Multiple Choice Answers

Question 1
Market failure occurs when
the price system fails to generate an equal distribution of income.
the price system fails to generate an equal distribution of wealth.
the price system allows consumers to make their own decisions.
the price system fails to generate an efficient allocation of resources.
Question 2
What would happen in a free market system when production of a good generates negative externalities?
There would be a shortage of the good.
The equilibrium quantity of the good would be more than the efficient amount.
The equilibrium quantity of the good would be less than the efficient amount.
There would be a surplus of the good.
Question 3
Which of the following is an example of a negative externality?
pollution that results from consuming a good
donating money to a charity
having to pay a fine for a traffic violation
improving city parks so that residents will be more inclined to use them
Question 4
Which of the following is the best example of a public good?
a streetlight
garbage collection
inoculation against a contagious disease
Internet access
Question 5
The private sector typically does not produce public goods because it lacks the means to collect payment from all those who benefit.
True
False
Question 6
Firms and consumers react to economic regulation with creative responses that generate feedback effects which undermine the intent of the regulation.
True
False
Question 7
Why does our government enforce antitrust legislation?
because monopolies are known to be unfair to their stockholders
because the government wants to create competition in markets in the interests of promoting efficiency
because monopolies are known to be unfair to their employees
because the government wants to create competition in markets in the interests of promoting an equal distribution of income
Question 8

Figure 8.2
no figure supplied
Refer to Figure 8.2. The market equilibrium is Q1. Point Q2 represents the optimal point of production. This indicates that
regressive taxation of the product would result in the most efficient outcome.
consumption of the good generates a negative externality.
consumption of the good generates a positive externality.
the good represented here is a public good.
Question 9
An economic activity where benefits or costs affect third parties is called
a public good.
an externality.
a third-party good.
the exclusion principle.
Question 10
If a corporation were forced to absorb the external cost arising from production of a good, this would likely cause the supply curve for the good to
shift to the right.
shift to the left.
become vertical.
become horizontal.
Question 11
What is the name given to the process by which unions and their employers negotiate the conditions of employment and wages?
collusive engagement
collective bargaining
boycotting
bilateral filibuster
Question 12
The marginal revenue product represents
the worker’s contribution to the firm’s output.
the marginal physical product of labor divided by the price of the good produced.
the value of each additional unit of output.
the worker’s contribution to the firm’s total revenues.
Question 13
A boycott is a labor tactic in which a union encourages members of the public not to buy goods from a company that is the target of a strike.
True
False
Question 14
The equilibrium wage rate in any one industry is determined by
whether the industry is subject to minimum wage legislation.
federal labor legislation.
the interaction of labor supply and labor demand.
whether the industry is unionized.
Question 15
Capital can serve as either a substitute for or a complement to labor.
True
False
Question 16
The upward slope of the labor supply curve suggests that the income effect of a wage increase outweighs the substitution effect.
True
False
Question 17
If a firm employs a new worker, the additional product he generates is
the diminished return.
the marginal physical product of labor.
the outside edge.
total product.
Question 18
As more workers are hired, the marginal physical product of labor declines due to the law of diminishing marginal returns.
True
False
Question 19
Suppose a perfectly competitive firm faces a labor market in which the going wage rate is $90 per day. If the last worker hired has a marginal physical product of 15 units of output per day, what is the selling price of the firm’s output?
$45 per unit
$90 per unit
$6 per unit
$15 per unit
Question 20
The marginal factor cost of labor is the cost of training new workers.
True
False
Question 21
How do corporations raise further capital?
by asking managers to contribute to an ownership fund
by asking employees to contribute to an ownership fund
by raising selling prices of their products
by selling shares of common stock
Question 22
Table 5.7
Q            Total Variable Cost          Average Variable Cost     Total Cost           Average Total Cost
1             10                          50
2             50                          90
340
Refer to Table 5.7. What is the average variable cost of producing one unit?
40
50
80
10
Question 23
LLC’s are exempt from minimum wage laws.
True
False
Question 24
When does marginal cost begin to increase?
when total cost begins to decrease
when marginal physical product starts to decline
when total cost begins to increase
when opportunity cost starts to decline
Question 25
A firm that focuses on earning a profit will be concerned with
maximizing the difference between revenues and costs.
converting its U-shaped marginal cost curve into a horizontal line.
converting its U-shaped marginal cost curve into a vertical line.
choosing the output level that minimizes total cost.
Question 26
When marginal physical product begins to decline, marginal cost begins to increase.
True
False
Question 27
Table 5.7
Q            Total Variable Cost          Average Variable Cost     Total Cost           Average Total Cost
1             10                          50
2             50                          90
340
Refer to Table 5.7. What is the average variable cost of producing two units?
25
10
50
Not enough information is provided.
Question 28
In the table below, what is the marginal cost of producing the first unit?
Total Output       Total Costs
0             $10
1             $15
2             $18
3             $20
4             $21
5             $23
$1
$3
$5
$2
Question 29
Which form of business organization guarantees that the firm will make a profit?
partnership
corporation
sole proprietorship
none of the above
Question 30
Which of the following is NOT a legal entitlement of stockholders in a corporation?
the right to vote on the company’s Board of Directors
the right to vote on major policy decisions in the company
the right to receive discounts on company products
the right to receive distributed profits in the form of dividends
Question 31
Duopoly is an industry structure in which each firm produces two products.
True
False
Question 32
Table 7.1
Output  Price per
Book ($)               Total Revenue    Marginal Revenue            Marginal Cost
0             8.00       0             0             0
1             7.00       7.00       7.00       1.00
2             6.00       12.00     5.00       2.00
3             5.00       15.00     3.00       3.00
4             4.00       16.00     1.00       4.00
Table 7.1 depicts price, quantity, and the marginal revenue and marginal costs the campus bookstore faces. Based on marginal analysis, what is the profit maximizing level of output for the bookstore?
3 books
1 book
2 books
4 books
Question 33
The fact that firms seek to have repeat transactions with their customers means that they have an incentive to
engage in price wars.
collude with other firms in the industry.
avoid opportunistic behavior.
engage in price discrimination.
Question 34
The type of product sold by a monopolistically competitive business
is differentiated.
can be either homogeneous or differentiated.
is neither homogeneous nor differentiated.
is homogeneous.
Question 35
Which of the following is a characteristic of both perfect competition and oligopoly?
There are no barriers to entry of new firms.
The firm seeks to maximize profit.
The firm recognizes its strategic dependence on its competitors.
Firms sell a differentiated product.
Question 36
Signaling is associated with strategic dependence.
True
False
Question 37
Which of the following is true of monopolistic competition but not of monopoly?
The firm will produce at the point where average total cost is minimized.
There are barriers to the entry of new firms.
The firm will produce at the point where marginal revenue equals marginal cost.
The firm will earn zero economic profit in the long run.
Question 38

Figure 7.3
no figure provided
For the monopolistic competitor depicted in Figure 7.3, what is the profit-maximizing quantity?
0
100
75
120
Question 39
The fact that an industry can be described by the price leadership model is evidence that the industry is characterized by
noncooperative behavior.
strategic dependence.
opportunistic behavior.
collusion.
Question 40
Effective price discrimination requires charging a higher price to customers with a relatively low price elasticity of demand.
True
False
Question 41
For a monopolist
P > MR.
P = MC.
P = ATC.
P = MR.
Question 42
What is a homogeneous product?
one for which there is only one substitute
one which has the same characteristics even when produced by different firms him
one which has only one use
one which is produced by only one firm
Question 43
no figure provided
Figure 6.5
Using Figure 6.5, the profit maximizing quantity and price will be
Q1 and P1.
Q3 and P4.
Q2 and P2.
Q3 and P3.
Question 44
A firm that faces a downward sloping demand curve is
a price setter.
a price taker.
a price provider.
a price creator.
Question 45
The profit maximizing level of production
is not measurable for a perfectly competitive firm.
is where the difference between marginal revenue and marginal cost is maximized.
ignores the relation of total revenues and total costs.
is the quantity at which marginal revenue equals marginal cost.
Question 46
The firm in a perfectly competitive industry is a
price seeker.
price maker.
price taker.
price dealer.
Question 47

Figure 6.4
Using Figure 6.4, the perfectly competitive firm should continue to produce in the short-run if the market price is above
P3.
P2.
P1.
P4.
Question 48
A monopoly sells 10 units of output at $10. The MR of the 11th unit is $4.50, then
the price of the 11th unit is $7.25.
the price of the 11th unit is also $10.
the price of the 11th unit is $9.50.
the price of the 11th unit must be greater than $10.
Question 49
The perfectly competitive firm takes its quantity as given by the market, and then selects the profit-maximizing price.
True
False
Question 50
The point of profit maximization for a monopolist is
the point at which marginal revenue equals average total cost.
the point at which total revenue equals total cost.
the point at which average total cost is minimized.
the point at which marginal revenue equals marginal cost