Assessment Quiz 1. The student will identify the country with the comparative advantage in a particular good. 1.

If China can produce 10 units of good A or 5 units of good B and India can produce 9 units of good A or 3 units of good B, then China has a. b. c. d. e. a comparative advantage in both goods. a comparative advantage in good B. a absolute advantage in good A but not in good B. a comparative advantage in good A. a comparative advantage in neither good.

2. Don can produce 10 pens and 20 pencils in one hour while Bob can produce 5 pencils and 15 pens in one hour. Which of the following statements is correct? a. Don has an absolute advantage over Bob in the production of pencils and Bob in the production of pens b. Bob has an absolute advantage over Don in the production of pencils c. Bob has a comparative advantage over Don in the production of pens d. Don has a comparative advantage over Bob in the production of pens e. Don does not have a comparative advantage in the production of either good

2. The student will know why opportunity costs increase. 3. The division of labor facilitates productivity increases for all of the following reasons except one. Which one? a. It allows people to do those tasks for which they have a greater natural ability. b. Workers get better at tasks the more they repeat them. c. The more experience workers gain by specializing in a task, the more likely they will enjoy that task. d. More sophisticated production techniques are introduced. e. The division of labor often permits the introduction of labor-saving machinery.

4. a. b. c. d. e.

A production possibilities frontier will be bowed out if there is scarcity resources are used efficiently production of one good involves an opportunity cost resources are not perfectly adaptable to making each good technology is improving

5. On a production possibilities frontier showing possible output levels of good A and good B, the opportunity cost of producing the first 10 units of A will usually be a. b. c. d. e. the same as the opportunity cost of producing the second 10 units of A less than the opportunity cost of producing the second 10 units of A greater than the opportunity cost of making the second 10 units of A 10 units of A 10 units of B

3. The student will understand the concept of equilibrium.

6. If the price of the good described in Exhibit 0023 is $1.60, then an economist would expect the a. b. c. d. e. price to decrease to $1.40 price to decrease to $1.50 quantity supplied to increase to 50 units quantity demanded to increase to 80 units quantity demanded to increase to 90 units

7. The market for bubble gum is competitive with a current price of 50 cents and quantity of 100,000 units. Which of the following events would lead to a new equilibrium price of 60 cents and quantity of 90,000 units? a. b. c. d. an increase in the price of other kinds of gum and candy an increase in the price of the ingredients used to make bubble gum a decrease in the number of young people in the population an agreement by workers in the bubble gum industry to work for lower wages e. an increase in income

4. The student will know why governments impose price ceilings and floors and know the problems associated with price ceilings and floors. 8. Many people argue against increasing the minimum wage because they believe the result would be increased unemployment. Which of the following best summarizes this argument? A higher minimum wage would a. increase the supply of labor while decreasing the demand for labor b. decrease the supply of labor while increasing the demand for labor c. increase the quantity supplied of labor while decreasing the quantity demanded of labor d. decrease the quantity supplied of labor while increasing the quantity demanded of labor e. increase the supply of labor while decreasing the quantity demanded of labor 9. If the demand for a toy increases at Christmastime,

a. retailers will increase the price to equate quantity supplied with quantity demanded b. retailers will reduce the price to equate quantity supplied with quantity demanded c. a shortage will often persist, because retailers are unwilling to adjust the price to its equilibrium level d. a surplus will often persist, because retailers are unwilling to adjust the price to its equilibrium level e. the government will often impose a price ceiling

5. The student will know the relationship between revenue and elasticity and use that to determine pricing prescriptions. 10. a. b. c. d. e. If officials raise tuition on our campus to increase revenue, it will not be successful if the demand curve slopes downward be successful if demand is elastic be successful if demand is inelastic be successful if supply is elastic be successful if supply is inelastic

6. The student will know the profit-maximization rule.

11. a. b. c. d. e.

Consider Exhibit 0122. At which quantity will this firm maximize profits? point a point b point c point d point e

12. Which of the following statements about the perfectly competitive firm represented in Exhibit 0131 is false? a. Short-run losses are minimized at output level q* because MR = MC there. b. The firm should shut down in the short run. c. If the firm shuts down in the short run, it will suffer a loss equal to the amount of its fixed cost. d. If the firm operates in the short run, it will suffer a loss greater than the amount of its fixed cost. e. If the firm operates in the short run, it will suffer a loss equal to the amount of its fixed cost plus the uncovered portion of its variable cost.

7. The student will know the four types of industries and how they differ. 13. Which of the following is not necessarily a characteristic of perfect competition? a. b. c. d. e. low prices a large number of buyers and sellers a homogeneous product perfect information easy entry and exit in the long run

14. A monopolist is a. b. c. d. e. 15. a. b. c. d. e. one of a large number of small firms producing a homogeneous good one of a small number of large firms producing a differentiated good a single seller of a product with many close substitutes one of a small number of large firms producing a homogeneous good a single seller of a product with no close substitutes Monopolistically competitive industries consist of one firm selling several products one firm selling one product many firms, all selling identical products many firms, each selling a slightly different product many firms, each selling a completely different product

16. Which of the following is unique to oligopoly among all the market structures? a. b. c. d. e. product differentiation profit maximization mutual interdependence Advertising long-run economic profits

8. The student will know how economies and diseconomies of scale arise. 17. As firms expand into overseas markets, information problems and the complexity of operating within many varied cultures and economies may result in a. b. c. d. e. constant returns to scale diminishing marginal returns declining long-run marginal cost diseconomies of scale economies of scale

18. For building contractors, doubling the size of an office building does not require double the inputs because there are common walls. This is an example of

a. b. c. d. e.

increasing marginal product diminishing marginal returns economies of scale diseconomies of scale constant returns to scale

19. Adopting a uniform menu across all sites provides the McDonald's Corporation __________ by spreading the cost of menu development over a large output. a. b. c. d. e. economies of scale diminishing returns constant returns to scale rising marginal product more flexibility

9. The student will know why a firm would want to differentiate its products. 20a. A firm could differentiate its product by all except one of the following means. Which is the exception? a. b. c. d. making the product available at a number of different locations increasing the number of services that accompany the product making the product physically different from other products using packaging or advertising to create a special subjective image of the product in the consumer's mind e. emphasizing that the product provides the same benefits to consumers as the others on the market, even when it's really physically different 20b. Firms engage in product differentiation

a. to gain market power. b. so that the industry they are in becomes classified as pure competition. c. to minimize average total cost. d. to maximize total revenue. e. to be classified as price-takers.

10. The student will know what GDP attempts to measure. 21. Which of the following is the best indicator of the performance of the national economy? a. b. c. d. e. the the the the the federal government budget deficit stock of capital goods (machinery) in the nation size of the nation's stock of money balance of trade with other nations flow of new goods and services produced in the nation 11. The student will know the appropriate fiscal and monetary prescriptions for inflation and unemployment. 22. When the MPC is .75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by a. b. c. d. e. $75 billion $100 billion $300 billion $400 billion $500 billion

23. Keynes believed that the best method for ending the Great Depression was to a. increase the money supply so that individuals would have more to spend b. cut government spending and increase taxes to reduce or even eliminate the government's deficit c. increase government spending and cut taxes so that consumers could spend more d. cut both government spending and taxes so that government would not be such a large part of the economy e. increase both government spending and taxes to increase the role government played in the economy 24. Which of the following might be considered the most expansionary set of fiscal policies? a. increase in government purchases, increase in taxes, and decrease in

b. c. d. e.

transfer payments decrease in government purchases, increase in taxes, and decrease in transfer payments increase in government purchases, decrease in taxes, and increase in transfer payments increase in government purchases, increase in taxes, and increase in transfer payments decrease in government purchases, decrease in taxes, and decrease in transfer payments

25. If the government wants the economy illustrated in Exhibit 0044 to be at full employment, it should a. increase taxes b. decrease transfer payments c. decrease government purchases d. wait for the SRAS curve to shift to the left e. do none of the above 26. The Fed's purchase of U.S. government securities constitutes a(n) a. contractionary policy because it lowers the amount of total reserves in the banking system b. contractionary policy because it lowers the amount of excess reserves in the banking system c. expansionary policy because it raises the amount of total reserves in the banking system

d. expansionary policy because it lowers the amount of total reserves in the banking system e. expansionary policy because it raises the amount of required reserves in the banking system

12. The student will know how banks and the Federal Reserve create money. 27. If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its a. b. c. d. e. required reserves are $500,000 required reserves are $20,000 Assets are $500,000 liabilities are $500,000 liabilities plus its net worth are $500,000

28. The immediate effect of a member bank's sale of U.S. government securities to the Fed is a(n) a. b. c. d. e. increase in that bank's required reserves decrease in that bank's required reserves increase in that bank's excess reserves decrease in that bank's excess reserves decrease in the Fed's assets

29. If the required reserve ratio is 0.2, and the Fed buys $3,000 of U.S. government securities, the maximum amount by which the money supply can increase is a. b. c. d. e. $200 $2,000 $600 $15,000 $1,500 13. The student will know the sources of economic growth. 30. Which of the following does not contribute to an improved standard of living?

a. b. c. d. e.

increases in the amount and quality of resources better technology a lower price for the necessities of life improvements in the rules of the game increases in the quality of labor

14. The student will know the different barriers to trade and understand the rationale for eliminating those barriers. 31. Which of the following best expresses the benefit from international trade?

a. With trade, each country can concentrate on producing those goods and services that it produces most efficiently. b. With trade, a country can increase its political involvement on a global scale. c. Increased U.S. trade will improve high-tech exports but not agricultural exports. d. Increased trade will increase U.S. exports and decrease U.S. imports. e. Increased trade implies that exports of goods and services will always equal imports of goods and services. 32. a. b. c. d. e. 33. a. b. c. d. e. Which of the following is not a basis for trade between two nations? different skill levels of the labor forces one nation's absolute advantage a difference in tastes between countries economies of scale different capital stocks Which of the following is not a type of trade restriction? low-interest loans to foreign buyers export subsidies for domestic firms domestic content requirements restrictive health and safety standards economies of scale

34. A major U.S. motive for negotiating a free-trade agreement with Mexico was to a. increase immigration into the United States b. encourage Mexico 's recent drive to achieve a more market-oriented economy c. keep Mexico from going Communist d. achieve, ultimately, political union with Mexico e. help foster the study of the Spanish language in the United States as a means to trading with all Spanish-speaking countries

15. The student will know why national banks engage in "dirty" or managed float. 35. The reason for calling the current exchange rate system a "managed float" is because a. it is managed by the IMF b. it is basically a misnomer because it is impossible to "manage" exchange rates c. it recognizes that there will be some intervention by central banks d. only the forces of supply and demand determine the exchange rates e. Congress passed a law declaring that the exchange rate system be legally termed "managed float" 36. Faced with growing problems in Asia, the U.S. government spent several billion dollars buying Japanese yen. This action was intended to a. b. c. d. increase the supply of Japanese yen in Asia increase the supply of Japanese yen in the United States weaken the Japanese yen and strengthen the U.S. dollar strengthen the Japanese yen and make Japanese exports less expensive e. strengthen the Japanese yen and make Japanese exports more expensive

16. The student will know how changes in X and M affect the value of the dollar in international trade.

37. Suppose that U.S. tastes for British goods increase. Then, in Exhibit 0242 a. b. c. d. e. the supply curve shifts from S1 to S2 the supply curve shifts from S2 to S1 the demand curve shifts from D2 to D1 the demand curve shifts from D1 to D2 both demand and supply shift to the right

38. Suppose that British incomes rise relative to incomes in the United States . Then, in Exhibit 0242 a. b. c. d. e. the demand curve will shift from D1 to D2 the demand curve will shift from D2 to D1 the supply curve will shift from S1 to S2 the supply curve will shift from S2 to S1 neither the demand for nor the supply curve will shift

17. The student will know how to compute GDP given C, I, G, X, and M.

39. In Exhibit 8-2, Gross Domestic Product equals a. b. c. d. e. $365 billion $385 billion $375 billion $390 billion $420 billion 18. The student will know how to convert an exchange rate. 40. If $1 equals 2 German marks, then 1 German mark equals a. b. c. d. e. $4.00 $2.00 $0.50 $1.00 $0.25

41. If 1 German mark equals $0.60, what is the price in German marks of a $10 wallet? a. b. c. d. e. 16.67 marks 60 marks 6 marks 67 marks 6.6 marks

19. The student will know how to compute Total Revenue, Total Cost and Economic Profit. 42. A young chef is considering opening his own sushi bar. To do so, he would have to quit his current job, which pays $20,000 a year, and take over a store building that he owns and currently rents to his brother for $6,000 a year. His expenses at the sushi bar would be $50,000 for food and $2,000 for gas and electricity. What are his implicit costs? a. b. c. d. e. $26,000 $66,000 $78,000 $52,000 $72,000

43. Maryann and Don want to open their own deli. To do so, Maryann must give up her job, at which she earns $20,000 per year, and Don must give up his part-time job, at which he earns $10,000 per year. They must liquidate their money market fund, which earns $1,000 interest annually. The rent on the building is $10,000 per year, and expenses for such necessities as utilities, corned beef, and pickles are $35,000 annually. What is the explicit cost per year of operating the deli? a. b. c. d. e. $10,000 $35,000 $45,000 $31,000 $76,000

44. Suppose Ernie gives up his job as financial advisor for P.E.T.S., at which he earned $30,000 per year, to open up a store selling spot remover to Dalmatians. He invested $10,000 in the store, which had been in savings earning 5 percent interest. This year's revenues in the new business were $50,000, and explicit costs were $10,000. Calculate Ernie's economic profit. a. b. c. d. e. $10,000 $50,000 $20,000 $40,000 $9,500

20. The student will draw an ordinary demand and supply curve, correctly labeled, and show equilibrium price and quantity. (See # 21 for questions.) 21. The student will, given a scenario, determine whether supply or demand shifts and in which direction, and show how the specified change in S or D changes equilibrium price and quantity. Draw an ordinary supply and demand graph in initial equilibrium. Show what happens to equilibrium price and quantity in the market for SUVs (sports utilities vehicles) as disposable incomes increase when the country experiences an economic expansion. Draw an ordinary supply and demand graph in initial equilibrium. Show what happens to equilibrium price and quantity in the market for DVD players as the costs of production fall. Go to Answers

In addition, the following problems may be useful for students preparing for the ETS major fields exam:

1. Refer to Exhibit 3-1. Which of the following would cause a shift in demand from D' to D? a. b. c. d. e. an increase in the price of a substitute good an increase in the number of consumers a decrease in the price of a complementary good a decline in consumers' incomes if it is a normal good an increase in consumers' incomes if it is a normal good

2. If the price of cars averaged $6,000 in 1990 (the base year) and $15,000 in 2000, the price index for cars in 2000 is a. b. c. d. e. 50 67 150 250 2,000

3. If the price index for 1999 is 100 and the price index for 2000 is 109, then how much did prices change between 1999 and 2000? a. 1 percent increase b. 8 percent increase c. 9 percent increase

d. 12 percent increase e. 12 percent decrease 4. If households save $30 billion more at each level of income and the MPC = 0.9, GDP will a. b. c. d. e. not be affected shift upward by $30 billion shift downward by $30 billion shift upward by $300 billion because of the multiplier shift downward by $300 billion because of the multiplier

5. If the mps is 0.25, the simple multiplier is a. b. c. d. e. 25 75 5 3/4 4

6. All of the following are tools of fiscal policy except one. Which is the exception? a. b. c. d. e. taxes transfer payments interest rates government purchases of goods government purchases of services

7. The opportunity cost of holding money is measured by the a. b. c. d. e. interest rate liquidity lost by holding money money supply curve inflation rate cost of cashing in financial assets

8. Which of the following, other things constant, will shift the demand for money curve to the left? a. an increase in the interest rate

b. c. d. e.

a decrease in the interest rate a decrease in real GDP an increase in real GDP an increase in the price level

9. If the money supply decreases, the opportunity cost of holding money __________ and people will want to hold __________ quantity of money. a. b. c. d. e. rises; a greater rises; a smaller does not change; the same falls; a greater falls; a smaller

10. The equilibrium interest rate is determined by a. b. c. d. e. the Fed Congress the demand for money alone the supply of money alone both the supply of and demand for money

11. An increase in the money supply leads to a(n) a. decline in interest rates, an increase in investment, and an increase in aggregate demand b. decline in interest rates, a decrease in investment, and an increase in aggregate demand c. decline in interest rates, an increase in investment, and a decline in aggregate demand d. increase in interest rates, an increase in investment, and an increase in aggregate demand e. decline in interest rates, a decline in investment, and a decline in aggregate demand 12. When interest rates are rising in the U.S. , all of the following happen except a. exports increase and imports decrease b. foreigners become interested in purchasing U.S. corporate bonds c. demand by foreigners for U.S. dollars increases

d. American consumers find foreign goods cheaper than before e. American businesses become less interested in purchasing new plant and equipment 13. If on Tuesday you can buy 125 yen per U.S. dollar and on Wednesday you can buy 120 yen per U.S. dollar, a. b. c. d. e. both the U.S. dollar and the yen have appreciated both the U.S. dollar and the yen have depreciated The U.S. dollar has appreciated and the yen has depreciated The U.S. dollar has depreciated and the yen has appreciated The yen has appreciated and the U.S. dollar has remained constant

14. Imagine that there are only two nations in the world, Canada and Switzerland . Which of the following is true of the suppliers and demanders in this market, as represented in Exhibit 0243? a. b. c. d. e. The demanders want Canadian dollars and are offering Swiss francs. The suppliers want Canadian dollars and are offering Swiss francs. Both the suppliers and the demanders are offering Canadian dollars. Both the suppliers and the demanders are offering Swiss francs. Francs are being exchanged by unknown suppliers and demanders in a money market in Switzerland ; anyone could be trading.

15. If variable cost rises from $60 to $100 as output increases from 15 to 20 units, the marginal cost of the twentieth unit a. b. c. d. e. is $100 is $5 is $40 is $8 cannot be determined without total cost

16. Perfectly competitive firms that earn an economic profit in the short run choose the output that a. b. c. d. e. maximizes total revenue minimizes total cost maximizes the difference between total revenue and total cost maximizes the difference between total revenue and explicit cost maximizes the difference between total revenue and implicit cost

17. Which of the following is not considered a barrier to entry? a. b. c. d. e. economies of scale patents control of a scarce resource licensing perfect price discrimination

18. Marginal revenue is the change in total revenue from selling one more unit of output. a. True b. False Go to Answers Answers to Assessment Quiz: 1. B 2. D 3. C

4. D 5. B 6. B 7. B 8. C 9. C 10. C 11. D 12. A 13. A 14. E 15. D 16. C 17. D 18. C 19. A 20. a) E b)A 21. E 22. C 23. C 24. C 25. E 26. C 27. B 28. C 29. D 30. C 31. A 32. B 33. E 34. B 35. C 36. E 37. D 38. C 39. E 40. C 41. A 42. A 43. C 44. E Answers to ETS sections 1. D 2. D

3. C 4. E 5. E 6. C 7. A 8. C 9. B 10. E 11. A 12. A 13. D 14. B 15. D 16. C 17. E 18. A Go to Explanations
Assessment Quiz -- explanations for answers 1. If China can produce 10 units of good A or 5 units of good B and India can produce 9 units of good A or 3 units of good B, then China has a. a comparative advantage in both goods. b. a comparative advantage in good B. c. a absolute advantage in good A but not in good B. d. a comparative advantage in good A. e. a comparative advantage in neither good. Don Answer is B. Reducing the ratios to China 2A:1B and India 3A:1B shows that it is more costly for India to produce good B, since they have to give up 3 units of good A to get good B, whereas China only has to give up 2. Therefore India has a comparative advantage in A and China has a comparative advantage in B. (China has the absolute adv. in both goods since they can produce more of both.) 2. Don can produce 10 pens and 20 pencils in one hour while Bob can produce 5 pencils and 15 pens in one hour. Which of the following statements is correct? a. Don has an absolute advantage over Bob in the production of pencils and Bob in the production of pens b. Bob has an absolute advantage over Don in the production of pencils c. Bob has a comparative advantage over Don in the production of pens

d. Don has a comparative advantage over Bob in the production of pens e. Don does not have a comparative advantage in the production of either good Answer is D. Since Don has an absolute advantage in pencils and Bob has an absolute advantage in pens, this also determines comparative advantage. 3. The division of labor facilitates productivity increases for all of the following reasons except one. Which one? a. It allows people to do those tasks for which they have a greater natural ability. b. Workers get better at tasks the more they repeat them. c. The more experience workers gain by specializing in a task, the more likely they will enjoy that task. d. More sophisticated production techniques are introduced. e. The division of labor often permits the introduction of labor-saving machinery. Answer is C. If anything, specialization of labor can lead to boring and tediously repetitive jobs. 4. A production possibilities frontier will be bowed out if

a. there is scarcity b. resources are used efficiently c. production of one good involves an opportunity cost d. resources are not perfectly adaptable to making each good e. technology is improving Answer is D. The reason that the production possibilities curve is bowed out (concave to the origin), is that certain resources do not adapt as well to the production of certain goods. Therefore, they are more expensive to use. An example is an old cigarette factory. You could probably change it into a cigar factory easily, but it would be harder to adapt to producing cars. If you had an old tractor factory, you could probably make cars with that more easily. A similar phenomenon is diminishing marginal product. 5. On a production possibilities frontier showing possible output levels of good A and

good B, the opportunity cost of producing the first 10 units of A will usually be a. the same as the opportunity cost of producing the second 10 units of A b. less than the opportunity cost of producing the second 10 units of A

c. greater than the opportunity cost of making the second 10 units of A d. 10 units of A e. 10 units of B Answer is B. The first 10 units of good A will cost you less than the second 10 units of good A. This is what the bowed out shape implies.

6. If the price of the good described in Exhibit 0023 is $1.60, then an economist would expect the
a. price to decrease to $1.40 b. price to decrease to $1.50 c. quantity supplied to increase to 50 units d. quantity demanded to increase to 80 units e. quantity demanded to increase to 90 units Answer is B. At a price of $1.50, quantity demanded = quantity supplied, which is the equilibrium. The equilibrium is the point where the supply and demand curves intersect. 7. The market for bubble gum is competitive with a current price of 50 cents and quantity of 100,000 units. Which of the following events would lead to a new equilibrium price of 60 cents and quantity of 90,000 units? a. an increase in the price of other kinds of gum and candy b. an increase in the price of the ingredients used to make bubble gum c. a decrease in the number of young people in the population d. an agreement by workers in the bubble gum industry to work for lower wages e. an increase in income Answer is B. If the price rose and the quantity fell, then this suggests that supply decreased. The most common reason for supply to fall is that the cost of input resources (like ingredients) increased.

8. Many people argue against increasing the minimum wage because they believe the result would be increased unemployment. Which of the following best summarizes this argument? A higher minimum wage would a. increase the supply of labor while decreasing the demand for labor b. decrease the supply of labor while increasing the demand for labor c. increase the quantity supplied of labor while decreasing the quantity demanded of labor d. decrease the quantity supplied of labor while increasing the quantity demanded of labor e. increase the supply of labor while decreasing the quantity demanded of labor Answer is C. If the minimum wage is above the current market wage, then there would be a surplus. The number of workers would exceed the number of vacancies. First, the number of people willing to work at that wage would go up, and second, the number of jobs available would go down. 9. If the demand for a toy increases at Christmastime,

a. retailers will increase the price to equate quantity supplied with quantity demanded b. retailers will reduce the price to equate quantity supplied with quantity demanded c. a shortage will often persist, because retailers are unwilling to adjust the price to its equilibrium level d. a surplus will often persist, because retailers are unwilling to adjust the price to its equilibrium level e. the government will often impose a price ceiling Answer is C. Retailers usually will not adjust prices upward, particularly since they do not want to have leftover inventory at the end of the season. They bypass the market and use other means of rationing goods, such as first-come, first-get and one to a customer. 10. If officials raise tuition on our campus to increase revenue, it will

a. not be successful if the demand curve slopes downward b. be successful if demand is elastic c. be successful if demand is inelastic d. be successful if supply is elastic

e. be successful if supply is inelastic Answer is C. Elastic demand means that consumers are very responsive to price changes, inelastic demand means they are not. If the current price is in the elastic range then attempts to raise it, will drive down revenue. (% change in Q will be greater than the % change in P.) The opposite is true when the price is in the inelastic range.

11.

Consider Exhibit 0122. At which quantity will this firm maximize profits?

a. point a b. point b c. point c d. point d e. point e Answer is D. The profit-maximizing rule is MR=MC, above AVC. A firm should produce up to the point where the addition to revenue just equals the addition to costs, assuming that the firm is covering all of its variable (or avoidable) costs.

12.

Which of the following statements about the perfectly competitive firm

represented in Exhibit 0131 is false? a. Short-run losses are minimized at output level q* because MR = MC there. b. The firm should shut down in the short run. c. If the firm shuts down in the short run, it will suffer a loss equal to the amount of its fixed cost. d. If the firm operates in the short run, it will suffer a loss greater than the amount of its fixed cost. e. If the firm operates in the short run, it will suffer a loss equal to the amount of its fixed cost plus the uncovered portion of its variable cost. Answer is A. Since the firm is not meeting its variable costs, it should shut down to minimize losses. 13. Which of the following is not necessarily a characteristic of perfect competition? a. low prices b. a large number of buyers and sellers c. a homogeneous product d. perfect information e. easy entry and exit in the long run Answer is A. All of the other answers are characteristics of perfect competition. The idea of a low price is subjective and has little meaning in economics, other than as a reflection of the costs of production. Under perfect competition, you will get the lowest possible price for the good, given costs.

14. A monopolist is a. one of a large number of small firms producing a homogeneous good b. one of a small number of large firms producing a differentiated good c. a single seller of a product with many close substitutes d. one of a small number of large firms producing a homogeneous good e. a single seller of a product with no close substitutes Answer is E. The only way a monopolist can be the only seller is if there are no close substitutes. 15. Monopolistically competitive industries consist of

a. one firm selling several products b. one firm selling one product c. many firms, all selling identical products d. many firms, each selling a slightly different product e. many firms, each selling a completely different product Answer is D. The differences in products do not have to be substantial or even substantive. 16. Which of the following is unique to oligopoly among all the market structures?

a. product differentiation b. profit maximization c. mutual interdependence d. Advertising e. long-run economic profits Answer is C. Oligopolistic firms must pay close attention to their rivals. 17. As firms expand into overseas markets, information problems and the complexity of

operating within many varied cultures and economies may result in a. constant returns to scale b. diminishing marginal returns c. declining long-run marginal cost d. diseconomies of scale e. economies of scale

Answer is D. If increasing the quantity supplied increases costs, then the firm has reached diseconomies of scale. 18. For building contractors, doubling the size of an office building does not require

double the inputs because there are common walls. This is an example of a. increasing marginal product b. diminishing marginal returns c. economies of scale d. diseconomies of scale e. constant returns to scale Answer is C. This is the opposite of question 17. If as quantity supplied increases, costs decrease, then you have reached economies of scale. 19. Adopting a uniform menu across all sites provides the McDonald's Corporation

__________ by spreading the cost of menu development over a large output. a. economies of scale b. diminishing returns c. constant returns to scale d. rising marginal product e. more flexibility Answer is A. Again definitional. See questions 17 and 18. 20a. A firm could differentiate its product by all except one of the following means.

Which is the exception? a. making the product available at a number of different locations b. increasing the number of services that accompany the product c. making the product physically different from other products d. using packaging or advertising to create a special subjective image of the product in the consumer's mind e. emphasizing that the product provides the same benefits to consumers as the others on the market, even when it's really physically different Answer is E. This would be really stupid! Product differentiation depends on making your product seem very different from your competitors, even when it isn't.

20b.

Firms engage in product differentiation

a. to gain market power. b. so that the industry they are in becomes classified as pure competition. c. to minimize average total cost. d. to maximize total revenue. e. to be classified as price-takers. Answer is A. Market power is the ability to set price. This is the whole point. If you can create a niche for your product, you may be able to charge a little more. 21. Which of the following is the best indicator of the performance of the national economy? a. the federal government budget deficit b. the stock of capital goods (machinery) in the nation c. the size of the nation's stock of money d. the balance of trade with other nations e. the flow of new goods and services produced in the nation Answer is E. This is the definition of GDP. The more goods and services being produced, the more each person has, which is one definition of well being. 22. When the MPC is .75, a decrease in net taxes of $100 billion will increase the equilibrium level of real GDP by a. $75 billion b. $100 billion c. $300 billion d. $400 billion e. $500 billion Answer is C. The multiplier is 1/(1-MPC) which is 1/.25 = 4. The tax multiplier = 1-the multiplier or MPC/(1-MPC). In this case, it is -3. As taxes fall by 100B, GDP changes by (-3)*(-100) = +300. 23. Keynes believed that the best method for ending the Great Depression was to a. increase the money supply so that individuals would have more to spend b. cut government spending and increase taxes to reduce or even eliminate the

government's deficit c. increase government spending and cut taxes so that consumers could spend more d. cut both government spending and taxes so that government would not be such a large part of the economy e. increase both government spending and taxes to increase the role government played in the economy Answer is C. Keynes believed that fiscal policy (changes in G and T) would stimulate demand and increase production, thereby decreasing unemployment. He was right, for a depression setting. The world pulled out of the depression as a result of military expenditures on WWII. 24. Which of the following might be considered the most expansionary set of fiscal

policies? a. increase in government purchases, increase in taxes, and decrease in transfer payments b. decrease in government purchases, increase in taxes, and decrease in transfer payments c. increase in government purchases, decrease in taxes, and increase in transfer payments d. increase in government purchases, increase in taxes, and increase in transfer payments e. decrease in government purchases, decrease in taxes, and decrease in transfer payments Answer is C. Each of these changes would shift AD outward and expand the economy.

25. If the government wants the economy illustrated in Exhibit 0044 to be at full employment, it should a. increase taxes b. decrease transfer payments c. decrease government purchases d. wait for the SRAS curve to shift to the left e. do none of the above Answer is E. All of the other answers are the opposite of what we should do when there is unemployment--potential output exceeds real output (where AD and SRAS intersect). The policies above would work for an inflationary setting where real output exceeds potential output. 26. The Fed's purchase of U.S. government securities constitutes a(n) a. contractionary policy because it lowers the amount of total reserves in the banking system b. contractionary policy because it lowers the amount of excess reserves in the banking system c. expansionary policy because it raises the amount of total reserves in the banking system d. expansionary policy because it lowers the amount of total reserves in the banking system e. expansionary policy because it raises the amount of required reserves in the banking system

Answer is C. When the Fed buys securities from banks, it increases the amount of reserves the banks have available. When the Fed buys securities from individuals and other corporations, deposits at the bank and at the Fed both increase. Since the change in required reserves is less than the change in total reserves (because of the fractional reserve system), answer C is correct either way. 27. If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its a. required reserves are $500,000 b. required reserves are $20,000 c. Assets are $500,000 d. liabilities are $500,000 e. liabilities plus its net worth are $500,000 Answer is B. Required reserves = ratio*checking account deposits = .2*100,000 = $20,000. 28. The immediate effect of a member bank's sale of U.S. government securities to

the Fed is a(n) a. increase in that bank's required reserves b. decrease in that bank's required reserves c. increase in that bank's excess reserves d. decrease in that bank's excess reserves e. decrease in the Fed's assets Answer is C. See answer to question 26. 29. If the required reserve ratio is 0.2, and the Fed buys $3,000 of U.S. government

securities, the maximum amount by which the money supply can increase is a. $200 b. $2,000 c. $600 d. $15,000 e. $1,500 Answer is D. The money multiplier = 1/reserve ratio = 1/.2 = 5. The maximum change in the money supply is the money multiplier * change in securities. When the Fed buys, the change is positive, when the Fed sells the change is negative. In this case, the answer is positive 5*3000.

30.

Which of the following does not contribute to an improved standard of living?

a. increases in the amount and quality of resources b. better technology c. a lower price for the necessities of life d. improvements in the rules of the game e. increases in the quality of labor