Trial Exam 1 PDF

1 1 Economic models do all of the following except A) portray reality in all its minute details B) answer economic questions. C) make economic ideas explicit and concrete for use by decision makers. D) simplify some aspect of economic life. 2) The economic analysis of minimum wage involves both nor...

1 1 Economic models do all of the following except A) portray reality in all its minute details B) answer economic questions. C) make economic ideas explicit and concrete for use by decision makers. D) simplify some aspect of economic life. 2) The economic analysis of minimum wage involves both normative and positive analysis. Consider the following consequences of a minimum wage: a. The minimum wage law causes unemployment. b. A minimum wage law benefits some groups and hurts others. c. In some cities such as San Francisco and New York, it would be impossible for low-skilled workers to live comfortably in the city without minimum wage laws. d. The gains to winners of a minimum wage law should be valued more highly than the losses to losers because the latter primarily comprises businesses. Which of the consequences above are positive statements and which are normative statements? A) a, b, and c are positive statements and d is a normative statement. B) a and b are positive statements, c and d are normative statement. C) Only a is a positive statement, b, c, and d are normative statements. D) a and c are positive statements, b and d are normative statements. 3) Which of the following statements is true about profit? A) Profit refers to the revenue received from the sale of a quantity of goods. B) Profit is calculated by multiplying price and quantity sold. C) The terms "accounting profit" and "economic profit" can be used interchangeably. D) Profit is the difference between revenue and cost. Figure 1 Apple recently announced that the company is exploring the electric vehicle market, and is looking to produce vehicles as early as 2020. Assume Apple chooses to produce both traditional electric-engine vehicles and self driving electric-engine vehicles. Figure 1 shows changes to its production possibilities frontier in response to new developments and different strategic production decisions. 4) Refer to Figure 1. Assume a technological advancement greatly reduces the cost to produce self-driving vehicles. This is best represented by the A) movement from E to F in Graph A. B) movement from G to H in Graph B. C) movement from K to L in Graph C. D) movement from H to J in Graph B. One Digital Wheat Camera (per pound) China 100 hours 4 hours South 60 hours 3 hours Korea Table 1 shows the number of labor hours required to produce a digital camera and a pound of wheat in China and South Korea. 5) Refer to Table 1. If the two countries specialize and trade, who should export wheat? A) There is no basis for trade between the two countries. B) China C) South Korea D) They should both be exporting wheat 2 6) All of the following are critical functions of the government in facilitating the operation of a market economy except A) protecting private property. B) enforcing property rights. C) ensuring an equal distribution of income to all citizens. D) enforcing contracts. Figure 2 7. Refer to Figure 2. The graph in this figure illustrates an initial competitive equilibrium in the market for at the intersection of D and S apples 2 2 (point E). Which of the following changes would cause the equilibrium to change to point A? A) a positive change in the technology used to produce apples and decrease in the price of oranges, a substitute for apples B) an increase in the wages of apple workers and a decrease in the price of oranges, a substitute for apples C) an increase in the number of apple producers and a decrease in the number of apple trees as a result of disease D) a decrease in the wages of apple workers and an increase in the price of oranges, a substitute for apples 8. Blu-ray players were introduced to the market in 2006, and new technology has allowed for the cost of manufacturing the players to decline significantly since the initial introduction. How did this change in technology affect the market for Blu-ray players? A) the new technology caused a decrease in the demand for Blu-ray players. B) the new technology caused an increase in the supply of Blu-ray players and a decrease in price of Blu-ray players. C) the new technology caused an increase in the supply of Blu-ray players and an increase in price of Blu-ray players D) the new technology caused an increase in the quantity of Blu-ray players supplied. 9. The demand for lobster is higher in the summer than in the spring. If the price of lobster is lower in summer than in spring then A) consumer’s tastes for lobster are greater in spring than in summer B) the supply of lobster is lower in spring than in summer C) there is a surplus of lobster in summer and a shortage of lobster in spring. D) there are more substitutes for lobster in summer that there are in spring. 3 Figure 3 shows the demand and supply curves for the almond market. The government believes that the equilibrium price is too low and tries to help almond growers by setting a price floor at Pf. 10) Refer to Figure 3. What area represents consumer surplus after the imposition of the price floor? A) A + B + E B) A + B C) A + B + E + F D) A 11) Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Leela Land. What will be the likely effect on the market for sparkling wine in Leela Land? A) Quantity demanded will decrease, quantity supplied will increase, and a surplus will result. B) Quantity demanded will increase, quantity supplied will decrease, and a surplus will result. C) Quantity demanded will decrease, quantity supplied will increase, and a shortage will result. D) Quantity demanded will increase, quantity supplied will decrease, and a shortage will result. Figure 4 shows the market for beer. The government plans to impose a per-unit tax in this market. 12) Refer to Figure 4. How much of the tax is paid by buyers? A) $2 B) $5 C) $7 D) $12 13) Governments can increase the consumption of a product that creates positive externalities by A) subsidizing the production of the product so that the supply is increased and market price is reduced. B) taxing the production and consumption of the product. C) convincing everyone to consume the product. D) assigning property rights to the producers of the product 4 14) Some policymakers have argued that products like cigarettes, alcohol, and sweetened soda generate negative externalities in consumption. All else equal, if the government decided to impose a tax on soda, the equilibrium quantity of soda would ________ and the equilibrium price of soda would ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease 15) Which of the following displays these two characteristics: nonrivalry and excludability? A) public goods B) private goods C) quasi-public goods D) common resources 16) Overuse of a common resource may be avoided by all of the following methods except A) charging for the use of a common resource. B) issuing tradable permits for the use of a common resource. C) government taking over ownership of all private common resources. D) setting quotas or legal limits on the quantity of the common resource consumed. 17) Leela can sell seven motor homes per week at a price of $20,000. If she lowers the price of motor homes to $18,000 per week she will sell eight motor homes. What is the marginal revenue of the 8th motor home? A) $18,000 B) -$4,000 C) $144,000 D) $4,000 18) Suppose a frost destroys the tomato crop in California but farmers see an increase in their revenues. Which of the following best explains this? A) The decrease in supply led to huge price increases. B) Tomatoes are necessities. C) The demand for tomatoes is price inelastic. D) The cross-price elasticity between tomatoes and most other substitute vegetables is very low 19) Bringing oil to the market is a relatively long and costly process. The whole process from exploration to pumping significant amounts of oil can take years. What does this indicate about the price elasticity of supply for oil? A) The elasticity coefficient is likely to be very high and supply is inelastic. B) The elasticity coefficient is likely to be close to zero and supply is perfectly elastic. C) The elasticity coefficient is likely to be low and supply is highly inelastic. D) The elasticity coefficient is likely to be low and supply is highly elastic. 20) Suppose the demand curve for a product is represented by a typical downward-sloping curve. Now suppose the demand for this product decreases. Which of the following statements accurately predicts the resulting decrease in price? A) The more elastic the supply curve, the greater the price increase. B) The more elastic the supply curve, the smaller the price decrease. C) The increase in price is not affected by the elasticity of the supply curve. D) The decrease in price will always be proportional to the magnitude of the demand shift 21) Which of the following parties is likely to have the most information about the health of an individual who is trying to purchase a health insurance policy? A) the company that issues the health insurance policy B) the individual who is applying for the health insurance policy C) the employer of the individual who is trying to purchase the health insurance policy D) All parties in the health insurance market have access to the same level of information. 5 22) Typically, the lower the level of income per person in a country, the lower the level of spending per person on health care. This relationship between income and spending indicates that health care is a A) normal good. B) inferior good. C) luxury. D) necessity. 23) If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of A) moral hazard. B) the principle-agent problem. C) asymmetric information. D) adverse selection. 24) Which of the following is not an advantage of starting a new business as a corporation? A) separation of ownership and business liability B) enhanced ability to raise funds C) ability to share risks D) possibility of double taxation 25) Which of the following is a characteristic of stock? A) Stock represents a promise to repay a fixed amount of funds. B) The face value or principal plus interest is repaid at a specified period of time. C) The length of coupon payments is fixed by the stated maturity period. D) Stock represents ownership in a firm 26) Leela sells homemade candles over the Internet. Her annual revenue is $64,000 per year, the explicit costs of her business are $17,000, and the opportunity costs of her business are $22,000. What is her economic profit? A) $17,000 B) $25,000 C) $42,000 D) $47,000 Figure 5 27) Refer to Figure 5. The tariff causes domestic consumption of rice A) to fall by 27 million pounds. B) to fall by 11 million pounds. C) to rise by 6 million pounds. D) to rise by 16 million pounds. 6 Figure 6 illustrates the impact of the quota. 28) Refer to Figure 6. What is the area of domestic producer surplus after the imposition of a quota? A) B B) B + C C) B + E + I + J + M D) E + I + J + M 29) Which of the following statements is used to justify protectionism? A) Free trade leads to higher prices for imported goods. B) Free trade increases employment by protecting domestic firms. C) A country should not rely on other countries for goods that are critical to its national defense. D) Trade restrictions are not necessary to protect new firms since they can gain experience and become more productive without protection. 30) One reason for the success that firms have in getting the government to erect barriers to foreign competition is that jobs lost to foreign competition are easy to identify but jobs created by foreign trade are often hard to identify. Which of the following is a second reason? A) The costs that tariffs and quotas impose on consumers are large in total but relatively small per person. B) People who benefit from foreign trade tend not to vote in elections; people who are harmed by foreign trade are much more likely to vote. C) Firms that benefit from trade barriers have more money to lobby government officials to support the barriers than do firms that are harmed by trade barriers. D) The benefits from free trade are less than costs Quantity Total Utility Quantity Total Utility of Soup of (cups) Sandwich es 1 40 1 45 2 60 2 75 3 72 3 102 4 82 4 120 5 88 5 135 6 90 6 145 Table 2 shows Keira's utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods. 31) Refer to Table 2. Suppose Keira's income increases from $18 to $23 but prices have not changed. What is her utility maximizing bundle now? A) 6 cups of soup and 5 sandwiches B) 4 cups of soup and 5 sandwiches C) 5 cups of soup and 4 sandwiches D) 5 cups of soup and 5 sandwiches 32) In order to derive an individual's demand curve for salmon, we would observe what happens to the utility maximizing bundle when we change A) income and hold everything else constant. B) tastes and preferences and hold everything else constant. C) the price of the product and hold everything else constant. D) the price of a close substitute and hold everything else constant. 7 33) A network externality occurs when A) there is production cost savings from being networked with suppliers. B) there is production cost savings from being networked with buyers. C) the usefulness of a good is affected by how many other people use the good. D) the usefulness of a good is affected by celebrities who use the good. 34) Which of the following is a common mistake consumers commit when they make decisions? A) They take into account nonmonetary opportunity costs but ignore monetary costs. B) They are overly pessimistic about their future behavior. C) They fail to ignore sunk costs. D) They sometimes value fairness too much. 35) If the 15th unit of output has a marginal cost of $29.50 and the average cost of producing 14 units of output is $30.23, what will happen to the average cost of production if the 15th unit is produced? A) Average cost increases as more is produced. B) Average cost will fall. C) Average cost could increase or decrease depending on what happens to variable cost. D) Average cost could increase or decrease depending on what happens to fixed cost. Figure 7 36) Refer to Figure 7. Identify the curves in the diagram. A) E = average fixed cost curve; F = variable cost curve; G = total cost curve, H = marginal cost curve B) E = marginal cost curve; F = total cost curve; G = variable cost curve, H = average fixed cost curve C) E = average fixed cost curve; F = average total cost curve; G = average variable cost curve, H = marginal cost curve D) E = marginal cost curve; F = average total cost curve; G = average variable cost curve; H = average fixed cost curve. 37) The long-run average cost curve shows A) the lowest average cost of producing every level of output in the long run. B) where the most profitable level of output occurs. C) the average cost of producing where diminishing returns are not present. D) the plant size or scale that the firm should build. 8 Figure 8 shows cost and demand curves facing a profit-maximizing, perfectly competitive firm. 38) Refer to Figure 8. At price P1, the firm would produce A) Q1 units B) Q3 units. C) Q5 units. D) zero units. Figure 9 39) Refer to Figure 9. Suppose the current price is $20 and the firm is currently producing 1,350 units. In the long-run equilibrium, the firm represented in the diagram A) will continue to produce the same quantity. B) will reduce its output to 1,100 units. C) will reduce its output to 750 units. D) will cease to exist. 9 Figure 10 40) Refer to Figure 10. Consider a typical firm in a perfectly competitive industry that makes short-run profits. Which of the diagrams in the figure shows the effect on the industry as it transitions to a long-run equilibrium? A) Panel A B) Panel B C) Panel C D) Panel D Figure 11 41) Refer to Figure 11. Using the per-worker production function in the figure above, the largest changes in an economy's standard of living would be achieved by a movement from A) A to B to C. B) B to C to D. C) C to B to A. D) D to C to B. 42) Knowledge capital is nonrival in the sense that A) two people can use the same knowledge to develop and produce a product. B) firms do not compete to be the first to develop new technologies. C) no single company can be excluded from the benefits of new technologies. D) firms can benefit from the research and development of rival firms without paying for that benefit. 10 43) Creative destruction means that A) firms develop new products that replace old products in the economy, thereby encouraging economic growth. B) economic growth can only be sustained if capital depreciates rapidly. C) knowledge capital can be created through a system of government subsidies for education and research and development. D) research and development should only be financed if research and development is incremental (a result of making small changes to existing products). 44) By offering more generous unemployment insurance programs, European countries can expect A) to pay less in taxes than in the United States. B) workers to gain new skills quickly in response to fluctuations in the labor market. C) shorter periods of unemployment for their workers. D) longer periods of unemployment for their workers. 45) Developing countries with low saving rates and poor levels of health and education are likely to experience A) high levels of foreign direct investment. B) easy access to financial backing from banks. C) rapid growth in household incomes. D) low rates of growth in real GDP per capita 46) A policy that offers parents a tax reduction based on how much they are saving for their children's college education should ________ the equilibrium level of loanable funds and ________ the rate of long-term growth. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase 47) If firms sell exactly what they expected to sell, all of the following will be true except A) aggregate expenditure will be greater than GDP. B) there is no unplanned change in inventories. C) inventories will not change, and GDP and employment will remain stable. D) aggregate expenditure will be equal to GDP. 48) Investment spending will increase when A) the interest rate rises. B) the corporate income tax increases. C) business cash flow increases. D) firms become more pessimistic about earning future profits. Figure 12 49) Refer to Figure 12. At point L in the figure above, which of the following is true? A) Aggregate expenditure is greater than GDP. B) The economy has achieved macroeconomic equilibrium. C) Actual inventories are greater than planned inventories. D) GDP will be increasing. 11 Figure 13 50) Refer to Figure 13. If the U.S. economy is currently at point N, which of the following could cause it to move to point K? A) Households expect future income to decline. B) Household wealth rises. C) The firm's cash flow rises as profits rise. D) Government expenditures increase. 51) Which of the following is a true statement about the multiplier? A) The multiplier rises as the MPC rises. B) The smaller the MPC, the larger the multiplier. C) The multiplier is a value between zero and one. D) The multiplier effect does not occur when autonomous expenditure decreases 52) What impact does a decrease in the price level in the United States have on net exports and why? A) A decrease in the price level increases net exports because lower prices increase the value of the dollar. B) A decrease in the price level increases net exports by reducing the relative cost of American goods. C) A decrease in the price level reduces net exports because lower prices raise the value of the dollar. D) A decrease in the price level reduces net exports because lower prices increase American spending on imports. 53) All of the following are reasons why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services except A) unions are successful in pushing up wages. B) firms are often slow to adjust wages. C) contracts make prices and wages sticky. D) menu costs make some prices sticky. Figure 14 54) Refer to Figure 14. Ceteris paribus, an increase in the expected future price level would be represented by a movement from A) SRAS to SRAS 1 2. B) SRAS to SRAS 2 1. C) point A to point B. D) point B to point A. 12 55) An increase in aggregate demand results in a(n) ________ in the ________. A) recession; long run B) expansion; long run C) expansion; short run D) recession; short run Figure 15 56) Refer to Figure 15. Which of the points in the above graph are possible short-run equilibria but not  equilibria? Assume that Y long-run 1 represents potential GDP. A) A and B B) A and C C) C and D D) B and D Figure 16 57) Refer to Figure 16. Given the economy is at point A in year 1, what will happen to the unemployment rate in year 2? A) It will rise. B) It will fall. C) It will remain constant. D) not enough information to answer the question 58) In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS A) inflation occurs. B) deflation occurs. C) stagflation occurs. D) disinflation occurs. 13 59) Monetary policy refers to the actions the A) President and Congress take to manage the money supply and interest rates to pursue their economic objectives. B) Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives. C) President and Congress take to manage government spending and taxes to pursue their economic objectives. D) Federal Reserve takes to manage government spending and taxes to pursue its economic objectives. 60) Fiscal policy refers to changes in A) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. B) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to fund the war on terrorism. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives. 61) Antoine de Saint-Exupéry in “Little Prince” wrote: A) Row, row, row your boat – merely down the stream. B) Roots are not as sweet as fruits C) Can I be done already? D) Well, I must endure the presence of a few caterpillars if I wish to become acquainted with the butterflies 62) In economics, choices must be made because we live in a world of A) unemployment. B) scarcity. C) greed. D) unlimited resources 63) A production possibilities frontier with a bowed-outward shape indicates A) the possibility of inefficient production. B) constant opportunity costs as more and more of one good is produced. C) increasing opportunity costs as more and more of one good is produced. D) decreasing opportunity costs as more and more of one good is produced 64) If an increase in income leads to a decrease in the demand for salami, then salami is A) an inferior good. B) a neutral good. C) a necessity. D) a normal good. 65) Arthur buys a new cell phone for $150. He receives consumer surplus of $150 from the purchase. What value does Arthur place on his cell phone? A) $0 B) $150 C) $225 D) $300 66) When a negative externality exists, the private market produces A) more than the economically efficient output level. B) less than the economically efficient output level. C) products at a low opportunity cost. D) products at a high opportunity cost. 67) Carrie Bradshaw claims that when it comes to buying shoes, "price is no object." If this is true, then her demand for shoes is A) perfectly elastic. B) perfectly inelastic. C) unit elastic. D) horizontal. 14 68) Assume you set up a sole proprietorship and your lawyer tells you that as the owner, you could stand to lose your personal wealth if the business goes bankrupt. This means a sole proprietorship A) faces limited liability. B) faces unlimited liability. C) has little chance of succeeding. D) is not a good type of business to set up. 69) Countries gain from specializing in producing goods in which they have ________ and trading for goods in which other countries have ________. A) a comparative advantage; an absolute advantage B) an absolute advantage; an absolute advantage C) a comparative advantage; a comparative advantage D) an absolute advantage; a comparative advantage 70) Assume that you had a ticket for a basketball playoff game that you bought for $50, the maximum price you were willing to pay. If a friend of yours offers to buy the ticket for $100 but you decide not to sell it, how can your decision be explained? A) You expect to receive greater utility from attending the playoff game than you received from buying the ticket. B) by the endowment effect C) by the law of diminishing marginal utility D) The income effect from the increase in the price of the ticket from $50 to $100 was greater than the substitution effect. 71) To improve package delivery, one change UPS made involved taking better account of weather forecasts to avoid delays in flying packages. This is an example of A) positive technological change. B) increasing marginal returns. C) a reduction in fixed costs. D) diseconomies of scale. 72) If in a perfectly competitive industry, the market price facing a firm is below its average total cost but above average variable cost at the output where marginal cost equals marginal revenue A) the industry supply will not change. B) new firms are attracted to the industry. C) some existing firms will exit the industry. D) firms are breaking even. 73) If a typical monopolistically competitive firm is making short-run losses, then A) other more competitive firms will enter the market. B) as some firms leave, the remaining firms will experience an increase in the demand for their products. C) as some firms leave, the demand for the products of the remaining firms will become more elastic. D) the industry will eventually cease to exist. 74 ) For which of the following firms is patent protection of vital importance? A) furniture producers B) software firms C) pharmaceutical firms D) auto makers 75) A profit maximizing monopoly's price is A) the same as the price that would prevail if the industry was perfectly competitive. B) less than the price that would prevail if the industry was perfectly competitive. C) greater than the price that would prevail if the industry was perfectly competitive. D) not consistently related to price that would prevail if the market was perfectly competitive. 15 76) Calling long distance is often more expensive on weekdays between 8 am and 5 pm than in the evening hours. Why is this the case? A) Telephone companies hope to discourage customers from calling long distance during the day to keep their labor costs down. B) The cost of making long-distance connections is higher during the day than in the evenings. C) Businesses who must call suppliers or customers during business hours have few alternatives and therefore have an inelastic demand during the workday compared to after-work hours. D) Increasingly, businesses who must call suppliers or customers during business hours resort to the internet, thereby reducing demand for long-distance calls. To make up for this fall in demand, telephone companies charge higher rates. 77) Leela and Chance are equally skilled construction workers employed by the Brown and Root Company. Leela's job is riskier because she typically works on a scaffold 1,000 feet above ground. Leela's wage rate is A) lower than Chance’s, because Leela likes the view from above. B) higher than Chance’s because Leela’s job is more dangerous. C) same as Chance’s because they are both employed by the same company. D) higher than Chance’s because Leela is a friend of the company’s owner. 78) Gross domestic product understates the total production of final goods and services because of the omission of A) the underground economy. B) intermediate goods. C) inflation. D) exports. 79) If the nominal interest rate is 6% and the inflation rate is 2% then the real interest rate is A) 8%. B) 4%. C) 3%. D) 2%. E) 1%. 80) In a closed economy, what is the relationship between saving and investment? A) Saving is greater than investment. B) Investment is greater than saving. C) Investment is equal to saving. D) Investment may be greater or smaller than saving. 81) In the long run, a country will experience an increasing standard of living only if it experiences A) a high rate of consumption. B) continuous technological change. C) a high rate of labor force growth. D) a slow rate of population growth. 82) In August 2008, Ethan Nicholas developed the iShoot application for the Apple iPhone 3G, and within five months had earned $800,000 from this program. By May 2009, Nicholas had dropped the price from $4.99 to $1.99 in an attempt to maintain sales. This example indicates that in a competitive market A) earning an economic profit in the long run is extremely easy. B) earning an economic profit in the long run is extremely difficult. C) it is impossible to earn an economic profit in either the short run or the long run. D) economic profits are only earned in the long run. 16 Figure 17 83) Refer to Figure 17. The firm represented in the diagram A) makes zero economic profit. B) makes zero accounting profit. C) should exit the industry. D) should expand its output to take advantage of economies of scale. Figure 18 84) Refer to Figure 18. The diagram demonstrates that A) in the short run, the monopolistic competitor produces an output Q b but in the long run after it adjusts capacity, it will produce the allocatively efficient output, Q its a. B) it is not possible for a monopolistic competitor to produce the productively efficient output level, Q a, because of product differentiation. C) it is possible for a monopolistic competitor to produce the productively efficient output level, Q a, if it willing to lower its price from P to P is b a. D) in the long run, the monopolistic competitor produces the minimum-cost output level, Q a, but in the run its output of Q short b is not cost minimizing. 85) Nike has used Michael Jordan to create the impression that Air Jordan basketball shoes are superior to any other basketball shoes. Nike is attempting to A) differentiate Air Jordan basketball shoes from other types of basketball shoes. B) lower the marginal cost of producing Air Jordan basketball shoes. C) increase its profit by raising the price of Air Jordan basketball shoes. D) convince consumers that Air Jordan basketball shoes are no different from other basketball shoes favored by celebrities. 17 86) To maximize their profits and defend those profits from competitors, monopolistically competitive firms must A) lobby government to erect barriers to entry in their industries. B) limit foreign competition in their markets by encouraging the government to impose tariffs and other trade restrictions. C) differentiate their products. D) achieve economies of scale. Table 3 Alistair Luggage and Baine Baggage are the only firms selling luggage in the upscale town of Montecito. Each firm must decide on whether to increase its advertising budget to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. Table 3 shows the payoff matrix for this advertising game. 87) Refer to Table 3. What is the Nash equilibrium in this game? A) There is no Nash equilibrium. B) Baine increases its advertising budget, but Alistair does not. C) Alistair increases its advertising budget, but Baine does not. D) Both Alistair and Baine increase their advertising budgets. 88) A member of a cartel like OPEC has an incentive to A) argue for larger production quotas for each member of the cartel. B) agree to a low cartel production level and then produce more than its quota. C) abide by its individual production quota. D) support equal production quotas for each member 89) A monopoly differs from monopolistic competition in that A) a monopoly has all the power while a firm in monopolistic competition does have only half of market power. B) a monopoly can never make a loss but a firm in monopolistic competition can. C) in a monopoly there are significant entry barriers but there are low barriers to entry in a monopolistically competitive market structure. D) a monopoly faces a perfectly inelastic demand curve while a monopolistic competitor faces an elastic demand curve. 18 Figure 19 above shows the demand and cost curves facing a monopolist. 90) Refer to Table 19. What happens to the monopolist represented in the diagram in the long run? A) It will raise its price at least until it breaks even. B) If the cost and demand curves remain the same, it will exit the market. C) The government will subsidize the monopoly to enable it to break even. D) It will be forced out of business by more efficient producers. Figure 20 91) Refer to Figure 20. What is the area that represents producer surplus under a A) the triangle 0P monopoly? 2E B) the triangle 0P 3H C) the trapezium 0P 1FH D) the rectangle P P 1 3HF 92) The Bay Area subway system, BART, offers senior citizens discounted fares for BART rides. This suggests that BART authorities believe that senior citizens have a ________ demand for subway rides. A) more income elastic B) less income elastic C) more price elastic D) less price elastic 19 93) Some consumer electronics products such as plasma TVs, DVD players, and digital cameras, are introduced at very high prices but over time, their prices start falling (beyond what could be attributed to falling costs as companies take advantage of economies of scale and cheaper technologies). Which of the following is the best explanation for this observation? A) Less firms are likely to enter the consumer electronics market over time, forcing market prices down. B) Early adopters of these new products typically have a higher demand and higher income compared to those who are willing to wait. C) Early adopters are more quality conscious and are willing to pay higher prices for the initial production of these goods. D) After satisfying the demand for early adopters, firms lower price to attract the more price-sensitive consumers. Figure 21 94) Refer to Figure 21. Suppose the firm represented in the diagram decides to practice perfect price discrimination. What is the profit-maximizing quantity? A) 320 units B) 480 units C) 560 units D) 640 units 95) Refer to Figure 15. Suppose the firm represented in the diagram decides to act as a monopolist and charge a single price. What is the profit maximizing quantity produced and what is the price charged? A) Q = 240 units; P = $28 B) Q = 320 units; P = $24 C) Q = 480 units; P = $16 D) Q = 560 units; P = $12 96) In general, the labor supply curve A) slopes downward because firms will hire fewer workers at higher wages. B) slopes upward because as the wage rises the opportunity cost of leisure increases. C) is vertical at the equilibrium wage rate. D) is perfectly elastic at the equilibrium wage rate 97) Which of the following is an example of a compensating wage differential? A) Nurse anesthetists are paid less than anesthesiologists (who have medical degrees). B) Workers in a dynamite mine receive higher wages than if they worked in other jobs that require the same level of skills. C) In the market for lawyers, top graduates from the top programs earn starting salaries that are significantly higher than the starting salaries earned by lower-ranked graduates from the lower-ranked programs. D) Popular movie stars like George Clooney command much higher salaries than other talented but lesser known actors.  20 Refer to Scenario 1. In academia, professors in some disciplines receive higher salaries than others. For example, professors teaching in business schools receive higher salaries than professors in the English department. Suppose at Unity College, assistant professors in the business school earn $80,000 while assistant professors in the English department earn $50,000. Now suppose the government passes comparable worth legislation that requires academic institutions to pay all faculty the same salaries. 98) Refer to Scenario 1. Following the passage of comparable worth legislation, Unity College responds by placing salaries for all assistant professors at $80,000. Which of the following is the result of the legislation? A) The supply of English professors increases; the market for business professors is not affected. B) The demand for English professors decreases; the market for business professors is not affected. C) There will be a surplus in the market for English professors and a shortage in the market for business professors. D) There will be a surplus in the market for English professors and the market for business professors will not be affected. 99) Which of the following factors will not cause the labor demand curve to shift? A) increases in human capital B) changes in technology C) a change in the price of the product produced with labor D) the wage rate 100) The political process is more likely to serve the interests of individuals whose preferences are in the middle, rather than individuals with preferences that are much to the left or right of the political center. This statement is best explained by which of the following? A) logrolling B) the voting paradox C) the Arrow impossibility theorem D) the median voter theorem Figure 22 shows a demand curve and two sets of supply curves, one set more elastic than the other. 101) Refer to Figure 22. If the government imposes an excise tax of $1.00 on every unit sold, the consumer's burden of the tax A) is greater under the more elastic supply curve S 0. B) is greater under the less elastic supply curve S 0. C) is greater under the less elastic supply curve S 1. D) is the same under either supply curve because there is a single demand curve that captures buyers' market behavior. 102) What is the largest component of spending in the United States? A) consumption spending B) investment spending C) government spending D) net investment spending 103) Consumption expenditures do not include household purchases of A) medical care. B) education. C) new houses. D) durable goods. 21 104) Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry, and have eight children. Bob stops working for Mary in order to care for the children. What will be the effect on GDP? A) GDP will decrease. B) GDP will increase. C) GDP will not change. D) GDP may increase or may decrease depending on inflation. 105) If GDP calculations included measurements of pollution and environmental damage, GDP values would most likely be A) greater than their values without these measurements. B) less than their values without these measurements. C) unchanged from their values without these measurements. D) meaningless, since GDP values without these measurements would no longer be of value. 106) To examine how the total production of an economy has changed over time, it would be better to examine A) real GDP. B) nominal GDP. C) GDP at current prices. D) the GDP deflator. 107) If prices in the economy rise, then A) the purchasing power of a dollar rises. B) the purchasing power of a dollar stays constant. C) the purchasing power of a dollar declines. D) the purchasing power of a dollar cannot be determined 108) If an American firm opens a production facility in India, the total value of the production will be included in the A) gross domestic product of the United States. B) national income of the United States. C) gross domestic product of India. D) national income of India. 109) If cyclical unemployment is eliminated in the economy, then A) the economy is considered to be at full employment. B) the unemployment rate is below the natural rate of unemployment. C) the unemployment rate is above the natural rate of unemployment. D) the economy is at less than full employment. 110) If the federal government implements programs so that the unemployed are more quickly matched with jobs, then A) the natural rate of unemployment will increase. B) the natural rate of unemployment will decrease. C) the natural rate of unemployment will not change. D) the natural rate of unemployment could either increase or decrease. 111) If firms pay what are called "efficiency wages," they pay wages that A) motivate workers to increase their productivity. B) are lower than average to ensure maximum profit. C) will eventually lower the unemployment rate. D) are mandated by the government. 112) The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and ________ the cost of the market basket. A) change; overestimates B) change; underestimates C) do not change; overestimates D) do not change; underestimates 22 113) If your nominal wage rises faster than the price level, we can say your real wage has ________ and the purchasing power of your income has ________. A) fallen; fallen B) fallen; risen C) risen; risen D) risen; fallen 114) When actual inflation is less than expected inflation A) borrowers lose and lenders gain. B) borrowers gain and lenders lose. C) borrowers and lenders both gain. D) borrowers and lenders both lose. 115) A good measure of the standard of living is A) real GDP per capita. B) nominal GDP per capita. C) total real GDP. D) total nominal GDP. 116) Which of the following is an example of human capital? A) a computer B) a factory building C) a college education D) a software program 117) According to the "Rule of 70," it will take 4 years for real GDP per capita to double when the growth rate of real GDP per capita is A) 4 percent. B) 12.25 percent. C) 17.5 percent. D) 28 percent. 118) In comparison to a government that runs a balanced budget, when the government runs a budget deficit, A) the equilibrium interest rate will fall. B) business investment will fall. C) household savings will fall. D) none of the above 119) The demand for durable goods A) has decreased over time. B) declines by a greater percentage than does GDP during a recession. C) declines by a smaller percentage than does GDP during a recession. D) rises by a greater percentage than does GDP during a recession 120) Typically, as an economy begins to emerge from a recessionary phase of the business cycle, A) unemployment falls immediately. B) unemployment continues to rise. C) inflation begins to fall. D) investment begins to fall.