26.

One way that governments can improve market outcomes is to ensure that individuals are able to own and exercise
control over their scarce resources.
ANS: T
2. One tradeoff society faces is between efficiency and equality. Define each term. If the U.S. government redistributes
income from the rich to the poor, explain how this action affects equality as well as efficiency in the economy.
Efficiency is the property of society getting the most it can from its scarce resources. Equality is defined as the property of
distributing economic prosperity fairly among the members of society. Often, these two goals conflict. When the government
redistributes income from the rich to the poor, it reduces the reward for working hard. Fewer goods and services are produced
and the economic pie gets smaller. When the government tries to cut the economic pie into more equal slices, the pie gets smaller.
Policies aimed at achieving a more equal distribution of economic well-being, such as the welfare system, try to help those
members of society who are most in need. The individual income tax asks the financially successful to contribute more than
others to support the government.
82. 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.
.
17. 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.
51. One reason we need government, even in a market economy, is that
a. there is insufficient market power in the absence of government.
b property rights are too strong in the absence of government.
.
c. the invisible hand is not perfect.
d Both a and b are correct.
.
3. Over the past century, the average income in the United States has risen about
a. twofold.
b. fivefold.
c. eightfold.
d. tenfold.
32. 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.
. 33. Once the demand curve for a product or service is drawn, it
a. remains stable over time.
b. can shift either rightward or leftward.
c. is possible to move along the curve, but the curve will not shift.
d. tends to become steeper over time.
115. Opponents of cigarette taxes often argue that tobacco and marijuana are substitutes so that high cigarette
prices
a. encourage marijuana use, and the evidence supports this argument.
b. encourage marijuana use, but the evidence does not support this argument.
c. discourage marijuana use, and the evidence supports this argument.
d. discourage marijuana use, but the evidence does not support this argument.
6. Other things equal, when the price of a good falls, the
a. quantity demanded of the good decreases.
b. supply decreases.
c. quantity supplied of the good decreases.
d. demand increases.
24.One thing economists do to help them understand how the real world works is
a. make assumptions.
b 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.
10.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.
88."Other things equal, an increase in supply causes a decrease in price" is a normative statement, not a positive
statement.

ANS:F
30. Once the supply curve for a product or service is drawn, it
a. remains stable over time.
b can shift either rightward or leftward.
c. is possible to move along the curve, but the curve will not shift.
d tends to become steeper over time.
2. “Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price
falls, the quantity demanded rises.” This 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.
3. “Other things equal, when the price of a good rises, the quantity supplied of the good also rises, and when the
price falls, the quantity supplied falls as well.” This relationship between price and quantity supplied
a. is referred to as the law of supply.
b applies only to a few goods in the economy.
c. is represented by a downward-sloping supply curve.
d All of the above are correct.
50. 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

49. 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. 1.00.
d 1.89.
50. On a certain supply curve, one point is (quantity supplied = 200, price = $2.00) and another point is (quantity
supplied = 250, price = $2.50). Using the midpoint method, the price elasticity of supply is about
a. 0.2.
b 0.5.
c. 1.0.
d 2.5.
21. 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.
208. 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.
 CHAPTER 6
65. One common example of a price floor is the minimum wage.
ANS: T
36. 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.
41. 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.
44. 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.
99. 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.
159. 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.
35. One common example of a price ceiling is rent control.
ANS: T

CHAPTER 7
9. 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.
13. On a graph, the area below a demand curve and above the price measures
a. producer surplus.
b consumer surplus.
c. deadweight loss.
d willingness to pay.
14. On a graph, consumer surplus is represented by 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.
49. Olaf would be willing to pay $35 to attend a dog show, but he buys a ticket for $20. Olaf values the dog show at
a. $15.
b $20.
c. $35.
d $50.
 CHAPTER 13
31. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce
4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of
diminishing marginal product?
a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
b The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers.
c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers.
d Any of the above could be correct.
32. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is able to produce
4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is consistent with the property of
diminishing marginal product?
a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
b The farmer is able to produce 5,400 bushels of wheat when he hires 4 workers.
c. The farmer is able to produce 5,200 bushels of wheat when he hires 4 workers.
d Any of the above could be correct.
167. One of the most important properties of cost curves is that
a. for most producers, the average total cost curve never crosses the marginal cost curve.
b the average fixed cost curve must eventually rise.
c. the average total cost curve first rises, then falls with increased output.
d the marginal cost curve eventually rises with the quantity of output.
2. One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is
that in the short run,
a. output is not variable.
b the number of workers used to produce the firm's product is fixed.
c. the size of the factory is fixed.
d there are no fixed costs.
 CHAPTER 14
21. 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.
26. One of the defining characteristics of a perfectly competitive market is
a. a small number of sellers.
b a large number of buyers and a small number of sellers.
c. a similar product.
d significant advertising by firms to promote their products.

2 One difference between a perfectly competitive firm and a monopoly is that a perfectly competitive firm produces
where
a marginal cost equals price, while a monopolist produces where price exceeds marginal cost
b marginal cost equals price, while a monopolist produces where marginal cost exceeds price
c price exceeds marginal cost, while a monopolist produces where marginal cost equals price
d marginal cost exceeds price, while a monopolist produces where marginal cost equals price
14 One solution to the problems of marginal-cost pricing of a regulated natural monopolist is average cost pricing In this
model, the monopolist is allowed to price its production at average total cost How does average-cost pricing differ from
marginal-cost pricing? Does this solution maximize social well-being?
ANS:
Under average-cost pricing, the monopolist earns zero economic profits, but average-cost pricing does not ensure a socially
optimal market solution Under marginal-marginal cost pricing, the monopolist cannot cover its total costs, so it will earn
negative economic profits (Recall that for a natural monopoly, ATC is declining for all relevant quantities, and MC is below
ATC
9 One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive
hardcover edition of a popular novel and later releases a cheaper paperback edition Use this example to demonstrate the benefits
and potential pitfalls of a price discrimination pricing strategy
ANS:
The answer should address the three basic lessons of price discrimination First, price discrimination is a rational strategy that can
lead to higher monopoly profits Second, price discrimination requires an ability to separate customers according to their
willingness to pay Third, price discrimination can raise economic welfare
3 One characteristic of a monopoly market is that the product is virtually identical to products produced by competing
firms
ANS: F
17 One problem with government operation of monopolies is that
a a benevolent government is likely to be interested in generating profits for political gain
b monopolies typically have rising average costs
c the government typically has little incentive to reduce costs
d a government-regulated outcome will increase the profitability of the monopoly
18 One problem with regulating a monopolist on the basis of cost is that
a by focusing on costs, the regulators ignore profits
b it does not provide an incentive for the monopolist to reduce its cost
c a monopolist's costs, by definition, are higher than costs of perfectly competitive firms
d a monopolist is still able to generate excessive economic profits
11 One method used to control the ability of firms to capture monopoly profit in the United States is through
a government purchase of products produced by monopolists
b government distribution of a monopolist's excess production
c enforcement of antitrust laws
d regulation of firms in highly competitive markets