3 Define opportunity cost What is the opportunity cost to you of attending college?

What was your opportunity

cost of coming to class today?
Whatever must be given up to obtain some item it its opportunity cost Basically, this would be a person's second
choice The opportunity cost of a person attending college is the value of the best alternative use of that person's
time, as well as the additional costs the person incurs by making the choice to attend college For most students this
would be the income the student gives up by not working plus the cost of tuition and books, and any other costs they
incur by attending college that they would not incur if they chose not to attend college A student's opportunity cost
of coming to class was the value of the best opportunity the student gave up (For most students, that seems to be
sleep)
31 During the early 1920s in Germany, prices
a doubled annually
b doubled monthly
c tripled monthly
d tripled annually
54 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 has a better education system than Turkey
b the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey
c workers in Turkey are more productive than workers in the United Kingdom
d there are more instances of market power in Turkey than in the United Kingdom

82 Demand refers to the amount buyers wish to buy, whereas the quantity demanded refers to the
position of the demand curve
ANS: F
134 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 equilibrium 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
17 Demand is inelastic if the price elasticity of demand is greater than 1
ANS: F
22 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
51 Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because
the demand for drugs is inelastic
ANS: F
43 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

44 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
39Duties 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
75 Demand is said to be price 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
77 Demand is elastic if elasticity is
a less than 1
b equal to 1
c equal to 0
d greater than 1
79 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
82 Demand is inelastic if elasticity is
a less than 1
b equal to 1
c greater than 1
d equal to 0

83 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
CHAPTER 6
56 Discrimination is an example of a rationing mechanism that may naturally develop in response to a
binding price floor
ANS: T
64 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
65 Denise values a stainless steel dishwasher for her new house at $500, but she succeeds in buying one for
$350 Denise's consumer surplus is
a $150
b $350
c $500
d $850
68 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
d does not buy the dishwasher, and on her purchase she experiences a consumer surplus of $0
87 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
11 David tunes pianos in his spare time for extra income Buyers of his service are willing to pay $150 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 $25
b $35
c $70
d $95
12 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
14 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
34 Diseconomies of scale occur when
a average fixed costs are falling
b average fixed costs are constant
c long-run average total costs rise as output increases
d long-run average total costs fall as output increases
15 Diminishing marginal productivity implies decreasing total product
ANS: F
16 Diminishing marginal product exists when the total cost curve becomes flatter as outputs increases
ANS: F
17 Diminishing marginal product exists when the production function becomes flatter as inputs increase
ANS: T

45 Diseconomies of scale often arise because higher production levels allow specialization among workers
ANS: F

26 Dianne has decided to start her own photography studio To purchase the necessary equipment, Dianne
withdrew $10,000 from her savings account, which was earning 3% interest, and borrowed an additional $5,000
from the bank at an interest rate of 8% What is Dianne's annual opportunity cost of the financial capital that has
been invested in the business?
a $300
b $400
c $700
d $1,650
ANS: C
41 Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own
catering business To invest in her factory, she withdrew $20,000 from her savings, which paid 3 percent interest,
and borrowed $30,000 from her uncle, whom she pays 3 percent interest per year Last year she paid $25,000 for
ingredients and had revenue of $60,000 She asked Louis the accountant and Greg the economist to calculate her
profit for her
a Louis says her costs are $25,900, and Greg says her costs are $66,500
b Louis says her costs are $25,000, and Greg says her costs are $65,000
c Louis says her profit is $66,500, and Greg says her costs are $66,500
d Louis says her profit is $75,000, and Greg says her costs are $41,500
42 Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own
catering business To invest in her factory, she withdrew $20,000 from her savings, which paid 3 percent interest,
and borrowed $30,000 from her uncle, whom she pays 3 percent interest per year Last year she paid $25,000 for
ingredients and had revenue of $60,000 She asked Louis the accountant and Greg the economist to calculate her
profit for her
a Louis says her profit is $25,900, and Greg says her profit is $66,500
b Louis says her profit is $35,000, and Greg says she lost $5,900
c Louis says her profit is $34,100, and Greg says she lost $6,500
d Louis says her profit is $34,100, and Greg says her profit is $34,100
60 David’s firm experiences diminishing marginal product for all ranges of inputs The total cost curve
associated with David’s firm
a gets flatter as output increases
b gets steeper as output increases
c is constant for all ranges of output
d is unrelated to the production function
163 Diminishing marginal product suggests that the marginal
a cost of an extra worker is unchanged
b cost of an extra worker is less than the previous worker's marginal cost
c product of an extra worker is less than the previous worker's marginal product
d product of an extra worker is greater than the previous worker's marginal product
164 Diminishing marginal product suggests that
a additional units of output become less costly as more output is produced
b marginal cost is upward sloping
c the firm is at full capacity
d adding additional workers will lower total cost

67 Dave consumes two normal goods, X and Y, and is currently at an optimum If the price of good X falls, we
can predict with certainty that
a Dave will definitely consume more of both goods since his real income has risen
b the substitution effect will be positive for good X and negative for good Y
c may consume more or less of good X and he will definitely consume less of good Y
d the substitution effect will offset the income effect for good X
ANS: B
8 Diana and Sarah each like jewelry and music by the Rolling Stones If we were to graph an indifference
curve with jewelry on the horizontal axis and cd’s by the Rolling Stones on the vertical axis, then
a Diana and Sarah would have identical indifference curves
b Diana’s indifference curve would be higher than Sarah’s indifference curve
c Sarah’s indifference curve would be higher than Diana’s indifference curve
d Because we do not know the intensity of each woman’s preferences, we do not have enough
information to compare their indifference curves
ANS: D

CHAPTER 15
1 Describe how government is involved in creating a monopoly Why might the government create one? Give
an example
ANS:
The government can create a monopoly by giving a single firm the exclusive right to produce some good
Monopolies are created for many reasons When an industry is characterized by high fixed costs, a single firm can
usually supply the entire market at a lower cost than having multiple firms in the industry Examples include most
utility companies The government also grants sole ownership of inventions through patent laws in order to help
eliminate the market failure that is likely to otherwise occur in the markets for those goods Patents encourage
creativity and research and development
DIF: 2
24 During the life of a drug patent, the monopoly pharmaceutical firm maximizes profit by producing the
quantity at which marginal revenue equals marginal cost
ANS: T
12 Declining average total cost with increased production is one of the defining characteristics of a natural
monopoly
ANS: T
72 During the holiday season, high-end retailers frequently place a high price on merchandise on weekends and
discount the price during the week They do this because they believe that two groups of customers exist: shoppers
with little free time and bargain hunters Bargain hunters have time to shop around and frequently shop during the
week What do economists call this price strategy used by high-end retailers?
a oligopoly
b price discrimination
c compensating differential
d in-kind transfers
1 Deadweight loss
a measures monopoly inefficiency
b exceeds monopoly profits
c equals monopoly profits
d equals monopoly revenues minus profits
129 Due to the nature of the patent laws on pharmaceuticals, the market for such drugs
a always remains a competitive market
b always remains a monopolistic market
c switches from competitive to monopolistic once the firm's patent runs out
d switches from monopolistic to competitive once the firm's patent runs out
30 Drug companies are allowed to be monopolists in the drugs they discover in order to
a allow drug companies to charge a price that is equal to their marginal cost
b discourage new firms from entering the drug market
c encourage research
d allow the government to earn patent revenue