chapter 16 monopolistic competition - notes & tutors 16/monopolistic competition 1403 8....

1402

Chapter 16 Monopolistic Competition

TRUE/FALSE

1. The "competition" in monopolistically competitive markets is most likely a result of having many

sellers in the market.

ANS: T DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Interpretive

2. The "monopoly" in monopolistically competitive markets is most likely a result of firms having

some pricing power due to product differentiation.


3. Monopolistic competition is characterized by many buyers and sellers, product differentiation, and

free entry.

ANS: T DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Definitional

4. Monopolistic competition is characterized by many buyers and sellers, product differentiation, and

barriers to entry.

ANS: F DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Definitional

5. A monopolistically competitive market is characterized by barriers to entry.

ANS: F DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Interpretive

6. Monopolistic competition is the only market structure that features many sellers.

ANS: F DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Markets MSC: Interpretive

7. Product differentiation always leads to some measure of market power.

ANS: T DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Demand curve MSC: Interpretive

Chapter 16/Monopolistic Competition 1403

8. Oligopoly is characterized by a few sellers offering similar products, whereas monopolistic

competition is characterized by many sellers offering differentiated products.


9. Monopolistic competition is characterized by a few sellers offering similar products, whereas

oligopoly is characterized by many sellers offering differentiated products.


10. Oligopoly and monopolistic competition are examples of a market structure called imperfect

competition.


11. Monopolistic competition and monopoly are examples of a market structure called imperfect

competition.


12. A markup of price over marginal cost is inconsistent with free entry and zero profit.

ANS: F DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Interpretive

13. Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price

that exceeds marginal cost.

ANS: T DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Interpretive

14. A profit-maximizing firm in a monopolistically competitive market charges a price equal to

marginal cost.


1404 Chapter 16/Monopolistic Competition

15. A profit-maximizing firm in a monopolistically competitive market always operates on the

downward-sloping portion of its marginal cost curve.

ANS: F DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Analytical

16. For a profit-maximizing firm in a monopolistically competitive market, when price is equal to

average total cost, price must lie above marginal cost.

ANS: T DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Analytical

17. A profit-maximizing firm in a monopolistically competitive market can earn positive, negative, or

zero profits in the short run.

ANS: T DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Interpretive

18. A firm in a monopolistically competitive market can earn both short-run and long-run profits.

ANS: F DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium | Long-run equilibrium MSC: Interpretive

19. A firm in a monopolistically competitive market can earn short-run profits but not long-run profits.

ANS: T DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium | Long-run equilibrium MSC: Interpretive

20. In the long run, monopolistically competitive firms produce where demand equals marginal cost.

ANS: F DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical

21. When a firm in a monopolistically competitive market earns zero economic profit, its product price

must equal marginal cost.

ANS: F DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Interpretive


22. In the long run, monopolistically competitive firms produce where demand equals average total cost.

ANS: T DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical

23. In a monopolistically competitive market, the number of firms adjusts until economic profits are

driven to zero.

ANS: T DIF: 1 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Interpretive

24. When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,

marginal cost must lie below average total cost.

ANS: T DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical

25. In a monopolistically competitive market, the demand curves faced by incumbent firms are

unaffected by the entry of new firms into the market.

ANS: F DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Demand curve | Long-run equilibrium MSC: Interpretive

26. A firm in a monopolistically competitive market is usually indifferent to an additional customer

walking through the door, since a sale to that customer will not increase the firm's profit.


27. The term excess capacity refers to the fact that a firm operates on the upward-sloping portion of its

average-total-cost curve.

ANS: F DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Interpretive

28. The term excess capacity refers to the fact that a firm produces a lower quantity than it would if it

operated at the efficient scale.

ANS: T DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Interpretive


29. Excess capacity characterizes firms in monopolistically competitive markets, even in situations of

long-run equilibrium.

ANS: T DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Interpretive

30. When a firm operates with excess capacity, it must be in a monopolistically competitive market.


31. A firm that would experience higher average total cost by increasing production is operating with

excess capacity.


32. When a firm operates at efficient scale, it is producing at the minimum point on its average total cost

curve.

ANS: T DIF: 1 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Efficient scale MSC: Definitional

33. Defenders of advertising argue that firms use advertising as a signal of quality, even if the

advertising delivers little helpful information about the product.

ANS: T DIF: 1 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Applicative

34. Critics of advertising argue that advertising leads to less elastic demand for products and a larger

markup of price over marginal cost.

ANS: T DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Interpretive

35. The claim that advertising reduces the elasticity of demand is likely to be made by a defender of

advertising.

ANS: F DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Interpretive

36. Critics of advertising argue that firms use advertising to manipulate consumers’ tastes.

ANS: T DIF: 1 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Applicative


37. When advertising is used to relay information about price, each firm is able to enhance market

power.


38. Policymakers have generally come to accept the view that advertising enhances the efficiency of

markets.


39. Economists are unanimous in their belief that advertising is socially inefficient.

ANS: F DIF: 1 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Definitional

40. When McDonald’s opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce product

quality consistent with stores in the United States.


41. The Mikati Philippines Hard Rock Cafe has the exact same menu as the Hard Rock Cafe in New

York. This is an example of a brand name enhancing market efficiency for U.S. tourists visiting the Philippines.


42. Empirical evidence suggests that advertising usually leads to an increase in the price for advertised

products.


43. Economists who argue that advertising enhances market efficiency suggest that celebrity advertising

signals inferior product quality.


44. Advertising during the Super Bowl is an example of information about quality contained primarily

in the existence and expense of the advertising.



45. Brand names are rarely used to convey information about product quality.


46. The government of Italy will not allow any Hard Rock Cafe restaurants to open in Italy. Defenders

of the efficiency of brand-name markets would argue that this has hindered restaurant market efficiency in Italy.


47. The debate over whether advertising serves a valuable purpose in society is definitively answered by

economists who study the tastes and preferences of individuals.


48. If advertising decreases the elasticity of demand for specific brand names of hard liquor, we would

expect firms to be able to charge a larger markup over marginal cost.


49. There is general disagreement among economists about the role of advertising, but there is

widespread agreement about the role of brand names on market efficiency.


50. The government may not be able to improve the inefficiencies of a monopolistically competitive

market.


51. Firms in monopolistically competitive markets and monopolies can earn long-run profits due to

barriers to entry.

ANS: F DIF: 2 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Interpretive

52. Free entry eliminates long-run profits for firms in competitive and monopolistic industries.



SHORT ANSWER

1. List five goods that are likely sold in a monopolistically competitive market.

ANS: Books, CDs, movies, computer games, and piano lessons are some examples.

DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Interpretive

2. Why does a typical monopolistically competitive firm face a downward-sloping demand curve?

ANS: Because its product is different from those offered by other firms.

DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Demand curve MSC: Interpretive

3. In many college towns, private independent bookstores typically locate on the periphery of the

college campus. However, in some college towns, the university has used political power to restrict private bookstores near campus through community zoning laws. Use your knowledge of markets to predict the price and quality of service differences in the market for college textbooks under the two different market regimes.

ANS: In monopoly markets, price will be higher and the quality of service will be lower than in monopolistically competitive markets.

DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Analytical


4. Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm must

operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.

ANS:

Competitive firms do not face downward-sloping demand. The graph shows the firm choosing a level of production in which the intersection of marginal revenue and marginal cost occurs at an output level where average total cost is decreasing. This profit-maximizing output level is less than the efficient scale (minimum of average total cost), and therefore the firm is said to be operating with excess capacity.

DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Analytical


5. In a small college town, four microbreweries have opened in the last two years. Demonstrate the

effect of new market entrants on demand for existing firms (microbreweries) that already served this market. Assume that the local community now places a moratorium on new liquor licenses for microbreweries. How will this moratorium affect the long-run profitability of incumbent firms?

ANS:

The arrival of a new entrant should be graphically depicted by a leftward shift in the demand curves faced by all incumbent firms. If firms are able to make economic profits, these will be able to be maintained in the long run if new entrants are not allowed (which would essentially be a barrier to entry, meaning the market would no longer be characterized as monopolistically competitive).

DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical

6. What is meant by the term "excess capacity" as it relates to monopolistically competitive firms?

ANS: Monopolistically competitive firms produce a level of output lower than the efficient scale of output and are therefore said to have excess capacity.

DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Interpretive


7. Entry of firms in a monopolistically competitive industry is characterized by two externalities. List

them and briefly describe how consumers and existing firms are influenced by them.

ANS: Business-stealing effect: incumbent firms are affected through the loss of sales; consumers are affected by lower price. Product-variety effect: incumbent firms face a market with more substitutes; consumers have more product variety from which to choose.

DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Interpretive

8. Evaluate the following statement in the context of business-stealing and product-variety

externalities: "We have too many student apartments in this town already. Statistics show that vacancy rates average 15 percent during any given semester."

ANS: Business-stealing effect: if new entrants into the market can be profitable, then average vacancy rates are likely to rise above 15 percent. Product-variety effect: if new entrants to the market are able to identify niche markets which are profitable (i.e., offer club rooms, pools, athletic facilities, etc.), then product variety will increase, and average vacancy rates are likely to rise above 15 percent.

DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Interpretive

9. Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce the

effectiveness of markets and decrease the social welfare of society.

ANS: Advertising manipulates people's tastes and is psychological rather than informational. As a result, advertising creates a desire for a product that might not otherwise exist. Advertising may also impede competition by convincing consumers that products that are identical have significant differences.

DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Interpretive

10. Assume the role of a defender of advertising. Describe the characteristics of advertising that enhance

the effectiveness of markets and increase the social welfare of society.

ANS: Advertising provides information to consumers and thus allows consumers to make more informed (and therefore better) choices. Advertising fosters competition by making consumers more aware of prices and product characteristics in a market.



11. Evaluate the following statement: "Advertisements that use celebrity endorsements are devoid of

any value and do not enhance the efficient functioning of markets."

ANS: Some people argue that celebrity endorsements are a signal of quality due to the high cost of the advertisement. If so, then these advertisements relay information about product quality and enhance the effective functioning of markets.


12. Professional organizations (for example, the American Medical Association and the American Bar

Association) have been active advocates for regulation to restrict the right of professionals to advertise. Describe what economic incentives might exist for existing professionals to restrict advertising.

ANS: If advertising increases information about prices and services, then providers of professional services will be required to compete with each other on the basis of price and service. As such, existing professionals will be subject to more competitive pressure in the markets they service, and individual profits are likely to fall.

DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Analytical

13. Discuss how brand names may enhance the efficiency of markets in a less developed country.

ANS: Recognizable brand names signal quality products. In the tourist- and business-services market, this signal can be critical at the early stages of development to ensure visitors have a quality experience when other information is unavailable or unreliable.


14. As developing countries make a transition to market-based economies, one of the first major capital

investments is in "Western-quality" hotels. Explain why brand-name hotel accommodations are a critical step in attracting foreign investment.

ANS: Brand-name hotels are a critical first step to economic development because their recognized signal of quality reduces the barriers of facilitating foreign visitors (and their money).



15. In markets where the government imposes an excise tax on unit sales, it also has a tendency to

dabble with restrictions on advertising (for example, cigarettes and hard liquor). Do potential (or actual) restrictions on advertising in these markets serve the interest of a government that is interested in maximizing its tax revenue from the sale of these products? Explain your answer.

ANS: In the case of the examples given, demand is quite inelastic, so restrictions on advertising are not likely to have a large impact on total sales but may have an impact on the distribution of sales across brand names. As such, government revenue is largely unaffected if the tax is on unit sales.


Sec 00 - Monopolistic Competition

MULTIPLE CHOICE

1. Which of the following is a characteristic of monopolistic competition?

a. ownership of a key resource by a single firm b. free entry c. identical product d. patents

ANS: B DIF: 1 REF: 16-0 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Definitional

2. The market for novels is

a. perfectly competitive. b. a monopoly. c. monopolistically competitive. d. an oligopoly.

ANS: C DIF: 1 REF: 16-0 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Applicative

3. Which of the following statements is not correct?

a. Monopolistic competition is similar to monopoly because in each market structure the firm can charge a price above marginal costs.

b. Monopolistic competition is similar to perfect competition because both market structures are characterized by free entry.

c. Monopolistic competition is similar to oligopoly because both market structures are characterized by barriers to entry.

d. Monopolistic competition is similar to perfect competition because both market structures are characterized by many sellers.

ANS: C DIF: 2 REF: 16-0 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Analytical



a. Monopolistic competition is different from monopoly because monopolistic competition is characterized by free entry, whereas monopoly is characterized by barriers to entry.

b. Both monopolistic competition and oligopoly fall in between the more extreme market structures of competition and monopoly.

c. Monopolistic competition is different from oligopoly because each seller in monopolistic competition is small relative to the market, whereas each seller can affect the actions of other sellers in an oligopoly.

d. Both monopolistic competition and perfect competition are characterized by product differentiation.

ANS: D DIF: 2 REF: 16-0 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Analytical

5. Monopolistic competition is a type of

a. oligopoly. b. market structure. c. price discrimination. d. advertising strategy.


6. A monopolistically competitive market has characteristics that are similar to

a. a monopoly only. b. a competitive firm only. c. both a monopoly and a competitive firm. d. neither a monopoly nor a competitive firm.


Sec01 - Monopolistic Competition - Between Monopoly and Perfect Competition

MULTIPLE CHOICE

1. A typical firm in the U. S. economy would be classified as

a. perfectly competitive. b. imperfectly competitive. c. a duopolist. d. an oligopolist.

ANS: B DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Imperfect competition MSC: Interpretive


2. The typical firm in the U. S. economy

a. has some degree of market power. b. sells its product for a price that is equal to the marginal cost of producing the last unit. c. is perfectly competitive. d. is a monopoly.

ANS: A DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Imperfect competition MSC: Interpretive

3. Which of the following pairs illustrates the two extreme examples of market structures?

a. competition and oligopoly b. competition and monopoly c. monopoly and monopolistic competition d. oligopoly and monopolistic competition

ANS: B DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Imperfect competition MSC: Interpretive

4. The general term for market structures that fall somewhere in-between monopoly and perfect

competition is a. incomplete markets. b. imperfectly competitive markets. c. oligopoly markets. d. monopolistically competitive markets.

ANS: B DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Imperfect competition MSC: Definitional

5. The two types of imperfectly competitive markets are

a. markets with differentiated products and monopoly. b. markets with differentiated products and oligopoly. c. oligopoly and monopoly. d. monopolistic competition and oligopoly.

ANS: D DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Imperfect competition MSC: Interpretive

6. The two types of imperfectly competitive markets are

a. monopoly and monopolistic competition. b. monopoly and oligopoly. c. monopolistic competition and oligopoly. d. monopolistic competition and cartels.

ANS: C DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Imperfect competition MSC: Definitional


7. In a market that is characterized by imperfect competition,

a. firms are price takers. b. there are always a large number of firms. c. there are at least a few firms that compete with one another. d. the actions of one firm in the market never have any impact on the other firms' profits.

ANS: C DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Imperfect competition MSC: Interpretive

8. Firms in industries that have competitors but do not face so much competition that they are price

takers are operating in either a(n) a. oligopoly or perfectly competitive market. b. oligopoly or monopoly market. c. oligopoly or monopolistically competitive market. d. monopoly or monopolistically competitive market.

ANS: C DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Imperfect competition MSC: Interpretive

9. Imperfectly competitive firms are characterized by

a. horizontal demand curves. b. standardized products. c. a large number of small firms. d. price making ability.

ANS: D DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Imperfect competition MSC: Interpretive

10. An oligopoly

a. has a concentration ratio of less than 50 percent. b. is a price taker. c. is a type of imperfectly competitive market. d. has many firms rather than just one firm or a few firms.

ANS: C DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Oligopoly MSC: Interpretive

11. An oligopoly is a market in which

a. there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market.

b. firms are price takers. c. the actions of one seller in the market have no impact on the other sellers' profits. d. there are many price-taking firms, each offering a product similar or identical to the

products offered by other firms in the market.

ANS: A DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Oligopoly MSC: Definitional


12. One characteristic of an oligopoly market structure is:

a. firms in the industry are typically characterized by very diverse product lines. b. firms in the industry have some degree of market power. c. products typically sell at a price equal to their marginal cost of production. d. the actions of one seller have no impact on the profitability of other sellers.

ANS: B DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Oligopoly MSC: Interpretive

13. A market structure with only a few sellers, each offering similar or identical products, is known as

a. oligopoly. b. monopoly. c. monopolistic competition. d. perfect competition.

ANS: A DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Oligopoly MSC: Definitional

14. The commercial jetliner industry consisting of Boeing and Airbus would best be described as a (an)

a. perfectly competitive market. b. monopolistically competitive market. c. oligopoly. d. monopoly.


15. Crude oil is primarily supplied to the world market by a few Middle Eastern countries. Such a

market is an example of a(n) (i) imperfectly competitive market.

(ii) monopoly market. (iii) oligopoly market.

a. (i) and (ii) only b. (ii) and (iii) only c. (i) and (iii) only d. (iii) only


16. A concentration ratio

a. measures the percentage of total output supplied by the four largest firms in the industry. b. reflects the level of competition in an industry. c. is related to the control that each firm has over price. d. All of the above are correct.

ANS: D DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Concentration ratio MSC: Applicative


17. A concentration ratio

a. measures the percentage of total sales of the top firm in the industry. b. reflects the level of competition in an industry. c. is inversely related to the price charged by the top firm in the industry. d. All of the above are correct.

ANS: B DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Concentration ratio MSC: Applicative

18. The higher the concentration ratio, the

a. more control an individual firm has to set prices. b. more competitive the industry. c. less competitive the industry. d. Both a and c are correct.

ANS: D DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Concentration ratio MSC: Interpretive

19. The lower the concentration ratio, the

a. more control an individual firm has to set prices. b. more competitive the industry. c. less competitive the industry. d. Both a and c are correct.

ANS: B DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Concentration ratio MSC: Interpretive

20. Which of the following industries has the highest concentration ratio?

a. wheat b. novels c. cigarettes d. dog food

ANS: C DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Concentration ratio MSC: Applicative


Table 16-1

The following table shows the percentage of output supplied by the top eight firms in four different industries.

Firm Industry A Industry B Industry C Industry D

1 0.24 0.46 0.10 0.32

2 0.13 0.24 0.08 0.16

3 0.10 0.10 0.06 0.08

4 0.08 0.05 0.05 0.04

5 0.05 0.04 0.04 0.02

6 0.03 0.03 0.03 0.01

7 0.02 0.02 0.02 0.01

8 0.01 0.01 0.01 0.01

21. Refer to Table 16-1. What is the concentration ratio in Industry A?

a. 24% b. 55% c. 66% d. 82%


22. Refer to Table 16-1. What is the concentration ratio in Industry B?

a. 5% b. 46% c. 85% d. 95%


23. Refer to Table 16-1. What is the concentration ratio in Industry C?

a. 29% b. 39% c. 45% d. 56%

ANS: A DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Concentration ratio MSC: Applicative


24. Refer to Table 16-1. What is the concentration ratio in Industry D?

a. 32% b. 56% c. 60% d. 65%


25. Refer to Table 16-1. Which industry has the highest concentration ratio?

a. Industry A b. Industry B c. Industry C d. Industry D


26. Refer to Table 16-1. Which industry is the least competitive?



27. Refer to Table 16-1. Which industry has the lowest concentration ratio?



28. Refer to Table 16-1. Which industry is the most competitive?




Table 16-2 The following table shows the total output produced by the top six firms as well as the total industry output for each industry.

Firm Industry A Industry B Industry C Industry D

1 13,250 8,750 1,750 15,000

2 10,975 7,500 1,725 14,000

3 8,175 6,400 1,700 13,000

4 4,275 5,000 1,675 12,000

5 1,250 4,250 1,650 11,000

6 875 4,000 1,625 10,000

Total 45,350 70,900 30,125 120,000

29. Refer to Table 16-2. What is the concentration ratio for Industry A?

a. about 71% b. about 81% c. about 88% d. 100%


30. Refer to Table 16-2. What is the concentration ratio for Industry B?

a. about 12% b. about 32% c. about 39% d. about 51%


31. Refer to Table 16-2. What is the concentration ratio for Industry C?




32. Refer to Table 16-2. What is the concentration ratio for Industry D?



33. Refer to Table 16-2. Which industry has the highest concentration ratio?



34. Refer to Table 16-2. Which industry is the least competitive?



35. Refer to Table 16-2. Which industry has the lowest concentration ratio?



36. Refer to Table 16-2. Which industry is the most competitive?




37. One key difference between an oligopoly market and a competitive market is that oligopolistic firms

a. are price takers while competitive firms are not. b. can affect the profit of other firms in the market by the choices they make while firms in

competitive markets do not affect each other by the choices they make. c. sell completely unrelated products while competitive firms do not. d. sell their product at a price equal to marginal cost while competitive firms do not.

ANS: B DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Oligopoly MSC: Interpretive

38. One way in which monopolistic competition differs from oligopoly is that

a. there are no barriers to entry in oligopolies. b. in oligopoly markets there are only a few sellers. c. all firms in an oligopoly eventually earn zero economic profits. d. strategic interactions between firms are rare in oligopolies.

ANS: B DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Oligopoly MSC: Interpretive

39. Which of the following is an example of a monopolistically competitive industry?

a. computer operating systems b. tennis balls c. movies d. cable television


40. Which of the following is an example of a monopolistically competitive industry?

a. computer operating systems b. tennis balls c. restaurants in New York City d. cable television


41. Which of the following goods are likely to be sold in a monopolistically competitive market?

a. compact discs b. wheat c. corn d. postage stamps

ANS: A DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Applicative


42. Which of the following goods are not likely to be sold in monopolistically competitive markets?

a. compact discs b. books c. cookies d. wheat

ANS: D DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Applicative

43. Examples of monopolistically competitive markets include the markets for

a. restaurants and furniture. b. wheat and corn. c. postage stamps and wooden pencils. d. All of the above are correct.

ANS: A DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Applicative

44. Which of the following markets is not likely characterized by a monopolistically competitive

market? a. piano lessons b. corn c. cookies d. clothing

ANS: B DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Applicative

45. A monopolistically competitive industry is characterized by

a. many firms selling products that are similar but not identical. b. many firms selling identical products. c. a few firms selling products that are similar but not identical. d. a few firms selling highly different products.

ANS: A DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Definitional

46. A monopolistically competitive industry is characterized by

a. many firms, differentiated products, and barriers to entry. b. many firms, differentiated products, and free entry. c. a few firms, identical products, and free entry. d. a few firms, differentiated products, and barriers to entry.



47. A market structure in which there are many firms selling products that are similar but not identical is

known as a. oligopoly. b. monopoly. c. monopolistic competition. d. perfect competition.

ANS: C DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Definitional

48. What do economists call a market structure in which there are many firms selling products that are

similar but not identical? a. perfect competition b. monopoly c. monopolistic competition d. oligopoly


49. Which of the following is not a characteristic of monopolistic competition?

a. a large number of sellers b. firms are price takers c. free entry into the market d. a differentiated product


50. Monopolistic competition is characterized by which of the following attributes?

(i) free entry (ii) product differentiation

(iii) many sellers

a. (i) and (iii) only b. (i) and (ii) only c. (ii) and (iii) only d. (i), (ii), and (iii)

ANS: D DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Definitional


51. In a monopolistically competitive market,

a. there are only a few sellers. b. each firm takes the price of its product as given. c. firms can enter or exit the market without restrictions. d. each firm produces a product that is essentially identical to the products of other firms in

the market.


52. A monopolistically competitive market

a. has some features of monopoly and some features of competition. b. has one large, dominant firm and many other smaller firms. c. is difficult to enter. d. occurs whenever firms earn zero economic profit.

ANS: A DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Definitional

53. Select the type of market that is described by the following attributes: many firms, differentiated

products, and free entry. a. natural monopoly b. perfectly competition c. monopolistic competition d. monopoly


54. If firms in a particular market sell identical products, then the market is

(i) perfectly competitive. (ii) monopolistically competitive.

(iii) an oligopoly.

a. (i) or (ii) only b. (ii) or (iii) only c. (i) or (iii) only d. (i) only

ANS: D DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Perfect competition MSC: Interpretive


55. When an industry has many firms, the industry is

a. an oligopoly if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products.

b. an oligopoly if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products.

c. monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products.

d. perfectly competitive if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products.

ANS: C DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Perfect competition MSC: Interpretive

56. If there are many firms participating in a market, the market is either

a. an oligopoly or monopolistically competitive. b. perfectly competitive or monopolistically competitive. c. an oligopoly or perfectly competitive. d. an oligopoly or a cartel.

ANS: B DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Perfect competition MSC: Interpretive

57. Which of the following statements is correct?

a. Monopolistic competition is similar to monopoly because both market structures are characterized by patents.

b. Monopolistic competition is similar to perfect competition because both market structures are characterized by each seller being small compared to the market.

c. Monopolistic competition is similar to oligopoly because both market structures are characterized by free entry.

d. Monopolistic competition is similar to perfect competition because both market structures are characterized by excess capacity.

ANS: B DIF: 3 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Perfect competition MSC: Analytical

58. In which of the following market structures is(are) there a large number of sellers?

(i) monopolistic competition (ii) perfect competition

(iii) oligopoly

a. (i) and (ii) only b. (ii) and (iii) only c. (ii) only d. (i), (ii), and (iii)

ANS: A DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Perfect competition MSC: Definitional


59. Monopolistic competition differs from perfect competition because in monopolistically competitive

markets a. there are barriers to entry. b. all firms can eventually earn economic profits. c. each of the sellers offers a somewhat different product. d. strategic interactions between firms are important.


60. Monopolistically competitive markets differ from perfectly competitive markets due to

(i) the number of sellers. (ii) the barriers to entry.

(iii) the product differentiation among the sellers.

a. (i) only b. (iii) only c. (i) and (iii) only d. (ii) and (iii) only

ANS: B DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Perfect competition MSC: Interpretive

61. In both perfect competition and monopolistic competition, each firm

a. has some monopoly power. b. sells a product that is at least slightly different from those of other firms. c. faces a downward-sloping demand curve. d. has many competitors.

ANS: D DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Perfect competition MSC: Definitional

62. Which of the following conditions distinguishes monopolistic competition from perfect

competition? a. the number of sellers in the market b. the freedom of entry and exit by firms in the market c. the size of firms in the market d. product differentiation

ANS: D DIF: 1 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Perfect competition MSC: Interpretive


63. A similarity between monopoly and monopolistic competition is that in both market structures

a. strategic interactions among sellers are important. b. there are a small number of sellers. c. sellers are price makers rather than price takers. d. there are only a few buyers but many sellers.

ANS: C DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Monopoly MSC: Interpretive


a. Cigarettes are likely to be produced in a monopolistically competitive industry. b. Novels are likely to be produced in a monopoly industry. c. Movies are likely to be produced in a monopolistically competitive industry. d. Milk is likely to be produced in an oligopoly industry.

ANS: C DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Interpretive


a. Novels are likely to be produced in a monopolistically competitive industry. b. Cable television is likely to be produced in a monopoly industry. c. Milk is likely to be produced in a monopolistically competitive industry. d. Cigarettes are likely to be produced in an oligopoly industry.


Sec02 - Monopolistic Competition - Competition with Differentiated Products

MULTIPLE CHOICE

1. A downward-sloping demand curve

a. is a feature of all monopolistically competitive firms. b. means that the firm in question will never experience a zero profit. c. causes marginal revenue to exceed price. d. prohibits firms from earning positive economic profits in the long run.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Demand curve MSC: Interpretive


2. Each firm in a monopolistically competitive firm faces a downward-sloping demand curve because

a. there are many other sellers in the market. b. there are very few other sellers in the market. c. the firm's product is different from those offered by other firms in the market. d. that firm faces the threat of entry into the market by new firms.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Demand curve MSC: Interpretive

3. For a monopolistically competitive firm,

a. marginal revenue and price are the same. b. average revenue and price are the same. c. at the profit-maximizing quantity of output, price equals marginal cost. d. at the profit-maximizing quantity of output, price equals the minimum of average total

cost.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Demand curve MSC: Interpretive

4. For a monopolistically competitive firm, at the profit-maximizing quantity of output,

a. price exceeds marginal cost. b. marginal revenue exceeds marginal cost. c. marginal cost exceeds average revenue. d. price equals marginal revenue.


5. Product differentiation causes the seller of a good to face what type of demand curve?

a. downward sloping b. vertical c. horizontal d. Any of the above could be correct since product differentiation does not affect the shape of

the demand curve.


6. A firm in a monopolistically competitive market faces a

a. downward-sloping demand curve because the firm’s product is different from those offered by other firms.

b. downward-sloping demand curve because there are only a few firms in the market. c. horizontal demand curve because there are many firms in the market. d. horizontal demand curve because firms can enter the market without restriction.

ANS: A DIF: 1 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Demand curve MSC: Interpretive


7. In the short run, a firm in a monopolistically competitive market operates much like a

a. firm in a perfectly competitive market. b. firm in an oligopoly. c. monopolist. d. monopsonist.


8. Each firm in a monopolistically competitive market

a. earns both short-run and long-run profits. b. faces a downward-sloping demand curve. c. cannot earn economic profit in the short run. d. sets price equal to marginal cost.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Demand curve MSC: Interpretive

9. In a monopolistically competitive industry, firms set price

a. equal to marginal cost since each firm is a price taker. b. below marginal cost since each firm is a price taker. c. above marginal cost since each firm is a price setter. d. always a fraction of marginal cost since each firm is a price setter.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Demand curve MSC: Interpretive

10. A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly

competitive market because the firm in the monopolistically competitive market a. is characterized by market-share maximization. b. has no barriers to entry. c. faces a downward-sloping demand curve for its product. d. faces a horizontal demand curve at the market clearing price.


11. A monopolistically competitive firm chooses

a. the quantity of output to produce, but the market determines price. b. the price, but competition in the market determines the quantity. c. price, but output is determined by a cartel production quota. d. the quantity of output to produce and the price at which it will sell its output.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Demand curve MSC: Interpretive


12. Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing

firms, a. marginal revenue will equal average total cost. b. price will exceed marginal cost. c. marginal cost will exceed average revenue. d. average variable cost will be declining.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Demand curve MSC: Interpretive

13. In a monopolistically competitive industry, a firm’s demand curve also represent its

a. marginal revenue. b. marginal cost. c. average revenue. d. profit.

ANS: C DIF: 1 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Demand curve MSC: Definitional

14. A firm in a monopolistically competitive market is similar to a monopoly in the sense that

(i) they both face downward-sloping demand curves. (ii) they both charge a price that exceeds marginal cost.

(iii) free entry and exit determines the long-run equilibrium.

a. (i) only b. (ii) only c. (i) and (ii) only d. (i), (ii), and (iii) only


15. A monopolistically competitive firm's choice of output level is virtually identical to the choice made

by a. a perfectly competitive firm. b. a duopolist. c. a monopolist. d. an oligopolist.



16. To maximize its profit, a monopolistically competitive firm

a. takes the price as given and chooses its quantity, just as a competitive firm does. b. takes the price as given and chooses its quantity, just as a colluding oligopolist does. c. chooses its quantity and price, just as a competitive firm does. d. chooses its quantity and price, just as a monopoly does.


17. Because monopolistically competitive firms produce differentiated products, each firm

a. faces a demand curve that is horizontal. b. faces a demand curve that is vertical. c. has no control over product price. d. has some control over product price.


18. A monopolistically competitive firm chooses its

a. price and quantity just as a monopoly does. b. quantity but faces a horizontal demand curve just as a competitive firm does. c. price but can sell any quantity at the market price just as an oligopoly does. d. price and quantity based on the decisions of the other firms in the industry just as an

oligopoly does.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization | Demand curve MSC: Interpretive

19. When a monopolistically competitive firm raises its price,

a. quantity demanded falls to zero. b. quantity demanded declines but not to zero. c. the market supply curve shifts outward. d. quantity demanded remains constant.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Analytical

20. A monopolistically competitive firm chooses the quantity to produce where

a. price equals marginal cost. b. demand equals marginal cost. c. marginal revenue equals marginal cost. d. Both a and c are correct.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Interpretive


21. The profit-maximizing rule for a firm in a monopolistically competitive market is to always select

the quantity at which a. marginal revenue is equal to marginal cost. b. average total cost is equal to marginal revenue. c. average total cost is equal to price. d. average revenue exceeds average total cost.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Interpretive

22. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the

following? a. average revenue exceeds marginal revenue b. marginal revenue exceeds average revenue c. average revenue is equal to marginal revenue d. revenue is always maximized along with profit



following? a. average revenue exceeds marginal revenue b. marginal revenue equals marginal cost c. price exceeds marginal cost d. All of the above are correct.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Interpretive


following? a. marginal cost exceeds marginal revenue b. average revenue equals marginal cost c. price exceeds marginal cost d. All of the above are correct.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Interpretive


25. To maximize its profit, a monopolistically competitive firm chooses its level of output by looking

for the level of output at which a. price equals marginal cost. b. marginal revenue equals marginal cost. c. average total cost is minimized. d. All of the above are correct.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Interpretive

26. A monopolistically competitive firm faces the following demand schedule for its product:

Price ($) 10 9 8 7 6 5 4 3 2 1

Quantity 2 4 6 9 11 13 15 17 19 21

The firm has total fixed costs of $20 and a constant marginal cost of $2 per unit. The firm will maximize profit with

a. 6 units of output. b. 9 units of output. c. 11 units of output. d. 13 units of output.

ANS: B DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Applicative

27. A monopolistically competitive firm faces the following demand curve for its product:

Price ($) 10 9 8 7 6 5 4 3 2 1

Quantity 2 4 6 8 10 12 14 16 18 20

The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit. The firm will maximize profit with the production of


ANS: A DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Applicative


28. A monopolistically competitive firm has the following cost structure:

Output 1 2 3 4 5 6 7

Total Cost($) 30 32 36 42 50 63 77

The firm faces the following demand curve:

Price ($) 20 18 15 12 9 7 4

Quantity 1 2 3 4 5 6 7

To maximize profit (or minimize losses), the firm will produce

a. 2 units. b. 3 units. c. 4 units. d. 5 units.


29. A monopolistically competitive firm is currently producing 10 units of output. At this level of output

the firm is charging a price equal to $10, has marginal revenue equal to $6, has marginal cost equal to $6, and has average total cost equal to $12. From this information we can infer that a. the firm is currently maximizing its profit. b. the profits of the firm are negative. c. firms are likely to leave this market in the long run. d. All of the above are correct.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Analytical

30. If "too much choice" is a problem for consumers, it would occur in which market structure(s)?

a. perfect competition b. monopoly c. monopolistic competition d. perfect competition and monopolistic competition


31. In the short run, a firm operating in a monopolistically competitive market can earn

a. positive economic profits. b. economic losses. c. zero economic profits. d. All of the above are possible.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Interpretive


32. In the short run, a firm operating in a monopolistically competitive market

a. produces an output level where marginal revenue equals average total cost. b. maximizes revenues as well as profits. c. can earn zero economic profits. d. sets price equal to marginal cost.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Interpretive

33. In the short run, a firm operating in a monopolistically competitive market

a. produces an output level where marginal revenue equals average total cost. b. sets price equal to demand where marginal revenue equals marginal cost. c. must earn zero economic profits. d. maximizes revenues as well as profits.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Interpretive

34. When a profit-maximizing firm in a monopolistically competitive market charges a price higher than

marginal cost, a. the firm must be earning a positive economic profit. b. the firm may be incurring economic losses c. there is a deadweight loss to society, but it is exactly offset by the benefit of excess

capacity. d. new firms will enter the market in the long run.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Analytical

35. Which of the following conditions is characteristic of a monopolistically competitive firm in short-

run equilibrium? a. P = AR b. MR = MC c. P > MC d. All of the above are correct.

ANS: D DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Analytical



run equilibrium? a. P > AR b. MR > MC c. P > MC d. All of the above are correct.

ANS: C DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Analytical


run equilibrium? a. P > ATC b. P = ATC c. P < ATC d. Any of the above could be correct.

ANS: D DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Analytical

38. Which of the following conditions is characteristic of a monopolistically competitive firm in both

the short-run and the long run? a. P > MC b. MC = ATC c. P < MR d. All of the above are correct.

ANS: A DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium | Long-run equilibrium MSC: Analytical

39. For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost in

a. the short run but not in the long run. b. the long run but not in the short run. c. both the short run and the long run. d. neither the short run nor the long run.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium | Long-run equilibrium MSC: Interpretive


40. For a profit-maximizing monopolistically competitive firm, marginal revenue equals marginal cost

in a. the short run but not in the long run. b. the long run but not in the short run. c. both the short run and the long run. d. neither the short run nor the long run.


41. A firm operating in a monopolistically competitive market can earn economic profits in

a. the short run but not in the long run. b. the long run but not in the short run. c. both the short run and the long run. d. neither the short run nor the long run.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium | Long-run equilibrium MSC: Interpretive

42. When a market is monopolistically competitive, the typical firm in the market is likely to experience

a a. positive profit in the short run and in the long run. b. positive or negative profit in the short run and a zero profit in the long run. c. zero profit in the short run and a positive or negative profit in the long run. d. zero profit in the short run and in the long run.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium | Long-run equilibrium MSC: Analytical

43. When a market is monopolistically competitive, the typical firm in the market can earn

a. losses in the short run and profits in the long run. b. profits in the short run and the long run. c. losses in the short run and zero profit in the long run. d. zero profit in the short run and losses in the long run.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium | Long-run equilibrium MSC: Analytical


44. An important difference between the situation faced by a profit-maximizing monopolistically

competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run, a. price may exceed marginal revenue, but in the long run, price equals marginal revenue. b. price may exceed marginal cost, but in the long run, price equals marginal cost. c. price may exceed average total cost, but in the long run, price equals average total cost. d. there are many firms in the market, but in the long run, there are only a few firms in the

market.


Figure 16-1. The figure is drawn for a monopolistically competitive firm.

MR

Demand

MC

18

12

4 8 12 16 20 24 28 32 Q

8

16

24

32P

45. Refer to Figure 16-1. The firm’s profit-maximizing level of output is



46. Refer to Figure 16-1. In order to maximize profit, the firm will charge a price of

a. $8. b. $12. c. $16. d. $18.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Applicative


47. Refer to Figure 16-1. Suppose that average total cost is $18 when Q=12. What is the profit-

maximizing price and resulting profit? a. P=$12, profit=$0 b. P=$18, profit=$72 c. P=$18, profit=$24 d. P=$18, profit=$0


48. Refer to Figure 16-1. If the average total cost is $15 at the profit-maximizing quantity, then the

firm’s maximum profit is a. $18. b. $24. c. $36. d. $45.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Applicative

49. Refer to Figure 16-1. If the average variable cost is $12 at the profit-maximizing quantity, and if

the firm’s fixed costs amount to $30, then the firm’s maximum profit is a. $-30. b. $22. c. $36. d. $42.


50. Refer to Figure 16-1. If the average variable cost is $13 at the profit-maximizing quantity, and if

the firm’s profit is $20 at that quantity, then its fixed costs amount to a. $12. b. $22. c. $40. d. $60.



51. Refer to Figure 16-1. Suppose ATC = $18 when Q = 12. Then the

a. firm is in a long-run equilibrium when it produces 12 units of output. b. firm is in a long-run equilibrium when it produces 16 units of output. c. best the firm can do is sustain a loss of $24. d. best the firm can do is earn a profit of $48.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Applicative

52. Refer to Figure 16-1. Suppose you were to add the ATC curve to the diagram to show the firm in a

situation of long-run equilibrium. You would draw the ATC curve a. with its minimum at the point (Q = 12, P = $18). b. with its minimum at the point (Q = 12, P = $12). c. tangent to the demand curve at the point (Q = 12, P = $18). d. tangent to the demand curve at the point (Q = 16, P = $16).

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Applicative


Figure 16-2 This figure depicts a situation in a monopolistically competitive market.

53. Refer to Figure 16-2. What price will the monopolistically competitive firm charge in this market?

a. $60 b. $70 c. $75 d. $80


54. Refer to Figure 16-2. What is the profit-maximizing price, quantity, and resulting profit?

a. P=$60, Q=20 units, profit=$200 b. P=$80, Q=20 units, profit=$200 c. P=$75, Q=25 units, profit=$100 d. P=$60, Q=40 units, profit=$0

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Analytical


55. Refer to Figure 16-2. How much consumer surplus will be derived from the purchase of this

product at the monopolistically competitive price? a. $200 b. $312.50 c. $400 d. $800

ANS: A DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Analytical

56. Refer to Figure 16-2. How much profit will the monopolistically competitive firm earn in this

situation? a. a $10 profit b. a $200 profit c. a $400 profit d. No profit, since monopolistically competitive firms never earn economic profit.


57. Refer to Figure 16-2. How much output will the monopolistically competitive firm produce in this

situation? a. 20 units b. 25 units c. 40 units d. 80 units



Figure 16-3

MRD

MC

ATC

5 10 15 20 25 30 35 40 Quantity

100

200

300

400

500

600

700

800

900

1000$

58. Refer to Figure 16-3. The firm in this figure is monopolistically competitive. It illustrates

a. the shut-down case. b. a long-run economic profit. c. a short-run economic profit. d. a short-run loss.


59. Refer to Figure 16-3. At the profit-maximizing, or loss-minimizing, output level, the firm in this

figure has total costs of approximately a. $2,000. b. $3,000. c. $4,000. d. $5,000.


60. Refer to Figure 16-3. Assume the firm in the figure is currently producing 8 units of output and

charging $400. The firm a. will increase its profits if it raises its price and reduces its production level. b. will increase its profits if it lowers its price and expands its production level. c. is maximizing profits. d. will increase its profits if it raises its prices and expands its production level.



61. Refer to Figure 16-3. The maximum total short-run economic profit for the monopolistically

competitive firm in this figure is a. $1,000. b. $2,000. c. $3,000. d. $5,000.


Figure 16-4

62. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage the

entry of other firms into a monopolistically competitive industry? a. panel a b. panel b c. panel c d. panel d

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Interpretive


63. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage the

exit of some firms from a monopolistically competitive industry? a. panel a b. panel b c. panel c d. panel d

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Interpretive

64. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will not encourage

either the entry or exit of firms in a monopolistically competitive industry? a. panel a b. panel b c. panel c d. panel d

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibrium MSC: Interpretive

65. Refer to Figure 16-4. Panel a shows a profit-maximizing monopolistically competitive firm that is

a. earning zero economic profit. b. likely to exit the market in the long run. c. producing its efficient scale of output. d. not maximizing its profit.


66. Refer to Figure 16-4. Which of the panels depicts a firm in a monopolistically competitive market

earning positive economic profits? a. panel a b. panel b c. panel c d. panel d



67. Refer to Figure 16-4. Panel b is consistent with a firm in a monopolistically competitive market

that is a. not in long-run equilibrium. b. in long-run equilibrium. c. producing its efficient scale of output. d. earning a positive economic profit.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Interpretive

68. Refer to Figure 16-4. Which of the panels shown could illustrate the short-run situation for a

monopolistically competitive firm? a. panel a b. panel b c. panel c d. All of the above are correct.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Interpretive


Figure 16-5

69. Refer to Figure 16-5. Which of the graphs shown would be consistent with a firm in a

monopolistically competitive market that is earning a positive profit? a. panel a b. panel b c. panel c d. panel d


70. Refer to Figure 16-5. Which of the graphs shown would be consistent with a firm in a

monopolistically competitive market that is doing its best but still losing money? a. panel a b. panel b c. panel c d. panel d

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Interpretive


71. Refer to Figure 16-5. Which of the graphs depicts a monopolistically competitive firm in long-run

equilibrium? a. panel a b. panel b c. panel c d. None of the above is correct.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Interpretive

Figure 16-6

72. Refer to Figure 16-6. Which of the graphs depicts the situation for a profit-maximizing firm in a

monopolistically competitive market? a. panel a b. panel b c. panel c d. panel d

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Interpretive


73. Refer to Figure 16-6. Suppose a firm is operating in the situation depicted in panel a. Which of the

following statements is correct? a. The firm is earning positive short-run profits. b. The firm is earning negative short-run profits. c. The firm is earning zero short-run profits. d. We cannot determine profits because we do not know the firm’s average total costs.


74. Refer to Figure 16-6. If a firm in a monopolistically competitive market was producing the level of

output depicted as Qd in panel (d), it would a. not be maximizing its profit. b. be minimizing its losses. c. be losing market share to other firms in the market. d. be operating at excess capacity.


75. Refer to Figure 16-6. The firm depicted in panel b faces a horizontal demand curve. If panel b

depicts a profit-maximizing firm, a. it could be operating in either a perfectly competitive market or in a monopolistically

competitive market. b. it would not have excess capacity in its production as long as it is earning zero economic

profit. c. it is able to choose the price at which it sells its product. d. the firm can always raise its profit by increasing production since consumers will buy as

much as the firm can produce.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Interpretive

76. In which of the following markets is economic profit driven to zero in the long run?

a. oligopoly b. monopoly c. monopolistic competition d. cartels

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Interpretive


77. Which of the following conditions is characteristic of a monopolistically competitive firm in long-

run equilibrium? a. P > demand and P = MR b. ATC > demand and MR = MC c. P > MC and demand = ATC d. P < ATC and demand > MR

ANS: C DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical

78. Which of the following conditions is characteristic of a monopolistically competitive firm in long-

run equilibrium? a. P > MR and P = MC b. ATC = demand and MR = MC c. P < MC and demand = ATC d. P > ATC and demand > MR

ANS: B DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical

79. A monopolistically competitive firm

a. charges a price that is equal to marginal cost. b. experiences a zero profit in the long run. c. produces at the efficient scale in the long run. d. All of the above are correct.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Interpretive


a. entry by new firms is impeded by barriers to entry; thus, the number of firms in the market is never ideal.

b. entry by new firms is impeded by barriers to entry, but the number of firms in the market is nevertheless always ideal.

c. free entry ensures that the number of firms in the market is ideal. d. there may be too few or too many firms in the market, despite free entry.



81. In which of the following market structures does free entry and exit play an important role in the

long-run equilibrium outcome? (i) perfect competition

(ii) monopolistic competition (iii) monopoly

a. (i) only b. (i) and (ii) only c. (ii) and (iii) only d. (i), (ii), and (iii)


82. If firms in a monopolistically competitive market are earning positive profits, then

a. firms will likely be subject to regulation. b. barriers to entry will be strengthened. c. some firms will exit the market. d. new firms will enter the market.


83. If firms in a monopolistically competitive market are earning economic profits, which of the

following scenarios would best describe the change existing firms would face as the market adjusts to the long-run equilibrium? a. an increase in demand for each firm b. a decrease in demand for each firm c. a downward shift in the marginal cost curve for each firm d. an upward shift in the marginal cost curve for each firm


84. If firms in a monopolistically competitive market are incurring economic losses, which of the

following scenarios would best describe the change existing firms (who are able to stay in the market) would face as the market adjusts to the long-run equilibrium? a. a downward shift in the marginal cost curve for each firm b. an upward shift in the marginal cost curve for each firm c. a decrease in demand for each firm d. an increase in demand for each firm



85. In monopolistically competitive markets, positive economic profits

a. suggest that some existing firms will exit the market. b. suggest that new firms will enter the market. c. are sustained through government-imposed barriers to entry. d. are never possible.


86. In monopolistically competitive markets, economic losses

a. suggest that some existing firms will exit the market. b. suggest that new firms will enter the market. c. are minimized through government-imposed barriers to entry. d. are never possible.


87. As new firms enter a monopolistically competitive market, profits of existing firms

a. rise, and product diversity in the market increases. b. rise, and product diversity in the market decreases. c. decline, and product diversity in the market increases. d. decline, and product diversity in the market decreases.


88. As firms exit a monopolistically competitive market, profits of remaining firms

a. decline, and product diversity in the market decreases. b. decline, and product diversity in the market increases. c. rise, and product diversity in the market decreases. d. rise, and product diversity in the market increases.


89. The free entry and exit of firms in a monopolistically competitive market guarantees that

a. both economic profits and economic losses can persist in the long run. b. both economic profits and economic losses disappear in the long run. c. economic profits, but not economic losses, can persist in the long run. d. economic losses, but not economic profits, can persist in the long run.



90. In monopolistically competitive markets, free entry and exit suggests that

a. the market structure will eventually be characterized by perfect competition in the long run.

b. all firms earn zero economic profits in the long run. c. some firms will be able to earn economic profits in the long run. d. some firms will be forced to incur economic losses in the long run.


91. When a profit-maximizing firm in a monopolistically competitive market is producing the long-run

equilibrium quantity, a. its average revenue will equal its marginal cost. b. its marginal revenue will exceed its marginal cost. c. it will be earning positive economic profits. d. its demand curve will be tangent to its average-total-cost curve.


92. When a firm's demand curve is tangent to its average total cost curve, the

a. firm's economic profit is zero. b. firm must be earning economic profits. c. firm must be incurring economic losses. d. firm must be operating at its efficient scale.


93. When a firm's demand curve is tangent to its average total cost curve, the

a. firm's economic profit is zero. b. firm may be earning economic profits. c. firm must be operating at its efficient scale. d. Both a and c are correct.


94. When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,

a. the demand curve will be perfectly elastic. b. price exceeds marginal cost. c. marginal cost must be falling. d. marginal revenue exceeds marginal cost.



95. A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run

equilibrium has a. minimized average total cost. b. chosen to produce where demand is unitary elastic. c. produced the efficient scale of output. d. chosen a quantity of output where average revenue equals average total cost.


96. In a long-run equilibrium, a firm in a monopolistically competitive market operates

a. where marginal revenue is zero. b. where marginal revenue is negative. c. on the rising portion of its average total cost curve. d. on the declining portion of its average total cost curve.


97. When a new firm enters a monopolistically competitive market, the individual demand curves faced

by all existing firms in that market will a. shift to the left. b. shift to the right. c. shift in a direction that is unpredictable without further information. d. remain unchanged. It is the supply curve that will shift.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Demand curve | Long-run equilibrium MSC: Analytical

98. When a firm exits a monopolistically competitive market, the individual demand curves faced by all

remaining firms in that market will a. shift in a direction that is unpredictable without further information. b. shift to the right. c. shift to the left. d. remain unchanged. It is the supply curve that will shift.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Demand curve | Long-run equilibrium MSC: Analytical


99. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due

to a(n) a. change in the technology that the firm utilizes. b. shift of its demand curve. c. shift of its supply curve. d. increase in the firm’s average cost of production.


100. Because a monopolistically competitive firm has some market power, in the long-run the price of its

product exceeds its a. average revenue. b. average total cost. c. marginal cost. d. profit per unit.


101. New firms will likely enter a monopolistically competitive market when price exceeds

a. marginal revenue. b. average revenue. c. marginal cost. d. average total cost.


102. Which two curves are tangent to each other in a monopolistically competitive market with zero

economic profit? a. demand and average variable cost b. demand and average total cost c. marginal revenue and average variable cost d. marginal revenue and average total cost



a. strategic interactions among the firms are very important. b. the threat of entry by new firms is not an important consideration. c. the attainment of a Nash equilibrium is an important objective. d. firms may enter even though they will earn zero economic profit in the long run.



104. Among the following situations, which one is least likely to apply to a monopolistically competitive

firm? a. profit is positive in the short run b. total cost exceeds total revenue in the short run c. profit is positive in the long run d. total revenue equals total cost in the long run


105. Suppose that monopolistically competitive firms in a certain market are earning positive profits. In

the transition from this initial situation to a long-run equilibrium, a. the number of firms in the market decreases. b. each existing firm experiences a decrease in demand for its product. c. each existing firm experiences a rightward shift of its marginal revenue curve. d. each existing firm experiences an upward shift in its average total cost curve.


106. Suppose that monopolistically competitive firms in a certain market are experiencing losses. In the

transition from this initial situation to a long-run equilibrium, a. the number of firms in the market decreases. b. each existing firm experiences a decrease in demand for its product. c. each firm experiences an upward shift of its marginal cost and average total cost curves. d. each existing firm’s average total cost falls to bring economic profit back to zero.


107. When a monopolistically competitive firm is in long-run equilibrium,

a. marginal revenue is equal to marginal cost. b. price is equal to average total cost. c. demand is equal to average total cost. d. All of the above are correct.


108. When a monopolistically competitive firm is in long-run equilibrium,

a. price is equal to average total cost. b. price is equal to marginal cost. c. price is equal to marginal revenue. d. the firm operates at its efficient scale.



109. Which of these types of firms can earn a positive economic profit in the long run?

a. monopolies, but not competitive firms or monopolistically competitive firms b. monopolies and monopolistically competitive firms, but not competitive firms c. monopolies, monopolistically competitive firms, and monopolies d. No firms earn positive economic profit in the long run. Entry will reduce all firms’

economic profit to zero in the long run.


110. "In a long-run equilibrium, price is equal to average total cost." This statement applies to

a. competitive markets, but not to monopolistically competitive markets or monopolies. b. competitive and monopolistically competitive markets, but not to monopolies. c. competitive markets, monopolistically competitive markets, and monopolies. d. None of the above is correct.


111. Entry and exit drive each firm in a monopolistically competitive market to a point of tangency

between its a. marginal revenue curve and its total cost curve. b. marginal revenue curve and its average total cost curve. c. demand curve and its total cost curve. d. demand curve and its average total cost curve.


112. Suppose the point of tangency that characterizes long-run equilibrium for a monopolistically

competitive firm occurs at Q1 units of output. This level of output, Q1, a. exceeds the level of output at which marginal revenue equals marginal cost. b. exceeds the level of output at which marginal cost equals average total cost. c. falls short of the level of output at which price equals marginal cost. d. exceeds the firm’s efficient scale of output.



113. Suppose for some firm that average total cost is minimized at Q1 units of output. For a

monopolistically competitive firm in long-run equilibrium, Q1

a. is also the level of output at which marginal cost equals average total cost. b. exceeds the level of output at which there is a point of tangency between the demand

curve and the average total cost curve. c. exceeds the level of output at which marginal revenue equals marginal cost. d. All of the above are correct.

ANS: D DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical

114. In a long-run equilibrium,

a. only a perfectly competitive firm operates at its efficient scale. b. only a monopolistically competitive firm operates at its efficient scale. c. neither a competitive firm nor a monopolistically competitive firm charges a markup over

marginal cost. d. both a perfectly competitive firm and a monopolistically competitive firm operate at their

efficient scale of production.


115. A monopolistically competitive firm faces the following demand curve for its product:

Price ($) 10 9 8 7 6 5 4 3 2 1

Quantity 2 4 6 8 10 12 14 16 18 20

The firm has total fixed costs of $40 and a constant marginal cost of $2 per unit. We can conclude that

a. firms will exit this market. b. firms will enter this market. c. this market is in long-run equilibrium. d. this firm is operating at its efficient scale.



116. A firm has the following cost structure:

Output 1 2 3 4 5 6 7

Total Cost($) 30 32 36 42 50 63 77

If this firm is in a typical perfectly competitive market, in the long run it will likely produce

a. 4 or fewer units of output. b. 5 units of output. c. more than 5 units of output. d. None of the above are necessarily correct because there is not enough information to tell.


117. A firm has the following cost structure:

Output 1 2 3 4 5 6 7

Total Cost($) 30 32 36 42 50 63 77

If this firm is in a typical monopolistically competitive market, in the long run it will likely produce

a. 4 or fewer units of output. b. 5 units of output. c. more than 5 units of output. d. None of the above are necessarily correct because there is not enough information to tell.

ANS: A DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical

118. A monopolistically competitive firm is currently earning a positive economic profit. If other firms

enter the market, we would expect that the added competition will cause this firm to adjust its output such that it a. will operate closer to its efficient scale. b. will operate further from its efficient scale. c. will no longer be at its efficient scale. d. might move either closer to or further from its efficient scale.

ANS: B DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical


119. In the long run,

a. monopolistically competitive firms earn a higher profit than perfectly competitive firms because monopolistically competitive firms have some monopoly power.

b. monopolistically competitive firms produce a higher output than perfectly competitive firms because competition drives the perfectly competitive firm's output down.

c. both monopolistically competitive and perfectly competitive firms produce where P = MC. d. both monopolistically competitive and perfectly competitive firms produce where P =

ATC.


120. Cecilia's Café operates in a monopolistically competitive market. Cecilia's is currently producing

where its average total cost is minimized. In the long run we would expect Cecilia’s output to a. decrease and average total cost to increase. b. decrease and average total cost to decrease. c. remain unchanged as Cecilia's is doing the best it can. d. increase and average total costs to decrease.

ANS: A DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Analytical

121. Which of the following statements regarding monopolistic competition is not correct?

a. In the long-run equilibrium, price equals average total cost. b. In the long-run equilibrium, firms earn zero economic profit. c. In the long-run equilibrium, firms charge a price above marginal cost. d. In the long-run equilibrium, firms produce a quantity in excess of their efficient scale.


122. Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is likely

earning a. a positive economic profit since it is charging a price above marginal cost. b. no economic profit since it is charging a price equal to its marginal cost. c. a positive economic profit since it is charging a price above its average total cost. d. no economic profit since it is charging a price equal to it average total cost.



Figure 16-7 The lines in the figures below illustrate the potential effect of entry and exit in a monopolistically competitive market on either the demand curve or the marginal cost curve of existing firms.

123. Refer to Figure 16-7. Panel (d) illustrates the change that would occur if existing firms faced

a. long-run economic losses. b. a decrease in the diversity of products offered in the market. c. new entrants in the market. d. firms exiting the market.


124. Refer to Figure 16-7. Which of the diagrams illustrates the impact of some existing firms leaving

the market? a. panel a b. panel b c. panel c d. panel d



Table 16-3 This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm.

Quantity Price Marginal Cost Average Total Cost

0 $10 -- --

1 $9 $3 $14

2 $8 $6 $10

3 $7 $9 $9

4 $6 $12 $10

5 $5 $15 $12

6 $4 $18 $14

7 $3 $21 $17

8 $2 $24 $21

9 $1 $27 $25

10 $0 $30 $29

125. Refer to Table 16-3. What price will this firm charge to maximize profit?

a. $6 b. $7 c. $8 d. $9


126. Refer to Table 16-3. Which of the following is likely to happen in the long run in this market?

a. The market is currently in a long-run equilibrium. b. The market price is likely to fall. c. Firms are likely to enter the market since firms are earning a positive economic profit. d. Firms are likely to leave the market since firms are earning a negative economic profit.

ANS: D DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Applicative

127. Refer to Table 16-3. How much profit will this firm earn when it chooses its output to maximize

profit? a. a $4 loss b. a $2 loss c. a $6 profit d. a $16 profit



Table 16-4 This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm.

Quantity Price Marginal Cost

Average Total Cost

0 $20 -- --

1 $16 $2 $21

2 $12 $4 $12

3 $8 $6 $9.67

4 $4 $8 $9

5 $0 $10 $9

128. Refer to Table 16-4. What price should this firm charge to maximize profit?

a. $4 b. $8 c. $12 d. $16


129. Refer to Table 16-4. How much profit will this firm earn at the monopolistically competitive price?

a. $0 b. $5 c. $12 d. $16


130. Refer to Table 16-4. Which of the following statements regarding this monopolistically competitive

firm is correct? a. New firms will enter this market in the long run since firm profits are greater than zero. b. Firms will leave this market in the long run since firm profits are less than zero. c. This firm is currently in long-run equilibrium. d. This firm is currently in long-run equilibrium, and the firm is producing its efficient scale

of output.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibrium MSC: Applicative


Table 16-5

Traci’s Hairstyling is one salon among many in the market for hairstyling. The following table presents cost and revenue data for hair cuts at Traci’s Hairstyling.

COSTS REVENUES Quantity Produced

Total Cost

Marginal Cost

Quantity Demanded

Price

Total Revenue

Marginal Revenue

0 $10 -- 0 $50 --

1 $15 1 $45

2 $21 2 $40

3 $28 3 $35

4 $36 4 $30

5 $45 5 $25

6 $55 6 $20

7 $66 7 $15

8 $78 8 $10

131. Refer to Table 16-5. What is the profit-maximizing output for Traci’s Hairstyling?

a. 3 haircuts b. 4 haircuts c. 5 haircuts d. 6 haircuts


132. Refer to Table 16-5. When maximizing profit, what price does Traci’s charge for a haircut?

a. $20 b. $25 c. $30 d. $35


133. Refer to Table 16-5. At the profit-maximizing quantity, what is Traci’s total profit?

a. $30 b. $59 c. $77 d. $84



134. Refer to Table 16-5. Given the cost and revenue data, Traci’s is

a. not in a long-run equilibrium. More businesses will enter the hair salon market in the long-run.

b. not in a short-run equilibrium. c. not in a long-run equilibrium. Some businesses currently in the hair salon market will exit

the market in the long-run. d. in a long-run equilibrium.


135. Refer to Table 16-5. If the government required Traci’s to produce at the efficient scale of output,

how many haircuts would Traci’s sell? a. either 3 or 4 b. either 4 or 5 c. either 5 or 6 d. either 6 or 7

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Efficient scale MSC: Analytical

136. Refer to Table 16-5. If the government forced Traci’s to produce at the efficient scale of output,

what is the maximum profit Traci’s could earn? a. $77 b. $80 c. $84 d. $96

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Efficient scale MSC: Applicative

137. Refer to Table 16-5. Suppose the government forced Traci’s to produce at the efficient scale of

output. Who would be better off as a result of this policy? Who would be worse off as a result of this policy? a. Traci’s would be better off; consumers would be worse off. b. Consumers would be better off; Traci’s would be worse off. c. No one would be better off; consumers would be worse off. d. No one would be better off; no one would be worse off.

ANS: D DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Welfare MSC: Interpretive


138. In which of the following market structures can firms earn economic profits in the long run?

a. perfect competition b. monopolistic competition c. monopoly d. Both b and c are correct.


139. Consider monopoly, monopolistic competition, and perfect competition. In which of these three

market structures does a profit-maximizing firm charge a price that exceeds marginal cost? a. monopoly only b. monopoly and monopolistic competition only c. monopoly, monopolistic competition, and perfect competition d. The answer cannot be determined without knowing whether the market is in the long run

or short run.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Monopoly MSC: Interpretive

140. Consider monopoly, monopolistic competition, and perfect competition. In which of these three

market structures does a profit-maximizing firm experience zero economic profit? a. perfect competition only b. perfect competition and monopolistic competition only c. perfect competition, monopolistic competition, and monopoly d. The answer cannot be determined without knowing whether the market is in the long run

or short run.


141. Firm A is a perfectly competitive firm. Firm B is a monopolistically competitive firm. Both firms

are currently maximizing their respective profits. Which of the following statements is correct? a. Both Firm A and Firm B would be eager to make an additional sale. b. Firm A would be eager to make an additional sale, but Firm B would not care whether it

made an additional sale or not. c. Firm B would be eager to make an additional sale, but Firm A would not care whether it

made an additional sale or not. d. Neither Firm A nor Firm B would care whether it made an additional sale or not.



142. Under which of the following market structures would consumers likely pay the highest price for a

product? a. perfect competition b. monopolistic competition c. oligopoly d. monopoly

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopoly MSC: Analytical

143. Under which of the following market structures would the highest output of a particular good be

produced? a. perfect competition b. monopolistic competition c. oligopoly d. monopoly

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Perfect competition MSC: Analytical

144. Under which of the following market structures would consumers likely receive the most product

variety? a. perfect competition b. monopolistic competition c. oligopoly d. monopoly


145. In the long run, a monopolistically competitive firm produces a quantity that is

a. equal to the efficient scale. b. less than the efficient scale. c. greater than the efficient scale. d. consistent with diseconomies of scale.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Efficient scale MSC: Interpretive


146. A monopolistically competitive firm has the following cost structure:

Output 1 2 3 4 5 6 7

Total Cost($) 30 32 36 42 50 63 77

The firm faces the following demand curve:

Price ($) 20 18 15 12 9 7 4

Quantity 1 2 3 4 5 6 7

If the government forces this firm to produce at its efficient scale, it will

a. produce 3 units and make $9. b. produce 4 units and make $6. c. produce 5 units and lose $5. d. produce 7 units and lose $49.

ANS: C DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Efficient scale MSC: Applicative

147. In the long run, a firm in a perfectly competitive market operates

a. at its efficient scale, and a monopolistically competitive firm operates at efficient scale. b. at its efficient scale, and a monopolistically competitive firm operates with excess

capacity. c. with excess capacity, and a monopolistically competitive firm operates with excess

capacity. d. with excess capacity, and a monopolistically competitive firm operates at its efficient

scale.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Efficient scale | Excess capacity MSC: Interpretive


a. In the long run, both perfectly competitive firms and monopolistically competitive firms operate with excess capacity.

b. A firm operates with excess capacity when, in the long run, its level of output is below the efficient scale.

c. For any firm, efficient scale is the level of output at which the average-total-cost curve is tangent to the demand curve.

d. All of the above are correct.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Efficient scale | Excess capacity MSC: Interpretive


149. A monopolistically competitive firm

a. has the usual deadweight loss of monopoly pricing. b. experiences a zero profit in a long-run equilibrium. c. is said to have excess capacity. d. All of the above are correct.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Deadweight loss | Excess capacity MSC: Interpretive

150. In comparison to perfect competition, monopolistic competition is characterized by

a. efficient scale. b. pricing at marginal cost. c. excess capacity. d. All of the above are correct.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Interpretive

151. In a monopolistically competitive market, social welfare would be enhanced if

a. price equaled marginal cost. b. government regulation eliminated the product-variety externality. c. the government raised taxes to subsidize firms that price below average total cost. d. there were fewer firms, making the industry closer to an oligopoly.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Interpretive

152. Since a firm in a monopolistically competitive market faces a

a. downward-sloping demand curve, it will always operate with excess capacity. b. downward-sloping demand curve, it will always operate at its efficient scale. c. perfectly elastic demand curve, it will always operate with excess capacity. d. perfectly inelastic demand curve, it will always operate at efficient scale.


153. When a firm operates with excess capacity,

a. additional production would lower the average total cost. b. additional production would increase the average total cost. c. it must be a perfectly competitive firm. d. it must be a monopolistically competitive firm.



154. In the long run, a profit-maximizing firm in a monopolistically competitive market operates at

a. efficient scale. b. a level of output at which average total cost is rising. c. a level of output at which average total cost is falling. d. the level of output at which total revenue is maximized.


155. Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on

an average night, 80 percent of the hotel rooms are full). This kind of excess capacity is indicative of what kind of market? a. monopoly b. perfect competition c. monopolistic competition d. oligopoly


156. Excess capacity is

a. an example of the inefficiencies of monopolistically competitive markets. b. a short-run problem but not a long-run problem. c. a characteristic of rising average total cost curves. d. Both a and b are correct.


157. In a long-run equilibrium,

a. excess capacity applies to monopolistically competitive firms but not to competitive firms. b. zero economic profit applies to competitive firms but not to monopolistically competitive

firms. c. markup over marginal cost applies to both monopolistically competitive and competitive

firms. d. product variety externalities apply to both perfectly competitive firms and

monopolistically competitive firms.



158. Monopolistically competitive firms have excess capacity. To maximize profits, firms will

a. increase their output to lower their average total cost of production and eliminate the excess capacity.

b. produce where price equals marginal cost to eliminate the excess capacity. c. produce where average revenue equals marginal cost to eliminate the excess capacity. d. maintain the excess capacity.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Interpretive

159. Which of the following best describes the idea of excess capacity in monopolistic competition?

a. Firms produce more output than is socially desirable. b. The output produced by a typical firm is less than what would occur at the minimum point

on its ATC curve. c. Due to product differentiation, firms choose output levels where price equals average total

cost. d. Firms keep some surplus output on hand in case there is a shift in the demand for their

product.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Interpretive

160. Both monopolistic competition and oligopoly are market structures

a. that fail to achieve the total surplus achieved by perfect competition. b. that feature only a few firms in each market. c. to which the concept of Nash equilibrium is frequently applied by economists. d. in which firms earn zero economic profit in the long run.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Welfare MSC: Interpretive

161. A monopolistically competitive market could be considered inefficient because

a. marginal revenue exceeds average revenue. b. price exceeds marginal cost. c. the efficient scale of production is only achieved in the long run, not in the short run. d. markup pricing does not occur in any other market structure.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Welfare MSC: Interpretive

162. The deadweight loss that is associated with a monopolistically competitive market is a result of

a. price falling short of marginal cost in order to increase market share. b. price exceeding marginal cost. c. the firm operating in a regulated industry. d. excessive advertising costs.



163. Monopolistically competitive markets may be socially inefficient because

a. most firms produce inferior products. b. government programs cannot effectively regulate price. c. firms earn zero economic profit. d. the market may have too much or too little entry by new firms.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Welfare MSC: Interpretive

164. In which of the following market structures do firms produce the welfare-maximizing level of

output? a. perfect competition b. monopolistic competition c. monopoly d. Both a and b are correct.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Welfare MSC: Analytical

165. The traditional view of monopolistic competition holds that this type of industrial structure is

inefficient because a. there are too few firms to reach an efficient level of production. b. firms do not operate at the output that minimizes average costs. c. more advertising is needed to inform customers about product differences. d. consumers do not have enough choice among the product varieties available.


166. Monopolistic competition is considered by some to be inefficient because

a. price exceeds marginal cost. b. output is excessive. c. long-run profits are positive. d. barriers to entry limit the number of firms in the market.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Welfare MSC: Interpretive

167. Monopolistic competition is an inefficient market structure because

a. price exceeds marginal cost. b. it has a deadweight loss, just as monopoly does. c. at the equilibrium, some consumers will value the good at more than the marginal cost of

production. d. All of the above are correct.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Welfare | Deadweight loss MSC: Interpretive


168. Monopolistic competition is an inefficient market structure because

a. marginal revenue equals marginal cost. b. it has a deadweight loss, just as monopoly does. c. long-run profits are zero due to free entry. d. All of the above are correct.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Welfare | Deadweight loss MSC: Interpretive

169. Monopolistic competition is an

a. efficient market structure because long-run profits are zero. b. efficient market structure because each firm produces at its efficient scale. c. inefficient market structure because there is deadweight loss. d. Both a and b are correct.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Welfare | Deadweight loss MSC: Interpretive

170. Monopolistic competition is an

a. inefficient market structure because there is deadweight loss. b. inefficient market structure because price exceeds marginal cost. c. efficient market structure because free entry drives long-run profits to zero. d. Both a and b are correct.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Welfare | Deadweight loss MSC: Interpretive

171. A monopolistically competitive market

a. usually has too many firms, reducing the economic profit of each firm to zero. b. usually has too few firms, reducing the product variety for consumers. c. may have too many or too few firms, and the government can intervene to achieve the

optimal number of firms. d. may have too many or too few firms, but the government can do little to rectify the

situation.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Regulation MSC: Interpretive

172. Senator Hubris wants to pass a law that would require all monopolistically competitive firms to

operate at their efficient scale. If this law were to pass and be enforced, we would expect that monopolistically competitive firms would a. see their profits increase. b. break even. c. lose money. d. not really be affected by the law.

ANS: C DIF: 3 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Regulation MSC: Interpretive


173. Regulation of a firm in a monopolistically competitive market

a. usually implies a very small administrative burden. b. will lower the firm's costs. c. is commonly used to enhance market efficiency. d. is unlikely to improve market efficiency.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Regulation MSC: Interpretive

174. The administrative burden of regulating price in a monopolistically competitive market is

a. small due to economies of scale. b. large because price is usually below marginal cost. c. large because of the large number of firms that produce differentiated products. d. small because firms produce with excess capacity.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Regulation MSC: Interpretive

175. If regulators required firms in monopolistically competitive markets to set price equal to marginal

cost, a. firms would most likely experience economic losses. b. firms would also operate at their efficient scale. c. new firms would likely to enter the market. d. the most efficient firms would not likely to be affected.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Regulation MSC: Interpretive

176. If regulators required firms in monopolistically competitive markets to set price equal to marginal

cost, a. firms would respond by lowering their costs. b. firms would require a subsidy to stay in business c. new firms that enter the market would operate at efficient scale. d. the most efficient firms would not be affected.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Regulation MSC: Interpretive

177. Which of the following represents the best government policy to reduce the deadweight loss

associated with a monopolistically competitive market? a. The government should regulate firms in a manner similar to natural monopolies. b. The government should encourage more firms to enter the industry because without

government intervention, there are likely to be “too few” firms. c. The government should encourage some firms to exit the industry because without

government intervention, there are likely to be “too many” firms. d. There is no government policy that can reduce deadweight loss without creating other

problems.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Deadweight loss MSC: Interpretive


178. Which of the following markets impose deadweight losses on society?

(i) perfect competition (ii) monopolistic competition

(iii) monopoly

a. (i) and (ii) only b. (ii) and (iii) only c. (i) and (iii) only d. (i) only

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Deadweight loss MSC: Interpretive

179. Monopolistic competition is characterized by

i) efficient scale ii) markup pricing over marginal cost

iii) deadweight loss iv) excess capacity

a. i) and ii) only b. ii) and iv) only c. i), ii), and iii) only d. ii), iii), and iv) only

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Deadweight loss | Excess capacity MSC: Analytical

180. The product-variety externality is associated with the

a. producer surplus that accrues to incumbent firms in a monopolistically competitive industry.

b. loss of consumer surplus from exposure to additional advertising. c. consumer surplus that is generated from the introduction of a new product. d. opportunity cost of firms exiting a monopolistically competitive industry.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Interpretive

181. With respect to monopolistic competition,

a. both the business-stealing externality and the product-variety externality are positive externalities.

b. the business-stealing externality is a positive externality, while the product-variety externality is a negative externality.

c. the business-stealing externality is a negative externality, while the product-variety externality is a positive externality.

d. both the business-stealing externality and the product-variety externality are negative externalities.



182. The fact that monopolistically competitive firms charge a price that exceeds marginal cost is

responsible for the a. business-stealing externality that is observed in monopolistically competitive markets. b. product-variety externality that is observed in monopolistically competitive markets. c. inefficiencies of the long-term losses earned by monopolistically competitive firms.. d. persistence of positive profits into the long run for monopolistically competitive firms.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Interpretive

183. When consumers are exposed to additional choices that result from the introduction of a new

product, a. their satisfaction is likely to be lowered as a result of their having to make additional

choices. b. a product-variety externality is said to occur. c. an advertising externality is said to occur. d. consumers are likely to experience negative consumption externalities.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Interpretive

184. A business-stealing externality is

a. an externality that is likely to be punished under antitrust laws. b. the negative externality that occurs when one firm attempts to duplicate exactly the

product of a different firm. c. an externality that is considered to be an explicit cost of business in monopolistically

competitive markets. d. the negative externality associated with entry of new firms in a monopolistically

competitive market.

ANS: D DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Interpretive

185. When existing firms lose customers and profits due to entry of a new competitor, a

a. predatory-pricing externality occurs. b. consumption externality occurs. c. business-stealing externality occurs. d. product-variety externality occurs.


186. When the loss from a business-stealing externality exceeds the gain from a product-variety

externality, a. firms are more likely to operate at efficient scale. b. there are likely to be too many firms in a monopolistically competitive market. c. market efficiency is likely to be enhanced by the entry of new firms. d. all firms are earning economic losses.



187. The entry of new firms into a monopolistically competitive market is accompanied by

a. both positive and negative externalities. b. only positive externalities. c. only negative externalities. d. only private profit opportunities (no externalities).


188. The product-variety externality arises in monopolistically competitive markets because

a. firms produce with excess capacity. b. firms try to differentiate their products. c. firms would like to produce homogeneous products, but the large number of firms

prohibits it. d. entry and exit is not restricted.



a. the entry of new firms creates externalities. b. the absence of restrictions on entry by new firms ensures that there will be no deadweight

loss. c. there are always too many firms in the market relative to the socially-optimal number of

firms. d. firms cannot earn positive economic profits in the short run.


190. Entry by new firms into a monopolistically competitive market

a. creates additional consumer surplus. b. imposes a positive externality on existing firms. c. leads to the same externalities that are observed when new firms enter a perfectly

competitive market. d. increases the demand for existing firms’ products.



Scenario 16-1

Vacation Inns of America (VIA) has recently announced intentions to build a new hotel/resort complex in Myrtle Beach, South Carolina. Assume that the hotel/resort market in Myrtle Beach is characterized by monopolistic competition.

191. Refer to Scenario 16-1. As a result of the new VIA hotel/resort, tourists who stay in Myrtle Beach

are likely to experience a a. product-variety externality, which harms consumers. b. product-variety externality, which benefits consumers. c. business-stealing externality, which harms consumers. d. business-stealing externality, which benefits consumers.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Applicative

192. Refer to Scenario 16-1. As a result of the new VIA hotel/resort, existing hotels, motels, and lodging

facilities in Myrtle Beach are likely to experience a a. product-variety externality, which harms producers. b. product-variety externality, which benefits producers. c. business-stealing externality, which harms producers. d. business-stealing externality, which benefits producers.

ANS: C DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Applicative

Scenario 16-2 McDonald’s restaurants has recently announced intentions to open a new restaurant in Smalltown, Indiana. Assume that the fast-food restaurant market in Smalltown is characterized by monopolistic competition.

193. Refer to Scenario 16-2. As a result of the new McDonald’s, residents of Smalltown are likely to

benefit from a. a product-variety externality. b. a business-stealing externality. c. the fact that McDonald’s will increase its production to achieve the efficient scale. d. Both b and c are correct.

ANS: A DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Applicative

194. Refer to Scenario 16-2. As a result of the new McDonald’s, existing fast food restaurants in

Smalltown are likely to a. suffer from a product-variety externality. b. suffer from a business-stealing externality. c. increase their production to achieve the efficient scale. d. Both b and c are correct.

ANS: B DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Externalities MSC: Applicative


Sec 03 - Monopolistic Competition - Advertising

MULTIPLE CHOICE

1. Which of the following is unique to a monopolistically competitive firm when compared to an

oligopoly? a. The monopolistically competitive firm advertises. b. The monopolistically competitive firm produces a quantity of output that falls short of the

socially optimal level. c. Monopolistic competition features many buyers. d. Monopolistic competition features many sellers.

ANS: D DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Markets MSC: Interpretive

2. Which of the following is a characteristic of oligopoly or monopolistic competition, but not perfect

competition? a. advertising and sales promotion b. profit maximization according to the MR = MC rule c. firms being price takers rather than price makers d. horizontal demand and marginal revenue curves

ANS: A DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Interpretive

3. Some firms have an incentive to advertise because they sell a

a. similar product and charge a price equal to marginal cost. b. similar product and charge a price above marginal cost. c. differentiated product and charge a price equal to marginal cost. d. differentiated product and charge a price above marginal cost.

ANS: D DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Interpretive

4. The relationship between advertising and product differentiation is

a. positive; the more differentiated the product, the more a firm is likely to spend on advertising.

b. negative; the more differentiated the product, the less a firm is likely to spend on advertising.

c. zero; there is no relationship between product differentiation and advertising. d. irrelevant; firms with differentiated products do not need to advertise.

ANS: A DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Analytical


5. For the economy as a whole, spending on advertising comprises about what percent of total firm

revenue? a. 0.5 b. 2 c. 10 d. 20

ANS: B DIF: 1 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Applicative

6. Firms that sell highly differentiated consumer goods, such as soft drinks, breakfast cereals, and dog

food, typically spend what percent of their revenues on advertising? a. 0-1 b. 2-4 c. 10-20 d. over 50

ANS: C DIF: 1 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Applicative

7. Which of the following correctly lists the products in order from most advertised to least advertised?

a. soft drinks, breakfast cereals, dog food b. corn, dog food, communication satellites c. dog food, communication satellites, corn d. wheat, corn, crude oil


8. Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell

a. industrial products. b. homogeneous products. c. consumer goods for which there are no close substitutes. d. highly-differentiated consumer goods.


9. Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell

a. highly-differentiated consumer goods. b. goods produced by natural monopolies. c. agricultural products. d. products with a limited shelf life such as milk and lettuce.



10. Compared to other firms, firms that sell highly differentiated products likely incur significant costs

associated with a. advertising. b. the product-variety externality. c. intermediate materials. d. taxes and regulation.


11. In which of the following product markets are we likely to observe the largest amount of

advertising? a. markets with highly differentiated products b. perfectly competitive markets c. markets in which industrial products are sold d. markets in which there is very little difference between different firms' products


12. If we observe a great deal of advertising of men's shaving products, we can infer that

a. the market for those products is perfectly competitive. b. it costs firms very little to produce those products. c. those products are highly differentiated. d. firms are irrational in their decisions to advertise.

ANS: C DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Interpretive

13. If we observe a great deal of advertising of dog food, we can infer that

a. consumers spend very little of their disposable income on dog food. b. dog food is cheap to produce. c. dog food is a highly-differentiated product. d. firms who do not advertise earn higher profits than those who do.


14. Firm A produces and sells in a market that is characterized by highly differentiated consumer goods.

Firm B produces and sells industrial products. Firm C produces and sells an agricultural commodity. Which firm is likely to spend the greatest portion of its total revenue on advertising? a. firm A b. firm B c. firm C d. There is no reason to believe that any one of the three firms would spend a greater portion

of its total revenue on advertising than the other two firms.

ANS: A DIF: 1 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Analytical


15. Advertising

a. provides information about products, including prices and seller locations. b. has been proven to increase competition and reduce prices compared to markets without

advertising. c. signals quality to consumers, because advertising is expensive. d. All of the above are correct.


16. Which of the following is not an argument made by critics of advertising?

a. Advertising manipulates people’s tastes. b. Advertising impedes competition. c. Advertising promotes economies of scale. d. Advertising increases the perception of product differentiation.


17. Critics of advertising argue that in some markets advertising may

a. attract products of lower quality into the market. b. attract less informed buyers into the market. c. decrease elasticity of demand allowing firms to charge a larger markup over marginal cost. d. enhance competition in markets to an unnecessary degree.


18. Critics of advertising argue that advertising

a. creates desires that otherwise might not exist. b. hinders competition. c. often fails to convey substantive information. d. All of the above are correct.



a. creates desires that otherwise might not exist. b. enhances competition. c. benefits television viewers who enjoy tv commercials. d. All of the above are correct.



20. If advertising reduces a consumer's price sensitivity between identical goods, it is likely to

a. increase the elasticity of demand for differentiated products. b. enhance competition and encourage more product diversity. c. reduce competition and reduce social welfare. d. encourage the consumption of all homogenous goods.


21. If a firm in a monopolistically competitive market successfully uses advertising to decrease the

elasticity of demand for its product, the firm will a. be able to increase its markup over marginal cost. b. eventually have to lower price to remain competitive. c. increase the welfare of society. d. reduce its average total cost.



a. creates demand for products that people otherwise do not want or need. b. lowers barriers to entry into an industry because new firms can more easily establish

themselves as competitors. c. increases competition by providing information about prices. d. encourages monopolization of markets by raising entry barriers.


23. Which of the following is a commonly-cited benefit of advertising?

a. Advertising can be a signal of the quality of a product. b. Advertising impedes competition. c. Advertising reduces the deadweight loss associated with monopolistic competition. d. Advertising encourages free entry, which increases profits.

ANS: A DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Applicative

24. Defenders of advertising

a. concede that advertising increases firms’ market power. b. concede that advertising makes entry by new firms more difficult. c. contend that firms use advertising to provide useful information to consumers. d. All of the above are correct.



25. When firms in a monopolistically competitive market engage in price-related advertising, defenders

of advertising argue that a. the quality of products sold in the market always increases. b. customers are less likely to be informed about other characteristics of the product. c. new firms are discouraged from entering the market. d. each firm has less market power.


26. Defenders of advertising argue that it is not rational for profit-maximizing firms to spend money on

advertising for products that have a. superior quality. b. inferior or mediocre quality. c. low prices. d. limited availability.

ANS: B DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Interpretive

27. The primary claim of defenders of advertising is that it

a. conveys information about firm profitability. b. is psychological rather than informational. c. enhances the information available to consumers. d. reduces the elasticity of demand for a firm’s product.


28. In his 1958 book, The Affluent Society, John Kenneth Galbraith argued that

a. brand names give firms an incentive to produce and sell high-quality products. b. consumers’ tastes cannot, in any real sense, be “determined” by advertising. c. firms use advertising to create demand for products that people otherwise do not want or

need. d. firms use advertising to send a signal to consumers about the quality of their products.


29. Evidence suggests that, in markets with differentiated products but little advertising,

a. consumers are not confused by conflicting signals. b. firms are generally less profitable. c. markets are less efficient. d. consumers make better choices.



30. In markets where restrictions on advertising have been used to curtail competition, the U.S. courts

have generally a. referred the matters of advertising restrictions to executive regulators. b. enforced industry-wide agreements to restrict advertising. c. been silent on the effect of explicit advertising restrictions. d. overturned laws that prohibit advertising.


31. A law that restricts the ability of hotels/motels to advertise on billboards outside of a resort

community would likely lead to a. a decrease in profits for all hotels/motels. b. reduced efficiency of local lodging markets. c. a request by consumers to increase the number of billboards. d. increased price competition among hotels/motels in the community.


32. Among arguments for and against advertising, both sides agree that advertising leads to

a. higher prices and less competitive markets. b. higher prices and more competitive markets. c. lower prices and more competitive markets. d. None of the above is correct. The debate fails to resolve the question of advertising's effect

on prices and competition.


33. Professional organizations and producer groups have an incentive to

a. restrict advertising in order to enhance competition on the basis of price. b. restrict advertising in order to reduce competition on the basis of price. c. encourage advertising in order to reduce competition on the basis of price. d. encourage advertising in order to enhance competition on the basis of price.


34. Evidence from the market for eyeglasses suggests that advertising leads to

a. lower-quality products for consumers. b. lower prices for consumers. c. higher prices for consumers. d. less concern on the part of consumers about price differences among similar goods.



35. In the study done by Lee Benham on advertising for eyeglasses,

a. advertising increased the average price. b. advertising decreased the average price. c. there was no difference in price, but quality was better in the states that didn't allow

advertising. d. advertising appeared to have no effect whatsoever in the states that permitted advertising.


36. Results of the study done by Lee Benham on advertising for eyeglasses would suggest that

a. brand loyalty and market power in the eyeglass market was likely to be more pervasive in states that allowed advertising.

b. eyeglass sales were more profitable in states that allowed advertising. c. optometrists would not be supportive of advertising restrictions. d. optometrists would enthusiastically endorse advertising restrictions.

ANS: D DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Applicative

37. A study of the market for optometrists' services in the 1960s showed that

a. all states in the United States prohibited advertising by optometrists. b. almost all professional optometrists opposed legal restrictions on their rights to advertise. c. the average price of eyeglasses would decrease if the legal restrictions on advertising by

optometrists were removed. d. advertising on eyeglasses limited competition among optometrists.


38. According to one theory, advertising sends a signal to consumers about the quality of the product

being offered. An implication of this theory is that a. the actual quality of the product is irrelevant. b. the content of the advertisement is irrelevant. c. advertising is not in the best interest of society. d. it is irrational for firms to pay famous people large amounts of money to appear in their

advertisements.


39. Advertising that uses celebrity endorsements is most likely intended to

a. increase elasticity of demand for the advertised product. b. reduce the ability of markets to allocate resources efficiently. c. provide a signal of product quality. d. be useful only for psychological effects.



40. Firms that spend a large amount of money on advertising a particular product are likely to be

providing consumers with a. information about the availability of the product. b. information about product price. c. a signal of product quality. d. a good example of wasted resources.


41. One theory of advertising suggests that

a. information on price is important to make advertising effective. b. the content of advertising may be irrelevant to product success in the market. c. celebrity advertising is not effective in retail food markets. d. Post and Kellogg should not advertise new cereals.


42. Advertisements that appear to convey no information at all

a. are usually associated with "infomercials." b. are useless to consumers but valuable to firms. c. are useless to firms but valuable to consumers for their entertainment quality alone. d. may convey information to consumers by providing them with a signal that firms are

willing to spend significant amounts of money to advertise.


43. Television advertisements aired during major sporting events are very expensive. A theory asserting

that people buy a product simply because it is advertised would suggest that information on the high cost of advertising a. enhances the effectiveness of the advertisement. b. reduces people's willingness to purchase advertised products. c. is leaked to discredit the firms that spend so much on advertising. d. reduces the effective staying power of a product.


44. According to the signaling theory of advertising, consumers

a. pay little or no attention to which firms advertise and which firms do not advertise. b. are often more impressed by a firm's willingness to spend money on advertising than they

are by the content of the advertisement. c. are often more impressed by low-cost advertisements than they are by high-cost

advertisements. d. gain little or no information about product quality from advertisements.



45. ABC Company knows that it produces and sells a very good mouse trap. XYZ Company knows that

it produces and sells a lousy mouse trap. According to the signaling theory of advertising, a. both ABC and XYZ have incentives to spend large amounts of money on advertising their

mouse traps. b. ABC has an incentive to spend a large amount of money on advertising its mouse trap, but

XYZ does not. c. XYZ has an incentive to spend a large amount of money on advertising its mouse trap, but

ABC does not. d. neither ABC nor XYZ has an incentive to spend a large amount of money on advertising

their mouse traps.

ANS: B DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Analytical

46. How does advertising signal to consumers that the product is a good one?

a. By seeing famous people using the product, consumers infer that they too can be famous. b. By being willing to spend money on advertising, firms let consumers know the product is

likely a good one since firms would not likely advertise a poor product. c. By making consumers laugh during commercials, firms are associating positive

experiences with the product. d. Without allowing consumers to actually use the product, it is not possible for firms to

signal to consumers the product's quality.


47. Most businesses advertise their products and services. Some business use SPAM emails to advertise

because the cost of a mass e-mail is close to zero. Other business spend millions of dollars to advertise in a 30-second spot during the Super Bowl. Having observed this real world data, economists argue that the amount of money that a business spends on advertising is a proxy for a good or service's a. size. b. quality. c. newness. d. cost of production.


48. Critics of markets that are characterized by firms that sell brand name products argue that brand

names encourage consumers to pay more for branded products that a. have elastic demand curves. b. are very different from generic products. c. are indistinguishable from generic products. d. consumer-advocate groups have found to be inferior.



49. Edward Chamberlin argued that brand names

a. hampered market efficiency. b. were instrumental in enhancing market efficiency. c. were useful in enhancing market efficiency when the government enforced the use of

exclusive trademarks. d. were likely to be more socially efficient when used in conjunction with advertising.


50. Edward Chamberlin argued that governments should

a. ban the use of brand names. b. not enforce the trademarks that companies use to identify their products. c. vigorously enforce the trademarks that companies use to identify their products. d. tax companies whose products have brand names in proportion to how much consumers

recognize their products.


51. The debate over the efficiency of markets in which products with brand names are sold

a. is framed by the role of regulation in advertising. b. is likely to be resolved by reference to anecdotal evidence. c. hinges on whether consumers are rational in their choices. d. hinges on the effectiveness of advertising that identifies price differences.


52. A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. This is an example

of a case in which a. brand name identity increases the effectiveness of markets. b. brand name identity can be detrimental to the profitability of a firm. c. advertising is ineffective in salvaging perceptions of product quality. d. advertising cannot be used to establish brand loyalty.

ANS: B DIF: 1 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Analytical

53. In some countries, brand name fast-food restaurants are not allowed to operate. Such restrictions are

likely to a. enhance the social welfare of society. b. increase the number of fast-food restaurants. c. reduce barriers to entry in imperfect markets. d. reduce the competitive nature of local fast-food markets.



54. Eunice consumes Coke exclusively. She claims that there is a clear taste difference and that

competing brands of cola leave an unsavory taste in her mouth. However, in a blind taste test, Eunice is found to prefer generic store-brand cola to Coke eight out of ten times. The results of Eunice's taste test would reinforce claims by critics of brand names that a. consumers are always willing to pay more for brand names. b. brand names cause consumers to perceive differences that do not really exist. c. brand names cause consumers to be more sensitive to product differences. d. brand names are a form of socially efficient advertising.


55. Kirk consumes Pepsi exclusively. He claims that there is a clear taste difference and that competing

brands of cola leave an unsavory taste in his mouth. In a blind taste test, Kirk is found to prefer Pepsi to store-brand cola eight out of ten times. The results of Kirk’s taste test would refute claims by critics of brand names that a. consumers are always willing to pay more for brand names. b. brand names cause consumers to perceive differences that do not really exist. c. consumers with the lowest levels of income are the most likely to be influenced by brand

name advertising. d. brand names are a form of socially efficient advertising.


56. Your company has recently requested that you travel to Dhaka, Bangladesh, to work on negotiations

for a new factory to be located in one of the port cities. Your travel agent provides a list of several hundred local hotels and a Sheraton. In this case, the Sheraton brand-name is likely to be used as a signal of a. perceived differences that are not likely to exist among your various options. b. quality when quality cannot be easily judged. c. inefficiency in markets characterized by recognizable brand names. d. the quality of general lodging accommodations in Dhaka.


57. On a vacation to Cancun, Mexico, you find yourself eating every meal at the local McDonald's

rather than having a hamburger from one of the street vendors. Your traveling companion claims that you are irrational, since you never eat McDonald's hamburgers when you are home, and McDonald's hamburgers cost more than those prepared and sold by Cancun's street vendors. An economist would most likely explain your behavior by suggesting that a. your behavior is rational, but your friend's behavior is clearly irrational. b. you are clearly irrational, but your friend’s behavior is rational. c. the McDonald's brand name suggests consistent quality. d. the advertising by McDonald’s in Cancun is more persuasive than the advertising by

McDonald’s in your home town.



58. Two college students, Josh and John, are spending spring break in Boston to visit Harvard

University’s law school. Josh buys a cup of coffee each morning at the local Dunkin’ Donuts rather than from one of the local coffee shops. John claims that Josh is irrational because he never purchased Dunkin’ Donuts’ coffee at home, and Dunkin’ Donuts’ coffee costs more than the coffee sold by local shops. An economist would most likely explain Josh’s behavior by suggesting that a. Josh’s behavior is rational, but John's behavior is clearly irrational. b. Josh’s behavior is clearly irrational, but John’s behavior is rational. c. the Dunkin’ Donuts brand name suggests consistent quality. d. the advertising by Dunkin’ Donuts in Boston is more persuasive than the advertising by

Dunkin’ Donuts in Josh and John’s home town.


59. Two soft drinks sit side-by-side in a grocery store: A six-pack of Coca-Cola (a brand name) sells for

$3.00, while a six-pack of Uncle Don's cola (not a brand name) sells for $1.50. Even defenders of brand names would have to admit that a. no rational consumer would spend twice as much for Coca-Cola as he would for Uncle

Don's cola. b. the side-by-side presence of these two colas conveys no useful information to consumers. c. Coca-Cola has no incentive to maintain the quality of its product just because of the Coca-

Cola brand name. d. None of the above is correct.


60. Two soft drinks sit side-by-side in a grocery store: A six-pack of Coca-Cola (a brand name) sells for

$3.00, while a six-pack of Uncle Don's cola (not a brand name) sells for $1.50. In a typical day the store sells some of each type of cola, which suggests that a. no rational consumer would spend twice as much for Coca-Cola as he would for Uncle

Don's cola. b. some consumers must perceive that Coca-Cola is a higher quality product. c. Coca-Cola has no incentive to maintain the quality of its product just because of the Coca-

Cola brand name. d. None of the above is correct.



61. Which of the following statements regarding brand names in advertising is not correct?

a. Brand names provide consumers with information about quality when quality cannot be easily judged in advance of purchase.

b. Brand names give firms an incentive to maintain high quality to maintain the reputation of the firm.

c. Brand names allow firms to produce and sell inferior products in the long run since people will continue to purchase the brand-name product.

d. Brand names can cause consumers to perceive differences in products that do not actually exist.

ANS: C DIF: 1 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Definitional

62. When quality cannot be easily judged in advance, what provides consumers with information about

the quality of a product? a. a brand name b. a tie-in c. the quantity available for sale d. the amount of deadweight loss


63. When monopolistically competitive firms advertise, in the long run

a. they will still earn zero economic profit. b. they can earn positive economic profit by increasing market share. c. the market price must fall. d. the market price must rise.



a. The typical monopolistically competitive firm could reduce its average total cost if it produced more output.

b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.

c. Expensive advertising might help consumers if it is a signal that the product is good. d. Brand names acquired at great cost might help consumers by assuring quality.




a. The more similar Firm A’s product is to Firm B’s product, the more likely Firm A is to advertise.

b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.

c. According to the signaling theory, the more product information an advertisement contains, the more effective it is.

d. Brand names may help consumers if they provide information about the quality of a product when acquiring such information is difficult.



a. Critics of advertising argue that firms advertise to manipulate consumers’ tastes. b. Defenders of advertising argue that advertising provides valuable product information to

consumers. c. An industry with many brand name products will be more competitive than one with many

generic products. d. The willingness of a firm to spend a large amount of money on advertising can signal the

quality of the product.


Scenario 16-3 Consider the problem facing two firms, Firm A and Firm B, in the fast-food restaurant market. Each firm has just come up with an idea for a new fast-food menu item which it would sell for $4. Assume that the marginal cost for each new menu item is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 2 million consumers to try its new product. Firm A has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units.

67. Refer to Scenario 16-3. If Firm A decides to advertise its product it can expect to

a. incur a loss of $8 million. b. incur a loss of $4 million. c. earn a profit of $4 million. d. earn a profit of $8 million.

ANS: A DIF: 3 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Applicative


68. Refer to Scenario 16-3. If firm B decides to advertise its product it can expect to

a. earn a profit of $48 million per year. b. earn a profit of $36 million per year. c. earn a profit of $12 million per year. d. incur a loss of $12 million per year.


69. Refer to Scenario 16-3. By its willingness to spend money on advertising, Firm B

a. signals the quality of its new product to consumers. b. signals that it is not a profit maximizer. c. is detracting from the efficiency of markets. d. will drive Firm A out of the market.


70. Refer to Scenario 16-3. On the basis of a theory that people buy a product because it is advertised,

the content of advertisements for Firm B's product a. should focus on quality comparisons in order to be successful. b. must include celebrity endorsements in order to be successful. c. is critical to the success of the product in the market. d. is irrelevant to the success of the advertisement.


71. Refer to Scenario 16-3. Which of the following is most likely?

a. Both Firm A and Firm B will advertise. b. Neither Firm A nor Firm B will advertise. c. Firm A will advertise, but Firm B will not advertise. d. Firm B will advertise, but Firm A will not advertise.


Sec 04 - Monopolistic Competition - Conclusion

MULTIPLE CHOICE

1. Firms in a monopolistically competitive market

a. are price takers. b. produce an output level that minimizes average total cost in the long run. c. maximize profits by producing where price equals marginal cost. d. cannot earn economic profits in the long run.




a. Firms in monopolistic competition and monopoly can earn economic profits in both the short run and the long run.

b. Both perfectly competitive and monopolistically competitive firms charge a price equal to marginal cost.

c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.

d. Both perfectly competitive and monopolistically competitive firms produce the welfare-maximizing level of output.

ANS: C DIF: 2 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Analytical


a. Firms in monopolistic competition and monopoly can earn economic profits in both the short run and the long run.

b. Both perfectly competitive and monopolistically competitive firms are price takers. c. Both a monopolistically competitive industry and a monopoly are characterized by a very

small number (or one) firm. d. Firms can easily enter a perfectly competitive or monopolistically competitive industry.



a. Both monopolistically competitive and perfectly competitive firms can earn economic profits in the short run.

b. Both monopolies and monopolistically competitive firms can earn economic profits in the long run.

c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.

d. Only competitive firms produce the welfare-maximizing level of output.




a. Firms in monopolistic competition and monopoly can earn economic profits in the short run.

b. Firms in monopolistic competition and perfect competition produce the welfare-maximizing level of output.

c. Monopolistically competitive firms price above marginal cost, whereas competitive firms price at marginal cost.

d. Firms wishing to enter a monopolistically competitive market can do so freely, whereas firms wishing to enter a monopoly market will face barriers.


6. A market is comprised of many firms as opposed to just one firm or a few firms

a. only when it is perfectly competitive. b. only when it is perfectly competitive or oligopolistic. c. only when it is perfectly competitive or monopolistically competitive. d. when it is perfectly competitive, monopolistically competitive, or oligopolistic.

ANS: C DIF: 1 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Perfect competition | Monopolistic competition MSC: Definitional

7. A firm is a price taker

a. only when the market is perfectly competitive. b. only when the market is perfectly competitive or monopolistic. c. only when the market is perfectly competitive or monopolistically competitive. d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

ANS: A DIF: 1 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Perfect competition | Monopolistic competition MSC: Interpretive

8. A firm maximizes its profit by producing output up to the point where marginal revenue equals

marginal cost a. only when the market is a monopoly. b. only when the market is a monopoly or monopolistically competitive. c. only when the market is monopolistically competitive or perfectly competitive. d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

ANS: D DIF: 2 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Perfect competition | Monopolistic competition | Monopoly MSC: Interpretive


9. A firm produces the welfare-maximizing level of output

a. only when the market is perfectly competitive. b. only when the market is a monopoly or monopolistically competitive. c. only when the market is monopolistically competitive or perfectly competitive. d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

ANS: A DIF: 2 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Perfect competition | Monopolistic competition | Monopoly MSC: Interpretive

10. A monopolistically competitive market is like a monopoly in that

a. both market structures feature easy entry by new firms in the long run. b. the main objective of firms in both market structures is something other than profit

maximization. c. firms in both market structures produce the welfare-maximizing level of output. d. firms in both market structures set price above marginal cost.

ANS: D DIF: 2 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Monopoly MSC: Interpretive

11. A monopolistically competitive market is like a competitive market in that

a. both market structures feature easy entry by new firms in the long run. b. the main objective of firms in both market structures is something other than profit

maximization. c. firms in both market structures produce the welfare-maximizing level of output. d. firms in both market structures set price above marginal cost.

ANS: A DIF: 2 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Monopoly MSC: Interpretive

12. A monopolistically competitive market is like both a competitive market and a monopoly in that

a. all three market structures feature easy entry by new firms in the long run. b. firms in all three market structures maximize profit by producing an output level where

marginal revenue equals marginal cost. c. firms in all three market structures produce the welfare-maximizing level of output. d. All of the above are correct.

ANS: B DIF: 2 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Monopoly MSC: Interpretive


13. A monopolistically competitive market is like both a competitive market and a monopoly in that

firms in all three market structures a. can earn economic profits in the short run. b. can earn economic profits in the long run. c. charge a price above marginal cost. d. All of the above are correct.

ANS: A DIF: 2 REF: 16-4 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Monopoly MSC: Interpretive

1502

Chapter 17

Oligopoly

TRUE/FALSE

1. The essence of an oligopolistic market is that there are only a few sellers.

ANS: T DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Definitional

2. Game theory is just as necessary for understanding competitive or monopoly markets as it is for

understanding oligopolistic markets.

ANS: F DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Game theory MSC: Interpretive

3. In a competitive market, strategic interactions among the firms are not important.

ANS: T DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory | Competitive markets MSC: Interpretive

4. For a firm, strategic interactions with other firms in the market become more important as the

number of firms in the market becomes larger.

ANS: F DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Game theory MSC: Interpretive

5. Suppose three firms form a cartel and agree to charge a specific price for their output. Each

individual firm has an incentive to maintain the agreement because the firm’s individual profits will be the greatest under the cartel arrangement.

ANS: F DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Interpretive

6. If firms in an oligopoly agree to produce according to the monopoly outcome, they will produce the

same level of output as they would produce in a Nash equilibrium.

ANS: F DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Cooperation MSC: Interpretive

7. Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same.

ANS: F DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive

Chapter 17/Oligopoly 1503

8. Cartels with a small number of firms have a greater probability of reaching the monopoly outcome

than do cartels with a larger number of firms.

ANS: T DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Interpretive

9. As the number of firms in an oligopoly becomes very large, the price effect disappears.

ANS: T DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive

10. If all of the firms in an oligopoly successfully collude and form a cartel, then total profit for the

cartel is equal to what it would be if the market were a monopoly.

ANS: T DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Interpretive

11. As the number of firms in an oligopoly increases, the magnitude of the price effect increases.

ANS: F DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive

12. All examples of the prisoner’s dilemma game are characterized by one and only one Nash

equilibrium.

ANS: F DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium | Prisoners' dilemma MSC: Interpretive

13. If two players engaged in a prisoner’s dilemma game are likely to repeat the game, they are more

likely to cooperate than if they play the game only once.

ANS: T DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive

14. The story of the prisoners' dilemma contains a general lesson that applies to any group trying to

maintain cooperation among its members.


15. In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the

other prisoner does.


1504 Chapter 17/Oligopoly

16. In the prisoners' dilemma game, confessing is a dominant strategy for each of the two prisoners.

ANS: T DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Dominant strategy MSC: Interpretive

17. The game that oligopolists play in trying to reach the oligopoly outcome is similar to the game that

the two prisoners play in the prisoners' dilemma.

ANS: T DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive

18. In the case of oligopolistic markets, self-interest makes cooperation difficult and it often leads to an

undesirable outcome for the firms that are involved.

ANS: T DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive

19. When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes

both parties to cooperate.


20. A tit-for-tat strategy, in a repeated game, is one in which a player starts by cooperating and then

does whatever the other player did last time.

ANS: T DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional

21. One way that public policy encourages cooperation among oligopolists is through antitrust law.

ANS: F DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Antitrust MSC: Interpretive

22. The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices.

ANS: T DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Sherman Antitrust Act of 1890 MSC: Interpretive

23. Resale price maintenance prevents retailers from competing on price.

ANS: T DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Interpretive


24. Some business practices that appear to reduce competition, such as resale price maintenance, may

have legitimate economic purposes.

ANS: T DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Interpretive

25. In 2007 the U.S. Supreme Court ruled that it was not necessary illegal for manufacturers and

distributors to agree on minimum retail prices.

ANS: T DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Definitional

26. Tying can be thought of as a form of price discrimination.

ANS: T DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Interpretive

27. Policymakers should be aggressive in using their powers to place limits on firm behavior, because

business practices that appear to reduce competition never have any legitimate purposes.

ANS: F DIF: 2 REF: 17-4 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive

SHORT ANSWER

1. Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with

the rest of the cartel. Why?

ANS: Individual profits can be increased at the expense of group profits if individuals cheat on the cartel's cooperative agreement.

PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Interpretive

2. What effect does the number of firms in an oligopoly have on the characteristics of the market?

ANS: As the number of firms increases, the equilibrium quantity of goods provided increases and price falls; the market begins to resemble a competitive one.

PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Analytical


3. Assume that demand for a product that is produced at zero marginal cost is reflected in the table

below.

Quantity Price

0 $36

200 $33

400 $30

600 $27

800 $24

1000 $21

1200 $18

1400 $15

1600 $12

1800 $ 9

2000 $ 6

2200 $ 3

2400 $ 0

a. What is the profit-maximizing level of production for a group of oligopolistic firms that

operate as a cartel? b. Assume that this market is characterized by a duopoly in which collusive agreements are

illegal. What market price and quantity will be associated with a Nash equilibrium?

ANS:

a. Q = 1200 b. Q = 1600, P = 12

PTS: 1 DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Applicative

4. Describe the source of tension between cooperation and self-interest in a market characterized by

oligopoly. Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.

ANS: The source of the tension exists because total profits are maximized when oligopolists cooperate on price and quantity by operating as a monopolist. However, individual profits can be gained by individuals cheating on their cooperative agreement. This is why cooperative agreements among members of a cartel are inherently unstable. This is evident in the problem OPEC experiences in enforcing the cooperative agreement on production and price of crude oil.

PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Interpretive


5. Describe the output and price effects that influence the profit-maximizing decision faced by a firm

in an oligopoly market. How does this differ from output and price effects in a monopoly market?

ANS: Output effect: Price > Marginal cost => increased output will add to profit Price effect: increased quantity is sold at a lower price => lower revenue (profit?) An oligopolist must take into account how the output and price effects will be influenced by competitors' production decisions, or it must assume competitors' production will not change in response to its own actions.

PTS: 1 DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Profit maximization | Oligopoly MSC: Interpretive

6. Explain how the output effect and the price effect influence the production decision of the individual

oligopolist.

ANS: Since the individual oligopolist faces a downward-sloping demand curve, she realizes that if she increases output, all output must be sold at a lower market price. As such, the revenue from selling the additional units at the lower market price must exceed the loss in revenue from selling all previous units at the new lower price. Otherwise, profits will fall as output (production) is increased.

PTS: 1 DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Profit maximization | Oligopoly MSC: Interpretive

7. Ford and General Motors are considering expanding into the Vietnamese automobile market. Devise

a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision.

ANS: The answer should present two strategies for each company, such as “Expand” and “Don’t Expand.” To be a prisoner’s dilemma, each firm needs a dominant strategy, but each firm choosing its dominant strategy results in an outcome that is jointly worse than if they both chose their other strategy. A possible payoff table with payoffs (Ford, GM) is

GM

Expand Don’t Expand

Ford Expand (2, 2) (4, 1)

Don’t Expand (1, 4) (3, 3)

PTS: 1 DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative


8. Nike and Reebok (athletic shoe companies) are considering whether or not to advertise during the

Super Bowl. Devise a simple prisoners' dilemma game to demonstrate the strategic considerations that are relevant to this decision. Does the repeated game scenario differ from a single period game? Is it possible that a repeated game (without collusive agreements) could lead to an outcome that is better than a single-period game? Explain the circumstances in which this may be true.

ANS: The answer should show that if both shoe companies decide to advertise they will both be worse off than if they did not. It should also show that each company has the individual incentive to advertise. The dominant strategy of both companies will be to advertise, regardless of what the other is doing. If the game is repeated more than once it is possible that the shoe companies will decide not to advertise in the hopes that the other company adequately understands the mutually beneficial gains that come from not advertising.

PTS: 1 DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative

9. Outline the purpose of antitrust laws. What do they accomplish?

ANS: The purpose of antitrust laws is to move markets toward a competitive equilibrium outcome. These laws are used to prevent behavior that would lead to excessive market power by any single firm.

PTS: 1 DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Antitrust MSC: Interpretive

10. Explain the practice of resale price maintenance and discuss why it is controversial.

ANS: Resale price maintenance is a requirement by producers that retailers sell their product for a price specified by the manufacturer. It is controversial because on the surface it appears to limit the ability of retailers to compete on the basis of price. However, if the manufacturer does not exercise resale price maintenance a free-rider problem may become evident among the retailers and ultimately lead to lower profits for the manufacturer.

PTS: 1 DIF: 2 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Resale price maintenance MSC: Interpretive

11. Explain the practice of tying and discuss why it is controversial.

ANS: Tying is the practice of bundling goods for sale. It is controversial because it is perceived as a tool for expanding the market power of firms by forcing consumers to purchase additional products. However, economists are skeptical that a buyer's willingness to pay increases just because two products are bundled together. In other words, simply bundling two products together doesn't necessarily add any value. It is more accurately believed to be a form of price discrimination.

PTS: 1 DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Interpretive


Sec00 - Oligopoly

MULTIPLE CHOICE

1. In the language of game theory, a situation in which each person must consider how others might

respond to his or her own actions is called a a. quantifiable situation. b. cooperative situation. c. strategic situation. d. tactical situation.

ANS: C DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional

2. In general, game theory is the study of

a. how people behave in strategic situations. b. how people behave when the possible actions of other people are irrelevant. c. oligopolistic markets. d. all types of markets, including competitive markets, monopolistic markets, and

oligopolistic markets.

ANS: A DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional


a. Strategic situations are more likely to arise when the number of decision-makers is very large rather than very small.

b. Strategic situations are more likely to arise in monopolistically competitive markets than in oligopolistic markets.

c. Game theory is useful in understanding certain business decisions, but it is not really applicable to ordinary games such as chess or tic-tac-toe.

d. Game theory is not necessary for understanding competitive or monopoly markets.

ANS: D DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive

4. In which of the following markets are strategic interactions among firms most likely to occur?

a. markets to which patent and copyright laws apply b. the market for piano lessons c. the market for tennis balls d. the market for corn

ANS: C DIF: 2 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive


Sec01 - Oligopoly - Markets with Only a Few Sellers

MULTIPLE CHOICE

1. A distinguishing feature of an oligopolistic industry is the tension between

a. profit maximization and cost minimization. b. cooperation and self interest. c. producing a small amount of output and charging a price above marginal cost. d. short-run decisions and long-run decisions.

ANS: B DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive

2. In studying oligopolistic markets, economists assume that

a. there is no conflict or tension between cooperation and self-interest. b. it is easy for a group of firms to cooperate and thereby establish and maintain a monopoly

outcome. c. each oligopolist cares only about its own profit. d. strategic decisions do not play a role in such markets.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Cooperation MSC: Interpretive

3. The simplest type of oligopoly is

a. monopoly. b. duopoly. c. monopolistic competition. d. oligopolistic competition.

ANS: B DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive

4. A special kind of imperfectly competitive market that has only two firms is called

a. a two-tier competitive structure. b. an incidental monopoly. c. a doublet. d. a duopoly.

ANS: D DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Definitional

5. An agreement between two duopolists to function as a monopolist usually breaks down because

a. they cannot agree on the price that a monopolist would charge. b. they cannot agree on the output that a monopolist would produce. c. each duopolist wants a larger share of the market in order to capture more profit. d. each duopolist wants to charge a higher price than the monopoly price.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive



a. If duopolists successfully collude, then their combined output will be equal to the output that would be observed if the market were a monopoly.

b. Although the logic of self-interest decreases a duopoly’s price below the monopoly price, it does not push the duopolists to reach the competitive price.

c. Although the logic of self-interest increases a duopoly’s level of output above the monopoly level, it does not push the duopolists to reach the competitive level.


ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive

7. Suppose that Sonny and Cher are duopolists in the music industry. In January, they agree to work

together as a monopolist, charging the monopoly price for their music and producing the monopoly quantity of songs. By February, each singer is considering breaking the agreement. What would you expect to happen next? a. Sonny and Cher will determine that it is in each singer’s best self interest to maintain the

agreement. b. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs

will increase, and the new equilibrium price will decrease. c. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs

will decrease, and the new equilibrium price will increase. d. Sonny and Cher will each break the agreement. The new equilibrium quantity of songs

will increase, and the new equilibrium price also will increase.

ANS: B DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive

8. As the number of firms in an oligopoly increases, the

a. price approaches marginal cost, and the quantity approaches the socially efficient level. b. price and quantity approach the monopoly levels. c. price effect exceeds the output effect. d. individual firms’ profits increase.

ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive

9. If a certain market were a monopoly, then the monopolist would maximize its profit by producing

1,000 units of output. If, instead, that market were a duopoly, then which of the following outcomes would be most likely if the duopolists successfully collude? a. Each duopolist produces 1,000 units of output. b. Each duopolist produces 600 units of output. c. One duopolist produces 400 units of output and the other produces 600 units of output. d. One duopolist produces 800 units of output and the other produces 400 units of output.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Applicative


Table 17-1 Imagine a small town in which only two residents, Lisa and Mark, own wells that produce safe drinking water. Each week Lisa and Mark work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Lisa and Mark can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below:

Quantity

(in gallons) Price Total Revenue

(and Total Profit)

0 $120 $0

100 110 11,000

200 100 20,000

300 90 27,000

400 80 32,000

500 70 35,000

600 60 36,000

700 50 35,000

800 40 32,000

900 30 27,000

1,000 20 20,000

1,100 10 11,000

1,200 0 0

10. Refer to Table 17-1. If Lisa and Mark operate as a profit-maximizing monopoly in the market for

water, what price will they charge? a. $20 b. $40 c. $60 d. $70

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Monopoly MSC: Applicative


water, how many gallons of water will be produced and sold? a. 0 b. 500 c. 600 d. 1,200

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Monopoly MSC: Applicative



water, how much profit will each of them earn? a. $0 b. $18,000 c. $32,000 d. $36,000

ANS: B DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Monopoly MSC: Applicative

13. Refer to Table 17-1. If the market for water were perfectly competitive instead of monopolistic,

how many gallons of water would be produced and sold? a. 0 b. 600 c. 900 d. 1,200

ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Competitive markets MSC: Applicative

14. Refer to Table 17-1. What is the socially efficient quantity of water?

a. 0 gallons b. 600 gallons c. 900 gallons d. 1,200 gallons


15. Refer to Table 17-1. If this market for water were perfectly competitive instead of monopolistic,

what price would be charged? a. $0 b. $50 c. $60 d. $120

ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Competitive markets MSC: Applicative


16. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from

operating as a monopoly. What will be the price of water once Lisa and Mark reach a Nash equilibrium? a. $30 b. $40 c. $50 d. $60

ANS: B DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Analytical

17. Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Lisa and Mark from

operating as a monopoly. How many gallons of water will be produced and sold once Lisa and Mark reach a Nash equilibrium? a. 600 b. 700 c. 800 d. 900

ANS: C DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Analytical

Table 17-2. The table shows the town of Pittsville’s demand schedule for gasoline. For simplicity, assume the town’s gasoline seller(s) incur no costs in selling gasoline.

Quantity (in gallons) Price

Total Revenue (and total profit)

0 $10 $0

100 9 900 200 8 1,600 300 7 2,100 400 6 2,400 500 5 2,500 600 4 2,400 700 3 2,100 800 2 1,600 900 1 900

1,000 0 0

18. Refer to Table 17-2. If the market for gasoline in Pittsville is perfectly competitive, then the

equilibrium price of gasoline is a. $8 and the equilibrium quantity is 200 gallons. b. $5 and the equilibrium quantity is 500 gallons. c. $2 and the equilibrium quantity is 800 gallons. d. $0 and the equilibrium quantity is 1,000 gallons.

ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Perfect competition TOP: Perfect Competition MSC: Applicative


19. Refer to Table 17-2. If the market for gasoline in Pittsville is a monopoly, then the profit-

maximizing monopolist will charge a price of a. $8 and sell 200 gallons. b. $5 and sell 500 gallons. c. $2 and sell 800 gallons. d. $0 and sell 1,000 gallons.

ANS: B DIF: 2 REF: 17-1 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Applicative

20. Refer to Table 17-2. If there are exactly two sellers of gasoline in Pittsville and if they collude,

then which of the following outcomes is most likely? a. Each seller will sell 500 gallons and charge a price of $5. b. Each seller will sell 500 gallons and charge a price of $2.50. c. Each seller will sell 350 gallons and charge a price of $3. d. Each seller will sell 250 gallons and charge a price of $5.

ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Applicative

21. Refer to Table 17-2. If there are exactly three sellers of gasoline in Pittsville and if they collude,

then which of the following outcomes is most likely? a. Each seller will sell 166.67 gallons and charge a price of $1.33. b. Each seller will sell 166.67 gallons and charge a price of $5. c. Each seller will sell 200 gallons and charge a price of $4. d. Each seller will sell 233.33 gallons and charge a price of $5.

ANS: B DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Applicative

22. Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and

BQ. If Exxoff sells 300 gallons and BQ sells 400 gallons, then a. Exxoff’s profit is $900 and BQ’s profit is $1,200. b. Exxoff’s profit is $2,100 and BQ’s profit is $2,400. c. there is an excess demand for gasoline in Pittsville. d. there is an excess supply of gasoline in Pittsville.

ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Applicative


23. Refer to Table 17-2. Suppose there are exactly two sellers of gasoline in Pittsville: Exxoff and

BQ. Currently, Exxoff sells 300 gallons and BQ sells 400 gallons. Which of the following statements is correct? (Hint: Perform simple interpolation between rows of the chart where necessary.) a. The current situation is a Nash equilibrium. b. The current situation is not a Nash equilibrium, as indicated by the fact that Exxoff’s profit

would increase if it increased its output to 400 gallons and BQ kept its output at 400 gallons.

c. The current situation is not a Nash equilibrium, as indicated by the fact that BQ’s profit would increase if it decreased its output to 350 gallons and Exxoff kept its output at 300 gallons.

d. The current situation is not a Nash equilibrium, as indicated by the fact that both sellers’ profits would increase if they colluded, decided on a total level of output, and agreed to each produce one-half of that amount.

ANS: C DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Applicative


a. When duopoly firms reach a Nash equilibrium, their combined level of output is the monopoly level of output.

b. When oligopoly firms collude, they are behaving as a cartel. c. In an oligopoly, self-interest drives the market to the competitive outcome. d. An oligopoly is an example of monopolistic competition.

ANS: B DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Cartels MSC: Interpretive

25. As the number of firms in an oligopoly increases, the magnitude of the

a. output effect increases. b. output effect decreases. c. price effect increases. d. price effect decreases.

ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive

26. As the number of sellers in an oligopoly becomes very large,

a. the quantity of output approaches the socially efficient quantity. b. the price approaches marginal cost. c. the price effect is diminished. d. All of the above are correct.



27. In markets characterized by oligopoly,

a. the oligopolists earn the highest profit when they cooperate and behave like a monopolist. b. collusive agreements will always prevail. c. collective profits are always lower with cartel arrangements than they are without cartel

arrangements. d. pursuit of self-interest by profit-maximizing firms always maximizes collective profits in

the market.

ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Interpretive

28. As a group, oligopolists would always be better off if they would act collectively

a. as if they were each seeking to maximize their own individual profits. b. in a manner that would prohibit collusive agreements. c. as a single monopolist. d. as a single perfectly competitive firm.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Interpretive

29. As a group, oligopolists would always earn the highest profit if they would

a. produce the perfectly competitive quantity of output. b. produce more than the perfectly competitive quantity of output. c. charge the same price that a monopolist would charge if the market were a monopoly. d. operate according to their own individual self-interests.


30. Because each oligopolist cares about its own profit rather than the collective profit of all the

oligopolists together, a. they are unable to maintain the same degree of monopoly power enjoyed by a monopolist. b. each firm's profit always ends up being zero. c. society is worse off as a result. d. Both a and c are correct.



Table 17-3. The information in the table below shows the total demand for premium-channel digital cable TV subscriptions in a small urban market. Assume that each digital cable TV operator pays a fixed cost of $200,000 (per year) to provide premium digital channels in the market area and that the marginal cost of providing the premium channel service to a household is zero.

Quantity Price (per year)

0 $180

3,000 $150

6,000 $120

9,000 $ 90

12,000 $ 60

15,000 $ 30

18,000 $ 0

31. Refer to Table 17-3. If there is only one digital cable TV company in this market, what price would

it charge for a premium digital channel subscription to maximize its profit? a. $30 b. $60 c. $90 d. $150

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Applicative

32. Refer to Table 17-3. Assume there are two digital cable TV companies operating in this market. If

they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that a. each firm will charge a price of $90 and each firm will sell 4,500 subscriptions. b. each firm will charge a price of $90 and each firm will sell 9,000 subscriptions. c. each firm will charge a price of $120 and each firm will sell 3,000 subscriptions. d. each firm will charge a price of $150 and each firm will sell 1,500 subscriptions.

ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly | Collusion MSC: Applicative

33. Refer to Table 17-3. Assume there are two profit-maximizing digital cable TV companies operating

in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. How much profit will each company earn? a. $610,000 b. $550,000 c. $410,000 d. $205,000

ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly | Collusion MSC: Applicative



in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. How many premium digital channel cable TV subscriptions will be sold altogether when this market reaches a Nash equilibrium? a. 6,000 b. 9,000 c. 12,000 d. 15,000



in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. What price will premium digital channel cable TV subscriptions be sold at when this market reaches a Nash equilibrium? a. $30 b. $60 c. $90 d. $120

ANS: B DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Applicative

36. Refer to Table 17-3. Assume that there are two profit-maximizing digital cable TV companies

operating in this market. Further assume that they are not able to collude on the price and quantity of premium digital channel subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibrium? a. $25,000 b. $90,000 c. $160,000 d. $215,000



Table 17-4. The information in the table below shows the total demand for high-speed Internet subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $200,000 (per year) and that the marginal cost of providing an additional subscription is always $80.

Quantity Price (per year)

0 $320

2,000 $280

4,000 $240

6,000 $200

8,000 $160

10,000 $120

12,000 $ 80

14,000 $ 40

16,000 $ 0

37. Refer to Table 17-4. Suppose there is only one high-speed Internet service provider in this market

and it seeks to maximize its profit. The company will a. sell 6,000 subscriptions and charge a price of $200 for each subscription. b. sell 8,000 subscriptions and charge a price of $160 for each subscription. c. sell 10,000 subscriptions and charge a price of $120 for each subscription. d. sell 12,000 subscriptions and charge a price of $80 for each subscription.

ANS: A DIF: 3 REF: 17-1 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Applicative

38. Refer to Table 17-4. Assume there are two high-speed Internet service providers that operate in this

market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that a. each firm will charge a price of $120 and each firm will sell 5,000 subscriptions. b. each firm will charge a price of $160 and each firm will sell 4,000 subscriptions. c. each firm will charge a price of $100 and each firm will sell 3,000 subscriptions. d. each firm will charge a price of $200 and each firm will sell 3,000 subscriptions.

ANS: D DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly | Collusion MSC: Applicative

39. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers

operating in this market. Further assume that they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions. How much profit will each company earn? a. $80,000 b. $120,000 c. $160,000 d. $210,000

ANS: C DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly | Collusion MSC: Applicative


40. Refer to Table 17-4. Assume there are two profit-maximizing high-speed Internet service providers

operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. How many subscriptions will be sold altogether when this market reaches a Nash equilibrium? a. 6,000 b. 8,000 c. 10,000 d. 12,000


41. Refer to Table 17-4. Assume there are two high-speed Internet service providers operating in this

market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. What price will they charge for a subscription when this market reaches a Nash equilibrium? a. $120 b. $160 c. $200 d. $240


42. Refer to Table 17-4. Assume that there are two profit-maximizing high-speed Internet service

providers operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibrium? a. $120,000 b. $150,000 c. $200,000 d. $225,000

ANS: A DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Applicative


Table 17-5. Imagine a small town in which only two residents, Bill and Ben, own wells that produce safe drinking water. Each week Bill and Ben work together to decide how many gallons of water to pump, to bring the water to town, and to sell it at whatever price the market will bear. Assume Bill and Ben can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water are shown in the table below.

Weekly

Quantity

(in gallons)

Price

Weekly

Total Revenue

(and Total Profit)

0 $12 $ 0

10 11 110

20 10 200

30 9 270

40 8 320

50 7 350

60 6 360

70 5 350

80 4 320

90 3 270

100 2 200

110 1 110

120 0 0

43. Refer to Table 17-5. Since Bill and Ben operate as a profit-maximizing monopoly in the market for

water, what price will they charge for water? a. $2 b. $4 c. $6 d. $7

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Applicative

44. Refer to Table 17-5. If the market for water were perfectly competitive instead of monopolistic,

how many gallons of water would be produced and sold? a. 70 b. 90 c. 110 d. 120



45. Refer to Table 17-5. As long as Bill and Ben operate as a profit-maximizing monopoly, what will

their combined weekly revenue amount to? a. $200 b. $270 c. $350 d. $360

ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Applicative

46. Refer to Table 17-5. The socially efficient level of water supplied to the market would be

a. 60 gallons. b. 80 gallons. c. 100 gallons. d. 120 gallons.


47. Refer to Table 17-5. Suppose the town enacts new antitrust laws that prohibit Bill and Ben from

operating as a monopolist. What will the new price of water be once the Nash equilibrium is reached? a. $3 b. $4 c. $5 d. $6

ANS: B DIF: 3 REF: 17-1 NAT: Analytic LOC: The role of government TOP: Nash equilibrium MSC: Applicative

Scenario 17-1. Assume that the countries of Irun and Urun are the only two producers of crude oil. Further assume that both countries have entered into an agreement to maintain certain production levels in order to maximize profits. In the world market for oil, the demand curve is downward sloping.

48. Refer to Scenario 17-1. The fact that both countries have colluded to earn higher profit shows their

desire to keep their combined level of output a. above the monopoly level. b. below the Nash equilibrium level. c. equal to the Nash equilibrium level. d. above the Nash equilibrium level.

ANS: B DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Analytical


49. Refer to Scenario 17-1. As long as the combined level of output is less than the Nash equilibrium

level, both Irun and Urun have the individual incentive to a. hold production constant. b. decrease production. c. increase production. d. increase price.

ANS: C DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Analytical

50. Refer to Scenario 17-1. The agreed-upon production level between the two countries will

invariably be a. lower than the Nash equilibrium level. b. equal to the Nash equilibrium level. c. equal to the duopoly market equilibrium level. d. higher than the duopoly market equilibrium level.

ANS: A DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Analytical

51. Refer to Scenario 17-1. If Irun fails to live up to the production agreement and overproduces, which

of the following statements will be true of Urun's condition? a. Urun will invariably be worse off than before the agreement was broken. b. Urun will counter by decreasing its production in order to maintain price stability. c. Urun's profit will be maximized by holding its production constant. d. Urun’s profit will decrease if it follows suit and increases production.

ANS: A DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Analytical

52. Assuming that oligopolists do not have the opportunity to collude, once they have reached the Nash

equilibrium, it a. is always in their best interest to supply more to the market. b. is always in their best interest to supply less to the market. c. is always in their best interest to leave their quantities supplied unchanged. d. may be in their best interest to do any of the above, depending on market conditions.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Interpretive

53. When an oligopoly market reaches a Nash equilibrium,

a. the market price will be different for each firm. b. the firms will not have behaved as profit maximizers. c. a firm will have chosen its best strategy, given the strategies chosen by other firms in the

market. d. a firm will not take into account the strategies of competing firms.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Interpretive


54. In a duopoly situation, the logic of self-interest results in a total output level that

a. equals the output level that would prevail in a competitive market. b. equals the output level that would prevail in a monopoly. c. exceeds the monopoly level of output, but falls short of the competitive level of output. d. falls short of the monopoly level of output.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Analytical

55. As a group, oligopolists earn the highest profit when they

a. achieve a Nash equilibrium. b. produce a total quantity of output that falls short of the Nash-equilibrium total quantity. c. produce a total quantity of output that exceeds the Nash-equilibrium total quantity. d. charge a price that falls short of the Nash-equilibrium price.

ANS: B DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Nash equilibrium MSC: Analytical

56. In order to be successful, a cartel must

a. find a way to encourage members to produce more than they would otherwise produce. b. agree on the total level of production for the cartel, but they need not agree on the amount

produced by each member. c. agree on the total level of production and on the amount produced by each member. d. agree on the prices charged by each member, but they need not agree on amounts

produced.


57. In a particular town, Metrovision and Cableview are the only two providers of cable TV service.

Metrovision and Cableview constitute a a. duopoly, whether they collude or not. b. cartel, whether they collude or not. c. Nash industry, whether they collude or not. d. monopolistically competitive market if they charge the same price.

ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive

58. Which of these situations produces the largest profits for oligopolists?

a. The firms reach a Nash equilibrium. b. The firms reach the monopoly outcome. c. The firms reach the competitive outcome. d. The firms produce a quantity of output that lies between the competitive outcome and the

monopoly outcome.



59. When firms have agreements among themselves on the quantity to produce and the price at which to

sell output, we refer to their form of organization as a a. Nash arrangement. b. cartel. c. monopolistically competitive oligopoly. d. perfectly competitive oligopoly.

ANS: B DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Definitional

60. The equilibrium quantity in markets characterized by oligopoly is

a. higher than in monopoly markets and higher than in perfectly competitive markets. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. lower than in monopoly markets and higher than in perfectly competitive markets. d. lower than in monopoly markets and lower than in perfectly competitive markets.

ANS: B DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Equilibrium quantity MSC: Analytical

61. The equilibrium price in a market characterized by oligopoly is

a. higher than in monopoly markets and higher than in perfectly competitive markets. b. higher than in monopoly markets and lower than in perfectly competitive markets. c. lower than in monopoly markets and higher than in perfectly competitive markets. d. lower than in monopoly markets and lower than in perfectly competitive markets.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Equilibrium price MSC: Analytical

62. When oligopolistic firms interacting with one another each choose their best strategy given the

strategies chosen by other firms in the market, we have a. a cartel. b. a group of oligopolists behaving as a monopoly. c. a Nash equilibrium. d. the perfectly competitive outcome.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Definitional

63. As the number of firms in an oligopoly market

a. decreases, the price charged by firms likely decreases. b. decreases, the market approaches the competitive market outcome. c. increases, the market approaches the competitive market outcome. d. increases, the market approaches the monopoly outcome.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Analytical


64. Assume oligopoly firms are profit maximizers, they do not form a cartel, and they take other firms'

production levels as given. Then in equilibrium the output effect a. must dominate the price effect. b. must be smaller than the price effect. c. must balance with the price effect. d. can be larger or smaller than the price effect.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Equilibrium MSC: Analytical

65. For cartels, as the number of firms (members of the cartel) increases,

a. the monopoly outcome becomes more likely. b. the magnitude of the price effect decreases. c. the more concerned each seller is about its own impact on the market price. d. the easier it becomes to observe members violating their agreements.

ANS: B DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Interpretive

66. Suppose a market is initially perfectly competitive with many firms selling an identical product.

Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect a. an increase in market output and an increase in the price of the product. b. an increase in market output and an decrease in the price of the product. c. a decrease in market output and an increase in the price of the product. d. a decrease in market output and a decrease in the price of the product.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive

67. Cartels are difficult to maintain because

a. antitrust laws are difficult to enforce. b. cartel agreements are conducive to monopoly outcomes. c. there is always tension between cooperation and self-interest in a cartel. d. firms pay little attention to the decisions made by other firms.


68. There are two types of markets in which firms face some competition yet are still able to have some

control over the prices of their products. Those two types of market are a. monopolistic competition and oligopoly. b. duopoly and triopoly. c. perfect competition and monopolistic competition. d. duopoly and imperfect competition.

ANS: A DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly | Monopolistic competition TOP: Markets MSC: Interpretive


69. A group of firms that act in unison to maximize collective profits is called a

a. monopolistically competitive industry. b. monopoly. c. cartel. d. Nash equilibrium market.

ANS: C DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Definitional

70. An agreement among firms regarding price and/or production levels is called

a. an antitrust market. b. a free-trade arrangement. c. collusion. d. a Nash agreement.

ANS: C DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Definitional

71. If duopolists individually pursue their own self-interest when deciding how much to produce, the

amount they will produce collectively will a. be less than the monopoly quantity. b. be equal to the monopoly quantity. c. be greater than the monopoly quantity. d. Any of the above are possible.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive

72. If duopolists individually pursue their own self-interest when deciding how much to produce, the

profit-maximizing price they will charge for their product will be a. less than the monopoly price. b. equal to the perfectly competitive market price. c. greater than the monopoly price. d. possibly less than or greater than the monopoly price.

ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive

73. To increase their individual profits, members of a cartel have an incentive to

a. charge a higher price than the other members of the cartel. b. increase production above the level agreed upon. c. ignore the choices made by the other firms and act as a monopolist. d. charge the same price a monopolist would charge.



74. Once a cartel is formed, the market is in effect served by

a. a monopoly. b. an oligopoly. c. imperfect competition. d. monopolistic competition.


75. A situation in which firms choose their best strategy given the strategies chosen by the other firms in

the market is called a. a competitive equilibrium. b. an open-market solution. c. a socially-optimal solution. d. a Nash equilibrium.

ANS: D DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Definitional

76. If an oligopolist is part of a cartel that is collectively producing the monopoly level of output, then

that oligopolist has the incentive to lower production with the aim of a. lowering prices. b. increasing profits for the group of firms as a whole. c. increasing profits for itself, regardless of the impact on profits for the group of firms as a

whole. d. None of the above is correct.

ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Analytical

77. When price is above marginal cost, selling one more unit at the current price will increase profit.

This concept is known as the a. income effect. b. price effect. c. output effect. d. cartel effect.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Profit maximization MSC: Definitional

78. In imperfectly competitive markets, increasing production will decrease the price of all units sold.

This concept is known as the a. income effect. b. cost effect. c. output effect. d. price effect.

ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Profit maximization MSC: Definitional


79. In a typical cartel agreement, the cartel maximizes profit when it

a. behaves as a monopolist. b. behaves as a duopolist. c. is flexible in enforcing production targets. d. behaves as a perfectly competitive firm.


80. An oligopolist will increase production if the output effect is

a. less than the price effect. b. equal to the price effect. c. greater than the price effect. d. The oligopolist never has an incentive to increase production.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | Profit maximization MSC: Interpretive

81. As the number of firms in an oligopoly increases,

a. each seller becomes more concerned about its impact on the market price. b. the output effect decreases. c. the total quantity of output produced by firms in the market gets closer to the socially

efficient quantity. d. the oligopoly has more market power and firms earn a greater profit.

ANS: C DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive

82. When an oligopoly grows very large, the

a. output effect disappears. b. price effect disappears. c. output effect equals the price effect. d. price of the product greatly exceeds marginal cost.


83. As the number of firms in an oligopoly increases, the price approaches

a. zero. b. marginal cost. c. infinity. d. the monopoly price.



84. Like monopolists, oligopolists are aware that an increase in the quantity of output always

a. reduces the price of their product. b. reduces their profit. c. reduces their revenue. d. reduces productivity.

ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Interpretive

85. Oligopolies would like to act like a

a. duopoly, but self-interest often drives them closer to the perfectly competitive outcome. b. competitive firm, but self-interest often drives them closer to the duopoly outcome. c. monopoly, but self-interest often drives them to charge a higher price than would be

charged by a monopoly. d. monopoly, but self-interest often drives them closer to the perfectly competitive outcome.


86. Oligopolies can end up looking like competitive markets if the number of firms is

a. large and they all cooperate. b. large and they do not cooperate. c. small and they all cooperate. d. small and they do not cooperate.


87. The theory of oligopoly provides another reason that free trade can benefit all countries because

a. increased competition leads to larger deadweight losses. b. as the number of firms within a given market increases, the price of the good decreases. c. as the number of firms within a given market increases, the profit of each firm increases. d. All of the above are correct.

ANS: B DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | International trade MSC: Interpretive

88. Firms do not need to be concerned about striking a balance between the price effect and the output

effect when making production decisions in which of the following types of markets? a. oligopoly b. duopoly c. monopoly d. competitive markets

ANS: D DIF: 2 REF: 17-1 TOP: Profit maximization MSC: Interpretive


89. If nations such as Germany, Japan, and the United States prohibited international trade in

automobiles, a likely effect would be that a. the price effect would become a more significant consideration for each firm that makes

automobiles. b. the excess of price over marginal cost would become less pronounced in the automobile

market. c. all countries would become better off. d. automobile producers in the U.S. would collude to produce a large number of cars.

ANS: A DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | International trade MSC: Interpretive

90. The theory of oligopoly provides a reason as to why

a. perfect competition is not a useful object of study. b. price is less than marginal cost for many firms. c. all countries can benefit from free trade among nations. d. firms do not want to capture larger shares of their markets.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Oligopoly | International trade MSC: Interpretive

91. During the 1990s, the members of OPEC operated independently from one another, causing the

world market for crude oil to become close to a. a monopoly market. b. an oligopoly market. c. a duopoly market. d. a competitive market.

ANS: D DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: OPEC MSC: Interpretive


92. Consider the diagram below, which shows the market demand curve for a particular product.

Suppose this market is served by two duopolists who each face the marginal cost curve shown in the diagram. The marginal revenue curve that a monopolist would face in this market is also shown. Which of the following statements is true?

a. The total output in this market will likely be 2 units when the market is served by a duopoly.

b. The price in this market will likely be $6 when the market is served by a duopoly. c. The total revenue to each firm will likely be more than $16 when the market is served by a

duopoly. d. The total output in this market will likely be less than 4 units when the market is served by

a duopoly.

ANS: D DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Interpretive

93. The more firms an oligopoly has,

a. the more market power the oligopoly has. This results in higher prices and lower quantities of output than an oligopoly with fewer firms would have.

b. the more important the price effect is, resulting in the market price being higher than when there are fewer firms in the oligopoly.

c. the farther market price will be from marginal cost. d. the more likely the firms will charge a price closer to the perfectly competitive price.



94. In an oligopoly, the total output produced in the market is

a. higher than the total output that would be produced if the market were a monopoly and higher than the total output that would be produced if the market were perfectly competitive.

b. higher than the total output that would be produced if the market were a monopoly but lower than the total output that would be produced if the market were perfectly competitive.

c. lower than the total output that would be produced if the market were a monopoly but higher than the total output that would be produced if the market were perfectly competitive.

d. lower than the total output that would be produced if the market were a monopoly and lower than the total output that would be produced if the market were perfectly competitive.


Table 17-6. The table shows the demand schedule for a particular product.

Quantity Price

0 16

1 14

2 12

3 10

4 8

5 6

6 4

7 2

8 0

95. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a

cartel. What price will the cartel charge in this market if the marginal cost of production is $0? a. $6 b. $8 c. $10 d. $12

ANS: B DIF: 2 REF: 17-1 NAT: Analytic TOP: Cartels MSC: Applicative

96. Refer to Table 17-6. Suppose the market for this product is served by two firms that have formed a

cartel. What price will the cartel charge in this market if the marginal cost of production is $4? a. $6 b. $8 c. $10 d. $12

ANS: C DIF: 2 REF: 17-1 NAT: Analytic TOP: Cartels MSC: Applicative


Table 17-7. The table shows the demand schedule for a particular product.

Quantity Price

0 10

5 9

10 8

15 7

20 6

25 5

30 4

35 3

40 2

45 1

50 0

97. Refer to Table 17-7. Suppose the market for this product is served by two duopolists who have

formed a cartel and are colluding to set the price and quantity in this market. If the marginal cost to produce this product is constant at $2 per unit, then what price will the cartel set in this market? a. $4 b. $5 c. $6 d. $7


98. Refer to Table 17-7. Suppose the marginal cost to produce this product is constant at $1 per unit.

If this market is served by two duopolists who choose their production levels independently, acting in their own self-interest, what is the Nash equilibrium production level for each firm? a. 5 units b. 10 units c. 15 units d. 20 units

ANS: C DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly | Nash equilibrium MSC: Applicative

99. Refer to Table 17-7. Suppose that the marginal cost to produce this product is constant at $1 per

unit and that the fixed cost of producing this product is $10. If the market is served by two duopolists who each, acting in their own self-interest, choose the Nash equilibrium level of production, how much profit will each firm earn? a. $10 b. $20 c. $35 d. $50

ANS: C DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly | Nash equilibrium MSC: Applicative


Table 17-8. For a certain small town, the table shows the demand schedule for water. Assume the marginal cost of supplying water is constant at $4 per bottle.

Price Quantity

(bottles)

$9 100

$8 200

$7 300

$6 400

$5 500

$4 600

$3 700

$2 800

100. Refer to Table 17-8. If there were many suppliers of bottled water, what would be the price and

quantity? a. The price would be $6 per gallon and the quantity would be 400 gallons. b. The price would be $5 per gallon and the quantity would be 500 gallons. c. The price would be $4 per gallon and the quantity would be 600 gallons. d. The price would be $3 per gallon and the quantity would be 700 gallons.

ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Perfect competition TOP: Competitive markets MSC: Applicative

101. Refer to Table 17-8. If there were only one supplier of water, what would be the price and quantity?

a. The price would be $7 per gallon and the quantity would be 300 gallons. b. The price would be $6 per gallon and the quantity would be 400 gallons. c. The price would be $5 per gallon and the quantity would be 500 gallons. d. The price would be $4 per gallon and the quantity would be 600 gallons.

ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Applicative

102. Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, and if they have

successfully formed a cartel, then what would be the price and the market quantity? a. The price would be $7 per bottle and the market quantity would be 300 bottles. b. The price would be $6 per bottle and the market quantity would be 400 bottles. c. The price would be $5 per bottle and the market quantity would be 500 bottles. d. The price would be $4 per bottle and the market quantity would be 600 bottles.

ANS: A DIF: 2 REF: 17-1 TOP: Cartels MSC: Applicative


103. Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, and if they have

successfully formed a cartel and split the market evenly, then how many bottles will Callie supply? a. 50 b. 100 c. 150 d. 200


104. Refer to Table 17-8. If there are two suppliers of water, Mort and Callie, then what will be their

combined level of output when a Nash equilibrium is reached? a. 200 b. 400 c. 600 d. 800

ANS: B DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Applicative

105. Cartels in the United States are

a. legal if price is competitively determined. b. legal if all firms in the industry agree to the terms of the cartel. c. legal if all conditions of the cartel are made public. d. illegal.

ANS: D DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Interpretive

106. Which of the following would be most likely to contribute to the breakdown of a cartel in a natural

resource (e.g., bauxite) market? a. high prices b. low price elasticity of demand c. high compatibility of member interests d. unequal member ownership of the natural resource


107. An equilibrium in which each firm in an oligopoly maximizes profit, given the actions of its rivals,

is called a. a general equilibrium. b. a dominant equilibrium. c. a Nash equilibrium. d. an oligopoly equilibrium.

ANS: C DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Definitional


108. An oligopoly would tend to restrict output and drive up price if

a. barriers to entering the industry are negligible. b. firms engage in informative advertising. c. firms produce a standardized product. d. firms collude and behave like a monopoly.

ANS: D DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Interpretive

Sec02 - Oligopoly - The Economics of Cooperation

MULTIPLE CHOICE

1. When firms are faced with making strategic choices in order to maximize profit, economists

typically use a. the theory of monopoly to model their behavior. b. the theory of aggressive competition to model their behavior. c. game theory to model their behavior. d. cartel theory to model their behavior.


2. When strategic interactions are important to pricing and production decisions, a typical firm will

a. set the price of its product equal to marginal cost. b. consider how competing firms might respond to its actions. c. generally operate as if it is a monopolist. d. consider exiting the market.

ANS: B DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Interpretive

3. Game theory is important for the understanding of

a. competitive markets. b. monopolies. c. oligopolies. d. all market structures.


4. Game theory is necessary for understanding

a. all market structures. b. competition and oligopoly, but it is not necessary for understanding monopoly. c. monopoly and oligopoly, but it is not necessary for understanding competition. d. oligopoly, but it is not necessary for understanding monopoly or competition.



5. The prisoners' dilemma provides insights into the

a. difficulty of maintaining cooperation. b. benefits of avoiding cooperation. c. benefits of government ownership of monopoly. d. ease with which oligopoly firms maintain high prices.

ANS: A DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive

6. In the prisoners' dilemma game, self-interest leads

a. each prisoner to confess. b. to a breakdown of any agreement that the prisoners might have made before being

questioned. c. to an outcome that is not particularly good for either prisoner. d. All of the above are correct.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive

7. The likely outcome of the standard prisoners' dilemma game is that

a. neither prisoner confesses. b. exactly one prisoner confesses. c. both prisoners confess. d. Not enough information is given to answer this question.

ANS: C DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive

8. The prisoners' dilemma is an important game to study because

a. most games present zero-sum alternatives. b. it identifies the fundamental difficulty in maintaining cooperative agreements. c. strategic decisions faced by prisoners are identical to those faced by firms engaged in

competitive agreements. d. all interactions among firms are represented by this game.

ANS: B DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Interpretive

9. The prisoners’ dilemma game

a. provides insight into why cooperation is individually rational. b. provides insight into why cooperation is difficult. c. is a game in which neither player has a dominant strategy. d. is a game in which exactly one of the two players has a dominant strategy.



10. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is one

a. in which neither Bonnie nor Clyde confesses. b. in which both Bonnie and Clyde confess. c. that involves neither Bonnie nor Clyde pursuing a dominant strategy. d. that is ideal in terms of Bonnie’s self-interest and in terms of Clyde’s self-interest.


11. In the prisoners’ dilemma game with Bonnie and Clyde as the players, the likely outcome is

a. a very good outcome for both players. b. a very good outcome for Bonnie, but a bad outcome for Clyde. c. a very good outcome for Clyde, but a bad outcome for Bonnie. d. a bad outcome for both players.


12. In a game, a dominant strategy is

a. the best strategy for a player to follow only if other players are cooperative. b. the best strategy for a player to follow, regardless of the strategies followed by other

players. c. a strategy that must appear in every game. d. a strategy that leads to one player's interests dominating the interests of the other players.

ANS: B DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Definitional

13. A dominant strategy is one that

a. makes every player better off. b. makes at least one player better off without hurting the competitiveness of any other

player. c. increases the total payoff for the player. d. is best for the player, regardless of what strategies other players follow.

ANS: D DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Definitional


Table 17-9 Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the healthcare related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates that cigarette smoke causes lung cancer (and other related illnesses). State prosecutors do not have access to the same data used by cigarette manufacturers and thus will have difficulty recovering full costs without the help of at least one cigarette firm study. Each firm has been presented with an opportunity to lower its liability in the suit if it cooperates with attorneys representing the states. Firm B Concede that

cigarette smoke

causes lung cancer

Argue that there is no evidence

that smoke causes cancer

Firm A

Concede that

cigarette smoke

causes lung cancer

Firm A profit = $–20 Firm B profit = $–15


Argue that there

is no evidence that

smoke causes cancer



14. Refer to Table 17-9. Pursuing its own best interests, Firm A will concede that cigarette smoke

causes lung cancer a. only if Firm B concedes that cigarette smoke causes lung cancer. b. only if Firm B does not concede that cigarette smoke causes lung cancer. c. regardless of whether Firm B concedes that cigarette smoke causes lung cancer. d. None of the above. In pursuing its own best interests, Firm A will in no case concede that

cigarette smoke causes lung cancer.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Applicative

15. Refer to Table 17-9. Pursuing its own best interests, Firm B will concede that cigarette smoke

causes lung cancer a. only if Firm A concedes that cigarette smoke causes lung cancer. b. only if Firm A does not concede that cigarette smoke causes lung cancer. c. regardless of whether Firm A concedes that cigarette smoke causes lung cancer. d. None of the above; in pursuing its own best interests, Firm B will in no case concede that

cigarette smoke causes lung cancer.


16. Refer to Table 17-9. If both firms follow a dominant strategy, Firm A's profits (losses) will be

a. $-50 b. $-20 c. $-10 d. $-5

ANS: C DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Applicative


17. Refer to Table 17-9. If both firms follow a dominant strategy, Firm B's profits (losses) will be

a. $-50 b. $-15 c. $-10 d. $-5


18. Refer to Table 17-9. When this game reaches a Nash equilibrium, profits for Firm A and Firm B

will be a. $-5 and $-50, respectively. b. $-10 and $-10, respectively. c. $-20 and $-15, respectively. d. $-50 and $-5, respectively.


Table 17-10 Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a mythical nation). Historically, legislators have made threats of not renewing MFN status because of human rights abuses in Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures by Farland. The payoff table below shows the potential economic gains associated with a game in which Farland may impose trade sanctions against U.S. firms and the United States may not renew MFN status with Farland. The table contains the dollar value of all trade-flow benefits to the United States and Farland.

Farland

Impose trade sanctions

against U.S. firms

Do not impose trade sanctions

against U.S. firms

United

States

Don't renew MFN

status with Farland

U.S. trade value = $65 b Farland trade value = $75 b


Renew MFN status

with Farland



19. Refer to Table 17-10. Pursuing its own best interests, Farland will impose trade sanctions against

U.S. firms a. only if the U.S. does not renew MFN status with Farland. b. only if the U.S. renews MFN status with Farland. c. regardless of whether the U.S. renews MFN status with Farland. d. None of the above is correct. In pursuing its own best interests, Farland will in no case

impose trade sanctions against U.S. firms.



20. Refer to Table 17-10. Pursuing its own best interests, the U.S. will renew MFN status with Farland

a. only if Farland does not impose trade sanctions against U.S. firms. b. only if Farland imposes trade sanctions against U.S. firms. c. regardless of whether Farland imposes trade sanctions against U.S. firms. d. None of the above is correct. In pursuing its own best interests, the United States will in

no case renew MFN status with Farland.


21. Refer to Table 17-10. This particular game

a. features a dominant strategy for the U.S. b. features a dominant strategy for Farland. c. is a version of the prisoners' dilemma game. d. All of the above are correct.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Dominant strategy MSC: Applicative

22. Refer to Table 17-10. If both countries follow a dominant strategy, the value of trade flow benefits

for Farland will be a. $5 b. b. $75 b. c. $275 b. d. $285 b.

ANS: B DIF: 1 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative

23. Refer to Table 17-10. If both countries follow a dominant strategy, the value of trade flow benefits

for the United States will be a. $35 b. b. $65 b. c. $130 b. d. $140 b.


24. Refer to Table 17-10. When this game reaches a Nash equilibrium, the value of trade flow benefits

will be a. United States $35 b and Farland $285 b. b. United States $65 b and Farland $75 b. c. United States $140 b and Farland $5 b. d. United States $130 b and Farland $275 b.



25. Refer to Table 17-10. If trade negotiators are able to communicate effectively about the

consequences of various trade policies (i.e., enter into an agreement about the policy they should adopt), then we would expect the countries to agree to which outcome? a. United States $35 b and Farland $285 b b. United States $65 b and Farland $75 b c. United States $140 b and Farland $5 b d. United States $130 b and Farland $275 b

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative

26. Refer to Table 17-10. Assume that trade negotiators meet to discuss trade policy between the

United States and Farland. If neither party to the negotiation is able to trust the other party, then a. each should assume that the other will choose a strategy that optimizes total value of the

trade relationship. b. the Nash equilibrium will provide the largest possible gains to each party. c. Chinese negotiators should assume that United States negotiators will implement a policy

that is in the mutual best interest of both countries. d. each should follow its dominant strategy.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative

Table 17-11 Two home-improvement stores (Big Box Deluxe and Homes R Us) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits of the two home-improvement stores are shown in the table below.

Big Box Deluxe Increase the size of store

and parking lot

Do not increase the size of

store and parking lot

Homes

R Us

Increase the size

of store and

parking lot

Big Box Deluxe = $0.50 million

Homes R Us = $0.75 million



Do not increase

the size of store

and parking lot





27. Refer to Table 17-11. Increasing the size of its store and parking lot is a dominant strategy for

a. Big Box Deluxe, but not for Homes R Us. b. Homes R Us, but not for Big Box Deluxe. c. both stores. d. neither store.

ANS: C DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Applicative


28. Refer to Table 17-11. If both stores follow a dominant strategy, Homes R Us's annual profit will

grow by a. $0.30 million. b. $0.75 million. c. $1.25 million. d. $1.70 million.

ANS: B DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative

29. Refer to Table 17-11. If both stores follow a dominant strategy, Big Box Deluxe's annual profit will

grow by a. $0.20 million. b. $0.50 million. c. $1.00 million. d. $1.60 million.

ANS: B DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative

30. Refer to Table 17-11. When this game reaches a Nash equilibrium, annual profit will grow by

a. $0.75 million for Homes R Us and by $0.50 million for Big Box Deluxe. b. $1.70 million for Homes R Us and by $0.20 million for Big Box Deluxe. c. $0.30 million for Homes R Us and by $1.60 million for Big Box Deluxe. d. $1.25 million for Homes R Us and by $1.00 million for Big Box Deluxe.


31. Refer to Table 17-11. Suppose the owners of Big Box Deluxe and Homes R Us meet for a friendly

game of golf one afternoon and happen to discuss a strategy to optimize growth related profit. They should both agree to a. increase their store and parking lot sizes. b. refrain from increasing their store and parking lot sizes. c. be more competitive in capturing market share. d. share the context of their conversation with the Federal Trade Commission.

ANS: B DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Cartels MSC: Applicative


Figure 17-1. Two companies, ABC and XYZ, each decide whether to produce a high level of output or a low level of output. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.

ABC's profit = $3 million ABC's profit = $2.5 million

ABC's profit = $4 million ABC's profit = $3.5 million

XYZ's profit = $3 million XYZ's profit = $4 million

XYZ's profit = $2.5 million XYZ's profit = $3.5 million

High output Low output

High output

Low output

ABC's Decision

XYZ'sDecision

32. Refer to Figure 17-1. The dominant strategy for ABC is to

a. produce high output, and the dominant strategy for XYZ is to produce high output. b. produce high output, and the dominant strategy for XYZ is to produce low output. c. produce low output, and the dominant strategy for XYZ is to produce high output. d. produce low output, and the dominant strategy for XYZ is to produce low output.

ANS: A DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative

33. Refer to Figure 17-1. Which of the following statements is correct?

a. ABC can potentially earn its highest possible profit if it produces a high level of output, and for that reason it is a dominant strategy for ABC to produce a high level of output.

b. The highest possible combined profit for the two firms occurs when both produce a low level of output, and for that reason producing a low level of output is a dominant strategy for both firms.

c. Regardless of the strategy pursued by ABC, XYZ’s best strategy is to produce a high level of output, and for that reason producing a high level of output is a dominant strategy for XYZ.

d. Our knowledge of game theory suggests that the most likely outcome of the game, if it is played only once, is for one firm to produce a low level of output and for the other firm to produce a high level of output.

ANS: C DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative


34. Refer to Figure 17-1. If this game is played only once, then the most likely outcome is that

a. both firms produce a low level of output. b. ABC produces a low level of output and XYZ produces a high level of output. c. ABC produces a high level of output and XYZ produces a low level of output. d. both firms produce a high level of output.


35. Much of the research on game theory in recent decades was driven by attempts to analyze actions of

players during a. the Great Depression of the 1930s. b. World War II. c. the Cold War between the United States and the Soviet Union. d. the ascendancy of the conservative movement in the United States in the 1970s and 1980s.


36. Consider a game of the “Jack and Jill” type in which a market is a duopoly and each firm decides to

produce either a “high” quantity of output or a “low” quantity of output. If the two firms successfully reach and maintain the cooperative outcome of the game, then a. both the combined profit of the firms and total surplus are maximized. b. the combined profit of the firms is maximized but total surplus is not maximized. c. the combined profit of the firms is not maximized but total surplus is maximized. d. neither the combined profit of the firms nor total surplus is maximized.


37. Games that are played more than once generally

a. lead to outcomes dominated purely by self-interest. b. lead to outcomes that do not reflect joint rationality. c. encourage cheating on cartel production quotas. d. make collusive arrangements easier to enforce.


38. Very often, the reason that players can solve the prisoners' dilemma and reach the most profitable

outcome is that a. each player tries to capture a large portion of the market share. b. the players play the game not once but many times. c. the game becomes more competitive. d. self interest results in the Nash equilibrium which is the best outcome for the players.



39. In a two-person repeated game, a tit-for-tat strategy starts with

a. cooperation and then each player mimics the other player's last move. b. cooperation and then each player is unresponsive to the strategic moves of the other

player. c. noncooperation and then each player pursues his or her own self-interest. d. noncooperation and then each player cooperates when the other player demonstrates a

desire for the cooperative solution.


40. A tit-for-tat strategy starts out

a. conciliatory and then encourages an optimal social outcome among the other players. b. unfriendly and then encourages friendly strategies among players. c. friendly, then penalizes unfriendly players, and forgives them if warranted. d. aggressive, then compensates losing players, and eventually forgives unfriendly players.


41. Individual profit earned by Dave, the oligopolist, depends on which of the following?

(i) The quantity of output that Dave produces (ii) The quantities of output that the other firms in the market produce

(iii) The extent of collusion between Dave and the other firms in the market

a. (i) and (ii) b. (ii) and (iii) c. (iii) only d. (i), (ii), and (iii)


42. Which of the following statements is (are) true of the prisoners' dilemma?

(i) Rational self-interest leads neither party to confess. (ii) Cooperation between the prisoners is difficult to maintain.

(iii) Cooperation between the prisoners is individually rational.

a. (ii) only b. (ii) and (iii) c. (i) and (iii) d. (i), (ii), and (iii)



43. When the prisoners’ dilemma game is generalized to describe situations other than those that

literally involve two prisoners, we see that cooperation between the players of the game a. can be difficult to maintain, but only when cooperation would make at least one of the

players of the game worse off. b. can be difficult to maintain, even when cooperation would make both players of the game

better off. c. always works to the benefit of society as a whole. d. always works to the detriment of society as a whole.


Scenario 17-2. Imagine that two oil companies, Lexxon and PB, own adjacent oil fields. Under the fields is a common pool of oil worth $48 million. Drilling a well to recover oil costs $4 million per well. If each company drills one well, each will get half of the oil and earn a $20 million profit ($24 million in revenue - $4 million in costs). Assume that having X percent of the total wells means that a company will collect X percent of the total revenue.

44. Refer to Scenario 17-2. If Lexxon were to drill a second well, what would its profit be if PB did not

drill a second well? a. $22 million b. $24 million c. $26 million d. $28 million

ANS: B DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Common resources MSC: Applicative

45. Refer to Scenario 17-2. If Lexxon were to drill a second well and PB also drilled a second well,

what would Lexxon's profit be? a. $14 million b. $16 million c. $18 million d. $22 million


46. Refer to Scenario 17-2. PB's dominant strategy would lead to what sort of well-drilling behavior?

a. PB will never drill a second well. b. PB will always drill a second well. c. PB will drill a second well only if Lexxon drills a well. d. PB will drill a second well only if Lexxon does not drill a well.



47. Suppose two companies own adjacent oil fields. Under the two fields is a common pool of oil worth

$30 million. For each well that is drilled, the company that drills the well incurs a cost of $3 million. Each company can drill up to two wells. What is the likely outcome of this game if each company pursues its own self-interest? a. Each company drills one well and experiences a profit of $12 million. b. Each company drills one well and experiences a profit of $10 million. c. Each company drills two wells and experiences a profit of $9 million. d. One company drills two wells and experiences a profit of $14 million; the other company

drills one well and experiences a profit of $7 million.

ANS: C DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Common resources | Prisoners' dilemma MSC: Applicative

48. We know that people tend to overuse common resources. This problem can be viewed as an

example of a. a game in which the players succeed in reaching the cooperative outcome. b. the prisoners’ dilemma. c. a situation to which game theory does not apply because of a lack of strategic thinking. d. a situation to which game theory does not apply because of too many decision-makers.

ANS: B DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Common resources | Prisoners' dilemma MSC: Applicative

49. The paradoxical nature of oligopoly can be demonstrated by the fact that, even though the monopoly

outcome is best for the oligopolists, a. they collude to set the output level equal to the Nash equilibrium level of output. b. they have incentives to increase production above the monopoly outcome. c. they do not behave as profit maximizers. d. self-interest juxtaposes the profits earned at the Nash equilibrium.


50. Hot-dog vendors on the beach fail to cooperate with one another on the quantity of hot-dogs they

should sell to earn monopoly profits. A consequence of their failure is that, relative to the outcome the vendors would like,

(i) the quantity of hot dogs supplied is closer to the socially optimal level. (ii) the price of hot dogs is closer to marginal cost.

(iii) the hot-dog market at the beach is less competitive.

a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. (iii) only

ANS: A DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Analytical


51. Why would lack of cooperation between criminal suspects be desirable for society as a whole?

a. The suspects are able to choose optimal outcomes for themselves by acting in their own self interest.

b. The prisoners' dilemma safeguards the criminals' constitutional rights. c. More criminals will be convicted. d. None of the above is correct.


52. What happens when the prisoners' dilemma game is repeated numerous times in an oligopoly

market? (i) The firms may well reach the monopoly outcome.

(ii) The firms may well reach the competitive outcome. (iii) Buyers of the oligopolists' product will likely be worse off as a result.

a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. (i), (ii), and (iii)


53. In game theory, a Nash equilibrium is

a. an outcome in which each player is doing his best given the strategies chosen by the other players.

b. an outcome in which no player wishes to change their chosen strategy given the strategies chosen by the other players.

c. the outcome that occurs when all players have a dominant strategy. d. All of the above are correct.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Interpretive


Scenario 17-3. Consider two countries, Muria and Zenya, that are engaged in an arms race. Each country must decide whether to build new weapons or to disarm existing weapons. Each country prefers to have more arms than the other because a large arsenal gives it more influence in world affairs. But each country also prefers to live in a world safe from the other country's weapons. The following table shows the possible outcomes for each decision combination. The numbers in each cell represent the country’s ranking of the outcome (4 = best outcome, 1 = worst outcome). Zenya

Build new weapons

Disarm existing weapons

Muria

Build new

weapons

Muria: 2 Zenya: 2

Muria: 4 Zenya: 1

Disarm existing

weapons

Muria: 1 Zenya: 4

Muria: 3 Zenya: 3

54. Refer to Scenario 17-3. If Zenya chooses to build new weapons, then Muria will

a. disarm in order to prevent the loss of influence in world affairs. b. disarm in order to promote world peace. c. build new weapons in order to prevent the loss of influence in world affairs. d. None of the above are correct.


55. Refer to Scenario 17-3. If Zenya chooses to disarm its existing weapons, then Muria will

a. disarm in order to increase its influence in world affairs. b. disarm in order to promote world peace. c. build new weapons in order to promote world peace. d. build new weapons in order to increase its influence in world affairs.


56. Refer to Scenario 17-3. Which of these statements is correct?

(i) Muria is better off building new weapons if Zenya builds new weapons. (ii) Muria is better off building new weapons if Zenya disarms existing weapons.

(iii) Building new weapons is Muria's dominant strategy.




57. Refer to Scenario 17-3. Building new weapons is a dominant strategy for

a. Muria, but not for Zenya. b. Zenya, but not for Muria. c. both Muria and Zenya. d. neither Muria nor Zenya.


58. Refer to Scenario 17-3. Suppose the two countries agreed to disarm existing weapons. In reality

these two countries may have a hard time keeping this agreement due to which of the following reasons?

(i) Even though Muria has no incentive to cheat on the agreement, Zenya has an incentive to cheat on the agreement.

(ii) Much like the prisoners’ dilemma, both countries are better off reneging on the agreement and building new weapons.

(iii) Both countries want to increase their world power by building new weapons.



Scenario 17-4. Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million.

59. Refer to Scenario 17-4. What will these two companies do if they behave as individual profit

maximizers? a. Neither company will advertise. b. Both companies will advertise. c. One company will advertise, the other will not. d. There is no way of knowing without knowing how many customers are stolen through

advertising.



60. Refer to Scenario 17-4. PM Inc.'s dominant strategy is to

a. refrain from advertising regardless of whether Brown Inc. advertises. b. advertise only if Brown Inc. advertises. c. advertise only if Brown Inc. does not advertise. d. advertise regardless of whether Brown Inc. advertises.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Applicative

61. Refer to Scenario 17-4. In 1971, Congress passed a law that banned cigarette advertising on

television. If cigarette companies are profit maximizers, it is likely that a. neither company opposed the ban on advertising. b. Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights

violation. c. both companies sued the federal government on grounds that the ban constitutes a civil

rights violation. d. both companies retaliated with black-market operations.

ANS: A DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative

62. Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the

car and finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do? a. Confess regardless of the partner's decision b. Confess only if the partner confesses c. Don’t confess regardless of the partner's decision d. Don’t confess only if the partner doesn’t confess

ANS: A DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Applicative

63. A lack of cooperation by oligopolists trying to maintain monopoly profits

a. is desirable for society as a whole. b. is not desirable for society as a whole. c. may or may not be desirable for society as a whole. d. is not a concern due to antitrust laws.

ANS: A DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Collusion MSC: Interpretive


64. Oligopolists may well be able to reach their preferred, cooperative outcome if

a. the number of oligopolists is large. b. they learn that a Nash equilibrium is in their best long-term interests. c. a sufficient number of firms can be persuaded to lower their prices. d. the game they play is repeated a sufficient number of times.


65. Martha and Oleg are competitors in a local market and each is trying to decide if it is worthwhile to

advertise. If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $15,000 and the other will earn $7,000. To earn the highest profit, Martha a. should advertise, and she will earn $5,000. b. should advertise, and she will earn $15,000. c. should not advertise, and she will earn $10,000. d. has no dominant strategy.


66. Barb and Sue are competitors in a local market. Each is trying to decide if it is better to advertise on

TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $5,000. If they both advertise on radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $8,000 and the other will earn $3,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $15,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant strategy, then Barb will a. advertise on TV and earn $5,000. b. advertise on radio and earn $7,000. c. not advertise at all and earn $10,000. d. None of the above is correct. Barb and Sue do not have dominant strategies.



67. Dave and Andy are competitors in a local market. Each is trying to decide if it is better to advertise

on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $4,000. If they both advertise on radio, each will earn a profit of $7,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $6,000 and the other will earn $5,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $11,000 and the other will earn $2,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $12,000 and the other will earn $4,000. If both follow their dominant strategy, then Dave will a. advertise on TV and earn $4,000. b. advertise on radio and earn $7,000. c. advertise on TV and earn $11,000. d. not advertise and earn $10,000.

ANS: B DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Dominant strategy MSC: Applicative

68. George and Jerry are competitors in a local market. Each is trying to decide if it is better to advertise

on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $3,000. If they both advertise on radio, each will earn a profit of $5,000. If neither advertises at all, each will earn a profit of $10,000. If one advertises on TV and the other advertises on radio, then the one advertising on TV will earn $4,000 and the other will earn $2,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $8,000 and the other will earn $5,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $9,000 and the other will earn $6,000. If both follow their dominant strategy, then George will a. advertise on TV and earn $3,000. b. advertise on radio and earn $5,000. c. advertise on TV and earn $8,000. d. not advertise and earn $10,000.


69. Laurel and Janet are competitors in a local market and each is trying to decide if it is worthwhile to

advertise. If both of them advertise, each will earn a profit of $5,000. If neither of them advertise, each will earn a profit of $10,000. If one advertises and the other doesn't, then the one who advertises will earn a profit of $12,000 and the other will earn $2,000. In this version of the prisoners' dilemma, if the game is played only once, Laurel should a. advertise, but if the game is to be repeated many times she should probably not advertise. b. advertise, and if the game is to be repeated many times she should still probably advertise. c. not advertise, but if the game is to be repeated many times she should probably advertise. d. not advertise, and if the game is to be repeated many times she should still not advertise.

ANS: A DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Applicative


Table 17-12. This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B).

B Right Left

A Up (2, 2) (3, 1)

Down (1, 3) (0, 0)

70. Refer to Table 17-12. Which of the following statements about this game is true?

a. Up is a dominant strategy for A and Right is a dominant strategy for B. b. Up is a dominant strategy for A and Left is a dominant strategy for B. c. Down is a dominant strategy for A and Right is a dominant strategy for B. d. Down is a dominant strategy for A and Left is a dominant strategy for B.

ANS: A DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Applicative

71. Refer to Table 17-12. Which outcome is the Nash equilibrium in this game?

a. Up-Right b. Up-Left c. Down-Right d. Down-Left


Table 17-13. This table shows a game played between two players, A and B. The payoffs in the table are shown as (Payoff to A, Payoff to B).

B Left Center Right

Up (1, 4) (6, 2) (3, 1)

A Middle (2, 2) (4, 6) (5, 7)

Down (3, 2) (5, 5) (4, 3)

72. Refer to Table 17-13. Which of the following statements regarding this game is true?

a. Both players have a dominant strategy. b. Player A has a dominant strategy, but player B does not have a dominant strategy. c. Player A does not have a dominant strategy, but player B does have a dominant strategy. d. Neither player has a dominant strategy.



73. Refer to Table 17-13. Which of the following outcomes represents a Nash equilibrium in the

game? a. Up-Center b. Middle-Right c. Down-Left d. Down-Center

ANS: B DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Applicative

Table 17-14. This table shows a game played between two players, A and B. The payoffs are given in the table as (Payoff to A, Payoff to B).

B Left Center Right

Up (4, 2) (2, 5) (3, 3)

A Middle (3, 1) (5, 3) (5, 2)

Down (1, 3) (4, 4) (6, 1)

74. Refer to Table 17-14. Which of the following statements is true regarding this game?

a. Both players have a dominant strategy. b. Neither player has a dominant strategy. c. A has a dominant strategy, but B does not have a dominant strategy. d. B has a dominant strategy, but A does not have a dominant strategy.


75. Refer to Table 17-14. This table shows a game played between two players, A and B. The payoffs

in the table are shown as (Payoff to A, Payoff to B). Which of the following outcomes represents a Nash equilibrium in the game? a. Middle-Center b. Down-Center c. Up-Left d. More than one of the above is a Nash equilibrium in this game.



Table 17-15. This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 2 units or 3 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B).

Firm B Q=2 Q=3

Firm A Q=2 (10, 10) (8, 12)

Q=3 (12, 8) (6, 6)

76. Refer to Table 17-15. In this game,

a. neither player has a dominant strategy. b. both players have a dominant strategy. c. Firm A has a dominant strategy, but Firm B does not have a dominant strategy. d. Firm B has a dominant strategy, but Firm A does not have a dominant strategy.


77. Refer to Table 17-15. Which of the following outcomes represent the Nash equilibrium in this

game? a. Q=2 for Firm A and Q=3 for Firm B. b. Q=3 for Firm A and Q=2 for Firm B. c. There is no Nash equilibrium in this game since neither player has a dominant strategy. d. Both a and b are correct.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Nash equilibrium MSC: Applicative

Table 17-16. This table shows a game played between two firms, Firm A and Firm B. In this game each firm must decide how much output (Q) to produce: 5 units or 6 units. The profit for each firm is given in the table as (Profit for Firm A, Profit for Firm B).

Firm B Q=5 Q=6

Firm A Q=5 (24, 24) (10, 30)

Q=6 (30, 10) (19, 19)

78. Refer to Table 17-16. The dominant strategy For Firm A is to produce

a. 5 units and the dominant strategy for Firm B is to produce 5 units. b. 5 units and the dominant strategy for Firm B is to produce 6 units. c. 6 units and the dominant strategy for Firm B is to produce 5 units. d. 6 units and the dominant strategy for Firm B is to produce 6 units.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Dominant strategy MSC: Applicative


79. Refer to Table 17-16. The Nash equilibrium for this game is

a. 5 units of output for Firm A and 5 units of output for Firm B. b. 5 units of output for Firm A and 6 units of output for Firm B. c. 6 units of output for Firm A and 5 units of output for Firm B. d. 6 units of output for Firm A and 6 units of output for Firm B.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma | Nash equilibrium MSC: Applicative

80. The prisoners' dilemma game

a. is a situation in which two players both have dominant strategies which lead to the highest total payoff for the two players.

b. has no Nash equilibrium since players, after agreeing to play their dominant strategy, will have an incentive to switch to another strategy.

c. has a Nash equilibrium, but the Nash equilibrium outcome is not the outcome the players would agree to if they could cooperate with each other.

d. Both a and c are correct.


81. In a prisoners' dilemma game,

a. the solution when playing the game once will be the same as the solution when the players play the game repeatedly, since agreements cannot be maintained in a prisoners' dilemma.

b. if the players play the game repeatedly, the players can achieve a higher payoff, on average, than when they play the game only once.

c. repeated play will always result in a better outcome for both players than when the game is played only once.

d. the tit-for-tat strategy in repeated play requires players to always select the opposite strategy as their opponent.



Table 17-17. Consider a small town that has two grocery stores from which residents can choose to buy a gallon of milk. The store owners each must make a decision to set a high milk price or a low milk price. The payoff table, showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2). Store 2

Low Price High Price

Store 1 Low Price (500, 500) (800, 100)

High Price (100, 800) (650, 650)

82. Refer to Table 17-17. If grocery store 2 sets a low price, what price should grocery store 1 set? And

what will grocery store 1's payoff equal? a. Low price, $500 b. High price, $800 c. Low price, $100 d. High price, $100


83. Refer to Table 17-17. If grocery store 2 sets a high price, what price should grocery store 1 set?

And what will grocery store 1's payoff equal? a. Low price, $800 b. High price, $650 c. Low price, $100 d. High price, $800


84. Refer to Table 17-17. If grocery store 1 sets a low price, what price should grocery store 2 set? And

what will grocery store 2's payoff equal? a. Low price, $500 b. High price, $800 c. Low price, $100 d. High price, $650


85. Refer to Table 17-17. If grocery store 1 sets a high price, what price should grocery store 2 set?

And what will grocery store 2's payoff equal? a. Low price, $800 b. High price, $100 c. Low price, $500 d. High price, $650



86. Refer to Table 17-17. What is grocery store 1's dominant strategy?

a. Grocery store 1 does not have a dominant strategy. b. Grocery store 1 should always set a low price. c. Grocery store 1 should always set a high price. d. Grocery store 1 should set a low price when grocery store 2 sets a low price, and grocery

store 1 should set a high price when grocery store 2 sets a high price.


87. Refer to Table 17-17. What is grocery store 2's dominant strategy?

a. Grocery store 2 does not have a dominant strategy. b. Grocery store 2 should always set a low price. c. Grocery store 2 should always set a high price. d. Grocery store 2 should set a low price when grocery store 1 sets a low price, and grocery

store 2 should set a high price when grocery store 1 sets a high price.


88. Refer to Table 17-17. What is the Nash Equilibrium of this price-setting game?

a. Grocery store 1: Low price Grocery store 2: Low price

b. Grocery store 1: Low price Grocery store 2: High price

c. Grocery store 1: High price Grocery store 2: How price

d. Grocery store 1: High price Grocery store 2: High price



Table 17-18. Amy and Heather are two college roommates who both prefer a clean common space in their dorm room, but neither enjoys cleaning. The roommates must each make a decision to either clean or not clean the dorm room's common space. The payoff table for this situation is provided below, where the higher a player’s payoff number, the better off that player is. The payoffs in each cell are shown as (payoff for Amy, payoff for Heather). Heather Clean Don’t Clean

Amy Clean (75, 75) (15, 100)

Don’t Clean (100, 15) (20, 20)

89. Refer to Table 17-18. If Heather chooses to clean, then Amy will

a. clean and Heather’s payoff will be 75. b. not clean and Heather’s payoff will be 100. c. clean and Heather’s payoff will be 15. d. not clean and Heather’s payoff will be 20.


90. Refer to Table 17-18. If Heather chooses not to clean, then Amy will

a. clean, and Amy’s payoff will be 100. b. not clean, and Amy’s payoff will be 20. c. clean, and Amy’s payoff will be 15. d. not clean, and Amy’s payoff will be 75.


91. Refer to Table 17-18. If Amy chooses to clean, then Heather will

a. clean, and Heather’s payoff will be 75. b. not clean, and Heather’s payoff will be 100. c. clean, and Heather’s payoff will be 15. d. not clean, and Heather’s payoff will be 20.


92. Refer to Table 17-18. If Amy chooses to not clean, then Heather will

a. clean, and Heather’s payoff will be 20. b. not clean, and Heather’s payoff will be 100. c. clean, and Heather’s payoff will be 75. d. not clean, and Heather’s payoff will be 20.



93. Refer to Table 17-18. What is Amy's dominant strategy?

a. Amy has no dominant strategy. b. Amy should always choose Clean. c. Amy should always choose Don’t Clean. d. Amy has two dominant strategies, Clean and Don’t Clean, depending on the choice

Heather makes.


94. Refer to Table 17-18. What is Heather's dominant strategy?

a. Heather has no dominant strategy. b. Heather should always choose Clean. c. Heather should always choose Don’t Clean. d. Heather has two dominant strategies, Clean and Don’t Clean, depending on the choice

Amy makes.


95. Refer to Table 17-18. What is the Nash Equilibrium in this dorm room cleaning game?

a. Amy: Clean Heather: Clean

b. Amy: Don't Clean Heather: Clean

c. Amy: Clean Heather: Don't Clean

d. Amy: Don't Clean Heather: Don't Clean

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Applicative


Figure 17-2. John and Michael are roommates. On a particular day, their apartment needs to be cleaned. Each person has to decide whether to take part in cleaning. At the end of the day, either the apartment will be completely clean (if one or both roommates take part in cleaning), or it will remain dirty (if neither roommate cleans). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows:

John's happiness = 7 John's happiness = 10

John's happiness = 3 John's happiness = 6

Michael's happiness = 8 Michael's happiness = 3

Michael's happiness = 10 Michael's happiness = 4

Clean Don't clean

Clean

Don't clean

John's Decision

Michael'sDecision

96. Refer to Figure 17-2. The dominant strategy for John is to

a. clean, and the dominant strategy for Michael is to clean. b. clean, and the dominant strategy for Michael is to refrain from cleaning. c. refrain from cleaning, and the dominant strategy for Michael is to clean. d. refrain from cleaning, and the dominant strategy for Michael is to refrain from cleaning.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative

97. Refer to Figure 17-2. In pursuing his own self-interest, Michael will

a. refrain from cleaning whether or not John cleans. b. clean only if John cleans. c. clean only if John refrains from cleaning. d. clean whether or not John cleans.


98. Refer to Figure 17-2. If this game is played only once, then the most likely outcome is that

a. John and Michael both clean. b. John cleans and Michael does not clean. c. Michael cleans and John does not clean. d. neither John nor Michael cleans.



99. Refer to Figure 17-2. In pursuing his own self-interest, John will

a. refrain from cleaning whether or not Michael cleans. b. clean only if Michael cleans. c. clean only if Michael refrains from cleaning. d. clean whether or not Michael cleans.


100. Refer to Figure 17-2. The possible outcome in which both John and Michael clean is analogous to

which of the following outcomes of the duopoly game? a. The duopolists collude to achieve the monopoly outcome. b. The duopolists collude to achieve the monopolistically-competitive outcome. c. The outcome is the one that is most preferable for consumers of the duopolists’ product. d. The outcome is the one that is least preferable for both the duopolists and for the

consumers of their product.



Figure 17-3. Katie and Taylor are roommates. On a particular day, their lawn needs to be mowed. Each person has to decide whether to take part in mowing the lawn. At the end of the day, either the lawn will be mowed (if one or both roommates take part in mowing), or it will remain unmowed (if neither roommate mows). With happiness measured on a scale of 1 (very unhappy) to 10 (very happy), the possible outcomes are as follows:

Katie's happiness = 7 Katie's happiness = 10

Katie's happiness = 5 Katie's happiness = 4

Taylor's happiness = 7 Taylor's happiness = 2

Taylor's happiness = 8 Taylor's happiness = 4

Mow Don't mow

Mow

Don't mow

Katie's Decision

Taylor'sDecision

101. Refer to Figure 17-3. The dominant strategy for Taylor is to

a. mow, and the dominant strategy for Katie is to mow. b. mow, and the dominant strategy for Katie is to refrain from mowing. c. refrain from mowing, and the dominant strategy for Katie is to mow. d. refrain from mowing, and there is no dominant strategy for Katie.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative

102. Refer to Figure 17-3. If this game is played only once, then which of the following outcomes is the

most likely one? a. Katie and Taylor both mow. b. Katie mows and Taylor does not mow. c. Taylor mows and Katie does not mow. d. All of the above outcomes are equally likely.



103. Refer to Figure 17-3. In pursuing her own self-interest, Taylor will

a. refrain from mowing whether or not Katie mows. b. mow only if Katie mows. c. mow only if Katie refrains from mowing. d. mow whether or not Katie mows.


104. Refer to Figure 17-3. In pursuing her own self-interest, Katie will

a. refrain from mowing whether or not Taylor mows. b. mow only if Taylor mows. c. mow only if Taylor refrains from mowing. d. mow whether or not Taylor mows.

ANS: C DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Dominant strategy MSC: Applicative

Table 17-19. The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul). Paul Turn Drive Straight

John Turn (10, 10) (5, 20)

Drive Straight (20, 5) (0, 0)

105. Refer to Table 17-19. If Paul chooses Turn, what will John choose to do and what will John’s

payoff equal? a. Turn, 10 b. Drive Straight, 20 c. Turn, 5 d. Drive Straight, 0


106. Refer to Table 17-19. If Paul chooses Drive Straight, what will John choose to do and what will

John’s payoff equal? a. Turn, 5 b. Drive Straight, 0 c. Turn, 20 d. Drive Straight, 5



107. Refer to Table 17-19. If John chooses Turn, what will Paul choose to do and what will Paul's

payoff equal? a. Turn, 10 b. Drive Straight, 20 c. Turn, 5 d. Drive Straight, 0


108. Refer to Table 17-19. If John chooses Drive Straight, what will Paul choose to do and what will

Paul's payoff equal? a. Turn, 5 b. Drive Straight, 0 c. Turn, 10 d. Drive Straight, 200


109. Refer to Table 17-19. What is Paul's dominant strategy?

a. Paul has no dominant strategy. b. Paul should always choose Turn. c. Paul should always choose Drive Straight. d. Paul has more than one dominant strategy.


110. Refer to Table 17-19. What is John's dominant strategy?

a. John has no dominant strategy. b. John should always choose Turn. c. John should always choose Drive Straight. d. John has two dominant strategies.


111. Refer to Table 17-19. How many Nash equilibria are there in this Chicken game?

a. 0 b. 1 c. 2 d. 3



112. Refer to Table 17-19. What is (are) the Nash equilibrium (equilibria) in this Chicken game?

a. John: Turn Paul: Turn

b. John: Turn Paul: Drive Straight

c. John: Drive Straight Paul: Turn

d. Both b and c are Nash equilibria


113. In the prisoners’ dilemma,

a. the prisoners easily collude in order to achieve the best possible payoff for both. b. only one player has a dominant strategy. c. when each player chooses his dominant strategy the players achieve the best joint

outcome. d. when each player chooses his dominant strategy the players reach a Nash equilibrium.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Analytical

114. In the game in which two oil companies own adjacent oil fields, the companies will not use the oil

efficiently because a. neither company has a dominant strategy in the game. b. the companies collude and produce a quantity of oil that is less than the socially-efficient

quantity. c. the pool from which they recover the oil is a common resource. d. the pool from which they recover the oil is not large enough to allow both companies to

earn a positive profit.

ANS: C DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Common resources | Prisoners' dilemma MSC: Interpretive

115. An equilibrium occurs in a game when

a. price equals marginal cost. b. quantity supplied equals quantity demanded. c. all independent strategies counterbalance all dominant strategies. d. all players follow a strategy that they have no incentive to change.

ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Interpretive


116. The players in a two-person game are choosing between Strategy X and Strategy Y. If the second

player chooses Strategy X, the first player's best outcome is to select X. If the second player chooses Strategy Y, the first player's best outcome is to select X. For the first player, Strategy X is called a a. dominant strategy. b. collusive strategy. c. repeated-trial strategy. d. cartel strategy.


117. Suppose that two poker players believe that they are superior players to the rest of the people at their

table. Further suppose that the two players make an agreement to concede hands to each other in order to drive the other players from the game first. Economists would model such behavior as a. monopolistic competition. b. game theory. c. predatory pricing. d. a dominant strategy.


118. After initial success, the OPEC cartel saw the price of oil and the revenues of its members decline

due, in part, to a. the low elasticity of demand for oil in the short run. b. the large number of buyers from each member nation. c. surging demand for oil in the early 1980s. d. OPEC members failing to produce their agreed-upon production levels.


Table 17-20. Brian and Matt own the only two bicycle repair shops in town. Each must choose between a low price for repair work and a high price. The annual economic profit from each strategy is indicated in the table. The profits are shown as (Matt, Brian) in each cell. Brian

Low Price High Price

Matt Low Price (1500, 1500) (5000, 200)

High Price (200, 3000) (4000, 4000)

119. Refer to Table 17-20. Which of the following statements is correct?

a. Matt's dominant strategy is to charge a low price. b. Brian's dominant strategy is to charge a high price. c. The dominant strategy for both Brian and Matt is to charge a low price. d. Matt's dominant strategy is to charge a high price.



120. Refer to Table 17-20. Which of the following statements is correct if Brian and Matt will play this

game only once? a. The Nash equilibrium is the high price. b. A Nash equilibrium cannot be established unless Brian and Matt collude. c. A Nash equilibrium cannot be established without the players repeating the game. d. The Nash equilibrium price is the low price.


Table 17-21. Two bottled beverage manufacturers (Firm A and Firm B) determine that they could lower their costs, and thus increase their profits, if they reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm’s product, but each firm also believes that if neither firm advertises, the costs savings will outweigh the lost sales. Listed in the table below are the individual profits for each firm. Firm A Breaks the agreement and

advertises

Maintains the agreement and

does not advertise

Firm B

Breaks the agreement

and advertises

Firm A profit = $9,000 Firm B profit = $4,000


Maintains the agreement

and does not advertise



121. Refer to Table 17-21. Suppose that the two firms, A and B, make an agreement to withhold any

advertising for one month in order to lower each firm’s costs and raise each firm’s profits. If the firms reach the Nash equilibrium, a. both firms will choose not to advertise. b. firm A will choose not to advertise, but firm B will break the agreement and choose to

advertise. c. firm B will choose not to advertise, but firm A will break the agreement and choose to

advertise. d. both firms will break the agreement and choose to advertise.

ANS: D DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Analytical

122. Refer to Table 17-21. At the Nash equilibrium, how much profit will Firm A earn?

a. $8,000 because firm A will maintain the agreement not to advertise, but firm B will break the agreement and choose to advertise.

b. $9,000 because each firm will break the agreement and choose to advertise. c. $10,000 because each firm will maintain the agreement and choose not to advertise. d. $11,000 because firm B will maintain the agreement not to advertise, but firm A will break

the agreement and choose to advertise.

ANS: B DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Analytical


123. Refer to Table 17-21. At the Nash equilibrium, how much profit will Firm B earn?

a. $3,500 because firm B will maintain the agreement not to advertise, but firm A will break the agreement and choose to advertise.

b. $4,000 because each firm will break the agreement and choose to advertise. c. $5,000 because each firm will maintain the agreement and choose not to advertise. d. $6,000 because firm A will maintain the agreement not to advertise, but firm B will break

the agreement and choose to advertise.

ANS: B DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners' dilemma MSC: Analytical

124. In which of the following games is it clearly the case that the cooperative outcome of the game is

good for the two players and good for society? a. Two guilty criminals have been captured by the police, and each prisoner decides whether

to confess or to remain silent. b. Two airlines dominate air travel between City A and City B, and each airline decides

whether to charge a “high” airfare or a “low” airfare. c. Two duopoly firms account for all of the production in a market, and each firm decides

whether to produce a “high” amount of output or a “low” amount of output. d. Two oil companies own adjacent oil fields over a common pool of oil, and each company

decides whether to drill one well or two wells.


125. In which of the following games is it clearly the case that the cooperative outcome of the game is

good for the two players and bad for society? a. Two oil companies own adjacent oil fields over a common pool of oil, and each company

decides whether to drill one well or two wells. b. Two airlines dominate air travel between City A and City B, and each airline decides

whether to charge a “high” airfare or a “low” airfare on flights between those two cities. c. Two superpowers decide whether to build new weapons or to disarm. d. In all of the above cases, the cooperative outcome of the game is good for the two players

and bad for society


126. Nobel prize-winner Thomas Schelling

a. opposed the use of game theory as a means of analyzing strategic situations. b. used mathematics to give precise formulations to game theory. c. described drug addiction as a “game against oneself.” d. had his life portrayed in the movie A Beautiful Mind.

ANS: C DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Game theory | Economists MSC: Interpretive


Sec03 - Oligopoly - Public Policy toward Oligopolies

MULTIPLE CHOICE

1. From society’s standpoint, cooperation among oligopolists is

a. desirable, because it leads to less conflict among firms and a wider variety of products for consumers.

b. desirable, because it leads to an outcome closer to the competitive outcome than what would be observed in the absence of cooperation.

c. undesirable, because it leads to output levels that are too low and prices that are too high. d. undesirable, because it leads to output levels that are too high and prices that are too high.

ANS: C DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Cooperation | Oligopoly MSC: Interpretive

2. The Sherman Antitrust Act

a. was passed to encourage judicial leniency in the review of cooperative agreements. b. was concerned with self-interest dominated Nash equilibriums in prisoners' dilemma

games. c. enhanced the ability to enforce cartel agreements. d. restricted the ability of competitors to engage in cooperative agreements.

ANS: D DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive

3. The Sherman Act made cooperative agreements

a. unenforceable outside of established judicial review processes. b. enforceable with proper judicial review. c. a criminal conspiracy. d. a crime, but did not give direction on possible penalties.

ANS: C DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive

4. The Sherman Antitrust Act was passed in

a. 1836. b. 1890. c. 1914. d. 1946.

ANS: B DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Definitional


5. The Sherman Antitrust Act prohibits price-fixing in the sense that

a. competing executives cannot even talk about fixing prices. b. competing executives can talk about fixing prices, but they cannot take action to fix prices. c. a price-fixing agreement can lead to prosecution provided the government can show that

the public was not well-served by the agreement. d. None of the above is correct. The Sherman Act did not address the matter of price-fixing.

ANS: A DIF: 2 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive

6. The Sherman Antitrust Act prohibits executives of competing companies from

a. fixing prices, but it does not prohibit them from talking about fixing prices. b. even talking about fixing prices. c. sharing with one another their knowledge of game theory. d. failing to stand by agreements that they had made with one another.

ANS: B DIF: 2 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Interpretive

7. The Sherman Antitrust Act

a. overturned centuries-old views of English and American judges on agreements among competitors.

b. had the effect of discouraging private lawsuits against conspiring oligopolists. c. strengthened the Clayton Act. d. elevated agreements among conspiring oligopolists from an unenforceable contract to a

criminal conspiracy.


8. The Clayton Act

a. preceded the Sherman Act. b. replaced the Sherman Act. c. strengthened the Sherman Act. d. was specifically designed to reduce the ability of cartels to organize.



9. According to the Clayton Act,

a. lawyers are given an incentive to reduce the number of cases involving cooperative arrangements.

b. individuals can sue to recover damages from illegal cooperative agreements. c. the government was able to incarcerate the CEO of a firm for illegal pricing arrangements. d. private lawsuits are discouraged.


10. If a person can prove that she was damaged by an illegal arrangement to restrain trade, that person

can sue and recover a. the damages she sustained, as provided for in the Sherman Act. b. the damages she sustained, as provided for in the Clayton Act. c. three times the damages she sustained, as provided for in the Sherman Act. d. three times the damages she sustained, as provided for in the Clayton Act.


11. Antitrust laws in general are used to

a. prevent oligopolists from acting in ways that make markets less competitive. b. encourage oligopolists to pursue cooperative-interest at the expense of self-interest. c. encourage frivolous lawsuits among competitive firms. d. encourage all firms to cut production levels and cut prices.


12. Economists claim that a resale price maintenance agreement is not anti-competitive because

a. suppliers are never able to exercise noncompetitive market power. b. if a supplier has market power, it will be likely to exert that power through wholesale price

rather than retail price. c. retail markets are inherently noncompetitive. d. retail cartel agreements cannot increase retail profits.

ANS: B DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Interpretive


13. Assume that Peach Computers has entered into a resale price maintenance agreement with Computer

Super Stores Inc. (CSS Inc.) but not with CompuMart. In this case, a. the wholesale price of Peach computers will be different for CSS Inc. than it is for

CompuMart. b. Peach computers will never increase profits by having a resale price maintenance

agreement with all retail outlets that sell its products. c. CompuMart will benefit from customers who go to CSS Inc. for information about

different computers. d. CSS Inc. will sell Peach computers at a lower price than CompuMart.

ANS: C DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Interpretive

14. Assume that Apple Computer has entered into an enforceable resale price maintenance agreement

with Computer Super Stores Inc. (CSS Inc.) and Wal-Mart. Which of the following will always be true? a. The wholesale price of Apple computers will be different for CSS Inc. than it is for Wal-

Mart. b. Wal-Mart will benefit from customers who go to CSS Inc. for information about different

computers. c. CSS Inc. will sell Apple computers at a lower price than Wal-Mart. d. Wal-Mart and CSS Inc. will always sell Apple Computers for exactly the same price.

ANS: D DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Interpretive

15. The practice of tying is illegal on the grounds that

a. it allows firms to expand their market power. b. it allows firms to form collusive arrangements. c. it prevents firms from forming collusive agreements. d. the Sherman Act explicitly prohibited such agreements.

ANS: A DIF: 2 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Tying MSC: Interpretive

16. The practice of tying is used to

a. enhance the enforcement of antitrust laws. b. encourage the enforcement of collusive agreements. c. control the retail price of a collection of related products. d. package products to sell at a combined price closer to a buyer's total willingness to pay.

ANS: D DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Definitional


Scenario 17-5

Assume that a local bank sells two services, checking accounts and ATM card services. The bank’s only two customers are Mr. Donethat and Ms. Beenthere. Mr. Donethat is willing to pay $8 a month for the bank to service his checking account and $2 a month for unlimited use of his ATM card. Ms. Beenthere is willing to pay only $5 for a checking account, but is willing to pay $9 for unlimited use of her ATM card. Assume that the bank can provide each of these services at zero marginal cost.

17. Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit-maximizing price to

charge for a checking account? a. $13 b. $9 c. $8 d. $5

ANS: D DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Applicative

18. Refer to Scenario 17-5. If the bank is unable to use tying, what is the profit-maximizing price to

charge for unlimited use of an ATM card? a. $14 b. $11 c. $9 d. $2

ANS: C DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Applicative

19. Refer to Scenario 17-5. If the bank is able to use tying to price checking account and ATM

services, what is the profit-maximizing price to charge for the "tied" good? a. $14 b. $10 c. $9 d. $8

ANS: B DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Applicative

20. Refer to Scenario 17-5. How much additional profit can the bank earn by switching to the use of a

tying strategy to price checking accounts and ATM service rather than pricing these services separately? a. $14 b. $11 c. $7 d. $1

ANS: D DIF: 3 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Applicative


21. When individuals are damaged by an illegal arrangement to restrain trade, which law allows them to

pursue civil action and recover up to three times the damages sustained? a. Trade Damage Act b. Clayton Act c. Sherman Act d. No law allows individuals to pursue civil action and recover up to three times the damages

sustained.


22. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust

laws? a. the U.S. Justice Department b. private citizens c. corporations d. All of the above are correct.


23. Who wrote, "People of the same trade seldom meet together, but the conversation ends in a

conspiracy against the public, or in some diversion to raise prices."? a. Thomas Jefferson b. Adam Smith c. Bill Gates d. Robert Axelrod


24. The practice of selling a product to retailers and requiring the retailers to charge a specific price for

the product is called a. fixed retail pricing. b. resale price maintenance. c. cost plus pricing. d. unfair trade.

ANS: B DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Definitional


25. The practice of requiring someone to buy two or more items together, rather than separately, is

called a. resale maintenance. b. product fixing. c. tying. d. free-riding.

ANS: C DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Definitional

26. If Levi Strauss & Co. were to require every retailer that carried its clothing to charge customers $42

for each pair of jeans, Levi Strauss & Co. would be practicing a. resale price maintenance. b. fixed retail pricing. c. tying. d. cost plus pricing.

ANS: A DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Interpretive

27. Which of the following prohibits executives of competing firms from even talking about fixing

prices? a. Sherman Act b. Clayton Act c. Federal Trade Commission d. U.S. Justice Department


28. Which government entity is charged with investigating and enforcing antitrust laws?

a. the U.S. Justice Department b. the U.S. Commerce Department c. the U.S. Treasury Department d. the Bureau of Alcohol, Tobacco, and Firearms


29. The argument that consumers will not be willing to pay any more for two items sold as one than

they would for the two items sold separately is used to justify the legality of which of the following? a. resale price maintenance b. tying c. predatory pricing d. free-riding

ANS: B DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Interpretive


30. OPEC is able to raise the price of its product by

a. tying. b. setting production levels for each of its members. c. increasing the supply of oil above the competitive level. d. imposing resale price maintenance agreements on members.


31. All cartels are inherently reliant on

a. a horizontal demand curve. b. an inelastic demand for their product. c. the cooperation of their members. d. enforcement of antitrust laws.


32. In 1971, Congress passed a law that banned cigarette advertising on television. After the ban it is

most likely that the (i) profits of cigarette companies increased.

(ii) prices of cigarettes increased. (iii) total costs incurred by cigarette companies increased.

a. (i) only b. (i) and (ii) c. (ii) and (iii) d. (i), (ii), and (iii)

ANS: A DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Oligopoly MSC: Applicative

33. To move the allocation of resources closer to the social optimum, policymakers should typically try

to induce firms in an oligopoly to a. collude with each other. b. form various degrees of cartels. c. compete rather than cooperate with each other. d. cooperate rather than compete with each other.

ANS: C DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Economic welfare MSC: Interpretive


34. Which of the following is necessarily a problem with antitrust laws?

a. They may target a business whose practices appear to be anti-competitive but in fact have legitimate purposes.

b. They promote competition. c. They limit monopoly power. d. They prohibit firms from entering or exiting a market.


35. Although the practice of predatory pricing is a common claim in antitrust suits, some economists are

skeptical of this argument because they believe a. the evidence of its practice is nearly impossible to collect. b. predatory pricing is not a profitable business strategy. c. even though predatory pricing is a profitable business strategy, it is on balance beneficial

to society. d. predatory pricing actually attracts new firms to the industry.

ANS: B DIF: 2 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Predatory pricing MSC: Interpretive

36. Which of the following statements is true?

a. The proper scope of antitrust laws is well defined and definite. b. Antitrust laws focus on granting certain firms the option to form a cartel. c. Policymakers have the difficult task of determining whether some firms' decisions have

legitimate purposes even though they appear anti-competitive. d. There is always a need for policymakers to try to limit a firm's pricing power, regardless

of whether the firm's market is competitive, a monopoly, or an oligopoly.


37. A central issue in the Microsoft antitrust lawsuit involved Microsoft's integration of its Internet

browser into its Windows operating system, to be sold as one unit. This practice is known as a. tying. b. predation. c. wholesale maintenance. d. retail maintenance.

ANS: A DIF: 2 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Tying MSC: Interpretive


38. A key issue in the Microsoft case involved whether or not the bundling of the Windows operating

system with an Internet browser was an example of a. predatory pricing. b. tying. c. resale price maintenance. d. price discrimination.

ANS: B DIF: 2 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Tying MSC: Interpretive

39. Which of the following statements is false?

a. The Clayton Act allows triple damages in civil lawsuits in order to encourage lawsuits against conspiring oligopolists.

b. Many economists defend the practice of resale price maintenance on the grounds that it may help solve a free-rider problem.

c. Most economists agree that predatory pricing is a profitable business strategy that usually preserves market power.

d. The U.S. Supreme Court's view that the practice of tying usually allows a firm to extend its market power is not generally supported by economic theory.

ANS: C DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Predatory pricing MSC: Interpretive

40. Consider a market served by a monopolist, Firm A. A new firm, Firm B, enters the market and, as a

result, Firm A lowers its price to try to drive Firm B out of the market. This practice is known as a. resale price maintenance. b. predatory tying. c. tying. d. predatory pricing.

ANS: D DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Predatory pricing MSC: Interpretive

41. Two CEOs from different firms in the same market collude to fix the price in the market. This action

violates the a. Clayton Act of 1914. b. Sherman Antitrust Act of 1890. c. Crandall-Putnam ruling of 1983. d. Jackson-Microsoft ruling of 2000.



42. The Clayton Act of 1914 allows those harmed by illegal arrangements to restrain trade to

a. sue for up to two times the damages they incurred. b. sue for up to three times the damages they incurred. c. sue for up to four times the damages they incurred. d. sue for damages, but only for the actual amount of damages they incurred.

ANS: B DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Definitional

43. The manufacturer of Bozz Radios sells radios to retail stores for $500 each, and it requires the retail

stores to charge customers $550 per radio. Any retailer that charges less than $550 would violate its contract with Bozz Radios. What do economists call this business practice? a. predatory pricing b. resale price maintenance c. tying d. leverage

ANS: B DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Interpretive

44. Suppose that Makemoney Movies produces two new films — The Hulk and The Piano. Makemoney

offers theaters the two films together at a single price but will not supply the movies separately. What do economists call this business practice? a. predatory pricing b. resale price maintenance c. tying d. leverage

ANS: C DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Interpretive

45. The primary purpose of antitrust legislation is to

a. protect small businesses. b. protect the competitiveness of U.S. markets. c. protect the prices of American-made products. d. ensure firms earn only a fair profit.



46. A law that encourages market competition by prohibiting firms from gaining or exercising excessive

market power is a. a patent. b. impossible to enforce. c. an antitrust law. d. an externality law.

ANS: C DIF: 1 REF: 17-3 NAT: Analytic LOC: The role of government TOP: Antitrust MSC: Definitional

47. Resale price maintenance involves a firm

a. colluding with another firm to restrict output and raise prices. b. selling two individual products together for a single price rather than selling each product

individually at separate prices. c. temporarily cutting the price of its product to drive a competitor out of the market. d. requiring that the firm reselling its product do so at a specified price.

ANS: D DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Definitional

48. Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to

charge customers $500 for the computers, then it is engaging in a. resale price maintenance. b. predatory pricing. c. tying. d. monopolistic competition.

ANS: A DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Resale price maintenance MSC: Definitional

49. Predatory pricing involves a firm



ANS: C DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Predatory pricing MSC: Definitional


50. Predatory pricing occurs when a firm

a. exercises its oligopoly power by raising its price through the formation of a cartel. b. exercises its monopoly power by raising its price. c. cuts its prices in order make itself more competitive. d. cuts its prices temporarily in order to drive out any competition.

ANS: D DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Predatory pricing MSC: Definitional

51. Tying involves a firm



ANS: B DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Definitional

52. A particular cable TV company requires a household to subscribe to its high-speed Internet service

if it subscribes to cable TV, and vice versa. This practice a. is referred to as tying. b. is regarded by some economists as a form of price discrimination. c. is controversial among economists because they disagree on whether it has adverse effects

for society as a whole. d. All of the above are correct.

ANS: D DIF: 2 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Tying MSC: Interpretive

Sec04 - Oligopoly - Conclusion

MULTIPLE CHOICE

1. The story of the prisoners’ dilemma shows why

a. predatory pricing is clearly not in society’s best interest. b. economists are unanimous in condemning resale price maintenance, since it inevitably

reduces competition. c. oligopolies can fail to act independently, even when independent decision-making is in

their best interest. d. oligopolies can fail to cooperate, even when cooperation is in their best interest.

ANS: D DIF: 1 REF: 16-4 NAT: Analytic LOC: Oligopoly TOP: Cooperation | Oligopoly MSC: Interpretive

1587

Chapter 18

The Markets For the Factors of Production

TRUE/FALSE

1. If the marginal productivity of the sixth worker hired is less than the marginal productivity of the

fifth worker hired, then the addition of the sixth worker causes total output to decline.

ANS: F DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Interpretive

2. In 2008, the total income of all U.S. residents was approximately $120 billion.

ANS: F DIF: 1 REF: 18-0 NAT: Analytic LOC: Labor markets TOP: Income MSC: Interpretive

3. In order to calculate the value of the marginal product of labor, a manager must know the marginal

product of labor and the wage rate of the worker.

ANS: F DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Interpretive

4. Let L represent the quantity of labor and let Q represent the quantity of output. Suppose a certain

production function includes the points (L = 7, Q = 27), (L = 8, Q = 35), and (L = 9, Q = 45). Based on these three points, this production function exhibits diminishing marginal product.

ANS: F DIF: 2 REF: 18-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Diminishing marginal product MSC: Applicative

5. When a competitive firm hires labor up to the point at which the value of the marginal product of

labor equals the wage, it also produces up to the point at which the price of output equals average variable cost.

ANS: F DIF: 3 REF: 18-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Competitive firms | Profit maximization MSC: Applicative

6. The demand for computer programmers is inseparably tied to the supply of computer software.

ANS: T DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Interpretive

1588 Chapter 18/The Markets For the Factors of Production

7. If Firm X is a competitive firm in the market for labor, it has little influence over the wage it pays its

employees.


8. The idea that rational employers think at the margin is central to understanding how many units of

labor they choose to employ.


9. For competitive firms, the curve that represents the value of marginal product of labor is the same as

the demand for labor curve.

ANS: T DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand | Value of the marginal product MSC: Interpretive

10. The value of the marginal product of labor can be calculated as the price of the final good minus the

marginal product of labor.

ANS: F DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Analytical

11. To compute the value of the marginal product of capital, you should multiply the market price of the

good by the marginal product of capital.

ANS: T DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Analytical

12. A profit-maximizing competitive firm will hire workers up to the point at which the wage equals the

price of the final good.

ANS: F DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand | Value of the marginal product MSC: Analytical

13. A profit-maximizing competitive firm will hire workers up to the point at which the wage equals the

marginal product of labor.

ANS: F DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand | Marginal product of labor MSC: Analytical

Chapter 18/The Markets For the Factors of Production 1589

14. Technological advances can cause the labor demand curve to shift.

ANS: T DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Applicative

15. In the United States, technological advances help explain persistently rising employment in the face

of rising wages.

ANS: T DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Applicative

16. The term Luddite refers to “tekkies” or people who are the first to adopt new technological

advances.

ANS: F DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Definitional

17. Labor-saving technological advances increase the marginal productivity of labor.


18. Labor-saving technological advances decrease the marginal productivity of labor.

ANS: T DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Definitional

19. Labor-augmenting technological advances increase the marginal productivity of labor.

ANS: T DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Definitional

20. Labor-augmenting technological advances decrease the marginal productivity of labor.


21. An increase in a product’s price will shift the labor demand curve for that product to the left.



22. The quantity available of one factor of production can affect the marginal product of other factors.

ANS: T DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor | Factor markets MSC: Applicative

23. In a competitive market for labor, the equilibrium wage always equals the value of the marginal

product.

ANS: T DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Applicative

24. From 1960 to 2000, inflation-adjusted wages increased by 131 percent in the U.S. As a result, firms

reduced the amount of labor they employed by nearly 20 percent.

ANS: F DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Interpretive

25. The labor-supply curve is affected by the trade-off between labor and leisure.

ANS: T DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Interpretive

26. The opportunity cost of leisure is impossible to measure, since we can't measure leisure time in

dollars.

ANS: F DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Interpretive

27. The labor supply curve reflects how workers' decisions about the labor-leisure tradeoff respond to

changes in the opportunity cost of leisure.


28. Labor supply curves are always upward sloping.

ANS: F DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Interpretive


29. When an individual’s income goes up, that individual may choose to supply less labor, resulting in a

backward-sloping labor supply curve.


30. The supply of labor in any one market depends on the opportunities available in other markets.

ANS: T DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Applicative

31. Movements of workers from country to country can cause shifts in the labor supply curves for both

countries.

ANS: T DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Applicative

32. If the demand for labor in a particular industry increases, the equilibrium wage in that industry will

also increase.

ANS: T DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Analytical

33. If the demand for labor decreases and the supply of labor is unchanged, then the opportunity cost of

leisure will decrease.

ANS: T DIF: 2 REF: 18-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Opportunity cost | Wages MSC: Interpretive

34. Profit maximization by firms ensures that the equilibrium wage always equals the value of the

marginal product of capital.

ANS: F DIF: 2 REF: 18-3 NAT: Analytic LOC: Understanding and applying economic models TOP: Marginal product | Wages MSC: Interpretive

35. As the number of concrete workers in the United States falls, the wage paid to the remaining

concrete workers will necessarily fall as well.

ANS: F DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Applicative


36. Oil field workers' wages are directly tied to the world price of oil.

ANS: T DIF: 1 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Applicative

37. Changes in supply and demand in the labor market will cause changes in wages.

ANS: T DIF: 1 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Definitional

38. In general, less productive workers are paid less than more productive workers.

ANS: T DIF: 1 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Applicative

39. Increases in productivity are not responsible for increased standards of living in the United States.

ANS: F DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Applicative

40. Average productivity can be measured as total output divided by total units of labor.

ANS: T DIF: 1 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Definitional

41. The rental price of capital is the price a person pays to own the capital indefinitely.

ANS: F DIF: 2 REF: 18-4 NAT: Analytic LOC: Understanding and applying economic models TOP: Capital market MSC: Interpretive

42. The marginal product of land depends on the quantity of land that is available.

ANS: T DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Interpretive

43. For a snow-removal business, the capital stock would include inputs such as snow blowers and

shovels.

ANS: T DIF: 1 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Definitional


44. The demand curve for each factor of production equals the value of the marginal product of that

factor.

ANS: T DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Interpretive

45. Capital income does not include income paid to households for the use of their capital.

ANS: F DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital income MSC: Definitional

46. Firms pay out a portion of their earnings in the form of interest and dividends, and those payments

are a portion of the economy's capital income.

ANS: T DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital income MSC: Definitional

47. When a firm decides to retain its earnings instead of paying dividends, the stockholders necessarily

suffer.

ANS: F DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Interpretive

48. Capital owners are compensated according to the value of the marginal product of that capital.

ANS: T DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Interpretive

49. A change in the supply of any one factor alters the earnings of all the other factors.

ANS: T DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Interpretive

50. If the output price of a product rises, the demand for capital will increase, raising the rental price of

capital.

ANS: T DIF: 1 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Applicative


51. Suppose the supply of capital decreases. As a result, the quantity of capital used in production and

the rental price of capital will both fall.

ANS: F DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Analytical

52. Suppose an influenza pandemic were to significantly decrease the population of a country. We

would predict a decrease in the marginal product of land in that country.

ANS: T DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Analytical

SHORT ANSWER

1. Describe the difference between a diminishing marginal product of labor and a negative marginal

product of labor. Why would a profit-maximizing firm always choose to operate where the marginal product of labor is decreasing (but not negative)?

ANS: Diminishing marginal product of labor means that the last worker hired contributes less to the total output of the firm than the worker who was hired just previous to her. Negative marginal product of labor suggests that the last person hired actually causes total output of the firm to decline. The firm evaluates the benefit of hiring (added revenue) versus the added cost of hiring (wage). In competitive markets, the cost and benefit converge only when marginal product declines. If the marginal product of labor is negative, hiring an additional worker would actually decrease revenue. A profit-maximizing firm would never choose to operate where marginal product is rising because hiring an additional worker would increase the “value” a worker contributes to the firm, while costs remain constant. Thus, the firm will choose to operate where marginal product of labor is decreasing.

PTS: 1 DIF: 2 REF: 18-1 TOP: Diminishing marginal product MSC: Analytical

2. Explain how a firm values the contribution of workers to its profitability. Would a profit-

maximizing competitive firm ever stop increasing employment as long as marginal product is rising? Explain your answer.

ANS: A firm values the contribution of a worker by evaluating the worker's individual contribution to firm revenue. This is done by multiplying the worker’s marginal product by the output price received for his production. A profit-maximizing firm would never choose to operate where marginal product is rising because hiring an additional worker would increase the "value" a worker contributes to the firm and cost would remain constant. As such, value and cost diverge as long a marginal product is increasing, and it is always more profitable to continue to hire more workers.

PTS: 1 DIF: 2 REF: 18-1 TOP: Marginal product of labor MSC: Analytical


3. In the 1980s, the dangerous Ebola virus entered the United States through contaminated monkeys

that were imported for use in medical experiments. Suppose this virus had not been contained but had spread to the general population. Assume that the virus is lethal in half of the people who are exposed to it. Describe the resulting effect on labor productivity.

ANS: There are two possible direct effects: One effect would be that people would be absent from work if they caught the virus (but did not die) and so marginal productivity would be higher for the remaining workers. The other effect is that people who caught the virus would die, the labor supply would decrease, and the remaining workers would have a higher marginal product of labor. While the marginal productivity of the remaining workers increases, total output would still fall.

PTS: 1 DIF: 2 REF: 18-3 TOP: Marginal product of labor MSC: Analytical

4. Using the theory of wage determination, explain why wages in developing countries. where levels of

capital are small, are typically quite low.

ANS: Wages are determined by the value of workers to firms. In many developing countries, the level of capital is quite small, and so worker productivity is quite low. Workers are not able to contribute as much value to a firm as their counterparts in countries that have more capital to complement their labor efforts. Since marginal productivity is low, wages are low.

PTS: 1 DIF: 2 REF: 18-3 TOP: Capital MSC: Analytical

5. A recent flood in the Midwest has destroyed much of the farmland that lies in fertile regions near the

rivers. Describe the effect of the flood on the marginal productivity of land, labor, and capital. How would the flood affect the price of inputs? Provide some examples.

ANS: The flood would increase the marginal product of unflooded land, lower the marginal product of labor, and lower the marginal product of capital. As such, the price of unflooded land should rise, and the prices of both labor and capital should fall.

PTS: 1 DIF: 2 REF: 18-3 TOP: Land markets MSC: Analytical


6. Describe the process by which the market for capital and the market for land reach equilibrium. As

part of your description, elaborate on the role of the stock of the resource versus the flow of services from the resource.

ANS: Equilibriums in the markets for land and capital are governed by the value of marginal product for these factors relative to their supply. One difference between these markets and the market for labor is that in land and capital markets there is both a rental value (flow) and purchase price (stock). The difference between the rental value and purchase price is reconciled by noting that in efficient markets, the purchase price should reflect the value of the stream of services provided by the land or capital (or the sum of rental values appropriately discounted).

PTS: 1 DIF: 3 REF: 18-4 TOP: Capital markets | Land markets MSC: Analytical

7. Describe the difference between the purchase price of capital and the rental price of capital. If you

know the value of marginal product from the flow of capital services, how would you determine the market price for the capital stock?

ANS: The purchase price of capital is a reflection of the flow of value in using that capital to produce goods and services over its life span. The rental price of capital is the period-specific contribution of capital to production of goods and services. The discounted present value of rental prices over the life of the capital equipment should be equal to its purchase price.

PTS: 1 DIF: 3 REF: 18-4 TOP: Capital MSC: Analytical

Sec00 - The Markets for the Factors of Production

MULTIPLE CHOICE

1. In 2008, the total income of all U.S. residents was about

a. $12 billion. b. $14 billion. c. $12 trillion. d. $14 trillion.

ANS: D DIF: 1 REF: 18-0 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Definitional


2. Capital, labor, and land

a. have derived demands. b. are factors of production. c. are inputs used in the production of goods and services. d. All of the above are correct.

ANS: D DIF: 1 REF: 18-0 NAT: Analytic LOC: Labor markets TOP: Factors of production MSC: Definitional

3. Most of the total income earned in the U.S. economy is ultimately paid to

a. households in the form of wages and fringe benefits. b. landowners in the form of rent. c. landowners in the form of interest. d. landowners in the form of profit.

ANS: A DIF: 2 REF: 18-0 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Definitional

4. Since workers in the U.S. economy receive most of the total income earned, which of the following

factors of production is considered to be the most important? a. Profit b. Wages c. Interest d. Labor


5. How much of the income in the United States is earned by workers in the form of wages and fringe

benefits? a. about 25 percent b. about 50 percent c. about 75 percent d. about 87 percent

ANS: C DIF: 1 REF: 18-0 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Definitional


Sec01 - The Markets for the Factors of Production - The Demand for Labor

MULTIPLE CHOICE

1. The production function is the

a. increase in the amount of output from an additional unit of labor. b. marginal product of an input times the price of output. c. relationship between the quantity of inputs and output. d. shift in labor demand caused by a change in the price of output.

ANS: C DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Production function MSC: Definitional

Table 18-1

Number of

Workers (L)

Output of

Firm A

Output of

Firm B

Output of

Firm C

Output of

Firm D

1 100 100 100 100

2 200 300 190 80

3 300 600 270 60

4 400 1,000 340 40

2. Refer to Table 18-1. Which firm’s production function exhibits diminishing marginal product?

a. Firm A b. Firm B c. Firm C d. Firm D

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Analytical

Scenario 18-1

Harry owns a snow-removal business. He hires workers to shovel driveways for him during the winter. The first worker he hires can shovel twelve driveways in one day. When Harry hires two workers, they can shovel a total of 22 driveways in one day. When Harry hires a third worker, he shovels an additional eight driveways in one day.

3. Refer to Scenario 18-1. What is the marginal productivity of the second worker?

a. 7 b. 10 c. 12 d. 22

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Analytical


4. Refer to Scenario 18-1. What is the total productivity of three workers?

a. 12 b. 22 c. 30 d. 42

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Analytical

5. Refer to Scenario 18-1. Suppose that Harry pays each worker $80 per day and that he charges each

customer $20 to have his driveway shoveled. What is the value of the marginal product of labor for the second worker? a. $200 b. $240 c. $800 d. $960

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Analytical

6. Refer to Scenario 18-1. Suppose that Harry pays each worker $80 per day and that he charges each

customer $20 to have his driveway shoveled. What is the value of the marginal product of labor for the third worker? a. $160 b. $640 c. $1,600 d. $2,400



Table 18-2

The following table shows the production function for a particular business. The numbers represent the various labor and output combinations the firm may choose for its output on a daily basis.

Labor Output

0 0

1 70

2 130

3 180

4 220

5 250

7. Refer to Table 18-2. What is the marginal product of the third unit of labor?

a. 40 units b. 50 units c. 60 units d. 180 units


8. Refer to Table 18-2. What is the marginal product of the fifth unit of labor?

a. 30 units b. 40 units c. 50 units d. 250 units

ANS: A DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Analytical

9. Refer to Table 18-2. Suppose this firm charges a price of $5 per unit of output and pays workers a

wage equal to $160 per day. What is the value of the marginal product of labor for the second worker? a. $300 b. $650 c. $9,600 d. $20,800




wage equal to $160 per day. What is the value of the marginal product of labor for the fourth worker? a. $200 b. $1,000 c. $6,400 d. $32,000



wage equal to $160 per day. How many workers should this firm hire to maximize its profit? a. 2 workers b. 3 workers c. 4 workers d. 5 workers

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product | Profit maximization MSC: Analytical

12. The value of the marginal product of labor

a. increases when the price of output decreases. b. is the firm’s demand for labor. c. equals the marginal product of labor divided by the wage rate. d. All of the above are correct.

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Analytical


a. An increase in the supply of other factors, such as capital, will increase the demand for labor.

b. Labor-saving technology will increase the demand for labor. c. Labor-augmenting technology will decrease the demand for labor. d. A decrease in the price of output will increase the demand for labor.

ANS: A DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Interpretive


14. Suppose that a competitive firm hires labor up to the point at which the value of the marginal

product equals the wage. If the firm pays a wage of $700 per week and the marginal product of labor equals 20 units per week, then the marginal cost of producing an additional unit of output is a. $35 b. $70 c. $700 d. We do not have enough information to answer this question.


15. Suppose that a competitive firm hires labor up to the point at which the value of the marginal

product equals the wage. If the firm pays a wage of $700 per week and the marginal product of labor equals 100 units per week, then the marginal cost of producing an additional unit of output is a. $7 b. $70 c. $700 d. We do not have enough information to answer this question.



Figure 18-1. On the graph, L represents the quantity of labor and Q represents the quantity of output per week.

120

210

285

345

390

420

1 2 3 4 5 6 L

Q

16. Refer to Figure 18-1. The figure illustrates the

a. demand for labor. b. supply of labor. c. production function. d. wage function.

ANS: C DIF: 1 REF: 18-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Production function MSC: Definitional

17. Refer to Figure 18-1. The marginal product of the second worker is


ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Marginal product of labor MSC: Applicative


18. Refer to Figure 18-1. The marginal product of the fourth worker is


ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Marginal product of labor MSC: Applicative

19. Refer to Figure 18-1. Suppose the firm hires each unit of labor for $600 per week, and each unit of

output sells for $9. What is the value of the marginal product of the third worker? a. $540 b. $600 c. $675 d. $810

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal revenue product MSC: Applicative

20. Refer to Figure 18-1. Suppose the firm sells its output for $12 per unit, and it pays each of its

workers $700 per week. The value of the marginal product of the fifth worker is a. $540 b. $700 c. $720 d. $1,080

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal revenue product MSC: Applicative

21. Refer to Figure 18-1. Suppose the firm hires each unit of labor for $700 per week, and each unit of

output sells for $9. How many workers will the firm hire to maximize its profit? a. 2 b. 3 c. 4 d. 5

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal revenue product | Profit maximization MSC: Applicative



workers $700 per week. How many workers will the firm hire to maximize its profit? a. 2 b. 3 c. 4 d. 5

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal revenue product | Profit maximization MSC: Applicative


workers $750 per week. When output increases from 210 units to 285 units, a. the marginal cost is $10 per unit of output. b. the marginal revenue is $5 per unit of output. c. the value of the marginal product of labor is $4,275 d. the firm’s profit decreases.

ANS: A DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal cost | Marginal revenue | Marginal revenue product MSC: Applicative


workers $400 per week. When the number of workers increases from 4 to 5, a. the marginal revenue is $450 per unit of output and the marginal cost is $400 per unit of

output. b. the value of the marginal product of labor is $3,900 and the marginal cost per unit of

output is $400. c. the value of the marginal product of labor is $450 and the marginal cost per unit of output

is about $8.89. d. the firm’s profit increases.

ANS: C DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal revenue | Marginal cost | Marginal revenue product MSC: Applicative


workers $1,000 per week. Also, the firm’s non-labor costs are fixed and they amount to $2,000. The firm maximizes profit by hiring a. 2 workers. b. 3 workers. c. 4 workers. d. 5 workers.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Profit maximization MSC: Applicative



workers $1,250 per week. The firm maximizes profit by hiring a. 3 workers. b. 4 workers. c. 5 workers. d. 6 workers.

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Profit maximization MSC: Analytical

27. Refer to Figure 18-1. The shape of the curve suggests the presence of

a. an inverted production function. b. diminishing total product. c. increasing marginal product. d. diminishing marginal product.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Analytical

Figure 18-2. The figure shows a particular firm’s value-of-marginal-product (VMP) curve. On the horizontal axis, L represents the number of workers. The time frame is daily.

VMP

1 2 3 4 5 6 7 L

40

80

120

160

200

240

280

320

360

400 VMP

28. Refer to Figure 18-2. The value-of-marginal-product curve that is drawn could be relabeled as the

firm’s a. production function. b. total revenue curve. c. labor supply curve. d. labor demand curve.

ANS: D DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal revenue product | Labor demand MSC: Interpretive


29. Refer to Figure 18-2. The firm would choose to hire three workers if

a. the market wage for a day’s work is $220. b. the market wage for a day’s work is $260. c. the output price is $220. d. the output price is $260.

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Applicative

30. Refer to Figure 18-2. Suppose the marginal product of the fifth unit of labor is 30 units of output

per day. The figure implies that the a. price of output is $4. b. price of output is $6. c. price of output is $8. d. daily wage is $120.

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal revenue product MSC: Applicative

31. Refer to Figure 18-2. Suppose one point on the firm’s production function is (L = 3, Q = 180), where L = number of workers and Q = quantity of output. If the firm sells its output for $5 per unit, then

a. a second point on the firm’s production function is (L = 4, Q = 216). b. the firm’s production function exhibits the property of diminishing marginal product of

labor. c. the firm will maximize profit by hiring four workers if it pays workers $160 per day. d. All of the above are correct.

ANS: D DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal revenue product | Profit maximization MSC: Applicative


32. Refer to Figure 18-2. Assume the following: • Two points on the firm’s production function are (L = 2, Q = 180) and (L = 3, Q = 228), where L = number of workers and Q = quantity of output. • The firm pays its workers $120 per day. • The firm’s non-labor costs are fixed and they amount to $250 per day. We can conclude that

a. the firm sells its output for $12 per unit. b. if the firm is currently employing 2 workers per day, then profit could be increased by $48

per day if a third worker is hired. c. the marginal cost per unit of output is $2.50 when output is increased from 180 units per

day to 228 units per day. d. the firm’s maximum profit occurs when it hires 3 workers per day.

ANS: C DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal cost | Marginal revenue product | Profit maximization MSC: Analytical

33. The factors of production are best defined as the

a. output produced from raw materials. b. inputs used to produce goods and services. c. wages paid to the workforce. d. goods and services sold in the market.

ANS: B DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Definitional

34. Economists refer to the inputs that firms use to produce goods and services as

a. derived factors. b. derived resources. c. factors of production. d. instruments of revenue.

ANS: C DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Factors of production MSC: Definitional

35. Because a firm's demand for a factor of production is derived from its decision to supply a good in

the market, it is called a a. differentiated demand. b. secondary demand. c. derived demand. d. hybrid demand-supply.

ANS: C DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Definitional


36. The term "factor market" applies to the market for

a. labor. b. capital. c. land. d. All of the above are correct.


37. Factor markets are different from product markets in an important way because

a. equilibrium is the exception, and not the rule, in factor markets. b. the demand for a factor of production is a derived demand. c. the demand for a factor of production is likely to be upward sloping, in violation of the

law of demand. d. All of the above are correct.

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Interpretive

38. Factor-market analysis could not be complete without some characterization of

a. product-market demand. b. the marginal productivities of the different factors. c. market prices for final goods and services. d. All of the above are correct.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Interpretive

39. The basic tools of supply and demand apply to

a. markets for goods and services and to markets for labor services. b. markets for goods and services but not to markets for labor services. c. markets for goods and services but not to markets for factors of production. d. all markets except those in which demand is derived demand.

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Factors of production MSC: Interpretive

40. Labor markets are different from most other markets because labor demand is

a. represented by a vertical line on a supply-demand diagram. b. represented by an upward-sloping line on a supply-demand diagram. c. such an elusive concept. d. a derived demand.

ANS: D DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Factors of production MSC: Interpretive


41. Which of the following best illustrates the concept of "derived demand?"

a. An increase in the wages of auto workers will lead to an increase in the demand for robots in automobile factories.

b. An automobile producer's decision to supply more cars will lead to an increase in the demand for automobile production workers.

c. An automobile producer's decision to supply more minivans results from a decrease in the demand for station wagons.

d. An increase in the price of gasoline will lead to an increase in the demand for small cars.

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Interpretive

42. When a firm maximizes profit,

a. it will hire workers up to the point where the marginal product of labor is equal to the product price.

b. it will hire workers up to the point where the marginal product of labor is equal to the wage.

c. it will hire workers up to the point where the value of the marginal product of labor is equal to the product price.

d. it will hire workers up to the point where the value of the marginal product of labor is equal to the wage.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Interpretive

43. For a competitive, profit-maximizing firm, the labor demand curve is the same as the

a. marginal cost curve. b. value of marginal product curve. c. production function. d. profit function.

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Analytical

44. Which of the following is true at the level of output at which a competitive firm maximizes profit?

a. Price = marginal cost b. Price = Wage/Value of marginal product of labor c. Price = Marginal product of labor/wage d. All of the above are correct.



45. What causes the labor demand curve to shift?

(i) changes in productivity (ii) changes in wages

(iii) changes in output prices

a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. All of the above are correct.

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Applicative

46. If the price of airline tickets falls, what will happen to the demand curve for flight attendants?

a. It will shift to the right. b. It will shift to the left. c. The direction of the shift is ambiguous. d. It will remain unchanged.

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Applicative

47. If the demand curve for beef shifts to the right, then the value of the marginal product of labor for

butchers will a. rise. b. fall. c. remain unchanged. d. rise or fall; either is possible.


48. If the demand curve for computer games shifts to the left, then the value of the marginal product of

labor for computer game authors will a. rise. b. fall. c. remain unchanged. d. rise or fall; either is possible.



49. Competitive firms decide how much output to sell by producing output until the price of the good

equals a. marginal product. b. the value of marginal product. c. marginal cost. d. marginal profit.


50. Competitive firms hire workers until the additional benefit they receive from the last worker hired is

equal to (i) the additional cost of that worker.

(ii) the wage paid to that worker. (iii) the marginal product of that worker.

a. (i) only b. (iii) only c. (i) and (ii) d. (ii) and (iii)

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Analytical

51. Dan owns one of the many bakeries in New York City. Which of the following events will lead to an

increase in Dan's demand for the services of bakers? (i) The price of muffins increases. (Muffins are Dan's specialty.)

(ii) Dan adds three new ovens to the kitchen area to help the bakers work faster. (iii) Local bakers form a union to protect themselves from low wages.




52. John owns a number of hot dog stands in New York City. He hires workers to sell hot dogs at his

stands. Which of the following events will lead to a decrease in John's demand for hot dog vendors? a. Hollywood glamorization of a new movie about a hot dog vendor leads hundreds of high-

school students in New York City to apply for a job at John's. b. The price of hot dogs falls. c. The local hot dog vendors form a union increasing hot dog vendor wages. d. The demand curve for hot dogs shifts to the right.


53. A sandwich shop hires workers to make sandwiches and sell them to customers. If the firm is

competitive in both the market for sandwiches and in the market for sandwich-makers, then it has a. some control over both the price of sandwiches and the wage it pays to its workers. b. no control over the price of sandwiches but some control over the wage it pays to its

workers. c. some control over the price of sandwiches but no control over the wage it pays to its

workers. d. no control over either the price of sandwiches or the wage it pays to its workers.

ANS: D DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Applicative

54. Which of the following events could increase the demand for labor?

a. A decrease in output price b. A decrease in the amount of capital available for workers to use c. An increase in the marginal productivity of workers d. A decrease in the wage paid to workers


55. Which of the following events could decrease the demand for labor?

a. An increase in the number of migrant workers b. An increase in the marginal productivity of workers c. A decrease in demand for the final product produced by labor d. A decrease in the supply of labor



56. When we focus on the firm as a supplier of a good or a service, we assume that the firm is a profit

maximizer. When we focus on the firm as a demander of labor, we assume that the firm's objective is to a. minimize wages. b. minimize variable costs. c. maximize the number of workers hired. d. maximize profit.


57. Suppose that a new invention increases the marginal productivity of labor, shifting labor demand to

the right. Such an invention would be an example of a. labor-saving technology. b. labor-augmenting technology. c. Luddite technology. d. supply-shifting technology.

ANS: B DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Definitional

58. Suppose that a new invention decreases the marginal productivity of labor, shifting labor demand to

the left. Such an invention would be an example of a. labor-saving technology. b. labor-augmenting technology. c. Luddite technology. d. supply-shifting technology.

ANS: A DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Definitional

59. Labor-saving technology causes which of the following? (i) The marginal productivity of labor increases. (ii) The marginal productivity of labor decreases. (iii) Labor demand shifts to the right. (iv) Labor demand shifts to the left.

a. (i) only b. (ii) only c. (i) and (iii) d. (ii) and (iv)



60. Labor-augmenting technology causes which of the following? (i) The marginal productivity of labor increases. (ii) The marginal productivity of labor decreases. (iii) Labor demand shifts to the right. (iv) Labor demand shifts to the left.

a. (i) only b. (ii) only c. (i) and (iii) d. (ii) and (iv)

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Interpretive

61. The term Luddite is used to describe

a. a person who readily adopts the latest technological advances. b. a person who is opposed to a reduction in the number of immigrants that are allowed into

the country each year. c. a person who opposes technological advance. d. any mythical historical figure.

ANS: C DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Definitional

62. A Luddite would be expected to oppose

a. working more than eight hours per day. b. technological advance. c. national policies that limit immigration into the country. d. the use of economic models to demonstrate market equilibrium.

ANS: B DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Interpretive

63. Along the vertical axis of the production function we typically measure

a. revenue. b. the marginal product of the input. c. the quantity of input. d. the quantity of output.

ANS: D DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Production function MSC: Definitional


64. Along the horizontal axis of the production function we typically measure

a. revenue. b. the marginal product of the input. c. the quantity of input. d. the quantity of output.

ANS: C DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Production function MSC: Definitional

65. A competitive firm sells its output for $30 per unit. The marginal product of the 10th worker is 20

units of output per day; the marginal product of the 11th worker is 16 units of output per day. The firm pays its workers a wage of $150 per day. a. For the 11th worker, the value of the marginal product of labor is $120. b. For the 11th worker, the value of the marginal product of labor is $480. c. For the 11th worker, the value of the marginal product of labor is $600. d. For the 11th worker, the value of the marginal product of labor is $2,400.


66. A competitive firm sells its output for $25 per unit. The marginal product of the 10th worker is 10

units of output per day; the marginal product of the 11th worker is 8 units of output per day. The firm pays its workers a wage of $160 per day. a. For the 10th worker, the value of the marginal product of labor is $50. b. For the 10th worker, the value of the marginal product of labor is $250. c. For the 10th worker, the value of the marginal product of labor is $300. d. For the 10th worker, the value of the marginal product of labor is $1,500.


67. Prairie Cabinets produces and sells custom kitchen cabinets. The firm has determined that if it hires

10 workers, it can produce 10 sets of cabinets per day. If it hires 11 workers, it can produce 12 sets of cabinets per day. It sells each set of cabinets for $2,000, and it pays each of its workers $200 per day. Which of the following is correct? a. For the 11th worker, the value of the marginal product of labor is $400. b. For the 11th worker, the value of the marginal product of labor is $4,000. c. The firm should not hire the 11th worker since hiring this worker reduces profit. d. In order to justify hiring the 11th worker the firm will need to raise the price of a set of

cabinets.



68. For a competitive, profit-maximizing firm, the demand curve for labor will shift in response to a

change in the a. wage rate. b. quantity of labor demanded. c. price of the product that the firm sells. d. an increase in the supply of labor.


69. Omega Custom Cabinets produces and sells custom bathroom vanities. The firm has determined that

if it hires 10 workers, it can produce 20 vanities per week. If it hires 11 workers, it can produce 22 vanities per week. It sells each vanity for $800, and it pays each of its workers $1,000 per week. Which of the following is correct? a. For the 11th worker, the marginal profit is $600. b. For the 11th worker, the marginal revenue product is $2,000. c. The firm is maximizing its profit. d. If the firm is employing 11 workers, then its profit would increase if it cut back to 10

workers.

ANS: A DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Production function MSC: Analytical

70. Suppose a labor-augmenting technology were developed for a product that increased the marginal

product of labor for all workers. Which of the following would happen in the labor market for this product? a. Demand would decrease. b. Demand would increase. c. Supply would decrease. d. Supply would increase.



Scenario 18-2

Gertrude Kelp owns three boats that participate in commercial fishing for fresh Pacific salmon off the coast of Alaska. As part of her business she hires a captain and several crew members for each boat. In the market for fresh Pacific salmon, there are thousands of firms like Gertrude's. While Gertrude usually catches a significant number of fish each year, her contribution to the entire harvest of salmon is negligible relative to the size of the market.

71. Refer to Scenario 18-2. Based on the given information, it is likely that Gertrude's firm has

a. some influence over the wages paid to crew members but no influence over the price of salmon.

b. some influence over the price of salmon but no influence over the wages paid to crew members.

c. some influence over both the price of salmon and the wages paid to crew members. d. no influence over either the price of salmon or the wages paid to crew members.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Applicative

72. Refer to Scenario 18-2. When Gertrude participates in the labor market to hire crew members for

her boats, she is most likely considered a a. demander of labor services. b. supplier of labor services. c. demander of capital. d. supplier of capital.


73. Refer to Scenario 18-2. If the price of fresh Pacific salmon were to decrease significantly, it is most

likely that Gertrude would a. reduce her demand for crew members. b. hire more boats. c. become a seller in at least one factor market. d. hire more crew members.



74. Refer to Scenario 18-2. If Gertrude is a competitor in both the fresh Pacific salmon market and in

the market for crew members, she is called a price a. taker in the salmon market and a wage setter in the crew market. b. taker in the crew market and a price setter in the salmon market. c. taker in both markets. d. setter in both markets.


75. Refer to Scenario 18-2. In the fresh Pacific salmon product market, Gertrude has some control over

a. the price she charges for her fresh salmon. b. the quantity of fresh salmon that she supplies to the market. c. the competitive environment of the market. d. the supply of labor in the market.


76. Refer to Scenario 18-2. If Gertrude is a price taker in the labor market, she can choose

a. the price at which she will sell the fish she catches. b. how many crew members she will hire. c. the wages that she will pay to her crew members. d. All of the above.


77. Refer to Scenario 18-2. Labor-market theory assumes that Gertrude's demand for crew members

and her supply of fresh Pacific salmon result from her a. intrinsic desire to hire crew members. b. primary goal of maximizing profit. c. altruistic motives to provide fresh salmon to consumers. d. desire to strike a balance between environmental concerns and maximum profit.



78. The following table shows the number of calculators that can be assembled per week by various

numbers of workers. If the price per calculator in a perfectly competitive product market is $8, how many workers would the firm employ if the weekly wage rate is $800?

Quantity of Number of Calculators

Labor Per Week

0 0

1 200

2 360

3 480

4 560

5 600

a. 1 b. 2 c. 3 d. 4

ANS: C DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor | Value of the marginal product MSC: Analytical

79. Bill is trying to convince the owner of a pizza shop to hire him. He argues that he could help the

shop sell an additional five pizzas per day at the market price of $8 each. If the facts are not in dispute, but the owner does not hire him, then a. the wage rate must be less than $40 per day. b. hiring Bill would involve a negative marginal product. c. the wage rate must be more than $40 per day. d. the wage rate must be less than $8 per day.


80. Suppose that eight workers can manufacture 70 radios per day and that nine workers can

manufacture 90 radios per day. If radios can be sold for $10 each, the value of marginal product of the ninth worker is a. 20 radios. b. 90 radios. c. $200. d. $900.

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Analytical


81. Value of marginal product is defined as the additional

a. output a firm would receive after hiring one more factor of production. b. cost of hiring one more factor of production. c. revenue earned from selling one more unit of product. d. revenue earned from hiring one more factor of production.

ANS: D DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Definitional

82. The marginal product of labor is defined as the change in

a. output per additional unit of revenue. b. output per additional unit of labor. c. revenue per additional unit of labor. d. revenue per additional unit of output.

ANS: B DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Definitional

83. The marginal product of labor is

a. the increase in the amount of output from an additional unit of labor. b. the total amount of output divided by the total units of labor. c. total revenue minus total cost. d. also called the marginal profit.

ANS: A DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Definitional


Table 18-3

Quantity of Number of Baseballs

Labor Per Day

0 0

1 100

2 240

3 360

4 440

5 500

84. Refer to Table 18-3. This table describes the number of baseballs a manufacturer can produce per

day with different quantities of labor. Each baseball sells for $5 in a competitive market. For which level of employment is the marginal product of labor greatest? a. 1 worker b. 2 workers c. 3 workers d. 4 workers



day with different quantities of labor. Each baseball sells for $5 in a competitive market. What is the total revenue per day that the firm will earn if it employs five workers? a. $500. b. $300. c. $2,200. d. $2,500.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor | Value of the marginal product MSC: Analytical


day with different quantities of labor. Each baseball sells for $5 in a competitive market. What is the marginal revenue product of the third worker? a. 120 baseballs. b. $300 c. $400 d. $600

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Analytical



day with different quantities of labor. Each baseball sells for $2.50 in a competitive market. What is the marginal revenue product of the fourth worker? a. $200 b. $300 c. $400 d. $500



day with different quantities of labor. Each baseball sells for $5 in a competitive market and the firm pays each unit of labor a wage equal to $320 per day. How many units of labor should the firm hire to maximize profit? a. 2 units b. 3 units c. 4 units d. 5 units



day with different quantities of labor. Each baseball sells for $2.50 in a competitive market and the firm pays each unit of labor a wage equal to $225 per day. How many units of labor should the firm hire to maximize profit? a. 2 units b. 3 units c. 4 units d. 5 units


90. When labor is the only input a firm uses, the marginal cost of a unit of output can be defined as

a. the marginal revenue multiplied by the wage. b. the marginal product of labor multiplied by the wage. c. the wage divided by the marginal product of labor. d. the marginal product of labor divided by the wage.

ANS: C DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Analytical


Table 18-4

Consider the following daily production data for Wills Golf Balls. Wills sells golf balls for $2.50 cents each and pays the workers a wage of $325 per day.

Labor

(number of

workers)

Quantity (golf

balls per day)

Marginal

Product of

Labor (golf

balls per day)

Value of the

Marginal

Product of

Labor

Wage

(per day)

Marginal

Profit

0 0

1 200

2 380

3 540

4 680

5 800

6 900

91. Refer to Table 18-4. What is the third worker's marginal product of labor?

a. 120 golf balls b. 140 golf balls c. 160 golf balls d. 180 golf balls

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Analytical

92. Refer to Table 18-4. What is the fourth worker's marginal product of labor?



93. Refer to Table 18-4. What is the sixth worker's marginal product of labor?




94. Refer to Table 18-4. What is the value of the marginal product of the second worker?

a. $180 b. $450 c. $950 d. $1,080


95. Refer to Table 18-4. What is the value of the marginal product of the fifth worker?

a. $120 b. $300 c. $2,000 d. $2,300


96. Refer to Table 18-4. What is the value of the marginal product of the first worker?

a. $200 b. $400 c. $500 d. $700


97. Refer to Table 18-4. The marginal product of labor begins to diminish with the addition of which

worker? a. the 1st worker b. the 2nd worker c. the 3rd worker d. the 4th worker

ANS: B DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Analytical

98. Refer to Table 18-4. What is the marginal profit of the fourth worker?

a. $25 b. $117 c. $350 d. $1,700

ANS: A DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor | Value of the marginal product MSC: Analytical


99. Refer to Table 18-4. What is the marginal profit of the sixth worker?

a. $12 b. $25 c. $50 d. $75


100. Refer to Table 18-4. Assuming Wills is a competitive, profit-maximizing firm, how many workers

will the firm hire? a. 3 workers b. 4 workers c. 5 workers d. 6 workers

ANS: B DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor | Value of the marginal product MSC: Analytical

101. Refer to Table 18-4. Assume that Wills is a competitive, profit-maximizing firm. If the market

price of golf balls decreases from $2.50 to $2.00, how many workers would the firm then hire? a. 2 workers b. 3 workers c. 4 workers d. 5 workers


102. Refer to Table 18-4. Suppose that there is a technological advance that allows Wills employees to

produce more golf balls than they could before. Because of this change, a. the firm’s demand for labor shifts right. b. the firm’s demand for labor shifts left. c. the firm’s supply of labor shifts right. d. the firm’s supply of labor shifts left.

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Analytical


103. For maximum profit, a firm hires labor up to the point at which the wage equals

(i) the value of the marginal product of labor. (ii) the marginal cost of an additional unit of output.

(iii) output price multiplied by the marginal product of labor.

a. (i) and (ii) b. (i) and (iii) c. (ii) and (iii) d. All of the above are correct.

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand | Value of the marginal product MSC: Analytical

Table 18-5

Number of

Workers

Output

Marginal Product

of Labor

Value of Marginal

Product of Labor

Wage

Marginal

Profit

0 0

1 100 $1,000 $500 $500

2 80 $ 800 $500

3 60 $500 $100

4 280 $ 400 $500

5 20 $500

104. Refer to Table 18-5. What is the market price of the final good?

a. $5 b. $6 c. $8 d. $10


105. Refer to Table 18-5. It is apparent from this table that increasing marginal product

a. occurs only after the first worker is hired. b. occurs only after the second worker is hired. c. occurs only after the third worker is hired. d. never occurs.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Analytical


106. Refer to Table 18-5. If the firm hires two workers, the two workers together produce



107. Refer to Table 18-5. What is the marginal product of the fourth worker?

a. 30 b. 40 c. 100 d. 400


108. Refer to Table 18-5. The fact that the marginal product falls as the number of workers increases

illustrates a property called a. diminishing marginal product. b. utility maximization. c. supply and demand. d. labor theory.

ANS: A DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Definitional

109. Refer to Table 18-5. The fact that the production function exhibits diminishing marginal

productivity implies that a. total production decreases beyond a certain level of output. b. labor markets are not always competitive. c. the additions to total output get smaller as more workers are hired. d. marginal profit is negative.

ANS: C DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Definitional


110. Refer to Table 18-5. What is the marginal profit of the fourth worker?

a. $400 b. $100 c. $0 d. $100


111. Refer to Table 18-5. What is the fourth worker's marginal revenue product?

a. $100 b. $40 c. $400 d. $500


112. Refer to Table 18-5. To maximize its profit, how many workers will the firm hire?

a. 2 b. 3 c. 4 d. 5

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor | Value of the marginal product MSC: Analytical

113. Refer to Table 18-5. To maximize its profit, the firm will hire workers as long as the value of the

marginal product of labor equals or exceeds a. $100. b. $200. c. $400. d. $500.




a. The value of the marginal product curve is the labor demand curve for competitive, profit-maximizing firms.

b. A competitive, profit-maximizing firm hires workers up to the point where the value of the marginal product of labor equals the wage.

c. By hiring labor up to the point where the value of the marginal product of labor equals the wage, the firm is producing where price equals marginal cost.


ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor | Value of the marginal product MSC: Interpretive

115. Dave is the owner of Dave's Pizza Palace. Dave is a profit-maximizing owner whose firm operates

in a competitive market. An additional worker costs Dave $200 and has a marginal productivity of 40 pizzas. Assuming no other variable costs, what is the marginal cost of a pizza? a. $200 b. $8 c. $5 d. There is insufficient information available to answer this question.


116. Sally runs a hair styling salon. Sally is a profit-maximizing owner whose firm operates in a

competitive market. The marginal cost of a haircut is $7. What is the maximum wage that Sally will pay her stylists? a. less than $7 per haircut b. $7 per haircut c. more than $7 haircut d. There is insufficient information to answer this question.



117. Diane's Auto World installs tires on automobiles, light trucks, and sport utility vehicles. She is a

profit-maximizing business owner whose firm operates in a competitive market. The marginal cost of installing a tire is $10. The marginal productivity of the last worker that Diane hired was 2 tires per hour. What is the maximum hourly wage that Diane was willing to pay the last worker hired? a. $5 b. $10 c. $20 d. There is insufficient information to answer this question.


Table 18-6

Labor

Output

Marginal Product

of Labor

Value of Marginal

Product of Labor

Wage

Marginal

Profit

0 0 --- --- --- ---

1 400 400 $1200 $400 $800

2 700 300 $ 900 $400 $500

3 950 250 $ 750 $400 $350

4 1050 100 $ 300 $400 -$100

118. Refer to Table 18-6. The price of output is

a. $1. b. $2. c. $3. d. $400.


119. Refer to Table 18-6. How many workers should the firm hire?

a. 1 b. 2 c. 3 d. 4

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product | Marginal product of labor MSC: Analytical


Table 18-7

Labor

Output

Marginal Product

of Labor

Value of Marginal

Product of Labor

Wage

Marginal

Profit

0 0 --- --- --- ---

1 300 300 $600 $300 $300

2 500 200 AA $300 $100

3 600 100 $200 $300 BB

4 650 CC DD $300 -$200

120. Refer to Table 18-7. What is the value for the cell labeled AA?

a. $600 b. $500 c. $400 d. $300


121. Refer to Table 18-7. What is the value for the cell labeled BB?

a. $300 b. $200 c. $100 d. $100


122. Refer to Table 18-7. What is the value for the cell labeled CC?

a. 650 b. 600 c. 100 d. 50

ANS: D DIF: 3 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Analytical

123. Refer to Table 18-7. What is the value for the cell labeled DD?

a. $100 b. $300 c. $100 d. $50



Table 18-8

Days of Labor Units of Output

0 0

1 10

2 18

3 25

4 30

5 33

6 34

124. Refer to Table 18-8. What is the marginal product of the third worker?

a. 7 b. 8 c. 25 d. 75


125. Refer to Table 18-8. Suppose that the firm pays its workers $45 per day. Each unit of output sells

for $10. How many days of labor should the firm hire? a. 1 b. 2 c. 3 d. 4


126. Refer to Table 18-8. Suppose that the firm pays its workers $80 per day. Each unit of output sells

for $15. How many days of labor should the firm hire? a. 3 b. 4 c. 5 d. 6



127. If hiring more workers results in each additional worker contributing successively smaller amounts

of output, then a. diminishing profitability is present. b. diminishing marginal cost is present. c. diminishing marginal product is present. d. diminishing total product is present.

ANS: C DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Definitional

128. Diminishing marginal product affects the shape of the production function in what way?

a. The slope of the production function decreases as the quantity of input increases. b. The production function becomes steeper as the quantity of input increases. c. The production function slopes downward. d. The production function is horizontal beyond a certain quantity of input.

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product | Production function MSC: Applicative

129. Diminishing marginal product is closely related to

a. diminishing total cost. b. diminishing marginal cost. c. increasing price. d. increasing marginal cost.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Interpretive

130. Diminishing marginal product occurs when

a. the marginal product of an input increases as the quantity of the input increases. b. the marginal product of an input decreases as the quantity of the input increases. c. total output increases as the quantity of an input increases. d. total output decreases as the quantity of an input increases.

ANS: B DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Definitional

131. Diminishing marginal product occurs when

a. the increases to total output are declining. b. marginal product is decreasing. c. total output is decreasing. d. Both a and b are correct.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Interpretive


132. When a production function exhibits a diminishing, but positive, marginal product of labor,

a. output increases, but at an increasing rate, as more workers are employed. b. output increases, but at a decreasing rate, as more workers are employed. c. output declines as more workers are employed. d. the effects on marginal product are ambiguous.

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Applicative

133. If a firm experiences diminishing marginal productivity of labor, the marginal product

a. increases as total product increases. b. decreases as total product increases. c. increases as total product decreases. d. decreases as total product decreases.

ANS: B DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product MSC: Definitional

134. A profit-maximizing, competitive firm for which the marginal product of labor is diminishing also

experiences a. a perfectly inelastic supply of labor. b. a perfectly elastic supply of labor. c. a downward-sloping demand for labor. d. an upward-sloping demand for labor.

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product | Labor demand MSC: Applicative

135. Typically, as a firm hires additional workers, the marginal product of labor

a. decreases and the value of the marginal product of labor decreases. b. stays constant and the value of the marginal product of labor decreases. c. decreases and the value of the marginal product of labor stays constant. d. decreases and the value of the marginal product of labor increases.

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Diminishing marginal product | Value of the marginal product MSC: Applicative

136. When deciding whether to hire an additional worker, firms look at how the additional worker would

affect a. costs only. b. revenue only. c. output only. d. profit.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Interpretive


137. The value of the marginal product of any input is equal to the marginal product of that input

multiplied by the a. wage. b. marginal cost of the output. c. change in total profit. d. market price of the output.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Definitional

138. The value of the marginal product of labor is equal to the change in

a. marginal cost caused by the addition of the last worker. b. total cost caused by the addition of the last worker. c. total revenue caused by the addition of the last worker. d. total profit caused by the addition of the last worker.

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Definitional

139. When a firm experiences diminishing marginal product, what is the shape of the curve that

represents the value of the marginal product of labor? a. U-shaped b. flat c. downward sloping d. upward sloping

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Interpretive

140. To maximize profit, a competitive firm hires workers up to the point of intersection of the

a. marginal product curve and the wage line. b. value of marginal product curve and the wage line. c. value of marginal product curve and the marginal revenue curve. d. total revenue curve and the wage line.

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Interpretive

141. The negative slope of the value of marginal product curve is most easily explained by

a. tight labor markets. b. a surplus of workers. c. diminishing marginal product. d. diminishing marginal cost.

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Applicative


142. If the value of the marginal product of labor exceeds the wage, then hiring another worker increases

the firm's a. profit. b. total cost. c. total revenue. d. All of the above are correct.


143. If the value of the marginal product of labor exceeds the wage, then the firm could

a. increase profit by hiring additional labor. b. increase profit by reducing the amount of labor hired. c. increase revenue by lowering output. d. reduce total cost by hiring additional workers.


144. If the value of the marginal product of labor is less than the wage, then the firm could

a. increase profit by hiring additional labor. b. increase profit by reducing the amount of labor hired. c. increase revenue by lowering output. d. reduce total cost by hiring additional workers.


145. If the wage exceeds the value of the marginal product of labor, then hiring another worker

a. decreases the firm's total revenue. b. increases the firm's profit. c. decreases the firm's total cost. d. decreases the firm’s profit.


146. A competitive, profit-maximizing firm hires workers up to the point where the

a. marginal product equals zero. b. marginal revenue product equals zero. c. marginal product equals the wage. d. value of the marginal product equals the wage.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Labor demand MSC: Analytical


147. A worker's contribution to a firm's revenue is measured directly by the worker's

a. marginal product. b. value of marginal product. c. marginal product multiplied by the worker’s wage. d. value of marginal product multiplied by the output price.

ANS: B DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Interpretive

148. We observe a profit-maximizing firm hiring its 51st employee. It is possible to infer that, when 50

employees are hired, the a. wage exceeds the value of the marginal product of labor. b. value of the marginal product of labor exceeds the wage. c. marginal product of labor is increasing. d. firm is attempting to increase its market share.


149. A profit-maximizing, competitive firm will always hire an additional worker when the additional

worker makes a positive contribution to a. total revenue. b. total profit. c. the value of the marginal product of labor. d. marginal revenue.


150. Suppose that in January a profit-maximizing firm has 25 employees. By February, the firm has

decreased employment. One can infer that, when 25 employees are hired, the a. firm is losing market share. b. firm is minimizing losses. c. wage exceeds the value of the marginal product of labor. d. value of the marginal product of labor exceeds the wage.



151. A competitive firm will hire workers up to the point at which the value of the marginal product of

labor equals the a. average total cost. b. average variable cost. c. wage. d. price per unit of output.

ANS: C DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Applicative

152. Competitive firms that maximize profit will hire workers until the value of the marginal product of

labor a. equals the wage. b. equals the price of the final good. c. begins to fall. d. begins to rise.


153. For a profit-maximizing competitive firm, the value of marginal product curve is

a. always rising. b. falling only when marginal product is rising. c. the labor supply curve. d. the labor demand curve.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Interpretive

154. For a competitive firm experiencing diminishing marginal productivity, the value of the marginal

product (i) increases when the price of output decreases.

(ii) changes when marginal product changes. (iii) diminishes as the number of workers rises.

a. (i) and (ii) b. (i) and (iii) c. (ii) and (iii) d. All of the above are correct.



155. The value of the marginal product of labor is calculated by multiplying the

a. price of output by the quantity of labor. b. price of output by the marginal product of labor. c. wage by the quantity of labor. d. wage by the marginal product of labor.

ANS: B DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Definitional

156. When a firm hires labor up to the point where the wage is equal to the value of the marginal product

of labor, it is a. minimizing labor costs. b. guaranteeing that labor costs do not exceed fixed costs. c. maximizing the number of workers it can hire and still experience a positive profit. d. maximizing profit.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Applicative

157. Which of the following events would bring about a change in the value of the marginal product of

labor? a. Technological progress b. A change in the marginal product of labor c. A change in the price of the product that the firm sells d. All of the above are correct.

ANS: D DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Applicative

158. The value of the marginal product is

a. total revenue minus total cost. b. the change in total output divided by the change in an input. c. the marginal product of an input times the price of the output. d. total output divided by total inputs.

ANS: C DIF: 1 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Value of the marginal product MSC: Definitional


Figure 18-3

The figure below shows the production function for a particular firm.

40

70

90

100105

1 2 3 4 5 L

Q

159. Refer to Figure 18-3. The marginal product of the third worker is


ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Applicative

160. Refer to Figure 18-3. Suppose the firm pays a wage equal to $160 per unit of labor and sells its

output at $10 per unit. What is the value of the marginal product of labor for the fourth worker? a. 10 units b. $100 c. $1,000 d. $1,600




output at $10 per unit. How many units of labor should the firm hire to maximize profit? a. 2 units b. 3 units c. 4 units d. 5 units



output at $15 per unit. How many units of labor should the firm hire to maximize profit? a. 2 units b. 3 units c. 4 units d. 5 units

ANS: A DIF: 2 REF: 18-1 NAT: Analytic LOC: Labor markets TOP: Marginal product of labor MSC: Applicative

Sec02 - The Markets for the Factors of Production - The Supply of Labor

MULTIPLE CHOICE

1. Your best friend receives a pay raise at her part-time job from $8 to $10 per hour. She used to work

20 hours per week, but now she decides to work 16 hours per week in order to spend more time studying economics. For this price range, her labor supply curve is a. vertical. b. horizontal. c. upward sloping. d. backward sloping.

ANS: D DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Analytical

2. Your best friend receives a pay raise at her part-time job from $8 to $10 per hour. She used to work

16 hours per week, but now she decides to work 20 hours per week. For this price range, her labor supply curve is a. vertical. b. horizontal. c. upward sloping. d. backward sloping.

ANS: C DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Analytical


3. Which of the following would shift a market labor supply curve to the right?

a. an increase in the price of output b. an increase in immigration c. a labor-saving technological change d. a decrease in the wage rate

ANS: B DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Applicative

4. Which of the following would shift a market labor supply curve to the left?

a. an increase in the wage paid to workers in a competing market b. labor-augmenting technology c. a change in worker tastes so that workers want to retire later d. a decrease in the supply of other factors such as capital

ANS: A DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Applicative

5. For a worker, the opportunity cost of an hour of leisure

a. rises by $5 when his or her wage rises by $5 per hour. b. falls by $5 when his or her wage rises by $5 per hour. c. is the same for a corporate chief executive officer as it is for a garbage-collection worker. d. is determined by factors that are unrelated to his or her hourly wage.

ANS: A DIF: 2 REF: 18-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Opportunity cost | Wages MSC: Interpretive

6. Immigration is an important

a. explanation for the failure of firms to operate on their labor-demand curves. b. explanation for the failure of firms to operate on their output-supply curves. c. source of shifts in labor demand. d. source of shifts in labor supply.

ANS: D DIF: 1 REF: 18-2 NAT: Analytic LOC: Understanding and applying economic models TOP: Labor supply MSC: Interpretive


Scenario 18-3

Jerry has two jobs, one for the winter and one for the summer. In the winter, he works as a lift attendant at a ski resort where he earns $10 per hour. During the summer, he drives a tour bus around the ski resort, earning $12 per hour.

7. Refer to Scenario 18-3. During the winter months, what is Jerry's opportunity cost of taking an

hour off work to go skiing? a. $12 b. between $10 and $12 c. $10 d. less than $10

ANS: C DIF: 1 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Interpretive

8. Refer to Scenario 18-3. During the summer months, what is Jerry's opportunity cost of taking an

hour off work to go hiking? a. $12 b. between $10 and $12 c. $10 d. less than $10

ANS: A DIF: 1 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Interpretive

9. Refer to Scenario 18-3. Assume that Jerry has an upward-sloping labor supply curve. If the

opportunity cost of Jerry's leisure time increases, he will respond by working a. more hours. b. fewer hours. c. an equal number of hours. d. a number of hours that cannot be determined from the information. The labor demand

curve is needed to make this determination.


10. Refer to Scenario 18-3. If Jerry takes fewer hours of leisure in the summer than in the winter, we

can assume that his labor supply curve a. is horizontal. b. is vertical. c. slopes upward. d. slopes downward.



11. Which of the following events would shift the labor supply curve?

a. Changes in the number of women willing to work b. Immigration of workers c. Changing attitudes towards work d. All of the above are correct.

ANS: D DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Applicative

12. The labor supply curve shifts when

a. employers need to hire more people. b. employers develop new technology. c. workers change the number of hours that they want to work at any given wage. d. workers become more productive.

ANS: C DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Applicative

13. The labor supply curve is fundamentally a representation of the trade-off people face between which

of the following? a. Work and wage b. Work and leisure c. Wage and productivity d. Technology and wage

ANS: B DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Interpretive

14. What does an upward-sloping labor supply curve mean?

a. It means that workers prefer to buy more leisure time when their incomes increase. b. It means that workers prefer to supply less labor when wages are high. c. It means that an increase in the opportunity cost of leisure leads workers to increase the

quantity of labor they supply. d. All of the above are correct.


15. If workers respond to an increase in the opportunity cost of leisure by taking less leisure, then their

labor supply curve is a. horizontal. b. vertical. c. downward sloping. d. upward sloping.

ANS: D DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Interpretive


16. If workers respond to an increase in the opportunity cost of leisure by taking more leisure, then their

labor supply curve is a. upward sloping. b. backward sloping. c. horizontal. d. vertical.

ANS: B DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Interpretive

17. What happens to labor supply in the pear-picking market when the wage paid to apple pickers

increases? a. The labor supply will stay unchanged until the wages paid to pear pickers change. b. The labor supply will decrease. c. The labor supply will increase. d. The labor supply may fall or rise, depending on the price of pears.


18. What happens to the labor supply curves in both countries when Mexican workers leave Mexico and

move to the United States? a. Labor supply decreases in Mexico and decreases in the United States. b. Labor supply increases in the United States and increases in Mexico. c. Labor supply increases in the United States and decreases in Mexico. d. Labor supply increases in Mexico and decreases in United States.


19. A household member's decision about how much labor to supply is most closely linked to

a. the supply of factors of production other than labor. b. technological change. c. the tradeoff between leisure and work. d. immigration trends.


20. Among the people who are characterized below, who has the highest opportunity cost of leisure?

a. an attorney who earns $200 per hour and who plays golf during her leisure time b. a medical doctor who earns $210 per hour and who sleeps during his leisure time c. a retail clerk who earns $15 per hour and who watches TV during her leisure time d. a waiter who earns $12 per hour and who reads poetry during his leisure time



21. The labor supply curve reflects how

a. workers' decisions about the labor-leisure tradeoff respond to a change in the wage. b. workers' decisions about the opportunity cost of labor respond to a change in the quantity

of labor supplied. c. firms' decisions about the labor-leisure tradeoff respond to the quantity of labor demanded. d. firms' decisions about how the quantity of labor they hire respond to changes in their

opportunities to earn profits.


22. If Emma's individual labor supply curve is upward sloping, then Emma responds to an increase in

a. the wage by working more hours per week. b. the opportunity cost of leisure by working fewer hours per week. c. the opportunity cost of leisure by taking more hours of leisure per week. d. Both a and b are correct.


23. Which of the following statements is correct? An individual worker's labor supply curve

a. can never be backward sloping. b. slopes backward if that person responds to a higher wage by taking fewer hours of leisure

per week. c. slopes backward if that person responds to a higher opportunity cost of leisure by working

fewer hours per week. d. slopes upward if that person works the same number of hours per week, regardless of the

opportunity cost of leisure.


24. Immigration of workers into the United States is often an important source of

a. increases in the demand for labor in the United States. b. decreases in the demand for labor in the United States. c. increases in the supply of labor in the United States. d. decreases in the supply of labor in the United States.



25. Which of the following events would lead to an increase in the supply of labor?

a. The price of a firm's product increases. b. A country experiences an increase in immigrant labor. c. The development of a new labor-augmenting technology. d. All of the above are correct.


26. What happens to the labor supply curve for academic economists when the wages paid to

government economists increase? a. The labor supply curve for academic economists shifts to the left. b. The labor supply curve for academic economists shifts to the right. c. The labor supply curve for academic economists will become backward-sloping. d. The labor supply curve for academic economists will not change.


27. Fred's hourly wage increases from $8 to $10. Which of the following describes a consequence of the

increase in Fred's wage? a. The opportunity cost of Fred's leisure time has decreased. b. Fred may choose to work fewer hours due to the increase in his wage. c. If Fred’s labor supply curve is upward sloping, Fred will choose to work fewer hours. d. Both a and b are correct.

ANS: B DIF: 2 REF: 18-2 NAT: Analytic LOC: Labor markets TOP: Income effect MSC: Analytical

Sec03 - The Markets for the Factors of Production - Equilibrium in the Labor

Market

MULTIPLE CHOICE

1. Suppose that the market for labor is initially in equilibrium. An increase in the price of output will

cause a. the equilibrium wage and the quantity of labor to both rise. b. the equilibrium wage and the quantity of labor to both fall. c. the equilibrium wage to rise and the quantity of labor to fall. d. the equilibrium wage to fall and the quantity of labor to rise.

ANS: A DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Interpretive


2. Suppose that the market for labor is initially in equilibrium. A decrease in the price of output will

cause a. the equilibrium wage and the quantity of labor to both rise. b. the equilibrium wage and the quantity of labor to both fall. c. the equilibrium wage to rise and the quantity of labor to fall. d. the equilibrium wage to fall and the quantity of labor to rise.

ANS: B DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Interpretive

3. Suppose that the market for labor is initially in equilibrium. If the firm employs labor-augmenting

technology, a. the equilibrium wage and the quantity of labor will both rise. b. the equilibrium wage and the quantity of labor will both fall. c. the equilibrium wage will rise and the quantity of labor will fall. d. the equilibrium wage will fall and the quantity of labor will rise.


4. Suppose that the market for labor is initially in equilibrium. If the firm employs labor-saving

technology, a. the equilibrium wage and the quantity of labor will both rise. b. the equilibrium wage and the quantity of labor will both fall. c. the equilibrium wage will rise and the quantity of labor will fall. d. the equilibrium wage will fall and the quantity of labor will rise.


5. Suppose that the market for labor is initially in equilibrium. An increase in immigration will cause

a. the equilibrium wage and the quantity of labor to both rise. b. the equilibrium wage and the quantity of labor to both fall. c. the equilibrium wage to rise and the quantity of labor to fall. d. the equilibrium wage to fall and the quantity of labor to rise.

ANS: D DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Interpretive


6. Suppose that the market for labor is initially in equilibrium. Suppose that workers’ tastes change so

that they choose to retire at age 55 rather than age 67. Then a. the equilibrium wage and the quantity of labor will both rise. b. the equilibrium wage and the quantity of labor will both fall. c. the equilibrium wage will rise and the quantity of labor will fall. d. the equilibrium wage will fall and the quantity of labor will rise.

ANS: C DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Interpretive

Figure 18-4 This figure below shows the labor market for automobile workers. The curve labeled S is the labor supply curve, and the curves labeled D1 and D2 are the labor demand curves. On the horizontal axis, L represents the quantity of labor in the market.

D

D

S

0

1

2

L

7. Refer to Figure 18-4. What is measured along the vertical axis on the graph?

a. The quantity of automobiles produced b. The price of automobiles c. The wage paid to automobile workers d. Time spent by workers producing automobiles



8. Refer to Figure 18-4. Which of the following is a possible explanation of the shift of the labor-

demand curve from D1 to D2? a. The wage earned by automobile workers increased. b. The price of automobiles increased. c. The opportunity cost of leisure, as perceived by automobile workers, decreased. d. Large segments of the population changed their tastes regarding leisure versus work.


9. Refer to Figure 18-4. Which of the following events would most likely explain the shift of the

labor-demand curve from D1 to D2? a. The price of automobiles decreased. b. A large number of immigrants entered the automobile-worker market. c. A technological advance increased the marginal product of automobile workers. d. All of the above events are equally-likely explanations.


10. Refer to Figure 18-4. Which of the following events would most likely explain a shift of the labor-

demand curve from D2 back to D1? a. The price of automobiles decreased. b. A large number of immigrants entered the automobile-worker market. c. A technological advance increased the marginal product of automobile workers. d. An increase in the demand for automobiles.


11. A significant slowdown in the growth of productivity persisted in the U.S. economy between

a. 1959 and 1973. b. 1973 and 1995. c. 1973 and the present. d. 1995 and the present.

ANS: B DIF: 2 REF: 18-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity MSC: Interpretive



a. Neither economic theory nor evidence from the U.S. economy suggests that there is a close link between productivity and real wages.

b. Economic theory suggests that there is a close link between productivity and real wages, but evidence from the U.S. economy fails to confirm that link.

c. Evidence from the U.S. economy suggests a close link between productivity and real wages, but economic theory provides no basis for such a link.

d. Both economic theory and evidence from the U.S. economy suggest that there is a close link between productivity and real wages.

ANS: D DIF: 2 REF: 18-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity | Wages MSC: Interpretive

13. Suppose that technological progress increases the productivity of teachers. Which of the following

accurately describes the labor market for teachers after the technological change? a. Wages will rise and quantity of teachers employed will fall. b. Wages will rise and the quantity of teachers employed will rise. c. Wages will fall and the quantity of teachers employed will fall. d. Wages will fall and the quantity of teachers employed will rise.

ANS: B DIF: 2 REF: 18-1 | 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Applicative

14. Which of the following correctly describes a representative labor market?

a. The wage adjusts to balance the supply and demand for labor. b. The wage equals the value of the marginal product of labor. c. An increase in the supply of labor increases the equilibrium wage. d. Both a and b are correct.

ANS: D DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Analytical

15. Consider the labor market for computer programmers. During the late 1990s, the value of the

marginal product of all computer programmers increased dramatically. Holding all else equal, what effect did this process have on the labor market for computer programmers? a. The equilibrium wage increased and the equilibrium quantity of labor increased. b. The equilibrium wage increased and the equilibrium quantity of labor decreased. c. The equilibrium wage decreased and the equilibrium quantity of labor increased. d. The equilibrium wage decreased and the equilibrium quantity of labor decreased.

ANS: A DIF: 2 REF: 18-1 | 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Applicative



marginal product of all computer programmers increased dramatically. Holding all else equal, what effect did this process have on the equilibrium wage in the labor market for computer programmers? a. The equilibrium wage increased. b. The equilibrium wage decreased. c. The equilibrium wage did not change. d. It is not possible to determine the equilibrium wage.



marginal product of all computer programmers increased dramatically. Holding all else equal, what effect did this process have on the equilibrium quantity in the labor market for computer programmers? a. The equilibrium quantity increased. b. The equilibrium quantity decreased. c. The equilibrium quantity did not change. d. It is not possible to determine the equilibrium quantity.


18. Consider the labor market for computer programmers. Because of the dot.com boom in the late

1990s, a lot of workers went to school to learn how to write computer code for one of thousands of new dot.com companies. However, when these computer programming students graduated, the dot.com bust took place. The dot.com bust decreased the value of the marginal product of computer programmers. Holding all else equal, what effect did these two circumstances have on the equilibrium wage in the labor market for computer programmers? a. The equilibrium wage increased. b. The equilibrium wage decreased. c. The equilibrium wage did not change. d. It is not possible to determine what happens to the equilibrium wage.

ANS: B DIF: 2 REF: 18-1 | 18-2 | 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Analytical


19. Consider the labor market for computer programmers. Because of the dot.com boom in the late

1990s, a lot of workers went to school to learn how to write computer code for one of thousands of new dot.com companies. However, when these computer programming students graduated the dot.com bust took place. The dot.com bust decreased the value of the marginal product of computer programmers. Holding all else equal what effect did these two circumstances have on the equilibrium quantity in the labor market for computer programmers? a. The equilibrium quantity of labor increased. b. The equilibrium quantity of labor decreased. c. The equilibrium quantity of labor did not change. d. It is not possible to determine what happens to the equilibrium quantity of labor.

ANS: D DIF: 2 REF: 18-1 | 18-2 | 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Analytical

20. Consider the labor market for heath care workers. Because of the aging population in the United

States, the output price for health care services has increased. Holding all else equal, what effect does this have on the labor market for health care employees? a. The equilibrium wage increases and the equilibrium quantity of labor increases. b. The equilibrium wage increases and the equilibrium quantity of labor decreases. c. The equilibrium wage decreases and the equilibrium quantity of labor increases. d. The equilibrium wage decreases and the equilibrium quantity of labor decreases.



States, the output price for health care services has increased. Holding all else equal, what effect does this have on the equilibrium wage of health care employees? a. The equilibrium wage increases. b. The equilibrium wage decreases. c. The equilibrium wage does not change. d. It is not possible to determine what happens to the equilibrium wage.



States, the output price for health care services has increased. Holding all else equal, what effect does this have on the equilibrium quantity of health care employees? a. The equilibrium quantity increases. b. The equilibrium quantity decreases. c. The equilibrium quantity does not change. d. It is not possible to determine what happens to the equilibrium quantity.



23. Consider the market for university economics professors. Suppose the opportunity cost of going to

graduate school to get a Ph.D. in economics decreases for many individuals. Since it generally takes about five years to get a Ph.D. in economics, holding all else constant, what will happen to the equilibrium wage for university economics professors in five years? a. The equilibrium wage will increase. b. The equilibrium wage will decrease. c. The equilibrium wage will not change. d. It is not possible to determine what will happen to the equilibrium wage.

ANS: B DIF: 2 REF: 18-2 | 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Applicative

24. Consider the market for university economics professors. Suppose the opportunity cost of going to

graduate school to get a Ph.D. in economics decreases for many individuals. Since it generally takes about five years to get a Ph.D. in economics, holding all else constant, what will likely happen to the equilibrium quantity of university economics professors in five years? a. The equilibrium quantity will increase. b. The equilibrium quantity will decrease. c. The equilibrium quantity will not change. d. It is not possible to determine what will happen to the equilibrium quantity.


25. Suppose the following events occur in the market for university economics professors. Event 1: A recession in the U.S. economy lowers the opportunity cost of going to graduate school in economics to become a university economics professor. Event 2: An increasing number of students in U.S. primary and secondary schools increases the number of students entering college, increasing the output price of university economics professors’ services. As a result of these two events, holding all else constant, what will likely happen to the equilibrium quantity of university economics professors?

a. The equilibrium quantity will increase. b. The equilibrium quantity will decrease. c. The equilibrium quantity will not change. d. It is not possible to determine what will happen to the equilibrium quantity.

ANS: A DIF: 3 REF: 18-1 | 18-2 | 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Analytical


26. Suppose the following events occur in the market for university economics professors. Event 1: A recession in the U.S. economy lowers the opportunity cost of going to graduate school in economics to become a university economics professor. Event 2: An increasing number of students in U.S. primary and secondary schools increases the number of students entering college, increasing the output price of university economics professors’ services. As a result of these two events, holding all else constant, what will likely happen to the equilibrium wage of university economics professors?

a. The equilibrium wage will increase. b. The equilibrium wage will decrease. c. The equilibrium wage will not change. d. It is not possible to determine what will happen to the equilibrium wage.

ANS: D DIF: 3 REF: 18-1 | 18-2 | 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Analytical

27. When labor supply increases,

a. the marginal productivity of workers always increases. b. profit-maximizing firms reduce employment. c. wages increase as long as labor supply is upward sloping. d. wages decrease as long as labor demand is downward sloping.

ANS: D DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Applicative

Scenario 18-4

In 1997, Albania experienced a civil war. The civil unrest sent thousands of refugees across the Adriatic Sea to Italy where they sought relief from the fighting.

28. Refer to Scenario 18-4. The Albanian civil war probably affected Italian labor markets in the

following way: a. Total employment in Italy decreased. b. Wages in Italy increased. c. The marginal product of labor in Italy decreased. d. All of the above are correct.

ANS: C DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Applicative


29. Refer to Scenario 18-4. The Italian government started to patrol the Adriatic Sea and had a policy

of returning all refugees to Albania. This policy would contribute to a. an increase in the supply of labor in Italy. b. an increase in the demand labor in Italy. c. a decrease in the demand for labor in Italy. d. preventing an increase in the supply of labor in Italy.


30. Refer to Scenario 18-4. When a labor market experiences a surplus of labor, there is downward

pressure on a. the supply of labor. b. final product price. c. wages. d. the demand for labor.


Scenario 18-5 Rocchetta Industries manufactures and supplies bottled water in Mexico. As a result of a contamination of water supplies at many of Mexico's resort communities, the demand for bottled water has increased.

31. Refer to Scenario 18-5. We would expect that, as a result of the contamination, the value of the

marginal product for Rocchetta Industries’ workers would a. be offset by a decrease in wages. b. be unaffected by a rise in demand for bottled water. c. rise. d. fall.

ANS: C DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Analytical

32. Refer to Scenario 18-5. When the labor market adjusts to its new equilibrium, we would expect the

a. marginal product of labor to be higher than it was before the increase in demand for bottled water.

b. value of the marginal product of labor to be higher than it was before the increase in demand for bottled water.

c. price of bottled water to be lower than it was before the increase in demand for bottled water.

d. wages of Rocchetta workers to be lower than they were before the increase in demand for bottled water.

ANS: B DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Analytical


33. When firms are able to increase the amount of physical capital available to workers, the

a. marginal product of labor will decrease. b. value of the marginal product of labor will decrease. c. value of the marginal product of labor will increase. d. final product price will increase.


Figure 18-5

34. Refer to Figure 18-5. If the apple pickers start working fewer hours (by taking more vacation time),

the equilibrium wage will a. fall below w1 due to a shift in demand. b. fall below w1 due to a shift in supply. c. rise above w1 due to a shift in demand. d. rise above w1 due to a shift in supply.


35. Refer to Figure 18-5. If the marginal product of labor falls and the price of apples remains

unchanged, (i) the value of the marginal product of labor will fall.

(ii) the quantity of labor demanded will increase above L1. (iii) the labor supply curve will remain unchanged.




36. Refer to Figure 18-5. If the price of apples increases, the

a. demand for apple pickers will shift to the left. b. demand for apple pickers will shift to the right. c. supply of apple pickers will shift to the left. d. supply of apple pickers will shift to the right.


37. Refer to Figure 18-5. If the price of apples decreases, the

a. demand for apple pickers will shift to the left. b. demand for apple pickers will shift to the right. c. supply of apple pickers will shift to the left. d. supply of apple pickers will shift to the right.

ANS: A DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Analytical

38. Refer to Figure 18-5. If the price of apples increases, the wage will

a. increase and more apple pickers will be hired. b. decrease and more apple pickers will be hired. c. increase and fewer apple pickers will be hired. d. decrease and fewer apple pickers will be hired.


39. Refer to Figure 18-5. If the price of apples decreases, the wage will

a. increase and more apple pickers will be hired. b. decrease and more apple pickers will be hired. c. increase and fewer apple pickers will be hired. d. decrease and fewer apple pickers will be hired.



Figure 18-6

40. Refer to Figure 18-6. When the relevant labor demand curve is D1 and the labor market is in

equilibrium, a. the value of the marginal product of labor to firms is less than W1. b. the opportunity cost of leisure to workers is greater than W1. c. the wage is W1. d. All of the above are correct.


41. Refer to Figure 18-6. The shift of the labor demand curve from D1 to D2 could possibly be

explained by a. technological progress. b. an increase in the price of firms' output. c. an increase in the supply of a relevant factor of production other than labor. d. All of the above are correct.


42. Refer to Figure 18-6. The shift of the labor demand curve from D1 to D2 could possibly be

explained by a. a change in workers' attitudes toward the work-leisure tradeoff. b. decreases in wages in other labor markets. c. an increase in the price of firms' output. d. All of the above are correct.



43. Refer to Figure 18-6. Assume W1 = $20 and W2 = $22 and the market is always in equilibrium.

Then the shift of the labor demand curve from D1 to D2

a. increases the value of the marginal product of labor by $2. b. increases the value of the marginal product of labor by less than $2. c. decreases the value of the marginal product of labor by more than $2. d. does not change the value of the marginal product of labor.


44. Refer to Figure 18-6. If the relevant labor demand curve is D2 and the current wage is W1,

a. there is a surplus of labor. b. there is a shortage of labor. c. the quantity of labor supplied exceeds the quantity of labor demanded. d. workers are failing to take into account the work-leisure tradeoff in deciding what quantity

of labor to supply at alternative wages.


45. An increase in the value of the marginal product of labor has the effect of increasing the

a. demand for labor. b. wage. c. quantity of labor employed. d. All of the above are correct.


46. An increase in the supply of labor has the effect of decreasing the

a. wage. b. marginal product of labor. c. value of the marginal product of labor. d. All of the above are correct.



47. Suppose medical research provides evidence that eating bananas provides far greater health benefits

than was previously thought. The resulting increase in the demand for bananas a. increases the marginal product of banana pickers for any given number of banana pickers. b. increases the value of the marginal product of banana pickers for any given number of

banana pickers. c. increases the supply of banana pickers. d. All of the above are correct.


48. Both theory and history point to a close relationship between increases in

a. labor demand and increases in labor supply. b. labor demand and decreases in real wages. c. the productivity of labor and increases in real wages. d. interest rates and decreases in real wages.


49. Suppose that workers immigrate to Minnesota from Canada. Which of the following correctly

describes what would happen in the market for labor in Minnesota? a. The equilibrium wage would increase, and the quantity of labor would increase. With

more workers, the added output from an extra worker is larger. b. The equilibrium wage would decrease, and the quantity of labor would decrease.. With

fewer workers, the added output from an extra worker is smaller. c. The equilibrium wage would decrease, and the quantity of labor would increase. With

more workers, the added output from an extra worker is smaller. d. The equilibrium wage would decrease, and the quantity of labor would increase. With

more workers, the added output from an extra worker is larger.



Figure 18-7

50. Refer to Figure 18-7. When the relevant labor supply curve is S1 and the labor market is in

equilibrium, a. the wage is W1. b. the opportunity cost of leisure to workers is W1. c. the value of the marginal product of labor to firms is W1. d. All of the above are correct.


51. Refer to Figure 18-7. The shift of the labor supply curve from S1 to S2 could possibly be explained

by a. technological progress. b. a decrease in the price of the firm’s output. c. a change in workers' attitudes toward the work-leisure tradeoff. d. an increase in the price of the firm’s output.


52. Refer to Figure 18-7. The shift of the labor supply curve from S1 to S2 could possibly be explained

by a. a change in workers' attitudes toward the work-leisure tradeoff. b. decreases in wages in other labor markets. c. immigration of workers into the region or country. d. All of the above are correct.



53. Refer to Figure 18-7. Assume W1 = $20 and W2 = $18 and the market is always in equilibrium.

Then the shift of the labor supply curve from S1 to S2

a. increases the value of the marginal product of labor by $2. b. decreases the value of the marginal product of labor by $2. c. decreases the value of the marginal product of labor by more than $2. d. does not change the value of the marginal product of labor.


54. Refer to Figure 18-7. If the relevant labor supply curve is S2 and the current wage is W1,

a. there is a surplus of labor. b. the quantity of labor demanded exceeds the quantity of labor supplied. c. an increase in the minimum wage could be employed to restore equilibrium in the market. d. firms will need to raise the wage to restore equilibrium.


Sec04 - The Markets for the Factors of Production - The Other Factors of

Production-Land and Capital

MULTIPLE CHOICE

1. Economists define capital as the

a. accumulation of goods produced in the past that are being used in the present to produce new goods and services.

b. the goods and services that are most affected by changes in technology. c. factors of production that can be rented by firms. d. factors of production that can be purchased by firms.

ANS: A DIF: 1 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Definitional



a. The market for capital is unlike the market for labor because the rental price of capital is unaffected by the marginal product of capital, whereas the price of labor is affected by the marginal product of labor.

b. The market for capital is unlike the market for labor because the purchase price of capital is unaffected by the marginal product of capital, whereas the price of labor is affected by the marginal product of labor.

c. The market for capital is like the market for labor because the rental price of capital is affected by the marginal product of capital, and the price of labor is affected by the marginal product of labor.

d. Both a and b are correct.

ANS: C DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital markets MSC: Interpretive

3. Suppose that a violent earthquake causes the uninhabited Hawaiian island of Mokuauia (also called

Goat Island) to fall into the Pacific Ocean. No people are killed or injured, and since the island is undeveloped, no buildings are destroyed. The island was a source of tourist income for Hawaiian landowners. Which of the following statements correctly describes the rents earned by the people who own land on the surrounding islands? a. As the supply of vacation land decreases, the marginal productivity of the remaining land

will decrease; thus rents will decrease. b. As the supply of vacation land decreases, the marginal productivity of the remaining land

will increase; thus, rents will decrease. c. As the supply of vacation land decreases, the marginal productivity of the remaining land

will increase; thus, rents will increase. d. There would be no change in the rents earned by the other landowners because the effects

of supply and demand would exactly cancel each other out.

ANS: C DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Interpretive

4. Suppose that a college physics experiment goes horribly wrong and releases an electronic pulse that

renders all electronic equipment in the city of San Francisco, California permanently useless. No people are hurt, and no buildings are damaged. Which of the following statements correctly describes the wages earned by California workers after the accident? a. The marginal productivities of workers will increase and wages will increase. b. The marginal productivities of workers will decrease and wages will decrease. c. The marginal productivities of workers will increase and wages will decrease. d. The marginal productivities of workers will decrease and wages will increase.

ANS: B DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital markets MSC: Interpretive


5. Suppose that a large tornado destroys the fleet of fire trucks for the city of Omaha, Nebraska. What

happens to the earnings of firefighters in Omaha? a. The reduction in the supply of fire trucks reduces the marginal productivities of Omaha

firefighters, which causes the equilibrium wage to fall. b. The reduction in the supply of fire trucks increases the marginal productivities of Omaha

firefighters, which causes the equilibrium wage to fall. c. The reduction in the supply of fire trucks reduces the marginal productivities of Omaha

firefighters, which causes the equilibrium wage to rise. d. The reduction in the supply of fire trucks increases the marginal productivities of Omaha

firefighters, which causes the equilibrium wage to rise.

ANS: A DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital markets MSC: Interpretive

6. The demand curve for capital

a. is vertical. b. is horizontal. c. is derived from households’ decisions concerning saving and spending. d. reflects the marginal productivity of capital.

ANS: D DIF: 2 REF: 18-4 NAT: Analytic LOC: Understanding and applying economic models TOP: Capital market MSC: Interpretive

7. Consider the market for land. Suppose the value of the marginal product of land decreases. Holding

all else constant, what will happen to the equilibrium rental price for land? a. The equilibrium rental rate increases. b. The equilibrium rental rate decreases. c. The equilibrium rental rate does not change. d. It is not possible to determine what will happen to the equilibrium rental rate.

ANS: B DIF: 2 REF: 18-1 | 18-3 | 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Analytical

8. When economists refer to a firm's capital, they are likely to be using the term to describe the

a. markets for final goods and services. b. stock of equipment and buildings used in production. c. amount of bank financing used by the firm. d. amount of financing provided by the equity markets.

ANS: B DIF: 1 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Definitional


9. The accumulation of machinery and buildings used in the production of new goods and services is

referred to as a. production factors. b. output factors. c. capital. d. equity.

ANS: C DIF: 1 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Definitional

10. If one were to consider a university as a business, the computers in the computer labs would be

regarded by economists as a. technology flows. b. mechanization flows. c. part of the university's stock of capital. d. a flow of services from the university's stock of capital.

ANS: C DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Interpretive

11. The purchase price of capital is

a. the value of the capital to the firm. b. always less than the rental price. c. the price received from the flow of some capital services. d. the price a person pays to own that factor of production indefinitely.

ANS: D DIF: 1 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Definitional

12. The owners of capital resources are compensated according to the

a. purchase price of the capital stock. b. marginal product of capital. c. value of the marginal product of capital. d. absolute level of production of final goods and services.

ANS: C DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Interpretive

13. The marginal product of any factor of production depends on

a. the quantity of the factor used. b. the price of the final good. c. the demand for the final good. d. All of the above are correct.

ANS: A DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Applicative


14. Because of diminishing returns, a factor in abundant supply has

a. a high marginal product and a high rental price. b. a high marginal product and a low rental price. c. a low marginal product and a high rental price. d. a low marginal product and a low rental price.

ANS: D DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Applicative

15. Because of diminishing returns, a factor in scarce supply has

a. a low marginal product and a low rental price. b. a low marginal product and a high rental price. c. a high marginal product and a low rental price. d. a high marginal product and a high rental price.

ANS: D DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Analytical

16. A change in the supply of one factor of production

a. will not change either the marginal productivities or the prices of other factors. b. will not change the prices of other factors, but it may change their marginal productivities. c. will not change the marginal productivities of other factors, but it may change their prices. d. changes the marginal productivities and the prices of other factors.


17. The equilibrium rental income paid to the owners of capital at any point in time equals the

a. marginal product of capital. b. value of the marginal product of capital. c. percentage of profits paid out to stockholders in the form of dividends. d. equilibrium purchase price of capital.

ANS: B DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital markets MSC: Applicative

18. In economics, the term capital is used to refer to

a. money. b. stocks and bonds. c. equipment and structures used in production. d. All of the above are correct.



19. The distinction between purchase price and rental price applies to which factor(s) of production?

a. Land only b. Capital only c. Land and capital only d. Land, capital, and labor

ANS: C DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Interpretive

20. Which term below refers to "the accumulation of goods produced in the past that are being used in

the present to produce new goods and services?" a. Inventories b. Products c. Factors of production d. Capital

ANS: D DIF: 1 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Definitional

21. "The firm hires the factor up to the point where the value of the factor's marginal product is equal to

the factor's price." This statement applies to which factor of production? a. Labor b. Land c. Capital d. All of the above are correct.


22. Capital is paid according to the value of its marginal product

a. only if earnings from capital are paid to households in the form of dividends. b. only if earnings from capital are kept within firms as retained earnings. c. regardless of whether earnings from capital are paid to households in the form of

dividends or whether those earnings are kept within firms as retained earnings. d. None of the above are correct; capital is a factor of production for which earnings are

unrelated to the value of marginal product.

ANS: C DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital MSC: Analytical


23. Which of the following best describes the economy's stock of equipment and structures?

a. Capital b. Aggregate demand c. Long-term inventory d. Aggregate stock


24. For a computer software firm, capital could be thought of as

(i) The firm's computer programmers. (ii) The wages the firm pays to its computer programmers.

(iii) Computer equipment.

a. (i) only b. (ii) only c. (iii) only d. (i) and (iii)


25. For a retail gasoline station, which of the following would qualify as capital?

(i) The gas tanks and pumps (ii) The service attendants' time

(iii) The plot of land on which the station sits

a. (i) only b. (iii) only c. (i) and (iii) d. (ii) and (iii)


26. The Black Death in fourteenth-century Europe resulted in

a. a lower marginal product of land. b. a lower marginal product of labor of surviving workers. c. economic hardship for surviving peasants. d. economic prosperity for surviving landowners.

ANS: A DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Analytical



a. a lower marginal product of labor of surviving workers. b. a higher marginal product of labor of surviving workers. c. economic hardship for surviving peasants. d. economic prosperity for surviving landowners.

ANS: B DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Analytical


a. a lower marginal product of labor of surviving workers. b. a higher marginal product of land. c. economic hardship for surviving peasants. d. economic hardship for surviving landowners.

ANS: D DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Factor markets MSC: Analytical

29. Suppose that the wage paid to workers who detassel corn rises. What happens in the market for

workers who weed soybean fields, given that workers who detassel corn can easily work weeding soybean fields? a. The demand curve for soybean workers increases. b. The demand curve for soybean workers decreases. c. The supply curve for soybean workers increases. d. The supply curve for soybean workers decreases.

ANS: D DIF: 2 REF: 18-2 | 18-4 NAT: Analytic LOC: Labor markets TOP: Labor supply MSC: Applicative

30. Which of the following accurately describes how earnings from capital eventually get paid to

households? a. Households can own a stock of capital and rent it to firms. b. Households lend money to firms, who then pay interest to the households. c. Households that own stock in firms receive dividends. d. All of the above are correct.

ANS: D DIF: 1 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital income MSC: Definitional

31. Rent, interest, and profit are all forms of income paid to the owners of

a. aggregate stock. b. aggregate demand. c. firms and not-for-profit organizations. d. land and capital.



32. The rental price of capital is

a. determined outside the realm of factor markets. b. the price paid to use capital for a limited time period. c. the price paid for ownership of the capital. d. always more than the purchase price.

ANS: B DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital income MSC: Interpretive

33. The rental price of capital is determined by

a. the forces of supply and demand in capital markets. b. the amount of equity that is generated in equity markets. c. the amount of bond financing used by profit-maximizing firms. d. the amount of dividends paid out to stockholders by profit-maximizing firms.

ANS: A DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital income MSC: Interpretive

34. Who receives income from capital in the United States?

a. Bank depositors b. Bondholders c. Stockholders d. All of the above are correct.

ANS: D DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital income MSC: Interpretive

35. Which of the following qualify as part of our economy's capital income?

a. Wages paid to workers b. Interest paid to the owners of corporate bonds c. Salaries paid to chief executive officers of corporations d. All of the above are correct.

ANS: B DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital income MSC: Interpretive

36. Consider the market for capital equipment. Suppose the value of the marginal product of capital

equipment increases. Holding all else constant, what will happen to the equilibrium rental price of capital equipment? a. The equilibrium rental price of capital equipment increases. b. The equilibrium rental price of capital equipment decreases. c. The equilibrium rental price of capital equipment does not change. d. It is not possible to determine what will happen to the equilibrium rental price of capital

equipment.

ANS: A DIF: 3 REF: 18-1 | 18-3 | 18-4 NAT: Analytic LOC: Labor markets TOP: Capital markets MSC: Analytical


37. Consider the market for capital equipment. Suppose the price of firms’ output increases. Holding all

else constant, what will happen to the equilibrium rental price of capital equipment? a. The equilibrium rental price of capital equipment increases. b. The equilibrium rental price of capital equipment decreases. c. The equilibrium rental price of capital equipment does not change. d. It is not possible to determine what will happen to the equilibrium rental price of capital

equipment.


38. Consider the market for capital equipment. Suppose the value of the marginal product of capital

equipment increases. Holding all else constant, what will happen to the equilibrium quantity of capital equipment? a. The equilibrium quantity of capital equipment increases. b. The equilibrium quantity of capital equipment decreases. c. The equilibrium quantity of capital equipment does not change. d. It is not possible to determine what will happen to the equilibrium quantity of capital

equipment.


39. Consider the market for capital equipment. Suppose the market price of firms’ output decreases.

Holding all else constant, what will happen to the equilibrium quantity of capital equipment? a. The equilibrium quantity of capital equipment increases. b. The equilibrium quantity of capital equipment decreases. c. The equilibrium quantity of capital equipment does not change. d. It is not possible to determine what will happen to the equilibrium quantity of capital

equipment.

ANS: B DIF: 3 REF: 18-1 | 18-3 | 18-4 NAT: Analytic LOC: Labor markets TOP: Capital markets MSC: Analytical

40. As a result of a fire, a small business owner loses some of her computers and other equipment. If the

property of diminishing returns applies to all factors of production, she should expect to see a. an increase in the marginal productivity of her remaining capital and an increase in the

marginal productivity of her labor. b. an increase in the marginal productivity of her remaining capital and a decrease in the

marginal productivity of her labor. c. a decrease in the marginal productivity of her remaining capital and an increase in the

marginal productivity of her labor. d. a decrease in the marginal productivity of her remaining capital and a decrease in the

marginal productivity of her labor.

ANS: B DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Capital markets MSC: Analytical


41. The rental price of land is

a. the price paid for ownership of the land. b. the price paid for the flow of services from land over a specified time period. c. always more than the purchase price. d. All of the above are correct.

ANS: B DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Interpretive

42. Owners of land are compensated according to the

a. absolute level of production from the land. b. number of laborers the land can support. c. purchase price of the land stock. d. value of the marginal product of land.

ANS: D DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Interpretive

43. Suppose the government designates certain areas within a community to be "wetlands," making it

illegal to build on the land. What happens to land not classified as "wetlands" within the community?

(i) The price of non-wetland land will rise. (ii) The marginal product of non-wetland land will fall.

(iii) The marginal product of non-wetland land will rise.

a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. (ii) only

ANS: C DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Analytical

44. As a result of severe flooding, a farmer loses half of his productive farmland. He should expect to

see the marginal productivity of his remaining land a. increase. b. remain unchanged. c. decrease, but remain positive. d. decrease and become negative.

ANS: A DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Applicative


45. As a result of severe flooding, a farmer loses half of his productive farmland. If the property of

diminishing returns applies to all factors of production, he should expect to see a. an increase in the marginal productivity of his remaining land and an increase in the

marginal productivity of his labor. b. an increase in the marginal productivity of his remaining land and a decrease in the

marginal productivity of his labor. c. a decrease in the marginal productivity of his remaining land and an increase in the

marginal productivity of his labor. d. a decrease in the marginal productivity of his remaining land and a decrease in the

marginal productivity of his labor.

ANS: B DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Analytical

46. The equilibrium rental income paid to landowners at any point in time equals the

a. purchase price of land. b. value of the marginal product of land. c. marginal product of land. d. wage paid to laborers.

ANS: B DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Applicative

47. The current value of the marginal product of land influences

a. the demand for land. b. the equilibrium rental price of land. c. the equilibrium purchase price of land. d. all of the above.

ANS: D DIF: 2 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Applicative

48. Suppose that a rare virus infects and kills a significant percentage of the population. Assuming that

land and labor are complements in a farming production function, what would happen to the wages earned by workers and the rents earned by landowners? a. Both wages and rents would increase. b. Both wages and rents would decrease. c. Wages would increase, and rents would decrease. d. Wages would decrease, and rents would increase.



49. Suppose that due to flooding in Louisiana, 100,000 farmers relocate from Louisiana to Texas.

Assuming that land and labor are complements in a farming production function, what would happen to the wages earned by workers and the rents earned by landowners in Texas? a. Both wages and rents would increase. b. Both wages and rents would decrease. c. Wages would increase, and rents would decrease. d. Wages would decrease, and rents would increase.

ANS: D DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Analytical

50. Suppose that a toxic waste spill renders half of the land in New Jersey uninhabitable. Assuming that

land and labor are complements in the production function, what would happen to the wages earned by workers and rents earned by landowners? a. Both wages and rents would increase. b. Both wages and rents would decrease. c. Wages would increase, and rents would decrease. d. Wages would decrease, and rents would increase.

ANS: D DIF: 3 REF: 18-4 NAT: Analytic LOC: Labor markets TOP: Land markets MSC: Analytical

51. Suppose that a large lake in the middle of Minnesota evaporates, leaving more fertile farm land for

growing corn available. Assuming that land and labor are complements in a farming production function, what would happen to the wages earned by workers and rents earned by landowners? a. Both wages and rents would increase. b. Both wages and rents would decrease. c. Wages would increase, and rents would decrease. d. Wages would decrease, and rents would increase.


52. A decrease in population can be expected to

a. increase the marginal product of land. b. decrease the supply of land. c. decrease the rents on land. d. increase the demand for land.



53. An increase in population can be expected to

a. increase the marginal product of land. b. decrease the supply of land. c. decrease the rents on land. d. decrease the demand for land.

ANS: A DIF: 2 REF: 18-3 NAT: Analytic LOC: Labor markets TOP: Labor-market equilibrium MSC: Applicative

Sec05 - The Markets for the Factors of Production - Conclusion

MULTIPLE CHOICE

1. According to the neoclassical theory of distribution, the wages paid to workers

a. reflect the market prices of the goods those workers produce. b. reflect the degree of market power held by the firms that pay those wages. c. fail to reflect those workers’ opportunity costs of leisure. d. are unrelated to the forces of supply and demand.

ANS: A DIF: 2 REF: 18-5 NAT: Analytic LOC: Understanding and applying economic models TOP: Neoclassical theory of distribution MSC: Interpretive

1678

Chapter 19

Earnings and Discrimination

TRUE/FALSE

1. A compensating differential refers to a difference in wages that arises from nonmonetary

characteristics.

ANS: T DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Definitional

2. A compensating differential is a difference in wages due to higher levels of education or other forms

of human capital.

ANS: F DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Definitional

3. The fact that doctors are paid more than economics professors is an example of a compensating

differential.

ANS: T DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Definitional

4. A computer is an example of productivity-enhancing human capital.

ANS: F DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Definitional

5. Higher levels of human capital are correlated with higher earnings because firms are willing to pay

more for better-educated workers who have higher marginal productivities.

ANS: T DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Interpretive

6. As a result of an increase in the earnings gap between skilled and unskilled jobs, the incentive to get

a college education has been declining.

ANS: F DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Interpretive

Chapter 19/Earnings and Discrimination 1679

7. The rising gap in wages between unskilled and skilled workers is most likely related to a larger

increase in demand for unskilled occupations relative to skilled occupations.


8. One hypothesis to explain the rising gap in wages between unskilled and skilled workers in the

United States is that international trade has altered the relative demands for skilled and unskilled workers.

ANS: T DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Interpretive

9. The statement that "the rich get richer, and the poor get poorer" is supported by evidence of an

expanding wage gap between high-skill and low-skill workers.


10. Some economists suggest that international trade has led to an expanding wage gap between high-

skill and low-skill workers in the United States.


11. It is increasingly clear that technological change, rather than international trade, has been largely

responsible for an expanding wage gap between high-skill and low-skill workers.


12. The United States is losing manufacturing jobs to countries like China and India, where

manufacturing jobs have increased 30 percent since 1995.

ANS: F DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Applicative

13. Since 1995, global manufacturing employment has declined, yet global industrial output has risen.

ANS: T DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Applicative

1680 Chapter 19/Earnings and Discrimination

14. One explanation for the loss in manufacturing jobs is that new technologies have replaced the need

for some workers.


15. The demand for workers with excellent problem-solving skills is increasing, as are the wages for

those workers.


16. One reason why better-looking workers may have higher earnings is that physical attractiveness may

enhance a worker’s productivity for certain jobs, especially for those workers who deal with the public.

ANS: T DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Beauty premium MSC: Interpretive

17. One reason why better-looking workers may have higher earnings is that physical attractiveness is

correlated with intelligence.

ANS: F DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Beauty premium MSC: Interpretive

18. The signaling theory of education maintains that workers who complete specific levels of education

signal their high productivity to potential to employers.

ANS: T DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling MSC: Definitional

19. The signaling theory of education maintains that workers who complete specific levels of education

enhance their productivity through education.

ANS: F DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling MSC: Definitional

20. If the signaling theory of education is correct, then education is correlated with higher earnings

because people with higher levels of education are more productive.

ANS: F DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling MSC: Interpretive


21. The human-capital theory of education maintains that workers who complete specific levels of

education enhance their productivity through education.

ANS: T DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Signaling MSC: Definitional

22. Education and on-the-job training are sources of human capital.

ANS: T DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Applicative

23. The superstar phenomenon explains why professional athletes earn more than amateur athletes.

ANS: F DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Definitional

24. Superstars earn high incomes due to their ability to satisfy the demands of millions of people at

once.

ANS: T DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Superstars MSC: Interpretive

25. An effective minimum wage law will increase the quantity of labor demanded.

ANS: F DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages MSC: Applicative

26. Labor unions will raise the quantity of labor demanded.

ANS: F DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Unions MSC: Applicative

27. Efficiency wages will raise the quantity of labor supplied to the market.

ANS: T DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Applicative

28. Efficiency wages decrease employee effort.

ANS: F DIF: 1 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages MSC: Interpretive


29. Efficiency wages decrease employee turnover.

ANS: T DIF: 1 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages MSC: Interpretive

30. Economic theory of labor markets suggests that wages are governed by labor supply and labor

demand.

ANS: T DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Wages MSC: Applicative

31. Empirical evidence suggests that ability, effort, and chance are not likely to be significant

contributors to wage differences.

ANS: F DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Wages MSC: Interpretive

32. Discrimination is a reflection of some people's prejudice against certain groups in society.

ANS: T DIF: 1 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Definitional

33. Differences in human capital among groups of workers is possibly a reflection of past

discrimination.

ANS: T DIF: 1 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Interpretive

34. Discrimination is an emotionally charged issue that is impossible to study objectively.

ANS: F DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Interpretive

35. When differences in human capital among workers lead to discrimination, the differences are

typically a result of social or political processes rather than economic processes.



36. When comparing average wages for black and white workers in the United States, wages paid to

black workers have been about 20 percent less than those paid to white workers.

ANS: T DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Applicative

37. When comparing average wages for male and female workers in the United States, wages paid to

females have been about 40 percent less than those paid to male workers.

ANS: F DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Applicative

38. Politicians often point to average wage differentials as evidence of labor-market discrimination

against ethnic minorities and women; however, economists argue against this approach because they don't trust any of the statistics quoted by the politicians.

ANS: F DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Interpretive

39. Politicians often point to wage differentials as evidence of labor-market discrimination against

ethnic minorities and women; however, economists argue against this approach because people differ in the kinds of work they are willing and able to do.

ANS: T DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Interpretive

40. Economists would argue that the gender wage gap is narrowing because of efficiency wages.

ANS: F DIF: 2 REF: 19-2 | 19-1 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination | Efficiency wages MSC: Interpretive

41. All differences in wages that are not accounted for by differences in human-capital investment are

likely to be a result of discrimination.


42. In a labor market free from discrimination, wages for workers that are employed by the same

company will still differ.

ANS: T DIF: 2 REF: 19-2 | 19-1 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination | Human capital MSC: Interpretive


43. Evidence of discrimination is most apparent when one compares wages among broad groups.


44. When discrimination occurs as a result of prejudice, firms do not maximize profits.


45. Consumers are often a primary source of discrimination in labor markets.


46. Discrimination is usually not a profit-maximizing strategy.


47. One example of labor-market discrimination is that firms may be less likely to interview job-market

candidates whose names suggest that they are members of a racial minority.


48. If people with blue eyes earn more than people with brown eyes, we have proof of discrimination

against people with brown eyes.

ANS: F DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Interpretive

49. Profit-maximizing, competitive firms will not discriminate in the hiring of workers unless

consumers exercise a preference for discrimination in product markets or governments mandate discrimination.



50. Streetcar owners in the early 20th century were against segregation for profit maximizing reasons.


51. Experimental evidence indicates women choose less competitive environments than men.

ANS: T DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Gender differences MSC: Interpretive

SHORT ANSWER

1. After graduating from college, you receive job offers from five different accounting firms. All job

offers have a different compensation package. Is it irrational for you to accept an offer that doesn't provide the highest level of monetary compensation? Use the concept of compensating differentials to explain your answer.

ANS: Compensating differentials refer to differences in job characteristics across different occupations. But compensating differentials can also lead to differences in job characteristics within an occupation. Such considerations may include geographic location and quality-of-life issues associated with a particular job offer. Thus, it is not irrational to consider nonmonetary compensation.

PTS: 1 DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Compensating differentials MSC: Analytical

2. The National Collegiate Athletic Association (NCAA) has long argued that nationally-prominent

college athletes are compensated with an investment in human capital that far exceeds the monetary reward of playing professional sports. Examine this argument in light of your knowledge of human capital theory and the economic theory of labor markets.

ANS: Many economists would argue that the NCAA is the most exploitative organization in the United States, considering the value that star student athletes contribute to a university. Most would argue that the education that star student athletes receive is of less value than what the athletes contribute.

PTS: 1 DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Human capital MSC: Analytical


3. A recent study of the determinants of wages for clerical staff at a state university found that years of

schooling, years of experience, age and job characteristics only explained about one-half of the difference in wages. Describe other factors that may be important in explaining wages differences for clerical staff.

ANS: Other factors may include gender, job tenure, and job responsibilities, ability and effort.

PTS: 1 DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Wages MSC: Analytical

4. Explain the theory that education acts as a signaling device. How does this contrast with the theory

of education as an investment in human capital?

ANS: The theory of signaling suggests that those who have desirable "productivity" characteristics are more likely to finish educational programs. The human capital theory suggests that productivity characteristics are enhanced by the learning that takes place in formal educational programs.

PTS: 1 DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Human capital | Signaling MSC: Definitional

5. List the productivity factors that may explain the differences in pay between men and women in

similar occupations. Do any of these factors arise as a result of cultural or social traditions? If so, describe how changes in social relationships will affect the pay gap over time.

ANS: Job experience, education, lifetime patterns of work experience, etc. The gap should narrow as the cultural and social barriers to female access to productivity-enhancing experiences are reduced.

PTS: 1 DIF: 2 REF: 19-2 NAT: Reflective LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical

6. Explain the role of job experience in explaining the differences between the average wages of men

and women.

ANS: Women, who have primary responsibility for housework and child-rearing duties, typically have less continuity in the labor force. As such, there is a difference in the average years of job experience between men and women.

PTS: 1 DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical


7. Explain how compensating differentials could contribute to differences between the average wages

of men and women.

ANS: Men and women may, on average, select different career paths. If men tend to be more concentrated in jobs that have less desirable working conditions, then compensating differentials can explain some of the difference in wages between men and women.

PTS: 1 DIF: 2 REF: 19-2 | 19-1 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination | Compensating differentials MSC: Applicative

8. Evaluate the following statement: "The gender pay gap provides evidence of widespread, severe,

ongoing discrimination by employers and fellow workers."

ANS: There are many explanations of the gender pay gap. Some are associated with discrimination both by consumers and employers. Others are not associated with discrimination. Examples of factors that would explain why men earn more than women, on average, but that are not associated with discrimination include years of labor-market experience, types of jobs, levels of human capital, and on-the-job training.


9. In a recent U.S. presidential campaign, a lobbyist for a prominent national women's organization

made the claim that women in the United States earn $0.60 for every $1.00 earned by a man. A reporter, who was prepared for this statement, asked the lobbyist why wages paid to the organization's secretarial staff (all of whom were women) were significantly below the national average if they were truly interested in raising the rates of compensation for women. If you were the lobbyist, how would you have answered this question? Do you think your answer is convincing? Explain.

ANS: The lobbyist would likely respond by citing factors that explain wage differences on the basis of compensating differentials, education, and job experience. These arguments would be convincing to those who subscribe to the marginal productivity theory of compensation.



10. Explain the role that consumers play in perpetuating discrimination in labor markets.

ANS: Consumers are able to exercise their biases when they purchase goods and services. For example, if consumers prefer to have female personal trainers than male personal trainers, then firms may respond to these preferences by paying a higher wage to attract female personal trainers. The higher wage paid to women based solely on their gender (or the lower wage paid to male trainers based solely on their gender) would be an example of discrimination driven by consumer preferences.

PTS: 1 DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Applicative

11. Explain why the following situation is likely to persist: soccer players in Europe are the highest paid

athletes and in the US they are among the lowest paid athletes.

ANS: Consumers use personal preferences when they make purchases. In this case, US consumers prefer other sports such as baseball, basketball, or football over soccer. Although over time we would expect a movement together in compensations for athletes in different sports, the discriminatory preferences of consumers allow the gap to persist over time.

PTS: 1 DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Applicative

Sec 01--Some Determinants of Equilibrium Wages

MULTIPLE CHOICE

1. Effective minimum-wage laws will most likely

a. increase demand for labor. b. create a surplus of labor. c. increase incomes for all unskilled workers. d. decrease incomes for all unskilled workers.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages MSC: Applicative

2. Above-equilibrium wages caused by efficiency wages will most likely result in

a. a shortage of labor. b. increased unemployment. c. compensating wage differentials. d. an decrease in the quantity of labor supplied.



3. If we were to observe above-equilibrium wages in a particular labor market, then a possible

explanation might be that a. the theory of efficiency wages holds true for that market. b. there is a powerful labor union representing workers in that market. c. workers are largely unskilled and/or inexperienced and minimum-wage laws are

effectively holding wages up in that market. d. All of the above are correct.

ANS: D DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages MSC: Applicative


a. Some firms pay wages that are above the equilibrium wage. b. Workers sometimes form labor unions to push their wages up. c. Wages never deviate from the balance of supply and demand in the market for labor. d. The federal government mandates that employers pay their workers at least as much as the

minimum wage.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Wages | Above-equilibrium wages MSC: Interpretive

5. Which of the following is not a consequence of above-equilibrium wages in a labor market?

a. a surplus of labor b. unemployment c. more unionized jobs d. All of the above are consequences of above-equilibrium wages.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages MSC: Analytical

6. Which of the following is the most likely outcome of minimum wage laws?

a. an increase in both the quantity of labor supplied by workers and the quantity of labor demanded by firms

b. an increase in the quantity of labor supplied by workers and a decrease in the quantity of labor demanded by firms

c. a decrease in the quantity of labor supplied by workers and an increase in the quantity of labor demanded by firms

d. a decrease in both the quantity of labor supplied by workers and the quantity of labor demanded by firms



Figure 19-1

7. Refer to Figure 19-1. Some policymakers have argued that the government should establish a

"living wage." A living wage would provide workers a reasonable standard of living in their city or region. If a living wage of $10 per hour is established in the market pictured here, we would expect a. employment will increase to 14 million. b. employment will decrease to 8 million. c. the wage will actually rise to $20 per hour. d. there will be a surplus of 14 million workers.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages MSC: Analytical

8. Refer to Figure 19-1. Suppose the local labor market was in equilibrium to begin with but then the

largest local employer decided to change its compensation scheme to $10 as shown. Which of the following compensation schemes could the graph be illustrating? a. An efficiency wage. b. Discrimination. c. A compensating differential. d. The superstar phenomenon.

ANS: A DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Above-equilibrium wages MSC: Analytical

9. Refer to Figure 19-1. What is the loss associated with wages moving from $8 to $10?

a. 2 million jobs. b. 6 million jobs. c. 8 million jobs. d. 14 million jobs.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages MSC: Analytical


Figure 19-2

10. Refer to Figure 19-2. This figure depicts labor demand and supply in a nonunionized labor market.

The original equilibrium is at point A. If a labor union subsequently establishes a union shop and negotiates an hourly wage of $20, then there will be an excess a. supply of 3,000 workers. b. demand of 7,000 workers. c. supply of 4,000 workers. d. supply of 7,000 workers.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages | Unions MSC: Analytical

11. Refer to Figure 19-2. This figure depicts labor demand and supply in a nonunionized labor market.

The original equilibrium is at point A. If a labor union subsequently establishes a union shop and negotiates an hourly wage of $20, then the employment level a. increases from 6,000 to 10,000. b. increases from 3,000 to 10,000. c. decreases from 10,000 to 3,000. d. decreases from 6,000 to 3,000.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages | Unions MSC: Analytical


Figure 19-3 The manufacturing labor market.

12. Refer to Figure 19-3. Suppose the manufacturing labor market, which is non-unionized, is in

equilibrium at a wage equal to $30. Suppose now that the AFL-CIO (a labor organization) organizes the workers in the manufacturing market and negotiates a wage of $38 per hour. Because of the union, a. 10 people who were once employed are now unemployed. b. 20 people who were once employed are now unemployed. c. 40 people who were once employed are now unemployed. d. 20 people who were once unemployed are now employed.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages | Unions MSC: Analytical

13. Refer to Figure 19-3. Suppose the manufacturing labor market, which is non-unionized, is in

equilibrium at a wage equal to $30. Suppose now that the AFL-CIO (a labor organization) organizes the workers in the manufacturing market and negotiates a wage of $38 per hour. After the workers become unionized, how many workers do manufacturing firms collectively hire? a. 130 workers b. 150 workers c. 170 workers d. There is not enough information to determine the number of workers.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Above-equilibrium wages | Unions MSC: Analytical


14. Which of the following is not an example of efficiency wages?

a. More productive workers are paid more to reflect their higher output. b. Higher wages induce higher output from workers. c. Better quality applicants apply for jobs that pay above-equilibrium wages. d. Workers are less likely to leave jobs that pay above-equilibrium wages.

ANS: A DIF: 3 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages | Above-equilibrium wages MSC: Analytical

15. Which of the following is true of minimum-wage laws?

a. They affect skilled workers’ wages. b. They create above-equilibrium wages for some unskilled workers. c. They create a shortage of unskilled labor. d. They negatively affect the employment of skilled workers.


16. A difference in wages that arises to offset the nonmonetary characteristics of different jobs is known

as a. a compensating differential. b. an inefficiency wage. c. the equilibrium difference. d. a union wage.

ANS: A DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Definitional

17. Working in a slaughterhouse is much riskier and more unpleasant than working in a bookstore. As a

result, we'd expect a difference in wages between the two jobs. The difference is known as a. an efficiency wage. b. a compensating differential. c. a wage adjustment. d. a minimum wage.

ANS: B DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Definitional

18. The term "compensating differential" refers to

a. the fact that workers who do similar work should be paid the same wage. b. the fact that some workers live further from their jobs than do other workers. c. a wage difference that is distinguishable on the basis of monetary characteristics. d. a wage difference that arises from nonmonetary characteristics of different jobs.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Definitional


19. A difference in wages that reflects differences in the nonpay features of two jobs is called

a. a compensating differential. b. a wage adjustment. c. an efficiency wage. d. a minimum wage.


20. Many kindergarten teachers have advanced educational degrees, yet they have lower average

earnings that other individuals with similar educational levels. A potential explanation for the differences in earnings is that kindergarten teachers a. have more pleasant working conditions. b. have less pleasant working conditions. c. work longer hours. d. must pass certification tests.

ANS: A DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Applicative

21. Suppose that a company hires recent college graduates for two types of jobs, sales people and credit

analysts. The hours worked and skill levels are the same for both positions. The sales people get to travel to several desirable locations, whereas the credit analysts do not leave the home office. When comparing the salaries of the two positions, it is likely that the company pays the a. sales people less as a compensating differential. b. credit analysts less as a compensating differential. c. same salary for both positions because they require the same skill level. d. same salary for both positions because it would be illegal to do otherwise.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Interpretive

22. Suppose that a company hires recent college graduates for two types of jobs, sales people and credit

analysts. The hours worked and skill levels are the same for both positions. The sales people must “cold call,” which many people find to be unpleasant. When comparing the salaries of the two positions, it is likely that the company pays the a. credit analysts more as a compensating differential. b. sales people more as a compensating differential. c. same salary for both positions because they require the same skill level. d. same salary for both positions because it would be illegal to do otherwise.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Interpretive


23. Workers who work the night shift are often paid more than those who do identical work on the day

shift. This is referred to as a a. discriminatory wage practice. b. compensating differential. c. wage inequity. d. a market inefficiency.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Definitional

24. Factory workers who work the day shift earn less per hour than similarly-skilled factory workers

who work on the night shift. The difference in pay is attributed to a. the marginal product of labor. b. the marginal product of capital. c. diminishing marginal returns. d. a compensating differential.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Applicative

25. The statement that "night shift workers make a higher wage than day shift workers" is likely to

reflect the fact that a. most people's preference is to work the day shift. b. some people prefer to work a night shift for nonmonetary reasons. c. night shift jobs are generally more technically difficult. d. more women than men work the night shift.


26. Wage differences that can't be explained by the number of years of training could result from

a. demand but not supply. b. supply but not demand. c. compensating differentials. d. the marginal product of capital.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Definitional


27. If a worker is indifferent between a job with a wage of $12 per hour and a job with a wage of $15

per hour, then the a. higher-paying job has a compensating wage differential of $3 per hour. b. higher-paying job has a compensating wage differential of $15 per hour. c. higher-paying job is intrinsically more attractive than the lower-paying job. d. worker's preferences are not rational.


28. On average, electricians who work on dangerous high-voltage power lines earn more per hour than

similarly skilled electricians who don't work on dangerous high-voltage power lines. The difference in pay is attributed to a. the marginal product of labor. b. the marginal product of capital. c. diminishing marginal returns. d. a compensating differential.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Applicative

29. The statement that "coal miners are paid more than workers with similar levels of education" is

likely to reflect the fact that a. coal mining is a declining industry. b. coal mining jobs are potentially more dangerous than jobs with comparable education

requirements. c. all coal mines use union labor. d. coal exports are rising.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Interpretive

30. Other things equal, a particular job will likely pay a higher wage if it involves

a. danger to the worker. b. personal enjoyment for the worker. c. intellectual stimulation for the worker. d. All of the above are correct.



31. Park rangers at Yellowstone National Park are known to have low wages. This is probably because

a. park rangers are required to be college graduates. b. park rangers don't need much money to live. c. park ranger jobs are perceived to be dangerous. d. park ranger jobs are perceived to be "fun."

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Interpretive

32. Which of the following comparisons best illustrates a compensating differential?

a. John's wage is higher than Jane's because the value of John's marginal product is higher than Jane's.

b. Beth's wage is higher than Bill's because Beth is very personable, and Bill is very gruff. c. Karl's wage is higher than Kay's because Karl's job may cause long-term health problems,

and Kay's job will not impair her health. d. All of the above are good illustrations of compensating differentials.

ANS: C DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Compensating differentials MSC: Interpretive

33. Public school teachers are known to have low wages. This is probably because

a. public school teacher jobs are easy. b. public school teachers are required to be college graduates. c. public school teachers need very little money to live. d. many people perceive the job of public school teacher to have a high element of personal

satisfaction.


34. A plumber who specializes in cleaning plugged sewer lines is typically paid a higher wage than a

plumber who works on installing water systems in new residential housing. This can be partially explained by the fact that a. plumbers who work with sewer lines require years of specialized training. b. plumbing jobs that involve sewer lines are likely to have an element of personal

satisfaction. c. plumbers who work with sewer lines are more likely to work a standard shift. d. plumbers who work with sewer lines are likely to be perceived as having a "dirty" job.



35. The job of night watchman at the Punxsutawny Phil Groundhog museum is known to have a high

wage. This can be partially explained by the fact that the job is likely to a. require specialized skills. b. be difficult. c. be incredibly dull. d. have minimal risk of injury.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Interpretive

36. Professional underwater divers are known to have high wages and work an average of only 20 hours

per week. The high wages are partially explained by the fact that the job is likely a. to be very dull. b. to be fun. c. to be very dangerous. d. to require a college degree.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials MSC: Interpretive

37. Assuming that all other things are equal, including the wage, which of the following statements is

correct? a. The quantity of labor supplied for easy jobs exceeds that for difficult jobs. b. The quantity of labor supplied for fun jobs exceeds that for dull jobs. c. The quantity of labor supplied for safe jobs exceeds that for dangerous jobs. d. All of the above are correct.


38. Store clerks are known to have low wages. This is likely to be reflect the fact that

a. store clerk jobs are perceived to be relatively easy, thus attracting low-skill workers. b. store clerk jobs are perceived to be relatively difficult, thus attracting high-skill workers.. c. many people perceive the job of store clerk as having significant risk of death on the job. d. store clerks are required to have a college degree.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Compensating differentials MSC: Interpretive


Scenario 19-1 Ferris B., a student at a community college, is considering what he should do for summer employment. Two recruiters show up at his school in search of summer workers. Recruiter A is looking for lifeguards to patrol the beach at an exclusive island resort in the Caribbean. Recruiter B is looking for workers to staff positions at a summer youth camp.

39. Refer to Scenario 19-1. Ferris is carefully considering the options that each recruiter presents. On

the basis of knowledge obtained in his economics class, Ferris concludes that a. wages are unlikely to be affected by job requirements. b. since the lifeguard job would expose him to a threat of skin cancer, the wage will be low. c. if the lifeguard job has a requirement for special training or certification, the wage offer

will be higher than otherwise. d. if the lifeguard job also requires a willingness to clean public restrooms, the wage offer

will be lower than otherwise.

ANS: C DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Human capital | Compensating differentials MSC: Interpretive

40. Refer to Scenario 19-1. Ferris is carefully considering the options that each recruiter presents. On

the basis of knowledge obtained in his economics class, Ferris concludes that a. the lifeguard job will be more fun than the summer camp job, so the wage for that job will

be higher than otherwise. b. if the summer camp job doesn't require any special skills, the wage for that job will be

lower than otherwise. c. since the summer camp job requires some night shift work, the wage for that job will be

lower than otherwise. d. All of the above are correct.

ANS: B DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Human capital | Compensating differentials MSC: Interpretive

41. Bill and Phil are identical twins who attended grammar school through college together. Bill took a

job as an engineer who does not have to travel out of the state. Phil took a job as an engineer who must travel out of state once a week. Bill earns $105,000 a year, and Phil earns $185,000 a year. Select the best explanation for this wage difference. a. Phil has more human capital relative to Bill. b. Phill has less human capital relative to Bill. c. Phil receives a higher wage to compensate for the disagreeable nature of business travel. d. Bill’s lower salary supports the signaling theory of education.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials | Human capital | Signaling MSC: Applicative


42. Jo and Flo are identical twins who attended grammar school through high school together. Jo got a

job after high school, and Flo got a job after graduating from college. Jo earns $36,000 a year, and Flo earns $69,000 a year. Select the best explanation for this wage difference. a. Jo has less human capital than Flo. b. Flo has less human capital than Jo. c. Jo has received a compensating differential d. Flo has received a compensating differential.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Compensating differentials MSC: Applicative

Scenario 19-2 Travis, a student at a community college, is considering what he should do for summer employment. Two recruiters show up at his school in search of summer workers. Recruiter A is looking for workers to help a disaster relief agency distribute food aid in Africa. Recruiter B is looking for custodial help to clean motel rooms in a motel located near the entrance to a famous national park.

43. Refer to Scenario 19-2. Travis is carefully considering the options that each recruiter presents. On

the basis of knowledge obtained in his economics class, Travis concludes that a. if the job in Africa has a lot of job satisfaction, the wage will be higher. b. if the job in Africa has a lot of job satisfaction, the wage will be lower. c. if the job cleaning motel rooms is disagreeable, the wage will be lower. d. if the job cleaning motel rooms is agreeable, the wage will be higher.

ANS: B DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Human capital | Compensating differentials MSC: Interpretive


the basis of knowledge obtained in his economics class, Travis concludes that a. if the motel job also requires an ability to do general plumbing repairs, the wage offer will

be higher than otherwise. b. if the food distribution job has a requirement for special training or certification, the wage

offer will be lower than otherwise. c. if the food distribution job exposes him to the Ebola virus, the wage will be low. d. if the motel job involves substantial amounts of driving for supplies, the wage offer will be

lower than otherwise.

ANS: A DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Human capital | Compensating differentials MSC: Interpretive



the basis of knowledge obtained in his economics class, Travis concludes that a. if the motel job requires some night shift work, wages will be lower than otherwise. b. the job that is more fun will have a higher wage. c. if the motel job doesn't require any special skills, the wage offer will be lower than

otherwise. d. All of the above are correct.

ANS: C DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Human capital | Compensating differentials MSC: Interpretive

46. A difference in wages between a highly-educated worker and a less-educated worker is

a. a compensating differential for the cost of becoming educated. b. a signal that the market is indifferent to a worker's level of human capital. c. considered unfair by economists. d. considered unfair by everyone.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Compensating differentials MSC: Interpretive

47. Coal mining is a dangerous and dirty job. Suppose someone developed new machinery that made

coal mining safer and cleaner; at the same time, it made coal miners more productive. We would expect that the wages of coal miners would a. rise. b. fall. c. stay exactly the same. d. rise, fall, or stay the same.

ANS: D DIF: 3 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials | Human capital MSC: Applicative

48. Jake and Bill are both college graduates. Jake is a patrolman and Bill is a detective in the same

police precint. While Jake’s job is inherently more dangerous than Bill’s, Bill passed a difficult exam to gain promotion to detective. Bill earns more than Jake because a. of a compensating differential. b. of efficiency wages. c. of education as a signal. d. Bill has more human capital.

ANS: D DIF: 3 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Signaling | Compensating differentials MSC: Applicative


49. Which theory is supportive of the idea that increasing educational levels for all workers would raise

all workers' productivity and therefore their wages? a. the theory of compensating differentials b. the efficient-market hypothesis c. human-capital theory d. signaling theory

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Signaling | Compensating differentials MSC: Interpretive

50. First grade teachers who work in Lynn, Massachusetts (a large, low income city north of Boston)

public schools earn more than first grade teachers who work in private schools in more affluent communities north of Boston. Lynn teachers belong to a teachers' union. Which statement best explains the scenario described above? a. Lynn school teachers receive a compensating differential because they work in a more

difficult environment, and they receive higher than market equilibrium wages because they are members of a teachers' union.

b. Lynn school teachers receive a compensating differential because they work in a more difficult environment, but they do not receive higher than market equilibrium wages because they are members of a teachers' union.

c. Lynn school teachers do not receive a compensating differential because they work in a more difficult environment, but they do receive higher than market equilibrium wages because they are members of a teachers' union.

d. Lynn school teachers do not receive a compensating differential because they work in a more difficult environment, and they do not receive higher than market equilibrium wages because they are members of a teachers' union.

ANS: A DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Compensating differentials | Unions MSC: Applicative

51. Which of the following factors affects the marginal productivity of a worker?

a. Human capital. b. The worker’s disposable income. c. Compensating wage differentials. d. Discrimination based on age, race, or gender.

ANS: A DIF: 3 REF: 19-1 | 19-2 NAT: Analytic LOC: Labor markets TOP: Human capital | Labor-market discrimination | Compensating differentials MSC: Interpretive



a. If the signaling theory of education is correct, additional schooling does not affect worker productivity but rather signals a correlation between natural ability and education.

b. The theory of efficiency wages suggests that firms pay higher wages to workers in order to induce workers to be more productive.

c. Discrimination against workers of a certain race or ethnicity is often in conflict with a firm's desire to maximize profits.

d. The theory of compensating wage differentials reflects the different skills, abilities, and productivity of workers.

ANS: D DIF: 3 REF: 19-1 | 19-2 NAT: Reflective LOC: Labor markets TOP: Compensating differentials | Signaling | Efficiency wages | Labor-market discrimination MSC: Analytical

53. Which of the following statements does not accurately describe the market for labor?

a. The characteristics of workers, such as their education and experience, the characteristics of jobs, such as their pleasantness or unpleasantness, and the presence or absence of discrimination by employers all determine equilibrium wages.

b. Labor unions, minimum wage laws, and efficiency wages all may increase wages above their equilibrium level.

c. Firms are willing to pay more for better-educated workers as long as there is an excess supply of this type of worker.

d. Discrimination by employers against a group of workers may artificially lower wages for that group.

ANS: C DIF: 2 REF: 19-1 | 19-2 NAT: Reflective LOC: Labor markets TOP: Wages | Compensating differentials | Unions | Labor-market discrimination MSC: Analytical

54. Which term do economists use to refer to a difference in wages that arises from nonmonetary

characteristics of different jobs? a. non-pecuniary differentials b. compensating differentials c. fundamental differences d. idiosyncratic differences

ANS: B DIF: 1 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Compensating differentials MSC: Definitional


55. Jobs that involve pleasant work, as opposed to jobs that involve unpleasant work, usually pay

a. higher wages, because jobs that involve pleasant work typically require more education than do jobs that involve unpleasant work.

b. higher wages, because jobs that involve pleasant work typically require more well-developed personality skills than do jobs that involve unpleasant work.

c. lower wages, because workers typically are not attracted to jobs that involve unpleasant work unless there is a monetary inducement.

d. lower wages, because workers who take jobs that involve unpleasant work typically stay in those jobs for relatively long periods of time and accumulate significant experience.

ANS: C DIF: 1 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Compensating differentials MSC: Interpretive

56. Who among the following individuals most likely experiences the largest nonmonetary reward as a

supplier of labor? Assume all of the four individuals have the same level of education and work the same number of hours per week. a. Albert, who prefers to be around other people but who works at home by himself b. Amy, whose job provides little intellectual and personal satisfaction c. Antoinette, whose preference is to avoid dangerous work but who works as a firefighter d. Arnold, who works the night shift and prefers to work at night and sleep during the day

ANS: D DIF: 3 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Compensating differentials MSC: Applicative

57. Which of the following theories explains why increased education translates into higher wages?

a. human-capital theory b. the theory of compensating differentials c. the theory of supply and demand d. comparative advantage

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital | Compensating differentials MSC: Interpretive

58. Which of the following is an economic explanation for the "beauty premium"?

a. Employers pay very attractive women less than average-looking women because they believe them to be less intelligent.

b. Employers pay above-average-looking men more than above-average-looking women. c. Employers pay above-average-looking women more than average-looking women because

customers prefer to deal with better-looking women. d. Employers pay above-average-looking men more because they signal to the market that

they are willing to spend more money on personal grooming, a sign of wealth and stability.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Beauty premium MSC: Interpretive


59. The "beauty premium" can be explained by the fact that

a. marginal productivity in all occupations has a physical dimension. b. in some occupations, physical attractiveness of workers may enhance the value of their

marginal product. c. beauty acts as an implicit signal of innate intelligence. d. beautiful people are likely to reflect "good breeding."

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Beauty premium MSC: Interpretive

60. Which of the following does not explain the "beauty premium" differences in wages?

a. Better-looking people are preferred by customers; thus, employers will pay them higher wages than average-looking people.

b. People who project an attractive personal appearance may be more intelligent than average-looking people; thus, employers will pay them higher wages than average-looking people.

c. Average-looking people are preferred by customers; thus, employers will pay them higher wages than better-looking people.

d. Employers discriminate in favor of better-looking people.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Beauty premium MSC: Interpretive

61. Which of the following explains the "beauty premium" differences in wages?

a. People who spend time on their personal appearance may send a signal that they are more productive workers.

b. Personal appearance and intelligence are inversely related. c. The “superstar phenomenon” explains the “beauty premium.” d. Better-looking people are more efficient; thus, they are paid an efficiency wage.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Beauty premium MSC: Interpretive

62. Which of the following explains the vast differences in earnings in the United States?

a. ability, effort, and chance b. compensating differentials c. physical attractiveness d. All of the above are correct.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Compensating differentials, Beauty premium MSC: Interpretive


63. Which of the following is not an explanation for why better educated workers earn more, on

average, than less educated workers? a. The higher wages may be a compensating differential for the cost of acquiring the

education. b. Workers with a college degree signal their higher abilities to potential employers. c. Skilled labor is increasingly becoming a substitute for unskilled labor, which raises the

earnings of workers with more education. d. Better educated workers are more productive, on average.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital, Signaling, Compensating differentials MSC: Interpretive

64. The accumulation of investments in people, such as education and on the job training, is known as

a. physical capital. b. human capital. c. efficiency wage. d. a union.

ANS: B DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Definitional

65. Which of the following is an example of human capital?

a. Machines built by people. b. Formal education acquired in schools. c. On-the-job training. d. Both b and c are correct.

ANS: D DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Definitional

66. Human capital is

a. an important determinant of wages, but it does not affect the production of goods and services.

b. an important determinant of wages, and it affects the production of goods and services. c. a specific type of physical capital made by humans rather than machines. d. very different from physical capital in that physical capital represents an investment, while

human capital does not represent an investment.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Interpretive


67. In recent years, the ratio of earnings of the typical U.S. college graduate to the earnings of the

typical high school graduate without additional education has a. risen as the demand for skilled labor has increased relative to the demand for unskilled

labor. b. risen as the demand for skilled labor has decreased relative to the demand for unskilled

labor. c. fallen as the demand for skilled labor has increased relative to the demand for unskilled

labor. d. fallen as the demand for skilled labor has decreased relative to the demand for unskilled

labor.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Interpretive

68. The time spent by students in college

a. leads to lower lifetime earnings because opportunity costs are high. b. is an investment in human capital. c. decreases human capital by lowering work experience. d. increases as the wages paid to low-skilled workers rise.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Definitional

69. Jill is the best eye surgeon in town, and she earns $350,000 a year. Susan is an average eye surgeon

in town, and she earns $100,000 a year. Jill's skills as a surgeon a. are valued more by the market relative to Susan's and that explains why her income is

higher than Susan's. b. are valued less by the market relative to Susan's and that explains why her income is

higher than Susan's. c. are valued less by the market relative to Susan's and that explains why her income is lower

than Susan's. d. are more expensive because she receives a compensating differential.



70. Philip is an average contractor in town, and he earns $40,000 a year. Billy is the best contractor in

town, and he earns $480,000 a year. Philip's contracting services a. are valued more by the market relative to Billy's and that explains why his income is

higher than Billy's. b. are valued less by the market relative to Billy's and that explains why his income is higher

than Billy's. c. are valued less by the market relative to Billy's and that explains why his income is lower

than Billy's. d. are more expensive because he receives a compensating differential.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Interpretive

71. In general, the higher a person's education level,

a. the higher the person's earnings. b. the more physically attractive the person is likely to be. c. the more socially outgoing the person is likely to be. d. All of the above are correct.

ANS: A DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Analytical

72. The belief that education makes a person more productive and thereby raises his or her wage is

referred to as the a. compensating-differential view of education. b. natural-ability view of education. c. unmeasured-variables view of education. d. human-capital view of education.

ANS: D DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Definitional

73. Which of the following is the most important contributor to human capital?

a. education b. effort c. chance d. physical strength

ANS: A DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Definitional


74. A recent law school graduate is considering two offers to practice law, one in California and one in

Alabama. The California bar exam is very difficult to pass, in part because California has a large number of unaccredited law schools. Assuming all other things equal, the attorney would expect a. to be unable to predict the wage difference between Alabama and California. b. to make a higher wage in California. c. to make a higher wage in Alabama. d. wages in California and Alabama to be identical.


75. Which of the following would be considered an investment in human capital?

a. education b. a teacher's blackboard c. the purchase of a new computer to enhance labor productivity d. All of the above are correct.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Definitional

76. Expenditures on human capital

a. reflect an expectation of some future return on the investment. b. are generally embodied in a specific individual. c. reflect an investment of resources today to raise productivity in the future. d. All of the above are correct.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Analytical

77. The ownership of human capital

a. is typically embodied in related physical capital. b. may be subject to government restrictions on transferability. c. is not easily transferable. d. All of the above are correct.


78. The return to investment in human capital is observed

a. only when workers are assigned identical tasks. b. in the wage differential between workers. c. in the high school dropout rate in inner-city urban school districts. d. in the low wages of educated factory workers.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Applicative


79. People are willing to invest in human capital because

a. the demand for skilled labor is higher than for unskilled labor. b. it increases the marginal product of their labor. c. firms are willing to pay more for more productive workers. d. All of the above are correct.

ANS: D DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Interpretive

80. A prestigious private high school requires each of its teachers to have a Ph.D. in the subject they

teach. This requirement is likely to a. increase the supply of teachers to this school. b. increase wages for teachers at the private school relative to those at public schools. c. decrease the marginal product of teachers at the private school. d. All of the above are correct.

ANS: B DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Analytical

81. When an employer pays the cost of educating a worker, it is likely that the employer

a. is demonstrating altruistic motives. b. is pursuing some objective other than profit-maximization. c. hopes to recapture its investment in the form of increased labor productivity. d. receives reimbursement from the government for the cost of the education.

ANS: C DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Applicative

82. The wage difference between jobs that require education and those that don't

a. is not likely to be related to productivity differences. b. is a barrier to obtaining an education. c. does not affect the supply of workers in the different labor markets. d. encourages workers to bear the cost of acquiring education.

ANS: D DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Applicative

83. The Asian Development Bank has been investing in education and training programs in the

developing economies of Asia over the last five years. As a result of this investment, economists who adhere to the human capital view of education would predict a. rising wages as labor productivity is enhanced. b. falling wages as the labor market is saturated with too many educated workers. c. the marginal productivity of capital would not be affected. d. the marginal productivity of labor would not be affected.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Applicative


84. The difference in wages paid to major-league baseball players and minor-league baseball players is

most likely due to a. chance. b. natural ability. c. the fact that the players' union is strong. d. a compensating differential.


85. A compensation scheme that pays salespeople a percentage of the sales they make is attempting to

reward a. work effort. b. loyalty to the firm. c. years of schooling. d. years of experience.


86. Workers whose skills become obsolete as a result of technological change are often paid a lower

wage as a result of a. natural ability. b. geographic location of employment. c. chance. d. work effort.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Analytical

87. Economists who study labor markets have discovered that

a. only about 5 percent of wage differences are related to chance. b. ability is not difficult to measure but is largely insignificant in explaining wage

differences. c. work effort is difficult to measure but is not likely to contribute much to an explanation of

wage differences. d. ability, effort, and chance are likely to be significant contributors to wage differences.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Interpretive


88. In empirical analyses of factors that help explain wages,

a. effort and ability are not likely to contribute to large differences in wages in the U.S. economy.

b. economists typically find that measurable factors explain less than half of the variation in wages.

c. economists typically find few factors that are not explicitly measurable. d. unmeasurable influences on wage differences are found to be quite small.


89. Which of the following statements is true of wages, educational attainment, and gender?

a. Male workers are compensated for attending college, while female workers generally are not.

b. Female workers are compensated for attending college, while male workers generally are not.

c. Both genders receive a higher wage for attending college. d. Neither gender receives a higher wage for attending college.

ANS: C DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Applicative

90. Why do major-league baseball players get paid more than minor-league players?

a. Major-league players are better athletes. b. The higher wage reflects a compensating differential. c. Playing in the major leagues in more pleasant then playing in the minor leagues. d. The higher wage is often due to educational discrepancies.


91. Which of the following statements correctly identifies the shift in employment in the manufacturing

sector in the United States? a. In the 1940s, about 10 percent of American workers were employed in the manufacturing

sector. b. Today, about 30 percent of American workers are employed in the manufacturing sector. c. The decline in jobs in the manufacturing sector mirrors a previous decline in employment

in the U.S. agricultural sector. d. Both a and b are correct.



92. The number of American workers employed in the manufacturing sector has

a. declined from 30 percent in the 1940s to 10 percent today. b. increased from 10 percent in the 1940s to 30 percent today. c. declined, which has contributed to the decline in global industrial output. d. increased more rapidly than the increase in farming jobs.



a. The U.S. is experiencing an increase in the types of jobs where workers identify and solve new problems. The wages for these jobs are also rising.

b. The U.S. is experiencing an increase in personal service jobs. The wages for these jobs are also rising.

c. Technological advancements have replaced many routine jobs such as bank tellers and telephone operators.

d. Manufacturing employment has decreased world-wide.


94. Based on the widening income gap between “personal-service” workers and “symbolic analysts,”

a. America is likely to lose even more manufacturing jobs to China and India. b. labor productivity has fallen, which has caused employment to fall as well. c. workers who have more education and better problem-solving skills are likely to work in

higher-paying jobs. d. the pay for personal-service workers is likely to rise.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Analytical

95. Suppose that a college student receives an offer for a summer internship with a stock brokerage

firm. Unfortunately for the student, the internship is unpaid. Is it ever economically beneficial to accept an unpaid job? a. Yes, because the experience gained during the internship would increase the student's

human capital. b. No, because the opportunity cost is too high. c. No, because the student is signaling to future employers that he or she is willing to accept

low wages. d. Yes, because accepting an unpaid job signals to future employers that the student has

stable personal finances.

ANS: A DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Human capital | Signaling MSC: Interpretive



a. Both the human capital theory and the signaling theory of education could explain why college graduates earn more than high school graduates.

b. The signaling theory of education suggests that the ability to complete a college degree is correlated with the ability to perform well in the labor market.

c. If the human capital theory of education is correct, a government policy that pays for additional schooling for all workers would not increase wages.

d. If the signaling theory of education is correct, a government policy that pays for additional schooling for all workers would not increase wages.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Signaling MSC: Interpretive

97. Of the theories listed below, which do the best job of explaining why educated people are paid more

than uneducated people? a. human-capital and price-fixing b. human-capital and signaling c. wage-differential and derived-demand d. cost-allocation and compensating differentials

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Signaling MSC: Interpretive

98. The human capital theory explanation for why people invest in education has been challenged by a

theory that suggests a. schooling acts as a signal of ability. b. humans cannot be considered "capital." c. productivity is not linked to wages. d. college is largely a social phenomenon.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital MSC: Interpretive

99. When employers sort employment applications into high-ability and low-ability people based on the

attainment of a college degree (irrespective of major), they are providing evidence in support of the a. human-capital theory of education. b. signaling theory of education. c. principle that education reduces marginal productivity. d. principle that most business owners are more interested in discriminating against a

particular group than in maximizing profits.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital MSC: Interpretive


100. A signaling theory of education suggests that educational attainment

a. is a signal of high marginal productivity. b. is correlated with natural ability. c. increases the productivity of low-ability workers. d. Both a and b are correct.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital MSC: Interpretive

101. According to the human-capital view, education

a. has no effect on lifetime earnings. b. alters work ethic. c. enhances productivity. d. is an indicator of natural ability.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Signaling MSC: Interpretive

102. A college degree makes a person more productive according to

a. both the human-capital and the signaling theories of education. b. the human-capital but not the signaling theory of education. c. the signaling but not the human-capital theory of education. d. neither the human-capital nor the signaling theory of education.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Signaling MSC: Interpretive

103. Which of the following statements represents the idea behind signaling in education?

a. Education can turn an unproductive person into a productive person. b. Education increases the marginal productivity of naturally productive workers. c. The more naturally productive people are more inclined to educate themselves. d. All of the above are correct.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital MSC: Interpretive

104. Which theory would support the idea that education does not enhance productivity and therefore

raising all workers' educational levels would not affect wages? a. signaling theory b. human-capital theory c. physical-capital theory d. the efficient-market hypothesis

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital MSC: Interpretive


105. Which of the following theories would suggest that attending school does not improve productivity

but that high-ability people are more likely to stay in school? a. physical-capital theory b. human-capital theory c. signaling theory d. neoclassical theory

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital MSC: Interpretive

106. Suppose that the country of Libraria made a concerted effort to increase the educational level of its

people. If this effort had no effect on the wages of its workers, one might consider this as evidence in support of a. the human-capital view of education. b. the signaling view of education. c. both the human-capital and the signaling view of education. d. neither the human-capital nor the signaling view of education.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital MSC: Analytical

107. According to the signaling theory of education,

a. schooling sends signals to employers in much the same way that advertising sends signals to consumers.

b. a person becomes more productive by earning a college degree. c. education is less important than natural ability. d. All of the above are correct.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital MSC: Applicative

108. Which theory explains the fact that some firms may choose to pay their employees more then they

would earn as determined by equilibrium in the labor market? a. the theory of efficiency wages b. the marginal-productivity theory c. human-capital theory d. signaling theory

ANS: A DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages | Human capital | Signaling MSC: Interpretive


109. Which of the following factors does not affect the value of a worker's marginal product?

a. Discrimination against a particular group of workers by a firm's customers. b. A worker's level of disposable income. c. A worker's level of human capital. d. Compensating wage differentials.

ANS: B DIF: 3 REF: 19-1 | 19-2 NAT: Analytic LOC: Labor markets TOP: Human capital | Labor-market discrimination MSC: Analytical


a. Compensating wage differentials reflect different skills of workers. b. Discrimination by employers affects the marginal productivity of workers. c. The signaling theory of education suggests that schooling does not affect worker

productivity. d. The superstar phenomenon explains why more talented entertainers earn more than less

talented entertainers.

ANS: C DIF: 3 REF: 19-1 | 19-2 NAT: Analytic LOC: Labor markets TOP: Signaling | Labor-market discrimination | Human capital MSC: Analytical

111. Jane and John are twins who attended grammar school through college together. Jane and John both

got jobs at a brokerage firm after graduating from college with the same major. They both work equally hard. Jane earns $43,000 a year, and John earns $69,000 a year. Select the best explanation for this wage difference. a. Jane has less human capital than John. b. Jane has more human capital than John. c. John has been discriminated against because he is male. d. Jane has been discriminated against because she is female.

ANS: D DIF: 2 REF: 19-1 | 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination | Human capital MSC: Applicative

112. Joan is a white 23-year-old female, and Marcia is a black 23-year-old female. Both Joan and Marica

are economics majors, and they graduated from the same college in the same year with the same GPA. Joan and Marcia both got jobs at a brokerage firm after graduating from college. They both work equally hard. Joan earns $38,000 a year, and Marcia earns $30,000 a year. Select the best explanation for this wage difference. a. Joan has less human capital than Marcia. b. Joan receives a compensating wage differential that Marcia does not. c. Joan has been discriminated against because she is white. d. Marcia has been discriminated against because he is black.



113. John is an Asian 23-year-old male, and Ken is an Asian 43-year-old male. Both John and Ken are

economics majors, and they graduated from the same college with the same GPA — John in 2006 and Ken in 1986. John and Ken both are both financial advisers at the same brokerage firm. John earns $52,000 a year, and Ken earns $88,000 a year. Select the best explanation for this wage difference. a. John has more human capital than Ken. b. John has less human capital than Ken. c. John has been discriminated against because he is young. d. Ken has been discriminated against because he is old.

ANS: B DIF: 2 REF: 19-1 | 19-2 NAT: Analytic LOC: Labor markets TOP: Human capital | Labor-market discrimination MSC: Applicative

114. Karen is a black 21-year-old female, and Jessica is a black 41-year-old female. Both Karen and

Jessica are accounting majors, and they graduated from the same college with the same GPA — Karen in 2008 and Jessica in 1988. Karen and Jessica are both financial advisers at the same mutual fund firm. Karen earns $45,000 a year, and Jessica earns $90,000 a year. Select the best explanation for this wage difference. a. Karen has more human capital than Jessica. b. Karen has less human capital than Jessica. c. Karen has been discriminated against because she is young. d. Jessica has been discriminated against because she is old.


115. Which of the following is not an explanation for why better educated workers earn more, on

average, than less educated workers in the United States? a. Better educated workers have higher marginal productivities, on average. b. Compensating differentials lower the wages of skilled workers relative to unskilled

workers. c. The United States tends to import goods produced with unskilled labor, which reduces the

U.S. demand for unskilled labor. d. The demand for skilled labor has risen over time relative to the demand for unskilled

labor.




a. Since the 1940s, the number of American workers employed in the manufacturing sector has declined from 30 percent to 10 percent.

b. Since 1910, the number of Americans working as farmers has increased from 3 percent to 33 percent.

c. Since 1995, global industrial output has fallen by more than 30 percent. d. Productivity decreases are one reason for the declining number of manufacturing jobs.


117. Which of the following describes the labor market for personal-service workers?

a. The pay of these workers is increasing. b. Legal and undocumented immigrants often work in this sector. c. Most personal-service jobs require post-high school education or training. d. The supply of workers is decreasing as workers displaced by technological innovations

seek jobs in sectors other than personal-services.


118. Which of the following is not an example of changing employment trends?

a. The number of people wanting to work in the personal services sector in the U.S. is increasing.

b. Employment in the U.S. agricultural sector has declined by about 30 percentage points in the last century.

c. Technological advances have replaced a great many routine jobs in the U.S. such as bank tellers and telephone operators.

d. Employment in the U.S. manufacturing sector has declined, while employment in manufacturing has increased worldwide.

ANS: D DIF: 3 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital MSC: Analytical


a. The human-capital theory of education could be called a productivity-enhancing theory. b. The human-capital theory of education could be called a productivity-revealing theory. c. The signaling theory of education could be called a productivity-enhancing theory. d. The signaling theory of education has been disproved by Princeton University economist

Alan Krueger.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Human capital | Signaling MSC: Interpretive


120. In the signaling theory of education,

a. schooling itself does not lead to more productive workers. b. chance plays more of a role than in the human-capital theory. c. schooling enhances worker productivity. d. compensating differentials do not matter.


121. In the signaling theory of education,

a. discrimination does not affect wage differentials. b. schooling makes workers more productive in the long-run. c. schooling makes workers more productive in the short-run. d. the worker signals to the employer that he is a valuable employee because he was willing

to spend time to get an education.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling | Human capital MSC: Applicative

122. According to the signaling theory of education, better-educated workers

a. are likely to be high-ability workers. b. improve their marginal productivity through education. c. are in scarce supply in less developed countries. d. can only find low-skilled jobs due to technology.


123. If an employer's behavior is supportive of the theory of efficiency wages, the employer would

a. raise wages in an effort to increase worker effort. b. raise wages in an effort to increase worker turnover. c. decrease wages in an effort to increase worker effort. d. decrease wages in an effort to increase worker turnover.

ANS: A DIF: 3 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Applicative

124. The theory of efficiency wages suggests that firms may pay above-equilibrium wages

a. to reduce employee turnover. b. to prevent unions from recruiting members. c. to reduce the need for minimum wage laws. d. to increase the demand for better-skilled workers.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Interpretive


125. How does the theory of efficiency wages explain above-equilibrium wages?

a. Employers are forced to pay higher wages in efficient markets. b. Employers give their workers a higher wage in the hope that it will lead to increased

productivity. c. Workers get higher wages when they prove they are increasing their productivity. d. Workers demand higher wages to compensate for poor fringe benefits.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Applicative

126. The theory of efficiency wages asserts that

a. unions are often successful in forcing employers to pay higher wages. b. employers strive to hold wages below equilibrium levels. c. employers may find it profitable to pay above-equilibrium wages. d. efficient workers actually earn lower wages than those earned by inefficient workers.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Applicative

127. The theory of efficiency wages challenges the assumption that

a. workers are efficient. b. workers have an incentive to shirk their responsibilities to their employers. c. wages adjust to balance labor supply and labor demand. d. firms sometimes choose to pay their workers above-equilibrium wages.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Interpretive

128. In 1913, the Ford Motor Company decided to pay its employees $5 a day. This wage was

significantly higher than what any other organization offered. Henry Ford believed that this wage would make his employees happier, increase their productivity, and lower employee turnover. Economists would say that Mr. Ford offered his employees a. a union. b. an efficiency wage. c. a diminishing rate of marginal return. d. a leisure wage.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Interpretive


129. The idea of paying workers an efficiency wage is that

a. doing so is more efficient than paying them the market wage. b. paying workers less gives them the incentive to work harder. c. workers and management gain at the expense of the stockholders of the company. d. workers have the incentive to work harder, thus increasing their marginal productivity.

ANS: D DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Definitional

130. Which of the following sets of circumstances is likely to provide the best evidence in support of the

theory of efficiency wages? a. Workers in the market are unskilled and not represented by a union, and their wage

exceeds the equilibrium wage. b. Workers in the market are highly skilled and not represented by a union, and their wage

exceeds the minimum wage. c. Workers in the market are highly skilled and represented by a union, and their wage

exceeds the equilibrium wage. d. Employers in the market are known for reducing the workers' wage whenever they get an

opportunity to do so.

ANS: A DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Efficiency wages MSC: Interpretive


a. It is possible that additional education will increase a worker's wage without increasing the worker's productivity.

b. If discriminating wage differentials persist in competitive markets, it is primarily because either consumers are willing to pay to maintain the discrimination or because government mandates it.

c. An efficiency wage corresponds to a lower wage that a nondiscriminating employer pays to a worker because a discriminating employer won't hire her.

d. In competitive markets, workers are paid a wage equal to the value of their marginal product.

ANS: C DIF: 3 REF: 19-1 | 19-2 NAT: Analytic LOC: Labor markets TOP: Efficiency wages | Labor-market discrimination | Signaling | Value of the marginal product MSC: Analytical


132. The theory of efficiency wages is that

a. above-equilibrium wages increase worker productivity. b. workers with higher levels of education earn more than workers with lower levels of

education. c. workers signal their high ability to potential employers by completing formal years of

schooling. d. union workers earn more than nonunion workers.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Applicative

133. Most wage differences can be understood while maintaining the assumption of equilibrium in the

labor market. We deviate from that assumption, however, when we consider a. the superstar phenomenon. b. the theory of efficiency wages. c. compensating differentials. d. differences in educational attainment.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Efficiency wages MSC: Interpretive

134. If unskilled labor is relatively plentiful and cheap in many foreign countries, then as the United

States expands its trade with these foreign countries, the domestic demand for a. both skilled and unskilled labor will rise proportionately. b. skilled labor will fall and the demand for unskilled labor will rise. c. skilled labor will rise and the demand for unskilled labor will fall. d. both skilled and unskilled labor will be unaffected, assuming no barriers to free trade.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Interpretive

135. In recent years, the amount of international trade in which the United States engages has

a. increased, altering the demand for skilled and unskilled labor. b. decreased a little, altering the demand for skilled and unskilled labor. c. decreased substantially, altering the demand for skilled and unskilled labor. d. remained fairly constant; thus, the demand for skilled and unskilled labor is unchanged.

ANS: A DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Interpretive


136. In recent years, the amount of international trade in which the United States engages has increased.

Which of the following accurately describes the effect(s) on labor demanded by firms in the United States? a. The demand for both skilled and unskilled labor has increased. b. The demand for both skilled and unskilled labor has decreased. c. The demand for skilled labor relative to unskilled labor has risen. d. The demand for unskilled labor relative to skilled labor has risen.


137. Workers with more human capital on average earn substantially higher pay than workers with less

human capital in a. most countries but not in the United States. b. the United States but not in most other countries. c. the United States and in most other countries. d. None of the above is correct; the evidence fails to indicate that human capital is a

significant factor in determining earnings anywhere in the world.


138. In the United States, the earnings gap between workers with college degrees and workers with high

school degrees a. has never been documented by reliable evidence. b. is evident, but it has remained roughly constant over the past 20 years. c. is evident, but it has diminished over the last 20 years. d. is evident, and it has widened over the last 20 years.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Interpretive

139. Over the last 20 years or so, the earnings gap between workers with college degrees and workers

with high school degrees has a. remained roughly constant for both men and women. b. widened for both men and women. c. widened for men and narrowed for women. d. narrowed for men and widened for women.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Interpretive


140. Economists who attempt to explain the increasing earnings gap between skilled and unskilled

workers offer two main hypotheses: a. One hypothesis emphasizes education, and the other emphasizes random influences. b. One hypothesis emphasizes education, and the other emphasizes supply and demand. c. One hypothesis emphasizes international trade, and the other emphasizes technology. d. One hypothesis emphasizes signaling, and the other emphasizes education.


141. Economists who attempt to explain the increasing earnings gap between skilled and unskilled

workers in the United States offer two main hypotheses. Both hypotheses a. suggest that demand and supply conditions have played a less important role in

determining workers' wages in recent years. b. suggest that, over time, the demand for skilled labor has risen relative to the demand for

unskilled labor. c. emphasize the shrinking importance of international trade in recent years. d. emphasize the growing importance of women and teenagers in the workforce in recent

years.

ANS: B DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Increasing value of skills MSC: Interpretive

142. A "technology" hypothesis has been advanced as an explanation for the widening earnings gap

between skilled and unskilled workers in the United States. This hypothesis emphasizes the likelihood that technological advances have a. increased the supply of both skilled and unskilled workers. b. increased the supply of skilled workers and decreased the supply of unskilled workers. c. increased the demand for skilled workers and decreased the demand for unskilled workers. d. decreased the demand for both skilled and unskilled workers.


143. The statement "the rich get richer and the poor get poorer" is evident in the fact that

a. the earnings gap between high-skill jobs and low-skill jobs has increased over the last several years.

b. developing countries do not pay workers the value of their marginal product. c. developed economies export high-skill jobs to developing countries. d. All of the above are correct.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Interpretive


144. Which of the following scenarios would serve to decrease the demand for unskilled labor in our

country? a. increased productivity gains among the unskilled laborers b. increased demand for goods produced by unskilled labor c. increased international trade with countries where unskilled labor is more plentiful d. increased supply of migrant workers


145. Economists who study labor markets have documented

a. a general decline in the wages of college graduates over the last decade. b. an increasing trend in U.S. labor markets for employers to pay all costs of education and

training. c. a decrease in the earnings gap between low-skill and high-skill workers over the past two

decades. d. an increase in the earnings gap between low-skill and high-skill workers over the past two

decades.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Applicative

146. When computers are used to replace workers on a factory production line, the wage gap between

skilled and unskilled workers a. will increase only if the company can increase the price of its product. b. is likely to increase. c. is likely to decrease. d. will not change.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Applicative

147. Economists have proposed which of the following hypotheses to explain the rising wage gap

between skilled and unskilled workers? a. Increases in the role of unions in negotiating wages. b. Declines in the amount of international trade. c. There is no rising wage gap. d. Technological change.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Increasing value of skills MSC: Interpretive


148. In order to explain the widening gap in earnings between skilled and unskilled workers in recent

years, economists have proposed two hypotheses. One hypothesis emphasizes a. compensating differentials. b. the increased recognition that a larger stock of human capital usually leads to higher

earnings. c. the decreasing importance of labor unions. d. the increasing importance of international trade.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Wages | Labor MSC: Interpretive

149. Former Secretary of Labor Robert Reich points to two growing categories of work in the United

States. Those two categories are a. work that involves manufacturing, and work that involves computers and electronics. b. work that involves manufacturing, and work that involves personal services. c. work that involves identifying and solving new problems, and work that involves personal

services. d. work that involves identifying and solving new problems, and work that involves

facilitating international trade.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Labor MSC: Interpretive

150. In determining wages, ability, effort, and chance

a. probably play no role whatsoever. b. play a role, but their importance is hard to gauge since ability, effort, and chance are hard

to measure. c. play a role, and that role is fully captured in easy-to-measure factors such as human capital

and age. d. play a role, and it is fully explained within the context of compensating differentials.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Labor | Wages MSC: Interpretive

151. The idea that minimum-wage laws lead to wages that exceed equilibrium levels

a. is a component of the theory of efficiency wages. b. cannot be valid unless labor unions are sufficiently powerful to force enactment of those

laws in the first place. c. is more applicable to unskilled-labor markets than to skilled-labor markets. d. All of the above are correct.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Minimum wage MSC: Interpretive


152. According to proponents of the signaling theory of education, an increase in the education levels of

all workers would a. increase workers’ productivity and increase their wages. b. increase workers’ productivity but leave their wages unaffected. c. leave workers’ productivity unaffected but increase their wages. d. leave workers’ productivity and wages unaffected.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Signaling | Productivity | Wages MSC: Interpretive

153. A signaling theory of education suggests that

a. people who attend college are more likely to capture a "beauty premium." b. education is a signal of social status. c. education does not necessarily increase productivity. d. education will sever the link between innate ability and compensation.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling MSC: Interpretive

154. If the signaling theory of education is correct,

a. workers with more years of formal schooling will earn less than workers with fewer years of formal schooling.

b. additional years of formal schooling do not increase a worker’s productivity. c. workers with more years of formal schooling are less likely to be affected by ability,

effort, and chance. d. men are more likely to earn more than women because men are more likely to have

graduated from college.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Signaling MSC: Interpretive

155. According to proponents of the signaling theory of education,

a. schooling has no real productivity benefit. b. no one person finds it easier to earn a college degree than does any other person. c. the human-capital view of education is entirely correct. d. employers send signals to young people to persuade them to expend whatever effort is

necessary to earn college degrees.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Signaling MSC: Interpretive


156. Which of the following statements accurately explains the superstar phenomenon in wages?

a. Better carpenters earn more than average carpenters because people are willing to pay higher prices for higher-quality work.

b. Funnier comedians earn more than less funny comedians because they are more talented. c. Talented athletes earn more than equally talented plumbers because technology allows the

delivery of the services provided by the athletes to all interested customers. d. Athletes get paid for performing services that everyday people perform as hobbies.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Interpretive

157. Technology is an important factor in explaining the high incomes of superstars because

a. technology accounts for differences in incomes within all occupations. b. technology makes it possible for the best producer to supply every customer at low cost. c. technology that can limit access to the superstars is available. d. only technologically-literate superstars can earn super incomes.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Interpretive

158. The most popular movie stars have high incomes for a number of reasons. One such reason is

a. an ability for almost everyone to enjoy movies at a relatively low cost. b. the above-average intellect of the average movie star. c. a compensating differential. d. a lack of technological advances in the movie industry.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Interpretive

159. Why is a plumber never likely to be as rich as a movie star?

a. Compensating differential creates a higher wage in the movie business. b. There haven't been any significant technological advances in the plumbing industry. c. Productivity levels are low in the plumbing industry due to low worker morale. d. A plumber can provide his services to only a limited number of customers.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Interpretive

160. The "superstar" phenomenon can apply to which of these jobs?

a. high-school teacher b. anchorperson for a national news program c. heart surgeon d. carpenter.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Applicative


161. For a "superstar" to emerge, it must be the case that

a. it is possible to supply the good or service that the superstar produces at low cost to every customer.

b. some customers are willing and able to pay large sums of money to enjoy the good or service provided by the superstar.

c. the superstar has a natural monopoly on his or her good or service. d. the superstar is willing to settle for a level of pay that is less than the value of his marginal

product.

ANS: A DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Definitional

162. The primary economic explanation as to why a world-renowned architect cannot attain the

"superstar" status that an athlete or actor can attain is that a. architects' services are not as highly valued by society as are the services of athletes and

actors. b. only physically attractive people can become superstars, and it would be a coincidence if a

highly talented architect were also physically attractive. c. government regulations place restrictions on the incomes of architects, but there are no

such restrictions on the incomes of athletes or actors. d. it is impossible, currently, for an architect to supply his or her services at low cost to every

customer.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Applicative

163. The fact that movie star Julia Roberts' salary is much higher than the salary earned by a Nobel prize

winning economics professor can best be explained by the a. failure of the market to reward talent fairly. b. fact that wage rates cannot reflect the influence of education properly. c. willingness of some people to accept a lower wage rate in order to do what they like most

to do. d. superstar phenomenon.

ANS: D DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Definitional


164. Suppose that Philip is the best contractor in town, and he makes $400,000 a year. Suppose that Julia

Roberts is the best and highest paid actress in Hollywood, and she makes $13 million per movie. Both are the best in their respective fields of work. One reason for the significant difference in incomes has to do with the nature of the service each offers. Philip's contracting services a. can be provided to an unlimited number of customers in a year, but Julia's work is sold to

only a few individuals in a year. b. can only be provided to a limited number of customers in a year, but Julia's work is sold to

millions of individuals in a year — i.e., to anyone who has the willingness and ability to pay for admission to her movies.

c. can be provided to a unlimited number of customers in a year, and Julia's work is sold to millions of individuals in a year — i.e., to anyone who has the willingness and ability to pay for admission to her movies.

d. can only be provided to a limited number of customers in a year, and Julia's work is sold to only a few individuals in a year.

ANS: B DIF: 2 REF: 19-1 NAT: Reflective LOC: Labor markets TOP: Superstar phenomenon MSC: Interpretive

165. The superstar phenomenon applies to

a. all famous people equally. b. workers receiving a compensating wage differential. c. markets where technology allows the best producer to supply every customer at a low cost. d. markets where a small group of workers produce a much higher quality product than the

average worker.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Superstar phenomenon MSC: Applicative

166. If, as some economists believe, changes in technology over recent decades have brought about

changes in labor markets, then those changes likely have resulted in a. reduced emphasis on compensating differentials as an explanation for wage differences. b. a reduced emphasis on human-capital differences among workers as an explanation for

wage differences. c. a narrowing of the earnings gap between high-skilled workers and low-skilled workers. d. a widening of the earnings gap between high-skilled workers and low-skilled workers.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Technology | Wages MSC: Interpretive

167. A worker association that bargains with employers over wages and working conditions is called

a. a strike. b. an oligopoly. c. a firm. d. a union.

ANS: D DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Unions MSC: Definitional


168. The organized withdrawal of labor from a firm by a union is called

a. a strike. b. a bargain. c. a monopoly. d. a tournament.

ANS: A DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Unions MSC: Definitional

169. Studies have shown that nonunion workers earn about

a. 10 to 20 percent more than union workers in similar jobs. b. 10 to 20 percent less than union workers in similar jobs. c. 40 to 50 percent more than union workers in similar jobs. d. 40 to 50 percent less than union workers in similar jobs.

ANS: B DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Unions MSC: Applicative

170. A union's major source of power is its

a. high-profile leadership. b. ability to increase productivity. c. ability to threaten a strike. d. ability to deny employers the opportunity to bargain over wages.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Unions MSC: Applicative

171. The market wage could be higher than the equilibrium wage if a worker

a. is a superstar. b. belongs to a labor union. c. has more human capital. d. All of the above are correct.

ANS: B DIF: 3 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Unions MSC: Applicative

172. The market wage could be higher than the equilibrium wage if a worker

a. belongs to a labor union. b. is covered by a minimum-wage law. c. is paid an efficiency wage. d. All of the above are correct.

ANS: D DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Unions, Minimum wage, Efficiency wages MSC: Applicative


173. When the supply of workers is plentiful, one would predict that market wages would be

a. determined outside the domain of economic theory. b. determined solely by factors that affect demand. c. low, other things equal. d. high, other things equal.

ANS: C DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Wages MSC: Interpretive

174. Other things equal, when the supply of workers is low, one would predict that market wages would

be a. relatively high. b. relatively low. c. determined solely by factors that affect demand. d. determined outside the domain of economic theory.

ANS: A DIF: 1 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Wages MSC: Interpretive

175. Hapland and Genoshia have just started to trade with each other. Hapland exports goods produced

with skilled labor and imports goods made with unskilled labor from Genoshia. Over time, we would expect that the wages of skilled labor in Hapland will a. rise, and the wages of unskilled labor in Hapland will fall. b. fall, and the wages of unskilled labor in Hapland will rise. c. rise, and the wages of unskilled labor in Hapland will rise. d. fall, and the wages of unskilled labor in Hapland will fall.

ANS: A DIF: 3 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Wages MSC: Analytical

176. Which of the following variables related to a worker’s wage are the most difficult to measure?

a. ability, effort, and chance b. job characteristics, gender, and race c. gender, race, and geographic location d. years of schooling, age, and years of experience



177. Studies of wages by labor economists indicate that measurable variables such as age, job

characteristics, years of education, and years of experience account for a. virtually none of the variation in wages in our economy. b. some, but less than 50 percent of the variation in wages in our economy. c. about 75 percent of the variation in wages in our economy. d. almost all of the variation in wages in our economy.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Wages MSC: Interpretive

178. Certain factors that are probably important in determining wages are nevertheless difficult to

measure. Consequently, labor economists find those factors difficult to incorporate into their studies of labor markets and wages. Those factors include a. effort and natural ability. b. natural ability and years of experience. c. years of experience and job characteristics. d. race and job characteristics.


179. The very high pay earned by the best actors and actresses is partially explained by the fact that

a. they benefit from a compensating differential. b. moviegoers all want to see the very best actors, not second-rate actors. c. they have acting degrees from accredited acting schools. d. the supply of good actors is very large.

ANS: B DIF: 2 REF: 19-1 NAT: Analytic LOC: Labor markets TOP: Wages MSC: Interpretive

180. Dr. Benson is regarded as, by far, the best dentist in his part of the country, yet his income is not

significantly higher than the average income for a dentist in his area. In contrast, Bo Johnson, the best baseball player in that region, earns five times the average salary of all baseball players. The most likely explanation is that a. the widespread perception that Dr. Benson is a great dentist is, in fact, incorrect. b. the baseball players’ union is more powerful than the professional association of dentists. c. Bo Johnson, unlike Dr. Benson, can provide his services to millions of people

simultaneously. d. chance plays a role in determining people’s incomes, resulting in earnings discrepancies

that are hard to explain or justify.

ANS: C DIF: 2 REF: 19-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Wages MSC: Interpretive


Sec02--The Economics of Discrimination

MULTIPLE CHOICE


a. If the signaling theory of education is correct, additional schooling does not affect worker productivity but rather signals a correlation between natural ability and education.

b. The theory of efficiency wages suggests that firms pay higher wages to workers in order to induce workers to be more productive.

c. Discrimination against workers of a certain race or ethnicity is often in conflict with a firm's desire to maximize profits.

d. The theory of compensating wage differentials reflects the different skills, abilities, and productivity of workers.

ANS: D DIF: 3 REF: 19-1 | 19-2 NAT: Reflective LOC: Labor markets TOP: Compensating differentials | Signaling | Efficiency wages | Labor-market discrimination MSC: Analytical

2. Which of the following statements does not accurately describe the market for labor?

a. The characteristics of workers, such as their education and experience, the characteristics of jobs, such as their pleasantness or unpleasantness, and the presence or absence of discrimination by employers all determine equilibrium wages.

b. Labor unions, minimum wage laws, and efficiency wages all may increase wages above their equilibrium level.

c. Firms are willing to pay more for better-educated workers as long as there is an excess supply of this type of worker.

d. Discrimination by employers against a group of workers may artificially lower wages for that group.

ANS: C DIF: 2 REF: 19-1 | 19-2 NAT: Reflective LOC: Labor markets TOP: Wages | Compensating differentials | Unions | Labor-market discrimination MSC: Analytical

3. Which of the following is least likely to be the reason women are underrepresented in the economics

profession? a. labor market discrimination. b. self-selection of females into other occupations. c. cultural bias in primary and secondary education. d. inability of women to solve economics problems.

ANS: D DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Interpretive


4. Economists found evidence of discrimination in each of the following markets except

a. 1960s baseball games. b. baseball cards. c. live basketball games in the 1980s. d. current era baseball games.

ANS: D DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Applicative

5. Which of the following explains why soccer players make millions of dollars in Europe but do not in

the United States? a. Discriminatory rules established by the government. b. Compensating wage differentials for living in Europe. c. Discriminatory preferences on the part of US sports fans for other sports. d. Efficiency wages paid to European players to enhance on-field performance.

ANS: C DIF: 1 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Applicative

6. That some schools direct females away from science and math courses is evidence of

a. labor-market discrimination. b. discrimination that occurs prior to people entering the labor market. c. discrimination by customers. d. discrimination by employers.

ANS: B DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Applicative

7. If an employer pays a man a higher wage than a woman, the employer

a. is discriminating against the woman but is still maximizing profit. b. is not discriminating against the woman. c. may or may not be discriminating against the woman. d. is discriminating against the woman and is not maximizing profit.

ANS: C DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Interpretive

8. Discrimination by a manager in the hiring process may be consistent with the decision to maximize

profits if a. customers are willing to pay higher prices in order to maintain the discrimination. b. the discrimination is based on race but not gender. c. the discrimination is based on gender but not race. d. Discrimination is never consistent with profit maximization.

ANS: A DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Applicative


9. Discrimination by a manager in the hiring process

a. decreases the firm’s costs. b. increases the firm’s costs. c. is evident if a white manager refuses to hire a Hispanic worker. d. is evident if a 30-year-old manager refuses to hire a 50-year-old worker.

ANS: B DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Interpretive

10. Two economists created fake resumes with either common African-American names such as

Lakisha and Jamal or common white names such as Emily and Greg. After sending them to potential employers with “Help Wanted” ads in Boston and Chicago newspapers, they found that a. black employees earned 50 percent less than white employees in Chicago but that blacks

and whites had similar wages in Boston. b. black employees earned 50 percent less than white employees in Boston but that blacks

and whites had similar wages in Chicago. c. job applicants with white names received 50 percent more phone calls from interested

employers. d. job applicants with white names received 7 percent more phone calls from interested

employers.

ANS: C DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Applicative

11. In the early 20th century, streetcars in many southern cities required that white passengers sit in the

front of car, while black passengers sat in the back. The firms that ran the streetcars were a. in favor of the segregation laws because they lowered costs and increased profits. b. against the segregation laws because they increased costs and lowered profits. c. lobbied local governments to enact such laws because their customers were willing to pay

more for service in order to maintain the segregation. d. concerned about the effects of smoking. Since blacks smoked more than whites, they

were supportive of the segregation laws.

ANS: B DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Discrimination MSC: Applicative

12. A 1986 study of segregation on early 20th century U.S. streetcars found that the primary source of

racial segregation on streetcars was a. a longstanding tradition of racial segregation. b. policies implemented by the owners of streetcars. c. laws passed by the government. d. threats by white people to boycott the streetcars if they were forced to sit with black

people.

ANS: C DIF: 2 REF: 19-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Discrimination MSC: Interpretive



a. It is possible that additional education will increase a worker's wage without increasing the worker's productivity.

b. If discriminating wage differentials persist in competitive markets, it is primarily because either consumers are willing to pay to maintain the discrimination or because government mandates it.

c. An efficiency wage corresponds to a lower wage that a nondiscriminating employer pays to a worker because a discriminating employer won't hire her.

d. In competitive markets, workers are paid a wage equal to the value of their marginal product.

ANS: C DIF: 3 REF: 19-1 | 19-2 NAT: Analytic LOC: Labor markets TOP: Efficiency wages | Labor-market discrimination | Signaling | Value of the marginal product MSC: Analytical

14. As a result of their experiment economists Muriel Niederle and Lise Vesterlund found that

a. women choose competitive environments more than men. b. women and men choose competitive environments equally. c. women choose competitive environments less than men. d. women are just as likely as men to have high-paying corporate jobs.

ANS: C DIF: 2 REF: 19-2 NAT: Reflective LOC: Labor markets TOP: Gender Differences MSC: Interpretive

15. In the experiment conducted by economists Muriel Niederle and Lise Vesterlund

a. men were better at adding than women. b. women chose the tournament payoff scheme more than men. c. 75% of men thought they won the four-player tournament part of the experiment. d. demonstrated that women face significant wage discrimination in stock brokerages..

ANS: C DIF: 3 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Gender Differences MSC: Interpretive

16. The competition experiement conducted by economists Muriel Niederle and Lise Vesterlund

confirmed the results of Terry Odean which were that a. men were better at math than women. b. men chose competition more because they were better at sports than women. c. men trade stocks excessively while women adopt a buy-and-hold strategy. d. streetcar companies were not in favor of segregation because it hurt their profits.

ANS: C DIF: 3 REF: 19-2 NAT: Reflective LOC: Labor markets TOP: Gender Differences MSC: Interpretive


17. Which of the following factors does not affect the value of a worker's marginal product?

a. Discrimination against a particular group of workers by a firm's customers. b. A worker's level of disposable income. c. A worker's level of human capital. d. Compensating wage differentials.

ANS: B DIF: 3 REF: 19-1 | 19-2 NAT: Analytic LOC: Labor markets TOP: Human capital | Labor-market discrimination MSC: Analytical


a. Compensating wage differentials reflect different skills of workers. b. Discrimination by employers affects the marginal productivity of workers. c. The signaling theory of education suggests that schooling does not affect worker

productivity. d. The superstar phenomenon explains why more talented entertainers earn more than less

talented entertainers.

ANS: C DIF: 3 REF: 19-1 | 19-2 NAT: Analytic LOC: Labor markets TOP: Signaling | Labor-market discrimination | Human capital MSC: Analytical

19. Jane and John are twins who attended grammar school through college together. Jane and John both

got jobs at a brokerage firm after graduating from college with the same major. They both work equally hard. Jane earns $43,000 a year, and John earns $69,000 a year. Select the best explanation for this wage difference. a. Jane has less human capital than John. b. Jane has more human capital than John. c. John has been discriminated against because he is male. d. Jane has been discriminated against because she is female.


20. Joan is a white 23-year-old female, and Marcia is a black 23-year-old female. Both Joan and Marica

are economics majors, and they graduated from the same college in the same year with the same GPA. Joan and Marcia both got jobs at a brokerage firm after graduating from college. They both work equally hard. Joan earns $38,000 a year, and Marcia earns $30,000 a year. Select the best explanation for this wage difference. a. Joan has less human capital than Marcia. b. Joan receives a compensating wage differential that Marcia does not. c. Joan has been discriminated against because she is white. d. Marcia has been discriminated against because he is black.



21. John is an Asian 23-year-old male, and Ken is an Asian 43-year-old male. Both John and Ken are

economics majors, and they graduated from the same college with the same GPA — John in 2006 and Ken in 1986. John and Ken both are both financial advisers at the same brokerage firm. John earns $52,000 a year, and Ken earns $88,000 a year. Select the best explanation for this wage difference. a. John has more human capital than Ken. b. John has less human capital than Ken. c. John has been discriminated against because he is young. d. Ken has been discriminated against because he is old.


22. Karen is a black 21-year-old female, and Jessica is a black 41-year-old female. Both Karen and

Jessica are accounting majors, and they graduated from the same college with the same GPA — Karen in 2008 and Jessica in 1988. Karen and Jessica are both financial advisers at the same mutual fund firm. Karen earns $45,000 a year, and Jessica earns $90,000 a year. Select the best explanation for this wage difference. a. Karen has more human capital than Jessica. b. Karen has less human capital than Jessica. c. Karen has been discriminated against because she is young. d. Jessica has been discriminated against because she is old.


23. If men, on average, earn 20 percent more than women in a particular occupation,

a. this is clear evidence of discrimination. b. some of this differential could be due to differences in educational levels. c. some of this differential could be due to differences in human capital. d. Both b and c are correct.

ANS: D DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Interpretive

24. Politicians often point to wage differentials as evidence of labor market discrimination against

ethnic minorities and women. Economists, however, argue against this approach because a. they don't believe the wage differential really exists. b. they can't agree on a definition of the term "discrimination." c. they believe compensating differentials account for all wage differences. d. different people may have different wages for reasons unrelated to discrimination.



25. Economists are skeptical that discrimination is employer driven because

a. discrimination cannot exist in markets. b. employers are not really interested in maximizing profit. c. employers typically base wages paid on the prevailing market wage. d. holding productivity constant, a profit-maximizing employer will hire the cheapest labor

available.

ANS: D DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical

26. Why would a wage differential due to discrimination be unlikely to persist in a competitive labor

market? a. There is a cost advantage for firms that do not discriminate. b. Workers who are victims of discrimination will eventually drop out of the labor market. c. Competing firms will hire fewer of the workers who are temporarily victimized by

discrimination. d. Discrimination cannot exist in makets.

ANS: A DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical

27. Which of the following represents an example of labor-market discrimination?

a. An employer is more likely to grant an interview to a person graduating from Yale than from the local community college.

b. An employer is more likely to grant an interview to a person graduating from the local community college than from Yale.

c. An employer is more likely to grant an interview to a woman with a traditionally “white” name such as Emily than to a woman with a traditionally “black” name such as Lakisha.

d. An employer is as likely to grant an interview to person with a traditionally “masculine” name such as “Alex” as a person with a traditionally “feminine” name such as “Emily.”

ANS: C DIF: 2 REF: 19-2 NAT: Reflective LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical

28. A study of segregated streetcars in the southern United States in the early twentieth century found

which of the following? a. Firms that ran the streetcars were more interested in segregating customers by race than

profits. b. The firms that ran the streetcars were unanimous in their support of laws that required

segregation of races. c. Before the passage of laws that mandated segregation of races on streetcars, segregation of

smokers and nonsmokers was more common than segregation of races. d. Segregation based on gender was more common than race at first.

ANS: C DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Interpretive


29. Labor-market discrimination is evident when

a. wages of individuals differ on the basis of some recognizable attribute that is unrelated to productivity.

b. wage rates differ for similar jobs. c. consumers prefer to shop at some stores, and not at others. d. wages reflect workers’ human capital.

ANS: A DIF: 1 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Definitional

30. Discrimination occurs when the marketplace offers different opportunities to similar individuals

who differ only by a. race. b. level of education. c. attitudes toward risk. d. attitude toward the tradeoff between labor and leisure.


31. By definition, there is discrimination when the marketplace offers different opportunities to similar

individuals who differ only by a. race, ethnic group, sex, age, or other personal characteristics. b. qualifications, experience, or job preferences. c. the levels of human capital. d. All of the above are correct.


32. Offering different opportunities to similar individuals who differ only by race, ethnic group, sex,

age, or other personal characteristics is called a. a compensating differential. b. an efficiency wage. c. discrimination. d. compensating variation.

ANS: C DIF: 1 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Definitional


33. Which of the following is an example of discrimination in the labor market?

a. Women earn less than men because women are more likely to be employed in occupations that pay less, such as elementary school teachers rather than electrical engineers.

b. Women earn less than men because women have, on average, fewer years of experience in the labor force because women, on average, periodically leave the labor force to raise children.

c. A pharmaceutical sales company pays women less than men because the company's customers, physicians and pharmacists, say that they prefer to deal with men rather than women.

d. All of the above are examples of discrimination.

ANS: C DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical


a. Differences in human capital may explain differences in wages between blacks and whites. b. Racial discrimination is the strongest explanation for differences in wages between blacks

and whites. c. Gender discrimination is the strongest explanation for differences in wages between blacks

and whites. d. None of the above statements is correct.

ANS: A DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Applicative

35. Suppose that an employer hires workers with brown hair and workers with blond hair. Each type of

worker has the same productivity. Which of the following is correct if the employer discriminates by offering blonde workers lower wages than brunette workers? a. The employer will be just as efficient as a nondiscriminating employer. b. The employer will face higher costs than firms that focus only on maximizing profits. c. The employer will immediately go out of business because discrimination is illegal. d. The employer will face union strikes.

ANS: B DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Interpretive

36. Evidence of differences in average wages of women compared to men

a. clearly illustrates differences in productivity between genders. b. provides conclusive evidence of discrimination on the basis of gender. c. is seldom used to provide evidence of discriminatory bias. d. does not provide conclusive evidence of discrimination.

ANS: D DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Applicative


37. Evidence of differences in average wages of black workers compared to white workers

a. does not alone provide conclusive evidence of discrimination. b. clearly indicates differences in productivity between races. c. is seldom used to provide evidence of discriminatory bias. d. clearly indicates discrimination on the basis of race.


38. Evidence of discrimination in labor markets

a. applies only to race and gender. b. is conclusively identified in large differences in average wages rates between men and

women. c. is difficult to verify by reference to differences in average wage rates. d. is more easily identified on the basis of race than gender.

ANS: C DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Applicative

39. Differences in human capital are likely to

a. be unrelated to wage rate differences across gender classifications, since both men and women are required to complete requirements for a high school diploma.

b. be most helpful in explaining age discrimination, but unhelpful in explaining race discrimination.

c. explain some of the differences in average wage rates across age classifications. d. explain all of the differences in average wage rates across gender classifications.


40. Economists generally agree that

a. human capital theory provides the best explanation of discriminatory practices. b. differences in average wages do not by themselves provide conclusive evidence about the

magnitude of discrimination effects in labor markets. c. discrimination is exclusively an economic, rather than political, phenomenon. d. most of the wage differentials observed in the U.S. economy are due to discrimination.



41. A natural correction to employer discrimination in market economies is the

a. threat of judicial review. b. profit motive. c. political process. d. union movement.


42. Firms that operate in competitive product markets and choose to practice discrimination in hiring

workers a. will survive if they increase production and garner a larger market share. b. will eventually earn zero economic profits. c. will survive as long as they are willing to have a smaller market share. d. are likely to eventually go out of business.


43. Evidence suggests that business owners are generally

a. interested in profits only when discrimination is illegal. b. more interested in discrimination than in making a profit. c. unable to determine the link between discrimination and profitability. d. more interested in making a profit than in discriminating against a particular group.


Scenario 19-3 In the small town of Hamilton, Montana, there is a local hardware store called Eddy's Hardware. There are only two types of workers who apply for jobs at Eddy's Hardware: cowboys and farm boys. Local politicians have received numerous complaints that Eddy's Hardware is practicing wage discrimination against cowboys. Eddy's Hardware denies the complaint and says the store is only trying to maximize profit.

44. Refer to Scenario 19-3. Which of the following statements would weaken the discrimination

complaint against Eddy's Hardware? a. Cowboys are more productive than farm boys. b. Cowboys work longer hours than farm boys and their effort is greater. c. Cowboys are generally less educated than farm boys in the field of hardware. d. All of the above would weaken the discrimination complaint.



45. Refer to Scenario 19-3. Which of the following statements would strengthen the discrimination

complaint against Eddy's Hardware? a. Farm boys call in sick to work more often than cowboys. b. Cowboys are less educated than farm boys, on average. c. Farm boys' experience with hardware generally exceeds cowboys' experience with

hardware. d. Many cowboys take six months per year off from work to compete in a rodeo circuit and

therefore have less on-the-job experience with a hardware store.

ANS: A DIF: 3 REF: 19-2 NAT: Reflective LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical

46. The fact that wage differentials continue to exist across different groups of workers leads economists

to believe that a. discrimination by customers is the most common type of economic discrimination. b. differences in human capital and job characteristics must be important in explaining the

differences in wages. c. firms apparently are not profit maximizers. d. the market has failed to properly allocate wages to different workers.


47. Business owners who care only about making money are

a. likely to discriminate against certain groups of workers. b. likely to be replaced by discriminating businesses. c. more concerned about racial discrimination than gender discrimination. d. at an advantage when competing against those who practice discrimination.



Scenario 19-4 Assume that the labor market for barbers is competitive and that it is differentiated into two groups: barbers who are bald (or going bald) and those who have a full head of hair. Assume that the barbers in this market have identical hair-cutting ability, regardless of whether they are bald or not. Currently the equilibrium wage in the bald barber market is lower than that in the nonbald market. Further assume that the market for haircuts is competitive.

48. Refer to Scenario 19-4. If consumers do not discriminate between bald barbers and barbers with

hair, then a. all barbershops now earn a normal economic profit. b. the difference in wages is able to be maintained since a haircut is not a homogeneous

good. c. barbershops that hire barbers with hair will be more profitable than those that don't. d. barbershops that hire bald barbers will be more profitable than those that don't.


49. Refer to Scenario 19-4. If consumers do not discriminate between bald barbers and barbers with

hair, then a. competitive pressure in the market for haircuts will eventually cause the equilibrium wage

in both markets to be identical. b. the equilibrium wage in the "bald" market will eventually fall. c. the equilibrium wage in the "hairy" market will eventually rise. d. wages in the market for barbers can never be in equilibrium.


50. Refer to Scenario 19-4. Competition in the market for haircuts is consistent with which of the

following statements? a. Firms hiring nonbald barbers will have a cost advantage, leading to an increase in the

demand for nonbald barbers. b. All firms that hire only bald barbers will go out of business. c. Firms hiring bald barbers will enter the market, increasing the demand for bald barbers. d. Firms hiring nonbald barbers will enter the market, increasing the demand for nonbald

barbers.



51. Refer to Scenario 19-4. If some consumers in the market for haircuts have a strong preference for

having their hair cut by a barber who is not going bald, then a. the difference in wages will eventually disappear since a haircut is a homogeneous good. b. barbershops that hire barbers with hair will be able to charge a higher price for a haircut to

those consumers who have a strong preference for barbers with hair. c. barbershops that hire barbers with hair will always be much more profitable. d. barbershops that hire bald barbers will always be much more profitable.

ANS: B DIF: 2 REF: 19-2 NAT: Reflective LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical

52. Empirical work that does not account for differences in the productivities of workers

a. is unlikely to find evidence of wage differentials. b. can provide strong evidence of labor market discrimination. c. is likely to misinterpret apparent evidence of labor market discrimination. d. is accepted as superior to empirical work that does correct for differences in productivity

of workers.


53. Attributing the gender wage gap to ongoing discrimination by employers will likely be incorrect

because a. some of the wage gap is explained by efficiency wages. b. differences in years of work experience likely lead to productivity differences between

men and women. c. compensating differentials usually lead to higher wages for women. d. All of the above are correct.

ANS: B DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Applicative

54. One of the problems with calculating the true amount of discrimination that takes place in the

market for labor is a. the inability to calculate wage differentials. b. the inability to see changes in the wage differentials over a period of time. c. the difficulty in measuring productivity differences between workers. d. the difficulty in measuring female labor-force participation.



Scenario 19-5 Billy works for the local piano moving company part-time after school. Billy has worked for the company for two years but still hasn't received a wage increase, even though newer employees have received raises. Billy has threatened his employer with a lawsuit if he doesn't get a raise in the next few weeks. Billy believes he is a victim of labor-market discrimination.

55. Refer to Scenario 19-5. Which of the following statements would weaken Billy's case against his

employer? a. Billy only works part-time; as a result, he has fewer hours of experience even though he

has been with the company for more years. b. Billy complains of lower back problems; as a result, he frequently gets the easy job of

holding the doors open while the movers carry the piano into the customer's house. c. The other employees have high school diplomas, but Billy did not graduate from high

school. d. All of the above statements would weaken Billy’s case.

ANS: D DIF: 2 REF: 19-2 NAT: Reflective LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical

56. Refer to Scenario 19-5. Why might an economist be skeptical of Billy's discrimination complaint?

a. Through antitrust laws, discriminating firms can be penalized with large fees. b. In a competitive market, employers pay employees based on their value to the firm. c. Discrimination leads to profit maximization. d. Only cost minimizers practice discrimination.

ANS: B DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical

57. Refer to Scenario 19-5. In a competitive market for piano movers, why might Billy's wage

differential persist? a. Billy workers harder than the other employees. b. Billy joins a labor union. c. Billy's amiable personality allows him to work well with his co-workers. d. Customers do not like Billy because he has a bad attitude.


58. Which of these instances would constitute labor-market discrimination? Pat receives a higher wage

than James. Pat and James are identical in all of their labor-market characteristics except that a. Pat is a college graduate, and James has only a high school diploma. b. Pat is a black , and James is white. c. Pat has 15 years of experience at her job, whereas James has only five years of experience. d. Pat is more willing to accept dangerous working conditions than James.



59. According to evidence provided by the U.S. government, the median black

a. woman is paid roughly the same as the median white woman. b. woman is paid roughly the same as the median black man. c. man is paid 22 percent less than the median white man. d. All of the above are correct.


60. Given that the median male is better paid than the median female, which of the following is a valid

explanation for wage differences? a. compensating differentials b. differences in human capital c. discrimination d. All of the above can be a partial explanation.


61. Which of the following can be used to help explain wage differences among different groups of

workers? a. human capital acquired through education b. human capital acquired through job experience c. compensating differentials d. All of the above can explain wage differences.


62. A consensus view among economists regarding the possibility of labor-market discrimination is that

a. most wage differences among groups are attributable to discrimination. b. many employers use compensating differentials to hide discriminatory practices. c. wage differences among groups are not sufficient by themselves to determine how much

discrimination there is. d. all wage differences among groups are attributable to differences in human capital and

compensating differentials.

ANS: C DIF: 2 REF: 19-2 NAT: Analytic LOC: Labor markets TOP: Labor-market discrimination MSC: Analytical


63. In what way do competitive markets have a "natural remedy" for discriminatory hiring practices?

a. Governments regulate to resolve problems of discrimination. b. Profit-maximizing firms that do not discriminate tend to replace firms that discriminate. c. Wages paid to groups that are victimized by discrimination are eventually bid up to above-

equilibrium levels. d. Discrimination is usually the outcome of rational decision-making processes, and

competitive markets produce rational outcomes.


64. If there is systematic discrimination against a group of workers, then the wage paid to those workers

likely will be a. lower due to a higher supply of workers in that group. b. lower due to a lower demand for workers in that group. c. higher due to a lower supply of workers in that group. d. higher due to a higher demand for workers in that group.


65. If employers are profit-maximizers, then

a. competition will always eventually eliminate employment discrimination. b. employment discrimination may persist if consumers discriminate. c. employment discrimination will persist because it is always profitable. d. compensating differentials cannot exist.


66. In the country of Freedonia, men and women have the same level of education and choose different

forms of work in the same proportions. The only real difference is that men typically stay home to raise young children, returning to the work force after their children enter elementary school. If no discrimination exists, then we would expect that, on average, a. women would earn less than men. b. women would earn more than men. c. men and women would earn the same wage. d. wage differences between men and women would be due to differences in beauty.



67. People who grew up in the western part of Aquilonia have an accent distinct from people who grew

up in the eastern part of the country. People from the west also receive lower wages than people from the east. From this information alone, we can conclude that it is possible that a. discrimination against people from the west exists. b. people from the east receive compensating differentials. c. people from the west have lower levels of human capital. d. All of the above could be correct.


68. In discussing discrimination and the wage differences that exist between men and women and

between blacks and whites, it has been said that "the disease is political even if the symptom is economic." What does this mean? a. Wage differences persist because the political system has failed to enact laws to equalize

wages among all groups. b. Wage differences exist because of past discrimination on the part of political bodies such

as city councils and school boards. c. Wage differences exist because of the differences in the political views of the different

groups. d. Wage differences exist because the political system is biased against paying compensating

differentials.


69. A study conducted by economists Marianne Bertrand and Sendhil Mullainathan found evidence of

labor-market discrimination based on which of the following findings? a. Restaurant customers preferred to be waited on by white waitresses than by black

waitresses. b. Black basketball players earned more than white basketball players. c. Employers were more likely to request interviews with job applicants with “white” names

such as Greg than from applicants with “black” names such as Jamal. d. Employers were more likely to request interviews with job applicants with “masculine”

names such as Mark than from applicants with “feminine” names such as Lisa.



70. Suppose that consumers suddenly prefer to do business with left-handed workers instead of right-

handed workers. We would expect that the marginal revenue product of a. left-handed workers would rise, which would increase the demand for left-handed

workers. This will increase the number of left-handed workers employed, which will in turn increase the marginal product of left-handed workers.

b. left-handed workers would rise, which would increase the demand for left-handed workers. This will increase the number of left-handed workers employed, which will in turn reduce the marginal product of left-handed workers.

c. right-handed workers would rise, which would increase the demand for right-handed workers. This will increase the number of right-handed workers employed, which will in turn increase the marginal product of right-handed workers.

d. right-handed workers would fall, which would reduce the demand for right-handed workers. This will reduce the number of right-handed workers employed, which will in turn reduce the marginal product of right-handed workers.

ANS: B DIF: 3 REF: 19-2 NAT: Reflective LOC: Labor markets TOP: Labor-market discrimination | Marginal product of labor MSC: Analytical

71. In the early twentieth century, streetcars in many southern cities were segregated by race. This racial

segregation was the result of a. laws that required such segregation. b. long-standing southern traditions about which the law was silent. c. streetcar firms trying to maximize profits. d. streetcar firms trying to minimize costs.


72. The case study of segregated street cars in southern cities illustrates which of the following?

a. Racial discrimination in the seating areas was an important catalyst in the Civil Rights movement.

b. Segregation laws were supported by local business owners as well as patrons. c. Firms usually care more about maximizing profits than discriminating against certain

customers. d. Racial discrimination was a precursor to gender discrimination.


73. In the early 20th century, streetcar seating which was segregated by race

a. was a result of economic discrimination by railroad company managers. b. was less profitable than streetcar seating that didn't have restrictions. c. was strongly supported by private streetcar companies. d. led to higher revenue and lower costs for streetcar companies.



74. In the early twentieth century, racial segregation of streetcars in the southern cities was largely

opposed by a. streetcar firms. b. government officials. c. Sherman antitrust laws. d. consumers.


75. The example of segregated streetcars in the southern United States in the early twentieth century is

one example of a. racial discrimination by firms, despite government efforts to halt it. b. racial discrimination by firms with no government action either to halt it or to support it. c. government-mandated racial discrimination. d. a failure to find any discrimination where most would expect to find it.


76. Some discriminatory hiring practices can be expected, even if markets are competitive, as a result of

a. unrestricted entry and exit in markets. b. lower costs of hiring. c. a perfectly elastic market demand. d. customer preferences.


77. If firms are competitive, then labor-market discrimination

a. cannot exist in either the short run or the long run. b. will be more of a problem than if the market were monopolistic or imperfectly

competitive. c. likely will not be a long-run problem unless customers exhibit discriminatory preferences

or government maintains discriminatory policies. d. likely will be more of a problem in the long run than in the short run due to the zero-profit

condition that characterizes long-run equilibrium for competitive firms.



78. A competitive market may be consistent with a discriminatory wage differential if

a. firms' customers have discriminatory preferences. b. the wage differential is explained by a compensating differential. c. the wage differential is explained by differences in human capital. d. All of the above are correct.


79. Discrimination may persist even in competitive markets when the source of the discrimination is

a. employer prejudice. b. customer prejudice. c. wage prejudice. d. employee prejudice.



a. If a firm discriminates by paying short workers less than tall workers, the firm may be able to compete in the market if the firm's customers also prefer taller workers to shorter workers.

b. If the government passes regulations that prevent shorter workers from working in higher paying jobs, taller workers may continue to earn higher wages than shorter workers.

c. Government regulation that prohibits discrimination is economically necessary because market forces support discrimination.

d. Competitive markets will eliminate discrimination in wages over time unless customer preferences also reflect discrimination and/or government intervention promotes discrimination.

ANS: C DIF: 2 REF: 19-2 NAT: Reflective LOC: Labor markets TOP: Labor-market discrimination MSC: Applicative

81. Evidence from a study of the market for baseball players using 1960s data

a. indicated that sports with strong player associations are unlikely to experience wage discrimination.

b. suggested that government regulation had eliminated most evidence of wage discrimination.

c. found some evidence of consumer-driven wage discrimination. d. found that measurement of marginal productivity was very difficult for baseball players.



82. Evidence from a 1988 study of the market for professional basketball players

a. found no evidence of consumer-driven wage discrimination. b. found some evidence of consumer-driven wage discrimination. c. found that measurement of marginal productivity was very difficult for basketball players. d. indicated that sports with strong player associations are unlikely to experience wage

discrimination.


83. A 1990 study of the market for collectable baseball cards suggested

a. there was no evidence of price discrimination on the basis of player position (hitter versus pitcher).

b. markets in which the product price is low are not typically characterized by consumer-driven race discrimination.

c. cards for white players (both hitters and pitchers) were 10 to 13 percent higher than those for comparable black players.

d. cards for black players (both hitters and pitchers) were 10 to 13 percent higher than those for comparable white players.


84. Studies of professional sports teams suggest that, in sports, racial discrimination is

a. rare. b. common and that owners of teams are largely to blame. c. common and that customers (fans) are largely to blame. d. None of the above is correct; there are no reliable studies of discrimination in sports due to

the difficulties inherent in measuring athletes' productivity.


85. Regarding wage differences among various groups of workers — blacks and whites, men and

women, etc. — most economists believe that a. no such differences are evident from the available data. b. most of the differences are attributable to discrimination. c. some of the wage differences are attributable to discrimination, but there is disagreement

about how much. d. none of the differences are attributable to discrimination.

ANS: C DIF: 1 REF: 19-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination | Wages MSC: Interpretive


86. It is likely that, if we could measure the quality as well as the quantity of education,

a. the human-capital argument would become less compelling as a means of explaining wage differentials between white workers and black workers.

b. the human-capital argument would become less compelling as a means of explaining wage differentials between male workers and female workers.

c. wage differentials between white workers and black workers would be more puzzling than they are now.

d. wage differentials between white workers and black workers would be more fully explained.

ANS: D DIF: 2 REF: 19-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination | Wages MSC: Interpretive

87. Men and women tend to choose different types of occupations, and so

a. a source of wage differences between men and women is differences in human capital. b. a source of wage differences between men and women is compensating differentials. c. the gap between the earnings of men and the earnings of women is likely even more

significant than the data alone indicate. d. we should expect the earnings of women to rise relative to the earnings of men, in order to

induce women to accept jobs that they have been reluctant to accept in the past.

ANS: B DIF: 2 REF: 19-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination | Wages MSC: Interpretive

88. Assume men, on balance, have lower amounts of human capital than women have. Then we would

expect a. the demand for female labor to be lower than the demand for male labor. b. the demand for female labor to be higher than the demand for male labor. c. the supply of female labor to be lower than the demand for male labor. d. the supply of female labor to be higher than the supply of male labor.


89. Some economists are skeptical of the argument that employers are responsible for discriminatory

wage differences. They argue that market economies provide a natural remedy to employer discrimination, and that remedy is a. social responsibility. b. the profit motive. c. fear of reprisal from groups that suffer from those wage differences. d. fear of reprisal from government in the form of prosecution.



90. Studies of discrimination in baseball suggest that black players

a. suffered from discriminatory wage differentials several decades ago and those wage differentials persist today.

b. suffered from discriminatory wage differentials several decades ago but those wage differentials have been eliminated.

c. did not suffer from discriminatory wage differentials several decades ago but in recent years wage differentials have become evident.

d. did not suffer from discriminatory wage differentials in the past and they do not suffer from wage differentials today.


91. Economists argue competitive markets provide a “natural remedy” to discriminatory wage practices.

Which of the following is widely recognized as a potential limit to the effectiveness of that natural remedy? a. Some workers are members in unions. b. Some firms pay efficiency wages; others do not. c. Some customers are discriminatory in their buying habits. d. Some employees have accumulated more human capital than other employees.

ANS: C DIF: 2 REF: 19-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination | Wages MSC: Interpretive

92. It is argued that competitive markets provide a “natural remedy” to discriminatory wage practices.

Which of the following is widely recognized as a potential limit to the potency of that natural remedy? a. Governments sometimes mandate discriminatory practices. b. Some employees have a lot of job experience; others have little job experience. c. In a discriminatory environment, a competitive firm that takes prices and wages as given

has nothing to gain from any particular choice it makes regarding who to hire or which customers to serve.

d. Not all firms exhibit social responsibility in sufficient measure to counter discriminatory wage practices.

ANS: A DIF: 2 REF: 19-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination | Wages MSC: Interpretive


93. In the presence of discrimination by customers,

a. market forces nevertheless always work to prevent discriminatory wage differentials. b. discriminatory wage differentials can exist, but only if firms refrain from maximizing their

profits. c. discriminatory wage differentials can exist, but only if government reinforces customers’

practices by passing laws that mandate discrimination. d. discriminatory wage differentials can exist, even in the absence of discriminatory practices

by firms or by government.

ANS: D DIF: 2 REF: 19-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination | Wages MSC: Interpretive

1760

Chapter 20

Income Inequality and Poverty

TRUE/FALSE

1. The poverty line is set by the government so that 10 percent of all families fall below that line and

are thereby classified as “poor.”

ANS: F DIF: 1 REF: 20-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Poverty line MSC: Definitional

2. The United States has more income inequality than Japan, Germany, and Canada.

ANS: T DIF: 1 REF: 20-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Income inequality MSC: Definitional

3. The United States has more income inequality than Brazil and South Africa.

ANS: F DIF: 1 REF: 20-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Income inequality MSC: Definitional

4. Standard measurements of the degree of income inequality take both money income and in-kind

transfers into account.

ANS: F DIF: 2 REF: 20-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: In-kind transfers | Income inequality MSC: Definitional

5. John Rawls, who developed the way of thinking called liberalism, argued that government policies

should be aimed at maximizing the sum of utility of everyone in society.

ANS: F DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utility MSC: Interpretive

6. One existing government program that works much like a negative income tax is the Earned Income

Tax Credit.

ANS: T DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Interpretive

Chapter 20/Income Inequality and Poverty 1761

7. One existing government program that works much like a negative income tax is Medicaid.

ANS: F DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Interpretive

8. The invisible hand of the marketplace acts to allocate resources efficiently, but it does not

necessarily ensure that resources are allocated fairly.

ANS: T DIF: 1 REF: 20-0 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Applicative

9. When the government enacts policies to make the distribution of income more equitable, it distorts

incentives, alters behavior, and makes the allocation of resources less efficient.

ANS: T DIF: 1 REF: 20-0 NAT: Analytic LOC: The role of government TOP: Income inequality MSC: Applicative

10. In the United States in 2005, the bottom fifth of the income distribution had incomes below $19,250.

ANS: F DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Applicative

11. The top 5 percent of U.S. annual family income in 2005 was $184,500 or more.


12. A U.S. family earning $80,000 would be in the top 20 percent of income distribution in 2005.


13. Free trade and economic growth have reduced poverty worldwide.

ANS: T DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty MSC: Applicative

14. Although globalization has reduced income inequality, the number of people living in extreme

poverty has remained unchanged.

ANS: F DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty MSC: Interpretive

1762 Chapter 20/Income Inequality and Poverty

15. The measured poverty rate may not reflect the true extent of economic deprivation because it does

not include some forms of government assistance.

ANS: T DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Applicative

16. The poverty line is an absolute standard and is based on the cost of providing an adequate diet.

ANS: T DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Definitional

17. The poverty line is based on the percentage of people who cannot afford an adequate diet.

ANS: F DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Interpretive

18. The poverty rate is a measure of people unable to meet the government’s poverty line.

ANS: T DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Interpretive

19. The elderly represent the largest demographic group in poverty.

ANS: F DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty MSC: Applicative

20. About half of black and Hispanic children in female-headed households live in poverty.

ANS: T DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty MSC: Applicative

21. The economic life cycle describes how young people usually have higher savings rates than middle-

aged people.

ANS: F DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Applicative

22. Many economists believe that a family bases its spending decisions on its permanent, or average,

income rather than on transitory income.

ANS: T DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Applicative


23. About four out of five millionaires in the United States earned their money rather than inherited it.

ANS: T DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Applicative

24. Fewer than three percent of families are poor for eight or more years.

ANS: T DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Applicative

25. Utilitarians believe that the proper goal of the government is to maximize the sum of the utilities of

everyone in society.

ANS: T DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utilitarianism MSC: Interpretive

26. The utilitarian justification for redistributing income is based on the assumption of diminishing

marginal utility.

ANS: T DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utilitarianism MSC: Interpretive

27. If a government could successfully achieve the maximin criterion, each member of society would

have an equal income.

ANS: F DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Liberalism MSC: Interpretive

28. According to libertarians, the government should redistribute income from rich individuals to poor

individuals to achieve a more equal distribution of income.

ANS: F DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Libertarianism MSC: Interpretive

29. Libertarians believe that the government should enforce individual rights to ensure that all people

have the same opportunities to use their talents to achieve success.

ANS: T DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Libertarianism MSC: Interpretive


30. The poverty rate is an absolute level of income set by the federal government for each family size

below which a family is deemed to be in poverty.

ANS: F DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate, Poverty line MSC: Definitional

31. An income distribution may not give an accurate picture of families’ standards of living because it

does not include in-kind transfers.

ANS: T DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Interpretive

32. A goal of libertarians is to provide citizens with equal opportunities rather than to ensure equal

outcomes.

ANS: T DIF: 2 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Libertarianism MSC: Interpretive

33. Temporary Assistance for Needy Families (TANF) is an example of a negative income tax program.

ANS: F DIF: 2 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Welfare MSC: Applicative

34. When poor families in developing countries experience an increase in family income, their children

supply fewer hours of labor.

ANS: T DIF: 2 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Child labor MSC: Applicative

35. Education is the most important factor explaining reductions in child labor in Vietnam.

ANS: F DIF: 2 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Child labor MSC: Applicative

36. Internet access is the most important factor explaining reductions in child labor in Vietnam.

ANS: F DIF: 2 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Child labor MSC: Applicative


37. Since 1959 the United States’ income distribution has become more equal.


38. In 2005 the top fifth of income earners accounted for over 50% of all income received by United

States’ families.


39. In 2005 the top 5 percent of income earners accounted for over 50% of all income received by

United States’ families.


40. From 1935 to 2005 the share of total income earned by the bottom fifth of income earners rose and

then fell.


SHORT ANSWER

1. Explain the relationship between labor earnings and the distribution of income.

ANS: A person's earnings depend on the supply and demand for that person's labor, which in turn depends on natural ability, human capital, compensating differentials, discrimination, and so on. Because labor earnings make up about three-fourths of the total income in the U.S. economy, the factors that determine wages are also largely responsible for determining how the economy's total income is distributed among the various members of society.

PTS: 1 DIF: 1 REF: 20-0 TOP: Income inequality MSC: Interpretive


2. What is meant by a perfectly equal distribution of income? Use a graph to depict such a situation.

ANS:

If income were equally distributed across all families, each one-fifth of families would receive one-fifth of income. That is, 20 percent of all families would receive 20 percent of all income, 60 percent of all families would receive 60 percent of all income, etc.

PTS: 1 DIF: 2 REF: 20-1 TOP: Income inequality MSC: Analytical

3. Given the table shown, which country has a more equal income distribution? Explain your answer.

Country Bottom Fifth Second Fifth Middle Fifth Fourth Fifth Top Fifth

Country A 9.0% 13.5% 17.5% 22.9% 37.1%

Country B 4.8% 10.5% 16.0% 23.5% 45.2%

ANS: Country A has a more equal income distribution. If income were equally distributed across all families, each one-fifth of families would receive one-fifth of income. Country A is closer to that situation than Country B.

PTS: 1 DIF: 2 REF: 20-1 TOP: Income inequality MSC: Interpretive


4. Explain what information is contained in the poverty rate statistic. Are there problems in using an

absolute scale to measure poverty? If so, explain them.

ANS: The poverty rate is the percentage of the population whose family income falls below an absolute level called the poverty line. The poverty line is set by the federal government at roughly three times the cost of providing an adequate diet. There are several problems associated with measuring poverty using an absolute scale. For example, the cost of living may differ across broad geographic regions. Families may be better off than their income level indicates if they receive in-kind transfers. Finally, it is very difficult to measure a true "standard of living."

PTS: 1 DIF: 2 REF: 20-1 TOP: Poverty rate | Poverty line MSC: Analytical

5. Compare and contrast the "life cycle" hypothesis and the "permanent income" hypothesis. What are

their respective implications for inequality in the income distribution?

ANS: Life-cycle variation in income suggests that people’s spending patterns vary less over their lifetimes than their income patterns. Young people may borrow so that they can spend more than they earn. An example of this would be a young person borrowing to go to college, buy a car, or buy a house. Annual earnings peak around age 50. Not surprisingly, many people save more in middle-age than at other times in their life. Their savings allow them to pay off the debts incurred when they were younger and to put away money that they will use to supplement their incomes once they retire. The permanent income hypothesis tries to account for random and transitory forces that affect income. People may borrow when they experience a temporary reduction in income and may save unexpected increases in income (e.g. a holiday bonus from an employer). The two theories are not mutually exclusive. Both theories would indicate that standard measures of income distribution overstate inequality in the distribution of well-being.

PTS: 1 DIF: 2 REF: 20-1 TOP: Economic life cycle MSC: Interpretive

6. Explain the concept of diminishing marginal utility, and describe the role that it plays in the

utilitarian argument for the redistribution of income.

ANS: Diminishing marginal utility refers to the principle that as a person's income rises, the extra well-being derived from an additional dollar of income falls. The utilitarian argument of redistribution from rich to poor hinges on the fact that a dollar of additional income to the poor is valued more than a dollar of additional income to the rich. If this is not true, then the transfer from rich to poor would actually reduce the well-being of society.

PTS: 1 DIF: 2 REF: 20-2 TOP: Diminishing marginal utility | Utilitarianism MSC: Interpretive


7. Explain how a "leaky bucket" can be used to illustrate the utilitarian argument that governments

should not attempt to completely equalize individual incomes.

ANS: Utilitarians reject complete equalization of income because they believe that people respond to incentives. As such, redistribution will reduce some people’s work efforts, which can actually lead to less total income generated in the economy. If the government attempts to redistribute income from the rich to the poor through taxes, some of the money will be lost due to the distorted incentives and deadweight losses associated with the taxes. We can think of the government as transporting the redistributed income in a “leaky bucket.”

PTS: 1 DIF: 2 REF: 20-2 TOP: Utilitarianism MSC: Interpretive

8. Briefly describe the three prominent schools of thought in political philosophy. Identify one of the

most well-known philosophers in each school.

ANS: According to utilitarianism, the government should choose policies to maximize the total utility of society by attempting to achieve a more equal distribution of income. Jeremy Bentham and John Stuart Mill were the founders. According to liberalism, the government should choose policies deemed to be just, as evaluated by an impartial observer behind a "veil of ignorance." The main decision-making rule is called the maximin criterion, which says that the government should aim to maximize the well-being of the worst-off person in society. John Rawls developed the liberalism philosophy in his book A Theory of Justice. According to libertarianism, the government should punish crimes and enforce voluntary agreements but not redistribute income that was fairly earned (not stolen). Libertarians argue that society itself earns no income; only individual members of society earn income. Robert Nozick was a libertarian.

PTS: 1 DIF: 2 REF: 20-2 TOP: Income redistribution MSC: Analytical


9. The table below reflects the levels of total utility received from income for each of four members of

a society.

Income Peter Paul Mary Jane $1 15 32 20 16

$2 29 61 38 30

$3 42 87 54 42

$4 54 110 68 52

$5 65 130 80 60

$6 75 147 90 66

$7 84 161 98 70

$8 92 172 103 72

a. Assume that the society has the following income distribution:

Peter $3 Paul $7 Mary $5 Jane $3 Is it possible for the government to increase total aggregate utility by redistributing income among members of society? Explain your answer.

b. Assume that the government has $19 to allocate among the four members of society. (Assume that no one has any income to start with.) If the government is interested in distributing income in a way that maximizes aggregate total utility, how should it distribute the $19 of income?

c. Does the table above describe a situation characterized by diminishing marginal utility? Explain your answer.

ANS:

a. No. If a dollar is taken from anyone, the possible net gain in utility to any other person is less than or equal to the loss incurred by the person it is taken from.

b. Peter $4 Paul $7 Mary $5 Jane $3

c. Yes. Marginal utility declines as income increases for each person.

PTS: 1 DIF: 3 REF: 20-3 TOP: Income redistribution MSC: Analytical


10. Assume that the government proposes a negative income tax that calculates taxes owed by the

following formula, Taxes Owed = (1/3 Income) - $10,000. Compute the tax that would be owed given each level of income.

a. $120,000 b. $90,000 c. $60,000 d. $30,000 e. $0

ANS:

a. $30,000 b. $20,000 c. $10,000 d. $0 e. No taxes will be owed. Instead, the family/person would receive a subsidy of $10,000

PTS: 1 DIF: 3 REF: 20-3 TOP: Negative income tax MSC: Analytical

11. Assume that the government proposes a negative income tax that calculates taxes owed by the

formula, Taxes Owed = (a Income) - b. A family with an income of $40,000 pays $5,000 in taxes, and a family with an income of $12,000 receives an income subsidy of $2,000. a. What is the value for “a”? b. What is the value for “b”? c. What is the tax liability of a family with an income of $50,000? d. At what level of income will a family neither pay taxes, nor receive an income subsidy?

ANS:

a. 0.25 or 25% b. $5,000 c. $7,500 d. $20,000

PTS: 1 DIF: 3 REF: 20-3 TOP: Negative income tax MSC: Analytical


12. Explain what is meant by "in-kind transfer" programs. Briefly outline the advantages and

disadvantages of an in-kind transfer program.

ANS: An in-kind transfer program distributes specific goods and services to individuals who meet some criteria of need based on income. Examples of such programs include food stamps, Medicaid, and the distribution of toys and other presents during the Christmas season. Advocates of in-kind transfers argue that such transfers ensure that the poor receive assistance that is focused on basic needs such as food and medical care. Because the programs are restrictive, society is somewhat reassured that recipients are not spending their benefits on unproductive addictions such as alcohol. Advocates of cash payments argue that in-kind transfers are inefficient because the government does not know what goods and services the poor need most.

PTS: 1 DIF: 1 REF: 20-3 TOP: In-kind transfers MSC: Applicative

13. Assume you are a critic of welfare reforms that impose a time limit on the number of years a person

is eligible for welfare benefits. What is the foundation of your critique?

ANS: The critique is based on the premise that most people on welfare would not make a "choice" to pursue a life on welfare if it were not thrust upon them. As such, we have an obligation to help them as long as there is demonstrated need.

PTS: 1 DIF: 1 REF: 20-3 TOP: Welfare MSC: Applicative

14. Outline the possible work disincentives created by anti-poverty programs. Is there a way to solve

this problem without causing other forms of inefficiency to arise? Explain your answer.

ANS: A high marginal tax rate exists on welfare transfers. There is inherently a trade-off between burdening the poor with a high effective marginal tax rate and burdening taxpayers with costly programs to reduce poverty.

PTS: 1 DIF: 2 REF: 20-3 TOP: Welfare MSC: Analytical


Sec 00--Income Inequality and Poverty

MULTIPLE CHOICE

1. A government's policy of redistributing income makes the income distribution

a. more equal, distorts incentives, alters behavior, and makes the allocation of resources more efficient.

b. more equal, distorts incentives, alters behavior, and makes the allocation of resources less efficient.

c. less equal, distorts incentives, alters behavior, and makes the allocation of resources more efficient.

d. less equal, distorts incentives, alters behavior, and makes the allocation of resources less efficient.

ANS: B DIF: 1 REF: 20-0 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Applicative

2. In the United States, labor earnings are what percent of total income?

a. 75 percent b. 70 percent c. 65 percent d. 50 percent

ANS: A DIF: 1 REF: 20-0 NAT: Analytic LOC: Efficiency and equity | The study of economics, and definitions of economics TOP: Income inequality MSC: Definitional

3. Which of the following is most likely to occur when the government enacts policies to make the

distribution of income more equal? a. A more efficient allocation of resources. b. A distortion of incentives. c. Unchanged behavior. d. All of the above are correct.


4. The invisible hand of the marketplace acts to allocate resources

a. efficiently but does not necessarily ensure that resources are allocated fairly. b. both fairly and efficiently. c. fairly but does not necessarily ensure that resources are allocated efficiently. d. neither fairly nor efficiently.

ANS: A DIF: 1 REF: 20-0 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Applicative


5. The marketplace allocates resources

a. fairly. b. efficiently. c. to those desiring them least. d. both efficiently and equitably.


6. When the government redistributes income to achieve greater equality, it

a. distorts incentives. b. improves efficiency. c. focuses on middle income brackets. d. relies on foreign aid to help balance the budget.

ANS: A DIF: 1 REF: 20-0 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Interpretive

7. Government programs that take money from high-income people and give it to low-income people

typically a. improve economic efficiency by reducing poverty. b. reduce economic efficiency because they distort incentives. c. have no effect on economic efficiency because they both reduce poverty and distort

incentives. d. sometimes improve, sometimes reduce, and sometimes have no effect on economic

efficiency.

ANS: B DIF: 2 REF: 20-0 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Interpretive

8. In the U.S. economy, labor earnings make up about

a. one-half of total income. b. two-thirds of total income. c. three-fourths of total income. d. nine-tenths of total income.

ANS: C DIF: 1 REF: 20-0 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Income | Labor MSC: Definitional


9. When the government enacts policies to redistribute income,

a. the objective is to enhance efficiency and a side effect is that the allocation of resources becomes more equal.

b. the objective is to enhance efficiency and a side effect is that the allocation of resources becomes less equal.

c. the objective is to enhance equality and a side effect is that the allocation of resources becomes more efficient.

d. the objective is to enhance equality and a side effect is that the allocation of resources becomes less efficient.

ANS: D DIF: 2 REF: 20-0 NAT: Analytic LOC: Efficiency and equity TOP: Efficiency | Equity MSC: Interpretive

10. Which of the following is correct?

a. Governments can never improve market outcomes. b. Governments can sometimes improve market outcomes. c. Governments can always improve market outcomes. d. Government can never make the income distribution more equal.

ANS: B DIF: 1 REF: 20-0 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Income inequality MSC: Definitional

11. Which of the Ten Principles of Economics do governments run into when they redistribute income

to achieve greater equality? a. Trade can make everyone better off. b. The cost of something is what you give up to get it. c. People face trade-offs. d. Markets are usually a good way to organize economic activity.

ANS: C DIF: 1 REF: 20-0 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Ten principles of economics MSC: Definitional

12. Which of the Ten Principles of Economics come into conflict with each other in this chapter?

a. A country’s standard of living depends on its ability to produce goods & People face tradeoffs.

b. Prices rise when the government prints too much money & Governments can sometimes improve market outcomes.

c. Governments can sometimes improve market outcomes & People face tradeoffs. d. People face tradeoffs & Prices rise when the government prints too much money .

ANS: C DIF: 1 REF: 20-0 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Ten principles of economics MSC: Definitional



The Measurement of Inequality

MULTIPLE CHOICE

1. Governments enact policies to

a. make the distribution of income more efficient. b. make the distribution of income more equal. c. maximize the use of the welfare system. d. minimize the use of in-kind transfers.


2. A family’s ability to buy goods and services depends largely on its

a. permanent income, which is its normal, or average, income. b. permanent income, which is the lowest annual income the family has received over a 10-

year period. c. transitory income, which is the measure of income used by the government to analyze the

distribution of income and the poverty rate. d. transitory income, which is its money income plus any in-kind transfers it receives.

ANS: A DIF: 2 REF: 20-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Consumption | Income MSC: Interpretive

3. Which of the following is not a question that economists try to answer when measuring the

distribution of income? a. How many people live in poverty? b. How often and how large are people’s raises? c. How often do people move among income classes? d. What problems arise in measuring the amount of inequality?


4. Economists study poverty and income inequality in order to answer which of the following

questions? a. What are people's wages? b. How does labor-force experience affect wages? c. How much inequality is there in society? d. How do people adjust their behavior due to taxation?

ANS: C DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Applicative


5. Comparing the United States household income distribution to other countries is

a. easy, because data is available for all countries in the world. b. easy, because some countries collect data on expenditures instead of incomes. c. problematic, because international agreements require countries to standardize their

income accounting procedures. d. problematic, because countries collect data in different ways.

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Interpretive

6. The income distribution in the United States shows that the income share of the top fifth of all

families is a. over 50 percent. b. around 25 percent. c. more than 10 times the income of the bottom fifth. d. not much different from the income of the top 5 percent.

ANS: C DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Interpretive

7. Based on data from 2005, the top fifth of all families received approximately what percent of all

income in the United States? a. 78 percent b. 48 percent c. 21 percent d. 4 percent


8. Based on U.S. income data from 2005, the bottom fifth of all families received approximately what

percent of all income? a. 48 percent b. 21 percent c. 10 percent d. 4 percent

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality MSC: Applicative


9. Based on U.S. income data from 2005, the top fifth of all families received

a. the same share of income as the bottom fifth. b. twice as much income as the bottom fifth. c. approximately 5 times more income than the bottom fifth. d. more than 10 times more income than the bottom fifth.


10. U.S. income data over the last seventy years suggests that the distribution of income

a. has gradually become more equal over the entire time period. b. has gradually become less equal over the entire time period. c. gradually became less equal until about 1970, then became more equal from 1970 to 2005. d. gradually became more equal until about 1970, then became less equal from 1970 to 2005.


11. In 2005, what percentage of U.S. families had income levels below $103,100?



12. In 2003, what percentage of U.S. families had income levels above $103,100?



13. Which of the following is not correct?

a. Poverty is long-term problem for relatively few families. b. Measurements of income inequality usually do not include in-kind transfers. c. Measurements of income inequality use lifetime incomes rather than annual incomes. d. Measurements of income inequality would be more meaningful if they reflected

permanent rather than current income.



14. Which of the following represents a problem in measuring inequality?

a. Measurements of income distributions typically include in-kind transfers, which distort the measure of inequality.

b. A normal life-cycle pattern causes inequality in the income distribution but may not reflect inequality in living standards.

c. Transitory income is a better measure of inequality than permanent income. d. Both a and b are correct.


15. If income were equally distributed among households,

a. each household's relative share of income would increase. b. each household's relative share of income would decrease. c. the top fifth of households would have 50 percent of the income. d. 50 percent of the households would receive exactly 50 percent of the income.


16. Which of the following does not explain the rise in income inequality from 1970 to 2005?

a. Changes in technology. b. An increase in minimum wages. c. A reduction in the demand for unskilled labor. d. Increased international trade with low-wage countries.


17. Which of the following explains the rise in income inequality from 1970 to 2005?

a. An increase in minimum wages. b. An increase in the demand for skilled labor. c. An increase in the demand for unskilled labor. d. Reduced international trade with low-wage countries.



Table 20-1

Group Annual Family Income

Top Quartile (25%) $85,000 and over

Second Quartile $50,000 to $84,999

Third Quartile $28,000 to $49,999

Bottom Quartile Under $28,000

18. Refer to Table 20-1. Seventy-five percent of all families have incomes below what level?

a. $28,000 b. $50,000 c. $85,000 d. There is insufficient information to answer this question.


19. Refer to Table 20-1. Fifty percent of all families have incomes below what level?

a. $28,000 b. $50,000 c. $85,000 d. There is insufficient information to answer this question.


20. When we compare the income distribution of the United States to those of other countries, we find

that the U.S. a. has one of the most unequal income distributions. b. has one of the most equal income distributions. c. ranks in the middle of the group. d. is second to China as the most unequal distribution.



Table 20-2 Percentage of Before-Tax Income Received by Families in Hapland

Group Percentage of

Family Income

in 2000

Percentage of

Family Income

in 1950

Top Fifth 50.7 45.9

Fourth Fifth 26.9 25.8

Middle Fifth 12.1 13.6

Second Fifth 6.2 7.2

Bottom Fifth 4.1 5.5

21. Refer to Table 20-2. According to the table, from 1950 to 2000, Hapland income distribution

became a. less equal. b. more equal. c. more equal at the lowest level of income but less equal at highest level of income. d. less equal at the lowest level of income but more equal at highest level of income.


Table 20-3 The Distribution of Income in Hapland

Group Annual Family Income

Top Fifth $120,000 and over

Fourth Fifth $90,000 - 119,999

Middle Fifth $60,000 - 89,999

Second Fifth $45,000 - 59,999

Bottom Fifth Under $45,000

22. Refer to Table 20-3. According to the table, what percent of families in Hapland have income

levels below $90,000? a. 20 percent. b. 40 percent. c. 60 percent. d. 80 percent.



23. Refer to Table 20-3. According to the table, what percent of families in Hapland have income

levels above $60,000? a. 80 percent b. 60 percent c. 50 percent d. 40 percent


24. Refer to Table 20-3. Where would the government in Hapland set the poverty line to have a

poverty rate of 40 percent? a. $45,000. b. $60,000. c. $90,000. d. $120,000.

ANS: B DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Applicative

25. The country that has the highest degree of income inequality is

a. Japan. b. Brazil. c. South Africa. d. the United States.


26. The country that has the most income equality is

a. Japan. b. Brazil. c. South Africa. d. the United States.


27. The United States has more income inequality than

a. Brazil. b. Mexico. c. Canada. d. South Africa.



28. The United States has less income inequality than

a. Japan. b. Canada. c. Germany. d. South Africa.


29. On average, the distribution of income tends to be

a. random across richer and poorer countries. b. similar between richer and poorer countries. c. less equal in richer countries than in poorer countries. d. more equal in richer countries than in poorer countries.


30. The United States has relatively greater income

a. inequality than developing countries but greater equality than other developed countries. b. inequality than both developing and other developed countries. c. equality than developing countries but greater inequality than other developed countries. d. equality than both developing and other developed countries.


31. When we examine historical data on income inequality in the U.S., we see that the distribution of

income gradually became a. more equal between 1935 and 2005. b. more equal between 1935 and 1973, but that trend reversed itself between 1973 and 2005. c. more unequal between 1935 and 1973, but that trend reversed itself between 1973 and

2005. d. more unequal between 1935 and 2005.


32. The 2005 U.S. distribution of income shows that the top fifth of all families have

a. more than ten times the income of the bottom 20 percent. b. more than five times the income of the bottom 20 percent. c. more than double the income of the bottom 20 percent. d. the same share of income as the bottom 20 percent.



33. The 2005 U.S. distribution of income shows that the top 5 percent of families have approximately

what share of income? a. 1 percent b. 5 percent c. 10 percent d. 20 percent


34. The study by economists Cox and Alm found that the 2006 pre-tax income of the richest fifth of

U.S. households is a. 5 times the pre-tax income of the poorest fifth. b. 10 times the pre-tax income of the poorest fifth. c. 15 times the pre-tax income of the poorest fifth. d. 20 times the pre-tax income of the poorest fifth.


35. The study by economists Cox and Alm found that the 2006 after-tax income of the richest fifth of

U.S. households is a. equal to the after-tax income of the poorest fifth. b. 7 times the after-tax income of the poorest fifth. c. 14 times the after-tax income of the poorest fifth. d. 21 times the after-tax income of the poorest fifth.


36. The study by economists Cox and Alm found

a. inequality in consumption is much smaller than inequality in annual income. b. inequality in consumption is slightly smaller than inequality in annual income. c. inequality in consumption is slightly larger than inequality in annual income. d. inequality in consumption is much larger than inequality in annual income.



37. The study by economists Cox and Alm found

a. the gap between rich and poor shrinks greatly if using after-tax income compared with pre-tax income.

b. the gap between rich and poor shrinks slightly if using after-tax income compared with pre-tax income.

c. the gap between rich and poor widens slightly if using after-tax income compared with pre-tax income.

d. the gap between rich and poor widens greatly if using after-tax income compared with pre-tax income.


38. Economist Tyler Cowen attributes increased income inequality to

a. lower income inequality among older populations than younder populations. b. lower in-kind transfers made by governments. c. a larger number of educated people in the U.S. population. d. the development of the internet.


39. Which of the following is not a reason given by economist Tyler Cowen for increased income

inequality? a. Higher income inequality among older populations than younger populations. b. Lower in-kind transfers made by governments. c. A larger number of educated people in the U.S. population. d. The increasing numbers of older people in the U.S. population overall.


40. Which of the following is not discussed by economist Tyler Cowen as an alternative to measuring

inequality by income? a. Leisure. b. Happiness. c. Consumption. d. Age.



41. When comparing the percentage of income (or expenditure) of the lowest and highest 20 percent of

the population, a. South Africa has a more equal income distribution than the United States. b. South Africa has a more equal income distribution than Japan. c. Japan has a more equal income distribution than the United States. d. Mexico has a more equal income distribution than Canada.


42. Since about 1970 in the U.S.,

a. decreases in the wages of unskilled workers, relative to skilled workers, have led to increased inequality in family incomes.

b. increases in the wages of unskilled workers, relative to skilled workers, have led to increased equality in family incomes.

c. inequality in family incomes has increased, despite increases in the wages of unskilled workers relative to skilled workers.

d. inequality in family incomes has decreased, despite increases in the wages of skilled workers relative to unskilled workers.


43. The normal life cycle pattern of income

a. contributes to more inequality in the distribution of annual income and to more inequality in living standards.

b. contributes to more inequality in the distribution of annual income, but it does not necessarily contribute to more inequality in living standards.

c. contributes to less inequality in the distribution of annual income and to less inequality in living standards.

d. has no effect on either the distribution of annual income or on living standards.

ANS: B DIF: 2 REF: 20-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Income inequality | Standard of living MSC: Interpretive

44. The poverty rate is based on a family’s

a. income, in-kind transfers, and other government aid. b. income and in-kind transfers. c. in-kind transfers only. d. income only.

ANS: D DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Definitional


45. The poverty rate is a measure of the percentage of people whose incomes fall below

a. a relative level of income. b. an absolute level of income. c. the median income for a family of three. d. the bottom 20 percent of the income distribution.

ANS: B DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Definitional

46. The poverty rate is

a. a measure of income inequality across families. b. the percentage of the population whose family income falls below a specified level. c. an absolute level of income set by the federal government for each family size. d. measured by the number of in-kind transfers that a family receives.


47. In 2005, the poverty rate in the United States was

a. 2.5 percent. b. 12.6 percent. c. 11.1 percent. d. 22.4 percent.

ANS: B DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Applicative

48. Over the past 50 years, the U.S. poverty rate was at its lowest level in

a. 1973. b. 1980. c. 1990. d. 2005.

ANS: A DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Interpretive

49. A commonly-used gauge of poverty is the

a. income inequality rate. b. average income rate. c. poverty rate. d. social inequality rate.

ANS: C DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Applicative


50. Based on U.S. data for 2005, the poverty rate is the highest for which group of people?

a. children b. married couples c. female households, no spouse present d. the elderly

ANS: C DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Applicative

51. The percentage of families with incomes below the poverty line

a. is defined as the 10 percent of U.S.households with the lowest incomes. b. is known as the poverty rate. c. is known as the unemployment rate. d. rises as the general income level rises.


52. Measures of poverty that fail to account for the value of in-kind transfers

a. understate the actual poverty rate. b. have little effect on the validity of reported poverty rates. c. are generally more reliable measures of actual poverty rates. d. overstate the actual poverty rate.

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate | In-kind transfers MSC: Interpretive

53. Since the early 1970s, average incomes have

a. increased, which has reduced the poverty rate. b. increased, while the poverty rate increased slightly. c. decreased, while the poverty rate has remained unchanged. d. remained unchanged, while the poverty rate has decreased.

ANS: B DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate | Income MSC: Applicative

54. In 2005, the poverty rate in the United States was 12.6 percent. This means that 12.6 percent

a. of the population had a total family income that fell below the poverty line. b. of the population had a total family income that was above the poverty line. c. of the population had a total family income below $10,000. d. of the population had a total family income above $50,000.

ANS: A DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Interpretive


55. The poverty line in the country of Inequalia is $10,000. The distribution of income for Inequalia is

as follows:

Number of Families Income

200 less than $5,000

300 between $5,000 and $10,000

500 between $10,000 and $15,000

700 between $15,000 and $20,000

100 over $20,000

The poverty rate in Inequalia is

a. 11.1 percent. b. 16.7 percent. c. 27.8 percent. d. 55.5 percent.

ANS: C DIF: 3 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Analytical

56. The distribution of income for Inequalia is as follows:



300 between $5,000 and $10,000

500 between $10,000 and $15,000

700 between $15,000 and $20,000

100 over $20,000

What would the poverty line need to be to have a poverty rate of 27.8 percent in Inequalia?

a. $5,000. b. $10,000. c. $15,000. d. $20,000.

ANS: B DIF: 3 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate | Poverty line MSC: Analytical


57. The poverty line in the country of Grim is $10,000. The distribution of income for Grim is as

follows:



1,000 between $5,000 and $10,000

1,000 between $10,000 and $15,000

400 between $15,000 and $20,000

100 over $20,000

The poverty rate in Grim is

a. 5 percent. b. 16.7 percent. c. 50 percent. d. 83.3 percent.

ANS: C DIF: 3 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Analytical

58. The distribution of income for Grim is as follows:



1,000 between $5,000 and $10,000

1,000 between $10,000 and $15,000

400 between $15,000 and $20,000

100 over $20,000

Where would the government in Grim set the poverty line to establish a poverty rate of 50 percent?

a. $5,000. b. $10,000. c. $15,000. d. $20,000.



59. The distribution of income for Danville is as follows:


500 less than $15,000

600 between $15,000 and $20,000

1,000 between $20,000 and $25,000

700 between $25,000 and $30,000

500 over $30,000

Where would the government in Danville set the poverty line to establish a poverty rate of 33.3 percent?

a. $15,000. b. $20,000. c. $25,000. d. $30,000.


60. The poverty line in the country of Abbyville is $15,000. The distribution of income for Abbyville is

as follows:


300 less than $15,000

500 between $15,000 and $20,000

900 between $20,000 and $25,000

600 between $25,000 and $30,000

200 over $30,000

The poverty rate in Abbyville is

a. 12 percent. b. 32 percent. c. 50 percent. d. 68 percent.

ANS: A DIF: 3 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate MSC: Analytical


61. The distribution of income for Abbyville is as follows:


300 less than $15,000

500 between $15,000 and $20,000

900 between $20,000 and $25,000

600 between $25,000 and $30,000

200 over $30,000

Where would the government in Abbyville set the poverty line to generate a poverty rate of 12 percent?

a. $15,000. b. $20,000. c. $25,000. d. $30,000.

ANS: A DIF: 3 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty rate | Poverty line MSC: Analytical

62. In 2005, the poverty line for a family of four in the U.S. was

a. $56,194. b. $28,097. c. $19,971. d. $12,603.

ANS: C DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Applicative

63. The poverty line is adjusted each year to reflect changes in the

a. number of people currently on public assistance. b. level of prices. c. nutritional content of an "adequate" diet. d. size of a family.

ANS: B DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Definitional

64. The federal government sets the poverty line at roughly

a. five times the cost of providing an adequate diet. b. four times the cost of providing an adequate diet. c. three times the cost of providing an adequate diet. d. two times the cost of providing an adequate diet.

ANS: C DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Definitional


65. The income level below which families are said to be poor is known as the

a. income maintenance threshold. b. poverty line. c. bottom quintile of the income distribution. d. minimum wage.


66. The poverty rate is the percentage of the population that have a family income level below the

a. income maintenance threshold. b. poverty line. c. bottom quintile of the income distribution. d. minimum wage.


67. If the U.S. government determines that the cost of feeding an urban family of six is $6,000 per year,

then the official poverty line for a family of that type is a. $6,000. b. $12,000. c. $18,000. d. $36,000.


68. If the U.S. government determines that the cost of feeding an urban family of four is $5,200 per

year, then the official poverty line for a family of that type is a. $10,400. b. $15,600. c. $20,800. d. $26,000.


69. The US government sets the poverty line equal to approximately

a. three times the cost of providing subsidized housing. b. three times the cost of providing an adequate diet. c. the minimum wage for a single person working 40 hours per week and 50 weeks per year. d. the cost of providing food, shelter, and health care expenses for a family of four.



70. The calculation of the poverty line includes adjustments for

a. energy costs. b. child care costs. c. the level of prices. d. the Earned Income Tax Credit.

ANS: C DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Interpretive


a. The poverty line is an absolute level of income set by the federal government below which a family is considered to be in poverty.

b. The poverty line is approximately equal to three times the cost of providing an adequate diet.

c. The poverty line is adjusted annually to reflect changes in price levels. d. The poverty line is adjusted semiannually to reflect changes in fuel prices.

ANS: D DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Definitional

72. Poverty is found to be correlated with

a. age and race but not family composition. b. race only. c. race and family composition but not age. d. age, race, and family composition.

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty MSC: Applicative

73. Measuring poverty using an absolute income scale like the poverty line can be misleading because

a. income measures do not include the value of in-kind transfers. b. money is more highly valued by the poor than by the rich. c. the poor are not likely to participate in the labor market. d. income measures are not adjusted for the effects of labor-market discrimination.

ANS: A DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty MSC: Interpretive


a. The poverty line is a relative standard. b. Economic growth that raises all incomes will decrease the number of families in poverty. c. Increasing income inequality reduces poverty. d. Economic growth, by definition, affects all families equally.

ANS: B DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty MSC: Analytical


75. Which of the following groups has the highest poverty rate?

a. Blacks. b. Asians. c. Children (under age 18). d. Female-headed households.

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Poverty MSC: Applicative

76. Which of the following is not correct?

a. Poverty is correlated with race. b. Poverty is correlated with age. c. Poverty is correlated with family composition. d. Poverty is correlated with country of origin.

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty MSC: Applicative

77. In comparison to the average poverty rate,

a. children and the elderly are more likely to be poor. b. children and the elderly are less likely to be poor. c. children are more likely to be poor, but the elderly are less likely to be poor. d. children are less likely to be poor, but the elderly are more likely to be poor.

ANS: C DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty MSC: Applicative


Table 20-4

Poverty Thresholds in 2002, by Size of Family and Number of Related Children Under 18 Years

[Dollars]

Related children under 18 years

Size of family unit None One Two Three Four Five Six Seven Eight or more

One person (unrelated individual) Under 65 years 9,359 65 years and over 8,628 Two persons Householder under 65 years 12,047 12,400 Householder 65 years and over 10,874 12,353 Three persons 14,072 14,480 14,494 Four persons 18,556 18,859 18,244 18,307 Five persons 22,377 22,703 22,007 21,469 21,141 Six persons 25,738 25,840 25,307 24,797 24,038 23,588 Seven persons 29,615 29,799 29,162 28,718 27,890 26,924 25,865 Eight persons 33,121 33,414 32,812 32,285 31,538 30,589 29,601 29,350 Nine persons or more 39,843 40,036 39,504 39,057 38,323 37,313 36,399 36,173 34,780

Source: U. S. Bureau of the Census, Current Population Survey.

78. Refer to Table 20-4. What is the poverty line for a family of six with three children?

a. $21,469 b. $24,797 c. $25,738 d. $28,718


79. Refer to Table 20-4. What is the poverty line for a family of eight with two children?

a. $14,494 b. $32,812 c. $33,121 d. $34,780


80. Refer to Table 20-4. What is the poverty line for a family of three with one child?

a. $12,072 b. $12,400 c. $14,480 d. $14,494



81. Refer to Table 20-4. What is the poverty line for a 75 year old individual?

a. $8,628 b. $9,359 c. $12,353 d. $12,400

ANS: A DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Applicative

82. Refer to Table 20-4. What is the poverty line for a family with one 35-year-old adult and one child?

a. $8,628 b. $9,359 c. $12,353 d. $12,400

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Poverty line MSC: Applicative


Figure 20-1

Number of Poor

83. Refer to Figure 20-1. The absolute number of people in poverty

a. is higher in 2001 than in 1959. b. is lower in 2001 than in 1959. c. has not changed between 1959 and 2001. d. has steadily decreased between 1959 and 2001.

ANS: B DIF: 2 REF: 20-1 NAT: Analytic LOC: Reading and interpreting graphs TOP: Poverty MSC: Interpretive

84. Refer to Figure 20-1. Between 1965 and 2001, during recessions (the shaded bars) the number of

individuals in poverty has a. increased. b. decrease. c. not changed. d. decreased and then increased.

ANS: A DIF: 2 REF: 20-1 NAT: Analytic LOC: Reading and interpreting graphs TOP: Poverty MSC: Interpretive


85. Refer to Figure 20-1. Between 1959 and 2001 the poverty rate has

a. increased. b. decreased. c. stayed the same. d. moved in the opposite direction of the number of people in poverty.

ANS: B DIF: 2 REF: 20-1 NAT: Analytic LOC: Reading and interpreting graphs TOP: Poverty rate MSC: Interpretive

Figure 20-2

Poverty Rates by Age

86. Refer to Figure 20-2. In 2001, the percent of children under age 18 in poverty is

a. higher than both the percentage of adults aged 18 to 64 and the percentage of elderly aged 65 years and over in poverty.

b. higher than the percentage of adults aged 18 to 64 but is lower than the percentage of elderly aged 65 years and over in poverty.

c. lower than both the percentage of adults aged18 to 64 and the percentage of elderly aged 65 years and over in poverty.

d. lower than the percentage of adults aged 18 to 64 but is higher than the percentage of elderly aged 65 years and over in poverty.



87. Refer to Figure 20-2. In 1968, the percent of adults aged 18 to 64 years in poverty is

a. higher than both the percentage of children under age 18 and the percentage of elderly aged 65 and over in poverty.

b. higher than the percentage of children under age 18 but is lower than the percentage of elderly aged 65 and over in poverty.

c. is lower than both the percentage of children under age 18 and the percentage of elderly aged 65 and over in poverty.

d. is lower than the percentage of children under age 18 but is higher than the percentage of elderly aged 65 and over in poverty.

ANS: C DIF: 2 REF: 20-1 NAT: Analytic LOC: Reading and interpreting graphs TOP: Poverty MSC: Interpretive

88. Refer to Figure 20-2. In 2001, the percent of adults between aged 18 and 64 in poverty is

a. higher than both the percentage of children under age 18 and the percentage of elderly aged 65 and over in poverty.

b. higher than the percentage of children under age 18 but is lower than the percentage of elderly aged 65 and over in poverty.

c. is lower than both the percentage of children under age 18 and the percentage of elderly aged 65 and over in poverty.

d. is lower than the percentage of children under age 18 and is equal to the percentage of elderly aged 65 and over in poverty.

ANS: D DIF: 2 REF: 20-1 NAT: Analytic LOC: Reading and interpreting graphs TOP: Poverty MSC: Interpretive

89. Refer to Figure 20-2. In 1968, the percent of children under age 18 in poverty is

a. higher than both the percentage of adults aged 18 to 64 and the percentage of elderly aged 65 and over in poverty.

b. higher than the percentage of adults aged 18 to 64 but is lower than the percentage of elderly aged 65 and over in poverty.

c. lower than both the percentage of adults aged 18 to 64 and the percentage of elderly aged 65 and over in poverty.

d. lower than the percentage of adults aged 18 to 64 but is higher than the percentage of elderly aged 65 and over in poverty.



90. Refer to Figure 20-2. In 1968, the percent of elderly aged 65 and over in poverty is

a. higher than both the percentage of adults aged 18 to 64 and the percentage of children under age 18 in poverty.

b. higher than the percentage of adults aged 18 to 64 but is lower than the percentage of children under age 18 in poverty.

c. lower than both the percentage of adults aged 18 to 64 and the percentage of children under age 18 in poverty.

d. is lower than the percentage of adults aged 18 to 64 but is higher than the percentage of children under age 18 in poverty.


91. Refer to Figure 20-2. In 2001, the percent of elderly aged 65 and over in poverty is

a. higher than both the percentage of adults aged 18 to 64 and the percentage of children under age 18 in poverty.

b. higher than the percentage of adults aged 18 to 64 but is lower than the percentage of children under age 18 in poverty.

c. lower than both the percentage of adults aged 18 to 64 and the percentage of children under age 18 in poverty.

d. lower than the percentage of children under age 18 but is equal to the percentage of adults aged 18 to 64 in poverty.

ANS: D DIF: 2 REF: 20-1 NAT: Analytic LOC: Reading and interpreting graphs TOP: Poverty MSC: Interpretive

92. Refer to Figure 20-2. From 1969 to 2001, the percent of elderly aged 64 and over in poverty has

a. declined, while the percentage of children under age 18 in poverty has also declined. b. declined, while the percentage of children under age 18 in poverty has increased. c. increased, while the percentage of children under age 18 in poverty has declined. d. increased, while the percentage of children under age 18 in poverty has also increased.


93. If the value of in-kind transfers are taken into account, the number of families living in poverty in

the United States would a. increase by about 1 percent. b. decrease by about 1 percent. c. decrease by about 5 percent. d. decrease by about 10 percent.

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: In-kind transfers MSC: Applicative


94. Which of the following is not an example of in-kind transfers?

a. Food stamps. b. Medicare. c. The Earned Income Tax Credit. d. Housing vouchers.

ANS: C DIF: 1 REF: 20-1 | 20-3 NAT: Analytic LOC: Efficiency and equity TOP: In-kind transfers MSC: Applicative

95. In-kind transfers are

a. obtained only by those who have political connections. b. provided only by the U. S. government. c. non-monetary items given to the poor. d. obtained primarily through soup kitchens and private charities.

ANS: C DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: In-kind transfers MSC: Definitional

96. Government vouchers to purchase food, also known as food stamps, are an example of

a. an in-kind transfer. b. life-cycle income. c. a negative income tax. d. permanent income.

ANS: A DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: In-kind transfers MSC: Definitional

97. In-kind transfers are transfers to the poor

a. in the form of goods and services rather than cash. b. in the form of goods, services, and cash. c. from private charitable organizations only. d. from the federal government only.

ANS: A DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: In-kind transfers MSC: Definitional

98. The statement that "measures of the distribution of income are based on money income" relates to

which problem in measuring inequality? a. In-kind transfers. b. Economic life cycle. c. Transitory versus permanent income. d. Economic mobility.

ANS: A DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: In-kind transfers MSC: Interpretive


99. In the United States, a typical worker's income peaks around age

a. 70. b. 60. c. 50. d. 40.

ANS: C DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Applicative

100. People have their highest saving rates when they are

a. retired. b. middle-aged. c. married with young children. d. young and single.

ANS: B DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Applicative

101. The regular pattern of income variation over a person's life is called

a. the earned income cycle. b. the substitution effect. c. the life cycle. d. the pattern of change.

ANS: C DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Definitional

102. A family's ability to buy goods and services depends largely on its

a. in-kind transfers. b. annual income. c. transitory income. d. permanent income.

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Applicative

103. Economists who study economic mobility have found that, if a father earns 20 percent above his

generation's average income, his son will most likely earn a. an income equal to his generation's average income. b. 8 percent above his generation's average income. c. 5 percent below his generation's average income. d. 3 percent above his generation's average income.

ANS: B DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Applicative


104. What percentage of millionaires in the United States are self-made?


ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Economic mobility MSC: Definitional

105. Economic mobility in the United States is

a. uncommon. Over 50 percent of poor families remain poor for 8 or more years. b. uncommon. Over 75 percent of poor families remain poor for 8 or more years. c. common. Fewer than 3 percent of poor families remain poor for 8 or more years. d. common. Fewer than 1 percent of poor families remain poor for 8 or more years.

ANS: C DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Applicative

106. Economists who study economic mobility have found that the income of a grandfather and his

grandson's income are a. not closely related. b. negatively related. c. directly related. d. equal.

ANS: A DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Interpretive

107. Susan won $2,000 at the blackjack tables on her birthday. Her winnings are an example of

a. permanent income. b. life-cycle income. c. transitory income. d. an in-kind transfer.



a. The distribution of annual income accurately reflects the distribution of living standards. b. Permanent incomes are more equally distributed than annual incomes. c. Transitory changes in income generally have a significant impact on a family's standard of

living. d. Annual income is more equally distributed than permanent income.

ANS: B DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Interpretive


109. Which of the following is correct?

a. Incomes tend to be high for young workers. b. Incomes tend to rise sharply at retirement. c. Incomes tend to peak at around age 50. d. Current income is more equally distributed than permanent income.

ANS: C DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Analytical

110. The life cycle effect characterizes a lifetime income profile in which income

a. tends to follow a seasonal pattern. b. rises as a worker gains maturity and experience. c. rises and falls in conjunction with the business cycle. d. falls during the early years of market activity and peaks at retirement.

ANS: B DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Analytical

111. Because people can borrow when they are young, the life cycle theory would suggest that one's

standard of living depends on a. lifetime income rather than annual income. b. aggregate income rather than annual personal income. c. annual extended family income rather than annual personal income. d. income averaged across seasons rather than across years.

ANS: A DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Analytical

112. An example of a transitory change in income is the

a. annual cost of living adjustment to your salary. b. increase in income that results from a job promotion linked to your education. c. increase in income of California orange growers that results from an orange-killing frost in

Florida. d. All of the above are correct.


113. Saving and borrowing is indicative of a family that

a. is most likely to be poor. b. has a difficult time balancing its standard of living. c. adjusts its standard of living to reflect transitory changes in income. d. is most likely millionaires.



114. Suppose that a family saves and borrows to buffer itself against changes in income. These actions

relate to which problem in measuring inequality? a. In-kind transfers. b. Negative income tax. c. Transitory versus permanent income. d. Economic mobility.

ANS: C DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Interpretive

115. Suppose that young people often borrow and then repay the loans when they are older. These actions

relate to which problem in measuring inequality? a. In-kind transfers. b. Economic life cycle. c. Negative income tax. d. Economic mobility.


116. Suppose that Family A borrows money when its car breaks down and saves money when the wife

receives a holiday bonus from her employer. Suppose that Family B borrows money to buy elaborate birthday presents for the children and spends the husband’s holiday bonus on a vacation to Florida. Which of the following is correct? a. Both Family A and Family B’s spending habits suggest that they base their purchasing

decisions on transitory income. b. Family A’s spending habits suggest that it bases its purchasing decisions on transitory

income rather than permanent income. Family B’s spending habits suggest that it bases its purchasing decisions on permanent income rather than transitory income.

c. Family A’s spending habits suggest that it bases its purchasing decisions on permanent income rather than transitory income. Family B’s spending habits suggest that it bases its purchasing decisions on transitory income rather than permanent income.

d. Both Family A and Family B’s spending habits suggest that they base their purchasing decisions on permanent income.

ANS: C DIF: 3 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle MSC: Analytical


117. Suppose that Jake and Abby each win $1,000 in a state lottery. Jake spends his winnings on a new

television. Abby saves her winnings for a “rainy day.” Which of the following is correct? a. Both Jake and Abby’s behaviors suggest that they base their purchasing decisions on

transitory income. b. Jake’s behavior suggests that he bases his purchasing decisions on transitory income rather

than permanent income. Abby’s behavior suggest that she bases her purchasing decisions on permanent income rather than transitory income.

c. Jake’s behavior suggests that he bases his purchasing decisions on permanent income rather than transitory income. Abby’s behavior suggests that she bases her purchasing decisions on transitory income rather than permanent income.

d. Both Jake and Abby’s behaviors suggest that they base their purchasing decisions on permanent income.



a. The percentage of the population that suffers from long-term poverty is far smaller than the percentage of the population that suffers from short-term poverty because there is a high level of economic mobility in the United States.

b. Permanent income is a better measure of a family's ability to buy the necessities of life than is transitory income.

c. The economic life cycle theory explains why gifts of goods and services reduce poverty for the very young and the very old.

d. Because people can borrow and save to smooth out changes in income, their standard of living in any one year depends more on lifetime income than on a particular year's income.

ANS: C DIF: 3 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic life cycle | Economic mobility MSC: Analytical

119. What percent of families are poor for eight or more years?

a. More than 20 percent. b. Between 15 and 20 percent. c. Approximately 10 percent. d. Less than 3 percent.

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Applicative

120. Data for the United States suggests that about how many millionaires inherited their fortunes?

a. One in seven. b. One in five. c. One in three. d. One in two.

ANS: B DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Applicative


121. Income mobility studies suggest that poverty

a. cannot be alleviated by privately sponsored anti-poverty programs. b. cannot be alleviated by government sponsored anti-poverty programs. c. is a long-term problem for a relatively large number of families. d. is not a long-term problem for most families.

ANS: D DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Applicative

122. Economic mobility in the United States is so great that fewer than

a. 3 percent of families are poor for 8 or more years. b. 5 percent of families are poor for 8 or more years. c. 8 percent of families are poor for 8 or more years. d. 10 percent of families are poor for 8 or more years.

ANS: A DIF: 1 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Applicative

123. Economic mobility refers to the

a. government's attempt to distribute monetary assistance to areas most in need. b. ability of families to freely relocate to find good jobs. c. movement of people among income classes. d. movement of resources from one country to another.

ANS: C DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Definitional

124. In the United States approximately 80 percent of millionaires did not inherit their wealth. This

statement is an example of a. transitory income. b. the effectiveness of government anti-poverty programs. c. economic mobility. d. permanent income.

ANS: C DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Analytical


a. Less than three percent of families are categorized as poor for eight years or more. b. In the United States, the grandson of a millionaire is much more likely to be rich than the

grandson of an average-income person. c. The majority of millionaires in the United States inherited their wealth. d. Most workers have about the same income (adjusted for inflation) when they are young as

when they are middle-aged.

ANS: A DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Analytical


126. Which of the following does not explain why data on income distribution and the poverty rate give

an incomplete picture of inequality? a. in-kind transfers b. economic life cycle c. transitory income d. All of the above contribute to an incomplete picture of inequality.

ANS: D DIF: 3 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: Economic mobility MSC: Analytical


a. The United States has a more equal distribution of income than other developed countries such as Japan and Germany.

b. The statement “a rising tide lifts all boats” illustrates how economic growth reduces the number of people with income levels below the poverty line.

c. The economic life cycle explains why people base spending decisions on transitory income.

d. The libertarian political philosophy follows the maximin criterion.

ANS: B DIF: 3 REF: 20-1 | 20-2 | 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality | Poverty level | Economic life cycle | Liberalism MSC: Analytical

128. When considering a person’s standard of living, data on the income distribution and the poverty rate

may provide an incomplete picture because the poor may a. receive in-kind transfers. b. be lending in order to smooth their income over their life cycle. c. be saving in order to smooth their income due to a drop in transitory income. d. under-report their income.

ANS: A DIF: 2 REF: 20-1 NAT: Analytic LOC: Efficiency and equity TOP: In-kind transfers, Economic life cycle MSC: Applicative


The political philosophy of redistributing income

MULTIPLE CHOICE

1. Whether or not policymakers should try to make our society more egalitarian is largely a matter of

a. economic efficiency. b. political philosophy. c. egalitarian principles. d. enhanced opportunity.

ANS: B DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Income redistribution MSC: Interpretive


2. Which political philosophy believes that the government should equalize the incomes of all

members of society? a. Utilitarianism. b. Liberalism. c. Libertarianism. d. None of the above is correct.

ANS: D DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Income redistribution MSC: Interpretive

3. When the government taxes income as part of a redistribution program,

a. the poor pay higher taxes. b. the rich always benefit more than the poor. c. the poor are encouraged to work. d. incentives to earn income are diminished.

ANS: D DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Income redistribution MSC: Interpretive

4. When incentives to earn income are distorted by income redistribution programs,

a. losses can exceed potential gains from greater equality of income. b. total income in an economy can fall. c. total utility in society can fall. d. All of the above are correct.

ANS: D DIF: 2 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Income redistribution MSC: Interpretive

5. Which of the following will not occur when government policies are enacted to make the

distribution of income more equitable? a. People will alter their behaviors. b. Incentives will be distorted. c. Total utility will remain constant. d. The allocation of resources will be less efficient .

ANS: C DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Income redistribution MSC: Analytical

6. As a result of the trade-off between income equality and incentives to work, an optimal

redistribution policy a. can never be funded through taxes on labor income. b. must always achieve a full egalitarian society. c. only benefits the middle class. d. always falls short of a fully egalitarian society.

ANS: D DIF: 3 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Income redistribution MSC: Analytical


7. Which group would be the least upset by wide variation in the income distribution?

a. Utilitarians. b. Liberals. c. Libertarians. d. Each group would be equally upset.

ANS: C DIF: 3 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Income redistribution MSC: Analytical

8. Which group (or groups) would be the most upset by wide variation in the income distribution?

a. Utilitarians b. Utilitarians and liberals. c. Libertarians. d. Liberals and Libertarians.

ANS: B DIF: 3 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Income redistribution MSC: Analytical

9. Which of the following programs would be opposed by philosopher John Rawls?

a. A negative income tax. b. The Supplemental Security Income (SSI) program. c. A tax plan creating a perfectly egalatarian income distribution. d. Rawls would oppose all of the programs.

ANS: C DIF: 3 REF: 20-2 | 20-3 NAT: Analytic LOC: The role of government TOP: Income redistribution | Liberalism MSC: Analytical

10. When designing public policies, which income group would philosopher John Rawls argue needs

the most attention? a. Individuals located in the bottom fifth of the income distribution. b. Individuals located at the average income level.. c. Individuals located in the top fifth of the income distribution. d. Individuals located in the top five percent of the income distribution.

ANS: A DIF: 2 REF: 20-2 | 20-3 NAT: Analytic LOC: The role of government TOP: Income redistribution | Liberalism MSC: Analytical


11. Which of the following programs to alleviate poverty would be most favored by philosopher Robert

Nozick and why? a. A negative income tax because it would maximize the minimum income of members of

society. b. An Earned Income Tax Credit (EITC) because a policy that rewards the working poor

would be the most just. c. An in-kind transfer program because it would maximize the total utility of all members of

society. d. None of the programs would be favored because each of them forcibly redistributes

income that was fairly, if not equally, earned.

ANS: D DIF: 3 REF: 20-2 | 20-3 NAT: Analytic LOC: The role of government TOP: Income redistribution | Libertarianism MSC: Analytical

12. Which of the following programs to alleviate poverty would be most favored by philosopher Robert

Nozick? a. A negative income tax. b. An Earned Income Tax Credit (EITC). c. An in-kind transfer program. d. None of the programs would be favored.


Scenario 20-1

Suppose that a society is made up of five families whose incomes are as follows: $120,000; $90,000; $30,000; $30,000; and $18,000. The federal government is considering two potential income tax plans: Plan A is a negative income tax plan where the taxes owed equal 1/3 of income minus $20,000. Plan B is a two-tiered plan where the poverty line is $35,000; families earning over $35,000 pay 10% of their income in taxes, and families earning less than $35,000 pay no income tax.

13. Refer to Scenario 20-1. Assuming that utility is directly proportional to the cash value of after-tax

income, which government policy would an advocate of utilitarianism prefer? a. Plan A b. Plan B c. either Plan A or Plan B d. neither Plan A nor Plan B because any plan that forcibly redistributes income is against the

philosophy

ANS: A DIF: 3 REF: 20-2 | 20-3 NAT: Analytic LOC: The role of government TOP: Income redistribution | Utilitarianism MSC: Analytical



income, which government policy would an advocate of liberalism prefer? a. Plan A b. Plan B c. either Plan A or Plan B d. neither Plan A nor Plan B because any plan that forcibly redistributes income is against the

philosophy

ANS: A DIF: 3 REF: 20-2 | 20-3 NAT: Analytic LOC: The role of government TOP: Income redistribution | Liberalism MSC: Analytical


income, which government policy would an advocate of libertarianism prefer? a. Plan A b. Plan B c. either Plan A or Plan B d. neither Plan A nor Plan B because any plan that forcibly redistributes income is against the

philosophy


16. Raising total utility is the prime objective of which political philosophy?

a. Utilitarianism. b. Liberalism. c. Libertarianism. d. None of the above is correct.

ANS: A DIF: 1 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Utilitarianism MSC: Interpretive

17. “The government should choose policies to maximize the total utility of society.” This statement is

most closely associated with which political philosophy? a. Liberalism. b. Utilitarianism. c. Libertarianism. d. Welfarism.

ANS: B DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utilitarianism MSC: Definitional


18. Utilitarianism is

a. a liberal religion that focuses on individual rights. b. a political philosophy that believes the government should choose policies deemed to be

just by an impartial observer. c. a political philosophy that believes the government should not redistribute income. d. a political philosophy that believes the government should choose policies to maximize

the total utility of society.

ANS: D DIF: 1 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Utilitarianism MSC: Definitional

19. According to a utilitarian, total social utility will be maximized when marginal dollars are

distributed to the people with the a. lowest marginal utility of income. b. highest marginal utility of income. c. highest total utility from their income. d. most productive labor resources.

ANS: B DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utilitarianism MSC: Definitional

20. The founders of utilitarianism include

a. A. C. Pigou and John Maynard Keynes. b. Jeremy Bentham and John Stuart Mill. c. Augustin Cournot and Jean B. Say. d. A. Kondratieff and Thomas Malthus.

ANS: B DIF: 1 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Utilitarianism MSC: Applicative

21. Which of the following statements is characteristic of utilitarianism?

a. An extra dollar of income provides higher marginal utility to a poor person than to a rich person.

b. Social policies should be created behind a "veil of ignorance." c. Society should strive to maximize the utility of its wealthiest member. d. Equality of opportunity is more important than equality of incomes.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Utilitarianism MSC: Interpretive


22. According to utilitarians, the ultimate objective of public actions should be to

a. enhance the income of the rich. b. ensure an egalitarian distribution of income. c. maximize the sum of individual utility. d. provide for the betterment of the poor.

ANS: C DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utilitarianism MSC: Interpretive

23. The concept of utility is fundamental to utilitarianism and describes the

a. optimal distribution of wealth in society. b. level of satisfaction derived from a person's circumstances. c. method by which society chooses to allocate resources. d. method whereby wealth is stored.

ANS: B DIF: 2 REF: 20-2 NAT: Analytic LOC: Utility and consumer choice TOP: Utilitarianism MSC: Interpretive

24. The utilitarian case for redistributing income is based on the assumption of

a. collective consensus. b. a notion of fairness engendered by equality. c. diminishing marginal utility. d. rising marginal utility.

ANS: C DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Diminishing marginal utility | Utilitarianism MSC: Interpretive

25. The concept of diminishing marginal utility is embedded in the utilitarian rationale for

a. trickle-down effects. b. enhancing market efficiency. c. redistributing income. d. maintaining the status quo income distribution.

ANS: C DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Diminishing marginal utility | Utilitarianism MSC: Interpretive

26. Diminishing marginal utility suggests that

a. more is always preferred to less. b. the well-being of society is maximized when the distribution of income is equal. c. the poor are less efficient at spending money than the rich. d. the poor receive more satisfaction from the last dollar spent than the rich.

ANS: D DIF: 2 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Diminishing marginal utility | Utilitarianism MSC: Interpretive


27. Which of the following statements illustrates diminishing marginal utility?

a. An extra dollar of income to a poor person provides that person with more additional utility than does an extra dollar to a rich person.

b. An extra dollar of income to a poor person provides that person with less additional utility than does an extra dollar to a rich person.

c. An extra dollar of income to a poor person provides that person with the same additional utility as does an extra dollar to a rich person.

d. An extra dollar of income to a poor person provides that person with the same total utility as does an extra dollar to a rich person.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Diminishing marginal utility MSC: Definitional

28. Ms. Spring currently earns $100,000 a year, while her junior partner, Mr. Fall, earns $55,000 a year.

From the perspective of a utilitarian, if both of their incomes are subject to diminishing marginal utility, taking a dollar from Ms. Spring and giving it to Mr. Fall will a. increase society's total utility. b. lower Ms. Spring's marginal utility of income. c. increase Mr. Fall's marginal utility of income. d. lower society’s total utlity.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Diminishing marginal utility | Utilitarianism MSC: Analytical

29. "An extra dollar of income gives more additional satisfaction to a poor person than to a rich person."

This is an important assumption of which political philosophy? a. Utilitarianism. b. Liberalism. c. Libertarianism. d. Republicanism.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Utilitarianism | Diminishing marginal utility MSC: Interpretive

30. Suppose a society consists of only two people: John and Jane. A utilitarian would say that the

proper role of government in this society is to a. equalize the incomes of John and Jane. b. equalize John’s utility and Jane’s utility. c. equalize John’s marginal utility and Jane’s marginal utility. d. maximize the sum of John’s utility and Jane’s utility.

ANS: D DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utility MSC: Interpretive


31. A society consists of three individuals: Arthur, Billie, and Chris. In terms of income and utility,

Arthur is currently best-off, Billie ranks in the middle, and Chris is worst-off. Which of the following statements is correct? a. Utilitarianism suggests that government policies should strive to maximize the sum of all

three individuals’ utility. b. Liberalism suggests that government policies should strive to maximize the sum of Billie’s

utility and Chris’s utility. c. Libertarianism suggests that government policies should strive to maximize Chris’s utility. d. Mobilism suggests that the government policies should strive to make Billie better off than

Arthur.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utility MSC: Interpretive

32. The English philosophers Jeremy Bentham and John Stuart Mill founded the school of thought

called a. liberalism. b. libertarianism. c. mobilism. d. utilitarianism.

ANS: D DIF: 1 REF: 20-2 NAT: Analytic LOC: The study of economics, and definitions of economics TOP: Economists MSC: Definitional

33. Which political philosophy believes in balancing the gains from greater equality against the losses

from distorted incentives? a. Utilitarianism. b. Liberalism. c. Libertarianism. d. Secularism.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utilitarianism MSC: Interpretive

34. In the parable of the leaky bucket, a fundamental problem with government redistribution programs

is identified. As long as the government only has "leaky buckets" at its disposal, a. the costs of welfare programs will exceed the benefits. b. it should not try to reach complete equality in income. c. income equality will be the best policy option. d. equality of economic opportunity will reduce society’s utility.

ANS: B DIF: 3 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utilitarianism MSC: Analytical


35. Suppose that income is subject to constant marginal utility. From a utilitarian perspective,

a. some income redistribution from rich to poor would increase social welfare. b. some income redistribution from poor to rich would increase social welfare. c. any income redistribution would probably reduce social welfare. d. any income redistribution would probably increase social welfare.

ANS: C DIF: 3 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Utilitarianism MSC: Analytical

36. Suppose that income is subject to increasing marginal utility. From a utilitarian perspective,

a. some income redistribution from rich to poor would increase social welfare. b. some income redistribution from poor to rich would increase social welfare. c. any income redistribution would probably reduce social welfare. d. any income redistribution would probably increase social welfare.

ANS: B DIF: 3 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Utilitarianism MSC: Analytical

37. Liberalism is the political philosophy espoused by

a. Robert Nozick. b. John Stuart Mill. c. John Rawls. d. Jeremy Bentham.

ANS: C DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Liberalism MSC: Interpretive

38. The maximin criterion is attributed to which political philosophy?

a. Utilitarianism. b. Liberalism. c. Libertarianism. d. Repubicanism.

ANS: B DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Liberalism MSC: Interpretive

39. Raising the welfare of the worst-off person in society is an important goal of which political

philosophy? a. Utilitarianism. b. Liberalism. c. Libertarianism. d. Secularism.



40. “The government should choose policies deemed to be just, as evaluated by an impartial observer

behind a ‘veil of ignorance.’” This statement is most closely associated with which political philosophy? a. Liberalism. b. Utilitarianism. c. Libertarianism. d. Welfarism.

ANS: A DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Liberalism MSC: Definitional

41. Suppose that Jamal is moving to a state where personal incomes are distributed randomly. If Jamal

believes in liberalism, he would prefer a. an income distribution that is relatively equal. b. that everyone has the same work opportunities and market-determined wage rates. c. that private property be transformed to government property to safeguard people’s

incomes. d. less economic assistance to the poor because it distorts the price system.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Liberalism MSC: Analytical

42. The philosopher John Rawls argued that

a. people would choose a more equal distribution of income if they had to determine an economic distribution system before knowing their place in it.

b. people would choose income inequality to allow the maximum use of their individual talents.

c. government has a role to ensure income equality to prevent social unrest. d. people would choose income equality because it is morally right.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Liberalism MSC: Analytical

43. Liberalism is founded on a premise that behind a "veil of ignorance,"

a. justice cannot be agreed upon. b. everyone’s income should be equal. c. everyone would agree to "just" rules to reallocate income. d. society should maximize the sum of individual utilities.

ANS: C DIF: 2 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Liberalism MSC: Interpretive


44. The maximin criterion for government policies is associated with

a. the school of thought called utilitarianism. b. the school of thought called liberalism. c. the school of thought called libertarianism. d. the school of thought called stoicism.

ANS: B DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utility MSC: Interpretive

45. According to the doctrine of liberalism, principles of justice are the result of

a. fair agreement and bargain. b. command-and-control policies. c. domination of the powerful by the weak. d. workers owning the factors of production.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Liberalism MSC: Interpretive

46. The political philosophy that views the redistribution of income as a form of social insurance is

a. Utilitarianism. b. Liberalism. c. Libertarianism. d. Welfarism.


47. The maximin criterion suggests that social policy should

a. expropriate the factors of production from the capitalist class. b. ensure an equal distribution of income. c. elevate the well-being of those at the bottom of the income distribution. d. elevate the well-being of all workers.


48. Liberalism suggests that public policies should aim to

a. maximize the sum of utility of everyone in society. b. maximize the well-being of the average person in society. c. maximize the well-being of the worst-off person in society. d. minimize the difference between the utility of the best-off person in the society and the

utility of the worst-off person in society.

ANS: C DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utility MSC: Interpretive


49. A society consists of three individuals: Arthur, Billie, and Chris. In terms of income and utility,

Arthur is currently best-off, Billie ranks in the middle, and Chris is worst-off. Which of the following statements is correct? a. Utilitarianism suggests that government policies should strive to maximize Billie’s utility. b. Liberalism suggests that government policies should strive to maximize Chris’s utility. c. Libertarianism suggests that government policies should strive to maximize Arthur’s

utility. d. Mobilism suggests that government policies should strive to make Chris better off than

Billie.

ANS: B DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utility MSC: Interpretive

50. The rule for redistribution proposed by John Rawls in his book A Theory of Justice is called the

a. "optimal ignorance" rule. b. libertarian justice rule. c. maximin criterion. d. egalitarian criterion.


51. According to the maximin criterion, income should be transferred from the rich to the poor as long

as it a. raises the well-being of the least fortunate. b. does not alter incentives to work and save. c. promotes an equal distribution of income. d. does not lower the welfare of the elderly.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Liberalism MSC: Interpretive

52. If society chose to maximize average utility rather than minimum utility,

a. society would achieve perfect income equality. b. society would achieve the maximin objective. c. its justice would be more utilitarian than Rawlsian. d. its justice would be more Rawlsian than utilitarian.

ANS: C DIF: 3 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Liberalism MSC: Analytical


53. Would the maximin criterion achieve perfect income equality?

a. Yes. There would be no way to reallocate resources to raise the utility of the poor. b. Yes. The maximin criterion would eliminate poverty. c. No. It is impossible for complete equality to benefit the worst-off people in society. d. No. Complete equality would reduce incentives to work, which would reduce total

income, which would reduce the incomes of the worst-off people in society.

ANS: D DIF: 3 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Liberalism MSC: Analytical

54. "Only individual members of society earn income, not society itself." This statement is most closely

associated with the political philosophy of a a. utilitarian. b. liberal. c. libertarian. d. None of the above is correct.

ANS: C DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Libertarianism MSC: Interpretive

55. “The government should punish crimes and enforce voluntary agreements but not redistribute

income.” This statement is most closely associated with which political philosophy? a. Liberalism. b. Utilitarianism. c. Libertarianism. d. Welfarism.

ANS: C DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Libertarianism MSC: Definitional

56. “Equality of opportunities is more important than equality of incomes.” This statement would be

most likely attributed to which political philosophy? a. Utilitarianism. b. Liberalism. c. Libertarianism. d. Welfarism.



57. Robert Nozick criticizes Rawls' concept of justice by using an example of

a. minimum wage laws. b. the grade distribution in an economics class. c. a leaky bucket. d. the price of tea in China.

ANS: B DIF: 1 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Libertarianism MSC: Interpretive

58. Which political philosophy focuses on the process of determining the distribution of income rather

than on the outcome? a. Utilitarianism. b. Liberalism. c. Libertarianism. d. Welfarism.


59. According to a libertarian, if income were to be distributed equally,

a. productivity would increase. b. social utility would increase. c. the marginal productivity of the poor would fall, whereas the marginal productivity of the

rich would rise. d. productivity would decrease.

ANS: D DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Libertarianism MSC: Applicative

60. Libertarians believe that in considering economic fairness, one should primarily consider the

a. outcome of the system. b. process by which outcomes arise. c. maximin criterion. d. maximizing total social utility.


61. Libertarianism identifies a redistribution of income role for government when

a. individual incomes vary widely. b. the income distribution is altered by illegal means (e.g. theft). c. a social planner is needed to smooth out the transitory income stream. d. workers lose their jobs as a result of structural changes in the economy.



62. Libertarians believe that

a. it is more important to evaluate the process by which economic outcomes are produced, rather than the outcomes themselves.

b. government should attempt to redistribute income from the rich to the poor when the gap between rich and poor is more than 20%.

c. Efficiency of opportunities is more important than efficiency of income levels. d. it is more important to evaluate economic outcomes first and then the process that

produced them.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Utility MSC: Interpretive

63. In general, which of the following would libertarians argue is more important than equal outcomes?

a. Equal opportunities. b. Equal incomes. c. Providing a social safety net. d. Assuring fair compensation for workers.

ANS: A DIF: 2 REF: 20-2 NAT: Analytic LOC: The role of government TOP: Libertarianism MSC: Interpretive

64. Bill earns more than Donna. A legislator proposes taxing Bill to supplement Donna's income. A

libertarian would view this proposal as a. a way to increase social justice. b. a way to enhance Donna's income in a socially responsible way. c. validation of the superiority of a libertarian maximin criterion over Rawlsian social justice. d. an inappropriate role for government, since government cannot morally redistribute

income that is not its own.

ANS: D DIF: 3 REF: 20-2 NAT: Analytic LOC: Efficiency and equity TOP: Libertarianism MSC: Analytical


Policies to reduce poverty

MULTIPLE CHOICE

1. Binding minimum-wage laws

a. are most effective at alleviating poverty when labor demand is highly elastic. b. force a market imbalance between the supply and demand for labor. c. increase the efficiency of labor markets. d. are typically associated with a rise in employment among the poor.

ANS: B DIF: 1 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Minimum wage MSC: Applicative


Figure 20-3

2. Refer to Figure 20-3. If the government imposes a minimum wage above Wo, it is likely to

a. increase employment to a level above Qo. b. reduce employment to a level below Qo. c. provide more income to the working poor than they collectively received before the

minimum wage was set. d. have no effect on employment.

ANS: B DIF: 2 REF: 20-3 NAT: Analytic LOC: Reading and interpreting graphs TOP: Minimum wage MSC: Applicative

3. Refer to Figure 20-3. An effective minimum wage would be set at a level

a. above Wo, and employment would rise above Qo. b. above Wo, and employment would fall below Qo. c. below Wo, and employment would rise above Qo. d. below Wo, and employment would fall below Qo.

ANS: B DIF: 2 REF: 20-3 NAT: Analytic LOC: Reading and interpreting graphs TOP: Minimum wage MSC: Applicative

4. Minimum wage laws

a. benefit all unskilled workers. b. create unemployment, but if demand is relatively elastic, the unemployment effects will be

minor. c. may help the nonpoor, such as teenagers from wealthy families. d. reduce poverty by reducing unemployment.

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Minimum wage MSC: Interpretive


5. A binding minimum wage

a. affects employees but not employers. b. lowers the productivity of workers. c. raises the cost of labor to firms. d. All of the above are correct.

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Minimum wage MSC: Applicative

6. Critics of the minimum wage argue that

a. labor demand is inelastic so firms can adjust production. b. too many older employees benefit at the expense of teenage workers. c. many minimum-wage earners are teenagers from middle-class families. d. All of the above are correct.

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Minimum wage MSC: Interpretive

7. Economists who support minimum-wage legislation are likely to believe that the

a. demand for unskilled labor is relatively inelastic. b. demand for unskilled labor is relatively elastic. c. supply of unskilled labor is relatively elastic. d. supply of unskilled labor is relatively inelastic.

ANS: A DIF: 3 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Minimum wage MSC: Analytical

8. A common criticism of welfare programs is that they

a. create self-reliant individuals. b. encourage strong family values. c. encourage illegitimate births. d. have increasing benefits over time, in real terms.

ANS: C DIF: 1 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Welfare MSC: Applicative

9. Since the early 1970s, welfare benefits have declined,

a. which is largely due to the success of the negative income tax program. b. which is largely due to the success of private charities. c. yet the percentage of children living with only one parent has increased. d. and the percentage of children living with only one parent has decreased.

ANS: C DIF: 1 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Welfare MSC: Interpretive


10. A common criticism of government programs that are designed to assist the poor is that

a. those who receive assistance rarely meet the criterion for eligibility. b. the majority of those below the poverty line refuse to accept government assistance. c. they create incentives for people to become "needy." d. they typically account for a majority of annual government expenditures.

ANS: C DIF: 1 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare MSC: Applicative

11. Unemployment insurance benefits is a type of

a. in-kind transfer. b. negative income tax payment. c. property income. d. welfare payment.

ANS: D DIF: 1 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare MSC: Definitional

12. Which of the following is an example of a welfare program?

a. Temporary Assistance for Needy Families (TANF). b. Capital Gains Tax (CGT). c. Life Cycle Transfers (LCT). d. North American Free Trade Agreement (NAFTA).

ANS: A DIF: 1 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare MSC: Applicative

13. In the Temporary Assistance for Needy Families program, most families

a. must have both parents in the home to qualify. b. are female head-of-household families in which the father is absent. c. have adult children with disabilities living at home. d. are ineligible to receive assistance from other support programs.

ANS: B DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare MSC: Applicative

14. Anti-poverty programs

a. encourage saving among recipient groups. b. impose a very low marginal tax rate on income. c. are only made available to those with no other source of income. d. may discourage the poor from escaping poverty on their own.

ANS: D DIF: 2 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Welfare MSC: Applicative


15. Critics of welfare reform argue that

a. drug addiction has increased among the working poor. b. the emphasis on work has forced many mothers into low-paying jobs while not providing

adequate child care. c. homelessness has increased dramatically. d. the number of people on welfare rolls increased after reform.

ANS: B DIF: 2 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Welfare MSC: Applicative

16. Supporters of welfare reform argue that

a. childhood literacy rates have increased. b. private charities have provided sufficient child-care resources for working mothers. c. employment has increased among the demographic groups traditionally on welfare,

including single mothers. d. tax evasion declined among employers of former welfare recipients.

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare MSC: Applicative

17. Proponents of welfare reform claim that programs that do not establish a time limit on recipient

benefits harm children by a. forcing mothers to work outside the home. b. encouraging a psychological dependency on government programs. c. encouraging child abuse by absent fathers. d. creating drug addiction.

ANS: B DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare MSC: Applicative


a. Welfare programs may encourage illegitimate births. b. The decline in welfare benefits since the 1970s has been associated with a decline in the

percentage of children living with a single parent. c. Welfare programs may reduce incentives for people to work. d. A negative income tax program uses tax revenues collected from high-income families to

provide cash subsidies to low-income families.

ANS: B DIF: 3 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare MSC: Analytical



a. A disadvantage of a minimum-wage law is that it may benefit unskilled workers who are not low-income workers.

b. A disadvantage of a negative income tax program is that a poor person who chooses not to work many hours would receive a cash benefit.

c. A disadvantage of an Earned Income Tax Credit (EITC) is that a person who is unable to work due to a disability does not benefit from the program.


ANS: D DIF: 3 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare | Minimum wage MSC: Analytical


a. An advantage of a minimum-wage law is that it may benefit unskilled workers who are not low-income workers.

b. An advantage of a negative income tax program is that a poor person who chooses not to work many hours would receive a cash benefit.

c. An advantage of an Earned Income Tax Credit (EITC) is that a person who is unable to work due to a disability does not benefit from the program.

d. Following the reform of welfare in 1996 there was a large decrease in the welfare rolls.

ANS: D DIF: 3 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Welfare | Minimum wage MSC: Analytical


a. An advantage of an in-kind transfer is that it prevents an alcoholic from spending a cash benefit on alcohol.

b. An advantage of the Supplemental Security Income (SSI) program is that it benefits the sick and disabled.

c. An advantage of a negative income tax program is that it encourages the poor to work in order to be eligible.

d. An advantage of a minimum wage law is that it benefits some unskilled workers.

ANS: C DIF: 3 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare | In-kind transfers | Minimum wage MSC: Analytical

22. A negative income tax system was designed to

a. provide in-kind benefits to the poor. b. provide a minimum income to the poor. c. reduce taxes on the rich when their incomes surpass the maximum income tax bracket. d. subsidize food consumption in poor families.

ANS: B DIF: 1 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Interpretive


23. A tax provision that works much like a negative income tax is the

a. Earned Income Tax Credit (EITC). b. Temporary Assistance for Needy Families (TANF). c. deduction for charitable contributions. d. mortgage interest rate deduction.

ANS: A DIF: 1 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Applicative

24. A negative income tax system would

a. make taxes more regressive. b. sever the link between tax policy and income distribution. c. collect from high-income households and give transfers to low-income households. d. eliminate progressive tax rates.

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Applicative

25. The only qualification to receive government assistance under a negative income tax is

a. pre-school children. b. to be enrolled in job training. c. a working head-of-household. d. a low income.

ANS: D DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Applicative

26. Which of the following formulas is most representative of a negative income tax proposal?

a. Taxes Owed = (1/4 of Income) $2 b. Taxes Owed = (1/2 of Income) 3/4 c. Taxes Owed = (1/2 of Income) + $10,000 d. Taxes Owed = (1/3 of Income) - $10,000

ANS: D DIF: 3 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Analytical

27. Assume that the government proposes a negative income tax that calculates the taxes owed as

follows: Taxes Owed = (1/3 Income) - 10,000. If a family doesn't earn any income, how does the negative income tax affect them? a. They will receive an income subsidy of $1,000. b. They will receive an income subsidy of $3,000. c. They will receive an income subsidy of $10,000. d. They will not be affected at all, since the negative income tax requires a family to earn

income.

ANS: C DIF: 3 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Analytical



follows: Taxes Owed = (1/3 Income) - 10,000. A family that earns an income of $60,000 will a. pay $10,000 in taxes. b. receive an income subsidy of $3,000. c. receive an income subsidy of $10,000. d. neither pay taxes nor receive an income subsidy.

ANS: A DIF: 3 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Negative income tax MSC: Analytical


follows: Taxes Owed = (1/3 Income) - 10,000. A family that earns an income of $30,000 will a. neither pay taxes nor receive an income subsidy. b. receive an income subsidy of $500. c. pay $1,000 in taxes. d. pay $600 in taxes.

ANS: A DIF: 3 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Analytical

30. Which of the following is not a characteristic of the Earned Income Tax Credit (EITC)?

a. It does not discourage recipients from working. b. It is less distortionary than other anti-poverty programs. c. It helps the disabled who cannot work. d. It applies only to the working poor.

ANS: C DIF: 3 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax MSC: Analytical

31. Medicaid and food stamps are

a. available only to the elderly. b. forms of in-kind assistance. c. forms of cash assistance. d. transfer payments.

ANS: B DIF: 1 REF: 20-3 NAT: Analytic LOC: The role of government TOP: In-kind transfers MSC: Definitional

32. In-kind transfers are politically popular because

a. they provide high quality food and shelter. b. they provide cash. c. allow resale of food stamps for cash, if needed. d. the public believes that the aid is not going to support addictions.

ANS: D DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: In-kind transfers MSC: Interpretive


33. Which of the following is an advantage of an in-kind transfer in comparison to a cash payment?

a. In-kind transfers cost less to administer than cash transfers. b. In-kind transfers restrict the use of the benefit; thus, recipients receive necessities such as

food and health care. c. In-kind transfers are more efficient than cash transfers. d. In-kind transfers give the recipient more utility than cash transfers.

ANS: B DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: In-kind transfers MSC: Analytical

34. Which of the following is most likely to explain why young children in developing countries often

work? a. Their parents want them to gain valuable work experience. b. Their parents do not view education as important. c. Their families are poor. d. Their families’ religious practices encourage child labor.

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Child labor MSC: Applicative


a. When most Americans picture child labor, they think of young children working in factories. In fact, many young children in poor countries work on family farms.

b. Many young children work in poor countries rather than attend school because education is not valued in those countries.

c. An increase in income for families in poor countries is often associated with an increase in the number of children attending school.

d. In the past, most policies aimed at deterring child labor focused on educating the parents about why their children should not work.

ANS: B DIF: 2 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Child labor MSC: Applicative

36. Which of the following statements about the minimum wage is correct?

a. An increase in the minimum wage enhances the well-being of all unskilled workers. b. An increase in the minimum wage has no effect on the well-being of middle-class

families. c. Advocates of the minimum wage argue that the demand for labor is relatively inelastic. d. Critics of the minimum wage argue that it is an undesirable way of helping the poor

because it is costly to the government.

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Minimum wage MSC: Interpretive


37. For which of the following programs can a person qualify solely by having a low income?

a. both Temporary Assistance for Needy Families (TANF) and Supplemental Security Income (SSI)

b. Temporary Assistance for Needy Families (TANF) but not Supplemental Security Income (SSI)

c. Supplemental Security Income (SSI) but not Temporary Assistance for Needy Families (TANF)

d. neither Temporary Assistance for Needy Families (TANF) nor Supplemental Security Income (SSI)

ANS: D DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare MSC: Definitional

38. The U.S. welfare system was revised by a 1996 law that

a. consolidated all of the previous assistance programs into a single program. b. limited the amount of time that people could receive assistance. c. said it was no longer necessary for poor people to demonstrate an additional “need,” such

as small children or a disability, to qualify for assistance. d. turned all federally-run welfare programs over to the states.

ANS: B DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Welfare MSC: Definitional

39. Poor families are eligible for financial assistance, without having to demonstrate any additional

“need,” a. under the current welfare system and under a negative income tax. b. under the current welfare system but not under a negative income tax. c. under a negative income tax but not under the current welfare system. d. under neither the current welfare system nor under a negative income tax.

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Negative income tax | Welfare MSC: Definitional

40. Relative to direct cash payments, in-kind transfers have the advantage of being

a. more politically popular. b. more efficient. c. more respectful of the poor. d. of a higher dollar value than cash payments.

ANS: A DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: In-kind transfers MSC: Interpretive


41. An example of an in-kind transfer to the poor is

a. the negative income tax. b. the Earned Income Tax Credit (EITC). c. Medicaid. d. Temporary Assistance for Needy Families (TANF).

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: In-kind transfers MSC: Interpretive

42. Eric V. Edmonds, an economist who has studied child labor issues, asserts that

a. international trade has led to more children working in agriculture in Vietnam. b. culture, not poverty, leads families to put their children to work. c. policies to curb child labor have the effect of “liberating millions of children from dismal

lives working in factories.” d. policies to curb child labor have the effect of “punishing the poorest for being poor.”

ANS: D DIF: 2 REF: 20-3 NAT: Analytic LOC: The role of government TOP: Child labor MSC: Interpretive

43. Many Democrats who campaigned in the 2006 elections supported raising the U.S. minimum wage.

Critics of raising the minimum wage argue that minimum-wage laws are a. too expensive for local governments to fund. b. too expensive for local governments to administer. c. imprecise in their ability to help the working poor. d. easy for businesses to pay.

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Minimum wage MSC: Interpretive

44. Many Democrats who campaigned in the 2006 elections supported raising the U.S. minimum wage.

Supporters of raising the minimum wage argue that minimum-wage laws are a. a tax-free way to help the working poor; after all, business bear the burden of paying

higher wages, not the government. b. better that the Earned Income Tax Credit (EITC) in targeting the working poor; after all,

the EITC may benefit teenagers from middle-class families who work summer jobs at the minimum wage.

c. better than in-kind transfers such as food stamps in providing food rather than unhealthy items such as drugs or alcohol.

d. a way to increase employment of those likely to make the minimum wage.

ANS: A DIF: 2 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Minimum wage MSC: Interpretive


45. Which of the following is not an example of a welfare program?

a. Supplemental Security Income (SSI) b. Temporary Assistance for Needy Families (TANF) c. food stamps d. minimum wage laws

ANS: D DIF: 2 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Welfare MSC: Applicative


a. An advantage of the Earned Income Tax Credit (EITC) is that it targets the working poor better than the minimum wage because it does not benefit teenagers from middle-class families who work summer jobs at the minimum wage.

b. A disadvantage of in-kind transfer programs such as food stamps is that they force recipients to purchase from a restricted set of items which may not include things that the poor need the most such as diapers or cleaning supplies.

c. A disadvantage of minimum wage laws is that they are expensive for state and local governments to fund.

d. Effective minimum wage laws create a surplus of labor.

ANS: C DIF: 3 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Minimum wage, Welfare, Negative income tax MSC: Analytical


a. An disadvantage of Supplemental Security Income (SSI) is that it does not encourage families to break up in order to qualify for assistance.

b. A disadvantage of in-kind transfer programs such as food stamps is that they force recipients to purchase from a restricted set of items which may not include things that the poor need the most such as diapers or cleaning supplies.

c. A disadvantage of minimum wage laws is that they are expensive for state and local governments to fund.

d. An advantage of a negative income tax is that it encourages the poor to work in order to receive government assistance.

ANS: B DIF: 3 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Minimum wage, Welfare, Negative income tax, Work incentives MSC: Analytical


48. Which of the following statements is correct regarding the international phenomenon of child labor?

a. The highest percentage of child laborers work in factories. b. Policies that restrict the opportunities for children to work are likely to punish the poorest

families. c. The most significant reason why children work is that their parents do not understand the

benefits of childhood education. d. When a family experiences an increase in income, the children are more likely to work

longer hours, especially if they are working in agriculture.

ANS: B DIF: 2 REF: 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Child labor MSC: Applicative

49. Initial policy efforts to curb child labor focused on

a. educating parents. b. educating children. c. banning child-made products. d. taxing employers that hire children.

ANS: A DIF: 1 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Child labor MSC: Analytical

50. Most children work in which sector of the economy?

a. agriculture b. manufacturing c. information technology d. service sector jobs, such as McDonalds

ANS: A DIF: 1 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Child labor MSC: Analytical

51. Eric V. Edmonds says which of the following explains most of the drop in child labor rates in

Vietnam? a. the availability of good schools b. the availability of jobs c. rising family income d. internet access

ANS: C DIF: 2 REF: 20-3 NAT: Analytic LOC: Labor markets TOP: Child labor MSC: Analytical



a. The biggest explanation for international child labor is poverty. b. Critics of the welfare system argue that it breaks up families. c. One of the problems with measuring income inequality is valuing in-kind transfers. d. Utilitarians believe that the government should punish crimes but should not redistribute

income.

ANS: D DIF: 3 REF: 20-1 | 20-2 | 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality | Utilitarianism | Welfare | Child labor MSC: Analytical


a. Followers of the liberalism political philosophy believe that society should maximize the total of individual utilities.

b. The poverty line is adjusted for regional differences in the costs of raising children. c. One advantage to the Earned Income Tax Credit (EITC) is that it benefits the working

poor. d. When family incomes rise in poor countries, young children are more likely to be taken

out of school to work on family farms.

ANS: C DIF: 3 REF: 20-1 | 20-2 | 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Poverty | Liberalism | Negative income tax | Child labor MSC: Analytical


a. Two key elements of welfare reform are work requirements and limiting the time that recipients can receive benefits.

b. The Earned Income Tax Credit (EITC) is very similar to a negative income tax. c. Minimum wage laws will likely increase unemployment. d. The elderly are more likely to be poor than single mothers.

ANS: D DIF: 3 REF: 20-1 | 20-2 | 20-3 NAT: Analytic LOC: Efficiency and equity TOP: Income inequality | Poverty | Minimum wage | Negative income tax MSC: Analytical

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