Answer-keys-mankiw-7th-1.docx

MICROECONOMICS MULTIPLE CHOICE Chapter 1 Ten Principles of Economics 1. Economics is best defined as the study of a. how society manages its scarce resources. b. how to run a business most profitably. c. how to predict inflation, unemployment, and stock prices. d. how the government can stop the harm from unchecked self-interest. 2. Your opportunity cost of going to a movie is a. the price of the ticket. b. the price of the ticket plus the cost of any soda and popcorn you buy at the theater. c. the total cash expenditure needed to go to the movie plus the value of your time. d. zero, as long as you enjoy the movie and consider it a worthwhile use of time and money. 3. A marginal change is one that a. is not important for public policy. b. incrementally alters an existing plan. c. makes an outcome inefficient. d. does not influence incentives. 4. Adam Smith’s “invisible hand” refers to a. the subtle and often hidden methods that businesses use to profit at consumers’ expense. b. the ability of free markets to reach desirable outcomes, despite the self-interest of market participants. c. the ability of government regulation to benefit consumers, even if the consumers are unaware of the regulations. d. the way in which producers or consumers in unregulated markets impose costs on innocent bystanders. 5. Governments may intervene in a market economy in order to a. protect property rights. b. correct a market failure due to externalities. c. achieve a more equal distribution of income. d. All of the above. 6. If a nation has high and persistent inflation, the most likely explanation is a. the central bank creating excessive amounts of money. b. unions bargaining for excessively high wages. c. the government imposing excessive levels of taxation. d. firms using their monopoly power to enforce excessive price hikes. Chapter 2 Thinking Like an Economist 1. An economic model is a. a mechanical machine that replicates the functioning of the economy. b. a fully detailed, realistic description of the economy. c. a simplified representation of some aspect of the economy. d. a computer program that predicts the future of the economy. 2. The circular-flow diagram illustrates that, in markets for the factors of production, a. households are sellers, and firms are buyers. b. households are buyers, and firms are sellers. c. households and firms are both buyers. d. households and firms are both sellers.

3. A point inside the production possibilities frontier is a. efficient, but not feasible. b. feasible, but not efficient. c. both efficient and feasible. d. neither efficient nor feasible. 4. An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers’ preferences, it would a. expand the production possibilities frontier. b. contract the production possibilities frontier. c. move the economy along the production possibilities frontier. d. move the economy inside the production possibilities frontier. 5. All of the following topics fall within the study of microeconomics EXCEPT a. the impact of cigarette taxes on the smoking behavior of teenagers. b. the role of Microsoft’s market power in the pricing of software. c. the effectiveness of antipoverty programs in reducing homelessness. d. the influence of the government budget deficit on economic growth. 6. Which of the following is a positive, rather than a normative, statement? a. Law X will reduce national income. b. Law X is a good piece of legislation. c. Congress ought to pass law X. d. The president should veto law X. Chapter 4 The Market Forces of Supply and Demand 1. A change in which of the following will NOT shift the demand curve for hamburgers? a. the price of hot dogs b. the price of hamburgers c. the price of hamburger buns d. the income of hamburger consumers 2. An increase in ________ will cause a movement along a given demand curve, which is called a change in ________. a. supply, demand b. supply, quantity demanded c. demand, supply d. demand, quantity supplied 3. Movie tickets and DVDs are substitutes. If the price of DVDs increases, what happens in the market for movie tickets? a. The supply curve shifts to the left. b. The supply curve shifts to the right. c. The demand curve shifts to the left. d. The demand curve shifts to the right. 4. The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price. a. supply, higher b. supply, lower c. demand, higher d. demand, lower 5. If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods? a. Prices and quantities both rise.

b. Prices and quantities both fall. c. Prices rise, quantities fall. d. Prices fall, quantities rise. 6. Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold? a. an increase in the price of peanut better, a complement to jelly b. an increase in the price of Marshmallow Fluff, a substitute for jelly c. an increase in the price of grapes, an input into jelly d. an increase in consumers’ incomes, as long as jelly is a normal good Chapter 5 Elasticity and Its Application 1. A life-saving medicine without any close substitutes will tend to have a. a small elasticity of demand. b. a large elasticity of demand. c. a small elasticity of supply. d. a large elasticity of supply. 2. The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to 90 units. Calculated with the midpoint method, the elasticity is a. 1/5. b. 1/2. c. 2. d. 5. 3. A linear, downward-sloping demand curve is a. inelastic. b. unit elastic. c. elastic. d. inelastic at some points, and elastic at others. 4. The ability of firms to enter and exit a market over time means that, in the long run, a. the demand curve is more elastic. b. the demand curve is less elastic. c. the supply curve is more elastic. d. the supply curve is less elastic. 5. An increase in the supply of a good will decrease the total revenue producers receive if a. the demand curve is inelastic. b. the demand curve is elastic. c. the supply curve is inelastic. d. the supply curve is elastic. 6. The price of coffee rose sharply last month, while the quantity sold remained the same. Each of five people suggests an explanation: Tom: Demand increased, but supply was perfectly inelastic. Dick: Demand increased, but it was perfectly inelastic. Harry: Demand increased, but supply decreased at the same time. Larry: Supply decreased, but demand was unit elastic. Mary: Supply decreased, but demand was perfectly inelastic. Who could possibly be right? a. Tom, Dick, and Harry b. Tom, Dick, and Mary c. Tom, Harry, and Mary d. Dick, Harry, and Larry

e. Dick, Harry, and Mary Chapter 6 Supply, Demand, and Government Policies 1. When the government imposes a binding price floor, it causes a. the supply curve to shift to the left. b. the demand curve to shift to the right. c. a shortage of the good to develop. d. a surplus of the good to develop. 2. In a market with a binding price ceiling, an increase in the ceiling will ___________ the quantity supplied, ___________ the quantity demanded, and reduce the ___________. a. increase, decrease, surplus b. decrease, increase, surplus c. increase, decrease, shortage d. decrease, increase, shortage 3. A $1 per unit tax levied on consumers of a good is equivalent to a. a $1 per unit tax levied on producers of the good. b. a $1 per unit subsidy paid to producers of the good. c. a price floor that raises the good’s price by $1 per unit. d. a price ceiling that raises the good’s price by $1 per unit. 4. Which of the following would increase quantity supplied, decrease quantity demanded, and increase the price that consumers pay? a. the imposition of a binding price floor b. the removal of a binding price floor c. the passage of a tax levied on producers d. the repeal of a tax levied on producers 5. Which of the following would increase quantity supplied, increase quantity demanded, and decrease the price that consumers pay? a. the imposition of a binding price floor b. the removal of a binding price floor c. the passage of a tax levied on producers d. the repeal of a tax levied on producers 6. When a good is taxed, the burden of the tax falls mainly on consumers if a. the tax is levied on consumers. b. the tax is levied on producers. c. supply is inelastic, and demand is elastic. d. supply is elastic, and demand is inelastic. Chapter 21 The Theory of Consumer Choice 1. Emilio buys pizza for $10 and soda for $2. He has income of $100. His budget constraint will experience a parallel outward shift if which of the following events occur? a. The price of pizza falls to $5, the price of soda falls to $1, and his income falls to $50. b. The price of pizza rises to $20, the price of soda rises to $4, and his income remains the same. c. The price of pizza falls to $8, the price of soda falls to $1, and his income rises to $120. d. The price of pizza rises to $20, the price of soda rises to $4, and his income rises to $400. 2. At any point on an indifference curve, the slope of the curve measures the consumer’s

a. income. b. willingness to trade one good for the other. c. perception of the two goods as substitutes or complements. d. elasticity of demand. 3. Matthew and Susan are both optimizing consumers in the markets for shirts and hats, where they pay $100 for a shirt and $50 for hat. Matthew buys 4 shirts and 16 hats, while Susan buys 6 shirts and 12 hats. From this information, we can infer that Matthew’s marginal rate of substitution is _____ hats per shirt, while Susan’s is _____. a. 2, 1 b. 2, 2 c. 4, 1 d. 4, 2 4. Charlie buys only milk and cereal. Milk is a normal good, while cereal is an inferior good. When the price of milk rises, Charlie buys a. less of both goods. b. more milk and less cereal. c. less milk and more cereal. d. less milk, but the impact on cereal is ambiguous. 5. If the price of pasta increases and a consumer buys more pasta, we can infer that a. pasta is a normal good, and the income effect is greater than the substitution effect. b. pasta is a normal good, and the substitution effect is greater than the income effect. c. pasta is an inferior good, and the income effect is greater than the substitution effect. d. pasta is an inferior good, and the substitution effect is greater than the income effect. 6. The labor-supply curve slopes upward if a. leisure is a normal good. b. consumption is a normal good. c. the income effect on leisure is greater than the substitution effect. d. the substitution effect on leisure is greater than the Chapter 13 The Costs of Production 1. Raj opens up a lemonade stand for two hours. He spends $10 for ingredients and sells $60 worth of lemonade. In the same two hours, he could have mowed his neighbor’s lawn for $40. Raj has an accounting profit of ______ and an economic profit of ______. a. $50, $10 b. $90, $50 c. $10, $50 d. $50, $90 2. Diminishing marginal product explains why, as a firm’s output increases, a. the production function and total-cost curve both get steeper. b. the production function and total-cost curve both get flatter. c. the production function gets steeper, while the total-cost curve gets flatter. d. the production function gets flatter, while the total-cost curve gets steeper. 3. A firm is producing 1,000 units at a total cost of $5,000. If it were to increase production to 1,001 units, its total cost would rise to $5,008. What does this information tell you about the firm? a. Marginal cost is $5, and average variable cost is $8. b. Marginal cost is $8, and average variable cost is $5. c. Marginal cost is $5, and average total cost is $8.

d. Marginal cost is $8, and average total cost is $5. 4. A firm is producing 20 units with an average total cost of $25 and marginal cost of $15. If it were to increase production to 21 units, which of the following must occur? a. Marginal cost would decrease. b. Marginal cost would increase. c. Average total cost would decrease. d. Average total cost would increase. 5. The government imposes a $1,000 per year license fee on all pizza restaurants. Which cost curves shift as a result? a. average total cost and marginal cost b. average total cost and average fixed cost c. average variable cost and marginal cost d. average variable cost and average fixed cost 6. If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit ________ of scale and ________ average total cost. a. economies, falling b. economies, rising c. diseconomies, falling d. diseconomies, rising Chapter 14 Firms in Competitive Markets 1. A perfectly competitive firm a. chooses its price to maximize profits. b. sets its price to undercut other firms selling similar products. c. takes its price as given by market conditions. d. picks the price that yields the largest market share. 2. A competitive firm maximizes profit by choosing the quantity at which a. average total cost is at its minimum. b. marginal cost equals the price. c. average total cost equals the price. d. marginal cost equals average total cost. 3. A competitive firm’s short-run supply curve is its ___________ cost curve above its ___________ cost curve. a. average total, marginal b. average variable, marginal c. marginal, average total d. marginal, average variable 4. If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between average variable cost and average total cost, it will a. keep producing in the short run but exit the market in the long run. b. shut down in the short run but return to production in the long run. c. shut down in the short run and exit the market in the long run. d. keep producing both in the short run and in the long run. 5. In the long-run equilibrium of a competitive market with identical firms, what is the relationship between price P, marginal cost MC, and average total cost ATC? a. P > MC and P > ATC. b. P > MC and P = ATC. c. P = MC and P > ATC.

d. P = MC and P = ATC. 6. Pretzel stands in New York City are a perfectly competitive industry in long-run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How does this policy affect the number of pretzels consumed in the short run and in the long run? a. down in the short run, no change in the long run b. up in the short run, no change in the long run c. no change in the short run, down in the long run d. no change in the short run, up in the long run Chapter 15 Monopoly 1. A firm is a natural monopoly if it exhibits the following as its output increases: a. decreasing marginal revenue b. increasing marginal cost c. decreasing average revenue d. decreasing average total cost 2. For a profit-maximizing monopoly that charges the same price to all consumers, what is the relationship between price P, marginal revenue MR, and marginal cost MC? a. P = MR and MR = MC. b. P > MR and MR = MC. c. P = MR and MR > MC. d. P > MR and MR > MC. 3. If a monopoly’s fixed costs increase, its price will _________ and its profit will _________. a. increase, decrease b. decrease, increase c. increase, stay the same d. stay the same, decrease 4. Compared to the social optimum, a monopoly firm chooses a. a quantity that is too low and a price that is too high. b. a quantity that is too high and a price that is too low. c. a quantity and a price that are both too high. d. a quantity and a price that are both too low. 5. The deadweight loss from monopoly arises because a. the monopoly firm makes higher profits than a competitive firm would. b. some potential consumers who forgo buying the good value it more than its marginal cost. c. consumers who buy the good have to pay more than marginal cost, reducing their consumer surplus. d. the monopoly firm chooses a quantity that fails to equate price and average revenue. 6. When a monopolist switches from charging a single price to perfect price discrimination, it reduces a. the quantity produced. b. the firm’s profit. c. consumer surplus. d. total surplus.

ANSWER KEY Chapter 1 Ten Principles of Economics 1a 2c 3b 4b 5d 6a Chapter 2 Thinking Like an Economist 1c 2a 3b 4c 5d 6a Chapter 4 The Market Forces of Supply and Demand 1b 2b 3d 4b 5a 6c Chapter 5 Elasticity and Its Application 1a 2b 3d 4c 5a 6c

Chapter 6 Supply, Demand, and Government Policies 1d 2c 3a 4a 5d 6d Chapter 21 The Theory of Consumer Choice 1d 2b 3a 4c 5c 6d Chapter 13 The Costs of Production 1a 2d 3d 4c 5b 6a Chapter 14 Firms in Competitive Markets 1c 2b 3d 4a 5d 6c Chapter 15 Monopoly 1d 2b 3d 4a 5c

6c