
MSC: Applicative
Figure 3-1
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88  Chapter 3/Interdependence and the Gains from Trade
24. Refer to Figure 3-1. If Paul divides his time equally between corn and wheat, he will be able to produce
a. 2 bushels of wheat and 2 bushels of corn.
b. 3 bushels of wheat and 3 bushels of corn.
c. 4 bushels of wheat and 5 bushels of corn.
d. 4 bushels of wheat and 6 bushels of corn.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
25. Refer to Figure 3-1. The opportunity cost of 1 bushel of wheat for Cliff is
a. 1/3 bushel of corn.
b. 2/3 bushel of corn.
c. 1 bushel of corn.
d. 3/2 bushels of corn.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
26. Refer to Figure 3-1. The opportunity cost of 2 bushels of corn for Cliff is
a. 2 bushels of wheat.
b. 3 bushels of wheat.
c. 6 bushels of wheat.
d. 12 bushels of wheat.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
27. Refer to Figure 3-1. The opportunity cost of 1 bushel of corn is
a. 4/5 bushel of wheat for Paul and 3/2 bushels of wheat for Cliff; thus, Paul has the comparative advantage in
growing corn.
b. 4/5 bushel of wheat for Paul and 3/2 bushels of wheat for Cliff; thus, Cliff has the comparative advantage in
growing corn.
c. 5/4 bushels of wheat for Paul and 2/3 bushel of wheat for Cliff; thus, Paul has the comparative advantage in
growing corn.
d. 5/4 bushels of wheat for Paul and 2/3 bushel of wheat for Cliff; thus, Cliff has the comparative advantage in
growing corn.
ANS: A
PTS: 1
DIF: 3
REF: 3-2
TOP: Opportunity cost | Comparative advantage
MSC: Applicative
28. Refer to Figure 3-1. Assume both Paul and Cliff divide their time equally between the production of corn and
wheat, and they do not trade. If they are the only producers of wheat and corn, then total production of wheat and
corn is
a. 8 bushels of wheat and 7 bushels of corn.
b. 7 bushels of wheat and 6 bushels of corn.
c. 6 bushels of wheat and 8 bushels of corn.
d. 7 bushels of wheat and 7 bushels of corn.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
29. Refer to Figure 3-1. Assume Cliff and Paul were both producing wheat and corn, and each person was dividing
his time equally between the two. Then each decides to specialize in the product in which he has a comparative
advantage. As a result of this change, total production of corn would
a. increase by 1 bushel.
b. increase by 3 bushels.
c. increase by 5 bushels.
d. decrease by 2 bushels.
ANS: B
PTS: 1
DIF: 3
REF: 3-2
TOP: Comparative advantage
MSC: Applicative
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Chapter 3/Interdependence and the Gains from Trade  89
30. Refer to Figure 3-1. Assume Cliff and Paul were both producing wheat and corn, and each person was dividing
his time equally between the two. Then each decides to specialize in the product in which he has a comparative
advantage. Furthermore, they agree to trade 3 bushels of wheat for 3 bushels of corn. As a result of these new
arrangements, Cliff is able to consume
a. 4 bushels of wheat and 3 bushels of corn, and this point lies on Cliff’s production possibilities frontier.
b. 3 bushels of wheat and 3 bushels of corn, and this point lies outside of Cliff’s production possibilities frontier.
c. 3 bushels of wheat and 2 bushels of corn, and this point lies on Cliff’s production possibilities frontier.
d. 4 bushels of wheat and 3 bushels of corn, and this point lies outside of Cliff’s production possibilities frontier.
ANS: B
PTS: 1
DIF: 3
REF: 3-2
TOP: Comparative advantage | Specialization | Trade MSC: Analytical
31. Refer to Figure 3-1. Which of the following statements is correct?
a. Paul has an absolute advantage in both wheat and corn.
b. Paul has an absolute advantage in wheat and Cliff has an absolute advantage in corn.
c. Cliff has an absolute advantage in wheat and Paul has an absolute advantage in corn.
d. Cliff has an absolute advantage in both wheat and corn.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage
MSC: Applicative
32. Refer to Figure 3-1. Which of the following statements is correct?
a. Paul has a comparative advantage in both wheat and corn.
b. Paul has a comparative advantage in wheat and Cliff has a comparative advantage in corn.
c. Cliff has a comparative advantage in wheat and Paul has a comparative advantage in corn.
d. Cliff has a comparative advantage in both wheat and corn.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Applicative
33. Refer to Figure 3-1. Suppose Paul must work 2 hours to produce each bushel of corn. Then Paul’s production
possibilities frontier is based on how many hours of work?
a. 0.2 hours
b. 5 hours
c. 10 hours
d. 20 hours
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
34. Refer to Figure 3-1. Suppose Paul must work 2 hours to produce each bushel of corn. Then Paul
a. must work 0.4 hours to produce each bushel of wheat, and his opportunity cost of a bushel of corn is 0.8
bushels of wheat.
b. must work 0.4 hours to produce each bushel of wheat, and his opportunity cost of a bushel of corn is 1.25
bushels of wheat.
c. must work 2.5 hours to produce each bushel of wheat, and his opportunity cost of a bushel of corn is 0.8
bushels of wheat.
d. must work 2.5 hours to produce each bushel of wheat, and his opportunity cost of a bushel of corn is 1.25
bushels of wheat.
ANS: C
PTS: 1
DIF: 3
REF: 3-2
TOP: Production possibilities frontier | Opportunity cost
MSC: Analytical
35. Refer to Figure 3-1. Suppose Cliff must work 5 hours to produce each bushel of corn. Then Cliff’s production
possibilities frontier is based on how many hours of work?
a. 0.2 hours
b. 2.5 hours
c. 15 hours
d. 20 hours
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
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90  Chapter 3/Interdependence and the Gains from Trade
36. Refer to Figure 3-1. Suppose Cliff must work 5 hours to produce each bushel of corn. Then Cliff
a. must work 3 1/3 hours to produce each bushel of wheat, and his opportunity cost of a bushel of corn is 2/3
bushel of wheat.
b. must work 3 1/3 hours to produce each bushel of wheat, and his opportunity cost of a bushel of corn is 1.5
bushels of wheat.
c. must work 7.5 to produce each bushel of wheat, and his opportunity cost of a bushel of corn is approximately
2/3 bushel of wheat.
d. must work 7.5 hours to produce each bushel of wheat, and his opportunity cost of a bushel of corn is 1.5
bushels of wheat.
ANS: B
PTS: 1
DIF: 3
REF: 3-2
TOP: Production possibilities frontier | Opportunity cost
MSC: Analytical
Figure 3-2
37. Refer to Figure 3-2. For Ben, the opportunity cost of 1 pound of ice cream is
a. 1/14 pound of cones.
b. 1/2 pound of cones.
c. 2 pounds of cones.
d. 4 pound of cones.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
38. Refer to Figure 3-2. For Jerry, the opportunity cost of 1 pound of ice cream is
a. 1/3 pound of cones.
b. 2/3 pound of cones.
c. 3/2 pounds of cones.
d. 2 pounds of cones.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
39. Refer to Figure 3-2. For Ben, the opportunity cost of 1 pound of cones is
a. 1/4 pound of ice cream.
b. 1/2 pound of ice cream.
c. 2 pounds of ice cream.
d. 4 pounds of ice cream.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
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Chapter 3/Interdependence and the Gains from Trade  91
40. Refer to Figure 3-2. For Jerry, the opportunity cost of 1 pound of cones is
a. 1/3 pound of ice cream.
b. 2/3 pound of ice cream.
c. 3/2 pounds of ice cream.
d. 2 pounds of ice cream.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
41. Refer to Figure 3-2. Ben has a comparative advantage in
a. cones and Jerry has a comparative advantage in ice cream.
b. ice cream and Jerry has a comparative advantage in cones.
c. neither good and Jerry has a comparative advantage in both goods.
d. both goods and Jerry has a comparative advantage in neither good.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Applicative
42. Refer to Figure 3-2. Ben has an absolute advantage in
a. ice cream and Jerry has an absolute advantage in cones.
b. cones and Jerry has an absolute advantage in ice cream.
c. neither good and Jerry has an absolute advantage in both goods.
d. both goods and Jerry has an absolute advantage in neither good.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage
MSC: Applicative
43. Refer to Figure 3-2. Ben has an absolute advantage in
a. neither good and he has a comparative advantage in neither good.
b. neither good and he has a comparative advantage in cones.
c. cones and he has a comparative advantage in cones.
d. ice cream and he has a comparative advantage in ice cream.
ANS: C
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
44. Refer to Figure 3-2. Jerry has an absolute advantage in
a. both goods and Ben has a comparative advantage in ice cream.
b. neither good and Ben has a comparative advantage in cones.
c. ice cream and Ben has a comparative advantage in ice cream.
d. ice cream and Ben has a comparative advantage in cones.
ANS: D
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
45. Refer to Figure 3-2. Suppose Ben and Jerry have both decided to produce at point A on their respective
production possibilities frontiers. We know that
a. neither Ben’s well-being nor Jerry’s well-being could be improved as a result of trade between the two.
b. trade between the two could benefit Ben but not Jerry.
c. trade between the two could benefit Jerry but not Ben.
d. Ben and Jerry are both allocating 1/2 of their time to the production of each good.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
46. Refer to Figure 3-2. Originally, Ben was producing at his point A and Jerry was producing at his point A. Then,
each person decided to specialize in the product in which he has a comparative advantage. Furthermore, they
agreed to trade 4 pounds of cones for 2 pounds of ice cream. As a result of these new arrangements, the gains from
trade relative to the original situation are as follows:
a. 1 additional pound of cones for Ben and 1 additional pound of ice cream for Jerry.
b. 1 additional pound of ice cream for Ben and 1 additional pound of cones for Jerry.
c. 2 additional pounds of ice cream for Ben and 2 additional pounds of cones for Jerry.
d. 2 additional pounds of ice cream for Ben and 1 additional pound of cones for Jerry.
ANS: B
PTS: 1
DIF: 3
REF: 3-2
TOP: Production possibilities frontier | Specialization | Trade
MSC: Analytical
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92  Chapter 3/Interdependence and the Gains from Trade
47. Refer to Figure 3-2. Suppose Ben’s production possibilities frontier is based on 4 hours of work. How much time
does Ben require to produce 1 pound of ice cream?
a. 1/2 hour
b. 1 hour
c. 2 hours
d. The answer cannot be determined from the given information.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
48. Refer to Figure 3-2. Suppose Jerry’s production possibilities frontier is based on 4 hours of work. Jerry requires
a. 1/4 hour to produce 1 pound of ice cream and 3/8 hour to produce 1 pound of cones.
b. 1/2 hour to produce 1 pound of ice cream and 3/4 hour to produce 1 pound of cones.
c. 1 hour to produce 1 pound of ice cream and 2/3 hour to produce 1 pound of cones.
d. 1 hour to produce 1 pound of ice cream and 3/2 hours to produce 1 pound of cones.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
49. Refer to Figure 3-2. Suppose Ben’s production possibilities frontier is based on 4 hours of work and the same true
is for Jerry’s. Then
a. Ben requires 2 hours to produce a pound of ice cream and Jerry requires 40 minutes to produce a pound of
cones.
b. if Ben worked 1 hour producing ice cream and 3 hours producing cones, and if Jerry worked 3 hours producing
ice cream and 1 hour producing cones, total output would be 3.5 pounds of ice cream and 7.5 pounds of cones.
c. if each person worked 4 hours, specializing in the activity in which he has a comparative advantage, total
output would be 4 pounds of ice cream and 8 pounds of cones.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 3
REF: 3-2
TOP: Production possibilities frontier | Specialization MSC: Applicative
For the following question(s), use the accompanying table.
Table 3-2
Labor Hours needed to make one
Quilt
Dress
Helen
50
10
Carolyn
90
45
Amount produced in 90 hours:
Quilts
Dresses
1.8
9
1
2
50. Refer to Table 3-2. For Helen, the opportunity cost of 1 quilt is
a. 0.2 dresses.
b. 2 dresses.
c. 3.5 dresses.
d. 5 dresses.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
51. Refer to Table 3-2. For Carolyn, the opportunity cost of 1 quilt is
a. 0.5 dresses.
b. 1 dress.
c. 2 dresses.
d. 3 dresses.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  93
52. Refer to Table 3-2. For Helen, the opportunity cost of 1 dress is
a. 1/5 quilt.
b. 1/4 quilt.
c. 2 quilts.
d. 5 quilts.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
53. Refer to Table 3-2. For Carolyn, the opportunity cost of 1 dress is
a. 5 quilts.
b. 4 quilts.
c. 1/2 quilt.
d. 1/10 quilt.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
54. Refer to Table 3-2. Helen has a comparative advantage in
a. quilts and Carolyn has an absolute advantage in neither good.
b. dresses and Carolyn has an absolute advantage in quilts.
c. quilts and Carolyn has an absolute advantage in dresses.
d. dresses and Carolyn has an absolute advantage in neither good.
ANS: D
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
55. Refer to Table 3-2. Helen has an absolute advantage in
a. dresses and Carolyn has an absolute advantage in quilts.
b. quilts and Carolyn has a comparative advantage in dresses.
c. both goods and Carolyn has a comparative advantage in quilts.
d. neither good and Carolyn has a comparative advantage in dresses.
ANS: C
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
56. Refer to Table 3-2. Helen has a comparative advantage in
a. dresses and Carolyn has a comparative advantage in quilts.
b. quilts and Carolyn has a comparative advantage in dresses.
c. neither good and Carolyn has a comparative advantage in both goods.
d. both goods and Carolyn has a comparative advantage in neither good.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Applicative
57. Refer to Table 3-2. We could use the information in the table to draw a production possibilities frontier for Helen
and a second production possibilities frontier for Carolyn. If we were to do this, measuring quilts along the
horizontal axis, then
a. the slope of Helen’s production possibilities frontier would be -0.2 and the slope of Carolyn’s production
possibilities frontier would be -0.5.
b. the slope of Helen’s production possibilities frontier would be -5 and the slope of Carolyn’s production
possibilities frontier would be -2.
c. the slope of Helen’s production possibilities frontier would be 0.2 and the slope of Carolyn’s production
possibilities frontier would be 0.5.
d. the slope of Helen’s production possibilities frontier would be 5 and the slope of Carolyn’s production
possibilities frontier would be 2.
ANS: B
PTS: 1
DIF: 3
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
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94  Chapter 3/Interdependence and the Gains from Trade
58. Refer to Table 3-2. We could use the information in the table to draw a production possibilities frontier for Helen
and a second production possibilities frontier for Carolyn. If we were to do this, measuring dresses along the
horizontal axis, then
a. the slope of Helen’s production possibilities frontier would be -0.2 and the slope of Carolyn’s production
possibilities frontier would be -0.5.
b. the slope of Helen’s production possibilities frontier would be -5 and the slope of Carolyn’s production
possibilities frontier would be -2.
c. the slope of Helen’s production possibilities frontier would be 0.2 and the slope of Carolyn’s production
possibilities frontier would be 0.5.
d. the slope of Helen’s production possibilities frontier would be 5 and the slope of Carolyn’s production
possibilities frontier would be 2.
ANS: A
PTS: 1
DIF: 3
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
These graphs illustrate the production possibilities available to Fred and Ginger with each person working 40 hours.
Figure 3-3
59. Refer to Figure 3-3. The opportunity cost of 1 pair of tap shoes for Fred is
a. 1/3 pair of ballet slippers.
b. 1/5 pair of ballet slippers.
c. 3/5 pair of ballet slippers.
d. 5/3 pairs of ballet slippers.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
60. Refer to Figure 3-3. The opportunity cost of 1 pair of tap shoes for Ginger is
a. 1/4 pair of ballet slippers.
b. 1/3 pair of ballet slippers.
c. 3/4 pair of ballet slippers.
d. 4/3 pairs of ballet slippers.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
61. Refer to Figure 3-3. The opportunity cost of 1 pair of ballet slippers for Ginger is
a. 1/4 pair of tap shoes.
b. 1/3 pair of tap shoes.
c. 3/4 pair of tap shoes.
d. 4/3 pairs of tap shoes.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
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Chapter 3/Interdependence and the Gains from Trade  95
62. Refer to Figure 3-3. The opportunity cost of 1 pair of ballet slippers for Fred is
a. 1/3 pair of tap shoes.
b. 1/5 pair of tap shoes.
c. 3/5 pair of tap shoes.
d. 5/3 pairs of tap shoes.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
63. Refer to Figure 3-3. Fred would incur an opportunity cost of 3 ballet slippers if he
a. increased his production of tap shoes by 4.
b. increased his production of tap shoes by 5.
c. decreased his production of tap shoes by 4.
d. increased the time he spends on the two activities from 40 hours to 50 hours.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
64. Refer to Figure 3-3. How long does it take Fred to make one ballet slipper?
a. 4 hours
b. 6 hours
c. 6 2/3 hours
d. 7 1/2 hours
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
65. Refer to Figure 3-3. Ginger has an absolute advantage in
a. ballet slippers and Fred has an absolute advantage in tap shoes.
b. tap shoes and Fred has an absolute advantage in ballet slippers.
c. neither good and Fred has an absolute advantage in both goods.
d. both goods and Fred has an absolute advantage in neither good.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage
MSC: Applicative
66. Refer to Figure 3-3. Ginger has a comparative advantage in
a. tap shoes and Fred has a comparative advantage in ballet slippers.
b. both goods and Fred has a comparative advantage in neither good.
c. ballet slippers and Fred has a comparative advantage in tap shoes.
d. neither good and Fred has a comparative advantage in both goods.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Applicative
67. Refer to Figure 3-3. Ginger has an absolute advantage in
a. tap shoes and Fred has a comparative advantage in ballet slippers.
b. both goods and Fred has a comparative advantage in neither good.
c. ballet slippers and Fred has a comparative advantage in tap shoes.
d. neither good and Fred has a comparative advantage in both goods.
ANS: C
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
68. Refer to Figure 3-3. Which of the following statements is correct?
a. Fred sacrifices 1 2/3 ballet slippers to produce 1 tap shoe; Ginger sacrifices 3/4 of a ballet slipper to produce 1
tap shoe; therefore, Fred has a comparative advantage in producing tap shoes.
b. Fred sacrifices 3/5 of a ballet slipper to produce 1 tap shoe; Ginger sacrifices 1 1/3 ballet slippers to produce 1
tap shoe; therefore, Fred has an absolute advantage in producing tap shoes.
c. Fred requires 4 hours to produce a tap shoe; Ginger requires 6 2/3 hours to produce a tap shoe; therefore, Fred
has a comparative advantage in producing tap shoes.
d. Fred requires 4 hours to produce a tap shoe; Ginger requires 6 2/3 hours to produce a tap shoe; therefore, Fred
has an absolute advantage in producing tap shoes.
ANS: D
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
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96  Chapter 3/Interdependence and the Gains from Trade
69. Refer to Figure 3-3. In order to maximize total output,
a. Ginger should specialize in tap shoes and Fred should specialize in ballet slippers.
b. Ginger should specialize in both goods and Fred should specialize in neither good.
c. Ginger should specialize in ballet slippers and Fred should specialize in tap shoes.
d. Ginger should specialize in neither good and Fred should specialize in both goods.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Specialization
MSC: Applicative
70. Refer to Figure 3-3. Suppose Fred spends half of his time producing ballet slippers and the other half of his time
producing tap shoes. Ginger divides her time the same way. Then
a. total production of ballet slippers would be 7 and total production of tap shoes would be 8.
b. total production of ballet slippers would be 8 and total production of tap shoes would be 8.
c. total production of ballet slippers would be 9 and total production of tap shoes would be 6.
d. total production of ballet slippers would be 10 and total production of tap shoes would be 8.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
71. Refer to Figure 3-3. Suppose Fred specializes in the good in which he has a comparative advantage, and Ginger
specializes in the good in which she has a comparative advantage. Then
a. total production of ballet slippers would be 6 and total production of tap shoes would be 6.
b. total production of ballet slippers would be 8 and total production of tap shoes would be 6.
c. total production of ballet slippers would be 8 and total production of tap shoes would be 8.
d. total production of ballet slippers would be 8 and total production of tap shoes would be 10.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage | Specialization
MSC: Applicative
72. Refer to Figure 3-3. Originally, Fred was spending half of his time producing tap shoes and the other half of his
time producing ballet slippers; Ginger was dividing her time the same way. Then, Fred began spending all of his
time producing the good in which he has a comparative advantage, and Ginger began spending all of her time
producing the good in which she has a comparative advantage. As a result,
a. total output of ballet slippers decreases by 1 and total output of tap shoes increases by 3.
b. total output of ballet slippers increases by 1 and total output of tap shoes increases by 2.
c. total output of ballet slippers increases by 2 and total output of tap shoes increases by 1.
d. total output of ballet slippers remains constant and total output of tap shoes increases by 2.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage | Specialization
MSC: Applicative
73. Suppose a gardener produces both green beans and corn in her garden. If she must give up 14 bushels of corn to get
5 bushels of green beans, then her opportunity cost of 1 bushel of green beans is
a. 0.36 bushel of corn.
b. 2.4 bushels of corn.
c. 2.8 bushels of corn.
d. 70 bushels of corn.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Interpretive
74. Suppose a gardener produces both green beans and corn in her garden. If the opportunity cost of one bushel of corn
is 3/5 bushel of green beans, then the opportunity cost of 1 bushel of green beans is
a. 5/3 bushels of corn.
b. 2/5 bushel of corn.
c. 5/2 bushels of corn.
d. 8/5 bushels of corn.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  97
75. If he devotes all of his available resources to cantaloupe production, a farmer can produce 120 cantaloupes. If he
sacrifices 1.5 watermelons for each cantaloupe that he produces, it follows that
a. if he devotes all of his available resources to watermelon production he can produce 80 watermelons.
b. he cannot have a comparative advantage over other farmers in producing cantaloupes.
c. his opportunity cost of one watermelon is 2/3 of a cantaloupe.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 3
REF: 3-2
TOP: Comparative advantage | Opportunity cost
MSC: Analytical
76. A farmer has the ability to grow either corn or cotton or some combination of the two. Given no other information,
it follows that the farmer’s opportunity cost of a bushel of corn multiplied by his opportunity cost of a bushel of
cotton
a. is equal to 1.
b. is greater than 1 but less than 2.
c. is equal to 2.
d. Not enough information is given to make this determination.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Interpretive
77. If Shawn can produce donuts at a lower opportunity cost than Sue, then
a. Shawn has a comparative advantage in the production of donuts.
b. Sue has a comparative advantage in the production of donuts.
c. Shawn should not produce donuts.
d. Shawn is capable of producing more donuts than Sue in a given amount of time.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Definitional
78. If Shawn can produce more donuts in one day than Sue can produce in one day, then
a. Shawn has a comparative advantage in the production of donuts.
b. Sue has a comparative advantage in the production of donuts.
c. Shawn has an absolute advantage in the production of donuts.
d. Shawn should produce donuts and Sue should spend her time on a different activity.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage
MSC: Definitional
Table 3-3
Montana
Missouri
Labor Hours Needed to Make One:
Basket
Birdhouse
6
2
3
1.5
Amount Produced in 24 Hours:
Baskets
Birdhouses
4
12
8
16
79. Refer to Table 3-3. The opportunity cost of 1 basket for Montana is
a. 1/3 birdhouse.
b. 1 birdhouse.
c. 3 birdhouses.
d. 4 birdhouses.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
80. Refer to Table 3-3. The opportunity cost of 1 basket for Missouri is
a. 1/4 birdhouse.
b. 1/2 birdhouse.
c. 2 birdhouses.
d. 2 2/3 birdhouses.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
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98  Chapter 3/Interdependence and the Gains from Trade
81. Refer to Table 3-3. The opportunity cost of 1 birdhouse for Montana is
a. 1/3 basket.
b. 1 basket.
c. 4/3 baskets.
d. 3 baskets.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
82. Refer to Table 3-3. The opportunity cost of 1 birdhouse for Missouri is
a. 1/2 basket.
b. 1 basket.
c. 1 1/2 baskets.
d. 2 baskets.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
83. Refer to Table 3-3. Montana has an absolute advantage in
a. birdhouses and Missouri has an absolute advantage in baskets.
b. baskets and Missouri has an absolute advantage in birdhouses.
c. neither good and Missouri has an absolute advantage in both goods.
d. both goods and Missouri has an absolute advantage in neither good.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage
MSC: Applicative
84. Refer to Table 3-3. Montana has a comparative advantage in
a. baskets and Missouri has a comparative advantage in birdhouses.
b. birdhouses and Missouri has a comparative advantage in baskets.
c. neither good and Missouri has a comparative advantage in both goods.
d. both goods and Missouri has a comparative advantage in neither good.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Applicative
85. Refer to Table 3-3. If Montana and Missouri trade based on the principle of comparative advantage, Montana will
export
a. baskets and Missouri will export birdhouses.
b. birdhouses and Missouri will export baskets.
c. neither good and Missouri will export both goods.
d. both goods and Missouri will export neither good.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage | Trade
MSC: Applicative
86. Refer to Table 3-3. If Montana and Missouri were to specialize and engage in trade that would benefit both states,
they would most likely base their decisions on the principle of
a. absolute advantage.
b. comparative advantage.
c. maximum opportunity cost.
d. zero-sum trade.
ANS: B
PTS: 1
DIF: 1
REF: 3-2
TOP: Comparative advantage | Trade
MSC: Interpretive
87. Specialization and trade are closely linked to
a. absolute advantage.
b. comparative advantage.
c. gains to some traders that exactly offset losses to other traders.
d. shrinkage of the economic pie.
ANS: B
PTS: 1
DIF: 1
REF: 3-2
TOP: Specialization | Trade
MSC: Interpretive
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Chapter 3/Interdependence and the Gains from Trade  99
88. For two individuals who engage in the same two productive activities, it is impossible for one of the two
individuals to
a. have a comparative advantage in both activities.
b. have an absolute advantage in both activities.
c. be more productive per unit of time in both activities.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Interpretive
89. Two individuals engage in the same two productive activities. In which of the following circumstances would
neither individual have a comparative advantage in either activity?
a. One individual’s production possibilities frontier is steeper than the other individual’s production possibilities
frontier.
b. One individual is faster at both activities than the other individual.
c. One individual’s opportunity costs are the same as the other individual’s opportunity costs.
d. None of the above is correct; one of the two individuals always will have a comparative advantage in at least
one of the two activities.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost | Comparative advantage
MSC: Interpretive
90. Comparative advantage is related most closely to which of the following?
a. output per hour
b. opportunity cost
c. efficiency
d. bargaining strength in international trade
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Interpretive
91. Which of the following statements about comparative advantage is not true?
a. Comparative advantage is determined by which person or group of persons can produce a given quantity of a
good using the fewest resources.
b. The principle of comparative advantage applies to countries as well as to individuals.
c. Economists use the principle of comparative advantage to emphasize the potential benefits of free trade.
d. A country may have a comparative advantage in producing a good, even though it lacks an absolute advantage
in producing that good.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Interpretive
92. The producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the
quantities of inputs required by other producers to produce the same amount of that good,
a. has a low opportunity cost of producing that good, relative to the opportunity costs of other producers.
b. has a comparative advantage in the production of that good.
c. has an absolute advantage in the production of that good.
d. has an artificial advantage in the production of that good.
ANS: C
PTS: 1
DIF: 1
REF: 3-2
TOP: Absolute advantage
MSC: Definitional
93. If Iowa’s opportunity cost of corn is lower than Oklahoma’s opportunity cost of corn, then
a. Iowa has a comparative advantage in the production of corn.
b. Iowa has an absolute advantage in the production of corn.
c. Iowa should import corn from Oklahoma.
d. Oklahoma should produce just enough corn to satisfy its own residents’ demands.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost | Comparative advantage
MSC: Interpretive
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100  Chapter 3/Interdependence and the Gains from Trade
94. The opportunity cost of an item is
a. the number of hours that one must work in order to buy one unit of the item.
b. what you give up to get that item.
c. always less than the dollar value of the item.
d. always greater than the cost of producing the item.
ANS: B
PTS: 1
DIF: 1
REF: 3-2
TOP: Opportunity cost
MSC: Definitional
95. What must be given up to obtain an item is called
a. out-of-pocket cost.
b. comparative worth.
c. opportunity cost.
d. absolute value.
ANS: C
PTS: 1
DIF: 1
REF: 3-2
TOP: Opportunity cost
MSC: Definitional
96. Absolute advantage is found by comparing different producers’
a. opportunity costs.
b. payments to land, labor, and capital.
c. input requirements per unit of output.
d. locational and logistical circumstances.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage
MSC: Interpretive
97. Total output in an economy increases when each person specializes because
a. there is less competition for the same resources.
b. each person spends more time producing that product in which he or she has a comparative advantage.
c. a wider variety of products will be produced within each country due to specialization.
d. government necessarily plays a larger role in the economy due to specialization.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Specialization
MSC: Interpretive
98. The gains from trade are
a. evident in economic models, but seldom observed in the real world.
b. evident in the real world, but impossible to capture in economic models.
c. a result of more efficient resource allocation than would be observed in the absence of trade.
d. based on the principle of absolute advantage.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Gains from trade
MSC: Interpretive
99. The fact that economists are generally united in their support of free trade is traceable to
a. the principle of absolute advantage.
b. the arguments made by Adam Smith and David Ricardo.
c. the decline in the power of labor unions during the 20 th century.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Economists | Trade
MSC: Interpretive
100. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or
20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that
a. Mike has an absolute advantage in chairs.
b. Mike has a comparative advantage in tables.
c. Sandy has an absolute advantage in chairs.
d. Sandy has a comparative advantage in chairs.
ANS: A
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  101
101. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or
20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that
a. Mike has a comparative advantage in tables.
b. Sandy has an absolute advantage in chairs.
c. Mike has an absolute advantage in tables.
d. Sandy has a comparative advantage in tables.
ANS: D
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
102. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or
20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of 1 chair is
a. 1/5 table for Mike and 1/3 table for Sandy.
b. 5 tables for Mike and 3 tables for Sandy.
c. 1/3 table for Mike and 1/5 table for Sandy.
d. 3 tables for Mike and 5 tables for Sandy.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
103. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4 tables or
20 chairs, where Sandy can make 6 tables or 18 chairs. Given this, we know that the opportunity cost of 1 table is
a. 1/5 chair for Mike and 1/3 chair for Sandy.
b. 5 chairs for Mike and 3 chairs for Sandy.
c. 1/3 chair for Mike and 1/5 chair for Sandy.
d. 3 chairs for Mike and 5 chairs for Sandy.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
104. Suppose Susan can wash three windows per hour or she can iron six shirts per hour. Paul can wash two windows
per hour or he can iron five shirts per hour.
a. Susan has an absolute advantage over Paul in washing windows.
b. Susan has a comparative advantage over Paul in washing windows.
c. Paul has a comparative advantage over Susan in ironing shirts.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
105. Travis can mow a lawn in two hours or he can trim a tree in one hour. Ricardo can mow a lawn in three hours or he
can trim a tree in two hours.
a. Travis has an absolute advantage over Ricardo in trimming trees.
b. Travis has a comparative advantage over Ricardo in mowing lawns.
c. Ricardo has a comparative advantage over Travis in trimming trees.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
106. Kelly and David are both capable of repairing cars and cooking meals. Which of the following scenarios is not
possible?
a. Kelly has a comparative advantage in repairing cars and David has a comparative advantage in cooking meals.
b. Kelly has an absolute advantage in repairing cars and David has an absolute advantage in cooking meals.
c. Kelly has a comparative advantage in repairing cars and in cooking meals.
d. Kelly has an absolute advantage in repairing cars and in cooking meals.
ANS: C
PTS: 1
DIF: 1
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Interpretive
These figures illustrate the production possibilities available to Barney and Betty with 8 hours of labor in their bakery.
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
102  Chapter 3/Interdependence and the Gains from Trade
Figure 3-4
107. Refer to Figure 3-4. The opportunity cost of 1 loaf of bread for Barney is
a. 1/4 pie.
b. 1/2 pie.
c. 1 pie.
d. 2 pies.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
108. Refer to Figure 3-4. The opportunity cost of 1 pie for Betty is
a. 1/4 loaf of bread.
b. 3/4 loaf of bread.
c. 1 loaf of bread.
d. 4/3 loaves of bread.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
109. Refer to Figure 3-4. Barney has an absolute advantage in
a. both goods and Betty has an absolute advantage in neither good.
b. loaves of bread and Betty has an absolute advantage in pies.
c. pies and Betty has an absolute advantage in loaves of bread.
d. neither good and Betty has an absolute advantage in both goods.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage
MSC: Applicative
110. Refer to Figure 3-4. Barney has a comparative advantage in
a. both goods and Betty has a comparative advantage in neither good.
b. loaves of bread and Betty has a comparative advantage in pies.
c. neither good and Betty has a comparative advantage in both goods.
d. pies and Betty has a comparative advantage in loaves of bread.
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Applicative
111. Refer to Figure 3-4. If Barney and Betty both specialize in the good in which they have a comparative advantage,
a. total production of bread will be 7 and total production of pies will be 15.
b. total production of bread will be 20 and total production of pies will be 14.
c. total production of bread will be 27 and total production of pies will be 29.
d. total production of bread will be 40 and total production of pies will be 22.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  103
112. Refer to Figure 3-4. Initially, Barney is spending one-half of his time making pies and the other one-half of his
time making bread, and Betty is doing the same. Relative to this initial situation, Barney and Betty could specialize
according to the principle of comparative advantage, and both could benefit from this new arrangement, provided
they agree that one loaf of bread will trade for somewhere between
a. 1/2 pie and 3/4 pie.
b. 3/4 pie and 1 pie.
c. 3/4 pie and 2 pies.
d. 1 pie and 1 1/2 pies.
ANS: C
PTS: 1
DIF: 3
REF: 3-2
TOP: Comparative advantage | Specialization | Trade MSC: Analytical
113. Refer to Figure 3-4. Initially, Barney is spending one-half of his time making pies and the other one-half of his
time making bread, and Betty is doing the same. Relative to this initial situation, Barney and Betty could specialize
according to the principle of comparative advantage, and both could benefit from this new arrangement, provided
they agree that one pie will trade for somewhere between
a. 1/2 loaf of bread and 4/3 loaves of bread.
b. 2/3 loaf of bread and 2 loaves of bread.
c. 3/4 loaf of bread and 2 loaves of bread.
d. 3/4 loaf of bread and 5/2 loaves of bread.
ANS: A
PTS: 1
DIF: 3
REF: 3-2
TOP: Comparative advantage | Specialization | Trade MSC: Analytical
Table 3-4
Brenda and Eric run a business that involves setting up and testing computers. The following table applies.
Brenda
Eric
Minutes Needed to
Set Up
Test
a Computer
a Computer
30
40
48
?
Number of Computers Set Up or Tested in a
40-Hour Week
Computers
Computers
Set Up
Tested
80
60
50
40
114. Refer to Table 3-4. The number of minutes needed by Eric to test a computer is
a. 36.
b. 48.
c. 60.
d. 64.
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Production MSC: Interpretive
115. Refer to Table 3-4. For Brenda, the opportunity cost of testing a computer is
a. setting up 2/3 of a computer.
b. setting up 3/4 of a computer.
c. setting up 1 1/3 computers.
d. setting up 1 1/2 computers
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Interpretive
116. Refer to Table 3-4. Which of the following statements is correct?
a. Brenda has an absolute advantage, and Eric has a comparative advantage, in testing computers.
b. Eric has an absolute advantage, and Brenda has a comparative advantage, in testing computers.
c. Brenda has an absolute advantage and a comparative advantage in testing computers.
d. Eric has an absolute advantage and a comparative advantage in testing computers.
ANS: A
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
104  Chapter 3/Interdependence and the Gains from Trade
117. Refer to Table 3-4. For Eric, the opportunity cost of setting up a computer is
a. testing 0.75 computers.
b. testing 0.8 computers.
c. testing 1.25 computers.
d. testing 1.5 computers.
ANS: B
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Interpretive
118. Refer to Table 3-4. Which of the following statements is correct?
a. Brenda has an absolute advantage, and Eric has a comparative advantage, in setting up computers.
b. Eric has an absolute advantage, and Brenda has a comparative advantage, in setting up computers.
c. Brenda has an absolute advantage and a comparative advantage in setting up computers.
d. Eric has an absolute advantage and a comparative advantage in setting up computers.
ANS: C
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
119. Refer to Table 3-4. Which of these points would not be on Brenda's production possibilities frontier, based on a
40-hour week and assuming Brenda can switch between setting up and testing computers at a constant rate?
a. (60 computers tested, 0 computers set-up)
b. (30 computers tested, 40 computers set-up)
c. (12 computers tested, 60 computers set-up)
d. (6 computers tested, 72 computers set-up)
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
120. Refer to Table 3-4. Which of these points would not be on Eric's production possibilities frontier, based on a 40hour week and assuming Eric can switch between setting up and testing computers at a constant rate?
a. (0 computers set-up, 40 computers tested)
b. (30 computers set-up, 16 computers tested)
c. (25 computers set-up, 20 computers tested)
d. (8 computers set-up, 32 computers tested)
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Production possibilities frontier
MSC: Applicative
121. Adam Smith
a. wrote An Inquiry into the Nature and Causes of the Wealth of Nations.
b. opposed free trade.
c. wrote The General Theory of Economics.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 1
REF: 3-2
TOP: Economists
MSC: Definitional
122. Adam Smith asserted that a person should never attempt to make at home
a. what it will cost him more to make than to buy.
b. any good in which that person does not have an absolute advantage.
c. any luxury good.
d. any necessity.
ANS: A
PTS: 1
DIF: 2
REF: 3-2
TOP: Economists
MSC: Interpretive
123. The principle of comparative advantage as we know it today was developed by
a. Aristotle.
b. David Ricardo.
c. John Maynard Keynes.
d. Adam Smith.
ANS: B
PTS: 1
DIF: 1
REF: 3-2
TOP: Economists
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  105
124. Which economist developed the theory of comparative advantage as we know it today?
a. Plato
b. Thomas Malthus
c. Karl Marx
d. David Ricardo
ANS: D
PTS: 1
DIF: 1
REF: 3-2
TOP: Comparative advantage
MSC: Definitional
125. David Ricardo
a. wrote a famous book in which he attacked the ideas of Adam Smith.
b. was the founder of modern economics.
c. argued that Britain should not restrict imports of grain.
d. wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776.
ANS: C
PTS: 1
DIF: 1
REF: 3-2
TOP: Economists
MSC: Definitional
126. David Ricardo, a millionaire stockbroker and economist,
a. opposed the Corn Laws as a member of the British Parliament.
b. disputed Adam Smith's theory of specialization and trade in the early 1800s.
c. developed the principle of absolute advantage.
d. was an early supporter of trade restrictions.
ANS: A
PTS: 1
DIF: 1
REF: 3-2
TOP: Economists
MSC: Definitional
127. David Ricardo was the author of
a. An Inquiry into the Nature and Causes of the Wealth of Nations.
b. Principles of Political Economy and Taxation.
c. The General Theory of Employment, Interest, and Money.
d. Why Homo Sapiens Dominated Neanderthals.
ANS: B
PTS: 1
DIF: 1
REF: 3-2
TOP: Economists
MSC: Definitional
128. The principle of comparative advantage does not provide answers to certain questions. One of those questions is as
follows:
a. Do specialization and trade benefit more than one party to a trade?
b. Is it absolute advantage or comparative advantage that really matters?
c. How are the gains from trade shared among the parties to a trade?
d. Is it possible for specialization and trade to increase total output of traded goods?
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage | Trade
MSC: Interpretive
129. The principle of comparative advantage does not provide answers to certain questions. One of those questions is as
follows:
a. Is it possible for specialization and trade to benefit more than one party to a trade?
b. Is it possible for specialization and trade to increase total output of traded goods?
c. Do opportunity costs play a role in people’s decisions to specialize in certain activities?
d. What determines the price at which trade takes place?
ANS: D
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage | Trade
MSC: Interpretive
130. If Korea is capable of producing either shoes or soccer balls or some combination of those two products, then
a. Korea should specialize in the product in which it has an absolute advantage.
b. it would be impossible for Korea to have an absolute advantage over another country in both products.
c. it would be difficult for Korea to benefit from trade with another country if Korea is efficient in the production
of both goods.
d. Korea’s opportunity cost of shoes is the inverse of its opportunity cost of soccer balls.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
106  Chapter 3/Interdependence and the Gains from Trade
131. Assume that Greece has a comparative advantage in fish and Germany has a comparative advantage in cars. Also
assume that Germany has an absolute advantage in both fish and cars. If these two countries specialize and trade so
as to maximize the benefits of specialization and trade,
a. the two countries’ combined output of both goods will be higher than it would be in the absence of trade.
b. Greece will produce more fish than it would produce in the absence of trade.
c. Germany will produce more cars than it would produce in the absence of trade.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Specialization | Trade
MSC: Interpretive
132. Belarus has a comparative advantage in the production of linen, but Russia has an absolute advantage in the
production of linen. If these two countries decide to trade,
a. Belarus should export linen to Russia.
b. Russia should export linen to Belarus.
c. trading linen would provide no net advantage to either country.
d. Without additional information about opportunity costs, this question cannot be answered.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Absolute advantage | Comparative advantage | Trade
MSC: Interpretive
133. Canada and the U.S. both produce wheat and computer software. Canada is said to have the comparative advantage
in producing wheat if
a. Canada requires fewer resources than the U.S. to produce a bushel of wheat.
b. the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S.
c. the opportunity cost of producing a bushel of wheat is lower for the U.S. than it is for Canada.
d. the U.S. has an absolute advantage over Canada in producing computer software.
ANS: B
PTS: 1
DIF: 1
REF: 3-2
TOP: Opportunity cost | Comparative advantage
MSC: Definitional
134. Assume for the United States that the opportunity cost of each airplane is 100 cars. Then which of these pairs of
points could be on the United States' production possibilities frontier?
a. (200 airplanes, 5,000 cars) and (150 airplanes, 4,000 cars)
b. (200 airplanes, 10,000 cars) and (150 airplanes, 20,000 cars)
c. (300 airplanes, 15,000 cars) and (200 airplanes, 25,000 cars)
d. (300 airplanes, 25,000 cars) and (200 airplanes, 40,000 cars)
ANS: C
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost | Production possibilities frontier
MSC: Applicative
135. When a country has a comparative advantage in producing a certain good,
a. the country should import that good.
b. the country should produce just enough of that good for its own consumption.
c. the country’s opportunity cost of that good is high relative to other countries’ opportunity costs of that same
good.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage
MSC: Interpretive
136. Trade between countries
a. allows each country to consume at a point outside its production possibilities frontier.
b. limits a country’s ability to produce goods and services on its own.
c. must benefit both countries equally; otherwise, trade is not mutually beneficial.
d. can best be understood by examining the countries’ absolute advantages.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Trade
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  107
137. Which of the following would not result from all countries specializing according to the principle of comparative
advantage?
a. Each country’s production possibilities frontier will shift outward.
b. Worldwide production of goods and services will increase.
c. The well-being of citizens in each country will be enhanced.
d. The size of the economic pie will increase.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Specialization | Trade
MSC: Interpretive
Table 3-5
Hours needed to make one:
Japan
U.S.
Car
30
50
Airplane
150
200
Amount produced in 2400 hours:
Cars
80
48
Airplanes
16
12
138. Refer to Table 3-5. The opportunity cost of 1 car for Japan is
a. 5 airplanes.
b. 4 airplanes.
c. 1/4 airplane.
d. 1/5 airplane.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost
MSC: Applicative
139. Refer to Table 3-5. The opportunity cost of 1 airplane for Japan is
a. 5 cars.
b. 4 cars.
c. 1/4 car.
d. 1/5 car.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost
MSC: Applicative
140. Refer to Table 3-5. The opportunity cost of 1 car for the United States is
a. 4 airplanes.
b. 3 airplanes.
c. 1/3 airplane.
d. 1/4 airplane.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost
MSC: Applicative
141. Refer to Table 3-5. The opportunity cost of 1 airplane for the United States is
a. 4 cars.
b. 3 cars.
c. 1/3 car.
d. 1/4 car.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost
MSC: Applicative
142. Refer to Table 3-5. Japan has a comparative advantage in
a. airplanes and the United States has an absolute advantage in cars.
b. cars and the United States has an absolute advantage in airplanes.
c. cars and the United States has an absolute advantage in neither good.
d. airplanes and the United States has an absolute advantage in both goods.
ANS: C
PTS: 1
DIF: 3
REF: 3-3
TOP: Absolute advantage | Comparative advantage MSC: Applicative
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108  Chapter 3/Interdependence and the Gains from Trade
143. Refer to Table 3-5. Japan has an absolute advantage in
a. both goods and the United States has a comparative advantage in cars.
b. both goods and the United States has a comparative advantage in airplanes.
c. cars (but not airplanes) and the United States has a comparative advantage in airplanes.
d. airplanes (but not cars) and the United States has a comparative advantage in cars.
ANS: B
PTS: 1
DIF: 3
REF: 3-3
TOP: Absolute advantage | Comparative advantage MSC: Applicative
144. Refer to Table 3-5. The United States has an absolute advantage in
a. airplanes and Japan has an absolute advantage in cars.
b. cars and Japan has an absolute advantage in airplanes.
c. both cars and airplanes.
d. neither cars nor airplanes.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Absolute advantage
MSC: Applicative
145. Refer to Table 3-5. The United States has a comparative advantage in
a. airplanes and Japan has a comparative advantage in airplanes.
b. cars and Japan has a comparative advantage in airplanes.
c. airplanes and Japan has a comparative advantage in cars.
d. neither good and Japan has a comparative advantage in both goods.
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage
MSC: Applicative
146. Refer to Table 3-5. The United States and Japan could benefit by the United States specializing in
a. airplanes and Japan specializing in airplanes.
b. cars and Japan specializing in airplanes.
c. airplanes and Japan specializing in cars.
d. neither good and Japan specializing in cars.
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Specialization
MSC: Applicative
147. Refer to Table 3-5. If the United States and Japan trade based on the principle of comparative advantage, the
United States will
a. export cars (but not airplanes) to Japan.
b. export airplanes (but not cars) to Japan.
c. export cars and airplanes to Japan.
d. import cars and airplanes from Japan.
ANS: B
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
148. Refer to Table 3-5. If the United States and Japan trade based on the principle of comparative advantage, Japan
will
a. export cars (but not airplanes) to the U.S.
b. export airplanes (but not cars) to the U.S.
c. export cars and airplanes to the U.S.
d. import cars and airplanes from the U.S.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
149. Refer to Table 3-5. If the United States and Japan specialize and trade based on the principle of comparative
advantage, the United States will
a. export cars and Japan will export airplanes.
b. export airplanes and Japan will export cars.
c. export cars and Japan will export cars.
d. export airplanes and Japan will export airplanes.
ANS: B
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  109
150. Refer to Table 3-5. If Japan and the United States trade based on the principle of comparative advantage,
a. both countries can consume outside of their respective production possibilities frontiers.
b. both countries can have more airplanes and cars than they would have without trade.
c. Japan will specialize in cars and the United States will specialize in airplanes.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
Figure 3-5 The graph below represents the various combinations of cars and corn that Country A could
produce in a given month. (On the vertical axis, corn is measured in bushels.)
151. Refer to Figure 3-5. The graph that is shown is called a
a. supply line.
b. opportunity line.
c. production possibilities frontier.
d. consumption possibilities frontier.
ANS: C
PTS: 1
DIF: 1
REF: 3-3
TOP: Production possibilities frontier
MSC: Definitional
152. Refer to Figure 3-5. The fact that the line slopes downward reflects the fact that
a. for Country A, it is more costly to produce a car than it is to produce a bushel of corn.
b. Country A will produce more cars and fewer bushels of corn as time goes by.
c. Country A faces a tradeoff between producing cars and producing corn.
d. Country A should specialize in producing corn.
ANS: C
PTS: 1
DIF: 1
REF: 3-3
TOP: Production possibilities frontier
MSC: Interpretive
153. Refer to Figure 3-5. Which of the following combinations of cars and corn could Country A produce in a given
month?
a. 7 cars and 40 bushels of corn
b. 5 cars and 92 bushels of corn
c. 3 cars and 165 bushels of corn
d. 2 cars and 180 bushels of corn
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Production possibilities frontier
MSC: Applicative
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110  Chapter 3/Interdependence and the Gains from Trade
154. Refer to Figure 3-5. Which of the following combinations of cars and corn could Country A not produce in a
given month?
a. 6 cars and 60 bushels of corn
b. 4 cars and 120 bushels of corn
c. 3 cars and 160 bushels of corn
d. 1 car and 210 bushels of corn
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Production possibilities frontier
MSC: Applicative
155. Refer to Figure 3-5. Suppose Country B is willing to trade 40 bushels of corn to Country A for each car that
Country A produces and sends to Country B. Which of the following combinations of cars and corn could Country
A then consume, assuming Country A specializes in car production?
a. 2 cars and 240 bushels of corn
b. 3 cars and 220 bushels of corn
c. 4 cars and 200 bushels of corn
d. 5 cars and 140 bushels of corn
ANS: A
PTS: 1
DIF: 3
REF: 3-3
TOP: Production possibilities frontier | Trade
MSC: Applicative
156. Refer to Figure 3-5. For Country A, what is the opportunity cost of each additional car that it decides to produce?
a. 25 bushels of corn
b. 30 bushels of corn
c. 35 bushels of corn
d. 40 bushels of corn
ANS: B
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost | Production possibilities frontier
MSC: Applicative
157. Refer to Figure 3-5. Suppose Country A decides to increase its production of corn by three bushels. What is the
opportunity cost of this decision?
a. one-sixth of a car
b. one-eighth of a car
c. one-tenth of a car
d. one-twelfth of a car
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost | Production possibilities frontier
MSC: Applicative
158. Refer to Figure 3-5. Country A would most likely find itself specializing in corn production if it began trading
with Country B and
a. Country A had an absolute advantage over Country B in producing corn.
b. Country B had a comparative advantage over Country A in producing corn.
c. Country B faced an opportunity cost of 20 bushels of corn for every additional car that it produced.
d. Country B faced an opportunity cost of 40 bushels of corn for every additional car that it produced.
ANS: D
PTS: 1
DIF: 3
REF: 3-3
TOP: Opportunity cost | Production possibilities frontier | Trade
MSC: Analytical
159. Refer to Figure 3-5. Under which of the following circumstances would Country A be able to consume outside of
its production possibilities frontier?
a. Under no circumstances is that possible.
b. Country A trades with Country B; Country A has a comparative advantage over Country B in producing corn;
and Country A specializes in car production.
c. Country A trades with Country B; Country A has a comparative advantage over Country B in producing cars;
and Country A specializes in car production.
d. Country A trades with Country B; Country A has an absolute advantage over Country B in producing cars; and
Country A specializes in car production.
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Absolute advantage | Comparative advantage MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  111
160. A good that is produced abroad and sold domestically is called
a. a quota.
b. a tariff.
c. an import.
d. an export.
ANS: C
PTS: 1
DIF: 1
REF: 3-3
TOP: Imports
MSC: Definitional
161. By definition, imports are
a. people who work in foreign countries.
b. goods in which a country has an absolute advantage.
c. whatever is given up to obtain some item.
d. goods produced abroad and sold domestically.
ANS: D
PTS: 1
DIF: 1
REF: 3-3
TOP: Imports
MSC: Definitional
162. By definition, exports are
a. a limit placed on the quantity of goods brought into a country.
b. opportunity benefits (as opposed to opportunity costs).
c. goods produced abroad and sold domestically.
d. goods produced domestically and sold abroad.
ANS: D
PTS: 1
DIF: 1
REF: 3-3
TOP: Exports
MSC: Definitional
163. Economists generally support
a. trade restrictions.
b. government management of trade.
c. export subsidies.
d. free international trade.
ANS: D
PTS: 1
DIF: 1
REF: 3-3
TOP: Economists | Trade
MSC: Interpretive
164. A country that currently does not trade with other countries could benefit by
a. restricting imports and promoting exports.
b. promoting imports and restricting exports.
c. restricting both imports and exports.
d. not restricting trade.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Gains from trade
MSC: Interpretive
165. Trade can make everybody better off because it
a. increases cooperation among nations.
b. allows people to specialize according to comparative advantage.
c. requires some workers in an economy to be retrained.
d. reduces competition among domestic companies.
ANS: B
PTS: 1
DIF: 2
REF: 3-3
TOP: Gains from trade
MSC: Interpretive
Use the accompanying table to answer the following questions:
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
112  Chapter 3/Interdependence and the Gains from Trade
Table 3-6
England
Spain
Labor hours needed to make one
unit of
Cheese
Bread
1
2
2
8
Amount produced in 40 hours
Cheese
Bread
40
20
20
5
166. Refer to Table 3-6. The opportunity cost of 1 unit of cheese in England is
a. 4 units of bread.
b. 2 units of bread.
c. 1/2 unit of bread.
d. 1/4 unit of bread.
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost
MSC: Applicative
167. Refer to Table 3-6. The opportunity cost of 1 unit of bread in England is
a. 4 units of cheese.
b. 2 units of cheese.
c. 1 unit of cheese.
d. 1/2 unit of cheese.
ANS: B
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost
MSC: Applicative
168. Refer to Table 3-6. The opportunity cost of 1 unit of cheese in Spain is
a. 2 unit of bread.
b. 1 unit of bread.
c. 1/2 unit of bread.
d. 1/4 unit of bread.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost
MSC: Applicative
169. Refer to Table 3-6. The opportunity cost of 1 unit of bread in Spain is
a. 4 units of cheese.
b. 2 units of cheese.
c. 1 unit of cheese.
d. 1/4 unit of cheese.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Opportunity cost
MSC: Applicative
170. Refer to Table 3-6. England has a comparative advantage in
a. bread and Spain has a comparative advantage in cheese.
b. cheese and Spain has a comparative advantage in bread.
c. both goods and Spain has a comparative advantage in neither good.
d. neither good and Spain has a comparative advantage in both goods.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage
MSC: Applicative
171. Refer to Table 3-6. England has an absolute advantage in
a. bread and Spain has an absolute advantage in cheese.
b. cheese and Spain has an absolute advantage in bread.
c. neither good and Spain has an absolute advantage in both goods.
d. both goods and Spain has an absolute advantage in neither good.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Absolute advantage
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  113
172. Refer to Table 3-6. England has a comparative advantage in
a. bread and Spain has an absolute advantage in cheese.
b. bread and Spain has an absolute advantage in neither good.
c. cheese and Spain has an absolute advantage in both goods.
d. both goods and Spain has an absolute advantage in cheese.
ANS: B
PTS: 1
DIF: 3
REF: 3-3
TOP: Absolute advantage | Comparative advantage MSC: Applicative
173. Refer to Table 3-6. England has an absolute advantage in
a. bread and Spain has a comparative advantage in cheese.
b. bread and Spain has a comparative advantage in neither good.
c. cheese and Spain has a comparative advantage in both goods.
d. both goods and Spain has a comparative advantage in cheese.
ANS: D
PTS: 1
DIF: 3
REF: 3-3
TOP: Absolute advantage | Comparative advantage MSC: Applicative
174. Refer to Table 3-6. England and Spain both could benefit, relative to a situation in which neither country is
specializing, by England specializing in
a. bread and Spain specializing in cheese.
b. cheese and Spain specializing in bread.
c. both goods and Spain specializing in neither good.
d. neither good and Spain specializing in both goods.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Specialization
MSC: Applicative
175. Refer to Table 3-6. If England and Spain specialize and trade based on the principle of comparative advantage,
England will export which product to Spain?
a. cheese
b. bread
c. both cheese and bread
d. England cannot benefit from trade with Spain.
ANS: B
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
176. Refer to Table 3-6. If England and Spain specialize and trade based on the principle of comparative advantage,
Spain will export which product to England?
a. bread
b. cheese
c. both bread and cheese
d. Spain cannot benefit from trade with England.
ANS: B
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
177. Refer to Table 3-6. If England and Spain specialize and trade based on the principle of comparative advantage,
England will export
a. bread and Spain will export cheese.
b. bread and Spain will export bread.
c. cheese and Spain will export cheese.
d. cheese and Spain will export bread.
ANS: A
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
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114  Chapter 3/Interdependence and the Gains from Trade
178. Refer to Table 3-6. If England and Spain trade based on the principle of comparative advantage, England will
import
a. bread and Spain will import cheese.
b. bread and Spain will import bread.
c. cheese and Spain will import bread.
d. cheese and Spain will import cheese.
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
179. Refer to Table 3-6. If England and Spain specialize and trade according to their respective comparative
advantages,
a. all individuals in both countries will benefit.
b. Spain will specialize in and export bread.
c. Spain will produce more bread than in the absence of trade.
d. Spain will produce more cheese than in the absence of trade.
ANS: D
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
180. Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year, and a worker in
Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. Without trade,
Freedonia produces and consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and
consumes 10 units of corn and 30 units of wheat. Suppose that trade is then initiated between the two countries,
and Freedonia sends 30 units of corn to Sylvania in exchange for 30 units of wheat. Freedonia will now be able to
consume a maximum of
a. 30 units of corn and 30 units of wheat.
b. 40 units of corn and 30 units of wheat.
c. 40 units of corn and 20 units of wheat.
d. 10 units of corn and 40 units of wheat.
ANS: A
PTS: 1
DIF: 3
REF: 3-3
TOP: Specialization | Trade
MSC:
Applicative
181. Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year, and a worker in
Sylvania can produce either 2 units of corn or 6 units of wheat per year. Each nation has 10 workers. For many
years the two countries traded, each completely specializing according to their respective comparative advantages.
Now, however, war has broken out between them and all trade has stopped. Without trade, Freedonia produces and
consumes 30 units of corn and 10 units of wheat per year. Sylvania produces and consumes 10 units of corn and 30
units of wheat. The war has caused the combined yearly output of the two countries to decline by
a. 10 units of corn and 10 units of wheat.
b. 20 units of corn and 20 units of wheat.
c. 30 units of corn and 30 units of wheat.
d. 40 units of corn and 40 units of wheat.
ANS: B
PTS: 1
DIF: 3
REF: 3-3
TOP: Specialization | Trade
MSC:
Applicative
182. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year, and a worker in
Teeveeland can produce either 2 radios or 4 televisions per year. Each nation has 100 workers. Also suppose that
each country completely specializes in producing the good for which it has a comparative advantage. If Radioland
trades 100 radios to Teeveeland in exchange for 100 televisions each year, then each country's maximum
consumption of new radios and televisions per year will be
a. 100 radios, 300 televisions in Radioland and 300 radios, 100 televisions in Teeveeland.
b. 300 radios, 100 televisions in Radioland and 100 radios, 300 televisions in Teeveeland.
c. 200 radios, 100 televisions in Radioland and 100 radios, 200 televisions in Teeveeland.
d. 300 radios, 100 televisions in Radioland and 100 radios, 400 televisions in Teeveeland.
ANS: B
PTS: 1
DIF: 3
REF: 3-3
TOP: Specialization | Trade
MSC:
Applicative
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Chapter 3/Interdependence and the Gains from Trade  115
183. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year, and a worker in
Teeveeland can produce either 2 radios or 5 televisions per year. Each nation has 100 workers, and each country
specializes according to the principle of comparative advantage. If Radioland trades 100 televisions to Teeveeland
in exchange for 100 radios each year, then each country's maximum consumption of new radios and televisions per
year will be
a. higher than it would be in the absence of trade because of the gains from trade.
b. the same as it would be in the absence of trade.
c. less than it would be in the absence of trade because neither country is specializing in the product for which it
has a comparative advantage.
d. less than it would be in the absence of trade because Teeveeland has an absolute advantage in both goods and
so it cannot benefit by trading with Radioland.
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Specialization | Trade
MSC: Applicative
184. Suppose that a worker in Agland can produce either 10 units of organic grain or 2 units of incense per year, and a
worker in Zenland can produce either 5 units of organic grain or 15 units of incense per year. There are 20 workers
in Agland and 10 workers in Zenland. Currently the two countries do not trade. Agland produces and consumes
100 units of grain and 20 units of incense per year. Zenland produces and consumes 50 units of grain and no
incense per year. If each country made the decision to specialize in producing the good for which it has a
comparative advantage, then the combined yearly output of the two countries would increase by
a. 30 units of grain and 100 units of incense.
b. 30 units of grain and 150 units of incense.
c. 50 units of grain and 90 units of incense.
d. 50 units of grain and 130 units of incense.
ANS: D
PTS: 1
DIF: 3
REF: 3-3
TOP: Comparative advantage | Specialization
MSC: Applicative
185. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker
in Oatland can grow either 5 bushels of corn or 50 bushels of oats per year. There are 20 workers in Cornland and
20 workers in Oatland. If the two countries do not trade, Cornland will produce and consume 400 bushels of corn
and 100 bushels of oats, while Oatland will produce and consume 60 bushels of corn and 400 bushels of oats. If
each country made the decision to specialize in producing the good for which it has a comparative advantage, then
the combined yearly output of the two countries would increase by
a. 280 bushels of corn and 450 bushels of oats.
b. 340 bushels of corn and 500 bushels of oats.
c. 360 bushels of corn and 520 bushels of oats.
d. 360 bushels of corn and 640 bushels of oats.
ANS: B
PTS: 1
DIF: 3
REF: 3-3
TOP: Comparative advantage | Specialization
MSC: Applicative
186. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per year, and a worker
in Oatland can grow either 20 bushels of corn or 5 bushels of oats per year. There are 20 workers in Cornland and
20 workers in Oatland. Which of the following statements is true?
a. Both countries could gain from trade with each other.
b. Neither country could gain from trade with each other because Cornland has an absolute advantage in both
goods.
c. Neither country could gain from trade with each other because neither one has a comparative advantage.
d. Oatland could gain from trade between the two countries, but Cornland definitively would lose.
ANS: C
PTS: 1
DIF: 3
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Applicative
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116  Chapter 3/Interdependence and the Gains from Trade
187. Suppose that a worker in Boatland can produce either 5 units of wheat or 25 units of fish per year, and a worker in
Farmland can produce either 25 units of wheat or 5 units of fish per year. There are 10 workers in each country.
Political pressure from the fish lobby in Farmland and from the wheat lobby in Boatland has prevented trade
between the two countries on the grounds that cheap imports would kill the fish industry in Farmland and the
wheat industry in Boatland. As a result, Boatland produces and consumes 25 units of wheat and 125 units of fish
per year while Farmland produces and consumes 125 units of wheat and 25 units of fish per year. If the political
pressure were overcome and trade were to occur, each country would completely specialize in the product for
which it has a comparative advantage. If trade were to occur, the combined output of the two countries would
increase by
a. 25 units of wheat and 25 units of fish.
b. 50 units of wheat and 50 units of fish.
c. 75 units of wheat and 75 units of fish.
d. 100 units of wheat and 100 units of fish.
ANS: D
PTS: 1
DIF: 3
REF: 3-3
TOP: Comparative advantage | Specialization
MSC: Applicative
188. Suppose that a worker in Boatland can produce either 5 units of wheat or 25 units of fish per year, and a worker in
Farmland can produce either 25 units of wheat or 5 units of fish per year. There are 30 workers in each country. No
trade occurs between the two countries. Boatland produces and consumes 75 units of wheat and 375 units of fish
per year while Farmland produces and consumes 375 units of wheat and 75 units of fish per year. If trade were to
occur, Boatland would trade 90 units of fish to Farmland in exchange for 80 units of wheat. If Boatland now
completely specializes in fish production, how many units of fish could it now consume along with the 80 units of
imported wheat?
a. 490 units
b. 500 units
c. 610 units
d. 660 units
ANS: D
PTS: 1
DIF: 3
REF: 3-3
TOP: Specialization
MSC: Applicative
189. Suppose that the country of Xenophobia chose to isolate itself from the rest of the world. Its ruler proclaimed that
Xenophobia should become self-sufficient, so it would not engage in foreign trade. From an economic perspective,
this idea would
a. make sense if Xenophobia had an absolute advantage in all goods.
b. make sense if Xenophobia had no absolute advantages in any good.
c. not make sense as long as Xenophobia had a comparative advantage in some good.
d. not make sense as long as Xenophobia had an absolute advantage in at least half the goods that could be traded.
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage | Trade
MSC: Interpretive
190. Recently, it has been suggested by researchers that the theory of comparative advantage may explain the fact that
a. Tiger Woods mows his own lawn.
b. brilliant scholars write textbooks.
c. Homo sapiens displaced Neanderthals.
d. many countries impose tariffs.
ANS: C
PTS: 1
DIF: 2
REF: 3-3
TOP: Comparative advantage
MSC: Interpretive
191. A recently-developed theory asserts that Homo sapiens dominated Neanderthals because
a. tools developed by Homo sapiens were superior to tools developed by Neanderthals.
b. Homo sapiens engaged in specialization and trade to a greater extent than did the Neanderthals.
c. Homo sapiens produced more children than did Neanderthals and eventually the Homo sapiens dominated
because of their larger population.
d. Homo sapiens adopted methods of production that were efficient, while Neanderthals tended to waste their
valuable resources.
ANS: B
PTS: 1
DIF: 2
REF: 3-3
TOP: Specialization | Trade
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  117
192. Suppose the United States has a comparative advantage over Mexico in producing pork. The principle of
comparative advantage asserts that
a. the United States should produce more pork than what it requires and export some of it to Mexico.
b. the United States should produce a moderate quantity of pork and import the remainder of what it requires from
Mexico.
c. the United States should refrain altogether from producing pork and import all of what it requires from Mexico.
d. Mexico has nothing to gain from importing United States pork.
ANS: A
PTS: 1
DIF: 1
REF: 3-3
TOP: Trade | Comparative advantage
MSC: Interpretive
True/False
1. Trade allows a country to consume outside its production possibilities frontier.
ANS: T
PTS: 1
DIF: 2
REF: 3-1
TOP: Production possibilities frontier | Trade
MSC: Interpretive
2. It takes Barbara 3 hours to make a pie and 4 hours to make a shirt. It takes Gary 2 hours to make a pie and 5 hours
to make a shirt. Barbara should specialize in making shirts and Gary should specialize in making pies, and they
should trade.
ANS: T
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage | Specialization
MSC: Applicative
3. It takes Russell 6 hours to produce a bushel of corn and 2 hours to wash and polish a car. It takes Wilma 6 hours to
produce a bushel of corn and 1 hour to wash and polish a car. Wilma and Russell cannot gain from specialization
and trade, since it takes each of them 6 hours to produce 1 bushel of corn.
ANS: F
PTS: 1
DIF: 2
REF: 3-2
TOP: Comparative advantage | Specialization
MSC: Applicative
4. For a country producing two goods, the opportunity cost of one good will be the inverse of the opportunity cost of
the other good.
ANS: T
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Interpretive
5. The producer who has the smaller opportunity cost of producing a good is said to have an absolute advantage in
producing that good.
ANS: F
PTS: 1
DIF: 1
REF: 3-2
TOP: Absolute advantage
MSC: Definitional
6. Trade is based on absolute advantage.
ANS: F
PTS: 1
DIF: 1
TOP: Trade
MSC: Interpretive
REF: 3-2
7. Rusty can edit 2 pages in one minute, and he can type 80 words in one minute. Emily can edit 1 page in one
minute, and she can type 100 words in one minute. Rusty has an absolute advantage and a comparative advantage
in editing, and Emily has an absolute advantage and a comparative advantage in typing.
ANS: T
PTS: 1
DIF: 3
REF: 3-2
TOP: Absolute advantage | Comparative advantage MSC: Applicative
8. Two countries can achieve gains from trade even if one country has an absolute advantage in the production of
both goods.
ANS: T
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage | Gains from trade
MSC: Interpretive
9. Differences in opportunity cost allow for gains from trade.
ANS: T
PTS: 1
DIF: 2
REF: 3-2
TOP: Gains from trade | Opportunity cost
MSC: Interpretive
10. When each person specializes in producing the good for which he or she has a comparative advantage, each person
can gain from trade but total production in the economy is unchanged.
ANS: F
PTS: 1
DIF: 2
REF: 3-2
TOP: Gains from trade
MSC: Interpretive
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118  Chapter 3/Interdependence and the Gains from Trade
11. Unless two people who are producing two goods have exactly the same opportunity costs, then one person will
have a comparative advantage in one good, and the other person will have a comparative advantage in the other
good.
ANS: T
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Interpretive
12. As long as two people have different opportunity costs, each can gain from trade, since trade allows each person to
obtain a good at a price lower than his or her opportunity cost.
ANS: T
PTS: 1
DIF: 2
REF: 3-2
TOP: Gains from trade | Opportunity cost
MSC: Interpretive
13. Trade allows a person to obtain goods at prices that are less than that person's opportunity cost because each person
specializes in the activity for which he or she has the lower opportunity cost.
ANS: T
PTS: 1
DIF: 2
REF: 3-2
TOP: Gains from trade | Opportunity cost
MSC: Interpretive
14. Jonathan can make a bird house in 3 hours. He can make a bird feeder in 1 hour. The opportunity cost to Jonathan
of making a bird house is 1/3 bird feeder.
ANS: F
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
15. Mark is a computer company executive, earning $200 per hour managing the company and promoting its products.
His daughter Regan is a high school student, earning $6 per hour helping her grandmother on the farm. Mark's
computer is broken. He can repair it himself in one hour. Regan can repair it in 10 hours. Mark’s opportunity cost
of repairing the computer is lower than Regan’s.
ANS: F
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
16. Suppose it takes a Chinese worker 2 hours to produce a ceramic pot, and 20 hours to produce a tablecloth. Suppose,
also, that it takes an American worker 2 hours to produce a ceramic pot and 10 hours to produce a tablecloth. It will
be worthwhile for China to produce extra pots and export them to the United States in return for imported U.S.
tablecloths.
ANS: T
PTS: 1
DIF: 2
REF: 3-2
TOP: Opportunity cost
MSC: Applicative
17. If it takes U.S. workers fewer hours to produce every good than it takes German workers, the United States cannot
gain from trade with Germany.
ANS: F
PTS: 1
DIF: 2
REF: 3-2
TOP: Absolute advantage
MSC: Interpretive
18. Adam Smith developed the theory of comparative advantage as we know it today.
ANS: F
PTS: 1
DIF: 2
REF: 3-2
TOP: Economists | Comparative advantage
MSC: Definitional
19. Goods produced abroad and sold domestically are called exports and goods produced domestically and sold abroad
are called imports.
ANS: F
PTS: 1
DIF: 1
REF: 3-3
TOP: Exports | Imports
MSC: Definitional
20. International trade may make some individuals in a nation better off, while other individuals are made worse off.
ANS: T
PTS: 1
DIF: 2
REF: 3-3
TOP: Trade
MSC: Interpretive
21. Some countries win in international trade, while other countries lose.
ANS: F
PTS: 1
DIF: 2
REF: 3-3
TOP: Trade
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 3/Interdependence and the Gains from Trade  119
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copied, or distributed without the prior consent of the publisher.
Chapter 4
The Market Forces of Supply and Demand
Multiple Choice
1. The forces that make market economies work are
a. work and leisure.
b. demand and supply.
c. regulation and restraint.
d. taxes and government spending.
ANS: B
PTS: 1
DIF: 1
REF: 4-0
TOP: Market economy
MSC: Interpretive
2. Which of the following are the words most commonly used by economists?
a. surplus and shortage
b. resources and allocation
c. supply and demand
d. theory and practice
ANS: C
PTS: 1
DIF: 1
REF: 4-0
TOP: Economists
MSC: Interpretive
3. In a market economy,
a. supply determines demand and, in turn, demand determines prices.
b. demand determines supply and, in turn, supply determines prices.
c. the allocation of scarce resources determines prices and, in turn, prices determine supply and demand.
d. supply and demand determine prices and, in turn, prices allocate scarce resources.
ANS: D
PTS: 1
DIF: 2
REF: 4-0
TOP: Market economy
MSC: Interpretive
4. In a market economy, supply and demand are important because they
a. play a critical role in the allocation of the economy’s scarce resources.
b. determine how much of each good gets produced.
c. can be used to predict the impact on the economy of various events and policies.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 4-0
TOP: Market economy
MSC: Interpretive
5. A market is a
a. group of buyers and sellers of a particular good or service.
b. group of people with common economic characteristics.
c. place where buyers and sellers come together to engage in trade.
d. place where an auctioneer helps set prices and arrange sales.
ANS: A
PTS: 1
DIF: 1
REF: 4-1
TOP: Markets
MSC: Definitional
6. For a market for a good or service to exist,
a. there must be a group of buyers and sellers.
b. there must be a specific time and place at which the good or service is traded.
c. the price of the good must be determined by the sellers.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 1
REF: 4-1
TOP: Market(s MSC: Definitional
122
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  123
7. The term market always refers to
a. an arrangement in which buyers and sellers meet at a specific time and place.
b. an arrangement in which an auctioneer plays at least a limited role in setting prices.
c. a group of buyers and sellers of a particular good or service.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 1
REF: 4-1
TOP: Markets
MSC: Definitional
8. A group of buyers and sellers of a particular good or service is called a
a. coalition.
b. partnership.
c. market.
d. union.
ANS: C
PTS: 1
DIF: 1
REF: 4-1
TOP: Markets
MSC: Definitional
9. A market is always characterized by
a. a high degree of organization.
b. an individual or small group of individuals who set the price of the product for all buyers and sellers.
c. the presence of buyers and sellers.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 4-1
TOP: Markets
MSC: Interpretive
10. Which of the following statements is correct?
a. Buyers determine supply and sellers determine demand.
b. Buyers determine demand and sellers determine supply.
c. Buyers and sellers as one group determine supply, but only buyers determine demand.
d. Buyers and sellers as one group determine demand, but only sellers determine supply.
ANS: B
PTS: 1
DIF: 2
REF: 4-1
TOP: Demand | Supply
MSC: Interpretive
11. For each good produced in a market economy, the interaction of demand and supply determines
a. the price of the good, but not the quantity.
b. the quantity of the good, but not the price.
c. both the price of the good and the quantity of the good.
d. neither price nor quantity, because prices and quantities are determined by the sellers of the goods alone.
ANS: C
PTS: 1
DIF: 2
REF: 4-1
TOP: Market economy
MSC: Interpretive
12. A competitive market is a market in which
a. an auctioneer helps set prices and arrange sales.
b. there are only a few sellers.
c. the forces of supply and demand do not apply.
d. no individual buyer or seller has any significant impact on the market price.
ANS: D
PTS: 1
DIF: 1
REF: 4-1
TOP: Competitive markets
MSC: Definitional
13. The demand for a good or service is determined by
a. those who buy the good or service.
b. the government.
c. the producers who create the good or service.
d. those who supply the raw materials used in the production of the good or service.
ANS: A
PTS: 1
DIF: 2
REF: 4-1
TOP: Demand MSC: Interpretive
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124  Chapter 4/The Market Forces of Supply and Demand
14. A competitive market is one in which
a. there is only one seller, but there are many buyers.
b. there are many sellers and each seller has the ability to set the price of his product.
c. there are many sellers and they compete with one another in such a way that some sellers are always being
forced out of the market.
d. there are so many buyers and so many sellers that each has a negligible impact on the price of the product.
ANS: D
PTS: 1
DIF: 2
REF: 4-1
TOP: Competitive markets
MSC: Definitional
15. In a competitive market,
a. only a few sellers sell the same product.
b. each seller has a limited degree of control over the price of his product.
c. if one buyer chooses to purchase a large quantity of the product, the price will rise.
d. if one seller withholds his product from the market, prices will rise.
ANS: B
PTS: 1
DIF: 2
REF: 4-1
TOP: Competitive markets
MSC: Interpretive
16. In a competitive market, each seller has limited control over the price of his product because
a. other sellers are offering similar products.
b. buyers exert more control over the price than do sellers.
c. these markets are highly regulated by government.
d. sellers usually agree to set a common price that will allow each seller to earn a comfortable profit.
ANS: A
PTS: 1
DIF: 2
REF: 4-1
TOP: Competitive markets
MSC: Interpretive
17. Most markets in the economy are
a. markets in which sellers, rather than buyers, control the price of the product.
b. markets in which buyers, rather than sellers, control the price of the product.
c. markets in which each seller of the product is aware that there are few, if any, similar products offered by other
sellers.
d. highly competitive.
ANS: D
PTS: 1
DIF: 2
REF: 4-1
TOP: Markets
MSC: Interpretive
18. For a competitive market, which of the following statements is correct?
a. A seller can always increase her profit by raising the price of her product.
b. If a seller charges more than the going price, buyers will go elsewhere to make their purchases.
c. A seller often charges less than the going price to increase sales and profit.
d. A single buyer can influence the price of the product, but only when purchasing from several sellers in a short
period of time.
ANS: B
PTS: 1
DIF: 2
REF: 4-1
TOP: Competitive markets
MSC: Interpretive
19. Assume Teresa buys computers in a competitive market. Then
a. Teresa has a limited number of sellers to turn to when she buys a computer.
b. Teresa will find herself negotiating with sellers whenever she buys a computer.
c. if Teresa buys a large number of computers, the price of computers will rise noticeably.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 2
REF: 4-1
TOP: Competitive markets
MSC: Interpretive
20. The highest form of competition is called
a. absolute competition.
b. cutthroat competition.
c. perfect competition.
d. market competition.
ANS: C
PTS: 1
DIF: 1
REF: 4-1
TOP: Perfect competition
MSC: Definitional
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Chapter 4/The Market Forces of Supply and Demand  125
21. Which of the following is not a characteristic of a perfectly competitive market?
a. Different sellers sell identical products.
b. There are many sellers.
c. Sellers must accept the price the market determines.
d. All of the above are characteristics of a perfectly competitive market.
ANS: D
PTS: 1
DIF: 2
REF: 4-1
TOP: Perfect competition
MSC: Interpretive
22. Which of the following is not a characteristic of a perfectly competitive market?
a. Sellers possess market power.
b. There are many sellers.
c. Buyers must accept the price the market determines.
d. All of the above are characteristics of a perfectly competitive market.
ANS: A
PTS: 1
DIF: 2
REF: 4-1
TOP: Perfect competition
MSC: Interpretive
23. The term price takers refers to buyers and sellers in
a. perfectly competitive markets.
b. monopolies.
c. markets that are regulated by government.
d. markets in which buyers cannot buy all they want and/or sellers cannot sell all they want.
ANS: A
PTS: 1
DIF: 2
REF: 4-1
TOP: Perfect competition
MSC: Interpretive
24. Buyers and sellers who have no influence on market price are referred to as
a. market pawns.
b. marginalists.
c. price takers.
d. price makers.
ANS: C
PTS: 1
DIF: 1
REF: 4-1
TOP: Perfect competition
MSC: Definitional
25. Price takers have no influence over prices in markets that feature
a. only a few buyers and a few sellers.
b. numerous sellers but only a few buyers.
c. numerous buyers but only a few sellers.
d. numerous buyers and numerous sellers.
ANS: D
PTS: 1
DIF: 1
REF: 4-1
TOP: Perfect competition
MSC: Interpretive
26. An example of a perfectly competitive market would be the
a. cable TV market.
b. soybean market.
c. new car market.
d. blue jean market.
ANS: B
PTS: 1
DIF: 2
REF: 4-1
TOP: Perfect competition
MSC: Interpretive
27. The market for ice cream is
a. a monopolistic market.
b. a competitive market.
c. a highly organized market.
d. a market in which there is no connection whatsoever between buyers and sellers.
ANS: B
PTS: 1
DIF: 1
REF: 4-1
TOP: Markets
MSC: Interpretive
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126  Chapter 4/The Market Forces of Supply and Demand
28. If a seller in a competitive market chooses to charge more than the market price, then
a. the sellers’ profits definitely would increase.
b. the owners of the raw materials used in production would raise the prices for the raw materials.
c. other sellers would also raise their prices.
d. buyers will tend to make purchases from other sellers.
ANS: D
PTS: 1
DIF: 2
REF: 4-1
TOP: Competitive markets
MSC: Interpretive
29. If buyers and sellers in a certain market are price takers, then individually
a. they have no influence on market price.
b. they have some influence on market price, but that influence is limited.
c. buyers will be able to find prices lower than those determined in the market.
d. sellers will find it difficult to sell all they want to sell at the market price.
ANS: A
PTS: 1
DIF: 2
REF: 4-1
TOP: Perfect competition
MSC: Interpretive
30. A monopoly is a market
a. with one seller, and that seller is a price taker.
b. with one seller, and that seller sets the price.
c. with one buyer.
d. in which competition has reached its highest form.
ANS: B
PTS: 1
DIF: 1
REF: 4-1
TOP: Monopoly MSC: Definitional
31. Which of the following would most likely serve as an example of a monopoly?
a. a bakery in a large city
b. a bank in a large city
c. a local cable television company
d. a small group of corn farmers
ANS: C
PTS: 1
DIF: 1
REF: 4-1
TOP: Monopoly MSC: Interpretive
32. Despite the fact that not all markets are perfectly competitive, the study of perfect competition is worthwhile, in
part because
a. buyers and sellers are price takers in all markets, not just in perfectly competitive markets.
b. buyers find it difficult to buy all they want to buy, and sellers find it difficult to sell all they want to sell, in all
markets, not just in perfectly competitive markets.
c. some degree of competition is present in most markets, not just in perfectly competitive markets.
d. perfectly competitive markets are the most difficult markets to analyze, and this makes the study of other types
of markets easy in comparison.
ANS: C
PTS: 1
DIF: 2
REF: 4-1
TOP: Perfect competition
MSC: Interpretive
33. To say that the quantity demanded of a good is negatively related to the price of the good is to say that
a. an increase in the quantity demanded of the good leads to a decrease in the price of the good.
b. an increase in the price of the good leads to a decrease in the quantity demanded of the good.
c. there is a weak relationship between the quantity demanded of a good and the price of the good.
d. there is no relationship between the quantity demanded of a good and the price of the good.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Price | Quantity demanded MSC: Interpretive
34. Quantity demanded falls as the price rises and rises as the price falls, so we say that
a. quantity demanded is determined by quantity supplied.
b. price is determined by quantity demanded.
c. quantity demanded is a function of demand.
d. quantity demanded is negatively related to the price.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Price | Quantity demanded MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  127
35. The negative relationship between price and quantity demanded
a. applies to most goods in the economy.
b. is represented by a downward-sloping demand curve.
c. is referred to as the law of demand.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 4-2
TOP: Negative relationships | Law of demand
MSC: Interpretive
36. Which of the following would not be a determinant of the demand for a particular good?
a. prices of related goods
b. income
c. tastes
d. the prices of the inputs used to produce the good
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Interpretive
37. Each of the following is a determinant of demand except
a. tastes.
b. technology.
c. expectations.
d. the prices of related goods.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Interpretive
38. The amount of the good buyers are willing and able to purchase is called the
a. demand.
b. quantity demanded.
c. supply.
d. quantity supplied.
ANS: B
PTS: 1
DIF: 1
REF: 4-2
TOP: Quantity demanded
MSC: Definitional
39. If a good is normal, then an increase in income will result in
a. an increase in the demand for the good.
b. a decrease in the demand for the good.
c. a movement down and to the right along the demand curve for the good.
d. a movement up and to the left along the demand curve for the good.
ANS: A
PTS: 1
DIF: 2
REF: 4-2
TOP: Normal goods
MSC: Interpretive
40. If Francis experiences a decrease in his income, we would expect that, as a result, Francis’s demand for
a. each good he purchases will remain unchanged.
b. normal goods will decrease.
c. luxury goods will increase.
d. inferior goods will decrease.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Normal goods
MSC: Interpretive
41. You lose your job and as a result you buy fewer romance novels. This shows that you consider romance novels to
be a(n)
a. luxury good.
b. inferior good.
c. normal good.
d. complementary good.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Normal goods
MSC: Interpretive
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128  Chapter 4/The Market Forces of Supply and Demand
42. Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December and you will
start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs are
a. a substitute good.
b. a normal good.
c. an inferior good.
d. a law-of-demand good.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Inferior goods
MSC: Interpretive
43. Two goods are substitutes if a decrease in the price of one good
a. decreases the demand for the other good.
b. decreases the quantity demanded of the other good.
c. increases the demand for the other good.
d. increases the quantity demanded of the other good.
ANS: A
PTS: 1
DIF: 2
REF: 4-2
TOP: Substitutes MSC: Definitional
44. Two goods are complements if a decrease in the price of one good
a. decreases the quantity demanded of the other good.
b. decreases the demand for the other good.
c. increases the quantity demanded of the other good.
d. increases the demand for the other good.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Complements
MSC: Definitional
45. A likely example of complementary goods for most people would be
a. hamburgers and hot dogs.
b. lawnmowers and automobiles.
c. hamburgers and French fries.
d. Dr. Pepper and Pepsi.
ANS: C
PTS: 1
DIF: 1
REF: 4-2
TOP: Complements
MSC: Interpretive
46. A likely example of substitute goods for most people would be
a. peanut butter and jelly.
b. tennis balls and tennis rackets.
c. televisions and subscriptions to cable television services.
d. pencils and pens.
ANS: D
PTS: 1
DIF: 1
REF: 4-2
TOP: Substitutes MSC: Interpretive
47. Which of the following statements about people’s tastes is correct?
a. Generally, economists are interested in explaining people’s tastes.
b. Generally, economists are interested in how changes in people’s tastes affect markets.
c. Tastes never change enough over time to cause noticeable shifts in demand curves.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Tastes
MSC: Interpretive
48. When it comes to people's tastes, economists generally believe that
a. tastes are based on forces that are well within the realm of economics.
b. tastes are based on historical and psychological forces.
c. tastes can only be studied through well-constructed, real-life models.
d. since tastes do not directly affect demand, there is little need to explain people's tastes.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Tastes
MSC: Interpretive
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Chapter 4/The Market Forces of Supply and Demand  129
49. Economists in general
a. do not try to explain people's tastes, but they do try to explain what happens when tastes change.
b. believe that they must be able to explain people's tastes in order to explain what happens when tastes change.
c. do not believe that people's tastes determine demand and therefore they ignore the subject of tastes.
d. incorporate tastes into economic models only to the extent that tastes determine whether pairs of goods are
substitutes or complements.
ANS: A
PTS: 1
DIF: 2
REF: 4-2
TOP: Tastes
MSC: Interpretive
50. Suppose today people change their expectations about the future. This change in expectations
a. results in a movement along a demand curve.
b. can affect future demand, but not today’s demand.
c. can affect today’s demand.
d. cannot affect either today’s demand or future demand.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Expectations
MSC: Interpretive
51. You love peanut butter. You hear on the news that 50 percent of the peanut crop in the South has been wiped out
by drought, and that this will cause the price of peanuts to double by the end of the year. As a result,
a. your demand for peanut butter will increase, but not until the end of the year.
b. your demand for peanut butter increases today.
c. your demand for peanut butter decreases as you look for a substitute good.
d. you will wait for the price of jelly to change before altering your demand for peanut butter.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Expectations
MSC: Interpretive
52. Ford Motor Company announces that it will offer $3,000 rebates on new Mustangs starting next month. As a result
of this information, today’s demand curve for Mustangs
a. shifts to the right.
b. shifts to the left.
c. shifts either to the right or to the left, but we cannot determine the direction of the shift from the given
information.
d. will not shift; rather, the demand curve for Mustangs will shift to the right next month.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Expectations
MSC: Interpretive
53. Suppose you like to make, from scratch, pies filled with banana cream and vanilla pudding. You notice that the
price of bananas has increased. How would this price increase affect your demand for vanilla pudding?
a. It would decrease.
b. It would increase.
c. It would be unaffected.
d. There is insufficient information given to answer the question.
ANS: A
PTS: 1
DIF: 2
REF: 4-2
TOP: Complements
MSC: Interpretive
54. Alyssa rents 5 movies per month when the price is $3.00 per rental and 7 movies per month when the price is $2.50
per rental. Alyssa’s demand demonstrates the law of
a. price.
b. supply.
c. demand.
d. expectations.
ANS: C
PTS: 1
DIF: 1
REF: 4-2
TOP: Law of demand
MSC: Interpretive
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130  Chapter 4/The Market Forces of Supply and Demand
55. According to the law of demand,
a. quantity supplied and quantity demanded are positively related.
b. quantity supplied and quantity demanded are negatively related.
c. price and quantity demanded are positively related.
d. price and quantity demanded are negatively related.
ANS: D
PTS: 1
DIF: 1
REF: 4-2
TOP: Law of demand
MSC: Definitional
56. The law of demand says that
a. an increase in price causes quantity demanded to increase.
b. an increase in price causes quantity demanded to decrease.
c. an increase in quantity demanded causes price to increase.
d. an increase in quantity demanded causes price to decrease.
ANS: B
PTS: 1
DIF: 1
REF: 4-2
TOP: Law of demand
MSC: Definitional
57. Which of the following demonstrates the law of demand?
a. Relative to last month, Jon buys more pretzels at $1.50 per pretzel since he got a raise at work this month.
b. Melissa buys fewer muffins at $0.75 per muffin than at $1 per muffin, other things equal.
c. Dave buys more donuts at $0.25 per donut than at $0.50 per donut, other things equal.
d. Kendra buys fewer Snickers at $0.60 per Snickers since the price of Milky Ways fell to $0.50 per Milky Way.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Law of demand
MSC: Interpretive
58. A downward-sloping demand curve reflects
a. the idea that the demand for the good in question is decreasing as time goes by.
b. the idea that there are fewer suppliers of the good as time goes by.
c. the idea that there exists a substitute for the good in question and the price of that substitute is decreasing.
d. the law of demand.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Law of demand
MSC: Interpretive
59. The negative relationship between price and quantity demanded
a. applies to most goods in the economy.
b. is represented by a downward-sloping demand curve.
c. is referred to as the law of demand.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 4-2
TOP: Negative relationships | Law of demand
MSC: Interpretive
60. A higher price for batteries would result in a(n)
a. increase in the demand for flashlights.
b. decrease in the demand for flashlights.
c. increase in the demand for batteries.
d. decrease in the demand for batteries.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Complements
MSC: Applicative
61. If a decrease in income increases the demand for a good, then the good is
a. a substitute good.
b. a complement good.
c. a normal good.
d. an inferior good.
ANS: D
PTS: 1
DIF: 1
REF: 4-2
TOP: Inferior goods
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  131
62. Which of the following is not a determinant of demand?
a. the price of a resource that is used to produce the good
b. the price of a complementary good
c. the price of the good next month
d. the price of a substitute good
ANS: A
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Interpretive
63. What will happen in the rice market if buyers are expecting higher rice prices in the near future?
a. The demand for rice will increase.
b. The demand for rice will decrease.
c. The demand for rice will be unaffected.
d. The supply of rice will increase.
ANS: A
PTS: 1
DIF: 2
REF: 4-2
TOP: Expectations
MSC: Interpretive
64. A table that shows the relationship between the price of a good and the quantity demanded of that good is called
a(n)
a. price-quantity table.
b. complementary table.
c. demand schedule.
d. equilibrium schedule.
ANS: C
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand schedule
MSC: Definitional
65. A demand schedule is a table showing the relationship between
a. quantity demanded and quantity supplied.
b. income and quantity demanded.
c. price and quantity demanded.
d. price and expected price.
ANS: C
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand schedule
MSC: Definitional
66. A demand schedule is a table showing the relationship between
a. quantity demanded and quantity supplied, and those quantities are usually positively related.
b. quantity demanded and quantity supplied, and those quantities are usually negatively related.
c. price and quantity demanded, and those quantities are usually positively related.
d. price and quantity demanded, and those quantities are usually negatively related.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand schedule | Negative relationships
MSC: Interpretive
67. With respect to the variables price and quantity demanded,
a. price and quantity demanded are independent of each other.
b. price is the dependent variable and quantity demanded is the independent variable.
c. price is the independent variable and quantity demanded is the dependent variable.
d. price and quantity demanded are both dependent variables, since both depend on the actions of buyers and
sellers.
ANS: C
PTS: 1
DIF: 3
REF: 4-2
TOP: Price | Quantity demanded MSC: Interpretive
68. When constructing a demand curve,
a. demand is on the vertical axis and quantity is on the horizontal axis.
b. price is on the horizontal axis and quantity is on the vertical axis.
c. price is on the vertical axis and demand is on the horizontal axis.
d. price is on the vertical axis and quantity demanded is on the horizontal axis.
ANS: D
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand curve
MSC: Interpretive
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132  Chapter 4/The Market Forces of Supply and Demand
69. The line that relates the price of a good to the quantity demanded of that good is called the
a. demand schedule, and it usually slopes upward.
b. demand schedule, and it usually slopes downward.
c. demand curve, and it usually slopes upward.
d. demand curve, and it usually slopes downward.
ANS: D
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand curve
MSC: Definitional
70. The line that relates the price of a good to the quantity demanded of that good is called the
a. demand schedule, and it slopes upward only if the good for which the line is drawn fails to conform to the law
of demand.
b. demand schedule, and it slopes upward only if the demand for the good in question, relative to the demand for
other goods, is increasing over time.
c. demand curve, and it slopes upward only if there is a positive relationship between income and quantity
demanded.
d. demand curve, and it slopes downward as long as the good in question conforms to the law of demand.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand curve
MSC: Interpretive
71. A downward-sloping demand curve illustrates the
a. relationship between consumers’ income and their willingness to purchase the good in question, provided the
good is inferior.
b. negative relationship between quantity demanded and quantity supplied.
c. idea that the more of one good that a consumer buys, the less income she has to spend on other goods.
d. law of demand.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand curve
MSC: Interpretive
72. The demand curve for a good is
a. a line that relates the price to quantity demanded.
b. a line that relates income to quantity demanded.
c. a line that will shift only if the price of a related good changes.
d. the same thing as a production possibilities frontier, except the axes are labeled differently.
ANS: A
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand curve
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  133
Figure 4-1
73. Refer to Figure 4-1. The movement from point A to point B on the graph would be caused by
a. an increase in price.
b. a decrease in price.
c. a decrease in the price of a substitute good.
d. an increase in income.
ANS: B
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand curve
MSC: Interpretive
74. Refer to Figure 4-1. The movement from point A to point B on the graph shows
a. a decrease in demand.
b. an increase in demand.
c. a decrease in quantity demanded.
d. an increase in quantity demanded.
ANS: D
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand curve
MSC: Interpretive
75. Refer to Figure 4-1. It is apparent from the figure that
a. the good is inferior.
b. the demand for the good decreases as income increases.
c. the demand for the good conforms to the law of demand.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand curve | Law of demand
MSC: Interpretive
76. When we move along a given demand curve,
a. only price is held constant.
b. income and the price of the good are held constant.
c. all nonprice determinants of demand are held constant.
d. all determinants of quantity demanded are held constant.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand curve
MSC: Interpretive
77. Which of the following changes would not shift the demand curve for a good or service?
a. a change in income
b. a change in the price of the good or service
c. a change in expectations about the future price of the good or service
d. a change in the price of a related good or service
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand curve | Shifts of curves
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
134  Chapter 4/The Market Forces of Supply and Demand
78. Which of the following would not affect an individual's demand curve?
a. expectations
b. income
c. prices of related goods
d. the number of buyers
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Individual demand
MSC: Interpretive
79. When the number of buyers in a market increases,
a. the market demand curve shifts to the right.
b. the demand curves of the individual demanders in the market are unaffected.
c. the market demand for the good in question increases.
d. Al of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Individual demand | Market demand
MSC: Interpretive
80. If the number of buyers in the market decreases, the
a. market demand will increase.
b. market demand will decrease.
c. market supply will increase.
d. market supply will decrease.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Market demand
MSC: Interpretive
81. When the law of demand applies to a good, then
a. the quantity demanded of the good is negatively related to the price of the good.
b. the demand curve for the good slopes downward.
c. when the price of the good falls, the quantity demanded of the good rises.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand | Demand curve
MSC: Interpretive
82. The market demand curve
a. is found by adding vertically the individual demand curves.
b. slopes upward.
c. represents the sum of the prices that all the buyers are willing to pay for a given quantity of the good.
d. represents the sum of the quantities demanded by all the buyers at each price of the good.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Market demand curve
MSC: Interpretive
83. 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 = 4, price = $2.50)
b. (quantity demanded = 16, price = $2.50)
c. (quantity demanded = 3, price = $1.50)
d. (quantity demanded = 10, price = $1.00)
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Market demand
MSC: Interpretive
84. An increase in demand is represented by
a. a movement downward and to the right along a demand curve.
b. a movement upward and to the left along a demand curve.
c. a rightward shift of a demand curve.
d. a leftward shift of a demand curve.
ANS: C
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand curve
MSC: Definitional
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Chapter 4/The Market Forces of Supply and Demand  135
85. Pizza is a normal good if
a. the demand for pizza rises when income rises.
b. the demand for pizza rises when the price of pizza falls.
c. the demand curve for pizza slopes downward.
d. the demand curve for pizza shifts to the right when the price of burritos falls, assuming pizza and burritos are
substitutes.
ANS: A
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand curve | Normal goods
MSC: Definitional
86. Today's demand curve for gasoline could shift in response to
a. a change in today's price of gasoline.
b. a change in the expected future price of gasoline.
c. a change in the number of sellers of gasoline.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Shifts of curves
MSC: Interpretive
87. Which of the following events could shift the demand curve for gasoline to the left?
a. Income of gasoline buyers rises, and gasoline is a normal good.
b. Income of gasoline buyers falls, and gasoline is an inferior good.
c. Public service announcements are run on television, encouraging people to walk or ride bicycles instead of
driving cars.
d. The price of gasoline rises.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Shifts of curves
MSC: Interpretive
88. The sum of all individual demand curves for a product is called
a. total demand.
b. consumption demand.
c. aggregate demand.
d. market demand.
ANS: D
PTS: 1
DIF: 1
REF: 4-2
TOP: Market demand
MSC: Definitional
89. The market demand is
a. the sum of all individual demands.
b. the demand for every product in an industry.
c. the average quantity demanded by individual demanders at each price.
d. positively related to the price of the product in question.
ANS: A
PTS: 1
DIF: 1
REF: 4-2
TOP: Market demand
MSC: Interpretive
90. To find the market demand for a product, individual demand curves are summed
a. vertically.
b. diagonally.
c. horizontally.
d. and then averaged.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Market demand | Individual demand
MSC: Interpretive
91. A market demand curve
a. is derived by a vertical summation of individual demand curves.
b. is derived by a horizontal summation of individual demand curves.
c. will shift in response to a change in the price of the good.
d. is always steeper than an individual demand curve.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Market demand
MSC: Interpretive
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136  Chapter 4/The Market Forces of Supply and Demand
92. A market demand curve represents
a. the fact that the level of income is inversely related to quantity demanded.
b. how quantity demanded changes when the number of buyers changes.
c. the sum of all prices that individual buyers are willing and able to pay for each possible quantity of the good.
d. how much of a good all buyers are willing and able to buy at each possible price.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Market demand
MSC: Interpretive
The table shows individual demand schedules for a market.
Table 4-1
Price of the Good
$0.00
0.50
1.00
1.50
2.00
2.50
Aaron
20
18
14
12
6
0
Angela
16
12
10
8
6
4
Austin
4
6
2
0
0
0
Alyssa
8
6
5
4
2
0
93. Refer to Table 4-1. When the price of the good is $1.00, the quantity demanded in this market would be
a. 42 units.
b. 31 units.
c. 24 units.
d. 14 units.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand schedule
MSC: Applicative
94. Refer to Table 4-1. If the price increases from $1.00 to $1.50,
a. the market demand decreases by 20 units.
b. individual demand curves, when drawn, will shift to the left.
c. the quantity demanded in the market decreases by 2 units.
d. the quantity demanded in the market decreases by 7 units.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand schedule
MSC: Applicative
95. Refer to Table 4-1. Whose demand does not conform to the law of demand?
a. Aaron’s
b. Angela’s
c. Austin’s
d. Alyssa’s
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand schedule | Law of demand
MSC: Applicative
96. Refer to Table 4-1. For whom is the good a normal good?
a. for Aaron
b. for Austin
c. for all of the four demanders
d. This cannot be determined from the table.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand schedule | Normal goods
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  137
97. 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. None of the above is correct.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Interpretive
98. Suppose scientists provide evidence to the effect that chocolate pudding increases cholesterol. 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.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Interpretive
99. If buyers today become more willing and able than before to purchase larger quantities of Vanilla Coke at each
price of Vanilla Coke,
a. we will observe a movement downward along the demand curve for Vanilla Coke.
b. we will observe a movement upward along the demand curve for Vanilla Coke.
c. the demand curve for Vanilla Coke will shift to the right.
d. the demand curve for Vanilla Coke will shift to the left.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand curve
MSC: Interpretive
100. Once the demand curve for a product or service is drawn, it
a. can shift either rightward or leftward.
b. remains stable over time at all possible prices.
c. is possible to move up or down the curve, but the curve will not shift.
d. tends to become steeper over time.
ANS: A
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand curve
MSC: Interpretive
101. When the price of a good or service changes,
a. the supply curve shifts in the opposite direction.
b. the demand curve shifts in the opposite direction.
c. the demand curve shifts in the same direction.
d. there is a movement along a given demand curve.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand curve
MSC: Interpretive
102. 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.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Inferior goods
MSC: Interpretive
103. Nancy likes pasta today more than she did yesterday. This fact leads us to conclude that
a. Nancy must now consider pasta a luxury.
b. Nancy must have experienced an increase in her income.
c. Nancy is now willing to pay more than before for pasta at each relevant price of pasta.
d. the supply of pasta must have increased and stimulated Nancy’s enhanced taste for pasta.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand | Tastes
MSC: Applicative
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138  Chapter 4/The Market Forces of Supply and Demand
104. A very hot summer in Atlanta will cause
a. the demand for lemonade to shift to the left.
b. the demand for air conditioners to decrease.
c. the demand for jackets to decrease.
d. a movement downward and to the right along the demand curve for jackets.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Applicative
105. If a study by medical researchers found that brown sugar caused weight loss while white sugar caused weight gain
we likely would see
a. an increase in demand for brown sugar and a decrease in demand for white sugar.
b. an increase in demand for brown sugar, but no change in the demand for white sugar.
c. a decrease in the demand for white sugar, but no change in the demand for brown sugar.
d. no change in either demand because weight loss is not a nonprice determinant of demand.
ANS: A
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Applicative
106. Warrensburg is a small college town in Missouri. At the end of August each year, the market demand for fast food
in Warrensburg
a. increases.
b. decreases.
c. remains constant, but we observe a movement downward and to the right along the demand curve.
d. remains constant, but we observe a movement upward and to the right along the supply curve.
ANS: A
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Interpretive
107. The downward slope of the typical demand curve reflects which of the following concepts?
a. Price is positively related to quantity supplied.
b. There is a negative relationship between price and quantity demanded.
c. There is a direct relationship between price and quantity demanded.
d. When the price falls, buyers are willing to buy more but they are able to buy less.
ANS: B
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand | Negative relationships
MSC: Interpretive
108. Which of these statements best represents the law of demand?
a. When buyers’ tastes for a good increase, they purchase more of the good.
b. When income levels increase, buyers respond by purchasing more of most goods.
c. When the price of a good falls, buyers respond by purchasing more of the good.
d. When buyers’ demands for a good increase, the price of the good will increase.
ANS: C
PTS: 1
DIF: 1
REF: 4-2
TOP: Law of demand
MSC: Definitional
109. An increase in the number of college scholarships issued by private foundations would
a. increase the supply of education.
b. decrease the supply of education.
c. increase the demand for education.
d. decrease the demand for education.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Applicative
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Chapter 4/The Market Forces of Supply and Demand  139
Figure 4-2
110. Refer to Figure 4-2. The shift from D to D1 is called
a. an increase in demand.
b. a decrease in demand.
c. a decrease in quantity demanded.
d. an increase in quantity demanded.
ANS: B
PTS: 1
DIF: 1
REF: 4-2
TOP: Demand MSC: Definitional
111. Refer to Figure 4-2. The movement from D to D1 could be caused by
a. an increase in price.
b. a decrease in the price of a complement.
c. a technological advance.
d. a decrease in the price of a substitute.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand | Substitutes
MSC: Applicative
112. Refer to Figure 4-2. If the demand curve shifts from D to D1, then
a. firms would be willing to supply less of the good than before at each possible price.
b. people are willing to buy less of the good than before at each possible price.
c. people’s incomes evidently have decreased.
d. the price of the product has increased, causing consumers to buy less of the product.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Interpretive
113. When quantity demanded decreases at every possible price, we know that the demand curve has
a. shifted to the left.
b. shifted to the right.
c. not shifted; rather, we have moved down the demand curve to a new point on the same curve.
d. not shifted; rather, the demand curve has become flatter.
ANS: A
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Interpretive
114. When quantity demanded has increased at every price, it might be because
a. the number of buyers in the market has decreased.
b. income has increased and the good is an inferior good.
c. the costs incurred by sellers in producing the good have decreased.
d. the price of a complementary good has decreased.
ANS: D
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand | Complements
MSC: Interpretive
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140  Chapter 4/The Market Forces of Supply and Demand
115. The demand curve for textbooks shifts
a. when a determinant of the demand for textbooks other than income changes.
b. when a determinant of the demand for textbooks other than the price of textbooks changes.
c. when any determinant of the demand for textbooks changes.
d. only when the number of textbook-buyers changes.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand | Shifts of curves
MSC: Interpretive
116. The demand curve for hot dogs
a. shifts when the price of hot dogs changes, because the price of hot dogs is measured on the vertical axis of the
graph.
b. shifts when the price of hot dogs changes, because the quantity demanded of hot dogs is measured on the
horizontal axis of the graph.
c. does not shift when the price of hot dogs changes, because the price of hot dogs is measured on the vertical axis
of the graph.
d. does not shift when the price of hot dogs changes, because the quantity demanded of hot dogs is measured on
the horizontal axis of the graph.
ANS: C
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand | Shifts of curves
MSC: Interpretive
117. Most studies indicate that tobacco and marijuana tend to be
a. substitutes.
b. complements.
c. not related since one is legal and one is illegal.
d. inferior goods.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Complements
MSC: Interpretive
118. The belief that tobacco is a “gateway drug” is consistent with
a. the idea that tobacco and marijuana are substitutes.
b. the idea that an increase in income causes a decrease in the demand for tobacco and an increase in the demand
for marijuana.
c. the idea that lower cigarette prices are associated with less use of marijuana.
d. most of the available evidence.
ANS: D
PTS: 1
DIF: 3
REF: 4-2
TOP: Complements
MSC: Applicative
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Chapter 4/The Market Forces of Supply and Demand  141
Figure 4-3
119. Refer to Figure 4-3. The graph shows the demand for cigarettes. The arrows are consistent with which of the
following events?
a. The price of marijuana, a complement to cigarettes, increased.
b. Mandatory health warnings were placed on cigarette packages.
c. Several foreign countries banned U.S. cigarettes in their countries.
d. A tax was placed on cigarettes.
ANS: D
PTS: 1
DIF: 3
REF: 4-2
TOP: Demand curve
MSC: Applicative
120. Refer to Figure 4-3. The graph shows the demand for cigarettes. The arrows are consistent with which of the
following events?
a. Tobacco and marijuana are complements and the price of marijuana decreased.
b. Tobacco is a “gateway drug” and the price of marijuana increased.
c. The price of cigarettes increased.
d. The arrows are consistent with all of these events.
ANS: C
PTS: 1
DIF: 3
REF: 4-2
TOP: Demand curve
MSC: Applicative
121. For teens, a 10 percent increase in the price of cigarettes leads to a
a. 6 percent drop in teenage smoking.
b. 12 percent drop in teenage smoking.
c. 18 percent drop in teenage smoking.
d. 24 percent drop in teenage smoking.
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Definitional
122. For which of the following groups of people does a 10 percent increase in the price of cigarettes lead to a decrease
in the quantity demanded of cigarettes that exceeds 10 percent?
a. women
b. teenagers
c. Southerners
d. the population as a whole
ANS: B
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Definitional
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142  Chapter 4/The Market Forces of Supply and Demand
123. The side of the market that deals with the willingness and ability to produce and sell is
a. demand.
b. competition.
c. supply.
d. monopoly.
ANS: C
PTS: 1
DIF: 1
REF: 4-3
TOP: Supply
MSC: Definitional
124. The relationship between price and quantity supplied is
a. negative.
b. positive.
c. the same as the relationship between price and quantity demanded.
d. not well understood by economists because laboratory-type experiments have not been conducted.
ANS: B
PTS: 1
DIF: 1
REF: 4-3
TOP: Price | Quantity supplied
MSC: Interpretive
125. According to the law of supply,
a. the quantity supplied of a good is negatively related to the price of the good.
b. when the price of a good falls, the quantity supplied of the good rises.
c. the supply curve for a good is upward-sloping.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 1
REF: 4-3
TOP: Supply curve
MSC: Definitional
126. Which of the following events would cause a movement upward and to the right along the supply curve for
tomatoes?
a. The number of sellers of tomatoes increases.
b. There is an advance in technology that reduces the cost of producing tomatoes.
c. The price of fertilizer decreases, and fertilizer is an input in the production of tomatoes.
d. The price of tomatoes rises.
ANS: D
PTS: 1
DIF: 1
REF: 4-3
TOP: Supply curve
MSC: Interpretive
127. A decrease in the supply of televisions is represented by
a. a leftward shift of the supply curve for televisions.
b. a rightward shift of the supply curve for televisions.
c. a flattening of the supply curve for televisions.
d. a movement down and to the left along the supply curve for televisions.
ANS: A
PTS: 1
DIF: 1
REF: 4-3
TOP: Shifts of curves
MSC: Definitional
128. Which of the following events could cause an increase in the supply of ceiling fans?
a. The number of sellers of ceiling fans increases.
b. There is an increase in the price of air conditioners, and consumers regard air conditioners and ceiling fans as
substitutes.
c. There is an increase in the price of the motor that powers ceiling fans.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 4-3
TOP: Shifts of curves
MSC: Interpretive
129. Other things equal, when the price of a good rises, the
a. quantity demanded of the good increases.
b. supply increases.
c. quantity supplied of the good increases.
d. demand curve shifts to the left.
ANS: C
PTS: 1
DIF: 2
REF: 4-3
TOP: Price | Quantity supplied
MSC: Interpretive
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Chapter 4/The Market Forces of Supply and Demand  143
130. If the price of a good is low,
a. firms would increase profit by increasing output.
b. the quantity supplied of the good could be zero.
c. the supply curve for the good will shift to the left.
d. firms can and should raise the price of the product.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Price | Quantity supplied
MSC: Interpretive
131. The supply schedule is a table that shows the relationship between
a. price and quantity supplied.
b. input costs and quantity supplied.
c. quantity demanded and quantity supplied.
d. price and profit.
ANS: A
PTS: 1
DIF: 1
REF: 4-3
TOP: Supply schedule
MSC: Definitional
132. The difference between a supply schedule and a supply curve is that
a. a supply schedule incorporates demand and a supply curve does not.
b. a supply schedule incorporates prices of related goods and a supply curve does not.
c. a supply schedule can shift, but a supply curve cannot shift.
d. a supply schedule is a table and a supply curve is drawn on a graph.
ANS: D
PTS: 1
DIF: 1
REF: 4-3
TOP: Supply schedule | Supply curve
MSC: Definitional
133. A market supply curve is determined by
a. vertically summing individual supply curves.
b. horizontally summing individual supply curves.
c. finding the average quantity supplied by sellers at each possible price.
d. finding the average price at which sellers are willing and able to sell a particular quantity of the good.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Market supply | Individual supply
MSC: Interpretive
134. The market supply curve shows
a. the total quantity supplied at all possible prices.
b. the average quantity supplied by producers at all possible prices.
c. a ratio between price and quantity supplied for the market.
d. suppliers’ responses, in terms of the amounts they will supply, to the demands of buyers.
ANS: A
PTS: 1
DIF: 1
REF: 4-3
TOP: Market supply
MSC: Interpretive
135. For a seller, which of the following quantities are not positively related?
a. the price of the good and the seller's profit
b. the price of the good and quantity supplied
c. the seller's profit and production costs
d. the seller's profit and quantity supplied
ANS: C
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Positive relationships
MSC: Applicative
136. The positive relationship between price and quantity supplied is called
a. profit.
b. a change in supply.
c. a shift of the supply curve.
d. the law of supply.
ANS: D
PTS: 1
DIF: 1
REF: 4-3
TOP: Law of supply
MSC: Definitional
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144  Chapter 4/The Market Forces of Supply and Demand
137. The supply of a good is negatively related to the
a. price of inputs used to make the good.
b. demand for the good by consumers.
c. price of the good itself.
d. amount of profit a firm can expect to receive from selling the good.
ANS: A
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Inputs
MSC: Interpretive
138. “Other things equal, when the price of a good rises, the quantity supplied of the good rises also.” This is a
statement of the law of
a. increasing costs.
b. diminishing returns.
c. supply.
d. supply and demand.
ANS: C
PTS: 1
DIF: 1
REF: 4-3
TOP: Law of supply
MSC: Definitional
139. If the number of sellers in a market increases, the
a. demand in that market will increase.
b. supply in that market will increase.
c. supply in that market will decrease.
d. demand in that market will decrease.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply
MSC: Interpretive
140. A decrease in the number of sellers in the market causes
a. the supply curve to shift to the left.
b. the supply curve to shift to the right.
c. a movement up and to the right along a stationary supply curve.
d. a movement downward and to the left along a stationary supply curve.
ANS: A
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply
MSC: Interpretive
141. Which of the following is a determinant of market supply curve but not a determinant of an individual seller’s
supply?
a. technology
b. expectations
c. input prices
d. the number of sellers
ANS: D
PTS: 1
DIF: 2
REF: 4-3
TOP: Market supply | Individual supply
MSC: Interpretive
142. A movement along the supply curve might be caused by a change in
a. technology.
b. input prices.
c. expectations about future prices.
d. the price of the good or service that is being supplied.
ANS: D
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply
MSC: Interpretive
143. Lead is an important input in the production of crystal. If the price of lead decreases, other things equal, we would
expect the supply of
a. crystal to be unaffected.
b. crystal to decrease.
c. crystal to increase.
d. lead to increase.
ANS: C
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Inputs
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  145
144. Suppose you make jewelry. If the price of gold falls, 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.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Inputs
MSC: Applicative
145. A technological advance will shift the
a. supply curve to the right.
b. supply curve to the left.
c. demand curve to the right.
d. demand curve to the left.
ANS: A
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Technology
MSC: Interpretive
146. An advance in production technology will
a. increase a firm's costs.
b. allow firms to raise the price of their product.
c. shift the supply curve to the right, but the demand curve will be unaffected.
d. shift the supply curve to the right and shift the demand curve to the right.
ANS: C
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Technology
MSC: Interpretive
147. A dress manufacturer recently has come to expect higher prices for dresses in the near future. We would expect
a. the dress manufacturer to supply more dresses now than it was supplying previously.
b. the dress manufacturer to supply fewer dresses now than it was supplying previously.
c. the demand for this manufacturer's dresses to fall.
d. no change in the dress manufacturer's current supply; instead, future supply will be affected.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Expectations
MSC: Interpretive
148. Holding the nonprice determinants of supply constant, a change in price would
a. result in either a decrease in supply or an increase in supply.
b. result in a movement along a stationary supply curve.
c. result in a shift of demand.
d. have no effect on the quantity supplied.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply
MSC: Interpretive
149. A supply curve slopes upward because
a. as more is produced, total cost of production falls.
b. an increase in input prices increases supply.
c. the quantity supplied of most goods and services increases over time.
d. an increase in price gives producers an incentive to supply a larger quantity.
ANS: D
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply curve
MSC: Interpretive
150. Which of the following events could shift both the demand curve and the supply curve for a good?
a. A technological advance pertaining to the production of the good is observed.
b. Incomes of all buyers of the good increase.
c. The number of sellers of the good increases.
d. Everyone revises upward their expectation of next month’s price of the good.
ANS: D
PTS: 1
DIF: 2
REF: 4-3
TOP: Demand curve | Supply curve | Expectations MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
146  Chapter 4/The Market Forces of Supply and Demand
151. An increase in the price of rubber coincides with an advance in the technology of tire production. As a result of
these two events,
a. the demand for tires increases and the supply of tires decreases.
b. the supply of tires decreases and the demand for tires is unaffected.
c. the supply of tires increases and the demand for tires is unaffected.
d. none of the above is necessarily correct.
ANS: D
PTS: 1
DIF: 3
REF: 4-3
TOP: Supply | Inputs | Technology MSC: Applicative
Figure 4-5
152. Refer to Figure 4-5. The movement from point A to point B on the graph would be caused by
a. a decrease in the price of the good.
b. an increase in the price of the good.
c. an advance in technology.
d. a decrease in input prices.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply curve
MSC: Interpretive
153. Refer to Figure 4-5. The movement from point A to point B on the graph is called
a. a decrease in supply.
b. an increase in supply.
c. an increase in the quantity supplied.
d. a decrease in the quantity supplied.
ANS: C
PTS: 1
DIF: 1
REF: 4-3
TOP: Quantity supplied
MSC: Definitional
154. Refer to Figure 4-5. The movement from point A to point B on the graph represents
a. an increased willingness and ability on the part of suppliers to supply the good at each possible price.
b. an increase in the number of suppliers.
c. a decrease in the price of a relevant input.
d. an increase in the price of the good that is being supplied and suppliers’ response to that price change.
ANS: D
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply curve
MSC: Interpretive
155. In a market, to find the total amount supplied at a particular price,
a. we must add up all of the amounts that firms are willing and able to supply at that price.
b. we must take the average of the amounts that firms are willing and able to supply at that price.
c. the tastes and preferences of buyers must be established.
d. all determinants of demand must be taken into account.
ANS: A
PTS: 1
DIF: 2
REF: 4-3
TOP: Market supply
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  147
156. When we compare an increase in supply with an increase in quantity supplied, we know that
a. the former is depicted by a movement along the supply curve and the latter is depicted by a shift of the curve.
b. the former could be caused by a decrease in input costs and the latter would be caused by an increase in the
price of the good.
c. both are always caused by a change in demand.
d. both are always caused by a change in the number of market participants.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Shifts of curves
MSC: Applicative
157. A leftward shift of a supply curve is called
a. an increase in supply.
b. a decrease in supply.
c. a decrease in quantity supplied.
d. an increase in quantity supplied.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Shifts of curves
MSC: Definitional
158. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government
increases the minimum wage by $1.00 an hour it is likely that the
a. demand for bicycle assembly workers will increase.
b. supply of bicycles will shift to the right.
c. supply of bicycles will shift to the left.
d. firm must increase output to maintain profit levels.
ANS: C
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Inputs
MSC: Applicative
159. If car manufacturers begin utilizing new labor-saving technology on their assembly lines, we would not expect
a. a smaller quantity of labor to be used.
b. the supply of cars to increase.
c. costs to the firm to fall.
d. individual car manufacturers to move up and to the right along their individual supply curves.
ANS: D
PTS: 1
DIF: 2
REF: 4-3
TOP: Individual supply | Technology
MSC: Applicative
160. Recent forest fires in the western states are expected to cause the price of lumber to rise in the next 6 months. As a
result we can expect the supply of lumber to
a. fall in 6 months, but not now.
b. increase in 6 months when the price goes up.
c. fall now.
d. increase now to meet as much demand as possible.
ANS: C
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Expectations
MSC: Applicative
161. If suppliers expect the price of their product to fall in the future they will
a. decrease supply now.
b. increase supply now.
c. decrease supply in the future but not now.
d. increase supply in the future but not now.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Expectations
MSC: Interpretive
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148  Chapter 4/The Market Forces of Supply and Demand
162. Funsters, Inc., the largest toy company in the country, sells its most popular doll for $15. It has just learned that its
leading competitor Toysorama is mass producing an excellent copy and plans to flood the market with their $5 doll
in 6 weeks. Funsters should
a. “fight fire with fire” by decreasing supply of its doll for 6 weeks and then increasing the supply.
b. increase the supply of their doll now before the other doll hits the market.
c. increase the price of their doll now.
d. discontinue their doll.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Expectations
MSC: Applicative
163. Suppose there is an increase in steel prices. We would expect the supply curve for steel barrels
a. to shift rightward.
b. to shift leftward.
c. to become flatter.
d. to remain unchanged.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Inputs
MSC: Applicative
164. An increase in the price of a good would
a. increase the supply of the good.
b. increase the amount purchased by buyers.
c. give producers an incentive to produce more.
d. decrease both the quantity demanded of the good and the quantity supplied of the good.
ANS: C
PTS: 1
DIF: 2
REF: 4-3
TOP: Price | Supply
MSC: Interpretive
165. A decrease in the price of a good would
a. increase the supply of the good.
b. increase the quantity demanded of the good.
c. give producers an incentive to produce more to keep profits from falling.
d. shift the supply curve for the good to the left.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Price | Supply | Quantity demanded
MSC: Interpretive
166. Wheat is the main input in the production of flour. If the price of wheat decreases, all else equal, we would expect
the
a. demand for flour to increase.
b. demand for flour to decrease.
c. supply of flour to increase.
d. supply of flour to decrease.
ANS: C
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Inputs
MSC: Interpretive
167. An increase in the price of oranges would lead to
a. an increased supply of oranges.
b. a reduction in the prices of inputs used in orange production.
c. an increased demand for oranges.
d. a movement up and to the right along the supply curve for oranges.
ANS: D
PTS: 1
DIF: 2
REF: 4-3
TOP: Price | Quantity supplied
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  149
Figure 4-6
168. Refer to Figure 4-6. The movement from S to S1 is called
a. a decrease in supply.
b. a decrease in quantity supplied.
c. an increase in supply.
d. an increase in quantity supplied.
ANS: C
PTS: 1
DIF: 1
REF: 4-3
TOP: Supply
MSC: Definitional
169. Refer to Figure 4-6. The movement from S to S1 could be caused by
a. a decrease in the price of the good.
b. an improvement in technology.
c. an increase in income.
d. an increase in input prices.
ANS: B
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply curve | Technology MSC: Interpretive
170. Refer to Figure 4-6. Suppose the supply curves that are drawn represent supply curves for single-family
residential houses. Then the movement from S to S1 could be caused by
a. an increase in the price of apartments (a substitute for single-family houses for many people looking for a place
to live).
b. a newly-formed expectation by house-builders that prices of houses will increase significantly in the next six
months.
c. a decrease in the price of lumber.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 3
REF: 4-3
TOP: Supply curve | Expectations | Inputs
MSC: Applicative
1. The unique point at which the supply and demand curves intersect is called
a. market harmony.
b. coincidence.
c. cohesion.
d. equilibrium.
ANS: D
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium
MSC: Definitional
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150  Chapter 4/The Market Forces of Supply and Demand
2. The dictionary defines equilibrium as a situation in which forces
a. balance.
b. are the same.
c. clash.
d. remain constant.
ANS: A
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium
MSC: Definitional
3. The price at which quantity supplied equals quantity demanded is called the
a. coordinating price.
b. monopoly price.
c. equilibrium price.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium price
MSC: Definitional
4. Another term for equilibrium price is
a. dynamic price.
b. market-clearing price.
c. quantity-defining price.
d. satisfactory price.
ANS: B
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium price
MSC: Definitional
5. If, at the current price, there is a shortage of a good,
a. sellers are producing more than buyers wish to buy.
b. the market must be in equilibrium.
c. the price is below the equilibrium price.
d. quantity demanded equals quantity supplied.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages MSC: Interpretive
6. A decrease in input costs to firms in a market will result in
a. a decrease in equilibrium price and an increase in equilibrium quantity.
b. a decrease in equilibrium price and a decrease in equilibrium quantity.
c. an increase in equilibrium price and no change in equilibrium quantity.
d. an increase in equilibrium price and an increase in equilibrium quantity.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Inputs
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  151
Figure 4-7
7. Refer to Figure 4-7. Equilibrium price and quantity are, respectively,
a. $35 and 200.
b. $35 and 600.
c. $25 and 400.
d. $15 and 200.
ANS: C
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium
MSC: Interpretive
8. Refer to Figure 4-7. At a price of $35,
a. there would be a shortage of 400 units.
b. there would be a surplus of 200 units.
c. there would be a surplus of 400 units.
d. there would be an excess supply of 200 units.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Surpluses MSC: Interpretive
9. Refer to Figure 4-7. At a price of $15,
a. there would be a shortage of 400 units.
b. there would be a surplus of 400 units.
c. there would be a shortage of 200 units.
d. there would be an excess demand of 200 units.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages MSC: Interpretive
10. Refer to Figure 4-7. At the equilibrium price,
a. 200 units would be supplied and demanded.
b. 400 units would be supplied and demanded.
c. 600 units would be supplied and demanded.
d. 600 units would be supplied, but only 200 would be demanded.
ANS: B
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium
MSC: Interpretive
11. Refer to Figure 4-7. At a price of $35,
a. a shortage would exist and the price would tend to fall from $35 to a lower price.
b. a surplus would exist and the price would tend to rise from $35 to a higher price.
c. a surplus would exist and the price would tend to fall from $35 to a lower price.
d. an excess demand would exist and the price would tend to fall from $35 to a lower price.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
152  Chapter 4/The Market Forces of Supply and Demand
12. Refer to Figure 4-7. At what price would there be an excess demand amounting to 200 units of the good?
a. $15
b. $20
c. $30
d. $35
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages MSC: Applicative
13. Refer to Figure 4-7. At a price of $27.50,
a. there is an excess supply of 50 units of the good and the law of supply and demand predicts that the price will
rise from $27.50 to a higher price.
b. there is an excess supply of 100 units of the good and the law of supply and demand predicts that the price will
fall from $27.50 to a lower price.
c. there is an excess demand of 100 units of the good and the law of supply and demand predicts that the price
will fall from $27.50 to a lower price.
d. there is a surplus of 75 units of the good and the law of supply predicts that the price will fall from $27.50 to a
lower price.
ANS: B
PTS: 1
DIF: 3
REF: 4-4
TOP: Surpluses | Law of supply and demand
MSC: Applicative
Figure 4-8
14. Refer to Figure 4-8. In this market, equilibrium price and quantity, respectively, are
a. $14 and 70.
b. $12 and 40.
c. $10 and 50.
d. $8 and 50.
ANS: C
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium
MSC: Interpretive
15. Refer to Figure 4-8. If price in this market is currently $14, there would be a
a. shortage of 20 units and the law of demand predicts that the price will rise from $14 to a higher price.
b. excess supply of 20 units and the law of supply and demand predicts that the price will fall from $14 to a lower
price.
c. shortage of 40 units and the law of supply predicts that the price will fall from $14 to a lower price.
d. surplus of 40 units and the law of supply and demand predicts that the price will fall from $14 to a lower price.
ANS: D
PTS: 1
DIF: 3
REF: 4-4
TOP: Surpluses | Law of supply and demand
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  153
16. Refer to Figure 4-8. If there is currently a shortage of 30 units of the good, then
a. the law of demand predicts that the price will rise by $5 to eliminate the shortage.
b. the law of supply predicts that the price will rise by $5 to eliminate the shortage.
c. the law of supply and demand predicts that the price will rise by $3 to eliminate the shortage.
d. the law of supply and demand predicts that the price will fall from its current level by an indeterminate amount,
exacerbating the shortage.
ANS: C
PTS: 1
DIF: 3
REF: 4-4
TOP: Shortages | Law of supply and demand
MSC: Applicative
Table 4-2
PRICE
$10
$8
$6
$4
$2
QUANTITY DEMANDED
10
20
30
40
50
QUANTITY SUPPLIED
60
45
30
15
0
17. Refer to Table 4-2. The equilibrium price and quantity, respectively, are
a. $4 and 40.
b. $6 and 30.
c. $8 and 30.
d. $10 and 35.
ANS: B
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium
MSC: Interpretive
18. Refer to Table 4-2. If the price were $8, a
a. surplus of 50 units would exist and price would tend to fall.
b. surplus of 10 units would exist and price would tend to fall.
c. surplus of 25 units would exist and price would tend to fall.
d. shortage of 25 units would exist and price would tend to rise.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Surpluses MSC: Interpretive
19. Refer to Table 4-2. If the price were $2, a
a. shortage of 25 units would exist and price would tend to fall.
b. surplus of 50 units would exist and price would tend to rise.
c. surplus of 25 units would exist and price would tend to fall.
d. shortage of 50 units would exist and price would tend to rise.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
154  Chapter 4/The Market Forces of Supply and Demand
Figure 4-9
20. Refer to Figure 4-9. In this market, equilibrium price and quantity, respectively, are
a. $15 and 400.
b. $20 and 600.
c. $25 and 500.
d. $25 and 800.
ANS: B
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium
MSC: Interpretive
21. Refer to Figure 4-9. If price is $25, quantity demanded and quantity supplied, respectively, are
a. 400 and 600.
b. 500 and 800.
c. 600 and 600
d. 800 and 500.
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Surpluses MSC: Interpretive
22. Refer to Figure 4-9. If the price is $25, there would be an
a. excess supply of 300 and price would fall.
b. excess supply of 200 and price would fall.
c. shortage of 200 and price would rise.
d. shortage of 300 and price would fall.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Surpluses MSC: Applicative
23. Refer to Figure 4-9. If the price is $10, there would be a
a. shortage of 200 and price would rise.
b. surplus of 200 and price would fall.
c. shortage of 600 and price would rise.
d. surplus of 600 and price would fall.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages MSC: Applicative
24. Refer to Figure 4-9. At a price of $15,
a. quantity demanded exceeds quantity supplied.
b. there is a shortage.
c. there is an excess demand.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  155
25. Refer to Figure 4-9. At a price of $20, which of the following statements is not correct?
a. The market is in equilibrium.
b. Equilibrium price is equal to equilibrium quantity.
c. There is no pressure for price to change.
d. The quantity of the good that is bought and sold is 600.
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium
MSC: Interpretive
26. In markets, prices move toward equilibrium because of
a. the actions of buyers and sellers.
b. government regulations placed on market participants.
c. increased competition among sellers.
d. buyers' ability to affect market outcomes.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium price
MSC: Interpretive
27. When the price of a good is higher than the equilibrium price,
a. a shortage will exist.
b. buyers desire to purchase more than is produced.
c. sellers desire to produce and sell more than buyers wish to purchase.
d. quantity demanded exceeds quantity supplied.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Surpluses MSC: Interpretive
28. Suppose roses are currently selling for $40.00 per dozen, while the equilibrium price of roses is $30.00 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.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Surpluses MSC: Applicative
29. When there is a shortage of 100 units of a particular good,
a. the law of supply predicts upward pressure on the price of the good from its current level.
b. the law of demand predicts downward pressure on the price of the good from its current level.
c. we say that there is a scarcity of 100 units of the good.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 3
REF: 4-4
TOP: Shortages MSC: Interpretive
30. A surplus exists in a market if
a. there is an excess demand for the good.
b. the situation is such that the law of supply and demand would predict an increase in the price of the good from
its current level.
c. the current price is above its equilibrium price.
d. None of the above is correct.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Surpluses MSC: Interpretive
31. If a surplus exists in a market we know that the actual price is
a. above equilibrium price and quantity supplied is greater than quantity demanded.
b. above equilibrium price and quantity demanded is greater than quantity supplied.
c. below equilibrium price and quantity demanded is greater than quantity supplied.
d. below equilibrium price and quantity supplied is greater than quantity demanded.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Surpluses | Equilibrium price MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
156  Chapter 4/The Market Forces of Supply and Demand
32. If excess demand exists in a market we know that the actual price is
a. below equilibrium price and quantity demanded is greater than quantity supplied.
b. above equilibrium price and quantity demanded is greater than quantity supplied.
c. above equilibrium price and quantity supplied is greater than quantity demanded.
d. below equilibrium price and quantity supplied is greater than quantity demanded.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages | Equilibrium price MSC: Applicative
33. Step one in the Three-Step program for analyzing changes in equilibrium is as follows:
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.
ANS: B
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium
MSC: Interpretive
34. You have been asked by your economics professor to graph the market for lumber and then to analyze the change
that would occur in equilibrium price as a result of recent forest fires in the west. Your first step would be to
a. decide which direction to shift the curve.
b. decide whether the fires affected demand or supply.
c. graph the shift to see the affect on equilibrium.
d. None of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  157
Figure 4-10
35. Refer to Figure 4-10. Which of the four graphs represents the market for peanut butter after a major hurricane hits
the peanut-growing south?
a. A
b. B
c. C
d. D
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Shifts of curves MSC: Applicative
36. Refer to Figure 4-10. Which of the four graphs represents the market for winter coats as we progress from winter
to spring?
a. A
b. B
c. C
d. D
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Shifts of curves
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
158  Chapter 4/The Market Forces of Supply and Demand
37. Refer to Figure 4-10. Which of the four graphs represents the market for pizza delivery in a college town as we go
from summer to the beginning of the fall semester?
a. A
b. B
c. C
d. D
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Shifts of curves
MSC: Applicative
38. Refer to Figure 4-10. Which of the four graphs represents the market for cars as a result of the adoption of new
technology on assembly lines?
a. A
b. B
c. C
d. D
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Shifts of curves
MSC: Applicative
39. Refer to Figure 4-10. Graph A shows which of the following?
a. an increase in demand and an increase in quantity supplied
b. an increase in demand and an increase in supply
c. an increase in quantity demanded and an increase in quantity supplied
d. an increase in supply and an increase in quantity demanded
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Demand | Quantity supplied MSC: Applicative
40. Refer to Figure 4-10. Graph C shows which of the following?
a. an increase in demand and an increase in quantity supplied
b. an increase in demand and an increase in supply
c. an increase in quantity demanded and an increase in quantity supplied
d. an increase in supply and an increase in quantity demanded
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Supply | Quantity demanded MSC: Applicative
41. Refer to Figure 4-10. Which of the four graphs illustrates an increase in quantity supplied?
a. A.
b. B.
c. C.
d. D.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Quantity supplied
MSC: Applicative
42. Refer to Figure 4-10. Which of the four graphs illustrates a decrease in quantity demanded?
a. A.
b. B.
c. C.
d. D.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Quantity demanded
MSC: Applicative
43. Refer to Figure 4-10. Suppose the events depicted in graphs A and C were illustrated together on a single graph. A
definitive result of the two events would be
a. an increase in the equilibrium quantity.
b. an increase in the equilibrium price.
c. an instance in which the law of demand fails to hold.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  159
44. 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 decrease their ability 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.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Supply
MSC: Applicative
45. If goods A and B are complements, then an increase in the price of good A will result in
a. more of good A being sold.
b. more of good B being sold.
c. less of good B being sold.
d. no difference in the quantity sold of either good.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Complements
MSC: Applicative
46. Holding all other things constant, a higher price for ski lift tickets would
a. increase the number of skiers.
b. increase the price of skis.
c. decrease the number of skis sold.
d. decrease the demand for other winter recreational activities.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Complements
MSC: Applicative
47. Which of the following events will definitely cause equilibrium quantity to fall?
a. demand increases and supply decreases
b. demand and supply both decrease
c. demand decreases and supply increases
d. demand and supply both increase
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
48. If the demand for a product increases, we would expect
a. equilibrium price to increase and equilibrium quantity to decrease.
b. equilibrium price to decrease and equilibrium quantity to increase.
c. equilibrium price and equilibrium quantity both to increase.
d. equilibrium price and equilibrium quantity both to decrease.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium price | Demand MSC: Interpretive
49. If the demand for a product decreases, we would expect
a. equilibrium price to increase and equilibrium quantity to decrease.
b. equilibrium price to decrease and equilibrium quantity to increase.
c. equilibrium price and equilibrium quantity to both increase.
d. equilibrium price and equilibrium quantity to both decrease.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand
MSC: Interpretive
50. If the supply of a product increases, we would expect
a. equilibrium price to increase and equilibrium quantity to decrease.
b. equilibrium price to decrease and equilibrium quantity to increase.
c. equilibrium price and equilibrium quantity both to increase.
d. equilibrium price and equilibrium quantity both to decrease.
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Supply
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
160  Chapter 4/The Market Forces of Supply and Demand
51. If the supply of a product decreases, we would expect
a. equilibrium price to increase and equilibrium quantity to decrease.
b. equilibrium price to decrease and equilibrium quantity to increase.
c. equilibrium price and equilibrium quantity both to increase.
d. equilibrium price and equilibrium quantity both to decrease.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Supply
MSC: Interpretive
52. 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. The equilibrium price would increase, but the impact on the amount sold in the market would be ambiguous.
b. The equilibrium price would decrease, but the impact on the amount sold in the market would be ambiguous.
c. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
d. Both equilibrium price and equilibrium quantity would increase.
ANS: C
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
53. Suppose that demand decreases and supply decreases. What would you expect to occur in the market for the good?
a. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
b. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous.
d. Both equilibrium price and equilibrium quantity would increase.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Interpretive
54. Which of the following events would result in an increase in equilibrium price and an ambiguous change in
equilibrium quantity?
a. an increase in supply and an increase in demand
b. an increase in supply and a decrease in demand
c. a decrease in supply and an increase in demand
d. a decrease in supply and a decrease in demand
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
55. 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.
ANS: D
PTS: 1
DIF: 3
REF: 4-4
TOP: Substitutes MSC: Applicative
56. A weaker demand together with a stronger supply would necessarily result in
a. a lower price.
b. a higher price.
c. an increase in equilibrium quantity.
d. a decrease in equilibrium quantity.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  161
57. Which of the following events would cause the price of oranges to fall?
a. There is a shortage of oranges.
b. An article is published in which it is claimed that tangerines cause a serious disease, and oranges and tangerines
are substitutes.
c. The price of land throughout Florida decreases, and Florida produces a significant proportion of the nation’s
oranges.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium price
MSC: Applicative
58. Which of the following quantities would increase in response to a decrease in the price of ironing boards?
a. the quantity of irons demanded at each possible price of irons
b. the equilibrium quantity of irons
c. the equilibrium price of irons
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Complements
MSC: Applicative
Table 4-3. The demand schedule below pertains to sandwiches demanded per week.
Alfred
$3.00
$5.00
Quantity
Demanded
3
1
Belinda
$3.00
$5.00
4
2
Charissa
$3.00
$5.00
3
x
Price
59. Refer to Table 4-3. Regarding Alfred and Belinda, whose demand for sandwiches conforms to the law of demand?
a. only Alfred’s
b. only Belinda’s
c. both Alfred’s and Belinda’s
d. neither Alfred’s nor Belinda’s
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Law of demand
MSC: Applicative
60. Refer to Table 4-3. Regarding Alfred and Belinda, for whom are sandwiches a normal good?
a. only for Alfred
b. only for Belinda
c. for Alfred and for Belinda
d. This cannot be determined from the given information.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Normal goods
MSC: Applicative
61. Refer to Table 4-3. Suppose x = 1. Then it must be true that
a. Alfred and Charissa have the same income, which is lower than Belinda’s income.
b. if sandwiches and potato chips are complements for Alfred, then those two goods are also complements for
Charissa.
c. Alfred’s demand curve is identical to Charissa’s demand curve.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Demand curve
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
162  Chapter 4/The Market Forces of Supply and Demand
62. Refer to Table 4-3. Suppose x = 1. Then the slope of the market demand curve is
a. –1/3.
b. –1/2.
c. –2.
d. –3.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Market demand curve
MSC: Applicative
63. Refer to Table 4-3. Suppose Alfred, Belinda, and Charissa are the only demanders of sandwiches. Also suppose
x = 2. Then
a. the slope of Charissa’a demand curve is –1/2 and the slope of the market demand curve is –5/2.
b. the slope of Charissa’a demand curve is –1/2 and the slope of the market demand curve is –2/5
c. the slope of Charissa’a demand curve is –2 and the slope of the market demand curve is –5/2.
d. the slope of Charissa’a demand curve is –2 and the slope of the market demand curve is –2/5.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Individual demand | Market demand
MSC: Applicative
64. Refer to Table 4-3. Suppose Alfred, Belinda, and Charissa are the only demanders of sandwiches and that the
market demand violates the law of demand. Then, in the table,
a. x < 5.
b. x > 5.
c. x > 7.
d. x > 10.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Market demand
MSC: Applicative
65. Refer to Table 4-3. Suppose Alfred, Belinda, and Charissa are the only demanders of sandwiches. Also suppose:
• x = 2;
• the current price of a sandwich is $5.00;
• the market quantity supplied of sandwiches is 10;
• the law of supply applies to the supply of sandwiches.
Then
a. there is a shortage of 3 sandwiches and the price would be expected to rise from its current level of $5.00.
b. there is a shortage of 3 sandwiches and the price would be expected to fall from its current level of $5.00.
c. there is a surplus of 5 sandwiches and the price would be expected to rise from its current level of $5.00.
d. there is a surplus of 5 sandwiches and the price would be expected to fall from its current level of $5.00.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Surpluses MSC: Applicative
66. Refer to Table 4-3. Suppose Alfred, Belinda, and Charissa are the only demanders of sandwiches. Also suppose:
• x = 2;
• the current price of a sandwich is $3.00;
• the market quantity supplied of sandwiches is 4;
• the slope of the supply curve is 2.
Then
a. there is currently a shortage of 6 sandwiches and the equilibrium price of a sandwich is between $3.00 and
$5.00.
b. there is currently a shortage of 6 sandwiches and the equilibrium price of a sandwich is $5.00.
c. there is currently a shortage of 8 sandwiches and the equilibrium price of a sandwich is between $3.00 and
$5.00.
d. there is currently a shortage of 8 sandwiches and the equilibrium price of a sandwich is higher than $5.00.
ANS: B
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  163
67. Refer to Table 4-3. Suppose Alfred, Belinda, and Charissa are the only demanders of sandwiches. Also suppose:
• x = 2;
• the current price of a sandwich is $3.00;
• the market quantity supplied of sandwiches is 5;
• the slope of the supply curve is 1.
Then
a. there is currently a shortage of 5 sandwiches and the equilibrium price of a sandwich is between $3.00 and
$5.00.
b. there is currently a shortage of 5 sandwiches and the equilibrium price of a sandwich is $5.00.
c. there is currently a shortage of 7 sandwiches and the equilibrium price of a sandwich is between $3.00 and
$5.00.
d. there is currently a shortage of 7 sandwiches and the equilibrium price of a sandwich is higher than $5.00.
ANS: A
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium
MSC: Analytical
68. In a given market, how are the equilibrium price and the market-clearing price related?
a. There is no relationship.
b. They are the same price.
c. The market-clearing price exceeds the equilibrium price.
d. The equilibrium price exceeds the market-clearing price.
ANS: B
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium price
MSC: Definitional
69. The current price of neckties is $30 and the equilibrium price of neckties is $25. As a result,
a. the quantity supplied of neckties exceeds the quantity demanded of neckties at the $30 price.
b. the equilibrium quantity of neckties exceeds the quantity demanded at the $30 price.
c. There is a surplus of neckties at the $30 price.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Surpluses
MSC: Interpretive
70. The law of supply and demand asserts that
a. demand curves and supply curves tend to shift to the right as time goes by.
b. the price of a good will eventually rise in response to an excess demand for that good.
c. when the supply curve for a good shifts, the demand curve for that good shifts in response.
d. the equilibrium price of a good will be rising more often than it will be falling.
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Law of supply and demand MSC: Interpretive
71. 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.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Complements | Equilibrium MSC: Applicative
72. During the last few decades in the United States, health officials have argued that eating too much beef might be
harmful to human health. As a result, there has been a significant decrease in the amount of beef produced. Which
of the following best explains the decrease in production?
a. Beef producers, concerned about the health of their customers, decided to produce relatively less beef.
b. Government officials, concerned about consumer health, ordered beef producers to produce relatively less beef.
c. Individual consumers, concerned about their own health, decreased their demand for beef, which lowered the
relative price of beef, making it less attractive to produce.
d. Anti-beef protesters have made it difficult for both buyers and sellers of beef to meet in the marketplace.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
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164  Chapter 4/The Market Forces of Supply and Demand
73. What will happen to the equilibrium price and quantity of traditional camera film if traditional cameras become
more expensive, digital cameras become cheaper, the cost of the resources needed to manufacture traditional film
falls and more firms decide to manufacture traditional film?
a. Price will fall and the effect on quantity is ambiguous.
b. Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d. The effect on both price and quantity is ambiguous.
ANS: A
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
74. Which of the following events would result in an increase in equilibrium price and an ambiguous change in
equilibrium quantity?
a. an increase in supply and an increase in demand
b. an increase in supply and a decrease in demand
c. a decrease in supply and an increase in demand
d. a decrease in supply and a decrease in demand
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
75. Good X and good Y are substitutes. If the price of good Y increases, then the
a. demand for good X will decrease.
b. market price of good X will decrease.
c. demand for good X will increase.
d. quantity demanded of good X will increase.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Substitutes MSC: Interpretive
76. 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.
ANS: D
PTS: 1
DIF: 3
REF: 4-4
TOP: Substitutes MSC: Applicative
77. When supply and demand both increase, equilibrium
a. price will increase.
b. price will decrease.
c. quantity may increase, decrease, or remain unchanged.
d. price may increase, decrease, or remain unchanged.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
78. If there is a shortage of farm laborers, we would expect
a. the wages of farm laborers to increase.
b. the wages of farm laborers to decrease.
c. the prices of farm commodities to decrease.
d. a decrease in the demand for substitutes for farm labor.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  165
79. Which of the following events would cause both the equilibrium price and equilibrium quantity of number two
grade potatoes (an inferior good) to increase?
a. an increase in consumer income
b. a decrease in consumer income
c. greater government restrictions on agricultural chemicals
d. fewer government restrictions on agricultural chemicals
ANS: B
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium price | Equilibrium quantity | Inferior goods
MSC: Applicative
80. Which of the following events would unambiguously cause a decrease in the equilibrium price of cotton shirts?
a. an increase in the price of wool shirts and a decrease in the price of raw cotton
b. a decrease in the price of wool shirts and a decrease in the price of raw cotton
c. an increase in the price of wool shirts and an increase in the price of raw cotton
d. a decrease in the price of wool shirts and an increase in the price of raw cotton
ANS: B
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Price MSC: Applicative
Table 4-4
An Increase in Demand
A Decrease in Demand
An Increase in Supply
A
C
A Decrease in Supply
B
D
81. Refer to Table 4-4. Which space represents an increase in equilibrium quantity and an indeterminate change in
equilibrium price?
a. A.
b. B.
c. C.
d. D.
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
82. Refer to Table 4-4. Which space represents an increase in equilibrium price and an indeterminate change in
equilibrium quantity?
a. A.
b. B.
c. C.
d. D.
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
83. Refer to Table 4-4. Which space represents a decrease in equilibrium price and an indeterminate change in
equilibrium quantity?
a. A.
b. B.
c. C.
d. D.
ANS: C
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
84. Refer to Table 4-4. Which space represents a decrease in equilibrium quantity and an indeterminate change in
equilibrium price?
a. A.
b. B.
c. C.
d. D.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
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166  Chapter 4/The Market Forces of Supply and Demand
85. What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the
price of tea fell?
a. Price will fall and the effect on quantity is ambiguous.
b. Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d. Quantity will rise and the effect on price is ambiguous.
ANS: A
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
86. New oak tables are normal goods. What would happen to the equilibrium price and quantity in the market for oak
tables if the price of maple tables rises, the price of oak wood rises, more buyers enter the market for oak tables and
the price of wood saws increased?
a. Price will fall and the effect on quantity is ambiguous.
b. Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d. Quantity will rise and the effect on price is ambiguous.
ANS: B
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
87. What will happen to the equilibrium price and quantity of new cars if the price of gasoline rises, the price of steel
rises, public transportation becomes cheaper and more comfortable, and auto-workers negotiate higher wages?
a. Price will fall and the effect on quantity is ambiguous.
b. Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d. Quantity will rise and the effect on price is ambiguous.
ANS: C
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
88. Music compact discs are normal goods. What will happen to the equilibrium price and quantity of music compact
discs if musicians accept lower royalties, compact disc players become cheaper, more firms start producing music
compact discs and music lovers experience an increase in income?
a. Price will fall and the effect on quantity is ambiguous.
b. Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d. Quantity will rise and the effect on price is ambiguous.
ANS: D
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
89. New cars are normal goods. What will happen to the equilibrium price of new cars if the price of gasoline rises, the
price of steel falls, public transportation becomes cheaper and more comfortable, auto-workers accept lower wages
and automobile insurance becomes more expensive?
a. Price will rise.
b. Price will fall.
c. Price will stay exactly the same.
d. The price change will be ambiguous.
ANS: B
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
90. What will happen to the equilibrium price of new textbooks if more students attend college, paper becomes
cheaper, textbook authors accept lower royalties and fewer used textbooks are sold?
a. Price will rise.
b. Price will fall.
c. Price will stay exactly the same.
d. The price change will be ambiguous.
ANS: D
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 4/The Market Forces of Supply and Demand  167
91. Consider the market for new DVDs. If DVD players became cheaper, buyers expected DVD prices to fall next
year, used DVDs became more expensive, and DVD production technology improved, then we could safely
conclude that the equilibrium price of a new DVD would
a. rise.
b. fall.
c. stay the same.
d. We couldn't be sure what it might do.
ANS: D
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
92. What would happen to the equilibrium price and quantity of peanut butter if the price of peanuts went up, the price
of jelly (a complementary good) fell, fewer firms decided to produce peanut butter, and health officials announced
that eating peanut butter was good for you?
a. Price will fall and the effect on quantity is ambiguous.
b. Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d. The effect on both price and quantity is ambiguous.
ANS: B
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
93. Pens are normal goods. What will happen to the equilibrium price of pens if the price of pencils rises, consumers
experience an increase in income, writing in ink becomes fashionable, people expect the price of pens to rise in the
near future, the population increases, fewer firms manufacture pens, and the wages of pen-makers increase?
a. Price will rise.
b. Price will fall.
c. Price will stay exactly the same.
d. The price change will be ambiguous.
ANS: A
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
94. Pens are normal goods. What will happen to the equilibrium price of pens if the price of pencils rises, consumers
experience an increase in income, writing in ink becomes fashionable, people expect the price of pens to fall in the
near future, the population increases, fewer firms manufacture pens, and the wages of pen-makers decrease?
a. Price will rise.
b. Price will fall.
c. Price will stay exactly the same.
d. The price change will be ambiguous.
ANS: D
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
95. Beef is a normal good. You observe that both the equilibrium price and quantity of beef have fallen over time.
Which of the following explanations would be most consistent with this observation?
a. Consumers have experienced an increase in income and beef-production technology has improved.
b. The price of chicken has risen and the price of steak sauce has fallen.
c. New medical evidence has been released that indicates a negative correlation between a person’s beef
consumption and his or her longevity.
d. The demand curve for beef must be positively sloped.
ANS: C
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand
MSC: Applicative
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168  Chapter 4/The Market Forces of Supply and Demand
96. Which of the following sets of events would most likely cause an increase in the price of a new house?
a. higher wages for carpenters, higher wood prices, increases in consumer incomes, higher apartment rents,
increases in population and expectations of higher house prices in the future
b. lower wages for carpenters, lower wood prices, increases in consumer incomes, higher apartment rents,
increases in population and expectations of higher house prices in the future
c. lower wages for carpenters, higher wood prices, decreases in consumer incomes, higher apartment rents,
decreases in population and expectations of higher house prices in the future
d. higher wages for carpenters, lower wood prices, decreases in consumer incomes, lower apartment rents,
decreases in population and expectations of lower house prices in the future
ANS: A
PTS: 1
DIF: 3
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Analytical
97. 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. Both equilibrium price and quantity would increase.
d. Both equilibrium price and quantity would decrease.
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Supply | Demand
MSC: Applicative
98. 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. The equilibrium price would increase, but the impact on the amount sold in the market would be ambiguous.
b. The equilibrium price would decrease, but the impact on the amount sold in the market would be ambiguous.
c. Both equilibrium price and equilibrium quantity would increase.
d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
ANS: B
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Demand | Supply
MSC: Applicative
99. Which of the following events would definitely result in a higher price in the market for Snickers?
a. Demand for Snickers increases and supply of Snickers decreases.
b. Demand for Snickers and supply of Snickers both decrease.
c. Demand for Snickers decreases and supply of Snickers increases.
d. Demand for Snickers and supply of Snickers both increase
ANS: A
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium price | Demand | Supply
MSC: Applicative
100. An early frost in the vineyards of Napa Valley would cause
a. an increase in the demand for wine, increasing price.
b. an increase in the supply of wine, decreasing price.
c. a decrease in the demand for wine, decreasing price.
d. a decrease in the supply of wine, increasing price.
ANS: D
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium | Supply
MSC: Applicative
101. The signals that guide the allocation of resources in a market economy are
a. surpluses and shortages.
b. quantities.
c. property rights.
d. prices.
ANS: D
PTS: 1
DIF: 1
REF: 4-5
TOP: Resource allocation | Prices MSC: Interpretive
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Chapter 4/The Market Forces of Supply and Demand  169
102. In a free market system, what coordinates the actions of millions of people with their varying abilities and desires?
a. producers
b. prices
c. consumers
d. the government
ANS: B
PTS: 1
DIF: 1
REF: 4-5
TOP: Resource allocation | Prices MSC: Interpretive
103. Which of these statements does not apply to market economies?
a. Prices guide economic decisions and thereby allocate scarce resources.
b. Prices ensure that quantity supplied and quantity demanded are in balance.
c. Prices ensure that anyone who wants a product can get it.
d. Prices influence how much of a good buyers choose to purchase and how much sellers choose to produce.
ANS: C
PTS: 1
DIF: 2
REF: 4-5
TOP: Resource allocation | Prices MSC: Interpretive
True/False
1. Prices, which are determined by all buyers and sellers as they interact in the marketplace, allocate the economy's
scarce resources.
ANS: T
PTS: 1
DIF: 2
REF: 4-0
TOP: Prices | Resource allocation MSC: Interpretive
2. A market is a group of buyers and sellers of a particular product.
ANS: T
PTS: 1
DIF: 1
REF: 4-1
TOP: Markets
MSC: Definitional
3. In a perfectly competitive market, buyers and sellers are price setters.
ANS: F
PTS: 1
DIF: 2
REF: 4-1
TOP: Perfect competition
MSC: Interpretive
4. If a good or service has only one seller, it is called a monopoly.
ANS: T
PTS: 1
DIF: 1
REF: 4-1
TOP: Monopoly MSC: Definitional
5. Local cable TV companies frequently are monopolists.
ANS: T
PTS: 1
DIF: 1
REF: 4-1
TOP: Monopoly MSC: Interpretive
6. The quantity demanded of a product is the amount that buyers are willing and able to purchase at a particular price.
ANS: T
PTS: 1
DIF: 1
REF: 4-2
TOP: Quantity demanded
MSC: Definitional
7. The law of demand states that the quantity demanded of a product is positively related to price.
ANS: F
PTS: 1
DIF: 1
REF: 4-2
TOP: Law of demand
MSC: Interpretive
8. If the demand for a good falls when income falls, the good is called an inferior good.
ANS: F
PTS: 1
DIF: 1
REF: 4-2
TOP: Inferior goods
MSC: Definitional
9. When an increase in the price of one good lowers the demand for another good, the two goods are called
complements.
ANS: T
PTS: 1
DIF: 1
REF: 4-2
TOP: Complements
MSC: Definitional
10. Baseballs and baseball bats are substitute goods.
ANS: F
PTS: 1
DIF: 2
REF: 4-2
TOP: Substitutes MSC: Interpretive
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170  Chapter 4/The Market Forces of Supply and Demand
11. An increase in the price of pizza will shift the demand curve for pizza to the left.
ANS: F
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand MSC: Interpretive
12. The market demand is the average of all of the individual demands for a particular good or service.
ANS: F
PTS: 1
DIF: 2
REF: 4-2
TOP: Market demand
MSC: Interpretive
13. Whenever a determinant of demand other than price changes, the demand curve shifts.
ANS: T
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand curve
MSC: Interpretive
14. A decrease in the price of a product and an increase in the number of buyers in the market affect the demand curve
in the same general way.
ANS: F
PTS: 1
DIF: 2
REF: 4-2
TOP: Demand curve
MSC: Interpretive
15. The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a particular price.
ANS: T
PTS: 1
DIF: 1
REF: 4-3
TOP: Quantity supplied
MSC: Definitional
16. The law of supply states that, other things equal, when the price of a good rises, the quantity supplied of the good
falls.
ANS: F
PTS: 1
DIF: 2
REF: 4-3
TOP: Law of supply
MSC: Interpretive
17. If a company making frozen orange juice expects the price of their product to be higher next month, it will supply
more to the market this month.
ANS: F
PTS: 1
DIF: 2
REF: 4-3
TOP: Expectations
MSC: Interpretive
18. A supply curve slopes upward because, all else equal, a higher price means a greater quantity supplied.
ANS: T
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply curve
MSC: Interpretive
19. A movement along a supply curve is called a change in supply while a shift of the curve is called a change in
quantity supplied.
ANS: F
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Quantity supplied MSC: Definitional
20. If there is an improvement in the technology used to produce a good, the supply curve for that good will shift to the
left.
ANS: F
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Technology
MSC: Interpretive
21. A reduction in an input price will cause a change in quantity supplied, but not a change in supply.
ANS: F
PTS: 1
DIF: 2
REF: 4-3
TOP: Supply | Inputs
MSC: Interpretive
22. At the equilibrium price, quantity demanded is equal to quantity supplied.
ANS: T
PTS: 1
DIF: 1
REF: 4-4
TOP: Equilibrium
MSC: Definitional
23. Surpluses drive price up while shortages drive price down.
ANS: F
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages | Surpluses
MSC: Interpretive
24. A shortage will occur at any price below equilibrium price and a surplus will occur at any price above equilibrium
price.
ANS: T
PTS: 1
DIF: 2
REF: 4-4
TOP: Shortages | Surpluses
MSC: Interpretive
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Chapter 4/The Market Forces of Supply and Demand  171
25. It is not possible for demand and supply to shift at the same time.
ANS: F
PTS: 1
DIF: 1
REF: 4-4
TOP: Supply | Demand
MSC: Interpretive
26. In a market, the price of any good adjusts until quantity demanded equals quantity supplied.
ANS: T
PTS: 1
DIF: 2
REF: 4-4
TOP: Quantity demanded | Quantity supplied
MSC: Interpretive
27. The behavior of buyers and sellers drives markets toward equilibrium.
ANS: T
PTS: 1
DIF: 2
REF: 4-4
TOP: Equilibrium
MSC: Interpretive
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172  Chapter 4/The Market Forces of Supply and Demand
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copied, or distributed without the prior consent of the publisher.
Chapter 5
Elasticity and Its Applications
Multiple Choice
1. In general, elasticity is a measure of
a. the extent to which advances in technology are adopted by producers.
b. the extent to which a market is competitive.
c. how fast the price of a good responds to a shift of the supply curve or demand curve.
d. how much buyers and sellers respond to changes in market conditions.
ANS: D
PTS: 1
DIF: 1
REF: 5-0
TOP: Elasticity MSC: Definitional
2. When studying how some event or policy affects a market, elasticity provides information on the
a. direction of the effect on the market.
b. magnitude of the effect on the market.
c. speed of adjustment of the market in response to the event or policy.
d. number of market participants who are directly affected by the event or policy.
ANS: B
PTS: 1
DIF: 2
REF: 5-0
TOP: Elasticity MSC: Interpretive
3. How does the concept of elasticity allow us to improve upon our understanding of supply and demand?
a. Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence
of the elasticity concept.
b. Elasticity provides us with a better rationale for statements such as “an increase in x will lead to a decrease in
y” than we would have in the absence of the elasticity concept.
c. Without elasticity, we would not be able to address the direction in which price is likely to move in response to
a surplus or a shortage.
d. Without elasticity, it is very difficult to assess the degree of competition within a market.
ANS: A
PTS: 1
DIF: 2
REF: 5-0
TOP: Elasticity MSC: Interpretive
4. Elasticity improves our understanding of supply and demand by adding
a. measures of equity.
b. measures of efficiency.
c. a quantitative element to our analysis.
d. a qualitative element to our analysis.
ANS: C
PTS: 1
DIF: 2
REF: 5-0
TOP: Elasticity MSC: Interpretive
5. The price elasticity of demand measures how much
a. quantity demanded responds to a change in price.
b. quantity demanded responds to a change in income.
c. price responds to a change in demand.
d. demand responds to a change in supply.
ANS: A
PTS: 1
DIF: 1
REF: 5-1
TOP: Price elasticity of demand
MSC: Definitional
6. The price elasticity of demand measures
a. buyers’ responsiveness to a change in the price of a good.
b. the extent to which demand increases as additional buyers enter the market.
c. how much more of a good consumers will demand when incomes rise.
d. the movement along a supply curve when there is a change in demand.
ANS: A
PTS: 1
DIF: 1
REF: 5-1
TOP: Price elasticity of demand
MSC: Definitional
177
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copied, or distributed without the prior consent of the publisher.
178  Chapter 5/Elasticity and Its Applications
7. Demand is said to be elastic if
a. the price of the good responds substantially to changes in demand.
b. demand shifts substantially when income or the expected future price of the good changes.
c. buyers do not respond much to changes in the price of the good.
d. buyers respond substantially to changes in the price of the good.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand
MSC: Definitional
8. Demand is said to be inelastic if
a. buyers respond substantially to changes in the price of the good.
b. demand shifts only slightly when the price of the good changes.
c. the quantity demanded changes only slightly when the price of the good changes.
d. the price of the good responds only slightly to changes in demand.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand
MSC: Definitional
9. If demand is inelastic, then
a. buyers do not respond much to a change in price.
b. buyers respond substantially to a change in price, but the response is very slow.
c. buyers do not alter their quantities demanded much in response to advertising, fads, or general changes in
tastes.
d. the demand curve is very flat.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand
MSC: Definitional
10. When quantity demanded responds strongly to changes in price, demand is said to be
a. fluid.
b. elastic.
c. dynamic.
d. highly variable.
ANS: B
PTS: 1
DIF: 1
REF: 5-1
TOP: Elastic demand
MSC: Definitional
11. Which of the following statements about the price elasticity of demand is correct?
a. The price elasticity of demand for a good measures the willingness of buyers of the good to move away from
the good as its price increases.
b. Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer
tastes.
c. Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand
for good x will be more elastic than the demand for good y.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
12. For a good that is a necessity,
a. quantity demanded tends to respond substantially to a change in price.
b. demand tends to be inelastic.
c. the law of demand often does not apply.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
13. For a good that is a luxury, demand
a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  179
14. If a person only occasionally buys a cup of coffee, his demand for coffee is probably
a. represented by a vertical or nearly-vertical demand curve.
b. not easily represented by a demand schedule or demand curve.
c. inelastic.
d. elastic.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of demand
MSC: Interpretive
15. A person who takes a prescription drug to control high cholesterol most likely has a demand for that drug that is
a. inelastic.
b. unit elastic.
c. elastic.
d. highly responsive to changes in income.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
16. Other things equal, the demand for a good tends to be more inelastic, the
a. fewer the available substitutes.
b. longer the time period considered.
c. more the good is considered a luxury good.
d. more narrowly defined is the market for the good.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand
MSC: Interpretive
17. The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
a. ice cream must be eaten quickly.
b. this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers.
c. the market is broadly defined.
d. other flavors of ice cream are good substitutes for this particular flavor.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Substitutes
MSC: Interpretive
18. The demand for Werthers candy is likely
a. elastic because candy is expensive relative to other snacks.
b. elastic because there are many close substitutes for Werthers.
c. elastic because Werthers are regarded as a necessity by many people.
d. inelastic because it is usually eaten quickly, making the relevant time horizon short.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
19. There are very few, if any, good substitutes for motor oil. Therefore,
a. the demand for motor oil would tend to be inelastic.
b. the demand for motor oil would tend to be elastic.
c. the demand for motor oil would tend to respond strongly to changes in prices of other goods.
d. the supply of motor oil would tend to respond strongly to changes in people’s tastes for large cars relative to
their tastes for small cars.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
20. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded
would fall substantially over a ten-year period because
a. buyers tend to be much less sensitive to a change in price when given more time to react.
b. buyers tend to be much more sensitive to a change in price when given more time to react.
c. buyers will have substantially more income over a ten-year period.
d. the quantity supplied of gasoline increases very little in response to an increase in the price of gasoline.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
180  Chapter 5/Elasticity and Its Applications
21. A good will have a more inelastic demand,
a. the greater the availability of close substitutes.
b. the broader the definition of the market.
c. the longer the period of time.
d. the more it is regarded as a luxury.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
22. It is likely that
a. the demand for flat-screen computer monitors is more elastic than the demand for monitors in general.
b. the demand for grandfather clocks is more elastic than the demand for wristwatches.
c. the demand for cardboard is more elastic over a long period of time than over a short period of time.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
23. It is likely that
a. the demand for natural gas is more elastic over a short period of time than over a long period of time.
b. the demand for smoke alarms is more elastic than the demand for Persian rugs.
c. the demand for bourbon whiskey is more elastic than the demand for alcoholic beverages in general.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
24. When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40,
the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the
demand for bubble gum is
a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly inelastic.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Midpoint method MSC: Applicative
25. Economists compute the price elasticity of demand as the
a. percentage change in price divided by the percentage change in quantity demanded.
b. change in quantity demanded divided by the change in the price.
c. percentage change in quantity demanded divided by the percentage change in price.
d. percentage change in quantity demanded divided by the percentage change in income.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Definitional
26. Suppose you calculate the price elasticity of demand for a certain good and you report that the elasticity is 0.8. The
fact that the elasticity is a positive number means that
a. when the price of the good increases, the quantity demanded increases in response.
b. demand for the good is elastic.
c. you have dropped the minus sign and reported the absolute value of the elasticity.
d. the good has close substitutes and/or the good is a luxury.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
27. The midpoint method is used to compute elasticity because it
a. automatically computes a positive number instead of a negative number.
b. results in an elasticity that is the same as the slope of the demand curve.
c. gives the same answer regardless of the direction of change.
d. automatically rounds quantities to the nearest whole unit.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Midpoint method MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  181
28. The main reason for using the midpoint method to calculate an elasticity is that it
a. gives the same answer regardless of whether the price increases or decreases.
b. recognizes that prices are usually increasing, not decreasing.
c. rounds prices to the nearest dollar and quantities to the nearest whole unit.
d. uses fewer numbers than alternative methods.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Midpoint method
MSC: Interpretive
29. Which of the following is not a determinant of the price elasticity of demand for a good?
a. the time horizon
b. the steepness or flatness of the supply curve for the good
c. the definition of the market for the good
d. the availability of substitutes for the good
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
30. The price elasticity of demand for a good measures the willingness of
a. consumers to move away from the good as price rises.
b. consumers to avoid monopolistic markets in favor of competitive markets.
c. firms to produce more of a good as price rises.
d. firms to cater to the tastes of consumers.
ANS: A
PTS: 1
DIF: 1
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
31. If the quantity demanded of a certain good responds only slightly to a change in the price of the good, then
a. the demand for the good is said to be elastic.
b. the demand for the good is said to be inelastic.
c. the law of demand does not apply to the good.
d. the demand curve for the good shifts only slightly in response to a change in price.
ANS: B
PTS: 1
DIF: 1
REF: 5-1
TOP: Inelastic demand
MSC: Definitional
32. The greater the price elasticity of demand, the
a. more likely the product is a necessity.
b. smaller the responsiveness of quantity demanded to a change in price.
c. greater the percentage change in price over the percentage change in quantity demanded.
d. greater the responsiveness of quantity demanded to a change in price.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
33. The value of the price elasticity of demand for a good will be relatively large when
a. there are no good substitutes available for the good.
b. the time period in question is relatively short.
c. the good is a luxury as opposed to a necessity.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
34. 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.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
182  Chapter 5/Elasticity and Its Applications
35. 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.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
36. If the price elasticity of demand for a good is 4.0, 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.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
37. If the price elasticity of demand for a good is 1.65, then a 3 percent decrease in price results in a
a. 0.55 percent increase in the quantity demanded.
b. 1.82 percent increase in the quantity demanded.
c. 4.95 percent increase in the quantity demanded.
d. 5.55 percent increase in the quantity demanded.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
38. If the price elasticity of demand for a good is 0.94, then which of the following events is consistent with a 4 percent
decrease in the quantity of the good demanded?
a. a 0.235 percent increase in the price of the good
b. a 2.350 percent increase in the price of the good
c. a 3.760 percent increase in the price of the good
d. a 4.255 percent increase in the price of the good
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
39. Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.78. Which
of the following events is consistent with a 4.68 percent decrease in the quantity of the good demanded?
a. a 3.65 increase in the price of the good
b. a 16.67 percent increase in the price of the good
c. an increase in the price of the good from $48.00 to $50.97
d. an increase in the price of the good from $65.00 to $66.98
ANS: C
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
40. Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 1.5. Which
of the following events is consistent with a 3.5 percent increase in the price of the good?
a. The quantity of the good demanded decreases from 25,294 to 24,000.
b. The quantity of the good demanded decreases from 50,000 to 48,847.
c. The quantity of the good demanded decreases by 2.33 percent.
d. The quantity of the good demanded decreases by 4.29 percent.
ANS: A
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  183
41. The midpoint method for calculating elasticities is convenient in that it allows us to
a. ignore the percentage change in quantity demanded and instead focus entirely on the percentage change in
price.
b. calculate the same value for the elasticity, regardless of whether the price increases or decreases.
c. assume that sellers’ total revenue stays constant when the price changes.
d. restrict all elasticity values to between 0 and 1.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Midpoint method
MSC: Interpretive
42. The price elasticity of demand for bread
a. is computed as the percentage change in quantity demanded of bread divided by the percentage change in price
of bread.
b. depends, in part, on the availability of close substitutes for bread.
c. reflects the many economic, social, and psychological forces that influence consumers’ tastes for bread.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
43. When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity
demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about
a. 0.22.
b. 0.67.
c. 1.33.
d. 1.50.
ANS: B
PTS: 1
DIF: 1
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
44. Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the quantity demanded
of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using
the midpoint method,
a. the price elasticity of demand is about 1.43 and an increase in the airfare will cause airlines’ total revenue to
decrease.
b. the price elasticity of demand is about 1.43 and an increase in the airfare will cause airlines’ total revenue to
increase.
c. the price elasticity of demand is about 0.70 and an increase in the airfare will cause airlines’ total revenue to
decrease.
d. the price elasticity of demand is about 0.70 and an increase in the airfare will cause airlines’ total revenue to
increase.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
45. For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of
the following statements is most likely applicable to this good?
a. There are no close substitutes for this good.
b. The good is a luxury.
c. The market for the good is broadly defined.
d. The relevant time horizon is short.
ANS: B
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand
MSC: Analytical
46. For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Which of
the following statements is most likely applicable to this good?
a. The relevant time horizon is short.
b. The good is a necessity.
c. The market for the good is broadly defined.
d. There are many close substitutes for this good.
ANS: D
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand
MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
184  Chapter 5/Elasticity and Its Applications
47. Demand is elastic if elasticity is
a. less than 1.
b. equal to 1.
c. equal to 0.
d. greater than 1.
ANS: D
PTS: 1
DIF: 1
REF: 5-1
TOP: Elastic demand
MSC: Definitional
48. Demand is inelastic if elasticity is
a. less than 1.
b. equal to 1.
c. greater than 1.
d. equal to 0.
ANS: A
PTS: 1
DIF: 1
REF: 5-1
TOP: Inelastic demand
MSC: Definitional
49. Demand is said to have unit elasticity if elasticity is
a. less than 1.
b. greater than 1.
c. equal to 1.
d. equal to 0.
ANS: C
PTS: 1
DIF: 1
REF: 5-1
TOP: Price elasticity of demand
MSC: Definitional
Figure 5-1
50. Refer to Figure 5-1. The section of the demand curve labeled A represents the
a. elastic section of the demand curve.
b. inelastic section of the demand curve.
c. unit elastic section of the demand curve.
d. perfectly elastic section of the demand curve.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand
MSC: Interpretive
51. Refer to Figure 5-1. Suppose the point labeled B is the “halfway point” on the demand curve and it corresponds to
a price of $5.00. Then, between prices of $4.90 and $5.10,
a. the price elasticity of demand is less than 1.
b. the price elasticity of demand is equal to 1.
c. the price elasticity of demand is greater than 1.
d. any of the above could be correct, depending on the quantities demanded at prices of $4.90 and $5.10.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  185
52. Refer to Figure 5-1. The section of the demand curve labeled C represents the
a. elastic section of the demand curve.
b. perfectly elastic section of the demand curve.
c. unit elastic section of the demand curve.
d. inelastic section of the demand curve.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand
MSC: Interpretive
53. Refer to Figure 5-1. Assume the section of the demand curve labeled A corresponds to prices between $8 and $16.
Then, when the price changes between $9 and $10,
a. quantity demanded changes proportionately less than the price.
b. quantity demanded changes proportionately more than the price.
c. quantity demanded changes the same amount proportionately as price.
d. the price elasticity of demand is less than 1.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand
MSC: Applicative
54. Refer to Figure 5-1. Assume the section of the demand curve labeled C corresponds to prices between $0 and $15.
Then, when the price changes between $7 and $9,
a. quantity demanded changes proportionately less than the price.
b. quantity demanded changes proportionately more than the price.
c. quantity demanded changes the same amount proportionately as price.
d. the price elasticity of demand is greater than 1.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand
MSC: Applicative
55. Refer to Figure 5-1. Assume the section of the demand curve labeled A corresponds to prices between $6 and $12.
Then, when the price increases from $8 to $10,
a. the percent decrease in the quantity demanded exceeds the percent increase in the price.
b. the percent increase in the price exceeds the percent decrease in the quantity demanded.
c. sellers’ total revenue increases as a result.
d. it is possible that the quantity demanded fell from 550 to 500 as a result.
ANS: A
PTS: 1
DIF: 3
REF: 5-1
TOP: Elastic demand
MSC: Applicative
56. Refer to Figure 5-1. Assume, for the good in question, two specific points on the demand curve are (Q = 1,000, P
= $40) and (Q = 1,500, P = $30). Then which of the following scenarios is possible?
a. Both of these points lie on section C of the demand curve.
b. The vertical intercept of the demand curve is the point (Q = 0, P = $60).
c. The horizontal intercept of the demand curve is the point (Q = 1,800, P = $0).
d. Any of these scenarios is possible.
ANS: B
PTS: 1
DIF: 3
REF: 5-1
TOP: Elastic demand
MSC: Analytical
57. Refer to Figure 5-1. Assume, for the good in question, two specific points on the demand curve are (Q = 2,000, P
= $15) and (Q = 2,400, P = $12). Then which of the following scenarios is possible?
a. Both of these points lie on section C of the demand curve.
b. The vertical intercept of the demand curve is the point (Q = 0, P = $22).
c. The horizontal intercept of the demand curve is the point (Q = 5,000, P = $0).
d. Any of these scenarios is possible.
ANS: A
PTS: 1
DIF: 3
REF: 5-1
TOP: Inelastic demand
MSC: Analytical
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186  Chapter 5/Elasticity and Its Applications
Figure 5-2
58. Refer to Figure 5-2. The price elasticity of demand between point A and point B, using the midpoint method, is
a. 1.
b. 1.5.
c. 2.
d. 2.5.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
59. Refer to Figure 5-2. The elasticity of demand between point B and point C, using the midpoint method, is
a. 0.5.
b. 0.75.
c. 1.0.
d. 1.3.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
60. Refer to Figure 5-2. If the price decreased from $18 to $6,
a. total revenue would increase by $1,200 and demand is elastic between points A and C.
b. total revenue would increase by $800 and demand is elastic between points A and C.
c. total revenue would decrease by $1,200 and demand is inelastic between points A and C.
d. total revenue would decrease by $800 and demand is inelastic between points A and C.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
61. Refer to Figure 5-2. Sellers’ total revenue would increase if the price
a. increased from $4 to $6.
b. increased from $16 to $18.
c. decreased from $8 to $6.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Total revenue
MSC: Applicative
62. Refer to Figure 5-2. Sellers’ total revenue would increase if the price
a. increased from $6 to $8.
b. decreased from $18 to $16.
c. decreased from $16 to $15.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Total revenue
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  187
63. Refer to Figure 5-2. Which of the following price changes would result in no change in sellers’ total revenue?
a. The price increases from $6 to $9.
b. The price increases from $9 to $15.
c. The price decreases from $12 to $9.
d. The price decreases from $9 to $5.
ANS: C
PTS: 1
DIF: 3
REF: 5-1
TOP: Total revenue
MSC: Applicative
64. When the price of kittens was $25 each, the pet shop sold 20 per month. When they raised the price to $35 each,
they sold 14 per month. The price elasticity of demand for kittens is about
a. 1.66.
b. 1.06.
c. 0.94.
d. 0.60.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
65. When the local used bookstore prices economics books at $15.00 each, they generally sell 70 books per month. If
they lower the price to $7.00, sales increase to 90 books per month. Given this information, we know that the price
elasticity of demand for economics books is about
a. 2.91, and an increase in price from $7.00 to $15.00 results in an increase in total revenue.
b. 2.91, and an increase in price from $7.00 to $15.00 results in a decrease in total revenue.
c. 0.34, and an increase in price from $7.00 to $15.00 results in an increase in total revenue.
d. 0.34, and an increase in price from $7.00 to $15.00 results in a decrease in total revenue.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
66. Demand is said to be inelastic if the
a. quantity demanded changes proportionately more than price.
b. price changes proportionately more than income.
c. quantity demanded changes proportionately less than price.
d. quantity demanded changes proportionately the same as price.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand
MSC: Definitional
67. Demand is said to be unit elastic if
a. quantity demanded changes by the same percent as the price.
b. quantity demanded changes by a larger percent than the price.
c. the demand curve shifts by the same percentage amount as the price.
d. quantity demanded does not respond to a change in price.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Definitional
68. Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a
change in price, the
a. steeper the demand curve will be.
b. flatter the demand curve will be.
c. further to the right the demand curve will sit.
d. closer to the vertical axis the demand curve will sit.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
188  Chapter 5/Elasticity and Its Applications
69. The flatter the demand curve through a given point, the
a. greater the price elasticity of demand at that point.
b. smaller the price elasticity of demand at that point.
c. closer the price elasticity of demand will be to the slope of the curve.
d. greater the absolute value of the change in total revenue when there is a movement from that point upward and
to the left along the demand curve.
ANS: A
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand
MSC: Analytical
70. A perfectly elastic demand implies that
a. buyers will not respond to any change in price.
b. any rise in price above that represented by the demand curve will result in a quantity demanded of zero.
c. quantity demanded and price change by the same percent as we move along the demand curve.
d. price will rise by an infinite amount when there is a change in quantity demanded.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly elastic demand
MSC: Interpretive
71. The case of perfectly elastic demand is illustrated by a demand curve that is
a. vertical.
b. horizontal.
c. downward-sloping but relatively steep.
d. downward-sloping but relatively flat.
ANS: B
PTS: 1
DIF: 1
REF: 5-1
TOP: Perfectly elastic demand
MSC: Interpretive
72. The smaller the price elasticity of demand, the
a. steeper the demand curve will be through a given point.
b. flatter the demand curve will be through a given point.
c. more strongly buyers respond to a change in price between any two prices P1 and P2.
d. larger the decrease in equilibrium price when the supply curve shifts rightward from S1 to S2.
ANS: A
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand
MSC: Analytical
73. In the case of perfectly inelastic demand,
a. the change in quantity demanded equals the change in price.
b. the percentage change in quantity demanded equals the percentage change in price.
c. infinitely-large changes in quantity demanded result from very small changes in the price.
d. quantity demanded stays the same whenever price changes.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
74. When demand is perfectly inelastic, the demand curve will be
a. negatively sloped, because buyers decrease their purchases when the price rises.
b. vertical, because buyers purchase the same amount as before whenever the price rises or falls.
c. positively sloped, because buyers respond by increasing the market quantity demanded of the good when price
rises.
d. positively sloped, because buyers respond by increasing their total expenditure on the good when price rises.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
75. When small changes in price lead to infinite changes in quantity demanded, demand is perfectly
a. elastic and the demand curve will be horizontal.
b. inelastic and the demand curve will be horizontal.
c. elastic and the demand curve will be vertical.
d. inelastic and the demand curve will be vertical.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly elastic demand
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  189
76. When quantity moves proportionately the same amount as price, demand is
a. elastic and the price elasticity of demand is 1.
b. perfectly elastic and the price elasticity of demand is infinitely large.
c. perfectly inelastic and the price elasticity of demand is 0.
d. unit elastic and the price elasticity of demand is 1.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
77. When demand is perfectly inelastic, the price elasticity of demand
a. is zero and the demand curve is vertical.
b. is zero and the demand curve is horizontal.
c. approaches infinity and the demand curve is vertical.
d. approaches infinity and the demand curve is horizontal.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
78. A perfectly inelastic demand implies that buyers
a. decrease their purchases when the price rises.
b. purchase the same amount as before when the price rises or falls.
c. increase their purchases only slightly when the price falls.
d. respond substantially to an increase in price.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
79. 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.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly inelastic demand | Equilibrium price | Equilibrium quantity
MSC: Applicative
80. 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.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly elastic demand | Equilibrium price | Equilibrium quantity
MSC: Applicative
81. Alice says that she would buy one banana split a day regardless of the price. If she is telling the truth,
a. Alice’s demand for banana splits is perfectly inelastic.
b. Alice’s price elasticity of demand for banana splits is 1.
c. Alice’s income elasticity of demand for banana splits is 0.
d. None of the above answers is correct.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
82. Jean-Paul says that he will spend exactly 75 cents a day on M&Ms, regardless of the price of M&Ms. Jean-Paul’s
demand for M&Ms is
a. perfectly elastic.
b. unit elastic.
c. perfectly inelastic.
d. None of the above answers is correct.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
190  Chapter 5/Elasticity and Its Applications
83. Which of the following expressions is valid for the price elasticity of demand?
a.
Price elasticity of demand =
b.
Price elasticity of demand =
c.
Price elasticity of demand =
d.
Price elasticity of demand =
ANS: B
PTS: 1
TOP: Price elasticity of demand
DIF: 2
REF: 5-1
MSC: Applicative
84. Which of the following expressions can be used to compute the price elasticity of demand?
a. Price elasticity of demand =
b. Price elasticity of demand =
c. Price elasticity of demand =
d. Price elasticity of demand =
ANS: C
PTS: 1
TOP: Price elasticity of demand
DIF: 3
REF: 5-1
MSC: Analytical
85. For which of the following goods would demand be most elastic?
a. clothing
b. blue jeans
c. Tommy Hilfiger jeans
d. All three would have the same elasticity of demand since they are all related.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
86. In any market, total revenue is calculated by taking the price of the good and
a. dividing it by the price elasticity of demand.
b. multiplying it by the price elasticity of demand.
c. multiplying it by the quantity of the good.
d. multiplying it by the quantity of the good and then subtracting the costs of production.
ANS: C
PTS: 1
DIF: 1
REF: 5-1
TOP: Total revenue
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  191
87. How does total revenue change as one moves downward and to the right along a linear demand curve?
a. It always increases.
b. It always decreases.
c. It first increases, then decreases.
d. It is unaffected by a movement along the demand curve.
ANS: C
PTS: 1
DIF: 3
REF: 5-1
TOP: Total revenue | Demand curve
MSC: Analytical
88. On a downward-sloping linear demand curve, total revenue reaches its maximum value at the
a. midpoint of the demand curve.
b. lower end of the demand curve.
c. upper end of the demand curve.
d. It is impossible to tell without knowing prices and quantities demanded.
ANS: A
PTS: 1
DIF: 3
REF: 5-1
TOP: Total revenue | Demand curve
MSC: Analytical
89. 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.
ANS: D
PTS: 1
DIF: 3
REF: 5-1
TOP: Total revenue | Demand curve
MSC: Analytical
90. If the price elasticity of demand is 1.5, regardless of which two points on the demand curve are used to compute the
elasticity, then
a. demand is perfectly inelastic and the demand curve is vertical.
b. demand is elastic and the demand curve is a straight, downward-sloping line.
c. demand is perfectly elastic and the demand curve is horizontal.
d. demand is elastic and the demand curve is something other than a straight, downward-sloping line.
ANS: D
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
Figure 5-3
91. Refer to Figure 5-3. If price falls within the A range of the demand curve we can expect total revenue to
a. increase.
b. decrease.
c. stay the same.
d. This determination cannot be made without further information.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Total revenue
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
192  Chapter 5/Elasticity and Its Applications
92. Refer to Figure 5-3. If price falls within the C range of the demand curve we can expect total revenue to
a. increase.
b. decrease.
c. stay the same.
d. This determination cannot be made without further information.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Total revenue
MSC: Applicative
93. Refer to Figure 5-3. If price is originally within the C range of the demand curve and then it increases to a value
within the A range of the demand curve, we can expect total revenue to
a. increase.
b. decrease.
c. stay the same.
d. This determination cannot be made without further information.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Total revenue
MSC: Applicative
Figure 5-4
94. Refer to Figure 5-4. As price falls from PA to PB, which demand curve represents the most elastic demand?
a. D1
b. D2
c. D3
d. All of the above are equally elastic.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
95. Refer to Figure 5-4. As price falls from PA to PB, we could use the three demand curves to calculate three
different values of the price elasticity of demand. Which of the three demand curves would produce the smallest
elasticity?
a. D1
b. D2
c. D3
d. All of the above are equally elastic.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  193
96. When demand is inelastic, a decrease in price will cause
a. an increase in total revenue.
b. a decrease in total revenue.
c. no change in total revenue, but an increase in quantity demanded.
d. no change in total revenue, but a decrease in quantity demanded.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand | Total revenue
MSC: Applicative
Figure 5-5
97. Refer to Figure 5-5. When the price is $30, total revenue is
a. $3,000.
b. $5,000.
c. $7,000.
d. $9,000.
ANS: D
PTS: 1
DIF: 1
REF: 5-1
TOP: Total revenue
MSC: Interpretive
98. Refer to Figure 5-5. When price falls from $50 to $40, it can be inferred that demand between those two prices is
a. inelastic, since total revenue decreases from $8,000 to $5,000.
b. inelastic, since total revenue increases from $5,000 to $8,000.
c. elastic, since total revenue increases from $5,000 to $8,000.
d. unit elastic, since total revenue increases from $5,000 to $8,000.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand | Total revenue
MSC: Applicative
99. Refer to Figure 5-5. An increase in price from $20 to $30 would
a. increase total revenue by $2,000.
b. decrease total revenue by $2,000.
c. increase total revenue by $1,000.
d. decrease total revenue by $1,000.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Total revenue
MSC: Applicative
100. Refer to Figure 5-5. An increase in price from $30 to $35 would
a. increase total revenue by $250
b. decrease total revenue by $250.
c. increase total revenue by $500.
d. decrease total revenue by $500.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Total revenue
MSC: Applicative
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194  Chapter 5/Elasticity and Its Applications
101. An increase in price causes an increase in total revenue when
a. demand is elastic.
b. demand is inelastic.
c. demand is unit elastic.
d. All of the above are possible.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand | Total revenue
MSC: Applicative
Figure 5-6
102. Refer to Figure 5-6. If price increases from $10 to $15, total revenue will
a. increase by $20, so demand must be inelastic in this price range.
b. increase by $5, so demand must be inelastic in this price range.
c. decrease by $20, so demand must be elastic in this price range.
d. decrease by $10, so demand must be elastic in this price range.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand | Total revenue
MSC: Applicative
103. Refer to Figure 5-6. Suppose this demand curve is a straight, downward-sloping line all the way from the
horizontal intercept to the vertical intercept. We choose two prices, P1 and P2, and the corresponding quantities
demanded, Q1 and Q2, for the purpose of calculating the price elasticity of demand. Also suppose P2 > P1. In which
of the following cases could we possibly find that (i) demand is elastic and (ii) an increase in price from P1 to P2
causes an increase in total revenue?
a. 0 < P1 < P2 < $10.
b. $10 < P1 < P2 < $15.
c. P1 > $15.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Analytical
104. Refer to Figure 5-6. A decrease in price from $15 to $10 leads to
a. a decrease in total revenue of $10, so the price elasticity of demand is greater than 1 in this price range.
b. a decrease in total revenue of $10, so the price elasticity of demand is less than 1 in this price range.
c. a decrease in total revenue of $20, so the price elasticity of demand is less than 1 in this price range.
d. a decrease in total revenue of $20, so demand is elastic in this price range.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand | Total revenue
MSC: Applicative
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Chapter 5/Elasticity and Its Applications  195
Figure 5-7
105. Refer to Figure 5-7. Total revenue when the price is P1 is represented by the area(s)
a. B + D.
b. A + B.
c. C + D.
d. D.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Demand curve | Total revenue
MSC: Applicative
106. Refer to Figure 5-7. Total revenue when the price is P2 is represented by the area(s)
a. B + D.
b. A + B.
c. C + D.
d. D.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Demand curve | Total revenue
MSC: Applicative
107. Refer to Figure 5-7. If rectangle D is larger than rectangle A, then
a. demand is elastic between prices P1 and P2.
b. a decrease in price from P2 to P1 will cause an increase in total revenue.
c. the magnitude of the percent change in price between P1 and P2 is smaller than the magnitude of the
corresponding percent change in quantity demanded.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Analytical
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196  Chapter 5/Elasticity and Its Applications
Figure 5-8. A demand curve is shown on the graph below. On the graph, Q represents quantity demanded
and P represents price.
108. Refer to Figure 5-8. The maximum value of total revenue corresponds to a price of
a. $18.
b. $30.
c. $42.
d. $48.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Total revenue
MSC: Applicative
109. Refer to Figure 5-8. Demand is unit elastic between prices of
a. $18 and $24.
b. $24 and $30.
c. $24 and $36.
d. $30 and $36.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
110. Refer to Figure 5-8. Using the midpoint method, between prices of $12 and $18, price elasticity of demand is
a. 0.33.
b. 0.67.
c. 1.33.
d. 1.89.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
111. Refer to Figure 5-8. Using the midpoint method, between prices of $48 and $54, price elasticity of demand is
about
a. 0.92.
b. 3.89.
c. 4.33.
d. 5.67.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  197
112. Refer to Figure 5-8. At a price of $48 per unit, sellers’ total revenue amounts to
a. $150.
b. $200.
c. $288.
d. $364.
ANS: C
PTS: 1
DIF: 1
REF: 5-1
TOP: Total revenue
MSC: Definitional
113. If the demand for donuts is elastic, then a decrease in the price of donuts will
a. increase total revenue of donut sellers.
b. decrease total revenue of donut sellers.
c. not change total revenue of donut sellers.
d. There is not enough information to answer this question.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand | Total revenue
MSC: Applicative
114. The local pizza restaurant makes such great bread sticks that consumers do not respond much at all to a change in
the price. If the owner is only interested in increasing revenue, he should
a. lower the price of the bread sticks.
b. leave the price of the bread sticks alone.
c. raise the price of the bread sticks.
d. reduce costs.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand | Total revenue
MSC: Interpretive
115. Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to increase his total revenue,
he should
a. increase the price of his jewelry boxes.
b. decrease the price of his jewelry boxes.
c. not change the price of his jewelry boxes.
d. None of the above answers is correct.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand | Total revenue
MSC: Interpretive
116. When demand is inelastic within a certain price range, then within that price range,
a. an increase in price would increase total revenue because the decrease in quantity demanded is proportionately
less than the increase in price.
b. an increase in price would decrease total revenue because the decrease in quantity demanded is proportionately
greater than the increase in price.
c. a decrease in price would increase total revenue because the increase in quantity demanded is proportionately
smaller than the decrease in price.
d. a decrease in price would not affect total revenue.
ANS: A
PTS: 1
DIF: 3
REF: 5-1
TOP: Inelastic demand | Total revenue
MSC: Applicative
117. When demand is inelastic the price elasticity of demand is
a. less than 1, and price and total revenue will move in the same direction.
b. less than 1, and price and total revenue will move in opposite directions.
c. greater than 1, and price and total revenue will move in the same direction.
d. greater than 1, and price and total revenue will move in opposite directions.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand | Total revenue
MSC: Applicative
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198  Chapter 5/Elasticity and Its Applications
118. If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will decrease the quantity
demanded of tuna by
a. 1.05% and tuna sellers’ total revenue will increase as a result.
b. 1.05% and tuna sellers’ total revenue will decrease as a result.
c. 2.14% and tuna sellers’ total revenue will increase as a result.
d. 2.14% and tuna sellers’ total revenue will decrease as a result.
ANS: A
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Analytical
119. If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease in the price of aluminum foil will
increase the quantity demanded of aluminum foil by
a. 1.66% and aluminum foil sellers’ total revenue will increase as a result.
b. 1.66% and aluminum foil sellers’ total revenue will decrease as a result.
c. 3.48% and aluminum foil sellers’ total revenue will increase as a result.
d. 3.48% and aluminum foil sellers’ total revenue will decrease as a result.
ANS: C
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Analytical
120. Holding all other forces constant, if raising the price of a good leads to a fall in total revenue, then the demand for
the good must be
a. unit elastic.
b. inelastic.
c. elastic.
d. None of the above is correct, since a price increase always leads to an increase in total revenue.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand | Total revenue
MSC: Applicative
121. If a change in the price of a good results in no change in total revenue, then
a. the demand for the good must be elastic.
b. the demand for the good must be inelastic.
c. the demand for the good must be unit elastic.
d. buyers must not respond very much to a change in price.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Interpretive
122. When demand is unit elastic, price elasticity of demand
a. equals 1 and total revenue and price move in the same direction.
b. equals 1 and total revenue and price move in opposite directions.
c. equals 1 and total revenue does not change when price changes.
d. equals 0 and total revenue does not change when price changes.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Interpretive
123. If the demand curve is linear and downward sloping, which of the following statements is not correct?
a. Demand is more elastic on the lower part of the demand curve than on the upper part.
b. Different pairs of points on the demand curve can result in different values of the price elasticity of demand.
c. Different pairs of points on the demand curve cannot result in different values of the slope of the demand curve.
d. Starting from a point on the upper part of the demand curve, an increase in price leads to a decrease in total
revenue.
ANS: A
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Analytical
124. For a vertical demand curve,
a. slope is undefined and price elasticity of demand is equal to 0.
b. slope is equal to 0 and price elasticity of demand is undefined.
c. slope and price elasticity of demand both are undefined.
d. slope and price elasticity of demand both are equal to 0.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
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Chapter 5/Elasticity and Its Applications  199
125. In which of these instances is demand said to be perfectly inelastic?
a. An increase in price of 2% causes a decrease in quantity demanded of 2%.
b. A decrease in price of 2% causes an increase in quantity demanded of 0%.
c. A decrease in price of 2% causes a decrease in total revenue of 0%.
d. The demand curve is horizontal.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
126. For a horizontal demand curve,
a. slope is undefined and price elasticity of demand is equal to 0.
b. slope is equal to 0 and price elasticity of demand is undefined.
c. slope and price elasticity of demand both are undefined.
d. slope and price elasticity of demand both are equal to 0.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly elastic demand
MSC: Interpretive
127. As we move downward and to the right along a linear, downward-sloping demand curve,
a. slope and elasticity both remain constant.
b. slope changes but elasticity remains constant.
c. slope and elasticity both change.
d. slope remains constant but elasticity changes.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
128. When we move upward and to the left along a linear demand curve, price elasticity of demand
a. first becomes smaller, then larger.
b. always becomes larger.
c. always becomes smaller.
d. first becomes larger, then smaller.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
129. Moving downward and to the right along a linear demand curve, we know that total revenue
a. first increases, then decreases.
b. first decreases, then increases.
c. always increases.
d. always decreases.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Demand curve | Total revenue
MSC: Interpretive
130. Total revenue will be at its largest value on a linear demand curve at
a. the top of the curve, where prices are highest.
b. the midpoint of the curve.
c. the low end of the curve, where quantity demanded is highest.
d. None of the above is correct.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Demand curve | Total revenue
MSC: Interpretive
131. Total revenue
a. always increases as price increases.
b. increases as price increases, as long as demand is elastic.
c. decreases as price increases, as long as demand is inelastic.
d. remains unchanged as price increases when demand is unit elastic.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
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200  Chapter 5/Elasticity and Its Applications
132. In which of the following situations will total revenue increase?
a. Price elasticity of demand is 1.2 and the price of the good decreases.
b. Price elasticity of demand is 0.5 and the price of the good increases.
c. Price elasticity of demand is 3.0 and the price of the good decreases.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Analytical
133. 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.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand | Total revenue
MSC: Applicative
134. You have just been hired as a business consultant to determine what pricing policy would be appropriate in order to
increase the total revenue of a major shoe store. The first step you would take would be to
a. increase the price of every shoe in the store.
b. look for ways to cut costs and increase profit for the store.
c. determine the price elasticity of demand for the store’s products.
d. determine the price elasticity of supply for the store’s products.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Interpretive
135. Harry’s Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the price of a haircut
from $5 to $9. The price elasticity of demand for Harry’s Haircuts is
a. 0.567.
b. 0.700.
c. 1.429.
d. 2.200.
ANS: B
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
136. Barb’s Bakery earned $200 in total revenue last month when it sold 100 loaves of bread. This month it earned $300
in total revenue when it sold 60 loaves of bread. The price elasticity of demand for Barb’s bread is
a. 0.27.
b. 0.58.
c. 1.25.
d. 1.71.
ANS: B
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
137. You are in charge of the local city-owned golf course. You need to increase the revenue generated by the golf
course in order to meet expenses. The mayor advises you to increase the price of a round of golf. The city manager
recommends reducing the price of a round of golf. You realize that
a. the mayor thinks demand is elastic and the city manager thinks demand is inelastic.
b. both the mayor and the city manager think that demand is elastic.
c. both the mayor and the city manager think that demand is inelastic.
d. the mayor thinks demand is inelastic and the city manager thinks demand is elastic.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  201
138. 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.
ANS: C
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
139. 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. charge the same price to both groups of customers.
d. increase the price for both groups of customers.
ANS: B
PTS: 1
DIF: 3
REF: 5-1
TOP: Elastic demand | Inelastic demand | Total revenue
MSC: Analytical
140. 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.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
141. 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 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.
ANS: D
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
202  Chapter 5/Elasticity and Its Applications
Figure 5-9
142. Refer to Figure 5-9. Between point A and point B,
a. the slope is equal to -1/4 and the price elasticity of demand is equal to 2/3.
b. the slope is equal to -1/4 and the price elasticity of demand is equal to 3/2.
c. the slope is equal to -3/2 and the price elasticity of demand is equal to 1/4.
d. the slope is equal to -2/3 and the price elasticity of demand is equal to 3/2.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
143. Refer to Figure 5-9. Between point A and point B on the graph, demand is
a. perfectly elastic.
b. inelastic.
c. unit elastic.
d. elastic, but not perfectly elastic.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand
MSC: Applicative
144. The price elasticity of demand changes as we move along a
a. horizontal demand curve.
b. vertical demand curve.
c. linear, downward-sloping demand curve.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Demand curve | Price elasticity of demand
MSC: Interpretive
145. The difference between slope and elasticity is that
a. slope is a ratio of two changes and elasticity is a ratio of two percentage changes.
b. slope is a ratio of two percentage changes and elasticity is a ratio of two changes.
c. slope measures changes in quantity demanded more accurately than elasticity.
d. none of the above; there is no difference between slope and elasticity.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
146. For which of the following goods is demand probably most inelastic?
a. camcorders
b. insulin
c. apples
d. devices that remove cores from apples
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  203
147. According to a Los Angeles Times article published in May 2005, John Felmy, chief economist at the American
Petroleum Institute, asserts that the short-run price elasticity of demand for gasoline is about
a. 0.10.
b. 0.25.
c. 0.50.
d. 1.00.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
148. According to a Los Angeles Times article published in May 2005, recent estimates indicate that
a. the short-run and long-run price elasticities of demand for gasoline are 0.1 and 0.5, respectively.
b. the short-run and long-run price elasticities of demand for gasoline are 0.1 and 1.0, respectively.
c. the short-run and long-run price elasticities of demand for gasoline are 0.2 and 1.5, respectively.
d. the short-run and long-run price elasticities of demand for gasoline are 0.5 and 1.5, respectively.
ANS: B
PTS: 1
DIF: 3
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
149. Whether a good is a luxury or necessity depends on
a. the price of the good.
b. the preferences of the buyer.
c. the intrinsic properties of the good.
d. how scarce the good is.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Demand MSC: Interpretive
150. Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $50,000 and she
purchased 10 pairs of shoes. Holding other factors constant, it follows that Sheila
a. considers shoes to be a necessity.
b. considers shoes to be an inferior good.
c. considers shoes to be a normal good.
d. has a low price elasticity of demand for shoes.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Normal goods
MSC: Interpretive
151. Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $52,000 and she
purchased 7 pairs of shoes. Holding other factors constant and using the midpoint method, it follows that Sheila’s
income elasticity of demand is about
a. 0.59 and Sheila regards shoes as an inferior good.
b. 0.59 and Sheila regards shoes as a normal good.
c. 1.7 and Sheila regards shoes as an inferior good.
d. 1.7 and Sheila regards shoes as a normal good.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand | Normal goods MSC: Applicative
152. When the rental price of DVD movies is $4, Denise rents five per month. When the price is $3, she rents nine per
month. Denise’s demand for DVD rentals is
a. elastic and her demand curve would be relatively flat.
b. elastic and her demand curve would be relatively steep.
c. inelastic and her demand curve would be relatively flat.
d. inelastic and her demand curve would be relatively steep.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
204  Chapter 5/Elasticity and Its Applications
153. Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs.
She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that
the demand for lemonade is elastic, what is your advice to her?
a. Leave the price at 25 cents and be patient.
b. Raise the price to increase total revenue.
c. Lower the price to increase total revenue.
d. There isn’t enough information given to answer this question.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Elastic demand | Total revenue
MSC: Applicative
154. Income elasticity of demand measures how
a. the quantity demanded changes as consumer income changes.
b. consumer purchasing power is affected by a change in the price of a good.
c. the price of a good is affected when there is a change in consumer income.
d. many units of a good a consumer can buy given a certain income level.
ANS: A
PTS: 1
DIF: 1
REF: 5-1
TOP: Income elasticity of demand MSC: Definitional
155. If a 6 percent increase in income results in a 10 percent increase in the quantity demanded of pizza, then the
income elasticity of demand for pizza is
a. negative and therefore pizza is an normal good.
b. negative and therefore pizza is a inferior good.
c. positive and therefore pizza is an inferior good.
d. positive and therefore pizza is a normal good.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Applicative
156. For which of the following goods is the income elasticity of demand likely highest?
a. water
b. diamonds
c. hamburgers
d. housing
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
157. Necessities such as food and clothing tend to have
a. high price elasticities of demand and high income elasticities of demand.
b. high price elasticities of demand and low income elasticities of demand.
c. low price elasticities of demand and high income elasticities of demand.
d. low price elasticities of demand and low income elasticities of demand.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Income elasticity of demand
MSC: Interpretive
158. Last year, Joan bought 50 pounds of hamburger when her household’s income was $40,000. This year, her
household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant, Joan’s income
elasticity of demand for hamburger is
a. positive, so Joan considers hamburger to be an inferior good.
b. positive, so Joan considers hamburger to be a normal good and a necessity.
c. negative, so Joan considers hamburger to be an inferior good.
d. negative, so Joan considers hamburger to be a normal good, but not a necessity.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Inferior goods | Income elasticity of demand MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  205
159. If an increase in income results in a decrease in the quantity demanded of a good, then for that good,
a. the cross-price elasticity of demand is negative.
b. the price elasticity of demand is negative.
c. the income elasticity of demand is negative.
d. an increase in the market supply will increase the equilibrium price of the good.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
160. Which of the following expressions represents a cross-price elasticity of demand?
a. percentage change in quantity demanded of apples divided by percentage change in quantity supplied of apples
b. percentage change in quantity demanded of apples divided by percentage change in price of pears
c. percentage change in price of apples divided by percentage change in quantity demanded of apples
d. percentage change in quantity demanded of apples divided by percentage change in income
ANS: B
PTS: 1
DIF: 1
REF: 5-1
TOP: Cross-price elasticity of demand
MSC: Definitional
161. To determine whether a good is considered normal or inferior, one could examine the value of the
a. income elasticity of demand for that good.
b. price elasticity of demand for that good.
c. price elasticity of supply for that good.
d. cross-price elasticity of demand for that good.
ANS: A
PTS: 1
DIF: 1
REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
162. You and your college roommate eat three packages of Ramen noodles each week. After graduation last month,
both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy
even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When
looking at income elasticity of demand for Ramen noodles,
a. yours would be negative and your roommate’s would be positive.
b. yours would be positive and your roommate’s would be negative.
c. yours would be zero and your roommate’s would approach infinity.
d. yours would approach infinity and your roommate’s would be zero.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
163. 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.
ANS: C
PTS: 1
DIF: 1
REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
164. For which of the following types of goods would the income elasticity of demand be positive and relatively large?
a. all inferior goods
b. all normal goods
c. goods for which there are many good complements
d. luxuries
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
165. Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The
income elasticity of demand for the good is
a. negative and therefore the good is an inferior good.
b. negative and therefore the good is a normal good.
c. positive and therefore the good is a normal good.
d. positive and therefore the good is an inferior good.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand | Normal goods MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
206  Chapter 5/Elasticity and Its Applications
166. Assume that a 4 percent decrease in income results in a 6 percent increase in the quantity demanded of a good. The
income elasticity of demand for the good is
a. negative and therefore the good is an inferior good.
b. negative and therefore the good is a normal good.
c. positive and therefore the good is an inferior good.
d. positive and therefore the good is a normal good.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand | Inferior goods MSC: Applicative
167. Muriel’s income elasticity of demand for football tickets is 1.50. All else equal, this means that if her income
increases by 20 percent, she will buy
a. 150 percent more football tickets.
b. 50 percent more football tickets.
c. 30 percent more football tickets.
d. 20 percent more football tickets.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Applicative
168. When her income increased from $10,000 to $20,000, Heather’s consumption of macaroni decreased from 10
pounds to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. We can conclude
that for Heather,
a. macaroni and soy-burgers are both normal goods with income elasticities equal to 1.
b. macaroni is an inferior good and soy-burgers are normal goods; both have income elasticities of 1.
c. macaroni is an inferior good with an income elasticity of -1 and soy-burgers are normal goods with an income
elasticity of 1.
d. macaroni and soy-burgers are both inferior goods with income elasticities equal to -1.
ANS: C
PTS: 1
DIF: 3
REF: 5-1
TOP: Income elasticity of demand | Normal goods | Inferior goods
MSC: Applicative
169. Which of the following should be held constant when calculating an income elasticity of demand?
a. the quantity of the good demanded
b. the price of the good
c. income
d. All of the above should be held constant.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
170. Which of the following should be held constant when calculating an income elasticity of demand?
a. the price of the good
b. prices of related goods
c. tastes
d. All of the above should be held constant.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
Table 5-1
Income
$30,000
$40,000
Quantity of Good X
Purchased
2
6
Quantity of Good Y
Purchased
20
10
171. Refer to Table 5-1. Using the midpoint method, what is the income elasticity of demand for good X?
a. –3.5
b. –0.29
c. 0.29
d. 3.5
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  207
172. Refer to Table 5-1. Using the midpoint method, the income elasticity of demand for good Y is
a. 2.33 and good Y is a normal good.
b. -2.33 and Y is an inferior good.
c. -0.43 and Y is an inferior good.
d. -0.43 and Y is a law-of-demand good.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand | Inferior goods MSC: Applicative
173. Cross-price elasticity of demand measures how
a. the price of one good changes in response to a change in the price of another good.
b. the quantity demanded of one good changes in response to a change in the quantity demanded of another good.
c. the quantity demanded of one good changes in response to a change in the price of another good.
d. strongly normal or inferior a good is.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Cross-price elasticity of demand
MSC: Definitional
174. The cross-price elasticity of demand can tell us whether goods are
a. normal or inferior.
b. elastic or inelastic.
c. luxuries or necessities.
d. complements or substitutes.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Cross-price elasticity of demand
MSC: Interpretive
175. If the cross-price elasticity of two goods is negative, then those two goods are
a. necessities.
b. complements.
c. normal goods.
d. inferior goods.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Cross-price elasticity of demand
MSC: Interpretive
176. Last month, sellers of good Y took in $100 in total revenue on sales of 50 units of good Y. This month sellers of
good Y raised their price and took in $120 in total revenue on sales of 40 units of good Y. At the same time, the
price of good X stayed the same, but sales of good X increased from 20 units to 40 units. We can conclude that
goods X and Y are
a. substitutes, and have a cross-price elasticity of 0.60.
b. complements, and have a cross-price elasticity of 0.60.
c. substitutes, and have a cross-price elasticity of 1.67.
d. complements, and have a cross-price elasticity of 1.67.
ANS: C
PTS: 1
DIF: 3
REF: 5-1
TOP: Cross-price elasticity of demand | Substitutes MSC: Applicative
177. 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.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Cross-price elasticity of demand
MSC: Applicative
178. If two goods are substitutes, their cross-price elasticity will be
a. positive.
b. negative.
c. zero.
d. equal to the difference between the income elasticities of demand for the two goods.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Cross-price elasticity of demand
MSC: Interpretive
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208  Chapter 5/Elasticity and Its Applications
179. If, for two goods, the cross-price elasticity of demand is 1.25, then
a. the two goods are luxuries.
b. the two goods are substitutes.
c. one of the goods is normal and the other good is inferior.
d. the demand for one of the goods conforms to the law of demand and the demand for the other good violates the
law of demand.
ANS: B
PTS: 1
DIF: 2
REF: 5-1
TOP: Cross-price elasticity of demand
MSC: Interpretive
180. Food and clothing tend to have
a. small income elasticities because consumers, regardless of their incomes, choose to buy relatively constant
quantities of these goods.
b. small income elasticities because consumers buy proportionately more of both goods at higher income levels
than they buy at low income levels.
c. large income elasticities because they are necessities.
d. large income elasticities because they are relatively inexpensive.
ANS: A
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Applicative
181. The income elasticity of demand for caviar tends to be
a. high because caviar is relatively expensive.
b. low because caviar is packaged in small containers.
c. high because buyers generally feel that they can do without it.
d. low because it is almost always in short supply.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
182. Suppose the income elasticity of demand for basketballs is 1.20. A 3 percent increase in the price of basketballs
will result in
a. a 3.6 percent decrease in the quantity of basketballs demanded.
b. a 3.6 percent increase in the quantity of basketballs demanded.
c. a 4 percent decrease in the number of basketballs demanded.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 2
REF: 5-1
TOP: Income elasticity of demand MSC: Applicative
183. Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that raising tuition
would enhance revenue, they are
a. ignoring the law of demand.
b. assuming that the demand for university education is elastic.
c. assuming that the demand for university education is inelastic.
d. assuming that the supply of university education is elastic.
ANS: C
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
184. The price elasticity of supply measures how much
a. the quantity supplied responds to changes in input prices.
b. the quantity supplied responds to changes in the price of the good.
c. the price of the good responds to changes in supply.
d. sellers respond to changes in technology.
ANS: B
PTS: 1
DIF: 1
REF: 5-2
TOP: Price elasticity of supply
MSC: Definitional
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Chapter 5/Elasticity and Its Applications  209
185. The price elasticity of supply measures how responsive
a. sellers are to a change in price.
b. sellers are to a change in buyers’ income.
c. buyers are to a change in production costs.
d. equilibrium price is to a change in supply.
ANS: A
PTS: 1
DIF: 1
REF: 5-2
TOP: Price elasticity of supply
MSC: Definitional
186. If the price elasticity of supply is 1.5 and a price increase led to a 1.8% increase in quantity supplied, then the price
increase amounted to
a. 0.67%.
b. 0.83%.
c. 1.20%.
d. 2.70%.
ANS: C
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
187. On a certain supply curve, one point is (quantity supplied = 200, price = $4.00) and another point is (quantity
supplied = 250, price = $4.50). Using the midpoint method, the price elasticity of supply is about
a. 0.22.
b. 0.53.
c. 1.89.
d. 2.22.
ANS: C
PTS: 1
DIF: 1
REF: 5-2
TOP: Price elasticity of supply
MSC: Definitional
188. A key determinant of the price elasticity of supply is
a. the ability of sellers to change the price of the good they produce.
b. the ability of sellers to change the amount of the good they produce.
c. how responsive buyers are to changes in sellers’ prices.
d. the slope of the demand curve.
ANS: B
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Interpretive
189. Frequently, in the short run, the quantity supplied of a good is
a. impossible, or nearly impossible, to measure.
b. not very responsive to price changes.
c. determined by the quantity demanded of the good.
d. determined by psychological forces and other non-economic forces.
ANS: B
PTS: 1
DIF: 2
REF: 5-2
TOP: Short run | Quantity supplied
MSC: Interpretive
190. Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases production by
20 percent when the market price of pencils increases from $0.50 to $0.60, then supply is
a. inelastic, since the price elasticity of supply is equal to .91.
b. inelastic, since the price elasticity of supply is equal to 1.1.
c. elastic, since the price elasticity of supply is equal to 0.91.
d. elastic, since the price elasticity of supply is equal to 1.1.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
191. If the quantity supplied responds only slightly to changes in price, then
a. supply is said to be elastic.
b. supply is said to be inelastic.
c. an increase in price will not shift the supply curve very much.
d. even a large decrease in demand will change the equilibrium price only slightly.
ANS: B
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Interpretive
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210  Chapter 5/Elasticity and Its Applications
192. A key determinant of the price elasticity of supply is
a. the length of the time period.
b. the definition of the market.
c. the number of close substitutes for the good in question.
d. the extent to which buyers alter their quantities demanded in response to changes in their incomes.
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Interpretive
193. The supply of a good will be more elastic, the
a. more the good is considered a luxury.
b. broader is the definition of the market for the good.
c. larger the number of close substitutes for the good.
d. longer the time period being considered.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Interpretive
Figure 5-10
194. Refer to Figure 5-10. The price elasticity of supply between point A and point B, using the midpoint method, is
approximately
a. 0.58.
b. 0.71.
c. 1.06.
d. 1.4.
ANS: B
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
195. Refer to Figure 5-10. The price elasticity of supply between point B and point C, using the midpoint method, is
approximately
a. 1.44.
b. 1.29.
c. 0.96.
d. 0.78.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  211
196. Refer to Figure 5-10. If, holding the supply curve fixed, there were an increase in demand that caused the
equilibrium price to increase from $6 to $8, then sellers’ total revenue would
a. increase.
b. decrease.
c. remain unchanged.
d. The effect on total revenue cannot be determined from the given information.
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Total revenue
MSC: Applicative
Figure 5-11
197. Refer to Figure 5-11. Which supply curve represents perfectly inelastic supply?
a. S1
b. S2
c. S3
d. It is impossible to tell without more information.
ANS: A
PTS: 1
DIF: 1
REF: 5-2
TOP: Perfectly inelastic supply
MSC: Interpretive
198. Refer to Figure 5-11. Which supply curve is most likely relevant over a very long period of time?
a. S1
b. S2
c. S3
d. All of the above are equally likely to be relevant over a very long period of time.
ANS: C
PTS: 1
DIF: 2
REF: 5-2
TOP: Perfectly elastic supply
MSC: Interpretive
199. 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. -1.04
b. 0.67
c. 0.89
d. 1.13
ANS: C
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
212  Chapter 5/Elasticity and Its Applications
200. An increase in the price of pure chocolate morsels from $2.25 to $2.45 causes suppliers of chocolate morsels to
increase their quantity supplied from 125 bags per minute to 145 bags per minute. Supply is
a. elastic and the price elasticity of supply is 1.74.
b. elastic and the price elasticity of supply is 0.57.
c. inelastic and the price elasticity of supply is 1.74.
d. inelastic and the price elasticity of supply is 0.57.
ANS: A
PTS: 1
DIF: 3
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
201. If the supply curve for news magazines is an upward-sloping line and goes through the point (quantity supplied =
0, price = $1.00), then the price elasticity of supply for news magazines is
a. less than one.
b. greater than one.
c. perfectly inelastic.
d. equal to the price elasticity of demand for news magazines.
ANS: B
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
202. If a 30 percent change in price causes a 15 percent change in quantity supplied, then the price elasticity of supply is
a. 0.5 and supply is elastic.
b. 0.5 and supply is inelastic.
c. 2 and supply is inelastic.
d. 2 and supply is elastic.
ANS: B
PTS: 1
DIF: 3
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
203. A bakery would be willing to supply 500 bagels per day at a price of $0.50 each. At a price of $0.80, the bakery
would be willing to supply 1,100 bagels. Using the midpoint method, the elasticity of supply for bagels is about
a. 0.62.
b. 0.77.
c. 1.24.
d. 1.63.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
204. In the long run, the quantity supplied of most goods
a. will increase in almost all cases, regardless of what happens to price.
b. cannot respond at all to a change in price.
c. can respond to a change in price, but the change is almost always inconsequential.
d. can respond substantially to a change in price.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply | Long run
MSC: Interpretive
205. When a supply curve is relatively flat,
a. sellers are not at all responsive to a change in price.
b. the equilibrium price changes substantially when the demand for the good changes.
c. the supply is relatively elastic.
d. the supply is relatively inelastic.
ANS: C
PTS: 1
DIF: 2
REF: 5-2
TOP: Inelastic supply
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  213
206. In January the price of widgets was $2.00 and Wendy’s Widgets produced 80 widgets. In February the price of
widgets was $2.50 and Wendy’s Widgets produced 110 widgets. In March the price of widgets was $3.00 and
Wendy’s Widgets produced 140 widgets. The price elasticity of supply of Wendy’s Widgets was
a. 0.70 when the price increased from $2.00 to $2.50 and 0.76 when the price increased from $2.50 to $3.00.
b. 0.88 when the price increased from $2.00 to $2.50 and 1.08 when the price increased from $2.50 to $3.00.
c. 1.42 when the price increased from $2.00 to $2.50 and 1.32 when the price increased from $2.50 to $3.00.
d. 1.50 when the price increased from $2.00 to $2.50 and 1.18 when the price increased from $2.50 to $3.00.
ANS: C
PTS: 1
DIF: 3
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
207. If sellers do not adjust their quantities supplied at all in response to a change in price,
a. advances in technology must be prevalent.
b. the time period under consideration must be very long.
c. supply is perfectly elastic.
d. supply is perfectly inelastic.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Perfectly inelastic supply
MSC: Interpretive
208. If an increase in the price of a good results in an increase in total revenue for the firm, then the supply of the good
must be
a. unit elastic.
b. inelastic.
c. elastic.
d. Nothing can be said about price elasticity of supply from the information given.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply | Total revenue
MSC: Applicative
209. If the price elasticity of supply for wheat is less than 1, then the supply of wheat is
a. inelastic.
b. elastic.
c. unit elastic.
d. quite sensitive to change in price.
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Inelastic supply
MSC:
Interpretive
210. If the price elasticity of supply is zero, then
a. supply is more elastic than it is in any other case.
b. the supply curve is horizontal.
c. the quantity supplied is the same, regardless of price.
d. a change in demand will cause a relatively small change in the equilibrium price.
ANS: C
PTS: 1
DIF: 2
REF: 5-2
TOP: Perfectly inelastic supply
MSC: Interpretive
211. If two supply curves pass through the same point and one is steep and the other is flat, which of the following
statements is correct?
a. The flatter supply curve represents a supply that is inelastic relative to the supply represented by the steeper
supply curve.
b. The steeper supply curve represents a supply that is inelastic relative to the supply represented by the flatter
supply curve.
c. Given two prices with which to calculate the price elasticity of supply, that elasticity is the same for both
curves.
d. A decrease in demand will increase total revenue if the steeper supply curve is relevant, while a decrease in
demand will decrease total revenue if the flatter supply cure is relevant.
ANS: B
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
214  Chapter 5/Elasticity and Its Applications
212. Which of the following statements is valid when the market supply curve is vertical?
a. Market quantity supplied does not change when the price changes.
b. Supply is perfectly elastic.
c. An increase in market demand will increase the equilibrium quantity.
d. An increase in market demand will not increase the equilibrium price.
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Perfectly inelastic supply
MSC: Interpretive
213. Which of the following statements is not valid when supply is perfectly elastic?
a. The elasticity of supply approaches infinity.
b. The supply curve is horizontal.
c. Very small changes in price lead to large changes in quantity supplied.
d. The time period under consideration is more likely a short period rather than a long period.
ANS: D
PTS: 1
DIF: 3
REF: 5-2
TOP: Perfectly elastic supply
MSC: Applicative
214. A linear, upward-sloping supply curve has
a. a constant slope and a changing elasticity of supply.
b. a changing slope and a constant elasticity of supply.
c. both a constant slope and a constant elasticity of supply.
d. both a changing slope and a changing elasticity of supply.
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Interpretive
215. If the quantity supplied is the same regardless of price, then supply is
a. elastic.
b. perfectly elastic.
c. perfectly inelastic.
d. inelastic.
ANS: C
PTS: 1
DIF: 2
REF: 5-2
TOP: Perfectly inelastic supply
MSC: Definitional
216. When supply is perfectly elastic, the value of the price elasticity of supply is
a. 0.
b. 1.
c. greater than 0 and less than 1.
d. infinity.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Perfectly elastic supply
MSC: Interpretive
217. As price elasticity of supply increases, the supply curve
a. becomes flatter.
b. becomes steeper.
c. becomes downward sloping.
d. shifts to the right.
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Interpretive
218. Which of the following would be true as the price elasticity of supply approaches infinity?
a. Very small changes in price lead to very large changes in quantity supplied.
b. Very large changes in price lead to very small changes in quantity supplied.
c. Very small changes in price lead to no change in quantity supplied.
d. Very large changes in price lead to no change in quantity supplied.
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Perfectly elastic supply
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  215
219. A key determinant of the price elasticity of supply is the time period under consideration. Which of the following
statements best explains this fact?
a. Supply curves are steeper over long periods of time than over short periods of time.
b. Buyers of goods tend to be more responsive to price changes over long periods of time than over short periods
of time.
c. The number of firms in a market tends to be more variable over short periods of time than over long periods of
time.
d. Firms tend to be more responsive to price changes over long periods of time than over short periods of time.
ANS: D
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Interpretive
220. 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.
ANS: C
PTS: 1
DIF: 3
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
Figure 5-12
221. Refer to Figure 5-12. Along which of these segments of the supply curve is supply least elastic?
a. between E and F
b. between C and D
c. between A and C
d. between A and B
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
222. Refer to Figure 5-12. Along which of these segments of the supply curve is supply most elastic?
a. between A and B
b. between C and D
c. between D and F
d. between E and F
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
216  Chapter 5/Elasticity and Its Applications
223. Refer to Figure 5-12. Using the midpoint method, what is the price elasticity of supply between points D and E?
a. 1.89
b. 1.26
c. 0.53
d. 0.34
ANS: C
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
224. Refer to Figure 5-12. Using the midpoint method, what is the price elasticity of supply between points B and C?
a. 1.67
b. 1.19
c. 0.84
d. 0.61
ANS: B
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
225. Generally, a firm is more willing and able to increase quantity supplied in response to a price change when
a. the relevant time period is short rather than long.
b. the relevant time period is long rather than short.
c. supply is inelastic.
d. the firm is experiencing capacity problems.
ANS: B
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
Table 5-2
Supply Curve A
Price
Quantity
Supplied
Supply Curve B
$1.00
$2.00
$1.00
500
600
600
Supply Curve C
$3.00
$2.00
$5.00
900
400
700
226. Refer to Table 5-2. Which of the three supply curves represents the least elastic supply?
a. supply curve A
b. supply curve B
c. supply curve C
d. There is no difference in the elasticity of the three supply curves.
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
227. Refer to Table 5-2. Which of the three supply curves represents the most elastic supply?
a. supply curve A
b. supply curve B
c. supply curve C
d. There is no difference in the elasticity of the three supply curves.
ANS: C
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
228. Refer to Table 5-2. Along which of the supply curves does quantity supplied move proportionately more than the
price?
a. along supply curve B only
b. along supply curves B and C
c. along all three supply curves
d. Quantity supplied moves proportionately more than the price along none of the three supply curves.
ANS: D
PTS: 1
DIF: 3
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  217
229. The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize
an increase in total revenue if
a. the supply of wheat is elastic.
b. the supply of wheat is inelastic.
c. the demand for wheat is inelastic.
d. the demand for wheat is elastic.
ANS: D
PTS: 1
DIF: 2
REF: 5-3
TOP: Supply | Price elasticity of demand | Total revenue
MSC: Applicative
230. Because the demand for wheat tends to be inelastic, the development of a new, more productive hybrid wheat
would tend to
a. increase the total revenue of wheat farmers.
b. decrease the total revenue of wheat farmers.
c. decrease the demand for wheat.
d. decrease the supply of wheat.
ANS: B
PTS: 1
DIF: 2
REF: 5-3
TOP: Supply | Price elasticity of demand | Total revenue
MSC: Applicative
231. Knowing that the demand for wheat is inelastic, if all farmers voluntarily plowed under 10 percent of their wheat
crop, then
a. consumers of wheat would buy more wheat.
b. wheat farmers would suffer a reduction in their total revenue.
c. wheat farmers would experience an increase in their total revenue.
d. the demand for wheat would decrease.
ANS: C
PTS: 1
DIF: 2
REF: 5-3
TOP: Supply | Price elasticity of demand | Total revenue
MSC: Applicative
232. Technological advances in wheat production can lower farmers’ total revenue because the
a. demand for wheat is inelastic.
b. demand for wheat is elastic.
c. supply of wheat is elastic.
d. supply of wheat is inelastic.
ANS: A
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
233. When a technological advance in wheat production is developed and applied to wheat farming, which of the
following consequences is most likely?
a. The price of wheat decreases by 6 percent and the quantity of wheat sold increases by 10 percent.
b. The price of wheat decreases by 10 percent and the quantity of wheat sold increases by 6 percent.
c. Wheat farmers’ total revenue increases.
d. All of the above are equally likely.
ANS: B
PTS: 1
DIF: 2
REF: 5-3
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
234. If corn farmers know that the demand for corn is inelastic, and they want to increase their total revenue, they
should all
a. plant more corn so that they would be able to sell more each year.
b. increase spending on fertilizer in an attempt to produce more corn on the acres they farm.
c. reduce the number of acres they plant in corn.
d. contribute to a fund that promotes technological advances in corn production.
ANS: C
PTS: 1
DIF: 2
REF: 5-3
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
218  Chapter 5/Elasticity and Its Applications
235. Which of the following was not a reason OPEC failed to keep the price of oil high?
a. Over the long run, producers of oil outside of OPEC responded to higher prices by increasing oil exploration
and by building new extraction capacity.
b. Consumers responded to higher prices with greater conservation.
c. Consumers replaced old inefficient cars with newer efficient ones.
d. The agreement OPEC members signed allowed each country to produce as much oil as each wanted.
ANS: D
PTS: 1
DIF: 2
REF: 5-3
TOP: OPEC
MSC: Applicative
236. OPEC successfully raised the world price of oil in the 1970s and early 1980s, primarily due to
a. an inelastic demand for oil and a reduction in the amount of oil supplied.
b. a reduction in the amount of oil supplied and a world-wide oil embargo.
c. a world-wide oil embargo and an elastic demand for oil.
d. a reduction in the amount of oil supplied and an elastic demand for oil.
ANS: A
PTS: 1
DIF: 2
REF: 5-3
TOP: OPEC
MSC: Applicative
237. In the market for oil in the short run, demand
a. and supply are both elastic.
b. and supply are both inelastic.
c. is elastic and supply is inelastic.
d. is inelastic and supply is elastic.
ANS: B
PTS: 1
DIF: 2
REF: 5-3
TOP: Price elasticity of demand | Price elasticity of supply
MSC: Interpretive
238. A decrease in supply will cause the largest increase in price when
a. both supply and demand are inelastic.
b. both supply and demand are elastic.
c. demand is elastic and supply is inelastic.
d. demand is inelastic and supply is elastic.
ANS: A
PTS: 1
DIF: 3
REF: 5-3
TOP: Price elasticity of demand | Price elasticity of supply
MSC: Analytical
239. A decrease in supply will cause the smallest increase in price when
a. both supply and demand are inelastic.
b. demand is elastic and supply is inelastic.
c. both supply and demand are elastic.
d. demand is inelastic and supply is elastic.
ANS: C
PTS: 1
DIF: 3
REF: 5-3
TOP: Price elasticity of demand | Price elasticity of supply
MSC: Analytical
240. Which of the following statements does not help to explain why government drug interdiction increases drugrelated crime?
a. The demand for illegal drugs is inelastic.
b. Interdiction results in drug addicts having a greater need for quick cash.
c. Interdiction results in an increase in the amount of money needed to buy the same amount of drugs.
d. Government drug programs are more lenient now with drug offenders than they were in the 1980s.
ANS: D
PTS: 1
DIF: 2
REF: 5-3
TOP: Government | Price elasticity of demand
MSC: Applicative
241. Which of the following statements is not correct concerning government attempts to reduce the flow of illegal
drugs into the country?
a. Drug interdiction raises prices and total revenue in the drug market.
b. Drug interdiction can increase drug-related crime.
c. Drug interdiction shifts the demand curve for drugs to the left.
d. Drug interdiction shifts the supply curve of drugs to the left.
ANS: C
PTS: 1
DIF: 2
REF: 5-3
TOP: Government | Demand | Supply
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  219
242. Given the market for illegal drugs, when the government is successful in reducing the flow of drugs into the United
States,
a. supply decreases, demand is unaffected, and price increases.
b. demand decreases, supply is unaffected, and price decreases.
c. demand and supply both decrease, leaving price essentially unchanged.
d. supply decreases, demand increases, and price increases substantially as a result.
ANS: A
PTS: 1
DIF: 2
REF: 5-3
TOP: Government | Demand | Supply
MSC: Applicative
243. There are fewer farmers in the United States today than 200 years ago because of
a. more educational opportunities and increases in farm technology.
b. increased government regulations in farming and increased farm technology.
c. an elastic demand for food and more attractive urban alternatives to farming.
d. increases in farm technology and an inelastic demand for food.
ANS: D
PTS: 1
DIF: 2
REF: 5-3
TOP: Technology | Inelastic demand
MSC: Applicative
244. How did the farm population in the United States change between 1950 and 2000?
a. It dropped from 10 million to fewer than 3 million people.
b. It dropped from 20 million to fewer than 5 million people.
c. It dropped from 30 million to just over 6 million people.
d. It increased from 10 million to almost 12 million people.
ANS: A
PTS: 1
DIF: 1
REF: 5-3
TOP: Population
MSC: Definitional
245. Between 1950 and 2000 there was a
a. 20 percent drop in the number of farmers, but farm output more than tripled.
b. 30 percent drop in the number of farmers, but farm output more than tripled.
c. 50 percent drop in the number of farmers, but farm output more than doubled.
d. 70 percent drop in the number of farmers, but farm output more than doubled.
ANS: D
PTS: 1
DIF: 2
REF: 5-3
TOP: Population | Output
MSC: Definitional
246. An advance in farm technology that results in an increased market supply is
a. good for farmers because it raises prices for their products, but bad for consumers because it raises prices
consumers pay for food.
b. bad for farmers because total revenue will fall, but good for consumers because prices for food will fall.
c. good for farmers because it raises prices for their products, and also good for consumers because more output is
available for consumption.
d. bad for farmers because total revenue will fall, and bad for consumers because farmers will raise the price of
food to increase their total revenue.
ANS: B
PTS: 1
DIF: 2
REF: 5-3
TOP: Technology | Supply
MSC: Applicative
247. Farm programs that pay farmers not to plant crops on all their land
a. hurt farmers by lowering their total revenue, and hurt consumers by causing shortages of some food items.
b. help farmers by cutting costs, which helps consumers by lowering food prices.
c. help farmers by increasing total revenue in the market, but hurt consumers by raising prices.
d. help farmers directly since they receive government payments, but has no real effect on consumers.
ANS: C
PTS: 1
DIF: 2
REF: 5-3
TOP: Total revenue
MSC: Applicative
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220  Chapter 5/Elasticity and Its Applications
248. If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of
marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal
organizations that currently supply marijuana. These advocates believe that the
a. supply for marijuana is elastic.
b. demand for marijuana is elastic.
c. supply for marijuana is inelastic.
d. demand for marijuana is inelastic.
ANS: D
PTS: 1
DIF: 2
REF: 5-3
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
249. Under which of the following conditions would the interdiction of illegal drugs result in a decrease in the quantity
of drugs sold and in a decrease in total spending on illegal drugs by drug users?
a. The interdiction has the effect of shifting the demand curve for illegal drugs to the right.
b. The price elasticity of demand for illegal drugs is 1.3.
c. The price elasticity of supply for illegal drugs is 0.8.
d. As a result of the interdiction, the price of illegal drugs increases by 20 percent and the quantity of illegal drugs
sold decreases by 16 percent.
ANS: B
PTS: 1
DIF: 2
REF: 5-3
TOP: Price elasticity of demand | Total revenue
MSC: Applicative
True/False
1. Demand for a good is said to be inelastic if the quantity demanded increases substantially when the price falls by a
small amount.
ANS: F
PTS: 1
DIF: 1
REF: 5-1
TOP: Inelastic demand
MSC: Definitional
2. Necessities tend to have inelastic demands, whereas luxuries have elastic demands.
ANS: T
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
3. Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.
ANS: T
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand | Substitutes
MSC: Interpretive
4. The demand for Rice Krispies is more elastic than the demand for cereal in general.
ANS: T
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
5. The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of
five years.
ANS: F
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
6. The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage
change in price.
ANS: T
PTS: 1
DIF: 1
REF: 5-1
TOP: Price elasticity of demand
MSC: Definitional
7. If the price of calculators increases by 15 percent and the quantity demanded per week falls by 45 percent as a
result, then the price elasticity of demand is 3.
ANS: T
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Applicative
8. Demand is inelastic if the price elasticity of demand is greater than 1.
ANS: F
PTS: 1
DIF: 1
REF: 5-1
TOP: Inelastic demand
MSC: Definitional
9. If the price elasticity of demand is equal to 0, then demand is unit elastic.
ANS: F
PTS: 1
DIF: 1
REF: 5-1
TOP: Price elasticity of demand
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
Chapter 5/Elasticity and Its Applications  221
10. The midpoint method is used to calculate elasticity between two points because it gives the same answer regardless
of the direction of the change.
ANS: T
PTS: 1
DIF: 2
REF: 5-1
TOP: Midpoint method
MSC: Interpretive
11. The flatter the demand curve that passes through a given point, the more inelastic the demand.
ANS: F
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
12. If demand is perfectly inelastic, the demand curve is vertical, and elasticity is equal to 0.
ANS: T
PTS: 1
DIF: 2
REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
13. When demand is inelastic, a decrease in price increases total revenue.
ANS: F
PTS: 1
DIF: 2
REF: 5-1
TOP: Inelastic demand | Total revenue
MSC: Interpretive
14. A linear, downward-sloping demand curve has constant elasticity, but not constant slope.
ANS: F
PTS: 1
DIF: 2
REF: 5-1
TOP: Demand curve | Price elasticity of demand
MSC: Interpretive
15. Price elasticity of demand along a linear, downward-sloping demand curve increases as price falls.
ANS: F
PTS: 1
DIF: 2
REF: 5-1
TOP: Price elasticity of demand
MSC: Interpretive
16. The income elasticity of demand is defined as the percentage change in quantity demanded divided by the
percentage change in income.
ANS: T
PTS: 1
DIF: 1
REF: 5-1
TOP: Income elasticity of demand MSC: Definitional
17. Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities
of demand.
ANS: F
PTS: 1
DIF: 2
REF: 5-1
TOP: Normal goods | Inferior goods
MSC: Interpretive
18. Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another
good changes.
ANS: T
PTS: 1
DIF: 1
REF: 5-1
TOP: Cross-price elasticity of demand
MSC: Definitional
19. Cross-price elasticity is used to determine whether goods are inferior or normal goods.
ANS: F
PTS: 1
DIF: 2
REF: 5-1
TOP: Cross-price elasticity of demand
MSC: Interpretive
20. Price elasticity of supply measures how much the quantity supplied responds to changes in the price.
ANS: T
PTS: 1
DIF: 1
REF: 5-2
TOP: Price elasticity of supply
MSC: Definitional
21. 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
PTS: 1
DIF: 1
REF: 5-2
TOP: Price elasticity of supply
MSC: Definitional
22. Supply tends to be more elastic in the short run and more inelastic in the long run.
ANS: F
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Interpretive
23. When the price of knee braces increased by 25 percent, the Brace Yourself Company increased its quantity
supplied of knee braces per week by 75 percent. BYC’s price elasticity of supply of knee braces is 0.33.
ANS: F
PTS: 1
DIF: 2
REF: 5-2
TOP: Price elasticity of supply
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
222  Chapter 5/Elasticity and Its Applications
24. If a supply curve is horizontal then supply is said to be perfectly elastic and the price elasticity of supply
approaches infinity.
ANS: T
PTS: 1
DIF: 2
REF: 5-2
TOP: Perfectly elastic supply
MSC: Interpretive
25. A government program that reduces land under cultivation hurts farmers but helps consumers.
ANS: F
PTS: 1
DIF: 2
REF: 5-3
TOP: Total revenue
MSC: Applicative
26. OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and the demand
for oil are more elastic in the long run than in the short run.
ANS: T
PTS: 1
DIF: 2
REF: 5-3
TOP: OPEC | Price elasticity of demand | Price elasticity of supply
MSC: Applicative
27. Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for
drugs is inelastic.
ANS: F
PTS: 1
DIF: 2
REF: 5-3
TOP: Price elasticity of demand
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6
Supply, Demand, and Government Policies
Multiple Choice
1. Price controls are usually enacted
a. as a means of raising revenue for public purposes.
b. when policymakers believe that the market price of a good or service is unfair to buyers or sellers.
c. when policymakers detect inefficiencies in a market.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 1
REF: 6-0
TOP: Price ceilings | Price floors MSC: Interpretive
2. The presence of price controls in a market usually is an indication that
a. an insufficient quantity of a good or service was being produced in that market to meet the public’s need.
b. the usual forces of supply and demand were not able to establish an equilibrium price in that market.
c. policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to
buyers or sellers.
d. policymakers correctly believed that, in that market, price controls would generate no inequities of their own.
ANS: C
PTS: 1
DIF: 2
REF: 6-0
TOP: Price ceilings | Price floors MSC: Interpretive
3. Policymakers sometimes are attracted to price controls because
a. they view the market's outcome as inefficient.
b. they view the market's outcome as unfair.
c. it is politically popular to impose price controls in markets in which the demand for the good or service is
inelastic.
d. they are required to do so under the Employment Act of 1946.
ANS: B
PTS: 1
DIF: 2
REF: 6-0
TOP: Price ceilings | Price floors MSC: Interpretive
4. Price controls
a. always produce an equitable outcome.
b. always produce an efficient outcome.
c. can generate inequities of their own.
d. produce revenue for the government.
ANS: C
PTS: 1
DIF: 2
REF: 6-0
TOP: Price ceilings | Price floors MSC: Interpretive
5. Policymakers use taxes
a. to raise revenue for public purposes, but not to influence market outcomes.
b. both to raise revenue for public purposes and to influence market outcomes.
c. when they realize that price controls alone are insufficient to correct market inequities.
d. only in those markets in which the burden of the tax falls clearly on the sellers.
ANS: B
PTS: 1
DIF: 2
REF: 6-0
TOP: Taxes
MSC: Interpretive
6. A legal maximum price at which a good can be sold is a price
a. floor.
b. stabilization.
c. support.
d. ceiling.
ANS: D
PTS: 1
DIF: 1
REF: 6-1
TOP: Price ceilings
MSC: Definitional
226
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  227
7. A price ceiling
a. is a legal maximum on the price at which a good can be sold.
b. is often imposed in markets in which “cutthroat competition” would prevail without a price ceiling.
c. is often imposed when sellers of a good are successful in their attempts to convince the government that the
market outcome is unfair without a price ceiling.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
8. A legal minimum price at which a good can be sold is
a. exemplified by rent-control laws.
b. usually intended to enhance efficiency in a market.
c. called a price ceiling.
d. called a price floor.
ANS: D
PTS: 1
DIF: 1
REF: 6-1
TOP: Price floors
MSC: Definitional
9. A price floor
a. is a legal minimum on the price at which a good can be sold.
b. can result when sellers of a good are successful in their attempts to convince the government that the market
outcome without a price floor is unfair to them.
c. can create inequities in a market.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 6-1
TOP: Price floors
MSC: Definitional
10. Which of the following is the most likely explanation for the imposition of a price floor in the market for corn?
a. Policymakers have studied the effects of the price floor carefully and they recognize that the price floor is
advantageous for society as a whole.
b. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore
pressured policy makers into enacting the price floor.
c. Buyers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting
the price floor.
d. Sellers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting
the price floor.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price floors
MSC: Interpretive
11. A price ceiling will be binding only if it is set
a. equal to equilibrium price.
b. above equilibrium price.
c. below equilibrium price.
d. none of the above; a price ceiling is never binding.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
12. A price ceiling is binding when it is set
a. above the equilibrium price, causing a shortage.
b. above the equilibrium price, causing a surplus.
c. below the equilibrium price, causing a shortage.
d. below the equilibrium price, causing a surplus.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
228  Chapter 6/Supply, Demand, and Government Policies
13. Suppose a price ceiling is not binding; this means that
a. the equilibrium price is above the price ceiling.
b. the equilibrium price is below the price ceiling.
c. it has no legal enforcement mechanism.
d. people are finding a way to circumvent the law.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
14. A price ceiling that is not binding will
a. cause a surplus in the market.
b. cause a shortage in the market.
c. cause the market to be less efficient than it would be without the price ceiling.
d. have no effect on the market price.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
15. A shortage results when
a. a binding price ceiling is imposed.
b. a binding price floor is imposed.
c. a price ceiling is imposed but it is not binding.
d. a price floor is imposed but it is not binding.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
16. When, in a particular market, the law of demand and the law of supply both apply, the imposition of a binding
price ceiling in that market causes quantity demanded to be
a. greater than quantity supplied.
b. less than quantity supplied.
c. equal to quantity supplied.
d. Any of the above is possible.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Interpretive
17. To say that a price ceiling is binding is to say that the price ceiling
a. results in a scarcity.
b. is set above the equilibrium price.
c. results in excess demand.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  229
Figure 6-1
18. Refer to Figure 6-1. A binding price ceiling is shown in
a. panel (a) but not panel (b).
b. panel (b) but not panel (a).
c. both panel (a) and panel (b).
d. neither panel (a) nor panel (b).
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Applicative
19. Refer to Figure 6-1. In which panel(s) of the figure would there be a shortage of the good at the ceiling price?
a. panel (a) but not panel (b)
b. panel (b) but not panel (a)
c. panel (a) and panel (b)
d. neither panel (a) nor panel (b)
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Applicative
20. Refer to Figure 6-1. The situation in panel (a) may be described as one in which
a. the price ceiling is not binding.
b. the price “ceiling” really functions as a price floor.
c. a surplus of the good will be observed.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
230  Chapter 6/Supply, Demand, and Government Policies
Figure 6-2
21. Refer to Figure 6-2. A binding price ceiling would be the result if the price ceiling were set at
a. $14.
b. $12.
c. $10.
d. $8.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Applicative
22. Refer to Figure 6-2. Which of the following statements is correct?
a. A price ceiling set at $12 would be binding, but a price ceiling set at $8 would not be binding.
b. A price floor set at $8 would be binding, but a price ceiling set at $8 would not be binding.
c. A price ceiling set at $9 would result in an excess supply.
d. A price floor set at $11 would result in a surplus.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Applicative
23. Refer to Figure 6-2. If the government imposes a price floor of $14 in this market, the result would be a
a. surplus of 20.
b. surplus of 40.
c. shortage of 20.
d. shortage of 40.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price floors | Surpluses
MSC: Applicative
24. Refer to Figure 6-2. If the government imposes a price ceiling of $8 in this market, the result would be a
a. surplus of 10.
b. surplus of 20.
c. shortage of 10.
d. shortage of 20.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Applicative
25. Refer to Figure 6-2. If the government imposes a price ceiling of $12 in this market, the result would be
a. a surplus of 10.
b. a surplus of 20.
c. a shortage of 20.
d. neither a surplus nor a shortage.
ANS: D
PTS: 1
DIF: 3
REF: 6-1
TOP: Price ceilings
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  231
26. Refer to Figure 6-2. In which of the following cases would sellers have to develop a rationing mechanism?
a. A price ceiling is set at $8.
b. A price ceiling is set at $12.
c. A price floor is set at $8.
d. A price floor is set at $10.
ANS: A
PTS: 1
DIF: 3
REF: 6-1
TOP: Price ceilings | Price floors MSC: Applicative
27. A price floor is binding if it
a. is set lower than the equilibrium market price.
b. results in an observed price that is the same as the equilibrium price.
c. leads to a surplus.
d. is strictly enforced by the government.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price floors | Surpluses
MSC: Interpretive
28. An example of a price floor is
a. the regulation of gasoline prices in the U.S. in the 1970s.
b. rent control.
c. the minimum wage.
d. any restriction on price that leads to a shortage.
ANS: C
PTS: 1
DIF: 1
REF: 6-1
TOP: Price ceilings | Price floors MSC: Definitional
29. When a price floor is binding, the equilibrium price is
a. lower than the price floor.
b. higher than the price floor.
c. equal to the price floor.
d. It is impossible to compare the equilibrium price with the price floor.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price floors MSC: Interpretive
30. A binding price floor in a market is set
a. above equilibrium price and causes a shortage.
b. above equilibrium price and causes a surplus.
c. below equilibrium price and causes a surplus.
d. below equilibrium price and causes a shortage.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price floors | Surpluses
MSC: Interpretive
31. A price floor is not binding if
a. the price floor is higher than the equilibrium price of the good.
b. the quantity of the good demanded with the price floor is less than the quantity demanded of the good without
the price floor.
c. the quantity of the good supplied with the price floor is less than the quantity supplied of the good without the
price floor.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 3
REF: 6-1
TOP: Price floors | Quantity demanded | Quantity supplied
MSC: Analytical
32. A binding price floor causes
a. excess demand.
b. a shortage.
c. a surplus.
d. quantity demanded to exceed quantity supplied.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price floors | Surpluses
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
232  Chapter 6/Supply, Demand, and Government Policies
Figure 6-3
33. Refer to Figure 6-3. Which of the panels represents a binding price floor?
a. panel (a) but not panel (b)
b. panel (b) but not panel (a)
c. panel (a) and panel (b)
d. neither panel (a) nor panel (b)
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price floors
MSC: Applicative
34. Refer to Figure 6-3. In panel (b), with the price floor in effect, there will be
a. a shortage of wheat.
b. equilibrium in the market.
c. a surplus of wheat.
d. an excess demand for wheat.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price floors | Surpluses
MSC: Applicative
35. If a price ceiling is a binding constraint on the market,
a. the equilibrium price must be below the price ceiling.
b. there is excess supply.
c. sellers cannot sell all they want to sell at the price ceiling.
d. buyers cannot buy all they want to buy at the price ceiling.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
36. When a price ceiling is imposed in a market and the ceiling is binding,
a. price no longer serves as a rationing device.
b. the quantity supplied at the price ceiling exceeds the quantity that would have been supplied without the price
ceiling.
c. buyers and sellers both benefit in equal measure.
d. buyers and sellers both are harmed in equal measure.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  233
37. 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 take advantage of an advance in technology that reduces the amount of labor necessary to produce
televisions.
b. The number of firms selling televisions decreases.
c. Consumers' income decreases, and televisions are a normal good.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Applicative
38. When a binding price ceiling is imposed to benefit buyers, a result is that
a. every buyer in the market benefits.
b. every seller in the market benefits, but the overall benefit to sellers is smaller than the overall benefit to buyers.
c. every buyer in the market benefits and every seller in the market is harmed.
d. some buyers will not be able to buy any amount of the good.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
39. Which of the following statements is correct?
a. A price ceiling is not binding when the price ceiling is set above the equilibrium price.
b. A price floor is not binding when the price floor is set below the equilibrium price.
c. A binding price ceiling causes a shortage and a binding price floor causes a surplus.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Interpretive
40. Which of the following observations would be consistent with a binding price ceiling in a market?
a. A smaller quantity of the good is bought and sold after the price ceiling becomes effective than before the price
ceiling became effective.
b. A smaller quantity of the good is demanded after the price ceiling becomes effective than before the price
ceiling became effective.
c. A larger quantity of the good is supplied after the price ceiling becomes effective than before the price ceiling
became effective.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
41. Which of the following observations would be consistent with a binding price floor in a market?
a. A smaller quantity of the good is bought and sold after the price floor becomes effective than before the price
floor became effective.
b. A smaller quantity of the good is demanded after the price floor becomes effective than before the price floor
became effective.
c. A larger quantity of the good is supplied after the price floor becomes effective than before the price floor
became effective.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price floors
MSC: Interpretive
42. If a binding price ceiling were imposed in the computer market,
a. the demand for computers would increase.
b. the supply of computers would decrease.
c. a shortage of computers would develop.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
234  Chapter 6/Supply, Demand, and Government Policies
43. If a binding price ceiling were imposed in the computer market,
a. the quantity of computers demanded would increase.
b. the quantity of computers supplied would decrease.
c. a shortage of computers would develop.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
44. 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 will increase.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Applicative
45. When policymakers set prices by legal decree, they
a. are usually following the advice of mainstream economists.
b. are usually improving the organization of economic activity.
c. are obscuring the signals that normally guide the allocation of society’s resources.
d. are demonstrating a willingness to sacrifice equity for the sake of a gain in efficiency.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Interpretive
46. An outcome that can result from either a price ceiling or a price floor is
a. a surplus in the market.
b. a shortage in the market.
c. a nonbinding price control.
d. long lines of frustrated buyers.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Applicative
47. An outcome that can result from either a price ceiling or a price floor is
a. an enhancement of efficiency.
b. undesirable rationing mechanisms.
c. excess supply.
d. excess demand.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  235
Figure 6-4
48. Refer to Figure 6-4. If the government imposes a price ceiling in this market at a price of $5.00, the result would
be a
a. shortage of 20 units.
b. shortage of 10 units.
c. surplus of 20 units.
d. surplus of 10 units.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Applicative
49. Refer to Figure 6-4. For a price ceiling to be binding, it would have to be set at
a. any price below $6.00.
b. a price between $4.00 and $6.00.
c. a price between $6.00 and $8.00.
d. any price above $6.00.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Applicative
50. Refer to Figure 6-4. Which of the following price controls would cause a shortage of 10 units of the good?
a. a price ceiling of $5.50
b. a price floor of $5.50
c. a price ceiling of $6.50
d. a price floor of $6.50
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Applicative
51. Refer to Figure 6-4. Suppose a price floor of $7.00 is imposed. As a result,
a. buyers’ total expenditure on the good decreases by $20.00.
b. the supply curve will shift to the left so as to now pass through the point (Q = 40, P = $7.00).
c. the quantity of the good demanded decreases by 20 units.
d. the price of the good continues to serve as the rationing mechanism.
ANS: A
PTS: 1
DIF: 3
REF: 6-1
TOP: Price floors
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
236  Chapter 6/Supply, Demand, and Government Policies
52. Refer to Figure 6-4. Suppose a price ceiling of $4.50 is imposed. As a result,
a. there is a shortage of 15 units of the good.
b. the demand curve will shift to the left so as to now pass through the point (Q = 35, P = $4.50).
c. the situation is very much like the one created by a binding minimum wage.
d. the quantity of the good that is bought and sold is the same as it would have been had a price floor of $7.50
been imposed.
ANS: D
PTS: 1
DIF: 3
REF: 6-1
TOP: Price ceilings
MSC: Analytical
Figure 6-5
53. Refer to Figure 6-5. If the government imposes a price ceiling of $2.00 in this market, the result is a
a. surplus of 30 units of the good.
b. shortage of 20 units of the good.
c. shortage of 30 units of the good.
d. shortage of 50 units of the good.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Applicative
54. Refer to Figure 6-5. In this market, which of the following price controls would be binding?
a. a price ceiling of $2.00, and it would cause a shortage
b. a price ceiling of $5.00, and it would cause a surplus
c. a price floor of $2.00, and it would cause a shortage
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Applicative
55. Refer to Figure 6-5. The price of the good would continue to serve as the rationing mechanism if
a. a price ceiling of $4.00 were imposed.
b. a price ceiling of $5.00 were imposed.
c. a price floor of $3.00 were imposed.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  237
56. Refer to Figure 6-5. When a certain price control is imposed in this market, the resulting quantity of the good that
is actually bought and sold is such that buyers are willing and able to pay a maximum of P1 dollars per unit for that
quantity and sellers are willing and able to accept a minimum of P2 dollars per unit for that quantity.
If P1 – P2 = $3.00, then the price control in question is
a. a price ceiling of $2.00.
b. a price ceiling of $5.00.
c. a price floor of $5.00.
d. either a price ceiling of $2.00 or a price floor of $5.00.
ANS: D
PTS: 1
DIF: 3
REF: 6-1
TOP: Price ceilings | Price floors MSC: Analytical
57. Rationing by long lines is
a. inefficient, because it wastes buyers' time.
b. efficient, because those who are willing to wait the longest get the goods.
c. the only way scarce goods can be rationed.
d. only necessary if price ceilings are not binding.
ANS: A
PTS: 1
DIF: 1
REF: 6-1
TOP: Shortages MSC: Interpretive
58. Price ceilings and price floors that are binding
a. are desirable because they make markets more efficient and more equitable.
b. cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price.
c. can have the effect of restoring a market to equilibrium.
d. are imposed because they can make the poor in the economy better off without causing adverse effects.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Interpretive
59. In the 1970s, long lines at gas stations in the United States were primarily a result of the fact that
a. OPEC raised the price of crude oil in world markets.
b. U.S. gasoline producers raised the price of gasoline.
c. the U.S. government maintained a price ceiling on gasoline.
d. Americans typically commute long distances.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Interpretive
60. Other than OPEC, the shortage of gasoline in the U.S. in the 1970s could also be blamed on
a. a sharp increase in the demand for gasoline that was brought on by the Vietnam War.
b. the government’s policy of maintaining a price ceiling on gasoline.
c. an indifference among U.S. consumers toward conservation.
d. the lack of substitutes for crude oil.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: OPEC | Price ceilings | Shortages
MSC: Interpretive
61. When OPEC raised the price of crude oil in the 1970s, it caused the
a. demand for gasoline to increase.
b. demand for gasoline to decrease.
c. supply of gasoline to increase.
d. supply of gasoline to decrease.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: OPEC | Supply
MSC: Interpretive
62. When OPEC raised the price of crude oil in the 1970s, it caused the
a. supply of gasoline to decrease.
b. quantity of gasoline demanded to decrease.
c. equilibrium price of gasoline to increase.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: OPEC | Supply | Quantity demanded
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
238  Chapter 6/Supply, Demand, and Government Policies
63. In the United States, before OPEC increased the price of crude oil in 1973, there was
a. no price ceiling on gasoline.
b. a price ceiling on gasoline but it was not binding.
c. a price ceiling on gasoline and it was binding.
d. a price floor on gasoline but it was not binding.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Definitional
64. Economists blame the long lines at gasoline stations in the U.S. in the 1970s on
a. U.S. government regulations pertaining to the price of gasoline.
b. the Organization of Petroleum Exporting Countries (OPEC).
c. major oil companies operating in the U.S.
d. consumers who bought gasoline frequently, even when their cars' gasoline tanks were nearly full.
ANS: A
PTS: 1
DIF: 1
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
Figure 6-6
65. Refer to Figure 6-6. When the price ceiling applies in this market and the supply curve for gasoline shifts from S 1
to S2,
a. the price will increase to P3.
b. a surplus will occur at the new market price of P 2.
c. the market price will stay at P1 due to the price ceiling.
d. a shortage will occur at the price ceiling of P2.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Shortages
MSC: Applicative
66. Refer to Figure 6-6. When the price ceiling applies in this market and the supply curve for gasoline shifts from S 1
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.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  239
67. Refer to Figure 6-6. Which of the following statements best relates the figure to the events of the 1970s?
a. Buyers of gasoline paid a price of P 1 before 1973; they paid a price of P2 after OPEC increased the price of
crude oil in 1973, and there was a shortage of gasoline at that price.
b. Buyers of gasoline paid a price of P 1 before 1973; they paid a price of P3 after OPEC increased the price of
crude oil in 1973, and there was a shortage of gasoline at that price.
c. Buyers of gasoline paid a price of P 2 before 1973; they paid a price of P3 after OPEC increased the price of
crude oil in 1973, with no shortage of gasoline at that price.
d. The price ceiling was binding before 1973; the price ceiling was no longer binding after OPEC increased the
price of crude oil in 1973.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: OPEC | Price ceilings
MSC: Applicative
68. Rent control
a. serves as an example of how a social problem can be alleviated or even solved by government policies.
b. serves as an example of a price floor.
c. is regarded by most economists as an inefficient way of helping the poor.
d. is the most efficient way to allocate scarce housing resources.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
69. The long-run effects of rent controls are a good illustration of the principle that
a. society faces a short-run tradeoff between unemployment and inflation.
b. the cost of something is what you give up to get it.
c. people respond to incentives.
d. government can sometimes improve on market outcomes.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control | Long run
MSC: Interpretive
70. Which of the following statements about the effects of rent control is correct?
a. The short-run effect of rent control is a surplus of apartments, and the long-run effect of rent control is a
shortage of apartments.
b. The short-run effect of rent control is a relatively small shortage of apartments, and the long-run effect of rent
control is a larger shortage of apartments.
c. In the long run, rent control leads to a shortage of apartments, and the quality of available apartments is
improved by rent control.
d. The effects of rent control are very noticeable to the public in the short run, because the primary effects of rent
control occur very quickly.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
71. Over time, housing shortages caused by rent control
a. increase, because the demand for, and supply of, housing are less elastic in the long run.
b. increase, because the demand for, and supply of, housing are more elastic in the long run.
c. decrease, because the demand for, and supply of, housing are less elastic in the long run.
d. decrease, because the demand for, and supply of, housing are more elastic in the long run.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control | Long run
MSC: Interpretive
72. Economists generally believe that rent control is
a. an efficient and equitable way to help the poor.
b. not efficient, but the best available means of solving a serious social problem.
c. a highly inefficient way to help the poor raise their standard of living.
d. an efficient way to allocate housing, but not a good way to help the poor.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
240  Chapter 6/Supply, Demand, and Government Policies
73. In the housing market, rent control causes
a. quantity supplied to fall and quantity demanded to fall.
b. quantity supplied to fall and quantity demanded to rise.
c. quantity supplied to rise and quantity demanded to fall.
d. quantity supplied to rise and quantity demanded to rise.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control | Quantity demanded | Quantity supplied
MSC: Interpretive
Figure 6-7
74. Refer to Figure 6-7. Which panel best represents a binding rent control in the short run?
a. panel (a)
b. panel (b)
c. neither panel
d. either panel (a) or panel (b), depending upon local housing conditions
ANS: A
PTS: 1
DIF: 1
REF: 6-1
TOP: Rent control
MSC: Interpretive
75. Refer to Figure 6-7. Which panel(s) best represent(s) a non-binding rent control in the long run?
a. panel (a)
b. panel (b)
c. neither panel
d. either panel (a) or panel (b), depending upon local housing conditions
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
76. Which of the following is not a rationing mechanism used by landlords in cities with rent control?
a. waiting lists
b. race
c. price
d. bribes
ANS: C
PTS: 1
DIF: 1
REF: 6-1
TOP: Rent control
MSC: Interpretive
77. Under rent control, bribery is a mechanism to
a. bring the total price of an apartment (including the bribe) closer to the equilibrium price.
b. allocate housing to the poorest individuals in the market.
c. force the total price of an apartment (including the bribe) to be less than the market price.
d. allocate housing to the most deserving tenants.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  241
78. One economist has argued that rent control is "the best way to destroy a city, other than bombing." Why would an
economist say this?
a. He fears that low rents will cause low-income people to move into the city, reducing the quality of life for other
people.
b. He fears that rent control will benefit landlords at the expense of tenants, increasing inequality in the city.
c. He fears that rent controls will cause a construction boom, which will make the city crowded and more
polluted.
d. He fears that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the
city.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
79. Under rent control, tenants can expect
a. lower rent and higher quality housing.
b. lower rent and lower quality housing.
c. higher rent and a shortage of rental housing.
d. higher rent and a surplus of rental housing.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
80. Under rent control, landlords cease to be responsive to tenants' concerns about the quality of the housing because
a. with shortages and waiting lists, they have no incentive to maintain and improve their property.
b. they become resigned to the fact that many of their apartments are going to be vacant at any given time.
c. with rent control the government guarantees landlords a minimal level of profit.
d. with rent control it becomes the government's responsibility to maintain rental housing.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
81. The goal of a rent-control policy is to
a. facilitate controlled economic experiments in urban areas.
b. help landlords by assuring them a low vacancy rate for their apartments.
c. help the poor by assuring them an adequate supply of apartments.
d. help the poor by making housing more affordable.
ANS: D
PTS: 1
DIF: 1
REF: 6-1
TOP: Rent control
MSC: Interpretive
82. Which of the following is not a result of government-imposed rent control?
a. fewer new apartments offered for rent
b. less maintenance provided by landlords
c. bribery
d. higher quality housing
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
83. Which of the following statements about rent control in New York City is accurate?
a. Rent control has proven successful in providing low-cost housing for poor people.
b. Rent control has produced an increase in available rental units.
c. Many well-to-do people live in rent-controlled apartments.
d. All of the above are accurate statements.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Definitional
84. Approximately what proportion of rental apartments in New York City are subject to some sort of rent control?
a. 10 percent
b. 33 percent
c. 67 percent
d. 90 percent
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Definitional
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242  Chapter 6/Supply, Demand, and Government Policies
85. In New York City, rent-control laws have resulted in
a. substantial benefits to people who are relatively wealthy and few, if any, benefits to the poor.
b. the passage of other laws that make it almost impossible for landlords to evict tenants.
c. a very slow rate of growth of the housing supply.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Interpretive
86. In the United States, rent-control policies were first adopted during
a. the Civil War.
b. the Great Depression.
c. World War II.
d. the 1960s.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Definitional
87. The minimum wage is an example of
a. a price ceiling.
b. a price floor.
c. a wage subsidy.
d. a price control that is not binding.
ANS: B
PTS: 1
DIF: 1
REF: 6-1
TOP: Minimum wage
MSC: Interpretive
88. Which of the following characterizations is correct?
a. Rent control and the minimum wage are both examples of price ceilings.
b. Rent control is an example of a price ceiling and the minimum wage is an example of a price floor.
c. Rent control is an example of a price floor and the minimum wage is an example of a price ceiling.
d. Rent control and the minimum wage are both examples of price floors.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control | Minimum wage
MSC: Interpretive
89. Minimum wage laws dictate the
a. average price employers must pay for labor.
b. highest price employers may pay for labor.
c. lowest price employers may pay for labor.
d. quality of labor which must be supplied.
ANS: C
PTS: 1
DIF: 1
REF: 6-1
TOP: Minimum wage
MSC: Definitional
90. The U.S. Congress first instituted a minimum wage in
a. 1890.
b. 1914.
c. 1938.
d. 1974.
ANS: C
PTS: 1
DIF: 1
REF: 6-1
TOP: Minimum wage
MSC: Definitional
91. The minimum wage was instituted in order to ensure workers
a. a middle-class standard of living.
b. employment.
c. a minimally adequate standard of living.
d. unemployment compensation.
ANS: C
PTS: 1
DIF: 1
REF: 6-1
TOP: Minimum wage
MSC: Definitional
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  243
92. As of 2005, the U.S. minimum wage according to federal law was
a. $4.25 per hour.
b. $4.85 per hour.
c. $5.15 per hour.
d. $5.45 per hour.
ANS: C
PTS: 1
DIF: 1
REF: 6-1
TOP: Minimum wage
MSC: Definitional
93. Which of the following is a correct statement about the labor market?
a. Workers determine the supply of labor, and firms determine the demand for labor.
b. Workers determine the demand for labor, and firms determine the supply of labor.
c. Workers determine the supply of labor, and government determines the demand for labor.
d. The forces of supply and demand, while present in the labor market, have nothing to balance in that market.
ANS: A
PTS: 1
DIF: 1
REF: 6-1
TOP: Labor demand | Labor supply
MSC: Interpretive
94. Which of the following is a correct statement about the labor market?
a. Price controls are absent from the labor market, just as they are absent from many markets in the economy.
b. “The labor market” really consists of a multitude of labor markets for different types of workers.
c. Workers determine the demand for labor, and firms determine the supply of labor.
d. The forces of supply and demand, while present in the labor market, have nothing to balance in that market.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Labor demand | Labor supply
MSC: Interpretive
95. A binding minimum wage
a. alters both the quantity demanded and quantity supplied of labor.
b. affects only the quantity of labor demanded; it does not affect the quantity of labor supplied.
c. has no effect on the quantity of labor demanded or the quantity of labor supplied.
d. causes only temporary unemployment, since the market will adjust and eliminate any temporary surplus of
workers.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage | Quantity demanded | Quantity supplied
MSC: Interpretive
96. At a minimum wage that exceeds the equilibrium wage,
a. the quantity demanded of labor will exceed the quantity supplied.
b. the quantity supplied of labor will exceed the quantity demanded.
c. the minimum wage will not be binding.
d. the market for skilled workers is affected, but the market for unskilled workers remains unaffected.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage | Surpluses MSC: Interpretive
97. A minimum wage that is set above a market's equilibrium wage will result in
a. an excess demand for labor, that is, unemployment.
b. an excess demand for labor, that is, a shortage of workers.
c. an excess supply of labor, that is, unemployment.
d. an excess supply of labor, that is, a shortage of workers.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage | Unemployment
MSC: Interpretive
98. A minimum wage that is set below a market's equilibrium wage will result in
a. an excess demand for labor, that is, unemployment.
b. an excess demand for labor, that is, a shortage of workers.
c. an excess supply of labor, that is, unemployment.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
244  Chapter 6/Supply, Demand, and Government Policies
99. The minimum wage, if it is binding, lowers the incomes of
a. no workers.
b. only those workers who cannot find jobs.
c. only those workers who have jobs.
d. all workers.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage | Income
MSC: Interpretive
100. The minimum wage has its greatest impact on the market for
a. female workers.
b. older workers.
c. black workers.
d. teenage workers.
ANS: D
PTS: 1
DIF: 1
REF: 6-1
TOP: Minimum wage | Labor force
MSC: Interpretive
101. To which of the following types of jobs does the minimum wage not apply?
a. jobs for teenagers
b. jobs for members of minority groups
c. internships
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 1
REF: 6-1
TOP: Minimum wage
MSC: Definitional
102. 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. 1 percent to 3 percent.
b. 2 percent to 6 percent.
c. 5 percent to 9 percent.
d. none of the above; the typical finding is that a 10 percent increase in the minimum wage has no measurable
effect on teenage employment.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage
MSC: Interpretive
103. The typical study on the effect of the minimum wage on teenage employment finds that a 10 percent increase in the
minimum wage
a. depresses teenage employment by 1 to 3 percent.
b. depresses teenage employment by 10 to 13 percent.
c. has no effect on teenage employment.
d. raises wages of teenagers by 10 percent.
ANS: A
PTS: 1
DIF: 1
REF: 6-1
TOP: Minimum wage
MSC: Definitional
104. If we were to construct an elasticity of teenage employment with respect to the minimum wage, the value of that
elasticity would be about
a. –1.0 to –0.4.
b. –0.3 to –0.1.
c. 0.2 to 0.7.
d. 0.5 to 1.0.
ANS: B
PTS: 1
DIF: 3
REF: 6-1
TOP: Minimum wage | Elasticity MSC: Applicative
105. Advocates of the minimum wage
a. deny that the minimum wage produces any adverse effects.
b. emphasize the benefits to teenagers of increases in the minimum wage.
c. emphasize the low annual incomes of those who work for the minimum wage.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  245
106. The minimum wage
a. alters the quantity of labor demanded, but not the quantity of labor supplied.
b. is binding for all workers, regardless of their levels of experience and skills.
c. has its greatest impact on the market for teenage labor.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 1
REF: 6-1
TOP: Minimum wage
MSC: Interpretive
107. Opponents of the minimum wage point out that the minimum wage
a. encourages teenagers to drop out of school.
b. prevents some workers from getting needed on-the-job training.
c. contributes to the problem of unemployment.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage
MSC: Interpretive
108. There are several criticisms of the minimum wage. Which of the following is not one of those criticisms?
a. The minimum wage often hurts those people who it is intended to help.
b. The minimum wage results in an excess supply of low-skilled labor.
c. The minimum wage prevents some younger workers from getting needed on-the-job training.
d. The minimum wage fails to raise the wage of any employed person.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage
MSC: Interpretive
109. The proportion of minimum-wage earners who are in families with incomes below the poverty line is
a. less than one-third.
b. between one-third and one-half.
c. between one-half and two-thirds.
d. greater than two-thirds.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage | Income
MSC: Definitional
110. Which of the following is not a function of prices in a market system?
a. Prices have the crucial job of balancing supply and demand.
b. Prices send signals to buyers and sellers to help them make rational economic decisions.
c. Prices coordinate economic activity.
d. Prices ensure an equitable distribution of goods and services among consumers.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Prices | Market economy
MSC: Interpretive
111. When government imposes a price ceiling or a price floor in a market,
a. price no longer serves as a rationing device.
b. efficiency in the market is enhanced.
c. shortages and surpluses are eliminated.
d. buyers and sellers both become better off.
ANS: A
PTS: 1
DIF: 1
REF: 6-1
TOP: Price ceilings | Price floors MSC: Interpretive
112. Which of the following would be the least likely result of a price ceiling imposed in the market for rental cars?
a. an accumulation of dirt in the interior of rental cars
b. poor engine maintenance in rental cars
c. free gasoline given to people as an incentive to a rent a car
d. slow replacement of old rental cars with new ones
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
246  Chapter 6/Supply, Demand, and Government Policies
113. Which of the following is the most correct statement about price controls?
a. Price controls always help those they are designed to help.
b. Price controls never help those they are designed to help.
c. Price controls often hurt those they are designed to help.
d. Price controls always hurt those they are designed to help.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Interpretive
114. You have responsibility for economic policy in the country of Freedonia. Recently the neighboring country of
Sylvania has cut off all exports of oranges to Freedonia. Harpo, who is one of your advisors, suggests that you
should impose a binding price ceiling in order to avoid a shortage of oranges. Chico, another one of your advisors,
argues that without a binding price floor, a shortage will certainly develop. Zeppo, a third advisor, says that the best
way to avoid a shortage of oranges is to take no action at all. Which of your three advisors is most likely to have
studied economics?
a. Harpo
b. Chico
c. Zeppo
d. Apparently, all three advisors have studied economics, but their views on positive economics are different.
ANS: C
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Applicative
115. Unlike minimum wage laws, wage subsidies
a. discourage firms from hiring the working poor.
b. cause unemployment.
c. help only wealthy workers.
d. raise living standards of the working poor without creating unemployment.
ANS: D
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage | Standard of living | Unemployment
MSC: Interpretive
116. An alternative to rent-control laws that would not reduce the quantity of housing supplied is
a. the payment by government of a fraction of a poor family’s rent.
b. higher taxes on rental income earned by landlords.
c. a policy that prevents landlords from evicting tenants.
d. a policy that allows government to confiscate residential property for the purpose of commercial development.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control | Quantity supplied
MSC: Applicative
117. One disadvantage of government subsidies over price controls is that subsidies
a. prevent the attainment of equilibrium in the markets in which they are imposed.
b. make higher taxes necessary.
c. are always unfair to those with low incomes.
d. cause unemployment.
ANS: B
PTS: 1
DIF: 2
REF: 6-1
TOP: Public policy | Taxes
MSC: Applicative
118. The Earned Income Tax Credit is an example of
a. a minimum-wage policy.
b. a price ceiling.
c. a wage subsidy.
d. a rent subsidy.
ANS: C
PTS: 1
DIF: 1
REF: 6-1
TOP: Earned Income Tax Credit MSC: Definitional
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  247
119. The term tax incidence refers to the
a. widespread view that taxes always will be a fact of life.
b. ongoing debate about which types of taxes make the most economic sense.
c. division of the tax burden between buyers and sellers.
d. division of the tax burden between sales taxes and income taxes.
ANS: C
PTS: 1
DIF: 1
REF: 6-2
TOP: Tax incidence
MSC: Definitional
120. A law is passed that requires the buyers of a good to pay a tax on each unit of the good they buy. The initial effect
of the tax is on
a. the supply of the good.
b. the demand for the good.
c. both the supply of the good and the demand for the good.
d. the price of the good.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Demand
MSC: Interpretive
121. When a tax is imposed on the buyers of a good, the demand curve shifts
a. downward by the amount of the tax.
b. upward by the amount of the tax.
c. downward by less than the amount of the tax.
d. upward by more than the amount of the tax.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Demand curve
MSC: Interpretive
122. A tax on bicycles that buyers of bicycles are required to pay shifts
a. the demand curve downward, causing both the price received by sellers and the equilibrium quantity to fall.
b. the demand curve upward, causing both the price received by sellers and the equilibrium quantity to rise.
c. the supply curve downward, causing the price received by sellers to fall and the equilibrium quantity to rise.
d. the supply curve upward, causing the price received by sellers to rise and the equilibrium quantity to fall.
ANS: A
PTS: 1
DIF: 3
REF: 6-2
TOP: Tax | Demand | Equilibrium MSC: Applicative
123. Assume the law of demand and the law of supply both apply to the market for cars. If the government imposed a
$500 tax per car on buyers of cars, then the price received by sellers of cars would
a. decrease by less than $500.
b. decrease by exactly $500.
c. decrease by more than $500.
d. increase by an indeterminate amount.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
248  Chapter 6/Supply, Demand, and Government Policies
Figure 6-8
124. Refer to Figure 6-8. The equilibrium price in the market before the tax is imposed is
a. $8.
b. $6.
c. $5.
d. $3.
ANS: B
PTS: 1
DIF: 1
REF: 6-2
TOP: Equilibrium price
MSC: Applicative
125. Refer to Figure 6-8. As the figure is drawn, who sends the tax payments to the government?
a. the buyers
b. the sellers
c. A portion of the tax payments is sent by the buyers and the remaining portion is sent by the sellers.
d. The question of who sends the tax payments cannot be determined from the figure.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
126. Refer to Figure 6-8. The effective price that buyers pay after the tax is imposed is
a. $8.
b. $6.
c. $5.
d. $3.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
127. Refer to Figure 6-8. The price that sellers receive after the tax is imposed is
a. $8.
b. $6.
c. $5.
d. $3.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
128. Refer to Figure 6-8. The amount of the tax per unit is
a. $1.
b. $2.
c. $3.
d. $5.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  249
129. Refer to Figure 6-8. The burden of the tax on buyers is
a. $1.00 per unit.
b. $1.50 per unit.
c. $2.00 per unit.
d. $3.00 per unit.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
130. Refer to Figure 6-8. The burden of the tax on sellers is
a. $1.00 per unit.
b. $1.50 per unit.
c. $2.00 per unit.
d. $3.00 per unit.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
131. Refer to Figure 6-8. Suppose the same S and D curves apply, and a tax of the same amount per unit as shown here
is imposed. Now, however, the sellers of the good, rather than the buyers, are required to pay the tax to the
government. Now, relative to the case depicted in the figure,
a. the burden on buyers will be larger and the burden on sellers will be smaller.
b. the burden on buyers will be smaller and the burden on sellers will be larger.
c. the burden on buyers will be the same and the burden on sellers will be the same.
d. The relative burdens in the two cases cannot be determined without further information.
ANS: C
PTS: 1
DIF: 3
REF: 6-2
TOP: Tax burden
MSC: Applicative
Figure 6-9
132. Refer to Figure 6-9. The effective price paid by buyers after the tax is imposed is
a. $18.
b. $14.
c. $12.
d. $8.
ANS: A
PTS: 1
DIF: 2
REF: 6-1
TOP: Tax | Equilibrium price
MSC: Applicative
133. Refer to Figure 6-9. The price received by sellers after the tax is imposed is
a. $18.
b. $14.
c. $12.
d. $8.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
250  Chapter 6/Supply, Demand, and Government Policies
134. Refer to Figure 6-9. The amount of the tax per unit is
a. $10.
b. $6.
c. $4.
d. $2.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
135. Refer to Figure 6-9. The per-unit burden of the tax is
a. $4 on buyers and $4 on sellers.
b. $5 on buyers and $5 on sellers.
c. $4 on buyers and $6 on sellers.
d. $6 on buyers and $4 on sellers.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden MSC: Applicative
136. Refer to Figure 6-9. How much tax revenue does this tax produce for the government?
a. $480
b. $600
c. $800
d. $1,080
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
137. If buyers are required to pay a $0.10 tax per bag on Hershey's kisses, the demand curve for kisses will shift
a. upward by $0.10 per bag.
b. upward by $0.05 per bag.
c. downward by $0.10 per bag.
d. downward by $0.05 per bag.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Demand curve
MSC: Interpretive
138. A tax on the buyers of popcorn
a. increases the size of the popcorn market.
b. reduces the size of the popcorn market.
c. has no effect on the size of the popcorn market.
d. may increase, decrease, or have no effect on the size of the popcorn market.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Interpretive
139. A tax on the buyers of coffee will
a. increase the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and
increase the equilibrium quantity of coffee.
b. decrease the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and
decrease the equilibrium quantity of coffee.
c. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and
decrease the equilibrium quantity of coffee.
d. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and
increase the equilibrium quantity of coffee.
ANS: C
PTS: 1
DIF: 3
REF: 6-2
TOP: Tax | Equilibrium price | Equilibrium quantity MSC: Analytical
140. When a tax is imposed on tea and buyers of tea are required to send in the tax payments to the government,
a. buyers of tea and sellers of tea both are made worse off.
b. buyers of tea are made worse off and the well-being of sellers is unaffected.
c. buyers of tea are made worse off and sellers of tea are made better-off.
d. the well-being of both buyers of tea and sellers of tea is unaffected.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  251
141. Which is the most correct statement about the burden of a tax imposed on buyers of sugar?
a. Buyers bear the entire burden of the tax.
b. Sellers bear the entire burden of the tax.
c. Buyers and sellers share the burden of the tax.
d. The government bears the entire burden of the tax.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Interpretive
142. Suppose a tax is imposed on the buyers of a good or service. The burden of the tax will fall
a. entirely on the buyers.
b. entirely on the sellers.
c. entirely on the government.
d. on both the buyers and the sellers.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Interpretive
143. When a tax is placed on the buyers of milk, the
a. size of the milk market is reduced.
b. effective price of milk paid by buyers decreases.
c. supply of milk decreases.
d. price of milk received by sellers decreases, and the size of the milk market is unchanged.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Interpretive
144. When a tax is placed on the buyers of a product, a result is that, relative to the pre-tax situation,
a. buyers pay more and sellers receive more.
b. buyers pay more and sellers receive less.
c. buyers pay less and sellers receive more.
d. buyers pay less and sellers receive less.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Interpretive
145. The initial impact of a tax on the sellers of a product is
a. on the supply of the product.
b. on the demand for the product.
c. on both the supply of the product and the demand for the product.
d. more difficult to characterize than is the initial impact of a tax on the buyers of a product
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Supply
MSC: Interpretive
146. If a tax is levied on the sellers of a product, the demand curve
a. will shift downward.
b. will shift upward.
c. will shift either upward or downward, depending on the amount of the tax.
d. will not shift.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Demand curve
MSC: Interpretive
147. A tax imposed on the sellers of a good will
a. raise the price paid by buyers and lower the equilibrium quantity.
b. raise the price paid by buyers and raise the equilibrium quantity.
c. raise the effective price received by sellers and raise the equilibrium quantity.
d. raise the effective price received by sellers and lower the equilibrium quantity.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
252  Chapter 6/Supply, Demand, and Government Policies
148. A tax imposed on the sellers of a good
a. raises both the price buyers pay and the effective price for sellers.
b. raises the price buyers pay and lowers the effective price for sellers.
c. lowers the price buyers pay and raises the effective price for sellers.
d. lowers both the price buyers pay and the effective price for sellers.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
149. When a tax is placed on the sellers of a product, the
a. size of the market is decreased.
b. effective price received by sellers decreases and the price paid by buyers increases.
c. supply of the product decreases.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
Figure 6-10
150. Refer to Figure 6-10. The equilibrium price in the market before the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.
ANS: C
PTS: 1
DIF: 1
REF: 6-2
TOP: Equilibrium price
MSC: Applicative
151. Refer to Figure 6-10. The price paid by buyers after the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
152. Refer to Figure 6-10. The effective price sellers receive after the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  253
153. Refer to Figure 6-10. The amount of the tax per unit is
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.50.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
154. Refer to Figure 6-10. From this tax the government will collect a total of
a. $125.00.
b. $175.00.
c. $200.00.
d. $250.00.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
155. Refer to Figure 6-10. Buyers effectively pay how much of the tax per unit?
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Applicative
156. Refer to Figure 6-10. Sellers effectively pay how much of the tax per unit?
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Applicative
157. Refer to Figure 6-10. Suppose the same S and D curves apply, and a tax of the same amount per unit as shown
here is imposed. Now, however, the buyers of the good, rather than the sellers, are required to pay the tax to the
government. Now,
a. the burden on buyers will be larger than in the case illustrated in Figure 6-10.
b. the burden on sellers will be smaller than in the case illustrated in Figure 6-10.
c. a downward shift of the demand curve replaces the upward shift of the supply curve.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 3
REF: 6-2
TOP: Tax incidence
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
254  Chapter 6/Supply, Demand, and Government Policies
Figure 6-11. On the graph below, the shift of the supply curve from S1 to S2 represents the imposition of a
tax on a good. On the axes, Q represents the quantity of the good and P represents the price.
158. Consider Figure 6-11. Before the tax is imposed,
a. buyers pay $5 per unit.
b. sellers receive $5 per unit.
c. total revenue for sellers amounts to $50.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
159. Consider Figure 6-11. The amount of the tax per unit is
a. $1.50.
b. $2.00.
c. $2.50.
d. $3.00.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
160. Consider Figure 6-11. From the appearance of the graph, it is apparent that, for every unit of the good that is sold,
a. sellers are required to send one dollar to the government and buyers are required to send two dollars to the
government.
b. sellers are required to send two dollars to the government and buyers are required to send one dollar to the
government.
c. sellers are required to send three dollars to the government and buyers are required to send nothing to the
government.
d. sellers are required to send nothing to the government and buyers are required to send two dollars to the
government.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
161. Consider Figure 6-11. As a result of the tax,
a. the price paid by buyers rises from $5 to $7.
b. the price received by sellers (after paying the tax) falls from $5 to $3.
c. the government collects $30 in tax revenue.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  255
162. Consider Figure 6-11. Which of the following statements correctly characterizes the burden of the tax?
a. One-fourth of the burden falls on buyers and three-fourths of the burden falls on sellers.
b. One-third of the burden falls on buyers and two-thirds of the burden falls on sellers.
c. One-half of the burden falls on buyers and one-half of the burden falls on sellers.
d. Two-thirds of the burden falls on buyers and one-third of the burden falls on sellers.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden MSC: Applicative
163. Consider Figure 6-11. Which of these statements about the effects of the tax is correct?
a. The tax is paid by sellers; sellers bear one-half of the burden of the tax; government collects $24 from the tax.
b. The tax is paid by sellers; sellers bear one-third of the burden of the tax; government collects $24 from the tax.
c. The tax is paid by sellers; sellers bear two-thirds of the burden of the tax; government collects $30 from the tax.
d. The tax is paid by buyers; buyers bear two-thirds of the burden of the tax; government collects $16 from the
tax.
ANS: B
PTS: 1
DIF: 3
REF: 6-2
TOP: Tax burden MSC: Applicative
164. Consider Figure 6-11. Suppose the demand curve is not the one drawn on the graph; instead, the demand curve is a
vertical line passing through the point (Q = 10, P = 5). Using the two supply curves that are drawn, which of the
following statements would describe the effects of the tax correctly?
a. The price paid by buyers would be $9.
b. The price received by sellers (after paying the tax) would be $6.50.
c. The government would collect $27 from the tax.
d. Buyers of the good would bear 100 percent of the burden of the tax.
ANS: D
PTS: 1
DIF: 3
REF: 6-3
TOP: Tax burden MSC: Analytical
165. A tax on the sellers of TVs
a. leads sellers to supply a smaller quantity at every price.
b. leads buyers to demand a smaller quantity at every price.
c. leads sellers to supply a larger quantity at every price.
d. causes the supply curve to shift to the right.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Quantity supplied
MSC: Interpretive
166. A tax of $0.10 per Snickers bar on the sellers of Snickers will cause the
a. supply curve for Snickers to shift down by $0.10.
b. supply curve for Snickers to shift up by $0.10.
c. supply curve for Snickers to shift down by $0.05.
d. demand curve for Snickers to shift up by $0.10.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Supply curve
MSC: Interpretive
167. Suppose there is currently a tax of $50 per ticket on airline tickets. The supply curve for airline tickets slopes
upward and the demand curve for airline tickets slopes downward. Sellers of 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, but the decrease will be
less than $20.
b. the demand curve will shift upward by more than $20 and the price paid by buyers will decrease by $20.
c. the supply curve will shift downward by $20 and the price paid by buyers will decrease, but the decrease will
be less than $20.
d. the supply curve will shift downward by more than $20 and the effective price received by sellers will increase
by $20.
ANS: C
PTS: 1
DIF: 3
REF: 6-2
TOP: Tax | Supply curve | Tax incidence
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
256  Chapter 6/Supply, Demand, and Government Policies
168. A tax on the sellers of cell phones will
a. reduce the size of the cell phone market.
b. place a burden on the sellers of cell phones but not on the buyers of cell phones.
c. affect the price paid by buyers of cell phones, but not the size of the market.
d. affect the size of the market, but it will have no effect on the effective price received by sellers of cell phones.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Applicative
169. A tax on the sellers of jewelry will
a. increase the price the buyers pay and increase the effective price the sellers receive.
b. increase the price the buyers pay and decrease the effective price the sellers receive.
c. decrease the price the buyers pay and increase the effective price the sellers receive.
d. decrease the price the buyers pay and decrease the effective price the sellers receive.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Interpretive
170. Suppose the demand curve for motorcycles slopes downward and the supply curve for motorcycles slopes upward.
If the government passes a law requiring buyers of motorcycles to send $500 to the government for every
motorcycle they buy, then
a. the demand curve for motorcycles shifts downward by $500.
b. buyers of motorcycles pay $500 more per motorcycle than they were paying before the tax.
c. sellers of motorcycles are unaffected by the tax.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Demand curve
MSC: Interpretive
171. Which of the following statements is correct concerning the burden of a tax imposed on candles?
a. Buyers bear the entire burden of the tax.
b. Sellers bear the entire burden of the tax.
c. Buyers and sellers share the burden of the tax.
d. We have to know whether it is the buyers or the sellers that are required to pay the tax to the government in
order to make this determination.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Applicative
172. A tax imposed on the sellers of blueberries
a. increases sellers’ costs, shifts the supply curve to the left (upward), and reduces profits.
b. increases sellers’ costs, shifts the supply curve to the right (downward), and reduces profits.
c. increases sellers’ costs, causes a movement upward and to the right along the supply curve, and reduces profits.
d. is passed on in full to the buyers of blueberries and profits remain unchanged.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Supply curve
MSC: Applicative
173. A $2.00 tax placed on the sellers of mailboxes will shift the supply curve
a. upward by exactly $2.00.
b. upward by less than $2.00.
c. downward by exactly $2.00.
d. downward by less than $2.00.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Supply curve
MSC: Interpretive
174. When a tax is placed on the sellers of lemonade,
a. the sellers bear the entire burden of the tax.
b. the buyers bear the entire burden of the tax.
c. the burden of the tax will be always be equally divided between the buyers and the sellers.
d. the burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always
equal.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  257
175. Revenue from the Federal Insurance Contribution Act (FICA) tax is used to
a. help retire the national debt.
b. cover crop insurance claims.
c. pay the salaries of members of Congress.
d. pay for Social Security and Medicare.
ANS: D
PTS: 1
DIF: 1
REF: 6-2
TOP: FICA taxes MSC: Definitional
176. The Federal Insurance Contribution Act (FICA) tax is an example of
a. a payroll tax.
b. a sales tax.
c. a farm subsidy.
d. an income subsidy.
ANS: A
PTS: 1
DIF: 1
REF: 6-2
TOP: FICA taxes MSC: Definitional
177. A payroll tax is a
a. fixed number of dollars that every firm must pay to the government for each worker that the firm hires.
b. tax that each firm must pay to the government before the firm can hire workers and operate its business.
c. tax on the wages that firms pay their workers.
d. tax on all wages above the minimum wage.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Payroll taxes
MSC: Definitional
178. Congress intended that
a. the entire FICA tax be paid by workers.
b. the entire FICA tax be paid by large firms.
c. the entire FICA tax be paid by small firms.
d. half the FICA tax be paid by workers, and half be paid by firms.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: FICA taxes MSC: Interpretive
179. Although lawmakers legislated a fifty-fifty division in the payment of the FICA tax,
a. the same outcome, in terms of tax incidence, would occur even if the entire tax had been levied on only the
workers or only on the firms.
b. the employer now is required by law to pay more than 50 percent of the tax.
c. the employee now is required by law to pay more than 50 percent of the tax.
d. employers are no longer required by law to pay any portion of the tax.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: FICA taxes MSC: Interpretive
180. A key lesson from the payroll tax is that the
a. tax amounts to a tax solely on workers.
b. tax amounts to a tax solely on firms that hire workers.
c. eliminates any wedge that might exist between the wage that firms pay and the wage that workers receive.
d. true burden of a tax cannot be legislated.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Payroll taxes
MSC: Interpretive
181. When a payroll tax is enacted,
a. the wage received by workers falls and the wage paid by firms rises.
b. the wage received by workers falls and the wage paid by firms falls.
c. the wage received by workers rises and the wage paid by firms falls.
d. the wage received by workers rises and the wage paid by firms rises.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Payroll taxes | Wages
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
258  Chapter 6/Supply, Demand, and Government Policies
182. Most labor economists believe that the supply of labor is
a. less elastic than demand and, therefore, firms bear most of the burden of the payroll tax.
b. less elastic than demand and, therefore, workers bear most of the burden of the payroll tax.
c. more elastic than demand and, therefore, workers bear most of the burden of the payroll tax.
d. more elastic than demand and, therefore, firms bear most of the burden of the payroll tax.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Labor supply | Payroll tax
MSC: Applicative
183. Lawmakers designed the burden of the FICA payroll tax to be split evenly between workers and firms. Labor
economists believe that
a. lawmakers may have actually achieved their goal, since statistics show that the tax burden is currently equally
divided.
b. the tax raises too little revenue for the government and so it should be eliminated.
c. firms bear most of the burden of the tax.
d. workers bear most of the burden of the tax.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: FICA taxes
MSC: Interpretive
184. In the final analysis, tax incidence
a. depends on the legislated burden.
b. is entirely random.
c. depends on the forces of supply and demand.
d. falls entirely on buyers or entirely on sellers.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  259
Figure 6-12
185. Refer to Figure 6-12. In which market will the majority of the tax burden fall on the buyer?
a. market (a)
b. market (b)
c. market (c)
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
186. Refer to Figure 6-12. In which market will the majority of the tax burden fall on the seller?
a. market (a)
b. market (b)
c. market (c)
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
187. Refer to Figure 6-12. In which market will the tax burden be most equally divided between the buyer and the
seller?
a. market (a)
b. market (b)
c. market (c)
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
260  Chapter 6/Supply, Demand, and Government Policies
Figure 6-13
188. Refer to Figure 6-13. The equilibrium price before the tax is imposed is
a. P0.
b. P1.
c. P2.
d. None of the above is correct.
ANS: B
PTS: 1
DIF: 1
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
189. Refer to Figure 6-13. The effective price that will be paid by buyers after the tax is
a. P0.
b. P1.
c. P2.
d. impossible to determine.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
190. Refer to Figure 6-13. The effective price that sellers receive after the tax is imposed is
a. P0.
b. P1.
c. P2.
d. impossible to determine.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
191. Refer to Figure 6-13. The per-unit burden of the tax on buyers is
a. P2 minus P0.
b. P2 minus P1.
c. P1 minus P0.
d. Q1 minus Q0.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
192. Refer to Figure 6-13 The per-unit burden of the tax on sellers is
a. P2 minus P0.
b. P2 minus P1.
c. P1 minus P0.
d. Q1 minus Q0.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  261
193. Refer to Figure 6-13 The amount of the tax per unit is
a. P2 minus P0.
b. P2 minus P1.
c. P1 minus P0.
d. Q1 minus Q0.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
Figure 6-14.
194. Refer to Figure 6-14. Before the tax is imposed, the equilibrium price is
a. $24.
b. $16.
c. $10.
d. $8.
ANS: B
PTS: 1
DIF: 1
REF: 6-2
TOP: Equilibrium price
MSC: Applicative
195. Refer to Figure 6-14. The effective price that buyers will pay after the tax is imposed is
a. $24.
b. $16.
c. $10.
d. $8.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
196. Refer to Figure 6-14. The effective price that sellers receive after the tax is imposed is
a. $24.
b. $14.
c. $10.
d. $8.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price
MSC: Applicative
197. Refer to Figure 6-14. The per-unit burden of the tax on buyers is
a. $16.
b. $14.
c. $8.
d. $6.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
262  Chapter 6/Supply, Demand, and Government Policies
198. Refer to Figure 6-14. The per-unit burden of the tax on sellers is
a. $16.
b. $14.
c. $8.
d. $6.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
199. Refer to Figure 6-14. The amount of the tax per unit is
a. $16.
b. $14.
c. $8.
d. $6.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax
MSC: Applicative
200. Refer to Figure 6-14. As the figure is drawn, who directly pays the tax to the government?
a. The buyers pay the full tax to the government.
b. The sellers pay the full tax to the government.
c. A portion of the tax is paid to the government by buyers and the remaining portion is paid to the government by
sellers.
d. As the figure is drawn, any of the above is possible.
ANS: D
PTS: 1
DIF: 3
REF: 6-2
TOP: Tax
MSC: Applicative
201. If a tax is imposed on a market with inelastic demand and elastic supply,
a. buyers will bear most of the burden of the tax.
b. sellers will bear most of the burden of the tax.
c. the burden of the tax will be shared equally between buyers and sellers.
d. it is impossible to determine how the burden of the tax will be shared.
ANS: A
PTS: 1
DIF: 3
REF: 6-2
TOP: Inelastic demand | Elastic supply | Tax incidence
MSC: Applicative
202. Buyers 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.
ANS: A
PTS: 1
DIF: 3
REF: 6-2
TOP: Elasticity | Tax incidence
MSC: Applicative
203. If a tax is imposed on a market with elastic demand and inelastic supply,
a. buyers will bear most of the burden of the tax.
b. sellers will bear most of the burden of the tax.
c. the burden of the tax will be shared equally between buyers and sellers.
d. it is impossible to determine how the burden of the tax will be shared.
ANS: B
PTS: 1
DIF: 3
REF: 6-2
TOP: Elastic demand | Inelastic supply | Tax incidence
MSC: Applicative
204. Which of the following is the most correct statement about tax burdens?
a. A tax burden falls most heavily on the side of the market that is more elastic.
b. A tax burden falls most heavily on the side of the market that is less elastic.
c. A tax burden falls most heavily on the side of the market that is closer to unit elastic.
d. A tax burden is distributed independently of relative elasticities of supply and demand.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Elasticity | Tax incidence
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  263
205. In general, a tax burden falls more heavily on the side of the market that
a. has a fewer number of participants.
b. is more elastic.
c. is unit elastic.
d. is less elastic.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Elasticity | Tax incidence
MSC: Applicative
206. Suppose that a tax is placed on DVDs. If the sellers end up bearing most of the tax burden, we know that the
a. demand is more inelastic than supply.
b. supply is more inelastic than demand.
c. government has required that buyers remit the tax payments.
d. government has required that sellers remit the tax payments.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Elasticity
MSC: Applicative
207. Suppose that a tax is placed on books. If the buyers pay the majority of the tax, 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 buyers remit the tax payments.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Elasticity
MSC: Applicative
208. In 1990, Congress passed a new luxury tax on items such as yachts, private airplanes, furs, jewelry, and expensive
cars. The goal of the tax was to
a. raise revenue from the wealthy.
b. prevent wealthy people from buying luxuries.
c. force producers of luxury goods to reduce employment.
d. limit exports of luxury goods to other countries.
ANS: A
PTS: 1
DIF: 1
REF: 6-2
TOP: Luxury tax
MSC: Definitional
209. Which of the following was not a result of the luxury tax imposed by Congress in 1990?
a. The larger part of the tax burden fell on sellers.
b. The larger part of the tax burden fell more on the middle class than on the rich.
c. Even the wealthy demanded fewer luxury goods.
d. The tax was never repealed or even modified.
ANS: D
PTS: 1
DIF: 2
REF: 6-2
TOP: Luxury tax
MSC: Interpretive
210. The burden of a luxury tax falls
a. more on the rich than on the middle class.
b. more on the poor than on the middle class.
c. more on the middle class than on the rich.
d. equally on the rich, the middle class, and the poor.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Luxury tax | Tax incidence MSC: Interpretive
211. Which of the following statements is true?
a. A tax levied on buyers will never be even partially paid by sellers.
b. Who actually pays a tax depends on the price elasticities of supply and demand.
c. Government can decide who actually pays a tax.
d. A tax levied on sellers always will be passed on completely to buyers.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Elasticity
MSC: Interpretive
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264  Chapter 6/Supply, Demand, and Government Policies
212. Suppose the demand for picture frames is inelastic and the supply of picture frames is elastic. A tax of $1 per frame
levied on buyers of picture frames will increase the equilibrium price paid by buyers of picture frames by
a. $1.
b. more than $0.50 but less than $1.00.
c. a positive amount but less than $0.50.
d. It is impossible to say without more information.
ANS: B
PTS: 1
DIF: 3
REF: 6-2
TOP: Tax | Inelastic demand | Elastic supply
MSC: Applicative
213. Suppose the demand curve for a good is very flat and the supply curve for the good is very steep. If the government
taxes this good,
a. buyers and sellers will each share 50 percent of the burden, regardless of the slopes of the demand and supply
curves.
b. sellers will bear a larger share of the tax burden and buyers will bear a smaller share of the burden.
c. the distribution of the burden will depend upon whether the buyers or the sellers are required to send the tax to
the government.
d. the amount of tax revenue collected by the government will depend upon whether the buyers or the sellers are
required to send the tax to the government.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden | Tax revenue
MSC: Applicative
214. Suppose the demand for picture frames is elastic and the supply of picture frames is inelastic. A tax of $1 per frame
levied on buyers of picture frames will increase the equilibrium price paid by buyers of picture frames by
a. $1.
b. more than $0.50 but less than $1.00.
c. a positive amount but less than $0.50.
d. It is impossible to say without more information.
ANS: C
PTS: 1
DIF: 3
REF: 6-2
TOP: Tax | Elastic demand | Inelastic supply
MSC: Applicative
215. The demand for salt is inelastic and the supply of salt is elastic. The demand for caviar is elastic and the supply of
caviar is inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt and a tax of $1 per pound is
levied on the buyers of caviar. We would expect that most of the burden of these taxes will fall on
a. sellers of salt and the buyers of caviar.
b. sellers of salt and the sellers of caviar.
c. buyers of salt and the sellers of caviar.
d. buyers of salt and the buyers of caviar.
ANS: C
PTS: 1
DIF: 3
REF: 6-2
TOP: Elasticity | Tax incidence
MSC: Applicative
216. 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.
ANS: A
PTS: 1
DIF: 3
REF: 6-2
TOP: Elasticity | Tax incidence
MSC: Applicative
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Chapter 6/Supply, Demand, and Government Policies  265
217. When the government passes a law requiring buyers of a good to send one dollar to the government for every unit
of the good they buy,
a. the supply curve for the good shifts to the right.
b. the demand curve for the good shifts to the left.
c. more than 50 percent of the burden of the tax falls on buyers.
d. the government collects less tax revenue than it would collect if the sellers of the good were required to send
one dollar to the government for every unit of the good they sell.
ANS: B
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Interpretive
218. The federal government uses the revenue from the FICA (Federal Insurance Contribution Act) tax to pay for
a. unemployment compensation.
b. flood insurance.
c. Social Security and Medicare.
d. housing subsidies for low-income people.
ANS: C
PTS: 1
DIF: 1
REF: 6-2
TOP: Federal Insurance Contribution Act (FICA) taxes
MSC: Definitional
219. The term tax incidence refers to
a. the matter of whether buyers or sellers of a good are required to send tax payments to the government.
b. the matter of whether the demand curve or the supply curve shifts when the tax is imposed.
c. the distribution of the tax burden between buyers and sellers.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence | Tax burden MSC: Definitional
220. 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 demand curve for liquor to shift downward by $0.80 at each quantity of liquor.
b. The incidence of the tax is summarized by the fact that sellers send the tax payments to the government.
c. Eighty percent of the burden of the tax falls on buyers.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence | Tax burden MSC: Interpretive
221. In which of these cases will the tax burden fall most heavily on buyers of the good?
a. The demand curve is relatively steep and the supply curve is relatively flat.
b. The demand curve is relatively flat and the supply curve is relatively steep.
c. The demand curve and the supply curve are both relatively flat.
d. The demand curve and the supply curve are both relatively steep.
ANS: A
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Interpretive
True/False
1. Economic policies often have effects that their architects did not intend or anticipate.
ANS: T
PTS: 1
DIF: 1
REF: 6-0
TOP: Public Policy
MSC: Interpretive
2. Policymakers use taxes both to raise revenue for public purposes and to influence market outcomes.
ANS: T
PTS: 1
DIF: 1
REF: 6-0
TOP: Taxes
MSC: Interpretive
3. A price ceiling is a legal minimum on the price of a good or service.
ANS: F
PTS: 1
DIF: 1
REF: 6-1
TOP: Price ceilings
MSC: Definitional
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266  Chapter 6/Supply, Demand, and Government Policies
4. If a price ceiling of $2 per gallon is imposed on gasoline, and the market equilibrium price is $1.50, the price
ceiling is a binding constraint on the market.
ANS: F
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
5. If a price ceiling is not binding, it will have no effect on the market.
ANS: T
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
6. If a price ceiling is below equilibrium price, the quantity demanded will exceed the quantity supplied.
ANS: T
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
7. Binding price ceilings benefit consumers because they allow consumers to buy all the goods they demand at a
lower price.
ANS: F
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings
MSC: Interpretive
8. When free markets ration goods with prices it is both efficient and impersonal.
ANS: T
PTS: 1
DIF: 1
REF: 6-1
TOP: Market efficiency
MSC: Interpretive
9. The housing shortages caused by rent controls are larger in the long run than in the short run because both the
supply of housing and the demand for housing are more elastic in the long run.
ANS: T
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control | Elasticity
MSC: Interpretive
10. Rent control may lead to lower rents for those who find housing, but the quality of the housing may also be lower.
ANS: T
PTS: 1
DIF: 2
REF: 6-1
TOP: Rent control
MSC: Applicative
11. If the equilibrium wage rate is $4 per hour, and the minimum wage is $5.15 per hour, a shortage of labor will exist.
ANS: F
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage
MSC: Interpretive
12. A binding minimum wage in a competitive labor market creates unemployment.
ANS: T
PTS: 1
DIF: 2
REF: 6-1
TOP: Minimum wage | Unemployment
MSC: Interpretive
13. Most economists are in favor of price controls as a way of allocating resources in the economy.
ANS: F
PTS: 1
DIF: 1
REF: 6-1
TOP: Economists | Price ceilings | Price Floors
MSC: Definitional
14. Rent subsidies and wage subsidies are better than price controls at helping the poor because they have no costs
associated with them.
ANS: F
PTS: 1
DIF: 2
REF: 6-1
TOP: Price ceilings | Price floors MSC: Interpretive
15. Economists use the term tax incidence to refer to who is legally responsible for paying the tax.
ANS: F
PTS: 1
DIF: 1
REF: 6-2
TOP: Tax incidence
MSC: Definitional
16. If buyers of a product are required to pay a tax, the demand curve for the product will shift downward by exactly
the size of the tax.
ANS: T
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Demand curve
MSC: Interpretive
17. A government-imposed tax on a market shrinks the size of the market.
ANS: T
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Markets
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 6/Supply, Demand, and Government Policies  267
18. A tax on golf clubs will cause buyers of golf clubs to pay a higher price, and the equilibrium quantity will decrease.
ANS: T
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Equilibrium price | Equilibrium quantity MSC: Interpretive
19. If a tax is imposed on the buyers of a product, the tax burden will fall entirely on the buyers.
ANS: F
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Interpretive
20. A tax on sellers shifts the supply curve upward by exactly the amount of the tax.
ANS: T
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax | Supply curve
MSC: Interpretive
21. The incidence of a tax depends on whether the tax is levied on buyers or sellers.
ANS: F
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax incidence
MSC: Interpretive
22. 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: F
PTS: 1
DIF: 2
REF: 6-2
TOP: FICA tax | Tax burden
MSC: Applicative
23. Lawmakers can decide whether the buyers or the sellers must send a tax to the government, but they cannot
legislate the true burden of a tax.
ANS: T
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Applicative
24. Who bears the majority of a tax burden when a product is taxed depends on whether the tax is placed on the buyers
or the sellers.
ANS: F
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden
MSC: Interpretive
25. In general, a tax burden falls more heavily on the side of the market that is more inelastic.
ANS: T
PTS: 1
DIF: 2
REF: 6-2
TOP: Tax burden | Elasticity
MSC: Interpretive
26. Most of the burden of a luxury tax falls on the middle class workers who produce luxury goods rather than on the
rich who buy them.
ANS: T
PTS: 1
DIF: 2
REF: 6-2
TOP: Luxury tax | Tax burden
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
268  Chapter 6/Supply, Demand, and Government Policies
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7
Consumers, Producers, and the Efficiency of Markets
Multiple Choice
1. Welfare economics is the study of
a. the well-being of less fortunate people.
b. welfare programs in the United States.
c. the effect of income redistribution on work effort.
d. how the allocation of resources affects economic well-being.
ANS: D
PTS: 1
DIF: 1
REF: 7-0
TOP: Economic welfare
MSC: Definitional
2. The study of how the allocation of resources affects economic well-being is called
a. consumer economics.
b. macroeconomics.
c. willingness-to-pay economics.
d. welfare economics.
ANS: D
PTS: 1
DIF: 1
REF: 7-0
TOP: Economic welfare
MSC: Definitional
3. Welfare economics is the study of
a. how the allocation of resources affects economic well-being.
b. how technology is best put to use in the production of goods and services.
c. government welfare programs for needy people.
d. taxes and subsidies.
ANS: A
PTS: 1
DIF: 1
REF: 7-0
TOP: Welfare economics
MSC: Definitional
4. Positive analysis refers to what
a. is.
b. should be.
c. will be.
d. used to be.
ANS: A
PTS: 1
DIF: 1
REF: 7-0
TOP: Positive statements
MSC: Definitional
5. Normative analysis refers to what
a. is.
b. was.
c. will be.
d. ought to be.
ANS: D
PTS: 1
DIF: 1
REF: 7-0
TOP: Normative statements
MSC: Definitional
6. Which of the Ten Principles of Economics does welfare economics explain more fully?
a. The cost of something is what you give up to get it.
b. Markets are usually a good way to organize economic activity.
c. Trade can make everyone better off.
d. A country’s standard of living depends on its ability to produce goods and services.
ANS: B
PTS: 1
DIF: 2
REF: 7-0
TOP: Economic welfare
MSC: Interpretive
274
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  275
7. One of the basic principles of economics is that markets are usually a good way to organize economic activity. This
principle is explained by the study of
a. factor markets.
b. energy markets.
c. welfare economics.
d. labor economics.
ANS: C
PTS: 1
DIF: 1
REF: 7-0
TOP: Welfare economics
MSC: Interpretive
8. A result of welfare economics is that the equilibrium price of a product is considered to be the best price because it
a. maximizes total revenue for firms and maximizes the quantity supplied of the product.
b. maximizes the combined welfare of buyers and sellers.
c. minimizes costs and maximizes profits of sellers.
d. minimizes the level of welfare payments to those who no longer live below the poverty line.
ANS: B
PTS: 1
DIF: 2
REF: 7-0
TOP: Economic welfare | Equilibrium price
MSC: Interpretive
9. The particular price that results in quantity supplied being equal to quantity demanded is the best price because it
a. maximizes costs of the seller.
b. maximizes tax revenue for the government.
c. maximizes the combined welfare of buyers and sellers.
d. minimizes the expenditure of buyers.
ANS: C
PTS: 1
DIF: 2
REF: 7-0
TOP: Economic welfare | Equilibrium price
MSC: Interpretive
10. 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.
ANS: B
PTS: 1
DIF: 1
REF: 7-1
TOP: Price | Value
MSC: Definitional
11. Willingness to pay
a. measures the value that a buyer places on a good.
b. is the amount a seller actually receives for a good minus the minimum amount the seller is willing to accept.
c. is the maximum amount a buyer is willing to pay minus the minimum amount a seller is willing to accept.
d. is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Price | Value
MSC: Interpretive
12. Consumer surplus is
a. the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
b. the amount a buyer is willing to pay for a good minus the cost of producing the good.
c. the amount by which the quantity supplied of a good exceeds the quantity demanded of the good.
d. a buyer’s willingness to pay for a good plus the price of the good.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Definitional
13. Consumer surplus
a. is the amount of a good that a consumer can buy at a price below equilibrium price.
b. is the difference between the amount that a consumer actually pays for a good and the amount that the
consumer is willing to pay for the good.
c. is the number of consumers who are excluded from a market because of scarcity.
d. measures how much a buyer values a good.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Definitional
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276  Chapter 7/Consumers, Producers, and the Efficiency of Markets
14. A consumer’s willingness to pay directly measures
a. the extent to which advertising and other external forces have influenced the consumer’s decisions regarding
his or her purchases of goods and services.
b. the cost of a good to the buyer.
c. how much a buyer values a good.
d. consumer surplus.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Price | Value
MSC: Interpretive
15. When a buyer’s willingness to pay for a good is equal to the price of the good,
a. the buyer’s consumer surplus for that good is maximized.
b. the buyer will buy as much of the good as the buyer’s budget allows.
c. the price of the good exceeds the value that the buyer places on the good.
d. the buyer is indifferent between buying the good and not buying it.
ANS: D
PTS: 1
DIF: 2
REF: 7-1
TOP: Price | Value
MSC: Interpretive
16. In which of the following circumstances would a buyer be indifferent about buying a good?
a. The amount of consumer surplus the buyer would experience as a result of buying the good is zero.
b. The price of the good is equal to the buyer’s willingness to pay for the good.
c. The price of the good is equal to the value the buyer places on the good.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 7-1
TOP: Price | Value
MSC: Interpretive
17. If a consumer places a value of $15 on a particular good and if the price of the good is $17, then
a. the consumer has consumer surplus of $2 if he or she buys the good.
b. the consumer does not purchase the good.
c. the market is not a competitive market.
d. there is going to be downward pressure on the price of the good.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Price | Value
MSC: Interpretive
18. If a consumer is willing and able to pay $20 for a particular good and if he pays $16 for the good, then for that
consumer, consumer surplus amounts to
a. $4.
b. $16.
c. $20.
d. $36.
ANS: A
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
19. Marjorie is willing to pay $68 for a pair of shoes for a formal dance. She finds a pair at her favorite outlet shoe
store for $48. Marjorie’s consumer surplus is
a. $10.
b. $20.
c. $48.
d. $68.
ANS: B
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
20. Brock is willing to pay $400 for a new suit, but he is able to buy the suit for $350. His consumer surplus is
a. $50.
b. $150.
c. $350.
d. $400.
ANS: A
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  277
21. 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.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
22. 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.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
23. 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, Kendras’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.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
24. Shannon buys a new CD player for her car 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.
ANS: D
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
25. Noah drinks Dr. Pepper. He can buy as many cans of Dr. Pepper as he wishes at a price of $0.50 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 Noah is rational in deciding how many cans to buy. His consumer surplus is
a. $0.50.
b. $0.85.
c. $1.05.
d. $1.20.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
26. In a market, the marginal buyer is the buyer
a. whose willingness to pay is higher than that of all other buyers and potential buyers.
b. whose willingness to pay is lower than that of all other buyers and potential buyers.
c. who is willing to buy exactly one unit of the good.
d. who would be the first to leave the market if the price were any higher.
ANS: D
PTS: 1
DIF: 2
REF: 7-1
TOP: Marginal buyers
MSC: Definitional
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278  Chapter 7/Consumers, Producers, and the Efficiency of Markets
Table 7-1
BUYER
MIKE
SANDY
JONATHAN
HALEY
WILLINGNESS TO PAY
$50.00
$30.00
$20.00
$10.00
27. Refer to Table 7-1. If the table represents the willingness to pay of four buyers and the price of the product is $15,
then who would be willing to purchase the product?
a. Mike
b. Mike and Sandy
c. Mike, Sandy, and Jonathan
d. Mike, Sandy, Jonathan, and Haley
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Price | Value
MSC: Applicative
28. Refer to Table 7-1. If the table represents the willingness to pay of four buyers and the price of the product is $18,
then their total consumer surplus is
a. $38.
b. $42.
c. $46.
d. $72.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
29. Refer to Table 7-1. If the table represents the willingness to pay of four buyers and the price of the product is $30,
then their total consumer surplus is
a. $-10.
b. $-6.
c. $20.
d. $30.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
30. Janine would be willing to pay $50 to see Les Misérables, but she buys a ticket for only $30. Janine values the
performance at
a. $20.
b. $30.
c. $50.
d. $80.
ANS: C
PTS: 1
DIF: 1
REF: 7-1
TOP: Price | Value
MSC: Definitional
31. Chad is willing to pay $5.00 to get his first cup of morning latté. He buys a cup from a vendor selling latté for
$3.75 per cup. Chad’s consumer surplus is
a. $8.75.
b. $5.00.
c. $3.75.
d. $1.25.
ANS: D
PTS: 1
DIF: 1
REF: 7--1
TOP: Consumer surplus
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  279
32. Chad is willing to pay $5.00 to get his first cup of morning latté; he is willing to pay $4.50 for a second cup. He
buys his first cup from a vendor selling latté for $3.75 per cup. He returns to that vendor later in the morning to
find that the vendor has increased her price to $3.90 per cup. Chad buys a second cup. Which of the following
statements is correct?
a. Chad’s willingness to pay for his second cup of latté was smaller than his willingness to pay for his first cup of
latté.
b. Chad’s consumer surplus on his second cup of latté was larger than his consumer surplus on his first cup of
latté.
c. Chad is irrational in that he is willing to pay a different price for his second cup of latté than what he is willing
to pay for his first cup of latté.
d. Chad places a higher value on his second cup of latté than on his first cup of latté.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus | Value
MSC: Interpretive
33. Denise values a stainless steel dishwasher for her new house at $500, but she succeeds in buying one for $350.
Denise’s willingness to pay is
a. $150.
b. $350.
c. $500.
d. $850.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Price | Value
MSC: Interpretive
34. Denise values a stainless steel dishwasher for her new house at $500. The actual price of the dishwasher is $650.
Denise
a. buys the dishwasher and on her purchase she experiences a consumer surplus of $150.
b. buys the dishwasher and on her purchase she experiences a consumer surplus of $-150.
c. does not buy the dishwasher and on her purchase she experiences a consumer surplus of $150 on her nonpurchase.
d. does not buy the dishwasher and on her purchase she experiences a consumer surplus of $0 on her nonpurchase.
ANS: D
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
35. Ray buys a new tractor for $118,000. He receives consumer surplus of $13,000 on his purchase. Ray’s willingness
to pay is
a. $13,000.
b. $105,000.
c. $118,000.
d. $131,000.
ANS: D
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
36. Jeff decides that he would pay as much as $3,000 for a new laptop computer. He buys the computer and realizes
consumer surplus of $700. How much did Jeff pay for his computer?
a. $700
b. $2,300
c. $3,000
d. $3,700
ANS: B
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
280  Chapter 7/Consumers, Producers, and the Efficiency of Markets
37. Cameron visits a sporting goods store to buy a new set of golf clubs. He is willing to pay $750 for the clubs, but
buys them on sale for $575. Cameron’s consumer surplus from the purchase is
a. $175.
b. $575.
c. $750.
d. $1,325.
ANS: A
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
38. Consumer surplus is the
a. amount of a good consumers get without paying anything for it.
b. amount a consumer pays minus the amount the consumer is willing to pay.
c. amount a consumer is willing to pay minus the amount the consumer actually pays.
d. value of a good to a consumer.
ANS: C
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Definitional
39. If the price a consumer pays for a product is equal to a consumer’s willingness to pay, then the consumer surplus
relevant to that purchase is
a. zero.
b. negative and the consumer would not purchase the product.
c. positive and the consumer would purchase the product.
d. There is not enough information given to answer this question.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
40. 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. It increases.
b. It decreases.
c. It 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.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus | Shifts of curves
MSC: Applicative
41. 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.
ANS: C
PTS: 1
DIF: 3
REF: 7-1
TOP: Price | Value
MSC: Applicative
42. A demand curve reflects each of the following except the
a. willingness to pay of all buyers in the market.
b. value each buyer in the market places on the good.
c. highest price buyers are willing to pay for each quantity.
d. ability of buyers to obtain the quantity they desire.
ANS: D
PTS: 1
DIF: 2
REF: 7-1
TOP: Demand curve
MSC: Interpretive
This table refers to five possible buyers’ willingness to pay for a case of Vanilla Coke.
Table 7-2
BUYER
DAVID
LAURA
MEGAN
WILLINGNESS TO PAY
$8.50
$7.00
$5.50
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Chapter 7/Consumers, Producers, and the Efficiency of Markets  281
MALLORY
AUDREY
$4.00
$3.50
43. Refer to Table 7-2. If the price of Vanilla Coke is $6.90, who will purchase the good?
a. all five individuals
b. Megan, Mallory and Audrey
c. David, Laura and Megan
d. David and Laura
ANS: D
PTS: 1
DIF: 1
REF: 7-1
TOP: Price | Value
MSC: Interpretive
44. Refer to Table 7-2. Which of the following is not true?
a. At a price of $9.00, no buyer is willing to purchase Vanilla Coke.
b. At a price of $5.50, Megan is indifferent between buying a case of Vanilla Coke and not buying one.
c. At a price of $4.00, total consumer surplus in the market will be $9.00.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 7-1
TOP: Price | Value | Consumer surplus
MSC: Interpretive
45. Refer to Table 7-2. If the market price is $5.50, the consumer surplus in the market will be
a. $3.00.
b. $4.50.
c. $15.50.
d. $21.00.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
46. Refer to Table 7-2. If the market price is $3.80,
a. David’s consumer surplus is $4.70 and total consumer surplus for the five individuals is $9.50.
b. Megan’s consumer surplus is $1.70 and total consumer surplus for the five individuals is $9.80.
c. David, Laura, and Megan will be the only buyers of Vanilla Coke.
d. the demand curve for Vanilla Coke, taking the five individuals into account, is horizontal.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
282  Chapter 7/Consumers, Producers, and the Efficiency of Markets
Table 7-3
For each of three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the
day. Assume Alex, Barb, and Carlos are the only three buyers of oranges, and only three oranges can be supplied per
day.
Alex
Barb
Carlos
First Orange
$2.00
$1.50
$0.75
Second Orange
$1.50
$1.00
$0.25
Third Orange
$0.75
$0.80
$0
47. Refer to Table 7-3. If the market price of an orange is $1.20, the market quantity of oranges demanded per day is
a. 1.
b. 2.
c. 3.
d. 4.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Market demand
MSC: Applicative
48. Refer to Table 7-3. If the market price of an orange is $0.70, the market quantity of oranges demanded per day is
a. 5.
b. 6.
c. 7.
d. 9.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Market demand
MSC: Applicative
49. Refer to Table 7-3. The market quantity of oranges demanded per day is exactly 5 if the price of an orange, P,
satisfies
a. $1.00 < P < $1.50.
b. $0.80 < P < $1.50.
c. $0.80 < P < $1.00.
d. $0.75 < P < $0.80.
ANS: D
PTS: 1
DIF: 3
REF: 7-1
TOP: Market demand
MSC: Applicative
50. Refer to Table 7-3. If the market price of an orange is $1.20, consumer surplus amounts to
a. $0.70.
b. $1.10.
c. $1.40.
d. $5.00.
ANS: C
PTS: 1
DIF: 3
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
51. Refer to Table 7-3. If the market price of an orange is $0.40,
a. 6 oranges are demanded per day and total consumer surplus amounts to $4.45.
b. 6 oranges are demanded per day and total consumer surplus amounts to $5.10.
c. 7 oranges are demanded per day and total consumer surplus amounts to $5.35.
d. 7 oranges are demanded per day and total consumer surplus amounts to $5.50.
ANS: D
PTS: 1
DIF: 3
REF: 7-1
TOP: Market demand | Consumer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  283
52. Refer to Table 7-3. If the market price of an orange increases from $0.60 to $1.05, total consumer surplus
a. increases by $2.90.
b. decreases by $2.25.
c. decreases by $2.70.
d. decreases by $3.85.
ANS: B
PTS: 1
DIF: 3
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
53. Refer to Table 7-3. Who experiences the largest loss of consumer surplus when the price of an orange increases
from $0.70 to $1.40?
a. Alex
b. Barb
c. Carlos
d. All three individuals experience the same loss of consumer surplus.
ANS: A
PTS: 1
DIF: 3
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
54. Refer to Table 7-3. Who experiences the largest gain in consumer surplus when the price of an orange decreases
from $1.05 to $0.75?
a. Alex
b. Barb
c. Carlos
d. Alex and Barb experience the same gain in consumer surplus, and Carlos’s gain is zero.
ANS: D
PTS: 1
DIF: 3
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
55. Refer to Table 7-3. Which of the following statements is correct?
a. Neither Barb’s consumer surplus nor Carlos’s consumer surplus can exceed Alex’s consumer surplus, for any
price of an orange.
b. All three individuals will buy at least one orange only if the price of an orange is less than $0.25.
c. If the price of an orange is $0.60, total consumer surplus is $4.90.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 3
REF: 7-1
TOP: Consumer surplus
MSC: Analytical
56. Consumer surplus is equal to the
a. Value to buyers - Amount paid by buyers.
b. Amount paid by buyers - Costs of sellers.
c. Value to buyers - Costs of sellers.
d. Value to buyers - Willingness to pay of buyers.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Definitional
57. The area below a demand curve and above the price measures
a. producer surplus.
b. consumer surplus.
c. excess supply.
d. willingness to pay.
ANS: B
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus | Demand curve
MSC: Interpretive
58. 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 100 th 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 100 th unit of the good is $25.
d. all of the five buyers are willing to pay at least $25 for the 100 th unit of the good.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Value | Price | Marginal buyers
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
284  Chapter 7/Consumers, Producers, and the Efficiency of Markets
59. On a graph, consumer surplus is the area
a. between the demand and supply curves.
b. below the demand curve and above price.
c. below the price and above the supply curve.
d. below the demand curve and to the right of equilibrium price.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus | Demand curve
MSC: Interpretive
60. Consumer surplus in a market can be represented by the
a. area below the demand curve and above the price.
b. distance from the demand curve to the horizontal axis.
c. distance from the demand curve to the vertical axis.
d. area below the demand curve and above the horizontal axis.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
61. Consumer surplus
a. is a concept that helps us make normative statements about the desirability of market outcomes.
b. is represented on a graph by the area below the demand curve and above the price.
c. is a good measure of economic welfare if buyers’ preferences are the primary concern.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
62. If the cost of producing sofas decreases, then consumer surplus in the sofa market will
a. increase.
b. decrease.
c. remain constant.
d. increase for some buyers and decrease for other buyers.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus | Production
MSC: Applicative
63. What happens to consumer surplus if the price of a good increases?
a. It increases.
b. It decreases.
c. It is unchanged.
d. It may increase, decrease, or remain unchanged.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
64. When there is a technological advance in the ice cream industry, consumer surplus in that market will
a. increase.
b. decrease.
c. not change, since technology affects producers and not consumers.
d. not change, since consumers’ willingness to pay is unaffected by the technological advance.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus | Technology
MSC: Applicative
65. If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets?
a. It increases.
b. It decreases.
c. It will not change consumer surplus; only producer surplus changes.
d. It depends on what event led to the increase in the price of oak lumber.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  285
66. Other things equal, if the price of a good falls, the consumer surplus
a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
67. Which of the following is not true when the price of a good or service falls?
a. Buyers who were already buying the good or service are better off.
b. Some new buyers, who are now willing to buy, enter the market.
c. The total consumer surplus in the market increases.
d. The total value of purchases before and after the price change is the same.
ANS: D
PTS: 1
DIF: 2
REF: 7-1
TOP: Price | Value
MSC: Interpretive
68. When the demand for a good increases and the supply of the good remains unchanged, consumer surplus
a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.
ANS: D
PTS: 1
DIF: 3
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
69. 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.
ANS: D
PTS: 1
DIF: 3
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
70. Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the gasoline
market
a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.
ANS: D
PTS: 1
DIF: 3
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
286  Chapter 7/Consumers, Producers, and the Efficiency of Markets
Figure 7-1
71. Refer to Figure 7-1. When the price is P1, consumer surplus is
a. A.
b. A + B.
c. A + B + C.
d. A + B + D.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
72. Refer to Figure 7-1. When the price is P2, consumer surplus is
a. A.
b. B.
c. A + B.
d. A + B + C.
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
73. Refer to Figure 7-1. When the price rises from P1 to P2, consumer surplus
a. increases by an amount equal to A.
b. decreases by an amount equal to B + C.
c. increases by an amount equal to B + C.
d. decreases by an amount equal to C.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
74. Refer to Figure 7-1. Area C represents
a. the decrease in consumer surplus that results from a downward-sloping demand curve.
b. consumer surplus to new consumers who enter the market when the price falls from P2 to P1.
c. the increase in producer surplus when quantity sold increases from Q2 to Q1.
d. the decrease in consumer surplus to each consumer in the market when the price increases from P1 to P2.
ANS: B
PTS: 1
DIF: 3
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
75. Refer to Figure 7-1. When the price rises from P1 to P2, which of the following statements is not true?
a. The buyers who still buy the good are worse off because they now pay more.
b. Some buyers leave the market because they are not willing to buy the good at the higher price.
c. Buyers place a higher value on the good after the price increase.
d. Consumer surplus in the market falls.
ANS: C
PTS: 1
DIF: 3
REF: 7-1
TOP: Price | Value
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  287
Figure 7-2
76. Refer to Figure 7-2. Which area represents consumer surplus at a price of P1?
a. ABD
b. ACF
c. BCDE
d. DEF
ANS: A
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
77. Refer to Figure 7-2. Which area represents consumer surplus at a price of P2?
a. ABD
b. ACF
c. BCDE
d. DEF
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
78. Refer to Figure 7-2. Which area represents the increase in consumer surplus when the price falls from P1 to P2?
a. ABD
b. ACF
c. DEF
d. BCFD
ANS: D
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
79. Refer to Figure 7-2. When the price falls from P1 to P2, which area represents the increase in consumer surplus to
existing buyers?
a. ABD
b. ACF
c. BCED
d. DEF
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
80. Refer to Figure 7-2. When the price falls from P1 to P2, which area represents the increase in consumer surplus to
new buyers entering the market?
a. ABD
b. ACF
c. BCDE
d. DEF
ANS: D
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
288  Chapter 7/Consumers, Producers, and the Efficiency of Markets
Figure 7-3.
On the graph below, Q represents the quantity of the good and P represents the good’s price.
81. Refer to Figure 7-3. If the price of the good is $6, then consumer surplus is
a. $4.
b. $6.
c. $8.
d. $10.
ANS: C
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
82. Refer to Figure 7-3. If the price of the good is $5, then consumer surplus is
a. $9.
b. $11.
c. $13.
d. $16.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
83. Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change
in his tastes such that he values strawberries more than before. If the market price is the same as before, then
a. Dallas’s consumer surplus would be unaffected.
b. Dallas’s consumer surplus would increase.
c. Dallas’s consumer surplus would decrease.
d. Dallas would be wise to buy fewer strawberries than before.
ANS: B
PTS: 1
DIF: 2
REF: 7-1
TOP: Consumer surplus
MSC: Applicative
84. Cost is a measure of the
a. seller’s willingness to sell.
b. seller’s producer surplus.
c. producer shortage.
d. seller’s willingness to buy.
ANS: A
PTS: 1
DIF: 1
TOP: Sellers
MSC: Interpretive
REF: 7-2
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  289
85. Ally mows lawns for a living. Ally’s out-of-pocket expenses (for equipment, gasoline, and so on) plus the value
that she places on her own time amount to her
a. producer surplus.
b. producer deficit.
c. cost of mowing lawns.
d. profit.
ANS: C
PTS: 1
DIF: 1
REF: 7-2
TOP: Opportunity cost
MSC: Definitional
86. A supply curve can be used to measure producer surplus because it reflects
a. the actions of sellers.
b. quantity supplied.
c. sellers’ costs.
d. the amount that will be purchased by consumers in the market.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus | Supply curve
MSC: Interpretive
87. A seller is willing to sell a product only if the seller receives a price that is at least as great as
a. the seller’s producer surplus.
b. the sellers’s cost of production.
c. the seller’s profit.
d. the average willingness to pay of buyers of the product.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Sellers | Price
MSC: Interpretive
88. Producer surplus is
a. measured using the demand curve for a good.
b. always a negative number for sellers in a competitive market.
c. the amount a seller is paid minus the cost of production.
d. the opportunity cost of production minus the cost of producing goods that go unsold.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Definitional
89. Producer surplus measures
a. the benefits to sellers of participating in a market.
b. the costs to sellers of participating in a market.
c. the price that buyers are willing to pay for sellers’ output of a good or service.
d. the benefit to sellers of producing a greater quantity of a good or service than buyers demand.
ANS: A
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
90. A seller’s willingness to sell is
a. measured by the seller’s cost of production.
b. to her supply curve as a buyer’s willingness to buy is to his demand curve.
c. less than the price received if producer surplus is a positive number.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 7-2
TOP: Price | Producer surplus
MSC: Interpretive
91. Sally sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.50 per knife
for as many knives as Sally is willing to sharpen. On a particular day, she is willing to sharpen the first knife for
$1.75, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.25. Assume Sally is rational
in deciding how many knives to sharpen. Her producer surplus is
a. $0.25.
b. $0.50.
c. $1.00.
d. $1.75.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
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290  Chapter 7/Consumers, Producers, and the Efficiency of Markets
Figure 7-4
92. Refer to Figure 7-4. Which area represents producer surplus when the price is P1?
a. BCE
b. ACF
c. ABED
d. DEF
ANS: A
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
93. Refer to Figure 7-4. Which area represents producer surplus when the price is P2?
a. BCE
b. ACF
c. ABED
d. AFEB
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
94. Refer to Figure 7-4. Which area represents the increase in producer surplus when the price rises from P1 to P2?
a. BCE
b. ACF
c. ABED
d. AFEB
ANS: D
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
95. Refer to Figure 7-4. When the price rises from P1 to P2, which area represents the increase in producer surplus to
existing producers?
a. BCE
b. ACF
c. DEF
d. ABED
ANS: D
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
96. Refer to Figure 7-4. Which area represents the increase in producer surplus when the price rises from P1 to P2 due
to new producers entering the market?
a. BCE
b. ACF
c. DEF
d. AFEB
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  291
Figure 7-5. On the graph below, Q represents the quantity of the good and P represents the good’s price.
97. Refer to Figure 7-5. If the price of the good is $8.50, then producer surplus is
a. $6.50.
b. $8.00.
c. $9.50.
d. $11.00.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
98. Refer to Figure 7-5. If the price of the good is $14, then producer surplus is
a. $17.
b. $22.
c. $25.
d. $28.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
99. 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.
ANS: A
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
100. If the demand for a good or service decreases, producer surplus
a. increases.
b. decreases.
c. remains the same.
d. may increase, decrease, or remain the same.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
292  Chapter 7/Consumers, Producers, and the Efficiency of Markets
101. The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of
chocolate
a. increases, and producer surplus increases.
b. increases, and producer surplus decreases.
c. decreases, and producer surplus increases.
d. decreases, and producer surplus decreases.
ANS: D
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
102. 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.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
103. Producer surplus equals
a. Value to buyers – Amount paid by buyers.
b. Amount received by sellers – Costs of sellers.
c. Value to buyers – Costs of sellers.
d. Value to buyers – Amount paid by buyers + Amount received by sellers – Costs of sellers.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Definitional
104. Which of the following statements is not correct?
a. A seller would be eager to sell her product at a price higher than her cost.
b. A seller would refuse to sell her product at a price lower than her cost.
c. A seller would be indifferent about selling her product at a price equal to her cost.
d. Since sellers cannot set the price for their product, they must be willing to sell their product at any price.
ANS: D
PTS: 1
DIF: 2
REF: 7-2
TOP: Sellers
MSC: Interpretive
105. Producer surplus is the
a. area under the supply curve to the left of the amount sold.
b. amount a seller is paid minus the cost of production.
c. area between the supply and demand curves, above the equilibrium price.
d. cost to sellers of participating in a market.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Definitional
106. Producer surplus is the area
a. under the supply curve.
b. between the supply and demand curves.
c. below the price and above the supply curve.
d. under the demand curve, and above the price.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
107. Producer surplus is
a. represented on a graph by the area below the demand curve and above the supply curve.
b. the amount a seller is paid minus the cost of production.
c. also referred to as excess supply.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  293
The following table represents the costs of five possible sellers.
Table 7-4
SELLER
DALE
JILL
DENISE
CATHERINE
JACKSON
COST
$1,500
$1,200
$1,000
$750
$500
108. Refer to Table 7-4. If the market price is $1,000, the producer surplus in the market is
a. $700.
b. $750.
c. $2,250.
d. $3,700.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
109. Refer to Table 7-4. If the market price is $1,100, the combined total cost of all participating sellers is
a. $3,700.
b. $2,700.
c. $2,250.
d. $1,500.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Opportunity cost
MSC: Applicative
110. Refer to Table 7-4. If the price is $1,000,
a. Denise is an eager supplier.
b. Catherine is an eager supplier.
c. Dale’s producer surplus is $500.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Supply | Producer surplus
MSC: Applicative
111. Refer to Table 7-4. If the price is $775, who would be willing to supply the product?
a. Dale and Jill
b. Dale, Jill and Denise
c. Denise, Catherine and Jackson
d. Catherine and Jackson
ANS: D
PTS: 1
DIF: 2
REF: 7-2
TOP: Supply
MSC: Applicative
112. Refer to Table 7-4. Suppose each of the five sellers can supply at most one unit of the good; then the market
quantity supplied is exactly 3 if the price is
a. $670.
b. $770.
c. $970.
d. $1,170.
ANS: D
PTS: 1
DIF: 2
REF: 7-2
TOP: Market Supply
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
294  Chapter 7/Consumers, Producers, and the Efficiency of Markets
113. Refer to Table 7-4. Who is a marginal seller when the price is $1,200?
a. only Jill
b. Jill and Dale
c. only Denise, Catherine, and Jackson
d. Denise, Catherine, Jackson, and Jill
ANS: A
PTS: 1
DIF: 2
REF: 7-2
TOP: Marginal sellers
MSC: Applicative
114. The marginal seller is the seller who
a. cannot compete with the other sellers in the market.
b. would leave the market first if the price were any lower.
c. can produce at the lowest cost.
d. has the largest producer surplus.
ANS: B
PTS: 1
DIF: 1
REF: 7-2
TOP: Marginal sellers
MSC: Definitional
115. The marginal seller is the seller
a. for whom the marginal cost of producing one more unit of output is the lowest among all sellers, and the
marginal buyer is the buyer for whom the marginal benefit of one more unit of the good is the highest among
all buyers.
b. who supplies the smallest quantity of the good among all sellers, and the marginal buyer is the buyer who
demands the smallest quantity of the good among all buyers.
c. who would leave the market first if the price were any lower, and the marginal buyer is the buyer who would
leave the market first if the price were any higher.
d. who has the largest producer surplus, and the marginal buyer is the buyer who has the largest consumer surplus.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Marginal sellers | Marginal buyers
MSC: Definitional
Figure 7-6
116. Refer to Figure 7-6. When the price is P2, producer surplus is
a. A.
b. A + C.
c. A + B + C.
d. D + E.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  295
117. Refer to Figure 7-6. When the price is P1, producer surplus is
a. A.
b. C.
c. A + B.
d. C + D.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
118. Refer to Figure 7-6. When the price falls from P2 to P1, producer surplus
a. decreases by an amount equal to C.
b. decreases by an amount equal to A + B.
c. decreases by an amount equal to A + C.
d. increases by an amount equal to A + B.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
119. Refer to Figure 7-6. Area B represents
a. the combined profits of all producers when the price is P2.
b. the increase in producer surplus to all producers as the result of an increase in the price from P1 to P2.
c. producer surplus to new producers entering the market as the result of an increase in the price from P1 to P2.
d. that portion of the increase in producer surplus that is offset by a loss in consumer surplus when the price
increases from P1 to P2.
ANS: C
PTS: 1
DIF: 3
REF: 7-2
TOP: Producer surplus
MSC: Applicative
120. Refer to Figure 7-6. When the price falls from P2 to P1, which of the following would not be true?
a. The sellers who still sell the good are worse off because they now receive less.
b. Some sellers leave the market because they are not willing to sell the good at the lower price.
c. The total cost of what is now sold by sellers is actually higher than it was before the decrease in the price.
d. Producer surplus would fall by area A + B.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
121. Refer to Figure 7-6. Area A represents
a. producer surplus to new producers entering the market as the result of an increase in price from P1 to P2.
b. the increase in consumer surplus that results from an upward-sloping supply curve.
c. the increase in total surplus when sellers are willing and able to increase supply from Q1 to Q2.
d. the increase in producer surplus to those producers already in the market when the price increases from P1 to
P2.
ANS: D
PTS: 1
DIF: 3
REF: 7-2
TOP: Producer surplus
MSC: Applicative
122. Producer surplus directly measures
a. the well-being of society as a whole.
b. the well-being of buyers and sellers.
c. the well-being of sellers.
d. sellers’ willingness to sell.
ANS: C
PTS: 1
DIF: 1
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
123. Producer surplus directly measures
a. the well-being of sellers.
b. production costs.
c. excess demand.
d. unsold inventories.
ANS: A
PTS: 1
DIF: 1
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
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296  Chapter 7/Consumers, Producers, and the Efficiency of Markets
124. Ivana produces cookies. Her production cost is $6 per dozen. She sells the cookies for $8 per dozen. Her producer
surplus per dozen cookies is
a. $2.
b. $6.
c. $8.
d. $14.
ANS: A
PTS: 1
DIF: 1
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
125. Donald produces nails at a cost of $200 per ton. If he sells the nails for $350 per ton, his producer surplus per ton is
a. $150.
b. $200.
c. $350.
d. $550.
ANS: A
PTS: 1
DIF: 1
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
126. If Roberta sells a shirt for $30, and her producer surplus from the sale is $23, her cost must have been
a. $53.
b. $30.
c. $7.
d. We would have to know the consumer surplus in order to make this determination.
ANS: C
PTS: 1
DIF: 1
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
127. Ronnie operates a lawn-care service. On each day, the cost of mowing the first lawn is $10; the cost of mowing the
second lawn is $12; and the cost of mowing the third lawn is $15. His producer surplus on the first three lawns of
the day is $53. If Ronnie charges all customers the same price for lawn mowing, that price is
a. $25.
b. $30.
c. $36.
d. $45.
ANS: B
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
128. At Nick’s Bakery, the cost to make homemade chocolate cake is $3 per cake. As a result of selling three cakes,
Nick experiences a producer surplus in the amount of $19.50. Nick must be selling his cakes for
a. $6.50 each.
b. $7.50 each.
c. $9.50 each.
d. $10.50 each.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
129. Kristi and Rebecca sell lemonade on the corner. It costs them 7 cents to make each cup. On a certain day, they sell
40 cups, and their producer surplus for that day amounts to $15.20. Kristi and Rebecca sold each cup for
a. 15 cents.
b. 30 cents.
c. 45 cents.
d. 55 cents.
ANS: C
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  297
130. Which of the following events would increase producer surplus?
a. Sellers’ costs stay the same and the price of the good increases.
b. Sellers’ costs increase and the price of the good stays the same.
c. Sellers’ costs increase and the price of the good decreases.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 1
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
Market Supply and Demand for Pepperoni Pizza
Table 7-5
PRICE
$12.00
$10.00
$ 8.00
$ 6.00
$ 4.00
$ 2.00
QUANTITY
DEMANDED
0
4
8
12
16
20
QUANTITY
SUPPLIED
12
10
8
6
4
2
131. Refer to Table 7-5. The equilibrium or market-clearing price is
a. $10.00.
b. $8.00.
c. $6.00.
d. $4.00.
ANS: B
PTS: 1
DIF: 1
REF: 7-3
TOP: Equilibrium price
MSC: Interpretive
132. Refer to Table 7-5. At a price of $4.00, total surplus is
a. more than it would be at the equilibrium price.
b. less than it would be at the equilibrium price.
c. the same as it would be at the equilibrium price.
d. There is insufficient information to make this determination.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
133. Refer to Table 7-5. As the table suggests, the demand curve is a straight line and so is the supply curve. Taking
this into account, when there is equilibrium, consumer surplus is
a. $4.
b. $8.
c. $12.
d. $16.
ANS: D
PTS: 1
DIF: 3
REF: 7-3
TOP: Consumer surplus
MSC: Applicative
134. Refer to Table 7-5. As the table suggests, the demand curve is a straight line and so is the supply curve. Taking
this into account, when there is equilibrium, producer surplus is
a. $16.
b. $24.
c. $32.
d. $48.
ANS: C
PTS: 1
DIF: 3
REF: 7-3
TOP: Producer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
298  Chapter 7/Consumers, Producers, and the Efficiency of Markets
135. Refer to Table 7-5. As the table suggests, the demand curve is a straight line and so is the supply curve. Taking
this into account, when there is equilibrium, total surplus is
a. $44.
b. $48.
c. $54.
d. $68.
ANS: B
PTS: 1
DIF: 3
REF: 7-3
TOP: Total surplus
MSC: Applicative
136. Refer to Table 7-5. As the table suggests, the demand curve is a straight line and so is the supply curve. Take this
into account and suppose the price is $8, with only 4 pizzas being bought and sold. Consumer surplus amounts to
a. $8.
b. $12.
c. $16.
d. $18.
ANS: B
PTS: 1
DIF: 3
REF: 7-3
TOP: Consumer surplus
MSC: Applicative
137. Refer to Table 7-5. As the table suggests, the demand curve is a straight line and so is the supply curve. Take this
into account and suppose the price is $8, with only 4 pizzas being bought and sold. Producer surplus amounts to
a. $24.
b. $28.
c. $32.
d. $40.
ANS: A
PTS: 1
DIF: 3
REF: 7-3
TOP: Producer surplus
MSC: Applicative
138. Refer to Table 7-5. As the table suggests, the demand curve is a straight line and so is the supply curve. Take this
into account and suppose the price is $8, with only 4 pizzas being bought and sold. Total surplus amounts to
a. $20.
b. $30.
c. $36.
d. $40.
ANS: C
PTS: 1
DIF: 3
REF: 7-3
TOP: Total surplus
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  299
Figure 7-7
139. Refer to Figure 7-7. Which area represents consumer surplus when the price is P1?
a. A
b. B
c. C
d. D
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Consumer surplus
MSC: Interpretive
140. Refer to Figure 7-7. Which area represents producer surplus when the price is P1?
a. A
b. B
c. C
d. D
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Producer surplus
MSC: Interpretive
141. Refer to Figure 7-7. Which area represents total surplus in the market when the price is P1?
a. A + B
b. B + C
c. C + D
d. A + B + C + D
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
142. We can say that the allocation of resources is efficient if
a. producer surplus is maximized.
b. consumer surplus is maximized.
c. total surplus is maximized.
d. sellers’ costs are minimized.
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus | Efficiency
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
300  Chapter 7/Consumers, Producers, and the Efficiency of Markets
143. Efficiency in a market is achieved when
a. a social planner intervenes and sets the quantity of output after evaluating buyers’ willingness to pay and
sellers’ costs.
b. the sum of producer surplus and consumer surplus is maximized.
c. all firms are producing the good at the same low cost per unit.
d. no buyer is willing to pay more than the equilibrium price for any unit of the good.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Efficiency MSC: Interpretive
144. Which of the following equations is not valid?
a. Consumer surplus = Value to buyers - Amount paid by buyers
b. Producer surplus = Amount received by sellers - Cost to sellers
c. Total surplus = Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers
d. Total surplus = Value to sellers - Cost to sellers
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Definitional
145. Which of the following equations is valid?
a. Consumer surplus = Total surplus – Cost to sellers
b. Producer surplus = Total surplus – Consumer surplus
c. Total surplus = Value to buyers – Amount paid by buyers
d. Total surplus = Amount received by sellers – Cost to sellers
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Definitional
146. Total surplus
a. can be used to measure society’s well-being.
b. is the sum of consumer and producer surplus.
c. amounts to value to buyers minus cost to sellers.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
147. Total surplus in a market is
a. the total cost to sellers of providing the good minus the total value of the good to buyers.
b. the total value of the good to buyers minus the cost to sellers of providing the good.
c. the difference between consumer surplus and sellers’ cost.
d. always smaller than producer surplus.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
148. In a market, total surplus is
a. equal to producer surplus plus consumer surplus.
b. equal to the total cost to sellers minus the total value to buyers.
c. equal to consumers’ willingness to pay plus producers’ cost.
d. greater than the sum of consumer surplus plus producer surplus.
ANS: A
PTS: 1
DIF: 1
REF: 7-3
TOP: Total surplus
MSC: Definitional
149. Total surplus in a market is represented by the total area
a. under the demand curve and above the price.
b. above the supply curve and up to the equilibrium price.
c. under price and up to the point of equilibrium.
d. between the demand and supply curves up to the point of equilibrium.
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  301
150. Total surplus in a market is the total area
a. below the demand curve and above the price.
b. below price and up to the point of equilibrium.
c. below the demand curve and above the supply curve, up to the equilibrium quantity.
d. below the demand curve and above the horizontal axis, up to the equilibrium quantity.
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
151. At the equilibrium price of a good, the good will be purchased by those buyers who
a. value the good more than price.
b. value the good less than price.
c. have the money to buy the good.
d. consider the good a necessity.
ANS: A
PTS: 1
DIF: 1
REF: 7-3
TOP: Equilibrium price | Value
MSC: Interpretive
Figure 7-8
152. Refer to Figure 7-8. Buyers who value this good more than price are represented by which line segment?
a. AC.
b. CE.
c. BC.
d. CD.
ANS: A
PTS: 1
DIF: 1
REF: 7-3
TOP: Price | Value
MSC: Interpretive
153. Refer to Figure 7-8. Buyers who value this good less than price are represented by which line segment?
a. AC.
b. CE.
c. BC.
d. CD.
ANS: B
PTS: 1
DIF: 1
REF: 7-3
TOP: Price | Value
MSC: Interpretive
154. Refer to Figure 7-8. Sellers whose costs are less than price are represented by which line segment?
a. AC.
b. CE.
c. BC.
d. CD.
ANS: C
PTS: 1
DIF: 1
REF: 7-3
TOP: Sellers | Price
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
302  Chapter 7/Consumers, Producers, and the Efficiency of Markets
155. Refer to Figure 7-8. Sellers whose costs are greater than price are represented by segment
a. AC.
b. CE.
c. BC.
d. CD.
ANS: D
PTS: 1
DIF: 1
REF: 7-3
TOP: Sellers | Price
MSC: Interpretive
156. Refer to Figure 7-8. If the government mandated a price increase from Pe to a higher price, then
a. total surplus would decrease.
b. consumer surplus would increase.
c. total surplus would increase, since producer surplus would increase.
d. total surplus would remain unchanged.
ANS: A
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
157. Total surplus in a market is equal to
a. Value to buyers - Amount paid by buyers.
b. Amount received by sellers - Costs of sellers.
c. Value to buyers - Costs of sellers.
d. Amount received by sellers - Amount paid by buyers.
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
158. Total surplus in a market is equal to
a. Consumer surplus + Producer surplus.
b. Value to buyers - Amount paid by buyers.
c. Amount received by sellers - Costs of sellers.
d. Producer surplus - Consumer surplus.
ANS: A
PTS: 1
DIF: 1
REF: 7-3
TOP: Total surplus
MSC: Definitional
159. Total surplus is equal to
a. value to buyers minus profit to sellers.
b. value to buyers minus cost to sellers.
c. consumer surplus minus producer surplus.
d. (consumer surplus plus producer surplus) times equilibrium quantity.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Consumer surplus | Producer surplus | Total surplus
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  303
Figure 7-9
160. Refer to Figure 7-9. At the equilibrium price, consumer surplus is
a. $480.
b. $640.
c. $1,120.
d. $1,280.
ANS: A
PTS: 1
DIF: 3
REF: 7-3
TOP: Consumer surplus
MSC: Applicative
161. Refer to Figure 7-9. If the price decreases from $22 to $16, consumer surplus increases by
a. $120.
b. $360.
c. $480.
d. $600.
ANS: B
PTS: 1
DIF: 3
REF: 7-3
TOP: Consumer surplus
MSC: Applicative
162. Refer to Figure 7-9. At the equilibrium price, producer surplus is
a. $480.
b. $640.
c. $1,120.
d. $1,280.
ANS: B
PTS: 1
DIF: 3
REF: 7-3
TOP: Producer surplus
MSC: Applicative
163. Refer to Figure 7-9. At the equilibrium price, total surplus is
a. $480.
b. $640.
c. $1,120.
d. $1,280.
ANS: C
PTS: 1
DIF: 3
REF: 7-3
TOP: Total surplus
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
304  Chapter 7/Consumers, Producers, and the Efficiency of Markets
164. Refer to Figure 7-9. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium
quantity increases to 110. The increase in producer surplus due to new producers entering the market would be
equal to
a. $90.
b. $210.
c. $360.
d. $480.
ANS: A
PTS: 1
DIF: 3
REF: 7-3
TOP: Producer surplus
MSC: Applicative
165. Refer to Figure 7-9. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium
quantity increases to 110. The increase in producer surplus to producers already in the market would be equal to
a. $90.
b. $210.
c. $360.
d. $480.
ANS: D
PTS: 1
DIF: 3
REF: 7-3
TOP: Producer surplus
MSC: Applicative
166. Refer to Figure 7-9. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium
quantity increases to 110. The increase in producer surplus is equal to
a. $210.
b. $360.
c. $480.
d. $570.
ANS: D
PTS: 1
DIF: 3
REF: 7-3
TOP: Producer surplus
MSC: Applicative
167. Refer to Figure 7-9. The efficient price is
a. $22 and the efficient quantity is 40.
b. $22 and the efficient quantity is 110.
c. $16 and the efficient quantity is 80.
d. $8 and the efficient quantity is 40.
ANS: C
PTS: 1
DIF: 1
TOP: Efficiency MSC: Interpretive
REF: 7-3
168. Refer to Figure 7-9. If 110 units of the good are being bought and sold, then
a. the cost to sellers is equal to the value to buyers.
b. the value to buyers is greater than the cost to sellers.
c. the cost to sellers is greater than the value to buyers.
d. producer surplus is greater than consumer surplus.
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Inefficiency
MSC: Interpretive
169. Refer to Figure 7-9. If 40 units of the good are being bought and sold, then
a. cost to sellers is equal to the value to buyers.
b. the value to buyers is greater than the cost to sellers.
c. the cost to sellers is greater than the value to buyers.
d. producer surplus would be greater than consumer surplus.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Inefficiency
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  305
Figure 7-10
170. Refer to Figure 7-10. The equilibrium (market-clearing) price is
a. P1.
b. P2.
c. P3.
d. P4.
ANS: B
PTS: 1
DIF: 1
REF: 7-3
TOP: Equilibrium price
MSC: Interpretive
171. Refer to Figure 7-10. At the equilibrium, total consumer surplus is represented by the area
a. A.
b. A + B + C.
c. D + E + F.
d. A + B + C + D + E + F.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Consumer surplus
MSC: Interpretive
172. Refer to Figure 7-10. At the market-clearing equilibrium, total producer surplus is represented by the area
a. F.
b. F + G.
c. D + E + F.
d. D + E + F + G + H.
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Producer surplus
MSC: Interpretive
173. Refer to Figure 7-10. At the market-clearing equilibrium, total surplus is represented by the area
a. A + B + C.
b. A + B + D + F.
c. A + B + C + D + E + F.
d. A + B + C + D + E + F + G + H.
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
174. Refer to Figure 7-10. The efficient price-quantity combination is
a. P1 and Q1.
b. P2 and Q2.
c. P3 and Q1.
d. P4 and 0.
ANS: B
PTS: 1
DIF: 1
REF: 7-3
TOP: Efficiency | Equilibrium
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
306  Chapter 7/Consumers, Producers, and the Efficiency of Markets
Figure 7-11. On the graph below, Q represents the quantity of the good and P represents the good’s price.
175. Refer to Figure 7-11. At the equilibrium, consumer surplus is measured by the area
a. ACG.
b. AFG.
c. DBG.
d. CFG.
ANS: B
PTS: 1
DIF: 1
REF: 7-3
TOP: Consumer surplus
MSC: Interpretive
176. Refer to Figure 7-11. At the equilibrium, producer surplus is measured by the area
a. ACG.
b. AFG.
c. DBG.
d. CFG.
ANS: D
PTS: 1
DIF: 1
REF: 7-3
TOP: Producer surplus
MSC: Interpretive
177. Refer to Figure 7-11. At the equilibrium, total surplus is measured by the area
a. ACG.
b. AFG.
c. DBG.
d. CFG.
ANS: A
PTS: 1
DIF: 1
REF: 7-3
TOP: Total surplus
MSC: Interpretive
178. Refer to Figure 7-11. At the equilibrium, consumer surplus amounts to
a. $24.
b. $36.
c. $48.
d. $72.
ANS: B
PTS: 1
DIF: 3
REF: 7-3
TOP: Consumer surplus
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  307
179. Refer to Figure 7-11. At the equilibrium, producer surplus amounts to
a. $32.
b. $48.
c. $72.
d. $144.
ANS: C
PTS: 1
DIF: 3
REF: 7-3
TOP: Producer surpluss
MSC: Analytical
180. Refer to Figure 7-11. At the equilibrium, total surplus amounts to
a. $64.
b. $72.
c. $96.
d. $108.
ANS: D
PTS: 1
DIF: 3
REF: 7-3
TOP: Total surplus
MSC: Analytical
181. Refer to Figure 7-11. The equilibrium allocation of resources is
a. efficient because total surplus is maximized at the equilibrium.
b. efficient because consumer surplus is maximized at the equilibrium.
c. inefficient because consumer surplus is larger than producer surplus at the equilibrium.
d. inefficient because total surplus is maximized when 10 units of output are produced and sold.
ANS: A
PTS: 1
DIF: 2
REF: 7-3
TOP: Efficiency MSC: Interpretive
182. Refer to Figure 7-11. If four units of the good are produced and sold, then
a. the cost to sellers exceeds the value to buyers.
b. producer surplus is maximized.
c. total surplus is minimized.
d. the allocation of resources is inefficient.
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Producer surplus | Total surplus | Efficiency
MSC: Interpretive
Figure 7-12
183. Refer to Figure 7-12. At the quantity Q3,
a. the market is in equilibrium.
b. consumer surplus is maximized.
c. the sum of consumer surplus and producer surplus is maximized.
d. the value to buyers is less than the cost to sellers.
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Inefficiency
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
308  Chapter 7/Consumers, Producers, and the Efficiency of Markets
184. Refer to Figure 7-12. At the quantity Q2,
a. the value to buyers and the cost to sellers are both P2.
b. the value to buyers is P2 and the cost to sellers is P3.
c. the value to buyers and the cost to sellers are both P3.
d. the value to buyers is P3 and the cost to sellers is P2.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Inefficiency
MSC: Interpretive
185. Which of the following statements is not correct about a market in equilibrium?
a. The price determines which buyers and which sellers participate in the market.
b. Those buyers who value the good more than the price choose to buy the good.
c. Those sellers whose costs are less than the price choose to produce and sell the good.
d. Consumer surplus will be equal to producer surplus.
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Equilibrium
MSC: Interpretive
186. Efficiency is attained when
a. total surplus is maximized.
b. producer surplus is maximized.
c. all resources are being used.
d. consumer surplus is maximized and producer surplus is minimized.
ANS: A
PTS: 1
DIF: 2
REF: 7-3
TOP: Efficiency MSC: Definitional
187. The distinction between efficiency and equity can be described as follows:
a. Efficiency refers to maximizing the number of trades among buyers and sellers; equity refers to maximizing the
gains from trade among buyers and sellers.
b. Efficiency refers to minimizing the price paid by buyers; equity refers to maximizing the gains from trade
among buyers and sellers.
c. Efficiency refers to maximizing the size of the pie; equity refers to producing a pie of a given size at the least
possible cost.
d. Efficiency refers to maximizing the size of the pie; equity refers to distributing the pie fairly among members
of society.
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Efficiency | Equity | Gains from trade
MSC: Interpretive
188. If an allocation of resources is efficient, then
a. consumer surplus is maximized.
b. producer surplus is maximized.
c. all potential gains from trade among buyers are sellers are being realized.
d. the allocation is necessarily equitable as well.
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Efficiency MSC: Interpretive
189. Moving production from a high-cost producer to a low-cost producer will
a. lower total surplus.
b. raise total surplus.
c. lower producer surplus.
d. raise producer surplus but lower consumer surplus.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
190. Inefficiency exists in an economy when a good is
a. not being consumed by buyers who value it most highly.
b. not distributed fairly among buyers.
c. not produced because buyers do not value it very highly.
d. being produced with less than all available resources.
ANS: A
PTS: 1
DIF: 2
REF: 7-3
TOP: Inefficiency
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  309
191. Inefficiency exists in an economy when a good is
a. being produced with less than all available resources.
b. not distributed fairly among buyers.
c. not being produced by the lowest-cost producers.
d. being consumed by buyers who value it most highly.
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Inefficiency
MSC: Interpretive
192. Which of the following is correct?
a. Efficiency deals with the size of the economic pie and equity deals with how fairly the pie is sliced.
b. Equity can be judged on positive grounds whereas efficiency requires normative judgments.
c. Efficiency is more difficult to evaluate than equity.
d. Equity and efficiency are both maximized in a society when total surplus is maximized.
ANS: A
PTS: 1
DIF: 2
REF: 7-3
TOP: Efficiency MSC: Interpretive
193. If the government allowed a free market for transplant organs (such as kidneys) to exist,
a. the shortage of organs would be eliminated and there would be no surplus of organs.
b. the shortage of organs would be eliminated, but a surplus of organs would develop.
c. the shortage of organs would persist.
d. the overall well-being of society would remain unchanged.
ANS: A
PTS: 1
DIF: 2
REF: 7-3
TOP: Price ceilings | Inefficiency MSC: Interpretive
194. The “invisible hand” refers to
a. the marketplace guiding the self-interests of market participants into promoting general economic well-being.
b. the fact that social planners sometimes have to intervene, even in perfectly competitive markets, to make those
markets more efficient.
c. the equity that results from market forces allocating the goods produced in the market.
d. the automatic maximization of consumer surplus in free markets.
ANS: A
PTS: 1
DIF: 2
REF: 7-3
TOP: Invisible hand
MSC: Interpretive
195. The “invisible hand” is
a. used to describe the welfare system in the United States.
b. a concept developed by Adam Smith to describe the virtues of free markets.
c. a concept used by J.M. Keynes to describe the role of government in guiding the allocation of resources in the
economy.
d. a term used by some economists to characterize the role of government in an economy-- inevitable but
invisible.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Invisible hand
MSC: Interpretive
196. Economists tend to see ticket scalping as
a. a way for a few to profit without producing anything of value.
b. an inequitable interference in the orderly process of ticket distribution.
c. a way of increasing the efficiency of ticket distribution.
d. an unproductive activity which should be made illegal everywhere.
ANS: C
PTS: 1
DIF: 2
REF: 7-3
TOP: Market efficiency
MSC: Interpretive
197. Laissez-faire is a French expression which literally means
a. to make do.
b. to get involved.
c. whatever works.
d. allow them to do.
ANS: D
PTS: 1
DIF: 1
REF: 7-3
TOP: Laissez-faire policy
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
310  Chapter 7/Consumers, Producers, and the Efficiency of Markets
198. The French expression used by free-market advocates, which literally translates as “allow them to do,” is
a. laissez-faire.
b. je ne sais pas.
c. si’l vous plait.
d. tête-à-tête.
ANS: A
PTS: 1
DIF: 1
REF: 7-3
TOP: Laissez-faire policy
MSC: Definitional
199. According to many economists, government restrictions on ticket scalping do all of the following except
a. inconvenience the public.
b. reduce the audience for cultural and sports events.
c. waste the police’s time.
d. keep the cost of tickets to consumers low.
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Market efficiency
MSC: Interpretive
200. Many economists believe that restrictions against ticket scalping result in each of the following except
a. a smaller audience for cultural and sporting events.
b. shorter lines at cultural and sporting events.
c. less tax revenue for the state.
d. an increase in ticket prices.
ANS: B
PTS: 1
DIF: 2
REF: 7-3
TOP: Market efficiency
MSC: Interpretive
201. 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.
ANS: C
PTS: 1
DIF: 3
REF: 7-3
TOP: Price floors | Producer surplus
MSC: Analytical
202. 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.
ANS: B
PTS: 1
DIF: 3
REF: 7-3
TOP: Price ceilings | Consumer surplus | Producer surplus
MSC: Analytical
203. 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.
ANS: D
PTS: 1
DIF: 3
REF: 7-3
TOP: Price floors | Consumer surplus | Producer surplus
MSC: Analytical
204. At present, the maximum legal price for a human kidney is $0. The price of $0 maximizes
a. consumer surplus, but not producer surplus.
b. producer surplus, but not consumer surplus.
c. both consumer and producer surplus.
d. neither consumer nor producer surplus.
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Price ceilings | Consumer surplus | Producer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  311
205. If a market is allowed to adjust freely to its equilibrium price and quantity, then an increase in demand will
a. increase producer surplus.
b. reduce producer surplus.
c. not affect producer surplus.
d. increase or decrease producer surplus or leave producer surplus unchanged.
ANS: A
PTS: 1
DIF: 2
REF: 7-3
TOP: Producer surplus
MSC: Applicative
206. If a market is allowed to move freely to its equilibrium price and quantity, then an increase in supply will
a. increase consumer surplus.
b. reduce consumer surplus.
c. not affect consumer surplus.
d. increase or decrease consumer surplus or leave consumer surplus unchanged.
ANS: A
PTS: 1
DIF: 2
REF: 7-3
TOP: Consumer surplus
MSC: Applicative
207. A simultaneous increase in both the demand for radios and the supply of radios would imply that
a. both the value of radios to consumers and the cost of producing radios has increased.
b. both the value of radios to consumers and the cost of producing radios has decreased.
c. the value of radios to consumers has decreased and the cost of producing radios has increased.
d. the value of radios to consumers has increased and the cost of producing radios has decreased.
ANS: D
PTS: 1
DIF: 2
REF: 7-3
TOP: Demand | Supply
MSC: Interpretive
208. Cornflakes and milk are complementary goods. A decrease in the price of corn will
a. increase consumer surplus in the market for cornflakes and decrease producer surplus in the market for milk.
b. increase consumer surplus in the market for cornflakes and increase producer surplus in the market for milk.
c. decrease consumer surplus in the market for cornflakes and increase producer surplus in the market for milk.
d. decrease consumer surplus in the market for cornflakes and decrease producer surplus in the market for milk.
ANS: B
PTS: 1
DIF: 3
REF: 7-3
TOP: Consumer surplus | Producer surplus
MSC: Applicative
209. Orange juice and apple juice are substitutes. Bad weather that sharply reduces the orange harvest would
a. increase consumer surplus in the market for orange juice and decrease producer surplus in the market for apple
juice.
b. increase consumer surplus in the market for orange juice and increase producer surplus in the market for apple
juice.
c. decrease consumer surplus in the market for orange juice and increase producer surplus in the market for apple
juice.
d. decrease consumer surplus in the market for orange juice and decrease producer surplus in the market for apple
juice.
ANS: C
PTS: 1
DIF: 3
REF: 7-3
TOP: Consumer surplus | Producer surplus
MSC: Applicative
210. A technological advance in the production of computers will
a. increase consumer surplus in the market for computers and decrease producer surplus in the market for
computer software.
b. increase consumer surplus in the market for computers and increase producer surplus in the market for
computer software.
c. decrease consumer surplus in the market for computers and increase producer surplus in the market for
computer software.
d. decrease consumer surplus in the market for computers and decrease producer surplus in the market for
computer software.
ANS: B
PTS: 1
DIF: 3
REF: 7-3
TOP: Consumer surplus | Producer surplus
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
312  Chapter 7/Consumers, Producers, and the Efficiency of Markets
211. Inefficiency can be caused in a market by the presence of
a. market power.
b. externalities.
c. imperfectly competitive markets.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 7-4
TOP: Market failures
MSC: Interpretive
212. Market power refers to the
a. side effects that may occur in a market.
b. government regulations imposed on the sellers in a market.
c. ability of market participants to influence price.
d. forces of supply and demand in determining equilibrium price.
ANS: C
PTS: 1
DIF: 1
REF: 7-4
TOP: Market power
MSC: Definitional
213. Externalities are
a. side effects passed on to a party other than the buyers and sellers in the market.
b. side effects of government intervention in markets.
c. external forces that cause the price of a good to be higher than it otherwise would be.
d. external forces that help establish equilibrium price.
ANS: A
PTS: 1
DIF: 1
REF: 7-4
TOP: Externalities
MSC: Definitional
214. The decisions of buyers and sellers that affect people who are not participants in the market create
a. market power.
b. externalities.
c. profiteering.
d. market equilibrium.
ANS: B
PTS: 1
DIF: 1
REF: 7-4
TOP: Externalities
MSC: Definitional
215. Market failure is the inability of
a. buyers to interact harmoniously with sellers in the market.
b. a market to establish an equilibrium price.
c. buyers to place a value on the good or service.
d. some unregulated markets to allocate resources efficiently.
ANS: D
PTS: 1
DIF: 2
REF: 7-4
TOP: Market failures
MSC: Definitional
216. When markets fail, public policy
a. can do nothing to improve the situation.
b. can potentially remedy the problem and increase economic efficiency.
c. can always remedy the problem and increase economic efficiency.
d. can, in theory, remedy the problem, but in practice, public policy has proven to be ineffective.
ANS: B
PTS: 1
DIF: 2
REF: 7-4
TOP: Market failures | Public policy
MSC: Interpretive
True/False
1. Welfare economics is the study of the welfare system.
ANS: F
PTS: 1
DIF: 1
REF: 7-1
TOP: Economic welfare
MSC: Definitional
2. The willingness to pay is the maximum amount that a buyer will pay for a good and measures how much the buyer
values the good.
ANS: T
PTS: 1
DIF: 1
REF: 7-1
TOP: Price | Value
MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
Chapter 7/Consumers, Producers, and the Efficiency of Markets  313
3. Consumer surplus is the amount a buyer actually has to pay for a good minus the amount the buyer is willing to
pay for it.
ANS: F
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Definitional
4. Joel has a 1966 Mustang, which he sells to Susie, an avid car collector. Susie is pleased since she paid $8,000 for
the car but would have been willing to pay $11,000 for the car. Susie’s consumer surplus is $2,000.
ANS: F
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
5. For any given quantity, the price on a demand curve represents the marginal buyer’s willingness to pay.
ANS: T
PTS: 1
DIF: 2
REF: 7-1
TOP: Demand curve | Marginal buyers
MSC: Interpretive
6. Consumer surplus measures the benefit to buyers of participating in a market.
ANS: T
PTS: 1
DIF: 1
REF: 7-1
TOP: Consumer surplus
MSC: Interpretive
7. A buyer is willing to buy a product at a price greater than or equal to his willingness to pay, but would refuse to
buy a product at a price less than his willingness to pay.
ANS: F
PTS: 1
DIF: 1
REF: 7-1
TOP: Price | Value
MSC: Definitional
8. Each seller of a product is willing to sell as long as the price he or she can receive is greater than the opportunity
cost of producing the product.
ANS: T
PTS: 1
DIF: 1
REF: 7-2
TOP: Opportunity cost
MSC: Interpretive
9. In a competitive market, sales go to those producers who are willing to supply the product at the lowest price.
ANS: T
PTS: 1
DIF: 1
REF: 7-2
TOP: Competitive markets
MSC: Interpretive
10. Producer surplus is the amount a seller is paid minus the cost of production.
ANS: T
PTS: 1
DIF: 1
REF: 7-2
TOP: Producer surplus
MSC: Definitional
11. Connie can clean windows in large office buildings at a cost of $1 per window. The market price for windowcleaning services is $3 per window. If Connie cleans 100 windows, her producer surplus is $100.
ANS: F
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Applicative
12. At any quantity, the price given by the supply curve shows the cost of the lowest-cost seller.
ANS: F
PTS: 1
DIF: 2
REF: 7-2
TOP: Supply curve | Opportunity cost
MSC: Interpretive
13. The area below the price and above the supply curve measures the producer surplus in a market.
ANS: T
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
14. When market price increases, producer surplus increases because (1) producer surplus received by existing sellers
increases, and (2) new sellers enter the market.
ANS: T
PTS: 1
DIF: 2
REF: 7-2
TOP: Producer surplus
MSC: Interpretive
15. Total surplus in a market is consumer surplus minus producer surplus.
ANS: F
PTS: 1
DIF: 1
REF: 7-3
TOP: Total surplus
MSC: Definitional
16. Total surplus = Value to buyers - Costs to sellers.
ANS: T
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
314  Chapter 7/Consumers, Producers, and the Efficiency of Markets
17. The equilibrium of supply and demand in a market maximizes the total benefits to buyers and sellers of
participating in that market.
ANS: T
PTS: 1
DIF: 2
REF: 7-3
TOP: Equilibrium | Total surplus MSC: Interpretive
18. Efficiency refers to whether a market outcome is fair, while equity refers to whether the maximum amount of
output was produced from a given number of inputs.
ANS: F
PTS: 1
DIF: 1
REF: 7-3
TOP: Efficiency | Equity
MSC: Definitional
19. Efficiency is related to the size of the economic pie, whereas equity is related to how the pie gets sliced and
distributed.
ANS: T
PTS: 1
DIF: 1
REF: 7-3
TOP: Efficiency | Equity
MSC: Definitional
20. Total surplus in a market can be measured as the area below the supply curve plus the area above the demand
curve, up to the point of equilibrium.
ANS: F
PTS: 1
DIF: 2
REF: 7-3
TOP: Total surplus
MSC: Interpretive
21. Free markets allocate (a) the supply of goods to the buyers who value them most highly and (b) the demand for
goods to the sellers who can produce them at least cost.
ANS: T
PTS: 1
DIF: 2
REF: 7-3
TOP: Markets
MSC: Interpretive
22. Even though participants in the economy are motivated by self-interest, the “invisible hand” of the marketplace
guides this self-interest into promoting general economic well-being.
ANS: T
PTS: 1
DIF: 2
REF: 7-3
TOP: Invisible hand
MSC: Interpretive
23. Economists generally believe that, although there may be advantages to society from ticket-scalping, the costs to
society of this activity outweigh the benefits.
ANS: F
PTS: 1
DIF: 2
REF: 7-3
TOP: Market efficiency
MSC: Interpretive
24. Economists argue that restrictions against ticket scalping actually drive up the cost of many tickets.
ANS: T
PTS: 1
DIF: 2
REF: 7-3
TOP: Market efficiency
MSC: Interpretive
25. If the United States legally allowed for the existence of a market in transplant organs, it is estimated that one
kidney would sell for at least $100,000.
ANS: F
PTS: 1
DIF: 2
REF: 7-3
TOP: Price ceilings
MSC: Interpretive
26. Unless markets are perfectly competitive, they mail fail to maximize the total benefits to buyers and sellers.
ANS: T
PTS: 1
DIF: 2
REF: 7-4
TOP: Market failures
MSC: Interpretive
27. When markets fail, public policy can potentially remedy the problem and increase economic efficiency.
ANS: T
PTS: 1
DIF: 2
REF: 7-4
TOP: Market failures | Public policy
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8
Application: The Costs of Taxation
Multiple Choice
1. In 1776, the American Revolution was sparked by anger over
a. the extravagant lifestyle of British royalty.
b. the crimes of British soldiers stationed in the American colonies.
c. British taxes imposed on the American colonies.
d. the failure of the British to protect American colonists from attack by hostile Native Americans.
ANS: C
PTS: 1
DIF: 1
REF: 8-0
TOP: Taxes
MSC: Definitional
2. Anger over British taxes played a significant role in bringing about
a. the election of John Adams as the second American president.
b. the American Revolution.
c. the War of 1812.
d. the “no new taxes” clause in the U.S. Constitution.
ANS: B
PTS: 1
DIF: 1
REF: 8-0
TOP: Taxes
MSC: Definitional
3. When Ronald Reagan ran for the presidency in 1980, he pledged to bring about
a. large cuts in personal income taxes.
b. large cuts in payroll taxes.
c. large increases in personal income taxes.
d. large increases in payroll taxes.
ANS: A
PTS: 1
DIF: 1
REF: 8-0
TOP: Taxes
MSC: Definitional
4. Which U.S. president lost his bid for re-election, in part because he had broken an earlier campaign promise to
refrain from imposing any new taxes?
a. Lyndon B. Johnson
b. Jimmy Carter
c. George H.W. Bush
d. Bill Clinton
ANS: C
PTS: 1
DIF: 1
REF: 8-0
TOP: Taxes
MSC: Definitional
5. During Ronald Reagan's presidency, the top tax rate on income fell from
a. 36 percent to 22 percent.
b. 50 percent to 22 percent.
c. 50 percent to 28 percent.
d. 70 percent to 28 percent.
ANS: D
PTS: 1
DIF: 2
REF: 8-0
TOP: Tax rates MSC: Definitional
6. In recent decades, which of the following U.S. presidents promised tax cuts and subsequently delivered tax cuts?
a. Jimmy Carter and Ronald Reagan
b. Ronald Reagan and Bill Clinton
c. Gerald Ford and George W. Bush
d. Ronald Reagan and George W. Bush
ANS: D
PTS: 1
DIF: 2
REF: 8-0
TOP: Taxes
MSC: Definitional
320
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copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  321
7. Who once said that taxes are the price we pay for a civilized society?
a. Aristotle
b. George Washington
c. Oliver Wendell Holmes
d. Ronald Reagan
ANS: C
PTS: 1
DIF: 1
REF: 8-0
TOP: Taxes
MSC: Definitional
8. To fully understand how taxes affect economic well-being, we must
a. assume that economic well-being is not affected if all tax revenue is spent on goods and services for the people
who are being taxed.
b. know the dollar amount of all taxes raised in the country each year.
c. compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.
d. take into account the fact that almost all taxes reduce the welfare of buyers, increase the welfare of sellers, and
raise revenue for the government.
ANS: C
PTS: 1
DIF: 2
REF: 8-0
TOP: Taxes | Economic welfare
MSC: Interpretive
9. Oliver Wendell Holmes once said taxes
a. are the price we pay for a civilized society.
b. are a fact of life.
c. cannot be escaped unless you are in jail.
d. can be avoided only by the rich.
ANS: A
PTS: 1
DIF: 1
REF: 8-1
TOP: Taxes
MSC: Definitional
10. When a tax is levied on a good, the buyers and sellers of the good share the burden,
a. provided the tax is levied on the sellers.
b. provided the tax is levied on the buyers.
c. provided a portion of the tax is levied on the buyers, with the remaining portion levied on the sellers.
d. regardless of how the tax is levied.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax burden
MSC: Interpretive
11. A tax on a good
a. raises the price that buyers effectively pay and raises the price that sellers effectively receive.
b. raises the price that buyers effectively pay and lowers the price that sellers effectively receive.
c. lowers the price that buyers effectively pay and raises the price that sellers effectively receive.
d. lowers the price that buyers effectively pay and lowers the price that sellers effectively receive.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Prices
MSC: Interpretive
12. When a good is taxed,
a. both buyers and sellers of the good are made worse off.
b. only buyers are made worse off, because they ultimately bear the burden of the tax.
c. only sellers are made worse off, because the government holds them responsible for sending in the tax
payments.
d. neither buyers nor sellers are made worse off, since tax revenue is used to provide goods and services that
would otherwise not be provided in a market economy.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Taxes | Economic welfare
MSC: Interpretive
13. To measure the gains and losses from a tax on a good, economists use the tools of
a. macroeconomics.
b. welfare economics.
c. international-trade theory.
d. circular-flow analysis.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Taxes | Economic welfare
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
322  Chapter 8/Application: The Costs of Taxation
14. When a tax is imposed on a good,
a. the supply curve for the good always shifts.
b. the demand curve for the good always shifts.
c. the amount of the good that buyers are willing to buy at each price always remains unchanged.
d. the equilibrium quantity of the good always decreases.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Taxes | Equilibrium quantity MSC: Interpretive
15. A tax levied on the sellers of a good shifts the
a. supply curve upward (or to the left).
b. supply curve downward (or to the right).
c. demand curve upward (or to the right).
d. demand curve downward (or to the left).
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Supply curve
MSC: Interpretive
16. A tax levied on the buyers of a good shifts the
a. supply curve upward (or to the left).
b. supply curve downward (or to the right).
c. demand curve downward (or to the left).
d. demand curve upward (or to the right).
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Demand curve
MSC: Interpretive
17. When a tax is imposed on the buyers of a good, the demand curve shifts
a. downward by the amount of the tax.
b. upward by the amount of the tax.
c. downward by less than the amount of the tax.
d. upward by more than the amount of the tax.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Demand curve
MSC: Interpretive
18. When a tax is imposed on the sellers of a good,
a. the demand curve shifts downward by less than the amount of the tax.
b. the demand curve shifts downward by the amount of the tax.
c. the supply curve shifts upward by less than the amount of the tax.
d. the supply curve shifts upward by the amount of the tax.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Supply curve
MSC: Interpretive
19. A tax placed on buyers of tires shifts
a. the demand curve for tires downward, decreasing the price received by sellers of tires and causing the market
for tires to expand.
b. the demand curve for tires downward, decreasing the price received by sellers of tires and causing the market
for tires to shrink.
c. the supply curve for tires upward, decreasing the effective price paid by buyers of tires and causing the market
for tires to expand.
d. the supply curve for tires upward, increasing the effective price paid by buyers of tires and causing the market
for tires to shrink.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Tax | Demand curve | Equilibrium quantity
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  323
20. Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax burden,
when
a. the tax is placed on the sellers of the product.
b. the tax is placed on the buyers of the product.
c. the supply of the product is more elastic than the demand for the product.
d. the demand for the product is more elastic than the supply of the product.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax incidence
MSC: Applicative
21. Sellers of a product will bear the larger part of the tax burden, and buyers will bear a smaller part of the tax burden,
when
a. the tax is placed on the sellers of the product.
b. the tax is placed on the buyers of the product.
c. the supply of the product is more elastic than the demand for the product.
d. the demand for the product is more elastic than the supply of the product.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax incidence
MSC: Applicative
22. When a tax is imposed on a good for which the supply is relatively elastic and the demand is relatively inelastic,
a. buyers of the good will bear most of the burden of the tax.
b. sellers of the good will bear most of the burden of the tax.
c. the effective price paid by buyers of the good will decrease.
d. the size of the market for the good will expand.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax incidence
MSC: Applicative
23. Suppose a tax is imposed on the buyers of fast-food hamburgers. The burden of the tax will
a. fall entirely on the buyers of fast-food hamburgers.
b. fall entirely on the sellers of fast-food hamburgers.
c. be shared equally by the buyers and sellers of fast-food hamburgers.
d. be shared by the buyers and sellers of fast-food hamburgers, but not necessarily equally.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax incidence
MSC: Interpretive
24. It does not matter whether a tax is levied on the buyers or the sellers of a good because
a. sellers always bear the full burden of the tax.
b. buyers always bear the full burden of the tax.
c. buyers and sellers will share the burden of the tax.
d. None of the above is correct; the incidence of the tax does depend on whether the buyers or the sellers are
required to pay the tax.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax incidence
MSC: Interpretive
25. When a tax is imposed on a good for which demand is elastic and supply is elastic,
a. sellers effectively pay the majority of the tax.
b. buyers effectively pay the majority of the tax.
c. the tax burden is equally divided between buyers and sellers.
d. None of the above is correct; further information would be required to determine how the burden of the tax is
distributed between buyers and sellers.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax incidence
MSC: Interpretive
26. When cigarettes are taxed and sellers of cigarettes are required to pay the tax to the government,
a. the size of the cigarette market is reduced.
b. the price paid by buyers of cigarettes decreases.
c. the demand for cigarettes decreases.
d. there is a movement downward and to the right along the demand curve for cigarettes.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium quantity MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
324  Chapter 8/Application: The Costs of Taxation
27. One result of a tax, irrespective of whether the tax is placed on the buyers or the sellers, is that the
a. size of the market is unchanged.
b. price the seller effectively receives is higher.
c. supply curve for the good shifts upward by the amount of the tax.
d. tax reduces the welfare of both buyers and sellers.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Economic welfare
MSC: Interpretive
28. When a tax is placed on the buyers of a product, a result is that
a. buyers effectively pay less than before and sellers effectively receive less than before.
b. buyers effectively pay less than before and sellers effectively receive more than before.
c. buyers effectively pay more than before and sellers effectively receive less than before.
d. buyers effectively pay more than before and sellers effectively receive more than before.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Interpretive
29. When a tax is levied on a good,
a. neither buyers nor sellers are made worse off.
b. only sellers are made worse off.
c. only buyers are made worse off.
d. both buyers and sellers are made worse off.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Economic welfare
MSC: Interpretive
30. Which of the following statements is correct regarding the imposition of a tax on gasoline?
a. The incidence of the tax depends upon whether the buyers or the sellers are required to remit tax payments to
the government.
b. The incidence of the tax depends upon the price elasticities of demand and supply.
c. The amount of tax revenue raised by the tax depends upon whether the buyers or the sellers are required to
remit tax payments to the government.
d. The amount of tax revenue raised by the tax does not depend upon the amount of the tax per unit.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Tax incidence
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  325
Figure 8-1
31. Refer to Figure 8-1. When the market is in equilibrium, consumer surplus is represented by area
a. A.
b. B.
c. C.
d. D.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Consumer surplus
MSC: Interpretive
32. Refer to Figure 8-1. When the market is in equilibrium, producer surplus is represented by area
a. A.
b. B.
c. C.
d. D.
ANS: C
PTS: 1
DIF: 1
REF: 8-1
TOP: Producer surplus
MSC: Interpretive
33. Refer to Figure 8-1. When the market is in equilibrium, total surplus is represented by area
a. A + B.
b. B + C.
c. C + D.
d. A + D.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Total surplus
MSC: Interpretive
34. Suppose a tax is levied on the buyers of a good;
a. then the supply curve shifts upward by the amount of the tax.
b. then the quantity supplied decreases for all conceivable prices of the good.
c. this means that the buyers of the good will send tax payments to the government.
d. this means that the buyers of the good will pay a higher effective price for the good, not that they will send tax
payments to the government.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Buyers
MSC: Definitional
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326  Chapter 8/Application: The Costs of Taxation
35. Suppose a tax is levied on the sellers of a good;
a. then the supply curve shifts upward by the amount of the tax.
b. then the quantity demanded decreases for all conceivable prices of the good.
c. this means that the sellers of the good will receive a lower price from buyers, not that the sellers are actually
responsible for paying the tax to the government.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Sellers
MSC: Interpretive
36. A $2.00 tax placed on the sellers of potting soil, for every bag of potting soil they sell, will shift the supply curve
a. downward by exactly $2.00.
b. downward by less than $2.00.
c. upward by exactly $2.00.
d. upward by less than $2.00.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Supply curve
MSC: Interpretive
37. When a good is taxed, the burden of the tax
a. falls more heavily on the side of the market that is more elastic.
b. falls more heavily on the side of the market that is more inelastic.
c. falls more heavily on the side of the market that is closer to unit elastic.
d. is distributed independently of relative elasticities of supply and demand.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax incidence
MSC: Applicative
38. When a tax on a good is enacted,
a. buyers and sellers share the burden of the tax regardless of whether the tax is levied on buyers or on sellers.
b. buyers always bear the full burden of the tax.
c. sellers always bear the full burden of the tax.
d. sellers bear the full burden of the tax if the tax is levied on them; buyers bear the full burden of the tax if the tax
is levied on them.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax incidence
MSC: Interpretive
39. A tax placed on a good
a. causes the effective price to sellers to increase.
b. affects the welfare of buyers of the good, but not the welfare of sellers.
c. causes the size of the market for the good to shrink.
d. creates a burden that is usually borne entirely by the sellers of the good.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price | Equilibrium quantity MSC: Interpretive
40. When a tax is levied on buyers of a good,
a. government collects too little revenue to justify the tax if the equilibrium quantity of the good decreases as a
result of the tax.
b. there is an increase in the quantity of the good supplied.
c. a wedge is placed between the price buyers pay and the price sellers effectively receive.
d. the effective price to buyers decreases because the demand curve shifts leftward.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Applicative
41. The benefit to buyers of participating in a market is measured by
a. the price elasticity of demand.
b. consumer surplus.
c. the amount buyers are willing to pay for the good.
d. the equilibrium price.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Consumer surplus
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  327
42. The benefit that government receives from a tax is measured by
a. the change in the equilibrium quantity of the good.
b. the change in the equilibrium price of the good.
c. tax revenue.
d. total surplus.
ANS: C
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax | Government
MSC: Interpretive
43. If T represents the size of the tax on a good and Q represents the quantity of the good that is sold, total tax revenue
received by government can be expressed as
a. T/Q.
b. T + Q.
c. T x Q.
d. (T x Q)/Q.
ANS: C
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax | Government
MSC: Interpretive
44. When a tax is levied on buyers,
a. the supply curves shifts upward by the amount of the tax.
b. the tax creates a wedge between the price buyers effectively pay and the price sellers receive.
c. the tax has no effect on the well-being of sellers.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax | Buyers
MSC: Interpretive
45. For the purpose of analyzing the gains and losses from a tax on a good, we use tax revenue as a direct measure of
a. government's benefit from the tax.
b. government's loss from the tax.
c. the deadweight loss of the tax.
d. the overall net gain to society of the tax.
ANS: A
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax revenue
MSC: Interpretive
46. The decrease in total surplus that results from a market distortion, such as a tax, is called a
a. wedge loss.
b. revenue loss.
c. deadweight loss.
d. shrinkage of consumer surplus.
ANS: C
PTS: 1
DIF: 1
REF: 8-1
TOP: Deadweight losses
MSC: Definitional
47. A tax on a good
a. gives buyers an incentive to buy more of the good than they otherwise would buy.
b. gives sellers an incentive to produce less of the good than they otherwise would produce.
c. creates a benefit to the government, the size of which exceeds the loss in surplus to buyers and sellers.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Producer surplus | Consumer surplus
MSC: Interpretive
48. When the price of a good is measured in dollars, then the size of the deadweight loss that results from taxing that
good is measured in
a. units of the good that is being taxed.
b. units of another good that is not being taxed.
c. dollars.
d. abstract units of measurement that reflect the well-being of the society.
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Deadweight losses
MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
328  Chapter 8/Application: The Costs of Taxation
49. Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to
decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and it decreases producer
surplus by $4,400. The deadweight loss of the tax is
a. $200.
b. $400.
c. $600.
d. $1,200.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Consumer surplus | Producer surplus | Deadweight losses
MSC: Applicative
50. Suppose a tax of $3 per unit is imposed on a good. The supply curve and the demand curve are straight lines. The
tax decreases consumer surplus by $3,900 and it decreases producer surplus by $3,000. The tax generates tax
revenue of $6,000. From this information it follows that the tax decreased the equilibrium quantity of the good
a. from 2,000 to 1,500.
b. from 2,400 to 2,000.
c. from 2,600 to 2,000.
d. from 3,000 to 2,400.
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Deadweight losses
MSC: Analytical
51. Suppose a tax of $5 per unit is imposed on a good. The supply curve and the demand curve are straight lines. The
tax decreases consumer surplus by $10,000 and it decreases producer surplus by $15,000. The deadweight loss of
the tax is $2,500. From this information it follows that the tax decreased the equilibrium quantity of the good
a. from 6,500 to 5,500.
b. from 5,500 to 4,500.
c. from 5,000 to 3,000.
d. from 6,000 to 4,000.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Deadweight losses
MSC: Analytical
52. A tax of $0.25 is imposed on each bag of potato chips that is sold. The tax
 decreases producer surplus by $600 per day;
 generates tax revenue of $1,220 per day;
 decreases the equilibrium quantity of potato chips by 120 bags per day.
From this information, it follows that the tax
a. decreases consumer surplus by $645 per day.
b. decreases the equilibrium quantity from 6,000 bags per day to 5,880 bags per day.
c. decreases total surplus from $3,000 to $1,800 per day.
d. produces a deadweight loss of $15 per day.
ANS: D
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Deadweight losses
MSC: Analytical
53. The benefit to sellers of participating in a market is measured by
a. the amount of taxes collected on sales of the good.
b. producer surplus.
c. the amount sellers receive for their product.
d. the sellers' willingness to sell.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Producer surplus
MSC: Interpretive
54. When the government places a tax on a product,
a. the cost of the tax to buyers and sellers is less than the revenue raised from the tax by the government.
b. the cost of the tax to buyers and sellers is equal to the revenue raised from the tax by the government.
c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government.
d. Without additional information, such as the elasticity of demand for this product, it is impossible to compare
the cost of a tax to buyers and sellers with tax revenue.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Economic welfare
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  329
55. Relative to a situation in which liquor is not taxed, the imposition of a tax on liquor causes
a. the equilibrium quantity of liquor demanded to decrease and the equilibrium quantity of liquor supplied to
decrease.
b. the equilibrium quantity of liquor demanded to decrease and the equilibrium quantity of liquor supplied to
increase.
c. the equilibrium quantity of liquor demanded to increase and the equilibrium quantity of liquor supplied to
decrease.
d. the equilibrium quantity of liquor demanded to increase and the equilibrium quantity of liquor supplied to
increase.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium quantity MSC: Interpretive
56. Which of the following quantities decrease in response to a tax on a good?
a. the size of the market for the good, the effective price of the good paid by buyers, and consumer surplus
b. the size of the market for the good, producer surplus, and the well-being of buyers of the good
c. the effective price received by sellers of the good, the wedge between the effective price paid by buyers and the
effective price received by sellers, and consumer surplus
d. None of the above is necessarily correct unless we know whether the tax is levied on buyers or on sellers.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Tax | Equilibrium | Economic welfare
MSC: Applicative
57. For a good that is taxed, the area on the relevant supply-and-demand graph that represents government’s tax
revenue is a
a. triangle.
b. rectangle.
c. trapezoid.
d. None of the above is correct; government’s tax revenue is the area between the supply and demand curves,
above the horizontal axis, and below the effective price to buyers.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Government
MSC: Interpretive
58. For a good that is taxed, the area on the relevant supply-and-demand graph that represents government’s tax
revenue is
a. smaller than the area that represents the loss of consumer surplus and producer surplus caused by the tax.
b. bounded by the supply curve, the demand curve, the effective price paid by buyers, and the effective price
received by sellers.
c. a right triangle.
d. a triangle, but not necessarily a right triangle.
ANS: A
PTS: 1
DIF: 3
REF: 8-1
TOP: Tax | Government
MSC: Applicative
59. Total surplus with a tax is equal to
a. consumer surplus plus producer surplus.
b. consumer surplus minus producer surplus.
c. consumer surplus plus producer surplus minus tax revenue.
d. consumer surplus plus producer surplus plus tax revenue.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Total surplus
MSC: Interpretive
60. Taxes cause deadweight losses because they
a. lead to losses in surplus for consumers and for producers that, when taken together, exceed tax revenue
collected by the government.
b. distort incentives to both buyers and sellers.
c. prevent buyers and sellers from realizing some of the gains from trade.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
330  Chapter 8/Application: The Costs of Taxation
61. Taxes cause deadweight losses because
a. taxes reduce the sum of producer and consumer surpluses by more than the amount of tax revenue.
b. taxes prevent buyers and sellers from realizing some of the gains from trade.
c. taxes cause marginal buyers and marginal sellers to leave the market, causing the quantity sold to fall.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Interpretive
62. Deadweight loss measures the
a. loss in a market to buyers and sellers that is not offset by an increase in government revenue.
b. loss in revenue to the government when buyers choose to buy less of the product because of the tax.
c. loss of equity in a market due to government intervention.
d. loss of total revenue to business firms due to the price wedge caused by the tax.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Interpretive
63. The loss in total surplus resulting from a tax is called
a. a deficit.
b. economic loss.
c. deadweight loss.
d. inefficiency.
ANS: C
PTS: 1
DIF: 1
REF: 8-1
TOP: Deadweight losses
MSC: Definitional
64. Deadweight loss is the
a. decline in total surplus that results from a tax.
b. decline in government revenue when taxes are reduced in a market.
c. decline in consumer surplus when a tax is placed on buyers.
d. loss of profits to business firms when a tax is imposed.
ANS: A
PTS: 1
DIF: 1
REF: 8-1
TOP: Deadweight losses
MSC: Definitional
65. A deadweight loss is a consequence of a tax on a good because the tax
a. induces the government to increase its expenditures.
b. induces buyers to consume less, and sellers to produce less, of the good.
c. causes a disequilibrium in the market.
d. imposes a loss on buyers that is greater than the loss to sellers.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Interpretive
66. The supply curve and the demand curve for a good are straight lines. When the good is taxed, the area on the
relevant supply-and-demand graph that represents the deadweight loss is
a. larger than the area that represents consumer surplus in the absence of the tax.
b. larger than the area that represents government’s tax revenue.
c. a triangle.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Interpretive
67. Taxes
a. distort incentives and this distortion causes markets to allocate resources inefficiently.
b. distort incentives and this distortion results in an inequitable allocation of resources.
c. do not distort incentives, but they do cause markets to allocate resources inefficiently.
d. do not distort incentives, but they do result in an inequitable allocation of resources.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Taxes | Inefficiency
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  331
68. The supply curve and the demand curve for a good are straight lines. When the good is taxed, the area on the
relevant supply-and-demand graph that represents
a. government’s tax revenue is a rectangle.
b. the deadweight loss of the tax is a triangle.
c. the loss of consumer surplus caused by the tax is neither a rectangle nor a triangle.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Interpretive
69. A tax of $10 per unit is imposed on a certain good. The supply curve and the demand curve are straight lines. The
tax reduces the equilibrium quantity in the market by 200 units. The deadweight loss from the tax is
a. $2,000.
b. $,1000.
c. $500.
d. $250.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Applicative
70. Suppose the equilibrium quantity in the market for widgets is 200 per month when there is no tax. Then a tax of $5
per widget is imposed. As a result, the government is able to raise $750 per month in tax revenue. We can conclude
that the equilibrium quantity of widgets has fallen by
a. 25 per month.
b. 50 per month.
c. 75 per month.
d. 100 per month.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Tax | Quantity demanded
MSC: Applicative
71. The supply curve and the demand curve for widgets are straight lines. Suppose the equilibrium quantity in the
market for widgets is 200 per month when there is no tax. Then a tax of $5 per widget is imposed. The price paid
by buyers increases by $2 and the after-tax price received by sellers falls by $3. The government is able to raise
$750 per month in revenue from the tax. The deadweight loss from the tax is
a. $250.
b. $125.
c. $75.
d. $50.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Deadweight losses
MSC: Applicative
72. The supply curve and the demand curve for cigars are straight lines. Suppose the equilibrium quantity in the market
for cigars is 1,000 per month when there is no tax. Then a tax of $0.50 per cigar is imposed. The effective price
paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40.
The government’s tax revenue amounts to $475 per month. Which of the following statements is correct?
a. After the tax is imposed, the equilibrium quantity of cigars is 900 per month.
b. The demand for cigars is more elastic than the supply of cigars.
c. The deadweight loss of the tax is $12.50.
d. The tax causes a decrease in consumer surplus of $380.
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Deadweight losses | Elasticity
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
332  Chapter 8/Application: The Costs of Taxation
73. The supply curve and the demand curve for cigars are straight lines. Suppose the equilibrium quantity in the market
for cigars is 1,000 per month when there is no tax. Then a tax of $0.50 per cigar is imposed. The effective price
paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40.
The government’s tax revenue amounts to $475 per month. Which of the following statements is correct?
a. The demand for cigars is less elastic than the supply of cigars.
b. The tax causes a decrease in consumer surplus of $390 and a decrease in producer surplus of $97.50.
c. The deadweight loss of the tax is $12.50.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 3
REF: 8-1
TOP: Deadweight losses | Elasticity
MSC: Applicative
Figure 8-2
74. Refer to Figure 8-2. The equilibrium price before the tax is imposed is
a. P1.
b. P2.
c. P3.
d. None of the above is correct.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Equilibrium price
MSC: Interpretive
75. Refer to Figure 8-2. The price that buyers effectively pay after the tax is imposed is
a. P1.
b. P2.
c. P3.
d. impossible to determine from the figure.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Applicative
76. Refer to Figure 8-2. The price that sellers effectively receive after the tax is imposed is
a. P1.
b. P2.
c. P3.
d. impossible to determine from the figure.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  333
77. Refer to Figure 8-2. The per unit burden of the tax on buyers is
a. P3 - P1.
b. P3 - P2.
c. P2 - P1.
d. Q2 - Q1.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax burden
MSC: Applicative
78. Refer to Figure 8-2. The per-unit burden of the tax on sellers is
a. P3 - P1.
b. P3 - P2.
c. P2 - P1.
d. Q2 - Q1.
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Tax burden
MSC: Applicative
79. Refer to Figure 8-2. The amount of the tax on each unit of the good is
a. P3 - P1.
b. P3 - P2.
c. P2 - P1.
d. Q2 - Q1.
ANS: A
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax
MSC: Applicative
80. Refer to Figure 8-2. The amount of tax revenue received by the government is equal to the area
a. P3 A C P1.
b. A B C.
c. P2 D A P3.
d. P1 C D P2.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Government
MSC: Applicative
81. Refer to Figure 8-2. The amount of deadweight loss associated with the tax is equal to
a. P3 A C P1.
b. A B C.
c. P2 A D P3.
d. P1 D C P2.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Applicative
82. Refer to Figure 8-2. Which of the following equations is valid for the loss in consumer surplus caused by the tax?
a. Loss of consumer surplus = (1/2)(P3 - P2)(Q1 - Q2).
b. Loss of consumer surplus = (1/2)(P3 - P2)(Q1 + Q2).
c. Loss of consumer surplus = (1/2)(P3 + P2)(Q1 - Q2).
d. Loss of consumer surplus = (1/2)(P3 + P2)(Q1 + Q2).
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus
MSC: Analytical
83. Refer to Figure 8-2. Which of the following equations is valid for the loss in producer surplus caused by the tax?
a. Loss of producer surplus = (1/2)(P2 + P1)(Q1 + Q2).
b. Loss of producer surplus = (1/2)(P2 + P1)(Q1 - Q2).
c. Loss of producer surplus = (1/2)(P2 - P1)(Q1 + Q2).
d. Loss of producer surplus = (1/2)(P2 - P1)(Q1 - Q2).
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Producer surplus
MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
334  Chapter 8/Application: The Costs of Taxation
84. Refer to Figure 8-2. Which of the following equations is valid for the tax revenue that the tax provides to the
government?
a. Tax revenue = (P2 - P1)Q1
b. Tax revenue = (P3 - P1)Q1
c. Tax revenue = (P3 - P2)Q1
d. Tax revenue = (P3 - P1)Q2
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Government
MSC: Applicative
85. Refer to Figure 8-2. Which of the following equations is valid for the deadweight loss of the tax?
a. Deadweight loss = (1/2)(P2 - P1)(Q2 + Q1)
b. Deadweight loss = (1/2)(P3 - P1)(Q2 + Q1)
c. Deadweight loss = (1/2)(P3 - P2)(Q2 - Q1)
d. Deadweight loss = (1/2)(P3 - P1)(Q2 - Q1)
ANS: D
PTS: 1
DIF: 3
REF: 8-1
TOP: Deadweight losses
MSC: Analytical
Figure 8-3
86. Refer to Figure 8-3. The equilibrium price before the tax is imposed is
a. $24 and the equilibrium quantity is 70.
b. $16 and the equilibrium quantity is 100.
c. $10 and the equilibrium quantity is 70.
d. $8 and the equilibrium quantity is 100.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Equilibrium price | Equilibrium quantity
MSC: Interpretive
87. Refer to Figure 8-3. The price that buyers effectively pay after the tax is imposed is
a. $24.
b. $16.
c. $10.
d. $8.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Equilibrium price
MSC: Applicative
88. Refer to Figure 8-3. The price that sellers effectively receive after the tax is imposed is
a. $24.
b. $14.
c. $10.
d. $8.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Equilibrium price
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  335
89. Refer to Figure 8-3. The per-unit burden of the tax on buyers is
a. $16.
b. $14.
c. $8.
d. $6.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax burden
MSC: Applicative
90. Refer to Figure 8-3. The per-unit burden of the tax on sellers is
a. $16.
b. $14.
c. $8.
d. $6.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax burden
MSC: Applicative
91. Refer to Figure 8-3. The amount of the tax on each unit of the good is
a. $16.
b. $14.
c. $8.
d. $6.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax
MSC: Applicative
92. Refer to Figure 8-3. The amount of tax revenue received by the government is equal to
a. $210.
b. $420.
c. $560.
d. $980.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Government
MSC: Applicative
93. Refer to Figure 8-3. The amount of deadweight loss as a result of the tax is
a. $210.
b. $420.
c. $560.
d. $980.
ANS: A
PTS: 1
DIF: 3
REF: 8-1
TOP: Deadweight losses
MSC: Applicative
94. Refer to Figure 8-3. The tax results in a loss of consumer surplus that amounts to
a. $360.
b. $480.
c. $560.
d. $680.
ANS: D
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus
MSC: Applicative
95. Refer to Figure 8-3. The tax results in a loss of producer surplus that amounts to
a. $210.
b. $510.
c. $600.
d. $660.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Producer surplus
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
336  Chapter 8/Application: The Costs of Taxation
Figure 8-4
96. Refer to Figure 8-4. The equilibrium price before the tax is imposed is
a. P1.
b. P2.
c. P3.
d. impossible to determine from the figure.
ANS: A
PTS: 1
DIF: 1
REF: 8-1
TOP: Equilibrium price
MSC: Interpretive
97. Refer to Figure 8-4. The price that buyers effectively pay after the tax is imposed is
a. P1.
b. P2.
c. P3.
d. impossible to determine from the figure.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Applicative
98. Refer to Figure 8-4. The price that sellers effectively receive after the tax is imposed is
a. P1.
b. P2.
c. P3.
d. impossible to determine from the figure.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Applicative
99. Refer to Figure 8-4. The tax is levied on
a. buyers only.
b. sellers only.
c. both buyers and sellers.
d. This is impossible to determine from the figure.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax
MSC: Interpretive
100. Refer to Figure 8-4. Consumer surplus before the tax was levied is represented by area
a. A.
b. A + B + C.
c. D + E + F.
d. F.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Consumer surplus
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  337
101. Refer to Figure 8-4. Producer surplus before the tax was levied is represented by area
a. A.
b. A + B + C.
c. D + E + F.
d. F.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Producer surplus
MSC: Interpretive
102. Refer to Figure 8-4. After the tax is levied, consumer surplus is represented by area
a. A.
b. A + B + C.
c. D + E + F.
d. F.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Consumer surplus
MSC: Applicative
103. Refer to Figure 8-4. After the tax is levied, producer surplus is represented by area
a. A.
b. A + B + C.
c. D + E + F.
d. F.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Producer surplus
MSC: Applicative
104. Refer to Figure 8-4. The tax causes a reduction in consumer surplus that is represented by area
a. A.
b. B + C.
c. D + E.
d. F.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Consumer surplus
MSC: Applicative
105. Refer to Figure 8-4. The tax causes a reduction in producer surplus that is represented by area
a. A.
b. B + C.
c. D + E.
d. F.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Producer surplus
MSC: Applicative
106. Refer to Figure 8-4. The benefit to the government is
a. measured by tax revenue and is represented by area A + B.
b. measured by tax revenue and is represented by area B + D.
c. measured by the net gain in total surplus and is represented by area B + D.
d. measured by the net gain in total surplus and is represented by area D + E.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Government
MSC: Applicative
107. Refer to Figure 8-4. The total surplus (consumer, producer, and government) with the tax is represented by area
a. C + E.
b. A + B + C.
c. D + E + F.
d. A + B + D + F.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Total surplus
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
338  Chapter 8/Application: The Costs of Taxation
108. Refer to Figure 8-4. The loss in total welfare that results from the tax is represented by area
a. A + B + D + F.
b. A + B + C.
c. D + E + F.
d. C + E.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Applicative
Figure 8-5
109. Refer to Figure 8-5. Without a tax, the equilibrium price and quantity are
a. $16 and 300.
b. $10 and 600.
c. $10 and 300.
d. $6 and 300.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Equilibrium price | Equilibrium quantity
MSC: Interpretive
110. Refer to Figure 8-5. Without a tax, consumer surplus in this market is
a. $1,500.
b. $2,400.
c. $3,000.
d. $3,600.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Consumer surplus
MSC: Interpretive
111. Refer to Figure 8-5. Without a tax, producer surplus in this market is
a. $1,500.
b. $2,400.
c. $3,000.
d. $3,600.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Producer surplus
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  339
112. Refer to Figure 8-5. Without a tax, total surplus in this market is
a. $3,000.
b. $4,800.
c. $6,000.
d. $7,200.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Total surplus
MSC: Interpretive
113. Refer to Figure 8-5. When a tax is imposed in this market, the price buyers effectively pay is
a. $10.
b. $16.
c. $22.
d. between $10 and $16.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Applicative
114. Refer to Figure 8-5. When a tax is imposed in this market, the price sellers effectively receive is
a. $6.
b. $10.
c. $16.
d. between $6 and $10.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Applicative
115. Refer to Figure 8-5. When a tax is imposed in this market, consumer surplus is
a. $600.
b. $900.
c. $1,500.
d. $3,000.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Consumer surplus
MSC: Applicative
116. Refer to Figure 8-5. When a tax is imposed in this market, producer surplus is
a. $450.
b. $600.
c. $900.
d. $1,500.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Producer surplus
MSC: Applicative
117. Refer to Figure 8-5. When a tax is placed on this good, the quantity sold
a. is 600 and buyers effectively pay $10.
b. is 300 and buyers effectively pay $10.
c. is 600 and buyers effectively pay $16.
d. is 300 and buyers effectively pay $16.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price | Equilibrium quantity MSC: Applicative
118. Refer to Figure 8-5. When the government imposes a tax in this market, tax revenue is
a. $600.
b. $900.
c. $1,500.
d. $3,000.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Government
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
340  Chapter 8/Application: The Costs of Taxation
119. Refer to Figure 8-5. The amount of the tax on each unit of the good is
a. $6.
b. $8.
c. $10.
d. $12.
ANS: C
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax
MSC: Interpretive
120. Refer to Figure 8-5. Total surplus with the tax in place is
a. $1,500.
b. $3,600.
c. $4,500.
d. $6,000.
ANS: C
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Total surplus
MSC: Applicative
121. Refer to Figure 8-5. What happens to consumer surplus when a tax is imposed in this market?
a. It falls by $3,600.
b. It falls by $2,700.
c. It falls by $1,800.
d. It falls by $900.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Tax | Consumer surplus
MSC: Applicative
122. Refer to Figure 8-5. What happens to producer surplus when a tax is imposed in this market?
a. It falls by $600.
b. It falls by $900.
c. It falls by $1,800.
d. It falls by $2,100.
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Tax | Producer surplus
MSC: Applicative
123. Refer to Figure 8-5. What happens to total surplus in this market when a tax is imposed?
a. It increases by $1,500.
b. It increases by $3,000.
c. It decreases by $1,500.
d. It decreases by $,3000.
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Tax | Total surplus
MSC: Applicative
124. Refer to Figure 8-5. The tax results in a deadweight loss that amounts to
a. $600.
b. $900.
c. $1,500.
d. $1,800.
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Deadweight losses
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  341
Figure 8-6
125. Refer to Figure 8-6. Before the tax is imposed,
a. the equilibrium price is $16 and the equilibrium quantity is 15.
b. the equilibrium price is $12 and the equilibrium quantity is 25.
c. the equilibrium price is $12 and the equilibrium quantity is 25.
d. the equilibrium price is $8 and the equilibrium quantity is 15.
ANS: B
PTS: 1
DIF: 1
REF: 8-1
TOP: Equilibrium price | Equilibrium quantity
MSC: Interpretive
126. Refer to Figure 8-6. As a result of the tax,
a. buyers effectively pay $16 for each unit of the good and sellers effectively receive $12 for each unit of the
good.
b. buyers effectively pay $16 for each unit of the good and sellers effectively receive $8 for each unit of the good.
c. buyers effectively pay $12 for each unit of the good and sellers effectively receive $8 for each unit of the good.
d. buyers effectively pay $14 for each unit of the good and sellers effectively receive $10 for each unit of the
good.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Applicative
127. Refer to Figure 8-6. Suppose a 20th unit of the good were sold by a seller to a buyer. Which of the following
statements is correct?
a. On the 20th unit, the difference between the buyer’s value and the seller’s cost is less than the tax per unit.
b. On the 20th unit, the difference between the buyer’s value and the seller’s cost is greater than the tax per unit.
c. On the 20th unit, the difference between the buyer’s value and the seller’s cost is equal to the tax per unit.
d. It makes sense for the buyer to buy, and for the seller to sell, the 20th unit with or without the tax in place.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Applicative
128. Refer to Figure 8-6. Which of the following statements summarizes the incidence of the tax?
a. For each unit of the good that is sold, buyers bear one-half of the tax burden and sellers bear one-half of the tax
burden.
b. For each unit of the good that is sold, buyers bear one-third of the tax burden and sellers bear two-thirds of the
tax burden.
c. For each unit of the good that is sold, buyers bear one-fourth of the tax burden and sellers bear three-fourths of
the tax burden.
d. For each unit of the good that is sold, buyers bear three-fourths of the tax burden and sellers bear one-fourth of
the tax burden.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax incidence
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
342  Chapter 8/Application: The Costs of Taxation
129. Refer to Figure 8-6. Which of the following statements is correct?
a. Total surplus before the tax was imposed amounted to $250.
b. After the tax is imposed, consumer surplus amounts to 36 percent of its pre-tax value.
c. After the tax is imposed, producer surplus amounts to 36 percent of its pre-tax value.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Total surplus
MSC: Applicative
130. Refer to Figure 8-6. Which of the following statements is correct?
a. Total surplus before the tax was imposed amounted to $225.
b. After the tax is imposed, consumer surplus amounts to 25 percent of its pre-tax value.
c. After the tax is imposed, the sum of producer surplus and consumer surplus amounts to 36 percent of its pre-tax
value.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Total surplus
MSC: Applicative
131. Refer to Figure 8-6. As a result of the tax,
a. consumer surplus decreases from $150 to $60.
b. producer surplus decreases from $125 to $45.
c. the market experiences a deadweight loss of $45.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Deadweight losses
MSC: Applicative
132. Refer to Figure 8-6. As a result of the tax,
a. consumer surplus decreases by $65; producer surplus decreases by $85; tax revenue of $120 is generated; and
the deadweight loss of the tax is $30.
b. consumer surplus decreases by $75; producer surplus decreases by $75; tax revenue of $120 is generated; and
the deadweight loss of the tax is $30.
c. consumer surplus decreases by $80; producer surplus decreases by $80; tax revenue of $120 is generated; and
the deadweight loss of the tax is $40.
d. consumer surplus decreases by $120; producer surplus decreases by $120; tax revenue of $200 is generated;
and the deadweight loss of the tax is $40.
ANS: C
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Deadweight losses
MSC: Applicative
133. Refer to Figure 8-6. Which of the following statements is correct?
a. The loss of producer surplus that is associated with some sellers dropping out of the market as a result of the
tax is $30.
b. The loss of consumer surplus for those buyers of the good who continue to buy it after the tax is imposed is
$60.
c. The loss of consumer surplus caused by this tax exceeds the loss of producer surplus caused by this tax.
d. This tax produces $200 in tax revenue for the government.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Deadweight losses
MSC: Applicative
134. Refer to Figure 8-6. The deadweight loss associated with this tax amounts to
a. $60, and this figure represents the amount by which tax revenue to the government exceeds the combined loss
of producer and consumer surpluses.
b. $60, and this figure represents the surplus that is lost because the tax discourages mutually advantageous trades
between buyers and sellers.
c. $40, and this figure represents the amount by which tax revenue to the government exceeds the combined loss
of producer and consumer surpluses.
d. $40, and this figure represents the surplus that is lost because the tax discourages mutually advantageous trades
between buyers and sellers.
ANS: D
PTS: 1
DIF: 3
REF: 8-1
TOP: Deadweight losses
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  343
Figure 8-7 The graph below represents a $10 per unit tax on a good. On the graph, Q represents quantity
and P represents price.
135. Refer to Figure 8-7. The tax causes consumer surplus to decrease by the area
a. A.
b. B + C.
c. A + B + C.
d. A + B + C+ D + F.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Consumer surplus
MSC: Interpretive
136. Refer to Figure 8-7. After the tax goes into effect, consumer surplus is the area
a. A.
b. B + C.
c. A + B + C.
d. A + B + D + J + K.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Consumer surplus
MSC: Interpretive
137. Refer to Figure 8-7. The tax causes producer surplus to decrease by the area
a. D + F.
b. D + F + G.
c. D + F + J.
d. D + F + G + H.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Producer surplus
MSC: Interpretive
138. Refer to Figure 8-7. After the tax goes into effect, producer surplus is the area
a. D + F + G + H + J.
b. D + F + G + H.
c. D + F + J.
d. J.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Producer surplus
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
344  Chapter 8/Application: The Costs of Taxation
139. Refer to Figure 8-7. The government collects tax revenue that is represented by the area
a. L.
b. B + D.
c. C + F.
d. F + G + L.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Government
MSC: Applicative
140. Refer to Figure 8-7. The decrease in consumer and producer surpluses that is not offset by tax revenue is the area
a. C.
b. F.
c. G.
d. C + F.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Applicative
141. Refer to Figure 8-7. The deadweight loss of the tax is represented by the area
a. B + D.
b. C + F.
c. A + C + F + J.
d. B + C + D + F.
ANS: B
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Applicative
142. Refer to Figure 8-7. One effect of the tax is to
a. reduce consumer surplus from $60 to $24.
b. reduce producer surplus from $32 to $8.
c. create a deadweight loss of $24.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Deadweight losses
MSC: Applicative
143. Refer to Figure 8-7. One effect of the tax is to
a. reduce consumer surplus by $36.
b. reduce producer surplus by $24.
c. create a deadweight loss of $20.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 3
REF: 8-1
TOP: Consumer surplus | Producer surplus | Deadweight losses
MSC: Applicative
Scenario 8-1
Ryan would be willing to pay as much as $100 per week to have his house cleaned. Tammy's opportunity cost of
cleaning Ryan’s house is $70 per week.
144. Refer to Scenario 8-1. If Ryan pays Tammy $80 to clean his house, Ryan’s consumer surplus is
a. $100.
b. $80.
c. $70.
d. $20.
ANS: D
PTS: 1
DIF: 1
REF: 8-1
TOP: Consumer surplus
MSC: Interpretive
145. Refer to Scenario 8-1. If Tammy cleans Ryan's house for $80, Tammy’s producer surplus is
a. $10.
b. $70.
c. $80.
d. $100.
ANS: A
PTS: 1
DIF: 1
REF: 8-1
TOP: Producer surplus
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  345
146. Refer to Scenario 8-1. Assume Ryan is required to pay a tax of $40 when he hires someone to clean his house for
a week. Which of the following is correct?
a. Ryan will now clean his own house.
b. Tammy will continue to clean Ryan's house but her producer surplus will decline.
c. Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will increase.
d. Ryan will continue to hire Tammy to clean his house but his consumer surplus will decline.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Deadweight losses
MSC: Applicative
147. Refer to Scenario 8-1. Assume Ryan is required to pay a tax of $15 when he hires someone to clean his house.
Which of the following is true?
a. Ryan will continue to hire Tammy to clean his house but his consumer surplus will decline.
b. Tammy will continue to clean Ryan's house but her producer surplus will decline.
c. Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will decrease.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Deadweight losses
MSC: Applicative
Scenario 8-2
Tom mows Stephanie's lawn for $25. Tom’s opportunity cost of mowing Stephanie’s lawn is $20, and Stephanie's
willingness to pay Tom to mow her lawn is $28.
148. Refer to Scenario 8-2. Stephanie's consumer surplus as a result of hiring Tom to mow her lawn is
a. $3.
b. $5.
c. $8.
d. $25.
ANS: A
PTS: 1
DIF: 1
REF: 8-1
TOP: Consumer surplus
MSC: Interpretive
149. Refer to Scenario 8-2. Tom’s producer surplus as a result of mowing Stephanie’s lawn is
a. $2.
b. $3.
c. $5.
d. $25.
ANS: C
PTS: 1
DIF: 1
REF: 8-1
TOP: Producer surplus
MSC: Interpretive
150. Refer to Scenario 8-2. Assume Ryan is required to pay a tax of $3 each time he mows a lawn. Which of the
following results is most likely?
a. Stephanie now will decide to mow her own lawn, and Ryan will decide it is no longer in his interest to mow
Stephanie’s lawn.
b. Stephanie still is willing to pay Ryan to mow her lawn, but Ryan will decline her offer.
c. Ryan still is willing to mow Stephanie’s lawn, but Stephanie will decide to mow her own lawn.
d. Ryan and Stephanie still can engage in a mutually agreeable trade.
ANS: D
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Deadweight losses
MSC: Applicative
151. Refer to Scenario 8-2. Assume Ryan is required to pay a tax of $10 each time he mows a lawn. Which of the
following results is most likely?
a. Stephanie now will decide to mow her own lawn, and Ryan will decide it is no longer in his interest to mow
Stephanie’s lawn.
b. Stephanie still is willing to pay Ryan to mow her lawn, but Ryan will decline her offer.
c. Ryan still is willing to mow Stephanie’s lawn, but Stephanie will decide to mow her own lawn.
d. Ryan and Stephanie still can engage in a mutually agreeable trade.
ANS: A
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Deadweight losses
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
346  Chapter 8/Application: The Costs of Taxation
152. The deadweight loss from a tax
a. does not vary in amount when the price elasticity of demand changes.
b. does not vary in amount when the amount of the tax per unit changes.
c. is larger, the larger is the amount of the tax per unit.
d. is smaller, the larger is the amount of the tax per unit.
ANS: C
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses
MSC: Interpretive
153. Which of the following statements is correct regarding a tax on a good and the resulting deadweight loss?
a. The greater are the price elasticities of supply and demand, the greater is the deadweight loss.
b. The greater is the price elasticity of supply and the smaller is the price elasticity of demand, the greater is the
deadweight loss.
c. The smaller are the decreases in quantity demanded and quantity supplied, the greater the deadweight loss.
d. The smaller is the wedge between the effective price to sellers and the effective price to buyers, the greater is
the deadweight loss.
ANS: A
PTS: 1
DIF: 2
REF: 8-2
TOP: Elasticity | Deadweight losses
MSC: Applicative
154. The amount of deadweight loss that results from a tax of a given size is determined by the
a. response of buyers to the tax.
b. number of buyers in the market relative to the number of sellers.
c. price elasticities of demand and supply.
d. ratio of the tax per unit to the effective price received by sellers.
ANS: C
PTS: 1
DIF: 2
REF: 8-2
TOP: Elasticity | Deadweight losses
MSC: Interpretive
155. The amount of deadweight loss from a tax depends upon
a. the price elasticity of demand.
b. the price elasticity of supply.
c. the amount of the tax per unit.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses
MSC: Interpretive
156. Suppose a tax of $1 per unit is imposed on a good. The more elastic the supply of the good, other things equal,
a. the smaller is the response of quantity supplied to the tax.
b. the larger is the tax burden on sellers relative to the tax burden on buyers.
c. the larger is the deadweight loss of the tax.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 3
REF: 8-2
TOP: Price elasticity of supply | Deadweight losses MSC: Applicative
157. Suppose a tax of $1 per unit is imposed on a good. The more elastic the demand for the good, other things equal,
a. the larger is the decrease in quantity demanded as a result of the tax.
b. the smaller is the tax burden on buyers relative to the tax burden on sellers.
c. the larger is the deadweight loss of the tax.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 3
REF: 8-2
TOP: Price elasticity of demand | Deadweight losses MSC: Analytical
158. Quantitatively, which of the following taxes are the most important taxes in the U.S. economy?
a. taxes on investment
b. taxes on labor
c. sales taxes
d. property taxes
ANS: B
PTS: 1
DIF: 1
REF: 8-2
TOP: Taxes | Labor
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  347
159. Economists disagree on whether labor taxes cause small or large deadweight losses. This disagreement arises
primarily because economists hold different views about
a. the size of labor taxes.
b. the importance of labor taxes imposed by the federal government relative to the importance of labor taxes
imposed by the various states.
c. the elasticity of labor supply.
d. the elasticity of labor demand.
ANS: C
PTS: 1
DIF: 2
REF: 8-2
TOP: Taxes | Labor | Elasticity | Deadweight losses MSC: Interpretive
160. Taxes on labor have the effect of encouraging
a. workers to work more hours.
b. the elderly to postpone retirement.
c. second earners within a family to take a job.
d. unscrupulous people to take part in the underground economy.
ANS: D
PTS: 1
DIF: 2
REF: 8-2
TOP: Taxes | Labor
MSC: Interpretive
161. The size of a tax and the deadweight loss that results from the tax are
a. positively related.
b. negatively related.
c. independent of each other.
d. equal to each other.
ANS: A
PTS: 1
DIF: 1
REF: 8-2
TOP: Deadweight losses
MSC: Interpretive
162. Suppose that policymakers are considering placing a tax on either of two markets. In Market A, the tax will have a
significant effect on the price consumers pay, but it will not affect equilibrium quantity very much. In Market B,
the same tax will have only a small effect on the price consumers pay, but it will have a large effect on the
equilibrium quantity. Other factors are held constant. In which market will the tax have a larger deadweight loss?
a. Market A
b. Market B
c. The deadweight loss will be the same in both markets.
d. There is not enough information to answer the question.
ANS: B
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses
MSC: Applicative
163. Consider a good to which a per-unit tax applies. The greater the price elasticities of demand and supply for the
good, the
a. smaller the deadweight loss from the tax.
b. greater the deadweight loss from the tax.
c. more efficient is the tax.
d. more equitable is the distribution of the tax burden between buyers and sellers.
ANS: B
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses | Elasticity
MSC: Interpretive
164. Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the
a. larger is the price elasticity of demand.
b. smaller is the price elasticity of supply.
c. larger is the amount of the tax.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses
MSC: Interpretive
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348  Chapter 8/Application: The Costs of Taxation
165. Consider a good to which a per-unit tax applies. The size of the deadweight that results from the tax is smaller, the
a. less elastic is the demand.for the good.
b. less elastic is the supply of the good.
c. smaller is the amount of the tax.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses
MSC: Interpretive
166. Assume the price of gasoline is $2.00 per gallon and the equilibrium quantity of gasoline is 10 million gallons per
day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would result in the
largest deadweight loss?
a. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.6; and the
gasoline tax amounts to $0.20 per gallon.
b. The price elasticity of demand for gasoline is 0.1; the price elasticity of supply for gasoline is 0.4; and the
gasoline tax amounts to $0.20 per gallon.
c. The price elasticity of demand for gasoline is 0.2; the price elasticity of supply for gasoline is 0.6; and the
gasoline tax amounts to $0.30 per gallon.
d. There is insufficient information to make this determination.
ANS: C
PTS: 1
DIF: 3
REF: 8-2
TOP: Deadweight losses
MSC: Applicative
167. Assume the price of gasoline is $2.40 per gallon and the equilibrium quantity of gasoline is 12 million gallons per
day with no tax on gasoline. Starting from this initial situation, which of the following scenarios would result in the
largest deadweight loss?
a. A 10 percent increase in the price of gasoline reduces the quantity of gasoline demanded by 2 percent and it
increases the quantity of gasoline supplied by 5 percent; and the tax on gasoline amounts to $0.40 per gallon.
b. A 10 percent increase in the price of gasoline reduces the quantity of gasoline demanded by 2 percent and it
increases the quantity of gasoline supplied by 7 percent; and the tax on gasoline amounts to $0.40 per gallon.
c. A 10 percent increase in the price of gasoline reduces the quantity of gasoline demanded by 1 percent and it
increases the quantity of gasoline supplied by 8 percent; and the tax on gasoline amounts to $0.35 per gallon.
d. There is insufficient information to make this determination.
ANS: D
PTS: 1
DIF: 3
REF: 8-2
TOP: Deadweight losses
MSC: Applicative
168. Other things equal, the deadweight loss of a tax
a. decreases as the size of the tax increases.
b. increases as the size of the tax increases, but the increase in the deadweight loss is less rapid than the increase
in the size of the tax.
c. increases as the size of the tax increases, and the increase in the deadweight loss is more rapid than the increase
in the size of the tax.
d. increases as the price elasticities of demand and/or supply increase, but the deadweight loss does not change as
the size of the tax increases.
ANS: C
PTS: 1
DIF: 3
REF: 8-2
TOP: Deadweight losses
MSC: Applicative
169. Economists generally agree that the most important tax in the U.S. economy is
a. the income tax.
b. the tax on labor.
c. the inheritance or death tax.
d. corporate profit taxes.
ANS: B
PTS: 1
DIF: 1
REF: 8-2
TOP: Taxes | Labor
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  349
170. Concerning the labor market and taxes on labor, economists disagree about
a. the size of the tax on labor.
b. the size of the deadweight loss of the tax on labor.
c. whether or not a tax on labor places a wedge between the wage that firms pay and the wage that workers
receive.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 8-2
TOP: Economists | Taxes
MSC: Interpretive
171. The Social Security tax is a tax on
a. capital.
b. labor.
c. consumption expenditures.
d. earnings during retirement.
ANS: B
PTS: 1
DIF: 1
REF: 8-2
TOP: Tax | Social Security
MSC: Interpretive
172. As more people become self-employed, which allows them to determine how many hours they work per week, we
would expect the deadweight loss from the Social Security tax to
a. increase and the revenue generated from the tax to increase.
b. increase and the revenue generated from the tax to decrease.
c. decrease and the revenue generated from the tax to increase.
d. decrease and the revenue generated from the tax to decrease.
ANS: B
PTS: 1
DIF: 2
REF: 8-2
TOP: Tax | Social Security
MSC: Applicative
173. Which of the following taxes is, at least in large part, a tax on labor?
a. the Social Security tax
b. the Medicare tax
c. the federal income tax
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 8-2
TOP: Taxes | Labor
MSC: Interpretive
174. If the labor supply curve is nearly vertical, a tax on labor
a. has a large deadweight loss.
b. raises a small amount of tax revenue.
c. has little impact on the amount of work that workers are willing to do.
d. results in a large tax burden on the firms that hire labor.
ANS: C
PTS: 1
DIF: 2
REF: 8-2
TOP: Tax | Inelastic supply
MSC: Applicative
175. The marginal tax rate on labor income for many workers in the United States is almost
a. 30 percent.
b. 40 percent.
c. 50 percent.
d. 65 percent.
ANS: C
PTS: 1
DIF: 1
REF: 8-2
TOP: Taxes | Labor
MSC: Definitional
176. The more mothers are pressured by society to be housekeepers and stay out of the labor force, the
a. more elastic the supply of labor will be.
b. less elastic the supply of labor will be.
c. flatter the labor supply curve will be.
d. greater is the decrease in employment that will result from a tax on labor.
ANS: B
PTS: 1
DIF: 2
REF: 8-2
TOP: Elasticity | Labor
MSC: Applicative
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350  Chapter 8/Application: The Costs of Taxation
177. The more freedom people are given to choose the date of their retirement, the
a. more elastic is the supply of labor.
b. less elastic is the supply of labor.
c. steeper is the labor supply curve.
d. smaller is the decrease in employment that will result from a tax on labor.
ANS: A
PTS: 1
DIF: 2
REF: 8-2
TOP: Elasticity | Labor
MSC: Applicative
178. Taxes on labor encourage all of the following except
a. older workers to take early retirement from the labor force.
b. mothers to stay at home rather than work in the labor force.
c. workers to work overtime.
d. people to be paid “under the table.”
ANS: C
PTS: 1
DIF: 2
REF: 8-2
TOP: Taxes | Labor
MSC: Interpretive
179. Henry George argued that the government should raise
a. all of its revenue from a tax on land.
b. all of its revenue from taxes on labor.
c. most of its revenue from consumption taxes.
d. tax revenue from multiple and diverse taxes.
ANS: A
PTS: 1
DIF: 1
REF: 8-2
TOP: Land tax MSC: Definitional
180. Since the amount of land is fixed, the total supply of land is
a. relatively elastic.
b. perfectly elastic.
c. perfectly inelastic.
d. relatively inelastic.
ANS: C
PTS: 1
DIF: 1
REF: 8-2
TOP: Perfectly inelastic supply
MSC: Interpretive
181. If the supply of land is fixed, the burden of a tax on land falls
a. partly on landowners and partly on users of land.
b. entirely on the renters or users of land.
c. entirely on workers.
d. entirely on landowners.
ANS: D
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax MSC: Interpretive
182. A tax on raw land causes
a. a large deadweight loss.
b. no deadweight loss.
c. landlords to bear none of the burden of the tax.
d. the generation of such a large amount of tax revenue that all other taxes could be eliminated.
ANS: B
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax | Deadweight losses MSC: Interpretive
183. Today's property tax
a. taxes only raw land.
b. is exactly the same as Henry George's single-tax proposal.
c. taxes land and the improvements to land.
d. has no deadweight loss since the amount of revenue going to the government equals the reduction in the
landowners’ surplus.
ANS: C
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax MSC: Definitional
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copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  351
184. For Henry George's single tax on land not to distort economic incentives, the tax would have to be on
a. improvements to land.
b. land used for commercial purposes.
c. land used for residential purposes.
d. raw land.
ANS: D
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax MSC: Interpretive
185. For Henry George's land-tax argument to be valid, the land that is taxed must be
a. improved land.
b. productive land.
c. raw land.
d. urban land.
ANS: C
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax MSC: Interpretive
186. Unlike the supply of raw land, the supply of improvements
a. is perfectly inelastic.
b. has an elasticity that is greater than zero.
c. cannot be taxed, even if an attempt were made to tax it.
d. is exempt from taxation under current law.
ANS: B
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax MSC: Interpretive
187. One negative aspect of Henry George's single tax on land is that, if it were applied today,
a. the loss of surplus to landowners would be greater than the tax revenue raised.
b. the deadweight loss would be much larger than the deadweight loss of alternative taxes.
c. the tax would not raise enough revenue to pay for government spending.
d. it would result in enormous harm to users of land.
ANS: C
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax MSC: Interpretive
188. According to the economist Milton Friedman, the "least bad" tax is a tax on
a. income received from profits and interest.
b. labor income.
c. the unimproved value of land.
d. the value of land including the improvements to the land.
ANS: C
PTS: 1
DIF: 1
REF: 8-2
TOP: Land tax MSC: Definitional
189. Nobel Prize-winning economist Milton Friedman said that, "In my opinion, the least bad tax is the property tax on
the unimproved value of land." Why?
a. Land owners can afford the tax better than other people.
b. A tax on unimproved land would be sufficient to fund government, so all other taxes could be abolished.
c. Such a tax could generate more government revenue than any tax on labor or capital.
d. A tax on unimproved land would have no deadweight loss.
ANS: D
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax MSC: Interpretive
190. If the tax on a good is doubled, the deadweight loss of the tax
a. increases by 50 percent.
b. doubles.
c. triples.
d. quadruples.
ANS: D
PTS: 1
DIF: 3
REF: 8-3
TOP: Deadweight losses
MSC: Analytical
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352  Chapter 8/Application: The Costs of Taxation
191. If the tax on a good is doubled, the deadweight loss of the tax
a. remains constant.
b. doubles.
c. quadruples.
d. decreases by a percentage that cannot be determined without further information.
ANS: C
PTS: 1
DIF: 3
REF: 8-3
TOP: Deadweight losses
MSC: Analytical
192. If the tax on a good is increased from $0.10 per unit to $0.40 per unit, the deadweight loss from the tax
a. remains constant.
b. increases by a factor of 4.
c. increases by a factor of 9.
d. increases by a factor of 16.
ANS: D
PTS: 1
DIF: 3
REF: 8-3
TOP: Deadweight losses
MSC: Analytical
193. In which of the following instances would the deadweight loss of the tax on airline tickets increase by a factor of 9?
a. The tax on airline tickets increases from $20 per ticket to $60 per ticket.
b. The tax on airline tickets increases from $20 per ticket to $90 per ticket.
c. The tax on airline tickets increases from $15 per ticket to $60 per ticket.
d. The tax on airline tickets increases from $15 per ticket to $135 per ticket.
ANS: A
PTS: 1
DIF: 3
REF: 8-3
TOP: Deadweight losses
MSC: Analytical
194. Which of the following events is consistent with an increase in the deadweight loss of the gasoline tax from $30
million to $120 million?
a. The tax on gasoline increases from $0.30 per gallon to $0.45 per gallon.
b. The tax on gasoline increases from $0.30 per gallon to $0.60 per gallon.
c. The tax on gasoline increases from $0.25 per gallon to $0.45 per gallon.
d. The tax on gasoline increases from $0.25 per gallon to $1.00 per gallon.
ANS: B
PTS: 1
DIF: 3
REF: 8-3
TOP: Deadweight losses
MSC: Analytical
195. The supply curve and the demand curve for a good are straight lines, and the good is taxed. When the tax is
doubled,
a. the base of the triangle that represents the deadweight loss quadruples.
b. the height of the triangle that represents the deadweight loss doubles.
c. the deadweight loss of the tax doubles.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 8-3
TOP: Deadweight losses
MSC: Applicative
196. If the size of a tax increases, tax revenue
a. definitely increases.
b. definitely decreases.
c. definitely remains the same.
d. may increase, decrease, or remain the same.
ANS: D
PTS: 1
DIF: 2
REF: 8-3
TOP: Taxes
MSC: Interpretive
197. The Laffer curve relates
a. the tax rate to tax revenue raised by the tax.
b. the tax rate to the deadweight loss of the tax.
c. the price elasticity of supply to the deadweight loss of the tax.
d. government welfare payments to the birth rate.
ANS: A
PTS: 1
DIF: 2
REF: 8-3
TOP: Laffer curve
MSC: Definitional
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Chapter 8/Application: The Costs of Taxation  353
198. Ronald Reagan believed that reducing income tax rates would
a. do little, if anything, to encourage hard work.
b. result in large increases in deadweight losses.
c. raise economic well-being and perhaps even tax revenue.
d. lower economic well-being, even though tax revenue could possibly increase.
ANS: C
PTS: 1
DIF: 2
REF: 8-3
TOP: Economic welfare | Laffer curve
MSC: Definitional
199. The view held by Arthur Laffer and Ronald Reagan—that cuts in tax rates would encourage people to increase the
quantity of labor they supplied—became known as
a. California economics.
b. welfare economics.
c. supply-side economics.
d. elasticity economics.
ANS: C
PTS: 1
DIF: 1
REF: 8-3
TOP: Supply-side economics
MSC: Definitional
200. Which of the following scenarios is not consistent with the Laffer curve?
a. The tax rate is very low and tax revenue is very low.
b. The tax rate is very high and tax revenue is very low.
c. The tax rate is very high and tax revenue is very high.
d. The tax rate is moderate (between very high and very low) and tax revenue is relatively high.
ANS: C
PTS: 1
DIF: 2
REF: 8-3
TOP: Laffer curve
MSC: Interpretive
201. When a country is on the downward-sloping side of the Laffer curves, a cut in the tax rate will
a. decrease tax revenue and decrease the deadweight loss.
b. decrease tax revenue and increase the deadweight loss.
c. increase tax revenue and decrease the deadweight loss.
d. increase tax revenue and increase the deadweight loss.
ANS: C
PTS: 1
DIF: 2
REF: 8-3
TOP: Laffer curve
MSC: Applicative
202. Studies indicate that if income tax rates in Sweden had been reduced from their high 1980s levels, income tax
collections would have
a. decreased moderately.
b. decreased significantly.
c. risen.
d. remained roughly constant.
ANS: C
PTS: 1
DIF: 2
REF: 8-3
TOP: Tax rates MSC: Definitional
203. The argument that cutting income tax rates will increase tax revenues
a. clearly has merit for the United States but not for most other countries.
b. clearly has merit for all countries that have income taxes.
c. may not have merit for the United States but it has merit for most other countries.
d. is most likely to have merit for a country that has very high marginal tax rates.
ANS: D
PTS: 1
DIF: 2
REF: 8-3
TOP: Tax rates MSC: Interpretive
204. The higher a country's tax rates, the more likely that country will be
a. at the top of the Laffer curve.
b. on the positively sloped part of the Laffer curve.
c. on the negatively sloped part of the Laffer curve.
d. experiencing small deadweight losses.
ANS: C
PTS: 1
DIF: 2
REF: 8-3
TOP: Laffer curve
MSC: Interpretive
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354  Chapter 8/Application: The Costs of Taxation
205. Which of the following would likely have the smallest deadweight loss relative to the tax revenue?
a. a head tax (that is, a tax everyone must pay regardless of what one does or buys)
b. an income tax
c. a tax on compact discs
d. a tax on caviar
ANS: A
PTS: 1
DIF: 3
REF: 8-3
TOP: Deadweight losses
MSC: Analytical
206. Which of the following statements is true for markets in which the demand curve slopes downward and the supply
curve slopes upward?
a. As the size of the tax increases, tax revenue continually rises and deadweight loss continually falls.
b. As the size of the tax increases, tax revenue and deadweight loss rise initially, but both eventually begin to fall.
c. As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss
continually rises.
d. As the size of the tax increases, tax revenue rises initially, but it eventually begins to fall; deadweight loss falls
initially, but eventually it begins to rise.
ANS: C
PTS: 1
DIF: 2
REF: 8-3
TOP: Deadweight losses
MSC: Applicative
207. Which of the following ideas is the most plausible?
a. Reducing a high tax rate is less likely to increase tax revenue than is reducing a low tax rate.
b. Reducing a high tax rate is more likely to increase tax revenue than is reducing a low tax rate.
c. Reducing a high tax rate will have the same effect on tax revenue as reducing a low tax rate.
d. Reducing a tax rate can never increase tax revenue.
ANS: B
PTS: 1
DIF: 3
REF: 8-3
TOP: Tax rates | Laffer curve
MSC: Applicative
208. Suppose the tax on gasoline is raised from $0.50 per gallon to $2.50 per gallon. As a result,
a. tax revenue necessarily increases.
b. the deadweight loss of the tax necessarily increases.
c. the supply curve for gasoline necessarily becomes steeper.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 8-3
TOP: Deadweight losses
MSC: Applicative
209. Suppose the tax on liquor is increased so that the tax goes from being a "medium" tax to being a "large" tax. As a
result, it is likely that
a. tax revenue increases and the deadweight loss increases.
b. tax revenue increases and the deadweight loss decreases.
c. tax revenue decreases and the deadweight loss increases.
d. tax revenue decreases and the deadweight loss decreases.
ANS: C
PTS: 1
DIF: 2
REF: 8-3
TOP: Deadweight losses
MSC: Applicative
210. As the tax on a good increases from $1 per unit to $2 per unit to $3 per unit and so on,
a. the tax revenue increases at first, but it eventually peaks and then decreases.
b. the deadweight loss increases at first, but it eventually peaks and then decreases.
c. the tax revenue always increases and the deadweight loss always increases.
d. the tax revenue always decreases and the deadweight loss always increases.
ANS: A
PTS: 1
DIF: 2
REF: 8-3
TOP: Deadweight losses
MSC: Applicative
211. In which of the following cases is it most likely that an increase in the size of a tax will decrease tax revenue?
a. The price elasticity of demand is small and the price elasticity of supply is large.
b. The price elasticity of demand is large and the price elasticity of supply is small.
c. The price elasticity of demand and the price elasticity of supply are both small.
d. The price elasticity of demand and the price elasticity of supply are both large.
ANS: D
PTS: 1
DIF: 3
REF: 8-3
TOP: Price elasticity of demand | Price elasticity of supply
MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  355
212. Which of the following statements is correct?
a. According to the evidence from major industrial countries, there is no significant relationship between tax rates
and the average number of hours worked per week.
b. In the early 1970s, the average French worker worked more hours per week than the average American worker;
by the mid-1990s, the reverse was true.
c. Between the early 1970s and the mid-1990s, labor taxes in France decreased while labor taxes in the United
States remained roughly constant.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 8-3
TOP: Taxes | Labor
MSC: Interpretive
213. Which of the following statements is correct?
a. In 2005, the combined Social Security-Medicare tax amounted to 15.3 percent of a worker’s income.
b. The White House budget office has asserted that Social Security and Medicare have promised to pay out $18
trillion more in benefits than they will receive in revenue in coming decades.
c. If payroll taxes are increased to maintain current levels of Social Security and Medicare benefits, an expected
result would be fewer hours worked per week by the average American worker.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 8-3
TOP: Taxes | Social Security | Medicare
MSC: Interpretive
True/False
1. Normally, both buyers and sellers of a good become worse off when the good is taxed.
ANS: T
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Buyers | Sellers
MSC: Interpretive
2. When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and
sellers caused by the tax.
ANS: F
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Economic welfare
MSC: Interpretive
3. A tax places a wedge between the price buyers pay and the price sellers receive.
ANS: T
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Interpretive
4. A tax on a good causes the size of the market to increase.
ANS: F
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax | Equilibrium quantity MSC: Interpretive
5. A tax raises the price received by sellers and lowers the price paid by buyers.
ANS: F
PTS: 1
DIF: 1
REF: 8-1
TOP: Tax | Equilibrium price
MSC: Interpretive
6. When a tax is imposed, the loss of consumer surplus and producer surplus as a result of the tax exceeds the tax
revenue collected by the government.
ANS: T
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Economic welfare
MSC: Interpretive
7. Because taxes distort incentives, they cause markets to allocate resources inefficiently.
ANS: T
PTS: 1
DIF: 2
REF: 8-1
TOP: Tax | Efficiency
MSC: Interpretive
8. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from
trade.
ANS: T
PTS: 1
DIF: 2
REF: 8-1
TOP: Deadweight losses
MSC: Interpretive
9. The more inelastic are demand and supply, the greater is the deadweight loss of a tax.
ANS: F
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses | Elasticity MSC: Applicative
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356  Chapter 8/Application: The Costs of Taxation
10. If a tax did not induce buyers or sellers to change their behavior, it would not cause a deadweight loss.
ANS: T
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses
MSC: Interpretive
11. The most important tax in the U.S. economy is the tax on corporations’ profits.
ANS: F
PTS: 1
DIF: 1
REF: 8-2
TOP: Taxes
MSC: Definitional
12. The Social Security tax, and to a large extent, the federal income tax, are labor taxes.
ANS: T
PTS: 1
DIF: 1
REF: 8-2
TOP: Taxes | Labor
MSC: Interpretive
13. Economists disagree on whether labor taxes have a small or large deadweight loss.
ANS: T
PTS: 1
DIF: 1
REF: 8-2
TOP: Deadweight losses | Economists
MSC: Definitional
14. A tax on unimproved land falls entirely on landowners, because the supply of land is perfectly inelastic.
ANS: T
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax | Perfectly inelastic supply
MSC: Interpretive
15. Because the supply of land is perfectly elastic, the deadweight loss of a tax on land is enormous.
ANS: F
PTS: 1
DIF: 2
REF: 8-2
TOP: Land tax | Deadweight losses MSC: Interpretive
16. The demand for bread is less elastic than the demand for donuts; hence, a tax on bread will create a larger
deadweight loss than will the same tax on donuts, other things equal.
ANS: F
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses | Elasticity MSC: Applicative
17. The larger the deadweight loss from taxation, the larger the cost of government programs.
ANS: T
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses | Government
MSC: Interpretive
18. A tax on insulin is likely to cause a tremendous deadweight loss to society.
ANS: F
PTS: 1
DIF: 2
REF: 8-2
TOP: Deadweight losses | Elasticity MSC: Applicative
19. The deadweight loss of a tax rises even more rapidly than the size of the tax.
ANS: T
PTS: 1
DIF: 2
REF: 8-3
TOP: Deadweight losses
MSC: Interpretive
20. As the size of a tax increases, the government's tax revenue rises, then falls.
ANS: T
PTS: 1
DIF: 2
REF: 8-3
TOP: Laffer curve
MSC: Interpretive
21. If the size of a tax doubles, the deadweight loss rises by a factor of six.
ANS: F
PTS: 1
DIF: 3
REF: 8-3
TOP: Deadweight losses
MSC: Applicative
22. Economist Arthur Laffer made the argument that tax rates in the United States were so high that reducing the rates
would increase tax revenue.
ANS: T
PTS: 1
DIF: 2
REF: 8-3
TOP: Laffer curve
MSC: Definitional
23. The Laffer curve is the curve showing how tax revenue varies as the size of the tax varies.
ANS: T
PTS: 1
DIF: 2
REF: 8-3
TOP: Laffer curve
MSC: Definitional
24. The result of the large tax cuts in the first Reagan Administration demonstrated very convincingly that Arthur
Laffer was correct when he asserted that cuts in tax rates would increase tax revenue.
ANS: F
PTS: 1
DIF: 2
REF: 8-3
TOP: Tax rates | Laffer curve
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 8/Application: The Costs of Taxation  357
25. The more elastic are supply and demand in a market, the greater are the distortions caused by a tax on that market,
and the more likely it is that a tax cut in that market will raise tax revenue.
ANS: T
PTS: 1
DIF: 3
REF: 8-3
TOP: Tax | Elasticity | Deadweight losses
MSC: Applicative
26. When the government imposes taxes on buyers and sellers of a good, society loses some of the benefits of market
efficiency.
ANS: T
PTS: 1
DIF: 1
REF: 8-4
TOP: Taxes | Efficiency
MSC: Interpretive
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copied, or distributed without the prior consent of the publisher.
Chapter 10
Externalities
Multiple Choice
1. In a market economy, government intervention
a. will always improve market outcomes.
b. reduces efficiency in the presence of externalities.
c. may improve market outcomes in the presence of externalities.
d. is necessary to control individual greed.
ANS: C
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Applicative
2. In the absence of externalities, the "invisible hand" leads a market to maximize
a. producer profit from that market.
b. total benefit to society from that market.
c. both equity and efficiency in that market.
d. output of goods or services in that market.
ANS: B
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Applicative
3. One advantage market economies have over other types of economies is that market economies
a. provide an equal distribution of goods and services to consumers.
b. establish government economic control.
c. solve the problem of scarcity.
d. are more efficient.
ANS: D
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Applicative
4. The term market failure refers to
a. a market that fails to allocate resources efficiently.
b. an unsuccessful advertising campaign which reduces demand.
c. ruthless competition among firms.
d. a firm that is forced out of business because of losses.
ANS: A
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Definitional
5. Market failure can be caused by
a. too much competition.
b. externalities.
c. low consumer demand.
d. scarcity.
ANS: B
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Interpretive
6. An externality is the impact of
a. society's decisions on the well-being of society.
b. a person's actions on that person's well-being.
c. one person's actions on the well-being of a bystander.
d. society's decisions on the poorest person in the society.
ANS: C
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Definitional
407
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408  Chapter 10/Externalities
7. The impact of one person's actions on the well-being of a bystander is called
a. an economic dilemma.
b. deadweight loss.
c. a multi-party problem.
d. an externality.
ANS: D
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Applicative
8. An externality
a. is a type of market failure.
b. causes markets to allocate resources efficiently.
c. strengthens the role of the “invisible hand” in the marketplace.
d. affects producers but not consumers.
ANS: A
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Interpretive
9. Dog owners do not bear the full cost of the noise their barking dogs create and often take too few precautions to
prevent their dogs from barking. Local governments address this problem by
a. making it illegal to "disturb the peace."
b. having a well-funded animal control department.
c. subsidizing local animal shelters.
d. encouraging people to adopt cats.
ANS: A
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Applicative
10. An externality is
a. the costs that parties incur in the process of agreeing and following through on a bargain.
b. the uncompensated impact of one person's actions on the well-being of a bystander.
c. the proposition that private parties can bargain without cost over the allocation of resources.
d. a market equilibrium tax.
ANS: B
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Definitional
11. An externality is an example of
a. a corrective tax.
b. a tradable pollution permit.
c. a market failure.
d. Both a and b are correct.
ANS: C
PTS: 1
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Applicative
12. An externality exists whenever
a. the economy can benefit from government intervention.
b. markets are not able to reach equilibrium.
c. a firm sells its product in a foreign market.
d. a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives
payment for that effect.
ANS: D
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Definitional
13. When externalities are present in a market, the well-being of market participants
a. and market bystanders are both directly affected.
b. and market bystanders are both indirectly affected.
c. is directly affected, and market bystanders are indirectly affected.
d. is indirectly affected, and market bystanders are directly affected.
ANS: C
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Analytical
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Chapter 10/Externalities  409
14. Which of the following statements about a well-maintained yard best conveys the general nature of the externality?
a. A well-maintained yard conveys a positive externality because it increases the home's market value.
b. A well-maintained yard conveys a negative externality because it increases the property tax liability of the
owner.
c. A well-maintained yard conveys a positive externality because it increases the value of adjacent properties in
the neighborhood.
d. A well-maintained yard cannot provide any type of externality.
ANS: C
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Applicative
15. Since restored historic buildings convey a positive externality, local governments may choose to
a. regulation the demolition of them.
b. provide tax breaks to owners who restore them.
c. increase property taxes in historic areas.
d. Both a and b are correct.
ANS: D
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Applicative
16. Externalities
a. cause markets to fail to allocate resources efficiently.
b. cause equilibrium prices to be too high.
c. benefit producers at the expense of consumers.
d. cause equilibrium prices to be too low.
ANS: A
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Applicative
17. When externalities exist, buyers and sellers
a. neglect the external effects of their actions, but the market equilibrium is still efficient.
b. do not neglect the external effects of their actions, and the market equilibrium is efficient.
c. neglect the external effects of their actions, and the market equilibrium is not efficient.
d. do not neglect the external effects of their actions, and the market equilibrium is not efficient.
ANS: C
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Applicative
18. Dioxin emission that results from the production of paper is a good example of a negative externality because
a. self-interested paper firms are generally unaware of environmental regulations.
b. there are fines for producing too much dioxin.
c. self-interested paper producers will not consider the full cost of the dioxin pollution they create.
d. toxic emissions are the best example of an externality.
ANS: C
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Applicative
19. If a paper manufacturer does not bear the entire cost of the dioxin it emits, it will
a. emit a lower level of dioxin than is socially efficient.
b. emit a higher level of dioxin than is socially efficient.
c. emit an acceptable level of dioxin.
d. not emit any dioxin in an attempt to avoid paying the entire cost.
ANS: B
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Applicative
20. One of the Ten Principles of Economics is that "markets are usually a good way to organize market behavior." This
statement does not imply which of the following?
a. Some markets produce negative externalities.
b. The invisible hand of the marketplace does not always lead buyers and sellers to maximize total benefit to
society.
c. Some markets are characterized by market failure.
d. Other types of economies are more efficient than market economies.
ANS: D
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Interpretive
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410  Chapter 10/Externalities
21. Which of the following is an example of an externality?
a. cigarette smoke that permeates an entire restaurant
b. a flu shot that prevents a student from transmitting the virus to her roommate
c. a beautiful flower garden outside of the local post office
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Applicative
22. Which of the following statements is not correct?
a. Government policies may improve the market's allocation of resources when negative externalities are present.
b. Government policies may improve the market's allocation of resources when positive externalities are present.
c. A positive externality is an example of a market failure.
d. Without government intervention, the market will tend to undersupply products that produce negative
externalities.
ANS: D
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Interpretive
23. Which of the following represents a way that a government can help the private market to internalize an
externality?
a. taxing goods that have negative externalities
b. subsidizing goods that have positive externalities
c. The government cannot improve upon the outcomes of private markets.
d. Both a and b are correct.
ANS: D
PTS: 1
DIF: 2
REF: 10-0
TOP: Externalities
MSC: Applicative
24. When externalities are present in a market,
a. the market equilibrium maximizes the total benefit to society as a whole.
b. participants lose some market benefits to bystanders.
c. firms produce too much output.
d. the market fails to allocate resources efficiently.
ANS: D
PTS: 1
DIF: 2
REF: 10-0 | 10-1
TOP: Externalities
MSC: Applicative
25. If an externality is present in a market, economic efficiency may be enhanced by
a. increased competition.
b. weakening property rights.
c. better informed market participants.
d. government intervention.
ANS: D
PTS: 1
DIF: 1
REF: 10-1
TOP: Externalities
MSC: Applicative
26. If a sawmill creates too much noise for local residents,
a. noise restrictions will force residents to move out of the area.
b. a sense of social responsibility will cause owners of the mill to reduce noise levels.
c. the government can raise economic well-being through noise-control regulations.
d. the government should avoid intervening because the market will allocate resources efficiently.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
27. Private markets fail to account for externalities because
a. externalities don't occur in private markets.
b. sellers include costs associated with externalities in the price of their product.
c. decisionmakers in the market fail to include the costs of their behavior to third parties.
d. the government cannot easily estimate the optimal quantity of pollution.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  411
28. When the government intervenes in markets with externalities, it does so in order to
a. increase production when negative externalities are present.
b. protect the interests of bystanders.
c. make certain all benefits are received by market participants.
d. reduce production when positive externalities are present.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
29. Research into new technologies
a. provides positive externalities because it creates knowledge others can use.
b. results in negative externalities because government funding for research causes less government spending in
other areas.
c. is protected by patent laws, which eliminates the need for government intervention.
d. should only be funded by the corporations that will receive the profits from the research.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
30. At any given quantity, the willingness to pay in the market for gasoline is reflected in the
a. height of the demand curve at that quantity.
b. height of the supply curve at that quantity.
c. value to the producer of the last unit of gasoline sold.
d. total quantity of gasoline exchanged in the market.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
31. The supply curve for a product reflects the
a. willingness to pay of the marginal buyer.
b. quantity buyers will ultimately purchase of the product.
c. cost to sellers of producing the product.
d. seller's profit from producing the product.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
32. Without government intervention, the market equilibrium for oranges will
a. maximize the sum of producer and consumer surplus in the market.
b. be both efficient and equitable.
c. be equitable but not efficient.
d. be neither efficient nor equitable.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
33. Since air pollution creates a negative externality,
a. social welfare will be enhanced when some, but not all air pollution is eliminated.
b. social welfare is optimal when all air pollution is eliminated.
c. governments should encourage private firms to consider only private costs.
d. the free market result maximizes social welfare.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
34. The difference between social cost and private cost is a measure of the
a. loss in profit to the seller as the result of a negative externality.
b. cost of an externality.
c. cost reduction when the negative externality is eliminated.
d. cost incurred by the government when it intervenes in the market.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
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412  Chapter 10/Externalities
35. Which of the following statements is correct?
a. Government should tax goods with either positive or negative externalities.
b. Government should tax goods with negative externalities and subsidize goods with positive externalities.
c. Government should subsidize goods with either positive or negative externalities.
d. Government should tax goods with positive externalities and subsidize goods with negative externalities.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
36. When a market is characterized by an externality, the government
a. can correct the market failure only in the case of positive externalities.
b. can correct the market failure only in the case of negative externalities.
c. can correct the market failure in the case of both positive and negative externalities by inducing market
participants to internalize the externality.
d. cannot correct for externalities due to the existence of patents.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Interpretive
Figure 10-1
37. Refer to Figure 10-1. This graph represents the tobacco industry. The industry creates
a. positive externalities.
b. negative externalities.
c. no externalities.
d. no equilibrium in the market.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
38. Refer to Figure 10-1. This graph represents the tobacco industry. Without any government intervention, the
equilibrium price and quantity are
a. $1.90 and 38 units, respectively.
b. $1.80 and 35 units, respectively.
c. $1.60 and 42 units, respectively.
d. $1.35 and 58 units, respectively.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  413
39. Refer to Figure 10-1. This graph represents the tobacco industry. The socially optimal price and quantity are
a. $1.90 and 38 units, respectively.
b. $1.80 and 35 units, respectively.
c. $1.60 and 42 units, respectively.
d. $1.35 and 58 units, respectively.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities
MSC: Applicative
40. Refer to Figure 10-1. This graph represents the tobacco industry. If the government uses a pollution tax, how
much of a tax must be imposed on each unit of production?
a. $1.90
b. $1.80
c. $1.60
d. $0.30
ANS: D
PTS: 1
DIF: 3
REF: 10-3
TOP: Corrective taxes
MSC: Analytical
41. Refer to Figure 10-1. This graph represents the tobacco industry. If the government uses a pollution tax, how
much tax revenue will the government receive?
a. $7.00
b. $10.50
c. $63.00
d. $67.20
ANS: B
PTS: 1
DIF: 3
REF: 10-3
TOP: Corrective taxes
MSC: Analytical
Figure 10-2
42. Refer to Figure 10-2. Suppose that the production of soccer balls creates a social cost which is depicted in the
graph above. Without any government regulation, how many soccer balls will be produced?
a. 3
b. 10
c. 25
d. 50
ANS: D
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
414  Chapter 10/Externalities
43. Refer to Figure 10-2. Suppose that the production of soccer balls creates a social cost which is depicted in the
graph above. Without any government regulation, what price will the firm charge per soccer ball?
a. $3
b. $5.50
c. $7.50
d. $10
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
44. Refer to Figure 10-2. Assume the production of the product shown by the graph imposes a cost on society of
$7.00 per unit. If the free market equilibrium output is 50 units, the government should
a. impose a tax of $2.50 per unit.
b. increase the output of the firm by 25 units.
c. impose a lump-sum tax of $350 per period.
d. impose a tax of $7.00 per unit.
ANS: D
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Analytical
45. Refer to Figure 10-2. Suppose that the production of soccer balls creates a social cost which is depicted in the
graph above. If the government wanted to force the firm to internalize the cost of the externality, what action
should it take?
a. Impose a tax of $7.50 per soccer ball.
b. Impose a tax of $7 per soccer ball.
c. Offer a subsidy of $3 per soccer ball.
d. Offer a subsidy of $2.50 per soccer ball.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Analytical
This figure reflects the market for outdoor concerts in a public park surrounded by residential neighborhoods.
Figure 10-3
46. Refer to Figure 10-3. The social cost curve is above the supply curve because
a. it takes into account the external costs imposed on society by the concert.
b. it takes into account the effect of local noise restrictions on concerts in parks surrounded by residential
neighborhoods.
c. concert tickets are likely to cost more than the concert actually costs the organizers.
d. residents in the surrounding neighborhoods get to listen to the concert for free.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  415
47. Refer to Figure 10-3. The difference between the social cost curve and the supply curve reflects the
a. profit margin of each concert.
b. cost of spillover effects from the concert (e.g., noise and traffic).
c. value of concerts to society as a whole.
d. amount by which the city should subsidize the concert organizers.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
48. Refer to Figure 10-3. At the private market outcome, the equilibrium price will be
a. P0.
b. P1.
c. P2.
d. None of the above is correct.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
49. Refer to Figure 10-3. What price and quantity combination best represents the optimum price and number of
concerts that should be organized?
a. P1, Q1
b. P2, Q0
c. P2, Q1
d. The optimum quantity is zero concerts as long as residents in surrounding neighborhoods are adversely affected
by noise and congestion.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
50. Refer to Figure 10-3. Assume that the concert organizers must purchase a concert permit before organizing the
concert and that the cost for the permit is included in the private cost curve. What criteria should the city use in
determining whether or not to issue a permit?
a. The majority vote of the residents in surrounding neighborhoods should determine whether a permit is issued.
b. As long as the value to consumers of concerts exceeds the cost of concerts, including the external costs, the
permit should be issued.
c. As long as concert organizers are willing to return the park to its original condition after the concert, the permit
should be issued.
d. The permit should not be issued as long as there are identifiable external costs imposed on residents in
surrounding neighborhoods.
ANS: B
PTS: 1
DIF: 3
REF: 10-1
TOP: Negative externalities
MSC: Interpretive
Figure 10-4
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copied, or distributed without the prior consent of the publisher.
416  Chapter 10/Externalities
51. Refer to Figure 10-4. If this market is currently producing at Q1, then total economic well-being would increase if
output
a. increased to Q2.
b. increased to Q3.
c. increased to Q4.
d. stayed at Q1.
ANS: A
PTS: 1
DIF: 1
REF: 10-1
TOP: Negative externalities
MSC: Analytical
52. Refer to Figure 10-4. This market is characterized by
a. government intervention.
b. a positive externality.
c. a negative externality.
d. None of the above is correct.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
53. Refer to Figure 10-4. Without government intervention, the equilibrium quantity would be
a. Q1.
b. Q2.
c. Q3.
d. Q4.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
54. Refer to Figure 10-4. The socially optimal quantity would be
a. Q1.
b. Q2.
c. Q3.
d. Q4.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
55. Refer to Figure 10-4. This market
a. has no need for government intervention.
b. would benefit from a tax on the product.
c. would benefit from a subsidy for the product.
d. would maximize total well-being at Q3.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
56. Refer to Figure 10-4. If this market is currently producing at Q4, then total economic well-being would increase if
output
a. increased beyond Q4.
b. decreased to Q2.
c. decreased to zero.
d. stayed at Q4.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
57. Refer to Figure 10-4. If all external costs were internalized, then the market’s equilibrium output would be
a. Q1.
b. Q2.
c. Q3.
d. Q4.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  417
58. Refer to Figure 10-4. If this market currently produces Q2, total economic well-being would be maximized if
a. production decreased to Q1.
b. production increased to Q3.
c. this product were no longer produced.
d. output stayed at Q2.
ANS: D
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
59. Refer to Figure 10-4. Externalities in this market could be internalized if
a. there were a tax on the product.
b. there were a subsidy for the product.
c. production were stopped.
d. the Coase theorem failed.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
60. Refer to Figure 10-4. At Q3
a. the marginal consumer values this product less than the social cost of producing it.
b. every consumer values this product less than the social cost of producing it.
c. the cost to society is equal to the value to society.
d. the marginal consumer values this product more than the private cost.
ANS: A
PTS: 1
DIF: 3
REF: 10-1
TOP: Negative externalities
MSC: Analytical
61. Refer to Figure 10-4. If this market currently produces Q3, total economic well-being would be increased if
a. production decreased to Q2.
b. production increased to Q4.
c. this product were no longer produced.
d. output stayed at Q3.
ANS: A
PTS: 1
DIF: 3
REF: 10-1
TOP: Negative externalities
MSC: Analytical
Figure 10-5
62. Refer to Figure 10-5. Which price and quantity combination represents the social optimum?
a. P0 and Q1.
b. P2 and Q1.
c. P1 and Q0.
d. P2 and Q0.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
418  Chapter 10/Externalities
63. Refer to Figure 10-5. Which of the following statements is correct?
a. The marginal benefit of the positive externality is measured by P 3 - P1.
b. The marginal cost of the negative externality is measured by P 3 - P2.
c. The marginal cost of the negative externality is measured by P 3 - P1.
d. The marginal cost of the negative externality is measured by P 3 - P0.
ANS: C
PTS: 1
DIF: 3
REF: 10-1
TOP: Negative externalities
MSC: Analytical
64. Negative externalities occur when one person's actions
a. cause another person to lose money in a stock market transaction.
b. cause his or her employer to lose business.
c. reveal his or her preference for foreign-produced goods.
d. adversely affect the well-being of a bystander who is not party to the action.
ANS: D
PTS: 1
DIF: 1
REF: 10-1
TOP: Negative externalities
MSC: Definitional
65. A negative externality
a. is an adverse impact on a bystander.
b. causes the product in a market to be under-produced.
c. is an adverse impact on market participants.
d. is present in markets where the good or service is undesirable for society.
ANS: A
PTS: 1
DIF: 1
REF: 10-1
TOP: Negative externalities
MSC: Definitional
66. A positive externality
a. causes the product to be overproduced.
b. provides an additional benefit to market participants.
c. benefits consumers because it results in a lower equilibrium price.
d. is a benefit to a market bystander.
ANS: D
PTS: 1
DIF: 1
REF: 10-1
TOP: Positive externalities
MSC: Definitional
67. Which of the following illustrates the concept of a negative externality?
a. A college professor plays a vigorous game of racquet ball with the racquet he recently purchased.
b. A flood wipes out a farmer's corn crop.
c. A college student plays loud music on his new stereo system at 2:00 a.m.
d. A janitor eats a hamburger during his lunch break.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Applicative
68. When a negative externality exists in a market, the cost to producers
a. is greater than the cost to society.
b. will be the same as the cost to society.
c. will be less than the cost to society.
d. will differ from the cost to society, regardless of whether an externality is present.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
69. When negative externalities are present in a market
a. private costs will be greater than social costs.
b. social costs will be greater than private costs.
c. only government regulation will solve the problem.
d. the market will not be able to reach any equilibrium.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  419
70. Suppose that large-scale pork production has the potential to create ground water pollution. Why might this type of
pollution be considered an externality?
a. The groundwater pollution reduces the cost of large-scale pork production.
b. The economic impact of a large-scale pork production facility is localized in a small geographic area.
c. The pollution has the potential for creating a health risk for water users in the region surrounding the pork
production facility.
d. Consumers will not reap the benefits of lower production cost from large-scale pork production.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
71. Markets are often inefficient when negative externalities are present because
a. private costs exceed social costs at the private market solution.
b. externalities cannot be corrected without government regulation.
c. social costs exceed private costs at the private market solution.
d. production externalities lead to consumption externalities.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
72. When the social cost curve is above a product's supply curve,
a. the government has intervened in the market.
b. a negative externality exists in the market.
c. a positive externality exists in the market.
d. the distribution of resources is unfair.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
73. Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the
market does not internalize the externality,
a. the supply curve would adequately reflect the marginal social cost of production.
b. consumers will be required to pay a higher price for steel than they would have if the externality were
internalized.
c. the market equilibrium quantity will not be the socially optimal quantity.
d. producers will produce less steel than they otherwise would if the externality were internalized.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Applicative
74. When producers operate in a market characterized by negative externalities, a tax that forces them to internalize the
externality will
a. give sellers the incentive to account for the external effects of their actions.
b. increase demand.
c. increase the amount of the commodity exchanged in market equilibrium.
d. restrict the producers' ability to take the costs of the externality into account when deciding how much to
supply.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
75. An optimal tax on pollution would result in which of the following?
a. Producers will choose not to produce any pollution.
b. Producers will internalize the cost of the pollution.
c. Producers will maximize production.
d. The value to consumers at market equilibrium will exceed the social cost of production.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
420  Chapter 10/Externalities
76. Which of the following statements is correct?
a. Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and
decrease the price of the good produced.
b. Internalizing a negative externality will cause an industry to decrease the quantity it supplies to the market and
increase the price of the good produced.
c. Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and
decrease the price of the good produced.
d. Internalizing a negative externality will cause an industry to increase the quantity it supplies to the market and
increase the price of the good produced.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
77. A negative externality will cause a private market to produce
a. less than is socially desirable.
b. more than is socially desirable.
c. exactly the quantity that is socially desirable.
d. less than the same market would produce in the presence of a positive externality.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Interpretive
78. Private markets fail to reach a socially optimal equilibrium when negative externalities are present because
a. social costs equal private costs at the private market solution.
b. private costs exceed social costs at the private market solution.
c. social costs exceed private costs at the private market solution.
d. they internalize externalities.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Interpretive
79. When negative externalities are present in a market,
a. producers will be affected but consumers will not.
b. producers will supply too much of the product.
c. demand will be too high.
d. the market will still maximize total benefits.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Applicative
80. Which of the following would not be considered a negative externality?
a. Smelter, Inc. creates steel and pollution.
b. Your friend buys a new puppy that barks every night.
c. You have an adverse reaction to a medication your doctor prescribed for you.
d. Your neighbor plays loud music that you dislike through stereo speakers set up on his deck.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Applicative
81. Suppose that meat producers create a negative externality. What is the relationship between the equilibrium
quantity and the socially optimal quantity of meat to be produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  421
82. Suppose that electricity producers create a negative externality equal to $5 per unit. What is the relationship
between the equilibrium quantity and the socially optimal quantity of electricity to be produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
83. Suppose that smoking creates a negative externality. If the government does not interfere in the cigarette market,
then
a. the equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked.
b. the equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes
smoked.
c. the equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes
smoked.
d. There is not enough information to answer the question.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
84. Suppose that a firm produces electricity by burning coal. The production process creates a negative externality of
air pollution. If the firm does not internalize the cost of the externality, it will produce where
a. the value of electricity to consumers equals the private cost of producing electricity.
b. the value of electricity to consumers equals the social cost of producing electricity.
c. the cost of the externality is maximized.
d. the transaction costs of private bargaining are minimized.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
85. Suppose that a negative externality is created by the production of good X. Which of the following statements is
correct?
a. The social cost of producing good X includes the private cost plus the cost to bystanders of the externality.
b. The increased social cost can be graphed as a decrease in demand.
c. The market equilibrium quantity will be the socially optimal quantity as long as the government does not
interfere.
d. Both a and b are correct.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Interpretive
86. A fertilizer plant emits a very foul odor during the production process. If the government forces the plant to
internalize the negative externality, then the
a. supply curve for fertilizer would shift down.
b. supply curve for fertilizer would shift up.
c. demand curve for fertilizer would shift down.
d. demand curve for fertilizer would shift up.
ANS: B
PTS: 1
DIF: 3
REF: 10-1
TOP: Negative externalities
MSC: Analytical
87. When a market is in equilibrium and the marginal consumer values a commodity at less than the social cost of
producing it, then
a. at market equilibrium the demand curve lies below the social cost curve.
b. reducing production to a level below the equilibrium level could possibly raise total economic well-being.
c. the equilibrium price is higher than necessary to insure maximum economic well-being.
d. Both a and b are correct.
ANS: D
PTS: 1
DIF: 3
REF: 10-1
TOP: Negative externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
422  Chapter 10/Externalities
88. Suppose that at present there are no laws to restrict pollution produced by the widget industry. Assume that the
supply and demand curves are linear and that the market price of a widget is $20. If the government imposes a tax
equal in value to the cost of the pollution, then firms would continue to produce widgets if
a. the cost imposed by the pollution is less than $20 per widget produced.
b. the private cost of producing a widget equals the cost of the pollution generated per widget.
c. $20 minus the private cost of producing a widget is greater than the cost of the pollution generated per widget.
d. $20 minus the private cost of producing a widget is less than the cost of the pollution generated per widget.
ANS: C
PTS: 1
DIF: 3
REF: 10-1
TOP: Negative externalities
MSC: Analytical
Figure 10-6
89. Refer to Figure 10-6. Which quantity represents the social optimum for this market?
a. Q1.
b. Q2.
c. Q3.
d. Q4.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
90. Refer to Figure 10-6. To internalize the externality in this market, the government should
a. impose a tax on this product.
b. provide a subsidy for this product.
c. forbid production.
d. produce the product itself.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
91. Which of the following is an example of a positive externality?
a. A college student buys a new car when she graduates.
b. The mayor of a small town plants flowers in the city park.
c. Local high school teachers have pizza delivered every Friday for lunch.
d. An avid fisherman buys new fishing gear for his next fishing trip.
ANS: B
PTS: 1
DIF: 1
REF: 10-1
TOP: Positive externalities
MSC: Applicative
92. Which of the following policies is the government most inclined to use when faced with a positive externality?
a. taxation
b. permits
c. subsidies
d. usage fees
ANS: C
PTS: 1
DIF: 1
REF: 10-1
TOP: Positive externalities
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  423
93. Which of the following is an example of a positive externality?
a. air pollution
b. a person littering in a public park
c. a nice garden in front of your neighbor's house
d. the pollution of a stream
ANS: C
PTS: 1
DIF: 1
REF: 10-1
TOP: Positive externalities
MSC: Applicative
94. If education produces positive externalities, we would expect
a. the government to tax education.
b. the government to subsidize education.
c. people to realize the benefits, which would increase the demand for education.
d. colleges to relax admission requirements.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Applicative
95. When a beekeeper places his hives of bees in an orchard so that the bees can gather nectar to produce honey, the
bees pollinate the orchard, which increases the yield of fruit. This benefits
a. only the beekeeper.
b. the beekeeper, but it creates a negative externality because the bees are a hazard to the orchard owner.
c. only the owner of the orchard.
d. both the beekeeper and the orchard owner.
ANS: D
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Applicative
96. Internalizing a positive externality will cause the demand curve to
a. shift up.
b. shift down.
c. become more elastic.
d. remain unchanged.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
97. If a market is characterized by a positive externality that is not the result of a technology spillover,
a. the socially optimal level of output is less than the equilibrium level of output, and the optimal price is greater
than the equilibrium price.
b. the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price
is less than the equilibrium price.
c. the socially optimal level of output is greater than the equilibrium level of output, and the socially optimal price
is greater than the equilibrium price.
d. the socially optimal level of output is less than the equilibrium level of output, and the socially optimal price is
less than the equilibrium price.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
98. To enhance the well-being of society, a social planner will encourage firms to increase production when
a. the firms are producing basic goods.
b. there is a shortage in the market.
c. technology spillovers are associated with production.
d. negative externalities “spill over” into production.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
424  Chapter 10/Externalities
99. A positive externality will cause a market to produce
a. more than is socially desirable.
b. less than is socially desirable.
c. the socially optimal equilibrium amount.
d. more than the same market would produce in the presence of a negative externality.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Interpretive
100. A positive externality occurs when
a. Jack receives a benefit from John's consumption of a certain good.
b. Jack receives personal benefits from his own consumption of a certain good.
c. Jack's benefit exceeds John's benefit when they each consume the same good.
d. Jack's receives a loss from John’s consumption of a certain good.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Interpretive
101. When a market experiences a positive externality,
a. the demand curve does not reflect the value to society of the good.
b. too much of the good is being produced.
c. the government can internalize the externality by imposing a tax on the product.
d. the private value is greater than the social value.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Interpretive
102. Private markets fail to reach a socially optimal equilibrium when positive externalities are present because the
a. private benefit equals the social benefit at the private market solution.
b. private cost exceeds the private benefit at the private market solution.
c. social value exceeds the private value at the private market solution.
d. private cost exceeds the social benefit at the private market solution.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Interpretive
103. Suppose that cookie producers create a positive externality equal to $2 per dozen. What is the relationship between
the equilibrium quantity and the socially optimal quantity of cookies to be produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
104. Suppose that flower gardens create a positive externality equal to $1 per plant. What is the relationship between the
equilibrium quantity and the socially optimal quantity of plants grown?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
105. Suppose that flu shots create a positive externality equal to $12 per shot. What is the relationship between the
equilibrium quantity and the socially optimal quantity of flu shots produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  425
106. Suppose that elementary education creates a positive externality. If the government does not subsidize education,
then
a. the equilibrium quantity of education will be equal the socially optimal quantity of education.
b. the equilibrium quantity of education will be greater than the socially optimal quantity of education.
c. the equilibrium quantity of education will be less than the socially optimal quantity of education.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
107. University researchers create a positive externality because what they discover in their research labs can easily be
learned by others who haven't contributed to the research costs. If there are no subsidies, what is the relationship
between the equilibrium quantity of university research and the optimal quantity of university research produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
108. Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without
government intervention in the vaccination market, which of the following statements is correct?
a. At the current output level, the marginal social benefit exceeds the marginal private benefit.
b. The current output level is inefficiently low.
c. A per-shot subsidy could turn an inefficient situation into an efficient one.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
109. Because there are positive externalities from higher education,
a. private markets will under-supply college classes.
b. private markets will over-supply college classes.
c. the government should impose a tax on college students.
d. government intervention cannot improve the market for college classes.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities
MSC: Analytical
110. Which of the following is true of markets characterized by positive externalities?
a. Social value exceeds private value, and market quantity exceeds the socially optimal quantity.
b. Social value is less than private value, and market quantity exceeds the socially optimal quantity.
c. Social value exceeds private value, and market quantity is less than the socially optimal quantity.
d. Social value seldom exceeds private value; therefore, social quantity is less than private quantity.
ANS: C
PTS: 1
DIF: 3
REF: 10-1
TOP: Positive externalities
MSC: Interpretive
111. In the case of a technology spillover, internalizing a positive externality will cause the supply curve of an industry
to
a. shift down.
b. shift up.
c. become more elastic.
d. remain unchanged.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities | Technology spillovers MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
426  Chapter 10/Externalities
112. In the case of a technology spillover, the government can encourage firms to internalize a positive externality by
a. taxing production, which would decrease supply.
b. taxing production, which would increase supply.
c. subsidizing production, which would decrease supply.
d. subsidizing production, which would increase supply.
ANS: D
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities | Technology spillovers MSC: Applicative
113. In the case of a technology spillover, internalizing a positive externality through a government subsidy will cause
the industry's supply curve to
a. shift up by an amount equal to the subsidy.
b. shift down by an amount less than the subsidy.
c. shift down by an amount equal to the subsidy.
d. shift down by an amount greater than the subsidy.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Positive externalities | Technology spillovers MSC: Applicative
114. Which of the following statements is not correct?
a. A patent is a way for the government to encourage the production of a good with technology spillovers.
b. A tax is a way for the government to reduce the production of a good with a negative externality.
c. A tax that accurately reflects social costs produces the socially optimal outcome.
d. Government policies cannot improve upon private market outcomes.
ANS: D
PTS: 1
DIF: 2
REF: 10-1
TOP: Externalities | Technology spillovers
MSC: Interpretive
115. Technology spillover is one type of
a. negative externality.
b. positive externality.
c. subsidy.
d. producer surplus.
ANS: B
PTS: 1
DIF: 1
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
116. Which of the following best defines the situation where one firm's research yields knowledge that is used by
society as a whole?
a. social cost
b. opportunity cost of technology
c. internalization of an externality
d. technology spillover
ANS: D
PTS: 1
DIF: 1
REF: 10-1
TOP: Technology spillovers
MSC: Definitional
117. Government intervention that aims to promote technology-enhancing industries is called
a. assisted technology.
b. intervention policy.
c. industrial technology assistance.
d. industrial policy.
ANS: D
PTS: 1
DIF: 1
REF: 10-1
TOP: Technology spillovers
MSC: Definitional
118. Technology spillover occurs when
a. a firm passes the high costs of technical research on to society through higher prices.
b. a firm's research yields technical knowledge that is used by society as a whole.
c. the government subsidizes firms engaged in high-tech research.
d. copyright laws prohibit firms from profiting from the research of others.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Definitional
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  427
119. When technology spillover occurs,
a. it is the government's responsibility to subsidize firms that are engaged in high-tech research.
b. a firm's research yields technological knowledge that can then be used by society as a whole.
c. those firms engaged in technology research should be taxed by the government.
d. when firms invest in the latest production technology, the cost of that technology "spills over" to the prices
consumers must pay for the product.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Definitional
120. If the government wanted to ensure that the market reaches the socially optimal equilibrium in the presence of a
technology spillover, it should
a. impose a corrective tax on any firm producing a technology spillover.
b. offer tax credits to consumers who are adversely affected by the new technology.
c. subsidize producers by an amount equal to the value of the technology spillover.
d. provide research grants to those firms not currently engaging in research to increase competition in the
industry.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
121. To ensure the market reaches the socially optimal equilibrium in presence of a technology spillover, the
government should subsidize producers by
a. imposing a corrective tax.
b. an amount equal to the value of the technology spillover
c. helping those companies that are adversely affected by the new technology.
d. transferring income to the poor by offering them free technology.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
122. When an industry is characterized by technology spillover, what should the government do to ensure that the
market equilibrium equals the socially optimal equilibrium?
a. Impose a tax greater than the value of the technology spillover.
b. Not allow production of any product that causes a technology spillover.
c. Provide a subsidy equal to the value of the technology spillover.
d. Require producers to "clean up" any spillover that results from their production process.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
123. If the production of computer chips yields greater technology spillovers than the production of potato chips, the
government should
a. encourage the production of computer chips with subsidies.
b. discourage the production of potato chips with taxes.
c. encourage the production of potato chips with subsidies.
d. discourage the production of computer chips with taxes.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
124. One drawback to industrial policy is that
a. technology spillovers are too expensive to control.
b. measuring the size of spillovers from different markets is difficult.
c. spillovers often occur in industries that produce undesirable products for society.
d. positive side effects are often outweighed by negative side effects.
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
428  Chapter 10/Externalities
125. The goal of industrial policy should be that
a. industries yielding the largest positive externalities should receive the biggest subsidies.
b. any industry that produces negative externalities should be heavily taxed.
c. any production process that produces negative externalities should be shut down.
d. all industries that produce positive externalities should be equally subsidized.
ANS: A
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Interpretive
126. Which of the following is the most effective way to internalize a technology spillover?
a. taxes
b. patents
c. government regulations
d. free markets
ANS: B
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
127. A patent is used to
a. disseminate information.
b. offset the negative effects of taxes.
c. protect inventors for as long as they live.
d. assign property rights.
ANS: D
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
128. Patents do not
a. provide firms an incentive to research.
b. assign property rights to inventors.
c. protect the rights of inventors for their lifetimes.
d. internalize externalities.
ANS: C
PTS: 1
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
129. Externalities tend to cause markets to be
a. inefficient.
b. inequitable.
c. unnecessary.
d. overwhelmed.
ANS: A
PTS: 1
DIF: 1
REF: 10-2
TOP: Externalities
MSC: Applicative
130. Externalities can be corrected by each of the following except
a. self-interest.
b. moral codes and social sanctions.
c. charity.
d. normal market adjustments.
ANS: D
PTS: 1
DIF: 1
REF: 10-2
TOP: Externalities
MSC: Interpretive
131. The Golden Rule can be used as a private solution for
a. subsidizing higher education.
b. internalizing externalities.
c. increasing production.
d. reducing scarcity.
ANS: B
PTS: 1
DIF: 1
REF: 10-2
TOP: Externalities
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  429
132. Two types of private solutions to the problem of externalities are
a. charities and the Golden Rule.
b. charities and subsidies.
c. the Golden Rule and taxes.
d. taxes and subsidies.
ANS: A
PTS: 1
DIF: 1
REF: 10-2
TOP: Externalities
MSC: Applicative
133. When externalities cause markets to be inefficient,
a. government action is always needed to solve the problem.
b. private solutions can be developed to solve the problem.
c. given enough time, externalities can be solved through normal market adjustments.
d. there is no way to eliminate the problem of externalities in a market.
ANS: B
PTS: 1
DIF: 1
REF: 10-1
TOP: Externalities
MSC: Interpretive
134. Honey producers provide a positive externality to orchards because
a. the honey producers get more honey.
b. the orchard owner frequently gets stung by the honey producer's bees.
c. the orchard owner does not have to purchase bees to pollinate his flowers.
d. the honey producers have to rent access to the orchard grounds.
ANS: C
PTS: 1
DIF: 1
REF: 10-2
TOP: Externalities
MSC: Interpretive
135. All remedies for externalities share the goal of
a. moving the allocation of resources toward the market equilibrium.
b. moving the allocation of resources toward the socially optimal equilibrium.
c. increasing the allocation of resources.
d. decreasing the allocation of resources.
ANS: B
PTS: 1
DIF: 2
REF: 10-2
TOP: Externalities
MSC: Interpretive
136. Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action
a. is always needed because private solutions can never be attained.
b. is needed when private solutions fail to arise.
c. will be needed only to correct for positive externalities.
d. will be needed only to correct for negative externalities.
ANS: B
PTS: 1
DIF: 2
REF: 10-2
TOP: Externalities
MSC: Interpretive
137. Firms that are involved in more than one type of business could be evidence of an attempt to
a. increase private profit at the expense of consumers.
b. internalize some forms of positive externalities.
c. reduce the impact of government regulations on their business.
d. increase the private marginal cost of production.
ANS: B
PTS: 1
DIF: 2
REF: 10-2
TOP: Externalities
MSC: Applicative
138. Private contracts between parties with mutual interests
a. will reduce the well-being of society.
b. will lead to market outcomes in which the public interest is sacrificed for personal gain.
c. can solve some inefficiencies associated with positive externalities.
d. will create negative externalities.
ANS: C
PTS: 1
DIF: 2
REF: 10-2
TOP: Externalities
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
430  Chapter 10/Externalities
139. 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 there are no government 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.
ANS: A
PTS: 1
DIF: 3
REF: 10-1 | 10-3
TOP: Externalities
MSC: Analytical
140. 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.
ANS: B
PTS: 1
DIF: 3
REF: 10-1 | 10-3
TOP: Externalities
MSC: Analytical
141. Which of the following statements is not correct?
a. Private markets tend to over-produce products with negative externalities.
b. Private markets tend to under-produce products with positive externalities.
c. Private parties can bargain to efficient outcomes even in the presence of externalities.
d. Private parties are usually more successful in achieving efficient outcomes than government policies.
ANS: D
PTS: 1
DIF: 2
REF: 10-0 | 10-2
TOP: Externalities | Coase theorem MSC: Interpretive
142. Private solutions may not be possible due to the costs of negotiating and enforcing these solutions. Such costs are
called
a. transaction costs.
b. opportunity costs.
c. deadweight loss.
d. corrective taxes.
ANS: A
PTS: 1
DIF: 1
REF: 10-2
TOP: Coase theorem
MSC: Definitional
143. Employing a lawyer to draft and enforce a private contract between parties wishing to solve an externality problem
is an example of
a. an opportunity cost.
b. an implicit cost.
c. a sunk cost.
d. a transaction cost.
ANS: D
PTS: 1
DIF: 1
REF: 10-2
TOP: Coase theorem
MSC: Applicative
144. The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the
problem of externalities on their own, is called
a. the transaction cost theorem.
b. a corrective tax.
c. the externality theorem.
d. the Coase theorem.
ANS: D
PTS: 1
DIF: 1
REF: 10-2
TOP: Coase theorem
MSC: Definitional
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  431
145. Which of the following suggests that private markets can be effective in dealing with externalities?
a. the "invisible hand"
b. the law of diminishing social returns
c. the Coase theorem
d. technology policy
ANS: C
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
146. The Coase theorem suggests that private markets may not be able to solve the problem of externalities
a. if the government does not become involved in the process.
b. when the number of interested parties is large and bargaining costs are high.
c. if the firm in the market is a monopoly.
d. if some people benefit from the externality.
ANS: B
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
147. Transaction costs
a. can keep private parties from solving externality problems.
b. are incurred in the production process due to externalities.
c. increase when taxes are imposed to correct negative externalities.
d. are eliminated when the government intervenes in a market with externalities.
ANS: A
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
148. One reason that private solutions to externalities do not always work is that
a. government intervention negates the benefits of positive externalities.
b. some people benefit from externalities.
c. interested parties incur costs in the bargaining process.
d. charities are not well organized.
ANS: C
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Interpretive
149. When parties who are bargaining to eliminate an externality “hold out” for a better deal,
a. the inefficient outcome persists.
b. the eventual outcome will maximize total well-being.
c. transaction costs must be low.
d. one party will gain more than the other party.
ANS: A
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
150. Assuming transaction costs are small, the Coase theorem would predict that private parties could arrive at an
efficient solution for which of the following problems?
a. One neighbor lets his dog run through another neighbor’s garden, damaging her flowers.
b. One neighbor doesn't mow her yard.
c. One neighbor deals drugs out of his house.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
151. If only a few people are affected by an externality, then it is likely that
a. corrective taxes will provide the most efficient solution to the externality.
b. command-and-control regulation will provide the most efficient solution to the externality.
c. a private solution to the inefficiency will occur.
d. a private solution will be very difficult to negotiate.
ANS: C
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
432  Chapter 10/Externalities
152. Reaching an efficient bargain is difficult when the
a. externality is large.
b. number of interested parties is large.
c. externality is negative.
d. government becomes involved.
ANS: B
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
153. Which of the following is a problem that keeps people from privately solving externality problems?
a. Each party involved holds out for a better deal.
b. The externality is large.
c. Only problems with a sufficiently large number of parties can be solved.
d. There is a lack of government intervention.
ANS: A
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
154. In class action lawsuits interested parties to the lawsuit are not required to pay attorney fees directly. This is an
example of an attempt to
a. maximize attorney fees.
b. reduce the incentive of attorneys to file class action lawsuits.
c. reduce the transaction costs of finding a private solution to an externality.
d. regulate attorney fees.
ANS: C
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
155. Nancy loves to landscape her yard, but her neighbor Lee places a low value on his landscaping. When Lee's grass
is neglected and gets long, Nancy will mow it for Lee. This is an example of
a. a situation in which the Coase theorem fails to explain the lawn mowing arrangement.
b. an improper allocation of resources.
c. a private solution to a negative externality problem.
d. an exploitation of a common resource.
ANS: C
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
156. The Coase theorem suggests that private solutions to an externality problem
a. are effective under all conditions.
b. will always allocate resources efficiently if private parties can bargain without cost.
c. are only efficient when there are negative externalities.
d. may not be possible because of the distribution of property rights.
ANS: B
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
157. In which of the following cases is the Coase theorem most likely to solve the externality?
a. Richard is annoyed because his roommate smokes.
b. Chemicals from farms in the Mississippi Valley are polluting the Gulf of Mexico.
c. Car exhaust in a small town is making one of its residents ill.
d. Industrialization around the world is causing acid rain.
ANS: A
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  433
158. A local laundry advertises that the clothes it washes smell "sunshine fresh" because it line dries everything outside.
Then a steel factory moves in next door and emits black smoke which stains the clothes drying at the laundry.
According to the Coase theorem, granting the
a. steel factory the right to pollute would be efficient, but granting the laundry the right to clean air would be
equitable.
b. laundry the right to clean air would be efficient, but granting the steel factory the right to pollute would be
equitable.
c. steel factory the right to pollute has the same effect on equity as granting the laundry the right to clean air.
d. steel factory the right to pollute has the same effect on efficiency as granting the laundry the right to clean air.
ANS: D
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Interpretive
159. According to the Coase theorem, private parties can solve the problem of externalities if
a. the cost of bargaining is small.
b. the initial distribution of legal rights favors the person being adversely affected by the externality.
c. the number of parties involved is sufficiently large.
d. All of the above are correct.
ANS: A
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
160. According to the Coase theorem, private markets will solve externality problems and allocate resources efficiently
as long as
a. the externalities that are present are positive, not negative.
b. government assigns property rights to the harmed party.
c. private parties can bargain with sufficiently low transaction costs.
d. businesses determine an appropriate level of production.
ANS: C
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
161. In many cases the Coase theorem does not work well because
a. there are too few parties at the negotiation table.
b. the government does not know about the Coase theorem.
c. transaction costs are too high.
d. transaction costs are too low.
ANS: C
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Interpretive
162. Why can't private individuals always internalize an externality without the help of government?
a. Legal restrictions prevent side payments between individuals.
b. Transactions costs may be too high.
c. Side payments between individuals are inefficient.
d. Side payments between individuals violate equity standards.
ANS: B
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
163. What economic argument suggests that if transactions costs are sufficiently low, the equilibrium is economically
efficient regardless of how property rights are distributed?
a. the Coase theorem
b. the laws of supply and demand
c. the law of comparative advantage
d. the law of externalities
ANS: A
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
434  Chapter 10/Externalities
164. The Coase theorem states that
a. taxes are an efficient way for governments to remedy negative externalities.
b. subsidies are an efficient way for governments to remedy positive externalities.
c. industrial policies encourage technology spillovers.
d. in the absence of transaction costs, private parties can solve the problem of externalities on their own.
ANS: D
PTS: 1
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Applicative
165. Mike and Bob are both in the same enclosed hotel room. Mike assigns a $20 value to smoking his cigar. Bob
values smoke-free air at $10. Which of the following scenarios is a successful example of the Coase theorem?
a. Bob offers Mike $15 not to smoke his cigar. Mike accepts and does not smoke.
b. Mike pays Bob $11 so that Mike can smoke his cigar.
c. Mike pays Bob $9 so that Mike can smoke his cigar.
d. Bob offers Mike $10 not to smoke his cigar. Mike accepts and does not smoke.
ANS: B
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
166. A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in
the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a
cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the
radio station's lost profits. What is the economically efficient outcome?
a. The radio station puts up a shield, which it pays for.
b. The radio station puts up a shield, which the dentist pays for.
c. Neither the radio station nor the dentist purchase additional equipment.
d. The dentist gets a new drill; it does not matter who pays for it.
ANS: D
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
167. Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth
$500 to Dick and that Jane bears a cost of $700 from the barking. Assuming Dick has the legal right to keep the
dog, a possible private solution to this problem is that
a. Jane pays Dick $450 to give the dog to his parents who live on an isolated farm.
b. Dick pays Jane $650 for her inconvenience.
c. Jane pays Dick $650 to give the dog to his parents who live on an isolated farm.
d. There is no private transaction that would improve this situation.
ANS: C
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
168. Dick owns a dog whose barking annoys Dick's neighbor Jane. Suppose that the benefit of owning the dog is worth
$700 to Dick and that Jane bears a cost of $500 from the barking. Assuming Dick has the legal right to keep the
dog, a possible private solution to this problem is that
a. Dick pays Jane $600 for her inconvenience.
b. Jane pays Dick $650 to give the dog to his parents who live on an isolated farm.
c. Jane pays Dick $800 to give the dog to his parents who live on an isolated farm.
d. There is no private transaction that would improve this situation.
ANS: D
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
169. Dick owns a dog whose barking annoys Dick's neighbor Jane. Dick receives personal benefit from owning the dog,
and Jane bears a cost of Dick's ownership of the dog. Assuming Jane has the legal right to peace and quiet, which
of the following statements is correct?
a. If Dick's benefit exceeds Jane's cost, government intervention is necessary.
b. Dick will pay to keep his dog if his benefit exceeds Jane's cost.
c. If Jane's cost exceeds Dick's benefit, Dick will pay Jane to keep his dog.
d. If Jane has the legal right to peace and quiet, no further transactions will be mutually beneficial.
ANS: B
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  435
170. Chad's maple tree hangs over Amy's fence and drops leaves into her yard each autumn. The benefit to Chad of
lower utility bills due to the tree’s shade in the summer is $300. The cost to Amy of having her lawn cleaned and
reseeded is $350. Based on the Coase theorem,
a. Chad should pay Amy $400 so that he may keep the tree.
b. Chad should pay Amy $350 to have her lawn repaired and cleaned.
c. Amy should pay Chad $325 to cut down the tree.
d. Amy should build a fence.
ANS: C
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
171. According to the Coase theorem, in the presence of externalities
a. private parties can bargain to reach an efficient outcome.
b. government assistance is necessary to reach an efficient outcome.
c. the assignment of legal rights can prevent externalities.
d. the initial distribution of property rights will determine the efficient outcome.
ANS: A
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
172. Assume that your roommate is very messy. Suppose she gets a $100 benefit from being messy but imposes a $200
cost on you. The Coase theorem would suggest that an efficient solution would be for you to
a. pay your roommate at least $100 but no more than $200 to clean up after herself.
b. pay your roommate at least $201 to clean up after herself.
c. charge your roommate at least $100 to have you clean up after her.
d. charge your roommate at least $200 but no more than $300 to keep you from complaining about the mess.
ANS: A
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
173. Assume that your roommate is very messy. According to campus policy, you have a right to live in an uncluttered
apartment. Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you. The Coase theorem
would suggest that an efficient solution would be for your roommate to
a. stop her messy habits or else move out.
b. pay you at least $100 but less than $200 to live with the clutter.
c. continue to be messy and force you to move out.
d. demand payment of at least $100 but no more than $200 to clean up after herself.
ANS: B
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
174. Anita enjoys growing flowers in her yard and has a lot of spare time, but she can't afford the $100 it costs to buy
flower seeds, fertilizer and water. Sally, who has a good view of Anita's yard, would also enjoy Anita's flowers.
Sally has plenty of money but has no time to plant flowers. According to the Coase theorem,
a. the city government should give Anita the $100 needed to grow flowers.
b. the city government should require Anita to grow flowers.
c. Sally and Anita could both be better off if Sally gave $100 to Anita to plant flowers.
d. Sally and Anita would both be better off if Sally gave $100 to Anita to plant flowers.
ANS: C
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
175. Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to
the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a
special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease
costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume
that there are no transaction costs. Which of the following characterizes the efficient outcome?
a. The railroad will continue to operate but will pay the farmer $1,500 in damages.
b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will
occur.
c. The farmer will incur $1,500 in damages to his crops.
d. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.
ANS: B
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
436  Chapter 10/Externalities
176. Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to
the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a
special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease
costs $1,200. Suppose that the railroad is not liable for any damage caused to the crops. Assume that there are no
transaction costs. Which of the following characterizes the efficient outcome?
a. The railroad will continue to operate but will pay the farmer $1,500 in damages.
b. The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will
occur.
c. The farmer will incur $1,500 in damages to his crops.
d. The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.
ANS: D
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
177. Suppose that Maria wants to dine at a fancy restaurant, but the only available table is in the smoking section. Maria
dislikes the smell of cigarette smoke. She notices that only one person, John, is smoking in the smoking section.
Maria values the absence of smoke at $25. John values the ability to smoke in the restaurant at $15. Which of the
following represents an efficient solution in the absence of transaction costs?
a. John continues to smoke because he has a right to smoke in the smoking section.
b. Maria offers John between $15 and $25 not to smoke. John accepts, and both parties are better off.
c. Maria offers John between $15 and $25 not to smoke. John declines because he has a right to smoke in the
smoking section.
d. Only a government policy banning smoking in restaurants will solve this problem.
ANS: B
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
178. Suppose that Maria wants to dine at a fancy restaurant, but the only available table is in the smoking section. Maria
dislikes the smell of cigarette smoke. She notices that only one person, John, is smoking in the smoking section.
Maria values the absence of smoke at $25. John values the ability to smoke in the restaurant at $20. In order for
Maria to pay John not to smoke, she will need to tip the waiter $10 to facilitate the transaction. Which of the
following represents an efficient solution?
a. John continues to smoke because the cost to Maria to pay him not to smoke is between $30 and $35, which
exceeds the benefit to her of no smoking ($25).
b. Maria offers John between $20 and $25 not to smoke, and she pays the waiter $10. John accepts, and both
parties are better off.
c. Maria offers John between $20 and $25 not to smoke, and she pays the waiter $10. John declines because he
has a right to smoke in the smoking section.
d. Maria offers John $10 not to smoke, and she pays the waiter $10. John accepts, and both parties are better off.
ANS: A
PTS: 1
DIF: 3
REF: 10-2
TOP: Coase theorem
MSC: Analytical
179. When the government chooses a policy that aligns private incentives with social efficiency to solve an externality
problem, it
a. provides incentives to private decisionmakers to induce them to solve the externality problem on their own.
b. typically uses command-and-control techniques.
c. uses taxes more often than subsidies.
d. uses subsidies more often than taxes.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Externalities
MSC: Interpretive
180. Since almost all forms of transportation produce some type of pollution,
a. the government should ban all transportation.
b. the government should ban all pollution.
c. society has to weigh the cost and benefits when deciding how much pollution to allow.
d. refrain from intervening because the market can best solve this problem.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Externalities
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  437
181. Some environmentalists argue that we should protect the environment as much as possible, regardless of cost.
Which of the following is not a likely outcome of pursuing such a course of action?
a. lower levels of nutrition, health care, and housing
b. a lower standard of living
c. slowing or reversing technological advancement
d. the elimination of all pollution
ANS: D
PTS: 1
DIF: 2
REF: 10-3
TOP: Externalities
MSC: Applicative
182. The best remedy for market failure is often
a. properly redirected market forces.
b. central planning.
c. government regulations.
d. ignoring externalities.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Externalities
MSC: Interpretive
183. Which of the following statements is correct?
a. Because a clean environment is a public good, a feasible goal is to eliminate all pollution, regardless of the
cost.
b. Rich countries usually have cleaner environments than poor countries because a clean environment is like other
normal goods in that it has a positive income elasticity.
c. Clean water and clean air are priceless goods.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Externalities
MSC: Interpretive
184. A command-and-control policy is another term for a
a. pollution permit.
b. government regulation.
c. corrective tax.
d. Both a and b are correct.
ANS: B
PTS: 1
DIF: 1
REF: 10-3
TOP: Command-and-control policies
MSC: Definitional
185. If the government were to limit the release of air-pollution produced by a steel mill to 75 parts per million, the
policy would be considered a
a. regulation.
b. corrective tax.
c. subsidy.
d. market-based policy.
ANS: A
PTS: 1
DIF: 1
REF: 10-3
TOP: Command-and-control policies
MSC: Applicative
186. When the government uses a command-and-control policy to solve an externality, it
a. is usually the most effective policy option available.
b. creates policies that directly regulate behavior.
c. usually involves taxing the consumption of a commodity.
d. typically refers to the Coase theorem to structure the policy.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Command-and-control policies
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
438  Chapter 10/Externalities
187. A local cafe that allowed patrons to smoke was forced to stop serving customers because it did not comply with
local clean air standards. This decision provides an example of
a. a direct regulation of an externality.
b. corrective taxes.
c. a Coase theorem solution to an externality.
d. the misuse of a subsidy.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Command-and-control policies
MSC: Applicative
188. Emission controls on automobiles are an example of a
a. corrective tax.
b. command-and-control policy to increase social efficiency.
c. policy that reduces pollution by allocating resources through market mechanisms.
d. policy to reduce congestion on urban freeways.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Command-and-control policies
MSC: Applicative
189. If it is illegal for a biochemical manufacturer to release its waste into a nearby stream, then this is an example of
a. a market-based policy.
b. a command-and-control policy.
c. tradable pollution permits.
d. transaction costs.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Command-and-control policies
MSC: Applicative
190. If the government were to impose a fine of $1,000 for each unit of air-pollution released by a steel mill, the policy
would be considered
a. a subsidy.
b. a regulation.
c. a corrective tax.
d. an application of the Coase theorem.
ANS: C
PTS: 1
DIF: 1
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
191. A gasoline tax is designed to correct each of the following problems except
a. traffic congestion.
b. traffic accidents.
c. air pollution.
d. EPA regulations.
ANS: D
PTS: 1
DIF: 1
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
192. Which of the following statements is correct?
a. Gasoline taxes are an example of an EPA regulation.
b. Gasoline taxes are higher in many European countries than in the United States.
c. Gasoline taxes contribute to global warming.
d. Gasoline taxes are an example of a command-and-control policy.
ANS: B
PTS: 1
DIF: 1
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
193. The tax on gasoline is an example of
a. a consumption tax.
b. a corrective tax.
c. an income tax.
d. a command-and-control policy.
ANS: B
PTS: 1
DIF: 1
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  439
194. Which of the following statements is correct?
a. Automotive manufacturers prefer stricter fuel economy regulations to higher gasoline taxes.
b. Higher gasoline taxes have provided a market-based incentive for Europeans to buy more fuel-efficient
vehicles.
c. Higher gasoline taxes have had no effect on the U.S. demand for gasoline because the demand for gasoline is
perfectly inelastic.
d. Fuel efficiency regulations are more effective than gasoline taxes in reducing the demand for gasoline in the
United States and Europe.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
195. Which of the following is not an advantage of corrective taxes?
a. They raise revenues for the government.
b. They enhance economic efficiency.
c. They subsidize the production of goods with positive externalities.
d. They move the allocation of resources closer to the social optimum.
ANS: C
PTS: 1
DIF: 1
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
196. Which of the following statements is not correct?
a. Corrective taxes can be used to place a price on the right to pollute.
b. Corrective taxes allocate pollution to those producers who face the highest cost of reducing pollution.
c. Corrective taxes provide incentives to develop cleaner technologies.
d. Corrective taxes require the government to set a target level of pollution.
ANS: D
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Interpretive
197. Most taxes distort incentives and move the allocation of resources away from the social optimum. Why do
corrective taxes avoid the disadvantages of most other taxes?
a. Corrective taxes apply only to goods that are bad for people's health, such as cigarettes and alcohol.
b. Because corrective taxes correct for market externalities, they take into consideration the well-being of
bystanders.
c. Corrective taxes provide incentives for the conservation of natural resources.
d. Corrective taxes do not affect deadweight loss.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Interpretive
198. Corrective taxes differ from most taxes in that corrective taxes
a. enhance economic efficiency.
b. do not raise revenue from the government.
c. cause deadweight loss.
d. cannot be divided between the buyer and seller.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
199. A corrective tax
a. allocates pollution to those factories that face the highest cost of reducing it.
b. is a form of regulation.
c. works well for all types of externalities.
d. is inferior to regulatory policy according to most economists.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
440  Chapter 10/Externalities
200. Corrective taxes are unlike most other taxes because they
a. distort incentives.
b. move the allocation of resources away from the social optimum.
c. raise revenue for the government.
d. move the allocation of resources closer to the social optimum.
ANS: D
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Interpretive
201. In Singapore, littering fines are strictly enforced. This is an example of a policy that
a. relies on moral codes to reduce the pollution externality.
b. relies on the Coase Theorem.
c. discriminates against foreigners.
d. relies on incentives to reduce the pollution externality.
ANS: D
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
202. Corrective taxes are typically advocated to correct for the effects of
a. positive externalities.
b. negative externalities.
c. patents.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
203. With a corrective tax, the supply curve for pollution is
a. perfectly inelastic.
b. perfectly elastic.
c. upward sloping.
d. downward sloping.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Analytical
204. Corrective taxes
a. encourage consumers to avoid sales taxes by shopping online.
b. are frequently used to discourage imports.
c. are less efficient than direct regulation.
d. give factory owners an economic incentive to reduce pollution.
ANS: D
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
205. Suppose that meat producers create a negative externality. Further suppose that the government imposes a tax on
the producers equal to the per-unit externality. What is the relationship between the equilibrium quantity and the
socially optimal quantity of meat to be produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Negative externalities
MSC: Analytical
206. Suppose that smoking creates a negative externality. What can the government do to equate the equilibrium
quantity of cigarettes and the socially optimal quantity of cigarettes smoked?
a. impose a tax on cigarettes that is equal to the per-unit externality
b. offer a subsidy on cigarettes that is equal to the per-unit externality
c. impose a regulation limiting the number of cigarettes that each consumer can purchase
d. nothing
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Negative externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  441
207. Suppose that smoking creates a negative externality. If the government imposes a per-cigarette tax equal to the percigarette externality, then
a. the equilibrium quantity of cigarettes smoked will be less than the socially optimal quantity of cigarettes
smoked.
b. the equilibrium quantity of cigarettes smoked will be greater than the socially optimal quantity of cigarettes
smoked.
c. the equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Negative externalities
MSC: Analytical
208. Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the
government impose a $5 per-unit tax on the producers. What is the relationship between the equilibrium quantity
and the socially optimal quantity of electricity to be produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Negative externalities
MSC: Analytical
209. Corrective taxes that are imposed upon the producer of a nasty smell can be successful in reducing that smell
because the tax makes the producer
a. externalize the positive externality.
b. externalize the negative externality.
c. internalize the positive externality.
d. internalize the negative externality.
ANS: D
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Negative externalities
MSC: Interpretive
210. Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the
government gives a $5 per-unit subsidy to producers. What is the relationship between the equilibrium quantity and
the socially optimal quantity of electricity to be produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: B
PTS: 1
DIF: 3
REF: 10-3
TOP: Corrective taxes | Negative externalities
MSC: Analytical
211. Suppose that electricity producers create a negative externality equal to $5 per unit. Further suppose that the
government imposes a $6 per-unit tax on the producers. What is the relationship between the equilibrium quantity
and the socially optimal quantity of electricity to be produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 3
REF: 10-3
TOP: Corrective taxes | Negative externalities
MSC: Analytical
212. Suppose that elementary education creates a positive externality. If the government subsidizes education by an
amount equal to the per-unit externality it creates, then
a. the equilibrium quantity of education will equal the socially optimal quantity of education.
b. the equilibrium quantity of education will be greater than the socially optimal quantity of education.
c. the equilibrium quantity of education will be less than the socially optimal quantity of education.
d. There is not enough information to answer the question.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Positive externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
442  Chapter 10/Externalities
213. University researchers create a positive externality because what they discover in their research labs can easily be
learned by others who haven't contributed to the research costs. What could the federal government do to equate
the equilibrium quantity of university research and the socially optimal quantity of university research produced?
a. tax university researchers
b. offer grants to university researchers
c. eliminate subsidized student loans
d. nothing
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Positive externalities
MSC: Analytical
214. University researchers create a positive externality because what they discover in their research labs can easily be
learned by others who haven't contributed to the research costs. Suppose that the federal government gives grants
to these researchers equal to the their per-unit production externality. What is the relationship between the
equilibrium quantity of university research and the socially optimal quantity of university research produced?
a. The equilibrium quantity is greater than the socially optimal quantity.
b. They are equal.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Positive externalities
MSC: Analytical
215. Suppose that flower gardens create a positive externality equal to $1 per plant. Further suppose that the local
government offers a $1 per-plant subsidy to growers. What is the relationship between the equilibrium quantity and
the socially optimal quantity of plants grown?
a. The equilibrium quantity is less than the socially optimal quantity.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. They are equal.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Positive externalities
MSC: Analytical
216. Suppose that cookie producers create a positive externality equal to $2 per dozen. Further suppose that the
government offers a $2 per-dozen subsidy to the producers. What is the relationship between the equilibrium
quantity and the socially optimal quantity of cookies to be produced?
a. The equilibrium quantity is greater than the socially optimal quantity.
b. The equilibrium quantity is less than the socially optimal quantity.
c. They are equal.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Positive externalities
MSC: Analytical
217. Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government
offers a $12 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the
socially optimal quantity of flu shots produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Positive externalities
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  443
218. Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government
offers a $5 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the
socially optimal quantity of flu shots produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: C
PTS: 1
DIF: 3
REF: 10-3
TOP: Corrective taxes | Positive externalities
MSC: Analytical
219. Suppose that flu shots create a positive externality equal to $12 per shot. Further suppose that the government
offers a $15 per-shot subsidy to producers. What is the relationship between the equilibrium quantity and the
socially optimal quantity of flu shots produced?
a. They are equal.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. The equilibrium quantity is less than the socially optimal quantity.
d. There is not enough information to answer the question.
ANS: B
PTS: 1
DIF: 3
REF: 10-3
TOP: Corrective taxes | Positive externalities
MSC: Analytical
220. Which of the following statements is not correct?
a. Tradable pollution permits have an advantage over corrective taxes if the government is uncertain as to the
optimal size of the tax necessary to reduce pollution to a specific level.
b. Both corrective taxes and tradable pollution permits provide market-based incentives for firms to reduce
pollution.
c. Corrective taxes set the maximum quantity of pollution, whereas tradable pollution permits fix the price of
pollution.
d. Both corrective taxes and tradable pollution permits reduce the cost of environmental protection and thus
should increase the public's demand for a clean environment.
ANS: C
PTS: 1
DIF: 3
REF: 10-3
TOP: Corrective taxes
MSC: Interpretive
Figure 10-7
221. Refer to Figure 10-7. Which graph illustrates a regulation?
a. the left graph
b. the right graph
c. both graphs
d. neither graph
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Command-and-control policies
MSC: Analytical
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
444  Chapter 10/Externalities
222. Refer to Figure 10-7. Which graph illustrates a corrective tax?
a. the left graph
b. the right graph
c. both graphs
d. neither graph
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Analytical
223. Refer to Figure 10-7. Which of the following is not necessary in order for the corrective tax and pollution permit
to have equivalent effects?
a. PB must be equivalent to the corrective tax.
b. QA must be equivalent to the amount of pollution allowed to the pollution permit holders.
c. The equilibrium price and quantity of pollution must be the same in both graphs.
d. The amount of pollution emitted by each firm must be the same.
ANS: D
PTS: 1
DIF: 3
REF: 10-3
TOP: Corrective taxes | Tradable pollution permits MSC: Analytical
224. Which of the following statements is correct?
a. Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a lower
cost.
b. Corrective taxes distort economic incentives.
c. Corrective taxes are often preferred over direct regulation because they typically reduce externalities at a faster
rate.
d. Both a and b are correct.
ANS: A
PTS: 1
DIF: 3
REF: 10-3
TOP: Corrective taxes | Command-and-control policies
MSC: Analytical
225. Corrective taxes are preferred over regulations to deal with pollution because corrective taxes
a. reduce pollution at a lower cost to society.
b. raise revenue and reduce pollution simultaneously, although efficiency is reduced.
c. obtain faster results than regulations.
d. allow for an accurate monitoring of pollution levels.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Command-and-control policies
MSC: Interpretive
226. Regulations to reduce pollution
a. cause pollution levels to drop below the regulated amount.
b. are a less costly solution to society than a corrective tax.
c. cause each factory to reduce pollution to the same level (or less).
d. are a better solution for the environment than a corrective tax.
ANS: C
PTS: 1
DIF: 2
REF: 10-3
TOP: Command-and-control policies | Corrective taxes
MSC: Applicative
227. A corrective tax
a. causes each factory to reduce pollution by the same amount.
b. assigns a legal pollution limit for firms.
c. places a price on the right to pollute.
d. costs society more than pollution regulations.
ANS: C
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Command-and-control policies
MSC: Applicative
228. Which of the following statements is correct?
a. Taxes are more difficult to administer than regulations.
b. Taxes provide incentives for firms to adopt new methods to reduce negative externalities.
c. Command-and-control policies provide incentives for private decisionmakers to solve their problems on their
own.
d. Corrective taxes distort incentives.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Command-and-control policies
MSC: Interpretive
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  445
229. Which of the following is not an effective method to reduce negative externalities?
a. relying on voluntary compliance
b. taxing the output of industries that pollute
c. creating legal environmental standards
d. increasing public spending on cleanup and reduction of pollution
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Command-and-control policies
MSC: Applicative
230. What is the difference between command-and-control policies and market-based policies toward externalities?
a. Command-and-control policies provide incentives for private decisionmakers to solve the problems on their
own, whereas market-based policies regulate behavior directly.
b. Command-and-control policies rely on taxes, whereas market-based policies rely on quotas.
c. Command-and-control policies regulate behavior directly, whereas market-based policies provide incentives
for private decisionmakers to change their behavior.
d. Command-and-control policies are efficient, whereas market-based policies are inefficient.
ANS: C
PTS: 1
DIF: 1
REF: 10-3
TOP: Command-and-control policies
MSC: Definitional
231. Which of the following statements is not correct?
a. Patents help internalize the externalities associated with technological advances.
b. Economists typically prefer regulations to corrective taxes because regulations provide more incentives for
firms to seek continued reductions in pollution.
c. Allowing firms to trade pollution permits will lower the total cost of reducing pollution.
d. A big impediment to implementing the Coase theorem in many cases is high transactions costs.
ANS: B
PTS: 1
DIF: 3
REF: 10-3
TOP: Command-and-control policies | Tradable pollution permits
MSC: Analytical
232. In many cases selling pollution permits is a better method for reducing pollution than imposing a corrective tax
because
a. it is hard to estimate the market demand curve and thus charge the "right" corrective tax.
b. selling pollution permits create a net increase in pollution.
c. Corrective taxes distort incentives.
d. Corrective taxes provide greater flexibility to firms that can reduce pollution at a low cost.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Tradable pollution permits MSC: Interpretive
233. The difference between a corrective tax and a tradable pollution permit is that
a. a corrective tax sets the price of pollution and a permit sets the quantity of pollution.
b. a corrective tax creates a more efficient outcome than a permit.
c. a corrective tax sets the quantity of pollution and a permit sets the price of pollution.
d. a permit creates a more efficient outcome than a corrective tax.
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Tradable pollution permits MSC: Analytical
234. In some cases, tradable pollution permits may be better than a corrective tax because
a. pollution permits allow for a market solution while a corrective tax does not.
b. pollution permits generate more revenue for the government than a corrective tax.
c. pollution permits are never preferred over a corrective tax.
d. the government can set a maximum level of pollution using permits.
ANS: D
PTS: 1
DIF: 2
REF: 10-3
TOP: Tradable pollution permits | Corrective taxes MSC: Interpretive
235. Which of the following helped reduce sulfur dioxide emissions, a leading cause of acid rain?
(i) corrective taxes
(ii) tradable pollution permits
(iii)amendments to the Clean Air Act
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446  Chapter 10/Externalities
a. (i) only
b. both (i) and (ii)
c. (iii) only
d. both (ii) and (iii)
ANS: D
PTS: 1
DIF: 3
TOP: Tradable pollution permits | Corrective taxes
REF: 10-3
MSC: Applicative
236. With pollution permits, the supply curve for pollution rights is
a. perfectly elastic.
b. perfectly inelastic.
c. upward sloping.
d. downward sloping.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
237. Tradable pollution permits
a. are widely viewed as a cost-effective way to reduce pollution.
b. have helped reduce carbon emissions.
c. have helped reduce sulfur dioxide emissions.
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 2
REF: 10-3
TOP: Tradable pollution permits MSC: Applicative
238. Once tradable pollution permits have been allocated to firms,
a. the government controls the price of permits.
b. firms that can reduce pollution only at high cost will be willing to pay the most for the pollution permits.
c. the value of pollution-saving technology will be lower than the market value of a pollution permit.
d. the Coase theorem is no longer applicable as a solution to reducing pollution.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Tradable pollution permits MSC: Interpretive
239. Tradable pollution permits
a. have prices that are set by the government.
b. will be more valuable to firms that can reduce pollution only at high costs.
c. are likely to create a higher level of total pollution.
d. are less desirable than corrective taxes in reducing pollution.
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
240. Which of the following is not a characteristic of pollution permits?
a. Prices are set by supply and demand.
b. Allowing firms to trade their permits reduces the total quantity of pollution beyond the initial allocation.
c. Real-world markets for pollution permits include sulfur dioxide and carbon.
d. Firms for whom pollution reduction is very expensive are willing to pay more for permits than firms for whom
pollution reduction is less expensive.
ANS: B
PTS: 1
DIF: 3
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
241. When one firm sells its pollution permit to another firm,
a. both firms benefit.
b. the total amount of pollution remains the same.
c. the total amount of pollution decreases.
d. Both a and b are correct.
ANS: D
PTS: 1
DIF: 3
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  447
242. Which of the following is an advantage of tradable pollution permits?
a. The government knows exactly how much each firm is allowed to pollute.
b. Revenue from the sale of permits is greater than revenue from a corrective tax.
c. The initial allocation of permits to firms does not affect the efficiency of the market.
d. Firms will engage in joint research efforts to reduce pollution.
ANS: C
PTS: 1
DIF: 3
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
Figure 10-8
243. Refer to Figure 10-8. This graph shows the market for pollution when permits are issued to firms and traded in the
marketplace. The equilibrium price of pollution is
a. $50
b. $500
c. $1,000
d. $2,000
ANS: C
PTS: 1
DIF: 2
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
244. Refer to Figure 10-8. This graph shows the market for pollution when permits are issued to firms and traded in the
marketplace. The equilibrium number of permits is
a. 50
b. 100
c. 1,000
d. 2,000
ANS: A
PTS: 1
DIF: 2
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
448  Chapter 10/Externalities
245. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to
reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the
river. The government gives each firm 20 pollution permits, which it can either use or sell to the other firm. It costs
Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each
ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from
each other, we would expect that Firm A will dump
a. 10 fewer tons of pollution into the river, and Firm B will dump 50 fewer tons of pollution into the river.
b. 50 fewer tons of pollution into the river, and Firm B will dump 10 fewer tons of pollution into the river.
c. 30 fewer tons of pollution into the river, and Firm B will dump 30 fewer tons of pollution into the river.
d. 10 more tons of pollution into the river, and Firm B will dump 50 fewer tons of pollution into the river.
ANS: A
PTS: 1
DIF: 3
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
246. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to
reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the
river. The government gives each firm 20 pollution permits, which it can either use or sell to the other firm. It costs
Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each
ton of pollution that it eliminates before it reaches the river. It is likely that
a. Firm A will buy all of Firm B's pollution permits. Each one will cost between $50 and $100.
b. Firm B will buy all of Firm A's pollution permits. Each one will cost between $50 and $100.
c. Both firms will use their own pollution permits.
d. Firm A will buy some of Firm B's pollution permits. Each one will cost less than $50.
ANS: A
PTS: 1
DIF: 3
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
247. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to
reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the
river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B
$50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20
pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits
to each other. What is the total cost of reducing pollution if firms are not allowed to buy and sell pollution permits
from each other? What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from
each other? You should assume that any firm that buys a permit pays the highest price for that permit.
a. $3,000; $1,500
b. $4,500; $3,500
c. $4,500; $4,000
d. $4,500; $2,500
ANS: B
PTS: 1
DIF: 3
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
248. Two firms, A and B, each currently dump 20 tons of chemicals into the local river. The government has decided to
reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the
river. The government gives each firm 10 pollution permits, which it can either use or sell to the other firm. It costs
Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each
ton of pollution that it eliminates before it reaches the river. After the two firms buy or sell pollution permits from
each other, we would expect that
a. Firm A will no longer pollute, and Firm B will not reduce its pollution at all.
b. Firm B will no longer pollute, and Firm A will not reduce its pollution at all.
c. Firm A will dump 10 tons of pollution into the river, and Firm B will dump 10 tons of pollution into the river.
d. Firm A will increase its pollution and Firm B will reduce its pollution.
ANS: B
PTS: 1
DIF: 3
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  449
249. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to
reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the
river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution
that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates
before it reaches the river. It is likely that between the cost of permits and the cost of additional pollution
abatement,
a. Firm B will spend $3,500.
b. Firm A will spend $4,000.
c. Firm A will spend $4,500.
d. Firm B will spend $3,000.
ANS: B
PTS: 1
DIF: 3
REF: 10-3
TOP: Tradable pollution permits MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
450  Chapter 10/Externalities
250. Which of the following require firms to pay to pollute?
(i) corrective taxes
(ii) tradable pollution permits
(iii)pollution regulations
a. (i) only
b. both (i) and (ii)
c. (iii) only
d. both (ii) and (iii)
ANS: B
PTS: 1
DIF: 2
REF: 10-3
TOP: Corrective taxes | Tradable pollution permits | Command-and-control policies
MSC: Applicative
True/False
1. When a transaction between a buyer and seller directly affects a third party, the effect is called an externality.
ANS: T
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Definitional
2. In a market characterized by externalities, the market equilibrium fails to maximize the total benefit to society as a
whole.
ANS: T
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Definitional
3. Barking dogs cannot be considered an externality because externalities must be associated with some form of
market exchange.
ANS: F
DIF: 1
REF: 10-0
TOP: Externalities
MSC: Applicative
4. The social cost of pollution includes the private costs of the producers plus the costs to those bystanders adversely
affected by the pollution.
ANS: T
DIF: 1
REF: 10-1
TOP: Externalities
MSC: Definitional
5. Organizers of an outdoor concert in a park surrounded by residential neighborhoods are likely to consider the noise
and traffic cost to residential neighborhoods when they assess the financial viability of the concert venture.
ANS: F
DIF: 1
REF: 10-1
TOP: Negative externalities
MSC: Applicative
6. When firms internalize a negative externality, the market supply curve shifts to the left.
ANS: T
DIF: 2
REF: 10-1
TOP: Negative externalities
MSC: Analytical
7. Government subsidized scholarships are an example of a government policy aimed at correcting for negative
externalities associated with education.
ANS: F
DIF: 1
REF: 10-1
TOP: Positive externalities
MSC: Applicative
8. Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive
externalities lead markets to produce a larger quantity of a good than is socially desirable.
ANS: F
DIF: 2
REF: 10-1
TOP: Negative externalities, Positive externalities
MSC: Interpretive
9. The government can “help” firms to internalize externalities by taxing goods that have negative externalities and
subsidizing goods that have positive externalities.
ANS: T
DIF: 2
REF: 10-1
TOP: Negative externalities, Positive externalities
MSC: Applicative
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copied, or distributed without the prior consent of the publisher.
Chapter 10/Externalities  451
10. If the social cost of producing robots is less than the private cost of producing robots, the private market produces
too few robots.
ANS: T
DIF: 2
REF: 10-1
TOP: Positive externalities, Technology spillovers MSC: Analytical
11. The patent system gives firms greater incentive to engage in research and other activities that advance technology.
ANS: T
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Applicative
12. A technology spillover is a type of negative externality.
ANS: F
DIF: 2
REF: 10-1
TOP: Technology spillovers
MSC: Interpretive
13. Government can be used to solve externality problems that are too costly for private parties to solve.
ANS: T
DIF: 1
REF: 10-2
TOP: Externalities
MSC: Interpretive
14. Government intervention is necessary to correct all externalities.
ANS: F
DIF: 2
REF: 10-2
TOP: Externalities
MSC: Applicative
15. According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the
problem of externalities.
ANS: T
DIF: 1
REF: 10-2
TOP: Coase theorem
MSC: Definitional
16. According to the Coase theorem, whatever the initial distribution of rights, the interested parties can bargain to an
efficient outcome.
ANS: T
DIF: 1
REF: 10-2
TOP: Coase theorem
MSC: Definitional
17. According to the Coase theorem, the private market will need government intervention in order to reach an
efficient outcome.
ANS: F
DIF: 1
REF: 10-2
TOP: Coase theorem
MSC: Definitional
18. Despite the appealing logic of the Coase theorem, private actors often fail to resolve on their own the problems
caused by externalities.
ANS: T
DIF: 1
REF: 10-2
TOP: Coase theorem
MSC: Applicative
19. Private parties may choose not to solve an externality problem if the transaction costs are large enough.
ANS: T
DIF: 2
REF: 10-2
TOP: Coase theorem
MSC: Interpretive
20. Even if possible, it would be inefficient to prohibit all polluting activity.
ANS: T
DIF: 2
REF: 10-3
TOP: Externalities
MSC: Applicative
21. One advantage of regulation as a method for reducing pollution is that the government can determine the maximum
quantity of pollution that is legally allowed.
ANS: T
DIF: 2
REF: 10-3
TOP: Command-and-control policies
MSC: Interpretive
22. When correcting for an externality, command-and-control policies are always preferable to market-based policies.
ANS: F
DIF: 2
REF: 10-3
TOP: Command-and-control policies, Corrective taxes
MSC: Interpretive
23. Corrective taxes enhance efficiency, but the cost to administer them exceeds the revenue they raise for the
government.
ANS: F
DIF: 1
REF: 10-3
TOP: Corrective taxes
MSC: Interpretive
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452  Chapter 10/Externalities
24. Most economists prefer regulation to taxation because regulation corrects market inefficiencies at a lower cost than
taxation does.
ANS: F
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Applicative
25. A corrective tax places a price on the right to pollute.
ANS: T
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Interpretive
26. The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.
ANS: F
DIF: 2
REF: 10-3
TOP: Corrective taxes
MSC: Interpretive
27. Both pollution permits and corrective taxes are viewed as cost effective ways to keep the environment clean.
ANS: T
DIF: 1
REF: 10-3
TOP: Corrective taxes, Tradable pollution permits
MSC: Applicative
28. A market for pollution permits can efficiently allocate the right to pollute by the forces of supply and demand.
ANS: T
DIF: 1
REF: 10-3
TOP: Tradable pollution permits MSC: Applicative
29. The Environmental Protection Agency (EPA) cannot reach a target level of pollution through the use of pollution
permits.
ANS: F
DIF: 1
REF: 10-3
TOP: Tradable pollution permits MSC: Applicative
30. Social welfare can be enhanced by allowing firms to trade their rights to pollute.
ANS: T
DIF: 2
REF: 10-3
TOP: Tradable pollution permits MSC: Applicative
31. Firms that can reduce pollution easily would be willing to sell their pollution permits.
ANS: T
DIF: 2
REF: 10-3
TOP: Tradable pollution permits MSC: Applicative
32. One example of a real-world market for tradable pollution permits is the market for carbon permits in Europe.
ANS: T
DIF: 1
REF: 10-3
TOP: Tradable pollution permits MSC: Applicative
TOP: Corrective taxes, Tradable pollution permits
MSC: Analytical
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copied, or distributed without the prior consent of the publisher.
1) Efficiency means that
a. society is conserving resources in order to save them for the future.
b. society's goods and services are distributed equally among society's members.
c. society's goods and services are distributed fairly, though not necessarily equally, among society's
members.
d. society is getting the maximum benefits from its scarce resources.
ANS: D
2) Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is
a. the improvement in his grades from studying for the hour.
b. the improvement in his grades from studying minus the enjoyment of playing tennis.
c. the enjoyment and exercise he would have received had he played tennis.
d. zero. Since Russell chose to study rather than to play tennis, the value of studying must have been
greater than the value of playing tennis.
ANS: C
3) Traci is planning to sell her house, and she is considering making two upgrades to the house before listing it
for sale. Replacing the carpeting will cost her $3,000 and replacing the roof will cost her $6,000. Traci
expects the new carpeting to increase the value of her house by $2,500 and the new roof to increase the
value of her house by $7,500.
a. Traci should make both improvements to her house.
b. Traci should replace the carpeting but not replace the roof.
c. Traci should replace the roof but not replace the carpeting.
d. Traci should not make either improvement to her house.
ANS: C
4) The basic principles of economics suggest that
a. markets are seldom, if ever, a good way to organize economic activity.
b. government should become involved in markets when trade between countries is involved.
c. government should become involved in markets when those markets fail to produce efficient or fair
outcomes.
d. All of the above are correct.
ANS: C
5) The circular-flow diagram is a
a. visual model of the economy.
b. visual model of the relationships among money, prices, and businesses.
c. model that shows the effects of government on the economy.
d. mathematical model of how the economy works.
ANS: A
6) In the circular-flow diagram,
a. firms own the factors of production.
b. the factors of production are labor, land, and capital.
c. the factors of production are also called “output.”
d. All of the above are correct.
ANS: B
Table 2-1
Production Possibilities for Toyland
Dolls
400
300
200
100
0
Fire Trucks
0
200
350
450
500
7) Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of dolls from 200 to
300?
a. 100 fire trucks
b. 150 fire trucks
c. 200 fire trucks
d. 350 fire trucks
ANS: B
8) Refer to Table 2-1. Which of the following statements is correct?
a. The opportunity cost of an additional 100 dolls is constant at 50 fire trucks.
b. The opportunity cost of an additional 100 dolls is constant at 100 fire trucks.
c. Toyland’s production possibilities frontier is a straight, downward-sloping line.
d. The opportunity cost of an additional 100 dolls increases as more dolls are produced.
ANS: D
The following table contains some production possibilities for an economy for a given month.
Sweaters
4
6
8
Gloves
300
?
100
9) If the production possibilities frontier is bowed outward, then “?” could be
a. 100.
b. 150.
c. 200.
d. 250.
ANS: D
10) Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can make 4
tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that
a. Mike has an absolute advantage in chairs.
b. Mike has a comparative advantage in tables.
c. Sandy has an absolute advantage in chairs.
d. Sandy has a comparative advantage in chairs.
ANS: A
Table 3-11
Assume that Falda and Varick can switch between producing wheat and producing cloth at a constant rate.
Quantity Produced in 1
Hour
Bushels
Yards
of Wheat
of
Cloth
8
12
6
15
Falda
Varick
11) Refer to Table 3-11. Falda has a comparative advantage in the production of
a. wheat.
b. cloth.
c. both goods.
d. neither good.
ANS: A
Figure 3-2
Peru’s Production Possibilities Frontier
400
rubies
360
320
280
240
200
160
120
80
40
1
2
3
4
5
6
7
8
emeralds
12) Refer to Figure 3-2. If the production possibilities frontier shown is for one month of production, then
which of the following combinations of emeralds and rubies could Peru produce in a given month?
a. 7 emeralds and 40 rubies
b. 5 emeralds and 92 rubies
c. 3 emeralds and 165 rubies
d. 2 emeralds and 180 rubies
ANS: D
13) Which of the following would not shift the demand curve for mp3 players?
a. a decrease in the price of mp3 players
b. a fad that makes mp3 players more popular among 12-25 year olds
c. an increase in the price of CDs, a complement for mp3 players
d. a decrease in the price of satellite radio, a substitute for mp3 players
ANS: A
Figure 4-3
price
D'
D
quantity
14) Refer to Figure 4-3. The movement from D to D’ could be caused by
a. an increase in price.
b. a decrease in the price of a complement.
c. a technological advance.
d. a decrease in the price of a substitute.
ANS: D
15) Lead is an important input in the production of crystal. If the price of lead decreases, then we would expect
the supply of
a. crystal to be unaffected.
b. crystal to decrease.
c. crystal to increase.
d. lead to increase.
ANS: C
Figure 4-6
price
S
B
P'
A
P
Q
Q'
quantity
16) Refer to Figure 4-6. The movement from point A to point B on the graph is caused by
a. a decrease in the price of the good.
b. an increase in the price of the good.
c. an advance in technology.
d. a decrease in input prices.
ANS: B
17) 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.
ANS: A
18) 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.
ANS: A
19) The price elasticity of demand for eggs
a. is computed as the percentage change in quantity demanded of eggs divided by the percentage
change in price of eggs.
b. will be lower if there is a new invention that is a close substitute for eggs.
c. will be higher if consumers consider eggs to be a luxury good.
d. All of the above are correct.
ANS: A
20) Jean-Paul says that he will spend exactly 75 cents a day on M&Ms, regardless of the price of M&Ms. JeanPaul’s demand for M&Ms is
a. perfectly elastic.
b. unit elastic.
c. perfectly inelastic.
d. None of the above answers is correct.
ANS: B
21) If a 20% increase in price for a good results in a 15% decrease in quantity demanded, the price elasticity of
demand is
a. 0.75.
b. 1.25.
c. 1.33.
d. 1.60.
ANS: A
Figure 5-8
10
Price
9
8
7
6
5
4
3
2
D
1
1
2
3
4
5
6
7
8
Quantity
22)
Refer to Figure 5-8. For prices above $5, demand is price
a. elastic, and raising price will increase total revenue.
b. inelastic, and raising price will increase total revenue.
c. elastic, and lowering price will increase total revenue.
d. inelastic, and lowering price will increase total revenue.
ANS: C
Table 5-1
Good
A
B
Price Elasticity of Demand
1.3
2.1
23)
Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2?
a. A is a luxury and B is a necessity.
b. A is a good several years after a price increase, and B is that same good several days after the price
increase.
c. A is a Kit Kat bar and B is candy.
d. A has fewer substitutes than B.
ANS: D
24) If a price ceiling is a binding constraint on a market, then
a. the equilibrium price must be below the price ceiling.
b. the quantity supplied must exceed the quantity demanded.
c. sellers cannot sell all they want to sell at the price ceiling.
d. buyers cannot buy all they want to buy at the price ceiling.
ANS: D
25) A tax imposed on the sellers of a good will
a. raise the price paid by buyers and lower the equilibrium quantity.
b. raise the price paid by buyers and raise the equilibrium quantity.
c. raise the effective price received by sellers and lower the equilibrium quantity.
d. raise the effective price received by sellers and raise the equilibrium quantity.
ANS: A
Table 6-1
Price
Quantity
Quantity
Demanded
Supplied
$0
12
0
$1
10
2
$2
8
4
$3
6
6
$4
4
8
$5
2
10
$6
0
12
26) Refer to Table 6-1. Suppose the government imposes a price floor of $5 on this market. What will be the
size of the surplus in this market?
a. 0 units
b. 2 units
c. 8 units
d. 10 units
ANS: C
Figure 6-2
Panel (a)
Panel (b)
price of wheat
price of wheat
S
S
price floor
price floor
D
D
quantity
27)
Refer to Figure 6-2. A binding price floor is shown in
a. both panel (a) and panel (b).
b. panel (a) but not panel (b).
c. panel (b) but not panel (a).
d. neither panel (a) nor panel (b).
ANS: C
Table 7-1
Buyer
Willingness To Pay
Mike
$50.00
Sandy
$30.00
Jonathan
$20.00
Haley
$10.00
28) Refer to Table 7-1. If price of the product is $30, then the total consumer surplus is
a. $-10.
b. $-6.
c. $20.
d. $30.
ANS: C
quantity
29) David tunes pianos in his spare time for extra income. Buyers of his service are willing to pay $135 per
tuning. One particular week, David is willing to tune the first piano for $115, the second piano for $125,
the third piano for $140, and the fourth piano for $175. Assume David is rational in deciding how many
pianos to tune. His producer surplus is
a. $-15.
b. $20.
c. $30.
d. $75.
ANS: C
Figure 7-16
P4
Price
Supply
A
P3
B
C
D
H
P2
P1
F
I
G
Demand
Q1
Q2
Quantity
30) Refer to Figure 7-16. At equilibrium, total surplus is represented by the area
a. A+B+C.
b. A+B+D+F.
c. A+B+C+D+H+F.
d. A+B+C+D+H+F+G+I.
ANS: C
Figure 8-2
The vertical distance between points A and B represents a tax in the market.
Price
12
11
Supply
10
A
9
8
7
6
5
4
B
3
2
1
Demand
0.5
31)
1
1.5
2
2.5
3
3.5
4
4.5
5
Quantity
Refer to Figure 8-2. The amount of tax revenue received by the government is
a. $2.50.
b. $4.
c. $5.
d. $9.
ANS: C
32) Refer to Figure 8-2. The amount of deadweight loss as a result of the tax is
a. $2.50.
b. $5.
c. $7.50.
d. $10.
ANS: A
Table 8-1
Market
Characteristic
A
Demand is very inelastic.
B
Demand is very elastic.
C
Supply is very inelastic.
D
Supply is very elastic.
33) 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
ANS: B
Figure 10-2
Price
8.5
8
7.5
7
6.5
Social Cost
6
5.5
5
4.5
P rivate Cost
4
3.5
3
2.5
2
1.5
Demand
1
0.5
100
200
300
400
500
600
700
800
900
Quantity
34) Refer to Figure 10-2. Assume the production of plastic imposes a cost on society of $2.00 per unit. If the
free market equilibrium output is 650 units, the government should
a. impose a tax of $1.50 per unit.
b. increase the output of the firm by 50 units.
c. offer a subsidy of $2.00 per unit..
d. impose a tax of $2.00 per unit.
ANS: D
Figure 8-7
The vertical distance between points A and B represents a tax in the market.
Price
24
Supply
22
20
18
A
16
14
12
10
8
B
6
4
2
Demand
5
10
15
20
25
30
35
40
45
50
55
60
Quantity
35) Refer to Figure 8-7. As a result of the tax, buyers effectively pay
a. $16 for each unit of the good, and sellers effectively receive $12 for each unit of the good.
b. $16 for each unit of the good, and sellers effectively receive $8 for each unit of the good.
c. $12 for each unit of the good, and sellers effectively receive $8 for each unit of the good.
d. $14 for each unit of the good, and sellers effectively receive $10 for each unit of the good.
ANS: B
36) Which of the following is not an advantage of corrective taxes?
a. They raise revenues for the government.
b. They enhance economic efficiency.
c. They subsidize the production of goods with positive externalities.
d. They move the allocation of resources closer to the social optimum.
ANS: C
37) Betty’s cat causes Suzy to sneeze. Betty values her cat’s companionship at $300 per year. The cost to Suzy
of tissues and her allergy medication is $350 per year. Based on the Coase theorem,
a. Betty should pay Suzy $400 so that she may keep her cat.
b. Betty should pay Suzy $350 to purchase her tissues and allergy medication.
c. Suzy should pay Betty $325 to give away her cat.
d. Suzy should move.
ANS: C
Figure 10-9
Price
Panel (a)
Supply
P1
Demand
Q1
Quantity
Price
Price
Panel (b)
Panel (c)
Social cost
Supply
Supply
P3a
P4a
P2
P5
P3b
P4b
Social value
Demand
Demand
Q2
Q3
Quantity
Q4
Q5
Quantity
38) Refer to Figure 10-9. The overuse of antibiotics leads to the development of antibiotic-resistant diseases.
Therefore, the market for antibiotics is shown in
a. Panel (a).
b. Panel (b).
c. Panel (c).
d. Both (b) and (c) are correct.
ANS: B
39) Which of the following would be an example of an implicit cost?
(i)
forgone investment opportunities
(ii)
wages of workers
(iii)
raw materials costs
a.
b.
c.
d.
ANS:
(i) only
(ii) only
(ii) and (iii) only
(i) and (iii) only
A
Table 13-1
Alyson’s Pet Sitting Service
Number of Output (number of
Workers
pet visits)
0
0
1
20
2
45
3
60
4
70
40) Refer to Table 13-1. What is the marginal product of the second worker?
a. 15
b. 20
c. 22.5
d. 25
ANS: D
Table 1
Assume that Sardi and Tinaka can switch between producing corn and producing pork at a constant rate.
Minutes Needed to Make 1
Bushel of Corn
Pound of Pork
Sardi
20
12
Tinaka
15
10
1) Refer to Table 1. What is Sardi’s opportunity cost of producing one bushel of corn?
a. 3/5 pound of pork
b. 6/5 pounds of pork
c. 4/3 pounds of pork
d. 5/3 pounds of pork
ANS: D
2) When the price of a good is lower than the equilibrium price,
a. a surplus will exist.
b. buyers desire to purchase more than is produced.
c. sellers desire to produce and sell more than buyers wish to purchase.
d. quantity supplied exceeds quantity demanded.
ANS: B
Figure 1
10
price
9
S
8
7
6
5
4
3
2
D
1
D after tax
10
20
30
40
50
60
70
80
quantity
3) Refer to Figure 1. The price that buyers pay after the tax is imposed is
a. $5.
b. $6.
c. $7.
d. $8.
ANS: D
Figure 2
televisions
13
12
Q
11
U
10
9
8
7
S
6
R
5
4
3
2
1
T
1
2
3
4
5
6
radios
4) Refer to Figure 2. Production is
a. possible at points Q, R, S, and T, but efficient only at points Q, S, and T.
b. possible at points Q, R, S, and T, but efficient only at point R.
c. possible at points Q, S, T, and U, but efficient only at points Q, S, and T.
d. possible at points Q, S, T, and U, but efficient only at point U.
ANS: A
5) If nominal GDP doubles and the GDP deflator doubles, then real GDP
a. remains constant.
b. doubles.
c. triples.
d. quadruples.
ANS: A
6) In the economy of Wrexington in 2008, consumption was $6000, exports were $1000, GDP was $10,000,
government purchases were $2000, and imports were $600. What was Wrexington’s investment in 2008?
a. $1400
b. $1600
c. $2400
d. $3600
ANS: B
7) If a U.S. citizen buys a dress made in Nepal by a Nepalese firm, then
a. U.S. consumption increases, U.S. net exports decrease, and U.S. GDP decreases.
b. U.S. consumption increases, U.S. net exports decrease, and U.S. GDP is unaffected.
c. U.S. consumption decreases, U.S. net exports increase, and U.S. GDP increases.
d. U.S. consumption decreases, U.S. net exports increase, and U.S. GDP is unaffected.
ANS: B
8) Suppose some country had an adult population of about 50 million, a labor-force participation rate of 60 percent,
and an unemployment rate of 5 percent. How many people were employed?
a. 1.5 million
b. 28.5 million
c. 30 million
d. 47.5 million
Answer: B
9) Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and
skills is called
a. the natural rate of unemployment.
b. cyclical unemployment.
c. structural unemployment.
d. frictional unemployment.
Answer: D
10) If minimum-wage laws, unions, efficiency wages, and all other factors that could prevent wages from reaching
equilibrium were eliminated, then there would be no
a. cyclical unemployment.
b. frictional unemployment.
c. structural unemployment.
d. natural rate of unemployment.
ANS: C
Table 2
The table below pertains to Pieway, an economy in which the typical consumer’s basket consists of 10 bushels of
peaches and 15 bushels of pecans.
Year
2005
2006
Price of
Peaches
$11 per bushel
$9 per bushel
Price of Pecans
$6 per bushel
$10 per bushel
11) Refer to Table 2. If 2005 is the base year, then the CPI for 2006 was
a. 83.3.
b. 100.
c. 120.
d. 240.
ANS: C
12) A decrease in the price of domestically produced industrial robots will be reflected in
a. both the GDP deflator and the consumer price index.
b. neither the GDP deflator nor the consumer price index.
c. the GDP deflator but not in the consumer price index.
d. the consumer price index but not in the GDP deflator.
Answer: C
13) To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?
a. substitution bias
b. introduction of new goods
c. unmeasured quality change
d. income bias
ANS: B
14) Waldo works eight hours and produces 7 units of goods per hour. Emerson works six hours and produces 10
units of goods per hour.
a. Waldo’s productivity and output are greater than Emerson’s.
b. Waldo’s productivity is greater than Emerson’s but his output is less.
c. Emerson’s productivity and output are greater than Waldo’s.
d. Emerson’s productivity is greater than Waldo’s but his output is less.
ANS: C
15) An economy’s production form takes the form Y = AF(L, K, H, N).If the production function has the constantreturns-to-scale property, then it could be rewritten as
a. Y/L = AF(1, K/L, H/L, N/L)
b. Y/L = AF(L, 1, H/L, N/L)
c. Y/L = AF(L, K/L, 1, N/L)
d. Y/L = AF(L, K/L, H/L, 1)
Answer: A
16) Which of the following is considered human capital?
a. knowledge acquired from early childhood education programs
b. knowledge acquired from grade school
c. knowledge acquired from on-the-job training
d. All of the above are correct.
ANS: D
17) In a closed economy, public saving is the
a. amount of income that households have left after paying for taxes and consumption.
b. amount of income that businesses have left after paying for the factors of production.
c. amount of tax revenue that the government has left after paying for its spending.
d. sum of A, B, and C.
ANS: C
Figure 3. The figure depicts a demand-for-loanable-funds curve and two
supply-of-loanable-funds curves.
S1
S2
Demand
18) Refer to Figure 3. Which of the following events would shift the supply curve from S1 to S2?
a. In response to tax reform, firms are encouraged to invest more than they previously invested.
b. In response to tax reform, households are encouraged to save more than they previously saved.
c. Government goes from running a balanced budget to running a budget deficit.
d. Any of the above events would shift the supply curve from S1 to S2.
ANS: B
19) If in a closed economy Y = $11 trillion, which of the following combinations would be consistent with national
saving of $2.5 trillion?
a. C = $8 trillion, G = $.5 trillion
b. C = $6.5 trillion, G = $3 trillion
c. C = $8.5 trillion, G = $2 trillion
d. C = $9 trillion, G = $.5 trillion
ANS: A
20) If banks desire to hold no excess reserves, the reserve ratio is 10 percent, and a bank that was previously just
meeting its reserve requirement receives a new deposit of $400, then initially the bank has a
a. $400 increase in excess reserves and no increase in required reserves.
b. $400 increase in required reserves and no increase in excess reserves.
c. $360 increase in excess reserves and $40 increase in required reserves.
d. $40 increase in excess reserves and $360 increase in required reserves.
ANS: C
21) As the reserve ratio increases, the money multiplier
a. increases.
b. does not change.
c. decreases.
d. could do any of the above.
ANS: C
22) If the Fed sells government bonds to the public, then reserves
a. increase and the money supply increases.
b. increase and the money supply decreases.
c. decrease and the money supply increases.
d. decrease and the money supply decreases.
ANS: D
23) Other things the same, an increase in velocity means that
a. the rate at which money changes hands falls, so the price level rises.
b. the rate at which money changes hands falls, so the price level falls.
c. the rate at which money changes hands rises, so the price level rises.
d. the rate at which money changes hands rises, so the price level falls.
ANS: C
24) The classical dichotomy argues that changes in the money supply
a. affect both nominal and real variables.
b. affect neither nominal nor real variables.
c. affect nominal variables, but not real variables.
d. do not affect nominal variables, but do affect real variables.
ANS: C
25)Whitney puts money in a savings account at her bank earning 3.5 percent. One year later she takes her money out
and notes that while her money was earning interest, prices rose 1.5 percent. Whitney earned a nominal
interest rate of
a. 3.5 percent and a real interest rate of 5 percent.
b. 3.5 percent and a real interest rate of 2 percent.
c. 5 percent and a real interest rate of 3.5 percent
d. 5 percent and a real interest rate of 2 percent
ANS: B
26) If there is a trade deficit, then
a. saving is greater than domestic investment and Y > C + I + G.
b. saving is greater than domestic investment and Y < C + I + G.
c. saving is less than domestic investment and Y > C +I + G.
d. saving is less than domestic investment and Y < C + I + G.
ANS: D
27) In the U.S. a candy bar costs $1. The nominal exchange rate is 6 Chinese yuan per dollar. If the real exchange
rate is 1.2, then, what is the price of a candy bar in China?
a. 7.2 yuan
b. 6 yuan
c. 5 yuan
d. 3.6 yuan
ANS: C
28) The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs
$40, how many florins must a basket of goods in Aruba cost for purchasing power parity to hold?
a. 20 florin
b. 40 florin
c. 60 florin
d. 80 florin
ANS: D
29) Economies of scale occur when a firm’s
a. marginal costs are constant as output increases.
b. long-run average total costs are decreasing as output increases.
c. long-run average total costs are increasing as output increases.
d. marginal costs are equal to average total costs for all levels of output.
Answer: B
Figure 4
10
Price
MC
9
ATC
8
AVC
7
P1
6
5
P2
P3
4
3
P4
2
1
1
2
3
4
5
6
7
8
Quantity
30) Refer to Figure 4. If the market price is P2, in the short run, the perfectly competitive firm will earn
a. positive economic profits.
b. negative economic profits but will try to remain open.
c. negative economic profits and will shut down.
d. zero economic profits.
Answer: D
31) Refer to Figure 4. Which of the four prices corresponds to a perfectly competitive firm earning negative
economic profits in the short run and shutting down?
a. P1
b. P2
c. P3
d. P4
Answer: D
Figure 5
Price
M arginal Cost
20
15
10
Demand
100
150
200
Quantity
M arginal Revenue
32) Refer to Figure 5. To maximize its profit, a monopolist would choose which of the following outcomes?
a. 100 units of output and a price of $10 per unit
b. 100 units of output and a price of $20 per unit
c. 150 units of output and a price of $15 per unit
d. 200 units of output and a price of $20 per unit
ANS: B
33) Refer to Figure 5. The deadweight loss caused by a profit-maximizing monopoly amounts to
a. $150.
b. $200.
c. $250.
d. $500.
ANS: C
34) Because a monopolist must lower its price in order to sell another unit of output,
a. marginal revenue is less than price.
b. long-term economic profits will be zero.
c. total revenue increases as price increases.
d. average revenue is less than price.
ANS: A
35) Which of the following best describes the idea of excess capacity in monopolistic competition?
a. Firms produce more output than is socially desirable.
b. The output produced by a typical firm is less than what would occur at the minimum point
on its ATC curve.
c. Due to product differentiation, firms choose output levels where price equals average total
cost.
d. Firms keep some surplus output on hand in case there is a shift in the demand for their
product.
Answer: B
36) Which of the following statements is not correct?
a. Monopolistic competition is similar to monopoly because in each market structure the firm can
charge a price above marginal costs.
b. Monopolistic competition is similar to perfect competition because both market structures are
characterized by free entry.
c. Monopolistic competition is similar to oligopoly because both market structures are characterized
by barriers to entry.
d. Monopolistic competition is similar to perfect competition because both market structures are
characterized by many sellers.
ANS: C
37) When a market is monopolistically competitive, the typical firm in the market is likely to experience a
a. positive profit in the short run and in the long run.
b. positive or negative profit in the short run and a zero profit in the long run.
c. zero profit in the short run and a positive or negative profit in the long run.
d. zero profit in the short run and in the long run.
ANS: B
38) Oligopolists may well be able to reach their preferred, cooperative outcome if
a. the number of oligopolists is large.
b. they learn that a Nash equilibrium is in their best long-term interests.
c. a sufficient number of firms can be persuaded to lower their prices.
d. the game they play is repeated a sufficient number of times.
Answer: D
Table 3. Amy and Heather are two college roommates who both prefer a clean common space in their dorm room,
but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's
common space. The payoff table for this situation is provided below, where the higher a player’s payoff number, the
better off that player is. The payoffs in each cell are shown as (payoff for Amy, payoff for Heather).
Heather
Amy
Clean
Don’t Clean
Clean
(75, 75)
(100, 15)
Don’t Clean
(15, 100)
(20, 20)
39) Refer to Table 3. What is Amy's dominant strategy?
a. Amy has no dominant strategy.
b. Amy should always choose Clean.
c. Amy should always choose Don’t Clean.
d. Amy has two dominant strategies, Clean and Don’t Clean, depending on the choice Heather makes.
ANS: C
40) Refer to Table 3. What is the Nash Equilibrium in this dorm room cleaning game?
a. Amy: Clean
Heather: Clean
b. Amy: Don't Clean
Heather: Clean
c. Amy: Clean
Heather: Don't Clean
d. Amy: Don't Clean
Heather: Don't Clean
ANS: D