27. Market failure refers to a situation in which the market does not allocate resources efficiently.

ANS: T
28. Market power and externalities are two possible causes of market failure.
ANS: T

6. Mitch has $100 to spend and wants to buy either a new amplifier for his guitar or a new mp3 player to listen
to music while working out. Both the amplifier and the mp3 player cost $100, so he can only buy one. This
illustrates the basic concept that
a. trade can make everyone better off.
b people face trade-offs
.
c. rational people think at the margin.
d people respond to incentives.
.
33. Mallory decides to spend three hours working overtime rather than watching a video with her friends. She
earns $8 an hour. Her opportunity cost of working is
a. the $24 she earns working.
b. the $24 minus the enjoyment she would have received from watching the video.
c. the enjoyment she would have received had she watched the video.
d. nothing, since she would have received less than $24 of enjoyment from the video.
34. Moira decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of
napping is
a. the value of the knowledge she would have received had she attended class.
b the $30 she could have earned if she had worked at her job for those two hours.
.
c. the value of her nap less the value of attending class.
d nothing, since she would valued sleep more than attendance at class.
.
53. Making rational decisions "at the margin" means that people
a. make those decisions that do not impose a marginal cost.
b. evaluate how easily a decision can be reversed if problems arise.
c. compare the marginal costs and marginal benefits of each
decision.
d. always calculate the marginal dollar costs for each decision.
66. Mike has spent $500 purchasing and repairing an old fishing boat, which he expects to sell for $800 once the
repairs are complete. Mike discovers that, in addition to the $500 he has already spent, he needs to make an
additional repair, which will cost another $400, in order to make the boat worth $800 to potential buyers. He
can sell the boat as it is now for $300. What should he do?
a. He should sell the boat as it is now for $300.
b He should keep the boat since it would not be rational to spend $900 on repairs and then sell the boat for $800.
.
c. He should complete the repairs and sell the boat for $800.
d It does not matter which action he takes; the outcome is the same either way.
.
20. Market economies are distinguished from other types of economies largely on the basis of
a. the political affiliations of government officials.
b the process by which government officials are elected or appointed.
.
c. the ways in which scarce resources are allocated.
d the number of retail outlets available to consumers.
.
63. Market failure can be caused by
a. low consumer demand.
b. equilibrium prices.
c. externalities and market power.
d. high prices and foreign competition.
74. Market power refers to the
a. power of a single person or small group to influence market prices.
b. ability of a person or small group to successfully market new products.
c. power of the government to regulate a market.
d. importance of a certain market in relation to the overall economy.
40. Most economists believe that an increase in the quantity of money results in
a. an increase in the demand for goods and services.
b lower unemployment in the short run.
.
c. higher inflation in the long run.
d All of the above are correct.
.
[Link] is the study of how households and firms make decisions and how they interact in specific
markets.
ANS:T
[Link] is the study of economywide phenomena.
ANS:T
[Link] and macroeconomics are closely intertwined.
ANS:T
[Link] is the study of
a. how money affects the economy.
b how individual households and firms make decisions.
c. how government affects the economy.
d how the economy as a whole works.
ANS:B
[Link] is the study of
a. individual decision makers.
b international trade.
c. economy-wide phenomena.
d markets for large products.
ANS:C

115. Music compact discs are normal goods. What will happen to the equilibrium price and quantity of
music compact discs if musicians accept lower royalties, compact disc players become cheaper, more firms
start producing music compact discs, and music lovers experience an increase in income?
a. Price will fall and the effect on quantity is ambiguous.
b Price will rise and the effect on quantity is ambiguous.
c. Quantity will fall and the effect on price is ambiguous.
d Quantity will rise and the effect on price is ambiguous.
7. Most markets in the economy are highly competitive.
ANS: T

14. Monopolists are price takers.

ANS: F

38. Most studies have found that tobacco and marijuana are complements rather than substitutes.
ANS: T
8. Most markets in the economy are
[Link] in which sellers, rather than buyers, control the price of the product.
b markets in which buyers, rather than sellers, control the price of the product.
[Link] competitive.
d highly competitive.
117. Most studies indicate that tobacco and marijuana tend to be
a. substitutes.
b complements.
c. not related since one is legal and one is illegal.
d inferior goods.
2. Measures of elasticity enhance our ability to study the magnitudes of changes.
ANS: T
210. Moving downward and to the right along a linear demand curve, we know that total revenue
a. first increases, then decreases.
b first decreases, then increases.
c. always increases.
d always decreases.

227. Muriel's income elasticity of demand for football tickets is 1.50. All else equal, this means that if her
income increases by 20 percent, she will buy
a. 150 percent more football tickets.
b 50 percent more football tickets.
c. 30 percent more football tickets.
d 20 percent more football tickets.
3. Minimum-wage laws dictate
a. the exact wage that firms must pay workers.
b a maximum wage that firms may pay workers.
c. a minimum wage that firms may pay workers.
d a minimum wage and a maximum wage that firms may pay workers.
79. Minimum-wage laws dictate the
a. average price employers must pay for labor.
b highest price employers may pay for labor.
c. lowest price employers may pay for labor.
d the highest and lowest prices employers may pay for labor.
152. Most labor economists believe that the supply of labor is
a. less elastic than the demand and, therefore, firms bear most of the burden of the payroll tax.
b less elastic than the demand and, therefore, workers bear most of the burden of the payroll tax.
c. more elastic than the demand and, therefore, workers bear most of the burden of the payroll tax.
d more elastic than the demand and, therefore, firms bear most of the burden of the payroll tax.
93. Many economists believe that restrictions against ticket scalping result in each of the following except
a. a smaller audience for cultural and sporting events.
b shorter lines at cultural and sporting events.
c. less tax revenue for the state.
d an increase in ticket prices.
3. Market power refers to the
a. side effects that may occur in a market.
b government regulations imposed on the sellers in a market.
c. ability of market participants to influence price.
d forces of supply and demand in determining equilibrium price.
6. Market failure is the inability of
a. buyers to interact harmoniously with sellers in the market.
b a market to establish an equilibrium price.
c. buyers to place a value on the good or service.
d some unregulated markets to allocate resources efficiently.
47. Markets will always allocate resources efficiently.
ANS: F

49. Market power and externalities are examples of market failures.

ANS: T
66. Michael values a stainless steel refrigerator for his new house at $3,500, but he succeeds in buying one for
$3,000. Michael's willingness to pay is
a. $500.
b $3,000.
c. $3,500.
d $6,500.
67. Michael values a stainless steel refrigerator for his new house at $3,500, but he succeeds in buying one for
$3,000. Michael's consumer surplus is
a. $500.
b $3,000.
c. $3,500.
d $6,500.
86. Motor oil and gasoline are complements. If the price of motor oil increases, consumer surplus in the
gasoline market
a. decreases.
b is unchanged.
c. increases.
d may increase, decrease, or remain unchanged.
23. Moving production from a high-cost producer to a low-cost producer will
a. lower total surplus.
b raise total surplus.
c. lower producer surplus.
d raise producer surplus but lower consumer surplus.

CHAPTER 13
40. Marginal cost is equal to
a. TC/Q.
b ATC/Q.
Δ
c. TC/ Q.
Δ Δ
d Q/ TC.
Δ Δ
43. Marginal cost equals
(i) change in total cost divided by change in quantity produced.
(ii) change in variable cost divided by change in quantity produced.
(iii) the average fixed cost of the current unit.

a.
(i) and (ii) only
b
(ii) and (iii) only
c.
(i) only
d
(i), (ii), and (iii)
44. Marginal cost equals
a. total cost divided by quantity of output produced.
b total output divided by the change in total cost.
c. the slope of the total cost curve.
d the slope of the line drawn from the origin to the total cost curve.
45. Marginal cost tells us the
a. value of all resources used in a production process.
b marginal increment to profitability when price is constant.
c. amount by which total cost rises when output is increased by one unit.
d amount by which output rises when labor is increased by one unit.
ANS: C

121. Marginal cost is equal to average total cost when

a.
average variable cost is falling.
b
average fixed cost is rising.
c.
marginal cost is at its minimum.
d
average total cost is at its minimum.
161. Marginal cost increases as the quantity of output increases. This reflects the property of
a. increasing total cost.
b diminishing total cost.
c. increasing marginal product.
d diminishing marginal product.
28. Marginal costs are costs that do not vary with the quantity of output produced.
ANS: F
51. Mark spends his weekly income on gin and cocktail olives. The price of gin has risen from $7 to $9 per
bottle, the price of cocktail olives has fallen from $6 to $5 per jar, and Mark's income has stayed fixed at $46 per
week. Since the price changes, Mark has been buying 4 bottles of gin and 2 jars of cocktail olives per week. At the
original prices, 4 bottles of gin and 2 jars of cocktail olives would have
a. exactly exhausted his income.
b cost more than his income.
c. cost less than his income.
d could have maximized his satisfaction given his budget constraint.

52. Mark spends his weekly income on gin and cocktail olives. The price of gin has risen from $7 to $9 per
bottle, the price of cocktail olives has fallen from $6 to $5 per jar, and Mark's income has stayed fixed at $46 per
week. If you illustrate gin on the vertical axis and cocktail olives on the horizontal axis, then the budget constraint
a. is steeper after the price changes.
b is flatter after the price changes.
c. is the same after the price changes.
d shifts in a parallel fashion to the old budget constraint after the price changes.
123. Mrs. Smith is operating a firm in a competitive market. The market price is $6.50. At her profit-
maximizing level of output, her average total cost of production is $7.00, and her average variable cost of production
is $6.00. Which of the following statements about Mrs. Smith’s firm is correct?
a. Mrs. Smith is earning a loss and should shut down in the short run.
b Mrs. Smith is earning a loss but should continue to operate in the short run.
c. Mrs. Smith is earning a profit since the price is above the average variable cost.
d Without knowing Mrs. Smith's marginal cost, we cannot determine whether she should stay in
business or shut down.
71. Mrs. Smith operates a business in a competitive market. The current market price is $8.50, and at her
profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Which
of the following statements about Mrs. Smith’s firm is correct?
a. Mrs. Smith should shut down her business in the short run but continue to operate in the long run..
b Mrs. Smith should continue to operate in the short run but shut down in the long run.
c. Mrs. Smith should continue to operate in both the short run and long run.
d Mrs. Smith should shut down in both the short run and long run.
11 Most markets are not monopolies in the real world because
a firms usually face downward-sloping demand curves
b supply curves slope upward
c price is usually set equal to marginal cost by firms
d there are reasonable substitutes for most goods
37 Movie theatres charge different prices to different groups of people based on the differing marginal costs
that exist from group to group
ANS: F
1 Monopolists can achieve any level of profit they desire because they have unlimited market power
ANS: F
2 Most firms have
a no monopoly pricing power
b some monopoly pricing power
c absolute monopoly pricing power
d the ability to earn monopoly profits
65 Many movie theaters allow discount tickets to be sold to senior citizens because
a senior-citizen laws mandate such discounts
b goodwill efforts show community respect and win loyal patrons
c the theaters are profit maximizers
d senior citizens lobby city councils for lower prices
29 Many economists criticize monopolists because they
a charge a price that equals marginal cost rather than a price that equals average cost
b don't innovate
c produce a large quantity of waste
d produce less than the socially efficient level of output
10 Monopoly pricing prevents some mutually beneficial trades from taking place These unrealized mutually
beneficial trades are
a of little concern to society
b a deadweight loss to society
c a sunk cost to society
d also observed in competitive markets
8 Monopolies are inefficient because they
(i) eliminate barriers to entry
(ii) price their product at a level where marginal revenue exceeds marginal cost
(iii) restrict output below the socially efficient level of production

a (i) and (ii) only

b (ii) and (iii) only
c (iii) only
d (i), (ii), and (iii)
40 Marginal revenue for a monopolist is computed as
a average revenue divided by quantity sold
b average revenue times quantity divided by price
c total revenue divided by quantity sold
d change in total revenue per one unit increase in quantity sold
19 Monopoly firms have
a downward-sloping demand curves and they can sell as much output as they desire at the market
price
b downward-sloping demand curves and they can sell only a limited quantity of output at each price
c horizontal demand curves and they can sell as much output as they desire at the market price
d horizontal demand curves and they can sell only a limited quantity of output at each price
12 Monopolies use their market power to
a charge prices that equal minimum average total cost
b increase the quantity sold as they increase price
c charge a price that is higher than marginal cost
d dump excess supplies of their product on the market
44 Marginal revenue can become negative for
a both competitive and monopoly firms
b competitive firms but not for monopoly firms
c monopoly firms but not for competitive firms
d neither competitive nor monopoly firms