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

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1 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 2. The "monopoly" in monopolistically competitive markets is most likely a result of firms having some pricing power due to product differentiation. ANS: T 3. REF: 16-1 TOP: Monopolistic competition Monopolistic competition is the only market structure that features many sellers. ANS: F 7. REF: 16-1 TOP: Monopolistic competition A monopolistically competitive market is characterized by barriers to entry. ANS: F 6. REF: 16-1 TOP: Monopolistic competition Monopolistic competition is characterized by many buyers and sellers, product differentiation, and barriers to entry. ANS: F MSC: Definitional 5. REF: 16-1 TOP: Monopolistic competition Monopolistic competition is characterized by many buyers and sellers, product differentiation, and free entry. ANS: T MSC: Definitional 4. REF: 16-1 TOP: Monopolistic competition REF: 16-1 TOP: Markets Product differentiation always leads to some measure of market power. ANS: T REF: 16-1 TOP: Demand curve 1402

2 Chapter 16/Monopolistic Competition Oligopoly is characterized by a few sellers offering similar products, whereas monopolistic competition is characterized by many sellers offering differentiated products. ANS: T MSC: Definitional 9. REF: 16-1 TOP: Monopolistic competition Monopolistic competition is characterized by a few sellers offering similar products, whereas oligopoly is characterized by many sellers offering differentiated products. ANS: F MSC: Definitional REF: 16-1 TOP: Monopolistic competition 10. Oligopoly and monopolistic competition are examples of a market structure called imperfect competition. ANS: T MSC: Definitional REF: 16-1 TOP: Monopolistic competition 11. Monopolistic competition and monopoly are examples of a market structure called imperfect competition. ANS: F MSC: Definitional REF: 16-1 TOP: Monopolistic competition 12. A markup of price over marginal cost is inconsistent with free entry and zero profit. ANS: F TOP: Profit maximization 13. Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price that exceeds marginal cost. ANS: T TOP: Profit maximization 14. A profit-maximizing firm in a monopolistically competitive market charges a price equal to marginal cost. ANS: F TOP: Profit maximization

3 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 TOP: Profit maximization 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 TOP: Profit maximization 17. A profit-maximizing firm in a monopolistically competitive market can earn positive, negative, or zero profits in the short run. ANS: T TOP: Short-run equilibrium 18. A firm in a monopolistically competitive market can earn both short-run and long-run profits. ANS: F TOP: Short-run equilibrium Long-run equilibrium 19. A firm in a monopolistically competitive market can earn short-run profits but not long-run profits. ANS: T TOP: Short-run equilibrium Long-run equilibrium 20. In the long run, monopolistically competitive firms produce where demand equals marginal cost. ANS: F TOP: Long-run equilibrium 21. When a firm in a monopolistically competitive market earns zero economic profit, its product price must equal marginal cost. ANS: F TOP: Long-run equilibrium

4 Chapter 16/Monopolistic Competition In the long run, monopolistically competitive firms produce where demand equals average total cost. ANS: T TOP: Long-run equilibrium 23. In a monopolistically competitive market, the number of firms adjusts until economic profits are driven to zero. ANS: T TOP: Long-run equilibrium 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 TOP: Long-run equilibrium 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 TOP: Demand curve Long-run equilibrium 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. ANS: F TOP: Profit maximization 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 TOP: Excess capacity 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 TOP: Excess capacity

5 1406 Chapter 16/Monopolistic Competition 29. Excess capacity characterizes firms in monopolistically competitive markets, even in situations of long-run equilibrium. ANS: T TOP: Excess capacity 30. When a firm operates with excess capacity, it must be in a monopolistically competitive market. ANS: F TOP: Excess capacity 31. A firm that would experience higher average total cost by increasing production is operating with excess capacity. ANS: F TOP: 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 MSC: Definitional TOP: Efficient scale 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 REF: 16-3 TOP: Advertising 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 REF: 16-3 TOP: Advertising 35. The claim that advertising reduces the elasticity of demand is likely to be made by a defender of advertising. ANS: F REF: 16-3 TOP: Advertising 36. Critics of advertising argue that firms use advertising to manipulate consumers tastes. ANS: T REF: 16-3 TOP: Advertising

6 Chapter 16/Monopolistic Competition When advertising is used to relay information about price, each firm is able to enhance market power. ANS: F REF: 16-3 TOP: Advertising 38. Policymakers have generally come to accept the view that advertising enhances the efficiency of markets. ANS: T REF: 16-3 TOP: Advertising 39. Economists are unanimous in their belief that advertising is socially inefficient. ANS: F REF: 16-3 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. ANS: T REF: 16-3 TOP: Advertising 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. ANS: T REF: 16-3 TOP: Advertising 42. Empirical evidence suggests that advertising usually leads to an increase in the price for advertised products. ANS: F REF: 16-3 TOP: Advertising 43. Economists who argue that advertising enhances market efficiency suggest that celebrity advertising signals inferior product quality. ANS: F REF: 16-3 TOP: Advertising 44. Advertising during the Super Bowl is an example of information about quality contained primarily in the existence and expense of the advertising. ANS: T REF: 16-3 TOP: Advertising

7 1408 Chapter 16/Monopolistic Competition 45. Brand names are rarely used to convey information about product quality. ANS: F REF: 16-3 TOP: Advertising 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. ANS: T REF: 16-3 TOP: Advertising 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. ANS: F REF: 16-3 TOP: Advertising 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. ANS: T REF: 16-3 TOP: Advertising 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. ANS: F REF: 16-3 TOP: Advertising 50. The government may not be able to improve the inefficiencies of a monopolistically competitive market. ANS: T REF: 16-4 TOP: Monopolistic competition 51. Firms in monopolistically competitive markets and monopolies can earn long-run profits due to barriers to entry. ANS: F REF: 16-4 TOP: Monopolistic competition 52. Free entry eliminates long-run profits for firms in competitive and monopolistic industries. ANS: T REF: 16-4 TOP: Monopolistic competition

8 Chapter 16/Monopolistic Competition 1409 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. REF: 16-1 TOP: Monopolistic competition 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. REF: 16-1 TOP: Demand curve 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. REF: 16-1 TOP: Monopolistic competition

9 1410 Chapter 16/Monopolistic Competition 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. TOP: Excess capacity

10 Chapter 16/Monopolistic Competition 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). TOP: Long-run equilibrium 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. TOP: Excess capacity

11 1412 Chapter 16/Monopolistic Competition 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. TOP: Externalities 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. TOP: Externalities 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. TOP: Advertising REF: 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. TOP: Advertising REF: 16-3

12 Chapter 16/Monopolistic Competition 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. TOP: Advertising REF: 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. TOP: Advertising REF: 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. TOP: Advertising REF: 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). TOP: Advertising REF: 16-3

13 1414 Chapter 16/Monopolistic Competition 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. DIF: 3 TOP: Advertising REF: 16-3 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 MSC: Definitional 2. The market for novels is a. perfectly competitive. b. a monopoly. c. monopolistically competitive. d. an oligopoly. 3. REF: 16-0 TOP: Monopolistic competition REF: 16-0 TOP: Monopolistic competition 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. REF: 16-0 TOP: Monopolistic competition

14 Chapter 16/Monopolistic Competition Which of the following statements is not correct? 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. 5. Monopolistic competition is a type of a. oligopoly. b. market structure. c. price discrimination. d. advertising strategy. MSC: Definitional 6. REF: 16-0 TOP: Monopolistic competition REF: 16-0 TOP: Monopolistic competition 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. REF: 16-0 TOP: Monopolistic competition 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. REF: 16-1 TOP: Imperfect competition

15 1416 Chapter 16/Monopolistic Competition 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. 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 4. REF: 16-1 TOP: Imperfect competition 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. 6. REF: 16-1 TOP: Imperfect competition 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. MSC: Definitional 5. REF: 16-1 TOP: Imperfect competition REF: 16-1 TOP: Imperfect competition 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. MSC: Definitional REF: 16-1 TOP: Imperfect competition

16 Chapter 16/Monopolistic Competition 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. 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. 9. REF: 16-1 TOP: Imperfect competition REF: 16-1 TOP: Imperfect competition Imperfectly competitive firms are characterized by a. horizontal demand curves. b. standardized products. c. a large number of small firms. d. price making ability. REF: 16-1 TOP: Imperfect competition 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. REF: 16-1 TOP: Oligopoly 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. REF: 16-1 TOP: Oligopoly MSC: Definitional

17 1418 Chapter 16/Monopolistic Competition 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. REF: 16-1 TOP: Oligopoly 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. REF: 16-1 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. REF: 16-1 TOP: Oligopoly 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. b. c. d. (i) and (ii) only (ii) and (iii) only (i) and (iii) only (iii) only REF: 16-1 TOP: Oligopoly 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. REF: 16-1 TOP: Concentration ratio

18 Chapter 16/Monopolistic Competition 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. REF: 16-1 TOP: Concentration ratio 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. REF: 16-1 TOP: Concentration ratio 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. REF: 16-1 TOP: Concentration ratio 20. Which of the following industries has the highest concentration ratio? a. wheat b. novels c. cigarettes d. dog food REF: 16-1 TOP: Concentration ratio

19 1420 Chapter 16/Monopolistic Competition 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 Refer to Table What is the concentration ratio in Industry A? a. 24% b. 55% c. 66% d. 82% REF: 16-1 TOP: Concentration ratio 22. Refer to Table What is the concentration ratio in Industry B? a. 5% b. 46% c. 85% d. 95% REF: 16-1 TOP: Concentration ratio 23. Refer to Table What is the concentration ratio in Industry C? a. 29% b. 39% c. 45% d. 56% REF: 16-1 TOP: Concentration ratio

20 Chapter 16/Monopolistic Competition Refer to Table What is the concentration ratio in Industry D? a. 32% b. 56% c. 60% d. 65% REF: 16-1 TOP: Concentration ratio 25. Refer to Table Which industry has the highest concentration ratio? a. Industry A b. Industry B c. Industry C d. Industry D REF: 16-1 TOP: Concentration ratio 26. Refer to Table Which industry is the least competitive? a. Industry A b. Industry B c. Industry C d. Industry D REF: 16-1 TOP: Concentration ratio 27. Refer to Table Which industry has the lowest concentration ratio? a. Industry A b. Industry B c. Industry C d. Industry D REF: 16-1 TOP: Concentration ratio 28. Refer to Table Which industry is the most competitive? a. Industry A b. Industry B c. Industry C d. Industry D REF: 16-1 TOP: Concentration ratio

21 1422 Chapter 16/Monopolistic Competition 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 Total Industry A 13,250 10,975 8,175 4,275 1, ,350 Industry B 8,750 7,500 6,400 5,000 4,250 4,000 70,900 Industry C 1,750 1,725 1,700 1,675 1,650 1,625 30,125 Industry D 15,000 14,000 13,000 12,000 11,000 10, , Refer to Table What is the concentration ratio for Industry A? a. about 71% b. about 81% c. about 88% d. 100% DIF: 3 REF: 16-1 TOP: Concentration ratio 30. Refer to Table What is the concentration ratio for Industry B? a. about 12% b. about 32% c. about 39% d. about 51% DIF: 3 REF: 16-1 TOP: Concentration ratio 31. Refer to Table What is the concentration ratio for Industry C? a. about 23% b. about 34% c. about 43% d. about 52% DIF: 3 REF: 16-1 TOP: Concentration ratio

22 Chapter 16/Monopolistic Competition Refer to Table What is the concentration ratio for Industry D? a. about 13% b. about 35% c. about 45% d. about 63% DIF: 3 REF: 16-1 TOP: Concentration ratio 33. Refer to Table Which industry has the highest concentration ratio? a. Industry A b. Industry B c. Industry C d. Industry D DIF: 3 REF: 16-1 TOP: Concentration ratio 34. Refer to Table Which industry is the least competitive? a. Industry A b. Industry B c. Industry C d. Industry D DIF: 3 REF: 16-1 TOP: Concentration ratio 35. Refer to Table Which industry has the lowest concentration ratio? a. Industry A b. Industry B c. Industry C d. Industry D DIF: 3 REF: 16-1 TOP: Concentration ratio 36. Refer to Table Which industry is the most competitive? a. Industry A b. Industry B c. Industry C d. Industry D DIF: 3 REF: 16-1 TOP: Concentration ratio

23 1424 Chapter 16/Monopolistic Competition 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. REF: 16-1 TOP: Monopolistic competition Oligopoly 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. REF: 16-1 TOP: Monopolistic competition Oligopoly 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 REF: 16-1 TOP: Monopolistic competition 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 REF: 16-1 TOP: Monopolistic competition 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 REF: 16-1 TOP: Monopolistic competition

24 Chapter 16/Monopolistic Competition Which of the following goods are not likely to be sold in monopolistically competitive markets? a. compact discs b. books c. cookies d. wheat REF: 16-1 TOP: Monopolistic competition 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. REF: 16-1 TOP: Monopolistic competition 44. Which of the following markets is not likely characterized by a monopolistically competitive market? a. piano lessons b. corn c. cookies d. clothing REF: 16-1 TOP: Monopolistic competition 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. MSC: Definitional REF: 16-1 TOP: Monopolistic competition 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. MSC: Definitional REF: 16-1 TOP: Monopolistic competition

25 1426 Chapter 16/Monopolistic Competition 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. MSC: Definitional REF: 16-1 TOP: Monopolistic competition 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 MSC: Definitional REF: 16-1 TOP: Monopolistic competition 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 MSC: Definitional REF: 16-1 TOP: Monopolistic competition 50. Monopolistic competition is characterized by which of the following attributes? (i) free entry (ii) product differentiation (iii) many sellers a. b. c. d. (i) and (iii) only (i) and (ii) only (ii) and (iii) only (i), (ii), and (iii) MSC: Definitional REF: 16-1 TOP: Monopolistic competition

26 Chapter 16/Monopolistic Competition 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. MSC: Definitional REF: 16-1 TOP: Monopolistic competition 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. MSC: Definitional REF: 16-1 TOP: Monopolistic competition 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 MSC: Definitional REF: 16-1 TOP: Monopolistic competition 54. If firms in a particular market sell identical products, then the market is (i) perfectly competitive. (ii) monopolistically competitive. (iii) an oligopoly. a. b. c. d. (i) or (ii) only (ii) or (iii) only (i) or (iii) only (i) only REF: 16-1 TOP: Perfect competition

27 1428 Chapter 16/Monopolistic Competition 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. REF: 16-1 TOP: Monopolistic competition Perfect competition 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. REF: 16-1 TOP: Monopolistic competition Perfect competition 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. DIF: 3 REF: 16-1 TOP: Monopolistic competition Perfect competition 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. b. c. d. (i) and (ii) only (ii) and (iii) only (ii) only (i), (ii), and (iii) MSC: Definitional REF: 16-1 TOP: Monopolistic competition Perfect competition

28 Chapter 16/Monopolistic Competition 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. REF: 16-1 TOP: Monopolistic competition Perfect competition 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. b. c. d. (i) only (iii) only (i) and (iii) only (ii) and (iii) only REF: 16-1 TOP: Monopolistic competition Perfect competition 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. MSC: Definitional REF: 16-1 TOP: Monopolistic competition Perfect competition 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 REF: 16-1 TOP: Monopolistic competition Perfect competition

29 1430 Chapter 16/Monopolistic Competition 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. REF: 16-1 TOP: Monopolistic competition Monopoly 64. Which of the following statements is correct? 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. REF: 16-1 TOP: Monopolistic competition 65. Which of the following statements is not correct? 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. REF: 16-1 TOP: Monopolistic competition 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. TOP: Demand curve

30 Chapter 16/Monopolistic Competition 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. 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. 4. TOP: Demand curve 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. TOP: Demand curve 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. TOP: Demand curve TOP: Demand curve 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. TOP: Monopolistic competition Demand curve

31 1432 Chapter 16/Monopolistic Competition 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. 9. TOP: Monopolistic competition TOP: Monopolistic competition Demand curve 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. TOP: Monopolistic competition Demand curve 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. TOP: Monopolistic competition Demand curve 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. TOP: Monopolistic competition Demand curve

32 Chapter 16/Monopolistic Competition 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. TOP: Monopolistic competition Demand curve 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. MSC: Definitional TOP: Monopolistic competition Demand curve 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. b. c. d. (i) only (ii) only (i) and (ii) only (i), (ii), and (iii) only TOP: Monopolistic competition Demand curve 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. TOP: Monopolistic competition Demand curve

33 1434 Chapter 16/Monopolistic Competition 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. TOP: Monopolistic competition Demand curve 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. TOP: Monopolistic competition Demand curve 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. TOP: Profit maximization Demand curve 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. TOP: Monopolistic competition 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. TOP: Profit maximization

34 Chapter 16/Monopolistic Competition 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. TOP: Profit maximization 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 TOP: Profit maximization 23. 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 equals marginal cost c. price exceeds marginal cost d. All of the above are correct. TOP: Profit maximization 24. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the 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. TOP: Profit maximization

35 1436 Chapter 16/Monopolistic Competition 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. TOP: Profit maximization 26. A monopolistically competitive firm faces the following demand schedule for its product: Price ($) Quantity The firm has total fixed costs of $20 and a constant marginal cost of $2 per unit. The firm will maximize profit with a. 6 units of output. b. 9 units of output. c. 11 units of output. d. 13 units of output. DIF: 3 TOP: Profit maximization 27. A monopolistically competitive firm faces the following demand curve for its product: Price ($) Quantity 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 a. 6 units of output. b. 8 units of output. c. 10 units of output. d. 12 units of output. DIF: 3 TOP: Profit maximization

36 Chapter 16/Monopolistic Competition A monopolistically competitive firm has the following cost structure: Output Total Cost($) The firm faces the following demand curve: Price ($) Quantity To maximize profit (or minimize losses), the firm will produce a. 2 units. b. 3 units. c. 4 units. d. 5 units. DIF: 3 TOP: Profit maximization 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. TOP: Profit maximization 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 TOP: 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. TOP: Short-run equilibrium

37 1438 Chapter 16/Monopolistic Competition 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. TOP: Short-run equilibrium 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. TOP: Short-run equilibrium 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. TOP: Short-run equilibrium 35. Which of the following conditions is characteristic of a monopolistically competitive firm in shortrun equilibrium? a. P = AR b. MR = MC c. P > MC d. All of the above are correct. DIF: 3 TOP: Short-run equilibrium

38 Chapter 16/Monopolistic Competition Which of the following conditions is characteristic of a monopolistically competitive firm in shortrun equilibrium? a. P > AR b. MR > MC c. P > MC d. All of the above are correct. DIF: 3 TOP: Short-run equilibrium 37. Which of the following conditions is characteristic of a monopolistically competitive firm in shortrun equilibrium? a. P > ATC b. P = ATC c. P < ATC d. Any of the above could be correct. DIF: 3 TOP: Short-run equilibrium 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. DIF: 3 TOP: Short-run equilibrium Long-run equilibrium 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. TOP: Short-run equilibrium Long-run equilibrium

39 1440 Chapter 16/Monopolistic Competition 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. TOP: Short-run equilibrium Long-run equilibrium 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. TOP: Short-run equilibrium Long-run equilibrium 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. TOP: Short-run equilibrium Long-run equilibrium 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. TOP: Short-run equilibrium Long-run equilibrium

40 Chapter 16/Monopolistic Competition 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. TOP: Short-run equilibrium Long-run equilibrium Figure The figure is drawn for a monopolistically competitive firm. P MC Demand 12 8 MR Q 45. Refer to Figure The firm s profit-maximizing level of output is a. 8 units. b. 12 units. c. 16 units. d. 24 units. TOP: Profit maximization 46. Refer to Figure In order to maximize profit, the firm will charge a price of a. $8. b. $12. c. $16. d. $18. TOP: Profit maximization

41 1442 Chapter 16/Monopolistic Competition 47. Refer to Figure Suppose that average total cost is $18 when Q=12. What is the profitmaximizing price and resulting profit? a. P=$12, profit=$0 b. P=$18, profit=$72 c. P=$18, profit=$24 d. P=$18, profit=$0 TOP: Profit maximization 48. Refer to Figure 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. TOP: Profit maximization 49. Refer to Figure 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. DIF: 3 TOP: Profit maximization 50. Refer to Figure 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. DIF: 3 TOP: Profit maximization

42 Chapter 16/Monopolistic Competition Refer to Figure 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. TOP: Long-run equilibrium 52. Refer to Figure 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). TOP: Long-run equilibrium

43 1444 Chapter 16/Monopolistic Competition Figure 16-2 This figure depicts a situation in a monopolistically competitive market. 53. Refer to Figure What price will the monopolistically competitive firm charge in this market? a. $60 b. $70 c. $75 d. $80 TOP: Profit maximization 54. Refer to Figure 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 TOP: Profit maximization

44 Chapter 16/Monopolistic Competition Refer to Figure How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price? a. $200 b. $ c. $400 d. $800 DIF: 3 TOP: Profit maximization 56. Refer to Figure 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. TOP: Profit maximization 57. Refer to Figure How much output will the monopolistically competitive firm produce in this situation? a. 20 units b. 25 units c. 40 units d. 80 units TOP: Profit maximization

45 1446 Chapter 16/Monopolistic Competition Figure $ MC 700 ATC D MR Quantity 58. Refer to Figure 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. TOP: Monopolistic competition 59. Refer to Figure 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. TOP: Profit maximization 60. Refer to Figure 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. TOP: Profit maximization

46 Chapter 16/Monopolistic Competition Refer to Figure 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. TOP: Profit maximization Figure Refer to Figure 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 TOP: Short-run equilibrium

47 1448 Chapter 16/Monopolistic Competition 63. Refer to Figure 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 TOP: Short-run equilibrium 64. Refer to Figure 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 TOP: Short-run equilibrium 65. Refer to Figure 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. TOP: Profit maximization 66. Refer to Figure 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 TOP: Monopolistic competition

48 Chapter 16/Monopolistic Competition Refer to Figure 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. TOP: Long-run equilibrium 68. Refer to Figure 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. TOP: Monopolistic competition

49 1450 Chapter 16/Monopolistic Competition Figure Refer to Figure 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 TOP: Monopolistic competition 70. Refer to Figure 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 TOP: Monopolistic competition

50 Chapter 16/Monopolistic Competition Refer to Figure 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. TOP: Long-run equilibrium Figure Refer to Figure 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 TOP: Monopolistic competition

51 1452 Chapter 16/Monopolistic Competition 73. Refer to Figure 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. TOP: Monopolistic competition 74. Refer to Figure 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. DIF: 3 TOP: Profit maximization 75. Refer to Figure 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. TOP: Profit maximization 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 TOP: Long-run equilibrium

52 Chapter 16/Monopolistic Competition Which of the following conditions is characteristic of a monopolistically competitive firm in longrun 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 DIF: 3 TOP: Long-run equilibrium 78. Which of the following conditions is characteristic of a monopolistically competitive firm in longrun 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 DIF: 3 TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 80. In a monopolistically competitive market, 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. TOP: Long-run equilibrium

53 1454 Chapter 16/Monopolistic Competition 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. b. c. d. (i) only (i) and (ii) only (ii) and (iii) only (i), (ii), and (iii) TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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 TOP: Long-run equilibrium 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 TOP: Long-run equilibrium

54 Chapter 16/Monopolistic Competition 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium

55 1456 Chapter 16/Monopolistic Competition 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium

56 Chapter 16/Monopolistic Competition 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Demand curve Long-run equilibrium 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. TOP: Demand curve Long-run equilibrium

57 1458 Chapter 16/Monopolistic Competition 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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 TOP: Long-run equilibrium 103. In a monopolistically competitive market, 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. TOP: Long-run equilibrium

58 Chapter 16/Monopolistic Competition 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 TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium

59 1460 Chapter 16/Monopolistic Competition 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. DIF: 3 TOP: Long-run equilibrium

60 Chapter 16/Monopolistic Competition 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. DIF: 3 TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 115. A monopolistically competitive firm faces the following demand curve for its product: Price ($) Quantity 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. DIF: 3 TOP: Long-run equilibrium

61 1462 Chapter 16/Monopolistic Competition 116. A firm has the following cost structure: Output Total Cost($) If this firm is in a typical perfectly competitive market, in the long run it will likely produce a. 4 or fewer units of output. b. 5 units of output. c. more than 5 units of output. d. None of the above are necessarily correct because there is not enough information to tell. DIF: 3 TOP: Long-run equilibrium 117. A firm has the following cost structure: Output Total Cost($) 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. DIF: 3 TOP: Long-run equilibrium 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. DIF: 3 TOP: Long-run equilibrium

62 Chapter 16/Monopolistic Competition 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. TOP: Long-run equilibrium 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. DIF: 3 TOP: Long-run equilibrium 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. TOP: Long-run equilibrium 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. TOP: Long-run equilibrium

63 1464 Chapter 16/Monopolistic Competition 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 Refer to Figure 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. TOP: Long-run equilibrium 124. Refer to Figure 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 TOP: Long-run equilibrium

64 Chapter 16/Monopolistic Competition 1465 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 $ $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 $ Refer to Table What price will this firm charge to maximize profit? a. $6 b. $7 c. $8 d. $9 TOP: Profit maximization 126. Refer to Table 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. DIF: 3 TOP: Long-run equilibrium 127. Refer to Table 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 TOP: Profit maximization

65 1466 Chapter 16/Monopolistic Competition Table 16-4 This table shows the demand schedule, marginal cost, and average total cost for a monopolistically competitive firm. Quantity Price Marginal Average Cost Total Cost 0 $ $16 $2 $21 2 $12 $4 $12 3 $8 $6 $ $4 $8 $9 5 $0 $10 $ Refer to Table What price should this firm charge to maximize profit? a. $4 b. $8 c. $12 d. $16 TOP: Profit maximization 129. Refer to Table How much profit will this firm earn at the monopolistically competitive price? a. $0 b. $5 c. $12 d. $16 TOP: Profit maximization 130. Refer to Table 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. TOP: Long-run equilibrium

66 Chapter 16/Monopolistic Competition 1467 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 $10 $15 $21 $28 $36 $45 $55 $66 $ $50 $45 $40 $35 $30 $25 $20 $15 $10 Total Revenue Marginal Revenue Refer to Table What is the profit-maximizing output for Traci s Hairstyling? a. 3 haircuts b. 4 haircuts c. 5 haircuts d. 6 haircuts TOP: Profit maximization 132. Refer to Table When maximizing profit, what price does Traci s charge for a haircut? a. $20 b. $25 c. $30 d. $35 TOP: Profit maximization 133. Refer to Table At the profit-maximizing quantity, what is Traci s total profit? a. $30 b. $59 c. $77 d. $84 TOP: Profit maximization

67 1468 Chapter 16/Monopolistic Competition 134. Refer to Table 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 longrun. 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. TOP: Long-run equilibrium 135. Refer to Table 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 TOP: Efficient scale 136. Refer to Table 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 TOP: Efficient scale 137. Refer to Table 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. DIF: 3 TOP: Welfare

68 Chapter 16/Monopolistic Competition 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. TOP: Long-run equilibrium 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. TOP: Monopolistic competition Monopoly 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. TOP: Monopolistic competition 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. TOP: Monopolistic competition Perfect competition

69 1470 Chapter 16/Monopolistic Competition 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 TOP: Monopoly 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 TOP: Perfect competition 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 TOP: Monopolistic competition 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. TOP: Efficient scale

70 Chapter 16/Monopolistic Competition A monopolistically competitive firm has the following cost structure: Output Total Cost($) The firm faces the following demand curve: Price ($) Quantity 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. DIF: 3 TOP: Efficient scale 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. TOP: Efficient scale Excess capacity 148. Which of the following statements is correct? 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. TOP: Efficient scale Excess capacity

71 1472 Chapter 16/Monopolistic Competition 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. TOP: Deadweight loss Excess capacity 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. TOP: Excess capacity 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. TOP: Excess capacity 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. TOP: Excess capacity 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. TOP: Excess capacity

72 Chapter 16/Monopolistic Competition 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. TOP: Excess capacity 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 TOP: Excess capacity 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. TOP: Excess capacity 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. TOP: Excess capacity

73 1474 Chapter 16/Monopolistic Competition 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. TOP: Excess capacity 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. TOP: Excess capacity 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. TOP: Monopolistic competition Welfare 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. TOP: Welfare 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. TOP: Welfare

74 Chapter 16/Monopolistic Competition 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. TOP: Welfare 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. TOP: Welfare 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. TOP: Welfare 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. TOP: Welfare 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. TOP: Welfare Deadweight loss

75 1476 Chapter 16/Monopolistic Competition 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. TOP: Welfare Deadweight loss 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. TOP: Welfare Deadweight loss 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. TOP: Welfare Deadweight loss 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. TOP: Regulation 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. DIF: 3 TOP: Regulation

76 Chapter 16/Monopolistic Competition 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. TOP: Regulation 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. TOP: Regulation 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. TOP: Regulation 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. TOP: Regulation 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. TOP: Deadweight loss

77 1478 Chapter 16/Monopolistic Competition 178. Which of the following markets impose deadweight losses on society? (i) perfect competition (ii) monopolistic competition (iii) monopoly a. b. c. d. (i) and (ii) only (ii) and (iii) only (i) and (iii) only (i) only 179. i) ii) iii) iv) TOP: Deadweight loss Monopolistic competition is characterized by efficient scale markup pricing over marginal cost deadweight loss excess capacity a. b. c. d. i) and ii) only ii) and iv) only i), ii), and iii) only ii), iii), and iv) only TOP: Deadweight loss Excess capacity 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. TOP: Externalities 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. TOP: Externalities

78 Chapter 16/Monopolistic Competition 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. TOP: Externalities 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. TOP: Externalities 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. TOP: Externalities 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. TOP: Externalities 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. TOP: Externalities

79 1480 Chapter 16/Monopolistic Competition 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). TOP: 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. TOP: Externalities 189. In a monopolistically competitive market, 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. TOP: Externalities 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. DIF: 3 TOP: Externalities

80 Chapter 16/Monopolistic Competition 1481 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 Refer to Scenario 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. TOP: Externalities 192. Refer to Scenario 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. TOP: Externalities 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 Refer to Scenario 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. TOP: Externalities 194. Refer to Scenario 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. TOP: Externalities

81 1482 Chapter 16/Monopolistic Competition 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. 2. REF: 16-3 TOP: Advertising 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. 4. 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 3. REF: 16-3 TOP: Markets REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

82 Chapter 16/Monopolistic Competition 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 REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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 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 d. over REF: 16-3 TOP: Advertising REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

83 1484 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: Advertising 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 REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

84 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 19. Critics of advertising argue that advertising 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. REF: 16-3 TOP: Advertising

85 1486 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 22. Critics of advertising argue that advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

86 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

87 1488 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

88 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

89 1490 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

90 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 47. Most businesses advertise their products and services. Some business use SPAM s to advertise because the cost of a mass 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

91 1492 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

92 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: 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. REF: 16-3 TOP: 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. REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising

93 1494 Chapter 16/Monopolistic Competition 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. REF: 16-3 TOP: Advertising 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 CocaCola brand name. d. None of the above is correct. REF: 16-3 TOP: Advertising 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 CocaCola brand name. d. None of the above is correct. REF: 16-3 TOP: Advertising

94 Chapter 16/Monopolistic Competition 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. REF: 16-3 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 REF: 16-3 TOP: Advertising 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. REF: 16-3 TOP: Advertising 64. Which of the following statements is not correct? 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. REF: 16-3 TOP: Advertising

95 1496 Chapter 16/Monopolistic Competition 65. Which of the following statements is correct? 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. REF: 16-3 TOP: Advertising 66. Which of the following statements is not correct? 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. REF: 16-3 TOP: Advertising 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 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. DIF: 3 REF: 16-3 TOP: Advertising

96 Chapter 16/Monopolistic Competition Refer to Scenario 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. DIF: 3 REF: 16-3 TOP: Advertising 69. Refer to Scenario 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. REF: 16-3 TOP: Advertising 70. Refer to Scenario 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. REF: 16-3 TOP: Advertising 71. Refer to Scenario 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. REF: 16-3 TOP: Advertising 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. REF: 16-4 TOP: Long-run equilibrium

97 1498 Chapter 16/Monopolistic Competition 2. Which of the following statements is correct? 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 welfaremaximizing level of output. 3. Which of the following statements is correct? 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. 4. REF: 16-4 TOP: Profit maximization REF: 16-4 TOP: Profit maximization Which of the following statements is not correct? 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. REF: 16-4 TOP: Profit maximization

98 Chapter 16/Monopolistic Competition Which of the following statements is not correct? 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 welfaremaximizing 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. MSC: Definitional 7. REF: 16-4 TOP: Perfect competition Monopolistic competition 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. 8. REF: 16-4 TOP: Monopolistic competition REF: 16-4 TOP: Perfect competition Monopolistic competition 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: LOC: TOP: MSC: D REF: 16-4 Monopolistic competition Perfect competition Monopolistic competition Monopoly Interpretive

99 1500 Chapter 16/Monopolistic Competition 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: LOC: TOP: MSC: A REF: 16-4 Monopolistic competition Perfect competition Monopolistic competition Monopoly 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. REF: 16-4 TOP: Monopolistic competition Monopoly 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. REF: 16-4 TOP: Monopolistic competition Monopoly 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. REF: 16-4 TOP: Monopolistic competition Monopoly

100 Chapter 16/Monopolistic Competition 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. REF: 16-4 TOP: Monopolistic competition Monopoly

101 Chapter 17 Oligopoly TRUE/FALSE 1. The essence of an oligopolistic market is that there are only a few sellers. ANS: T 2. REF: 17-0 TOP: Game theory Competitive markets REF: 17-0 TOP: Oligopoly Game theory REF: 17-1 TOP: Collusion 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 7. REF: 17-0 TOP: Oligopoly Game theory 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 6. 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 5. MSC: Definitional In a competitive market, strategic interactions among the firms are not important. ANS: T 4. REF: 17-0 TOP: Oligopoly Game theory is just as necessary for understanding competitive or monopoly markets as it is for understanding oligopolistic markets. ANS: F 3. REF: 17-1 TOP: Oligopoly Cooperation Whether an oligopoly consists of 3 firms or 10 firms, the level of output likely will be the same. ANS: F REF: 17-1 TOP: Oligopoly 1502

102 Chapter 17/Oligopoly 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 9. REF: 17-1 TOP: Cartels As the number of firms in an oligopoly becomes very large, the price effect disappears. ANS: T REF: 17-1 TOP: Oligopoly 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 REF: 17-1 TOP: Cartels 11. As the number of firms in an oligopoly increases, the magnitude of the price effect increases. ANS: F REF: 17-1 TOP: Oligopoly 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 TOP: Nash equilibrium Prisoners' dilemma 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 REF: 17-2 TOP: Prisoners' dilemma 14. The story of the prisoners' dilemma contains a general lesson that applies to any group trying to maintain cooperation among its members. ANS: T REF: 17-2 TOP: Prisoners' dilemma 15. In the prisoners' dilemma game, one prisoner is always better off confessing, no matter what the other prisoner does. ANS: T REF: 17-2 TOP: Prisoners' dilemma

103 1504 Chapter 17/Oligopoly 16. In the prisoners' dilemma game, confessing is a dominant strategy for each of the two prisoners. ANS: T REF: 17-2 TOP: Prisoners' dilemma Dominant strategy 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 REF: 17-2 TOP: Game theory 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 REF: 17-2 TOP: Game theory 19. When prisoners' dilemma games are repeated over and over, sometimes the threat of penalty causes both parties to cooperate. ANS: T REF: 17-2 TOP: Prisoners' dilemma 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 REF: 17-2 TOP: Game theory MSC: Definitional 21. One way that public policy encourages cooperation among oligopolists is through antitrust law. ANS: F REF: 17-3 TOP: Antitrust 22. The Sherman Antitrust Act prohibits competing firms from even talking about fixing prices. ANS: T REF: 17-3 TOP: Sherman Antitrust Act of Resale price maintenance prevents retailers from competing on price. ANS: T REF: 17-3 TOP: Resale price maintenance

104 Chapter 17/Oligopoly Some business practices that appear to reduce competition, such as resale price maintenance, may have legitimate economic purposes. ANS: T REF: 17-3 TOP: Resale price maintenance 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 MSC: Definitional REF: 17-3 TOP: Resale price maintenance 26. Tying can be thought of as a form of price discrimination. ANS: T REF: 17-3 TOP: Tying 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 REF: 17-4 LOC: The role of government TOP: Antitrust 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 2. TOP: Cartels REF: 17-1 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 TOP: Oligopoly REF: 17-1

105 1506 Chapter 17/Oligopoly 3. Assume that demand for a product that is produced at zero marginal cost is reflected in the table below. Quantity a. b. ANS: a. b. What is the profit-maximizing level of production for a group of oligopolistic firms that operate as a cartel? 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? Q = 1200 Q = 1600, P = 12 PTS: 1 4. Price $36 $33 $30 $27 $24 $21 $18 $15 $12 $9 $6 $3 $0 DIF: 3 TOP: Cartels REF: 17-1 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 TOP: Cartels REF: 17-1

106 Chapter 17/Oligopoly 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 6. DIF: 3 REF: 17-1 TOP: Profit maximization Oligopoly 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 7. REF: 17-1 TOP: Profit maximization Oligopoly 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 Ford PTS: 1 Expand Don t Expand Expand (2, 2) (1, 4) DIF: 3 REF: 17-2 TOP: Prisoners' dilemma Don t Expand (4, 1) (3, 3)

107 1508 Chapter 17/Oligopoly 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 9. DIF: 3 REF: 17-2 TOP: Prisoners' dilemma 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 TOP: Antitrust REF: 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 LOC: The role of government REF: 17-3 TOP: Resale price maintenance 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 TOP: Tying REF: 17-3

108 Chapter 17/Oligopoly 1509 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. 2. REF: 17-0 TOP: Game theory MSC: Definitional Which of the following statements is correct? 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. 4. REF: 17-0 TOP: Game theory MSC: Definitional 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. 3. REF: 17-0 TOP: Game theory 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 REF: 17-0 TOP: Game theory

109 1510 Chapter 17/Oligopoly 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. 2. REF: 17-1 TOP: Oligopoly Cooperation REF: 17-1 TOP: Duopoly 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. 5. The simplest type of oligopoly is a. monopoly. b. duopoly. c. monopolistic competition. d. oligopolistic competition. 4. REF: 17-1 TOP: Oligopoly 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. 3. REF: 17-1 TOP: Duopoly MSC: Definitional 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. REF: 17-1 TOP: Duopoly

110 Chapter 17/Oligopoly Which of the following statements is correct? 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. d. All of the above are correct. 7. REF: 17-1 TOP: Duopoly 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. 9. REF: 17-1 TOP: Duopoly 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. 8. REF: 17-1 TOP: Oligopoly 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. REF: 17-1 TOP: Duopoly

111 1512 Chapter 17/Oligopoly 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) ,000 1,100 1,200 Price $ Total Revenue (and Total Profit) $0 11,000 20,000 27,000 32,000 35,000 36,000 35,000 32,000 27,000 20,000 11, Refer to Table 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 REF: 17-1 TOP: Oligopoly Monopoly 11. Refer to Table If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how many gallons of water will be produced and sold? a. 0 b. 500 c. 600 d. 1,200 REF: 17-1 TOP: Oligopoly Monopoly

112 Chapter 17/Oligopoly Refer to Table If Lisa and Mark operate as a profit-maximizing monopoly in the market for water, how much profit will each of them earn? a. $0 b. $18,000 c. $32,000 d. $36,000 DIF: 3 REF: 17-1 TOP: Oligopoly Monopoly 13. Refer to Table 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 REF: 17-1 TOP: Competitive markets 14. Refer to Table What is the socially efficient quantity of water? a. 0 gallons b. 600 gallons c. 900 gallons d. 1,200 gallons REF: 17-1 TOP: Competitive markets 15. Refer to Table If this market for water were perfectly competitive instead of monopolistic, what price would be charged? a. $0 b. $50 c. $60 d. $120 REF: 17-1 TOP: Competitive markets

113 1514 Chapter 17/Oligopoly 16. Refer to Table 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 DIF: 3 REF: 17-1 TOP: Nash equilibrium 17. Refer to Table 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 DIF: 3 REF: 17-1 TOP: Nash equilibrium Table 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) ,000 Price $ Total Revenue (and total profit) $ ,600 2,100 2,400 2,500 2,400 2,100 1, Refer to Table 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. REF: 17-1 LOC: Perfect competition TOP: Perfect Competition

114 Chapter 17/Oligopoly Refer to Table If the market for gasoline in Pittsville is a monopoly, then the profitmaximizing 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. LOC: Monopoly REF: 17-1 TOP: Monopoly 20. Refer to Table 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. REF: 17-1 TOP: Duopoly 21. Refer to Table 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 gallons and charge a price of $1.33. b. Each seller will sell 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 gallons and charge a price of $5. REF: 17-1 TOP: Duopoly 22. Refer to Table 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. REF: 17-1 TOP: Duopoly

115 1516 Chapter 17/Oligopoly 23. Refer to Table 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. DIF: 3 REF: 17-1 TOP: Nash equilibrium 24. Which of the following statements is correct? 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. REF: 17-1 TOP: Oligopoly Cartels 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. REF: 17-1 TOP: Oligopoly 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. REF: 17-1 TOP: Oligopoly

116 Chapter 17/Oligopoly 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. REF: 17-1 TOP: Cartels 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. REF: 17-1 TOP: Cartels 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. REF: 17-1 TOP: Cartels 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. REF: 17-1 TOP: Cartels

117 1518 Chapter 17/Oligopoly Table 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 0 3,000 6,000 9,000 12,000 15,000 18,000 Price (per year) $180 $150 $120 $ 90 $ 60 $ 30 $ Refer to Table 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 LOC: Monopoly REF: 17-1 TOP: Monopoly 32. Refer to Table 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. REF: 17-1 TOP: Duopoly Collusion 33. Refer to Table 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 REF: 17-1 TOP: Duopoly Collusion

118 Chapter 17/Oligopoly Refer to Table Assume 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 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 DIF: 3 REF: 17-1 TOP: Nash equilibrium 35. Refer to Table Assume 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. 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 DIF: 3 REF: 17-1 TOP: Nash equilibrium 36. Refer to Table 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 DIF: 3 REF: 17-1 TOP: Nash equilibrium

119 1520 Chapter 17/Oligopoly Table 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 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Price (per year) $320 $280 $240 $200 $160 $120 $ 80 $ 40 $0 37. Refer to Table 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. DIF: 3 LOC: Monopoly REF: 17-1 TOP: Monopoly 38. Refer to Table 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. DIF: 3 REF: 17-1 TOP: Duopoly Collusion 39. Refer to Table 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 DIF: 3 REF: 17-1 TOP: Duopoly Collusion

120 Chapter 17/Oligopoly Refer to Table 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 DIF: 3 REF: 17-1 TOP: Nash equilibrium 41. Refer to Table 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 DIF: 3 REF: 17-1 TOP: Nash equilibrium 42. Refer to Table 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 DIF: 3 REF: 17-1 TOP: Nash equilibrium

121 1522 Chapter 17/Oligopoly Table 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) $ Refer to Table 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 REF: 17-1 TOP: Cartels 44. Refer to Table 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 REF: 17-1 TOP: Competitive markets

122 Chapter 17/Oligopoly Refer to Table 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 REF: 17-1 TOP: Cartels 46. Refer to Table The socially efficient level of water supplied to the market would be a. 60 gallons. b. 80 gallons. c. 100 gallons. d. 120 gallons. REF: 17-1 TOP: Competitive markets 47. Refer to Table 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 DIF: 3 REF: 17-1 LOC: The role of government TOP: Nash equilibrium Scenario 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 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. REF: 17-2 TOP: Cartels

123 1524 Chapter 17/Oligopoly 49. Refer to Scenario 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. REF: 17-2 TOP: Cartels 50. Refer to Scenario 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. REF: 17-2 TOP: Nash equilibrium 51. Refer to Scenario 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. REF: 17-2 TOP: Cartels 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. REF: 17-1 TOP: Nash equilibrium 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. REF: 17-1 TOP: Nash equilibrium

124 Chapter 17/Oligopoly 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. REF: 17-1 TOP: Duopoly 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. REF: 17-1 TOP: Oligopoly Nash equilibrium 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. REF: 17-1 TOP: Cartels 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. REF: 17-1 TOP: Duopoly 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. DIF: 3 REF: 17-1 TOP: Oligopoly

125 1526 Chapter 17/Oligopoly 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. REF: 17-1 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. REF: 17-1 TOP: Oligopoly Equilibrium quantity 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. REF: 17-1 TOP: Oligopoly Equilibrium price 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. MSC: Definitional REF: 17-1 TOP: Nash equilibrium 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. REF: 17-1 TOP: Oligopoly

126 Chapter 17/Oligopoly 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. REF: 17-1 TOP: Oligopoly Equilibrium 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. REF: 17-1 TOP: Cartels 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. REF: 17-1 TOP: Oligopoly 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. REF: 17-1 TOP: Cartels 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. TOP: Markets REF: 17-1 Monopolistic competition

127 1528 Chapter 17/Oligopoly 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. REF: 17-1 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. REF: 17-1 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. REF: 17-1 TOP: Duopoly 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. REF: 17-1 TOP: Duopoly 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. REF: 17-1 TOP: Cartels

128 Chapter 17/Oligopoly Once a cartel is formed, the market is in effect served by a. a monopoly. b. an oligopoly. c. imperfect competition. d. monopolistic competition. REF: 17-1 TOP: Cartels 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. MSC: Definitional REF: 17-1 TOP: Nash equilibrium 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. REF: 17-1 TOP: Cartels 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. MSC: Definitional REF: 17-1 TOP: Profit maximization 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. MSC: Definitional REF: 17-1 TOP: Profit maximization

129 1530 Chapter 17/Oligopoly 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. REF: 17-1 TOP: Cartels 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. REF: 17-1 TOP: Oligopoly Profit maximization 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. DIF: 3 REF: 17-1 TOP: Oligopoly 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. REF: 17-1 TOP: Oligopoly 83. As the number of firms in an oligopoly increases, the price approaches a. zero. b. marginal cost. c. infinity. d. the monopoly price. REF: 17-1 TOP: Oligopoly

130 Chapter 17/Oligopoly 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. REF: 17-1 TOP: Oligopoly 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. REF: 17-1 TOP: Oligopoly 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. REF: 17-1 TOP: Oligopoly 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. REF: 17-1 TOP: Oligopoly International trade 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 TOP: Profit maximization REF: 17-1

131 1532 Chapter 17/Oligopoly 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. DIF: 3 REF: 17-1 TOP: Oligopoly International trade 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. REF: 17-1 TOP: Oligopoly International trade 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. REF: 17-1 TOP: OPEC

132 Chapter 17/Oligopoly 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. DIF: 3 REF: 17-1 TOP: Duopoly 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. REF: 17-1 TOP: Oligopoly

133 1534 Chapter 17/Oligopoly 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. REF: 17-1 TOP: Oligopoly Table The table shows the demand schedule for a particular product. Quantity Price Refer to Table 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 TOP: Cartels REF: Refer to Table 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 TOP: Cartels REF: 17-1

134 Chapter 17/Oligopoly 1535 Table The table shows the demand schedule for a particular product. Quantity Price Refer to Table 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 DIF: 3 REF: 17-1 TOP: Cartels 98. Refer to Table 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 DIF: 3 REF: 17-1 TOP: Duopoly Nash equilibrium 99. Refer to Table 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 DIF: 3 REF: 17-1 TOP: Duopoly Nash equilibrium

135 1536 Chapter 17/Oligopoly Table 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 $9 $8 $7 $6 $5 $4 $3 $2 Quantity (bottles) Refer to Table 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. REF: 17-1 LOC: Perfect competition TOP: Competitive markets 101. Refer to Table 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. LOC: Monopoly REF: 17-1 TOP: Monopoly 102. Refer to Table 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. TOP: Cartels REF: 17-1

136 Chapter 17/Oligopoly Refer to Table 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 REF: 17-1 TOP: Cartels 104. Refer to Table 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 DIF: 3 REF: 17-1 TOP: Cartels 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. REF: 17-1 TOP: Cartels 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 REF: 17-1 TOP: Cartels 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. MSC: Definitional REF: 17-1 TOP: Nash equilibrium

137 1538 Chapter 17/Oligopoly 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. REF: 17-1 TOP: Collusion 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. REF: 17-2 TOP: Game theory Game theory is important for the understanding of a. competitive markets. b. monopolies. c. oligopolies. d. all market structures. 4. REF: 17-2 TOP: Game theory 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. 3. REF: 17-2 TOP: Game theory 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. REF: 17-2 TOP: Game theory

138 Chapter 17/Oligopoly 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. 6. REF: 17-2 TOP: Prisoners' dilemma REF: 17-2 TOP: Prisoners' dilemma 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. 9. 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. 8. REF: 17-2 TOP: Prisoners' dilemma 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. 7. REF: 17-2 TOP: Prisoners' dilemma 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. REF: 17-2 TOP: Prisoners' dilemma

139 1540 Chapter 17/Oligopoly 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. REF: 17-2 TOP: Prisoners' dilemma 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. REF: 17-2 TOP: Prisoners' dilemma 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. MSC: Definitional REF: 17-2 TOP: Dominant strategy 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. MSC: Definitional REF: 17-2 TOP: Dominant strategy

140 Chapter 17/Oligopoly 1541 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. Concede that cigarette smoke causes lung cancer Firm A Concede that cigarette smoke causes lung cancer Argue that there is no evidence that smoke causes cancer Firm B Argue that there is no evidence that smoke causes cancer Firm A profit = $ 20 Firm B profit = $ 15 Firm A profit = $ 50 Firm B profit = $ 5 Firm A profit = $ 5 Firm B profit = $ 50 Firm A profit = $ 10 Firm B profit = $ Refer to Table 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. REF: 17-2 TOP: Game theory 15. Refer to Table 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. REF: 17-2 TOP: Game theory 16. Refer to Table If both firms follow a dominant strategy, Firm A's profits (losses) will be a. $-50 b. $-20 c. $-10 d. $-5 REF: 17-2 TOP: Game theory

141 1542 Chapter 17/Oligopoly 17. Refer to Table If both firms follow a dominant strategy, Firm B's profits (losses) will be a. $-50 b. $-15 c. $-10 d. $-5 REF: 17-2 TOP: Game theory 18. Refer to Table 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. REF: 17-2 TOP: Nash equilibrium Table 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. United States Don't renew MFN status with Farland Renew MFN status with Farland Farland Impose trade sanctions Do not impose trade sanctions against U.S. firms against U.S. firms U.S. trade value = $65 b U.S. trade value = $140 b Farland trade value = $75 b Farland trade value = $5 b U.S. trade value = $35 b U.S. trade value = $130 b Farland trade value = $285 b Farland trade value = $275 b 19. Refer to Table 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. REF: 17-2 TOP: Game theory

142 Chapter 17/Oligopoly Refer to Table 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. REF: 17-2 TOP: Game theory 21. Refer to Table 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. REF: 17-2 TOP: Prisoners' dilemma Dominant strategy 22. Refer to Table 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. REF: 17-2 TOP: Prisoners' dilemma 23. Refer to Table 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. REF: 17-2 TOP: Prisoners' dilemma 24. Refer to Table 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. REF: 17-2 TOP: Nash equilibrium

143 1544 Chapter 17/Oligopoly 25. Refer to Table 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 REF: 17-2 TOP: Prisoners' dilemma 26. Refer to Table 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. REF: 17-2 TOP: Prisoners' dilemma Table 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. Homes R Us Increase the size of store and parking lot Do not increase the size of store and parking lot Big Box Deluxe Increase the size of store Do not increase the size of and parking lot store and parking lot Big Box Deluxe = $0.50 Big Box Deluxe = $0.20 million million Homes R Us = $0.75 million Homes R Us = $1.70 million Big Box Deluxe = $1.60 Big Box Deluxe = $1.00 million million Homes R Us = $0.30 million Homes R Us = $1.25 million 27. Refer to Table 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. REF: 17-2 TOP: Dominant strategy

144 Chapter 17/Oligopoly Refer to Table 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. REF: 17-2 TOP: Game theory Dominant strategy 29. Refer to Table 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. REF: 17-2 TOP: Game theory Dominant strategy 30. Refer to Table 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. REF: 17-2 TOP: Nash equilibrium 31. Refer to Table 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. REF: 17-2 TOP: Cartels

145 1546 Chapter 17/Oligopoly Figure 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 Decision High output Low output ABC's profit = $3 million ABC's profit = $2.5 million High output XYZ's Decision XYZ's profit = $3 million ABC's profit = $4 million XYZ's profit = $4 million ABC's profit = $3.5 million Low output XYZ's profit = $2.5 million XYZ's profit = $3.5 million 32. Refer to Figure 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. REF: 17-2 TOP: Game theory Dominant strategy 33. Refer to Figure 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. REF: 17-2 TOP: Game theory Dominant strategy

146 Chapter 17/Oligopoly Refer to Figure 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. REF: 17-2 TOP: Game theory 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. REF: 17-2 TOP: Game theory 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. REF: 17-2 TOP: Prisoners' dilemma 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. REF: 17-2 TOP: Game theory 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. REF: 17-2 TOP: Prisoners' dilemma

147 1548 Chapter 17/Oligopoly 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. REF: 17-2 TOP: Prisoners' dilemma 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. REF: 17-2 TOP: Prisoners' dilemma 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. b. c. d. (i) and (ii) (ii) and (iii) (iii) only (i), (ii), and (iii) REF: 17-2 TOP: Oligopoly 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. b. c. d. (ii) only (ii) and (iii) (i) and (iii) (i), (ii), and (iii) REF: 17-2 TOP: Prisoners' dilemma

148 Chapter 17/Oligopoly 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. REF: 17-2 TOP: Prisoners' dilemma Scenario 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 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 REF: 17-2 TOP: Prisoners' dilemma Common resources 45. Refer to Scenario 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 REF: 17-2 TOP: Prisoners' dilemma Common resources 46. Refer to Scenario 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. DIF: 3 REF: 17-2 TOP: Prisoners' dilemma Common resources

149 1550 Chapter 17/Oligopoly 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. REF: 17-2 TOP: Common resources Prisoners' dilemma 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. REF: 17-2 TOP: Common resources Prisoners' dilemma 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. REF: 17-2 TOP: Oligopoly 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. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (iii) only REF: 17-2 TOP: Collusion

150 Chapter 17/Oligopoly 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. REF: 17-2 TOP: Prisoners' dilemma 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. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (i), (ii), and (iii) REF: 17-2 TOP: Prisoners' dilemma 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. REF: 17-2 TOP: Nash equilibrium

151 1552 Chapter 17/Oligopoly Scenario 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 Muria Build new weapons Disarm existing weapons Build new weapons Muria: 2 Zenya: 2 Muria: 1 Zenya: 4 Disarm existing weapons Muria: 4 Zenya: 1 Muria: 3 Zenya: Refer to Scenario 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. REF: 17-2 TOP: Game theory 55. Refer to Scenario 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. REF: 17-2 TOP: Game theory 56. Refer to Scenario 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. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (i), (ii), and (iii) REF: 17-2 TOP: Game theory

152 Chapter 17/Oligopoly Refer to Scenario 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. REF: 17-2 TOP: Dominant strategy 58. Refer to Scenario 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. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (i), (ii), and (iii) REF: 17-2 TOP: Prisoners' dilemma Scenario 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 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. REF: 17-2 TOP: Prisoners' dilemma

153 1554 Chapter 17/Oligopoly 60. Refer to Scenario 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. REF: 17-2 TOP: Dominant strategy 61. Refer to Scenario 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. REF: 17-2 TOP: Prisoners' dilemma 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 REF: 17-2 TOP: Dominant strategy 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. REF: 17-2 TOP: Collusion

154 Chapter 17/Oligopoly 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. REF: 17-2 TOP: Prisoners' dilemma 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. REF: 17-2 TOP: 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. DIF: 3 REF: 17-2 TOP: Dominant strategy

155 1556 Chapter 17/Oligopoly 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. DIF: 3 REF: 17-2 TOP: Dominant strategy 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. DIF: 3 REF: 17-2 TOP: Dominant strategy 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. DIF: 3 REF: 17-2 TOP: Prisoners' dilemma

156 Chapter 17/Oligopoly 1557 Table 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 A Up Down Right (2, 2) (1, 3) Left (3, 1) (0, 0) 70. Refer to Table 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. REF: 17-2 TOP: Game theory 71. Refer to Table Which outcome is the Nash equilibrium in this game? a. Up-Right b. Up-Left c. Down-Right d. Down-Left REF: 17-2 TOP: Game theory Table 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) Middle (2, 2) (4, 6) (5, 7) A Down (3, 2) (5, 5) (4, 3) 72. Refer to Table 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. REF: 17-2 TOP: Game theory

157 1558 Chapter 17/Oligopoly 73. Refer to Table Which of the following outcomes represents a Nash equilibrium in the game? a. Up-Center b. Middle-Right c. Down-Left d. Down-Center REF: 17-2 TOP: Game theory Table 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). A Up Middle Down Left (4, 2) (3, 1) (1, 3) B Center (2, 5) (5, 3) (4, 4) Right (3, 3) (5, 2) (6, 1) 74. Refer to Table 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. REF: 17-2 TOP: Game theory 75. Refer to Table 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. REF: 17-2 TOP: Game theory

158 Chapter 17/Oligopoly 1559 Table 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 Firm A Q=2 Q=3 Q=2 (10, 10) (12, 8) Q=3 (8, 12) (6, 6) 76. Refer to Table 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. REF: 17-2 TOP: Game theory Dominant strategy 77. Refer to Table 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. REF: 17-2 TOP: Game theory Nash equilibrium Table 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 Firm A Q=5 Q=6 Q=5 (24, 24) (30, 10) Q=6 (10, 30) (19, 19) 78. Refer to Table 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. REF: 17-2 TOP: Prisoners' dilemma Dominant strategy

159 1560 Chapter 17/Oligopoly 79. Refer to Table 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. REF: 17-2 TOP: Prisoners' dilemma Nash equilibrium 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. REF: 17-2 TOP: Prisoners' dilemma 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. REF: 17-2 TOP: Prisoners' dilemma

160 Chapter 17/Oligopoly 1561 Table 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 Store 1 Low Price High Price Low Price (500, 500) (100, 800) High Price (800, 100) (650, 650) 82. Refer to Table 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 REF: 17-2 TOP: Game theory 83. Refer to Table 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 REF: 17-2 TOP: Game theory 84. Refer to Table 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 REF: 17-2 TOP: Game theory 85. Refer to Table 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 REF: 17-2 TOP: Game theory

161 1562 Chapter 17/Oligopoly 86. Refer to Table 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. REF: 17-2 TOP: Dominant strategy 87. Refer to Table 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. REF: 17-2 TOP: Dominant strategy 88. Refer to Table 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 REF: 17-2 TOP: Nash equilibrium

162 Chapter 17/Oligopoly 1563 Table 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 Amy Clean Don t Clean Clean (75, 75) (100, 15) Don t Clean (15, 100) (20, 20) 89. Refer to Table 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. REF: 17-2 TOP: Game theory 90. Refer to Table 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. REF: 17-2 TOP: Game theory 91. Refer to Table 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. REF: 17-2 TOP: Game theory 92. Refer to Table 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. REF: 17-2 TOP: Game theory

163 1564 Chapter 17/Oligopoly 93. Refer to Table 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. REF: 17-2 TOP: Dominant strategy 94. Refer to Table 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. REF: 17-2 TOP: Dominant strategy 95. Refer to Table 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 REF: 17-2 TOP: Nash equilibrium

164 Chapter 17/Oligopoly 1565 Figure 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 Decision Clean Don't clean John's happiness = 7 John's happiness = 10 Clean Michael's Decision M ichael's happiness = 8 John's happiness = 3 M ichael's happiness = 3 John's happiness = 6 Don't clean M ichael's happiness = 10 M ichael's happiness = Refer to Figure 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. REF: 17-2 TOP: Game theory Dominant strategy 97. Refer to Figure 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. REF: 17-2 TOP: Game theory Dominant strategy 98. Refer to Figure 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. REF: 17-2 TOP: Game theory

165 1566 Chapter 17/Oligopoly 99. Refer to Figure 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. REF: 17-2 TOP: Game theory Dominant strategy 100. Refer to Figure 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. DIF: 3 REF: 17-2 TOP: Game theory

166 Chapter 17/Oligopoly 1567 Figure 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 Decision Mow Don't mow Katie's happiness = 7 Katie's happiness = 10 Mow Taylor's Decision Taylor's happiness = 7 Katie's happiness = 5 Taylor's happiness = 2 Katie's happiness = 4 Don't mow Taylor's happiness = 8 Taylor's happiness = Refer to Figure 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. REF: 17-2 TOP: Game theory Dominant strategy 102. Refer to Figure 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. DIF: 3 REF: 17-2 TOP: Game theory

167 1568 Chapter 17/Oligopoly 103. Refer to Figure 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. REF: 17-2 TOP: Game theory Dominant strategy 104. Refer to Figure 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. REF: 17-2 TOP: Game theory Dominant strategy Table 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 John Turn Drive Straight Turn (10, 10) (20, 5) Drive Straight (5, 20) (0, 0) 105. Refer to Table 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 REF: 17-2 TOP: Game theory 106. Refer to Table 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 REF: 17-2 TOP: Game theory

168 Chapter 17/Oligopoly Refer to Table 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 REF: 17-2 TOP: Game theory 108. Refer to Table 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 REF: 17-2 TOP: Game theory 109. Refer to Table 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. REF: 17-2 TOP: Dominant strategy 110. Refer to Table 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. REF: 17-2 TOP: Dominant strategy 111. Refer to Table How many Nash equilibria are there in this Chicken game? a. 0 b. 1 c. 2 d. 3 DIF: 3 REF: 17-2 TOP: Nash equilibrium

169 1570 Chapter 17/Oligopoly 112. Refer to Table 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 DIF: 3 REF: 17-2 TOP: Nash equilibrium 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. REF: 17-2 TOP: Nash equilibrium 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. REF: 17-2 TOP: Common resources Prisoners' dilemma 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. REF: 17-2 TOP: Nash equilibrium

170 Chapter 17/Oligopoly 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. REF: 17-2 TOP: Dominant 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. REF: 17-2 TOP: Game theory 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. REF: 17-2 TOP: Cartels Table 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 Low Price (1500, 1500) (5000, 200) Matt High Price (200, 3000) (4000, 4000) 119. Refer to Table 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. REF: 17-2 TOP: Game theory

171 1572 Chapter 17/Oligopoly 120. Refer to Table 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. DIF: 3 REF: 17-2 TOP: Nash equilibrium Table 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 B Breaks the agreement and advertises Maintains the agreement and does not advertise Breaks the agreement and advertises Firm A profit = $9,000 Firm B profit = $4,000 Firm A profit = $11,000 Firm B profit = $3,500 Firm A Maintains the agreement and does not advertise Firm A profit = $8,000 Firm B profit = $6,000 Firm A profit = $10,000 Firm B profit = $5, Refer to Table 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. DIF: 3 REF: 17-2 TOP: Prisoners' dilemma 122. Refer to Table 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. DIF: 3 REF: 17-2 TOP: Prisoners' dilemma

172 Chapter 17/Oligopoly Refer to Table 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. DIF: 3 REF: 17-2 TOP: Prisoners' dilemma 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. DIF: 3 REF: 17-2 TOP: Prisoners' dilemma 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 DIF: 3 REF: 17-2 TOP: Prisoners' dilemma 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. REF: 17-2 TOP: Game theory Economists

173 1574 Chapter 17/Oligopoly 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. 2. REF: 17-3 LOC: The role of government TOP: Antitrust 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. 4. REF: 17-3 TOP: Cooperation Oligopoly 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. 3. REF: 17-3 LOC: The role of government TOP: Antitrust The Sherman Antitrust Act was passed in a b c d MSC: Definitional REF: 17-3 LOC: The role of government TOP: Antitrust

174 Chapter 17/Oligopoly 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. 6. REF: 17-3 LOC: The role of government TOP: Antitrust 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. TOP: Antitrust 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. 7. REF: 17-3 LOC: The role of government REF: 17-3 LOC: The role of government TOP: Antitrust 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. REF: 17-3 LOC: The role of government TOP: Antitrust

175 1576 Chapter 17/Oligopoly 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. REF: 17-3 LOC: The role of government TOP: Antitrust 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. REF: 17-3 LOC: The role of government TOP: Antitrust 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. REF: 17-3 LOC: The role of government TOP: Antitrust 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. REF: 17-3 TOP: Resale price maintenance

176 Chapter 17/Oligopoly 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. REF: 17-3 TOP: Resale price maintenance 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 WalMart. 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. REF: 17-3 TOP: Resale price maintenance 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. REF: 17-3 LOC: The role of government TOP: Tying 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. REF: 17-3 TOP: Tying MSC: Definitional

177 1578 Chapter 17/Oligopoly 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 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 REF: 17-3 TOP: Tying 18. Refer to Scenario 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 REF: 17-3 TOP: Tying 19. Refer to Scenario 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 REF: 17-3 TOP: Tying 20. Refer to Scenario 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 DIF: 3 REF: 17-3 TOP: Tying

178 Chapter 17/Oligopoly 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. REF: 17-3 LOC: The role of government TOP: Antitrust 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. REF: 17-3 LOC: The role of government TOP: Antitrust 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 REF: 17-3 TOP: Oligopoly 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. MSC: Definitional REF: 17-3 TOP: Resale price maintenance

179 1580 Chapter 17/Oligopoly 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. REF: 17-3 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. REF: 17-3 TOP: Resale price maintenance 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 REF: 17-3 LOC: The role of government TOP: Antitrust 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 REF: 17-3 LOC: The role of government TOP: Antitrust 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 REF: 17-3 TOP: Tying

180 Chapter 17/Oligopoly 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. REF: 17-3 TOP: Cartels 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. REF: 17-3 TOP: Cartels 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. b. c. d. (i) only (i) and (ii) (ii) and (iii) (i), (ii), and (iii) REF: 17-3 TOP: Oligopoly 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. REF: 17-3 LOC: The role of government TOP: Economic welfare

181 1582 Chapter 17/Oligopoly 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. REF: 17-3 LOC: The role of government TOP: Antitrust 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. REF: 17-3 LOC: The role of government TOP: Predatory pricing 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. REF: 17-3 LOC: The role of government TOP: Antitrust 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. REF: 17-3 LOC: The role of government TOP: Tying

182 Chapter 17/Oligopoly 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. REF: 17-3 LOC: The role of government TOP: Tying 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. REF: 17-3 TOP: Predatory pricing 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. REF: 17-3 TOP: Predatory pricing 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 b. Sherman Antitrust Act of c. Crandall-Putnam ruling of d. Jackson-Microsoft ruling of REF: 17-3 LOC: The role of government TOP: Antitrust

183 1584 Chapter 17/Oligopoly 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. MSC: Definitional REF: 17-3 LOC: The role of government TOP: Antitrust 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 REF: 17-3 TOP: Resale price maintenance 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 REF: 17-3 TOP: Tying 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. REF: 17-3 LOC: The role of government TOP: Antitrust

184 Chapter 17/Oligopoly 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. MSC: Definitional REF: 17-3 LOC: The role of government TOP: Antitrust 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. MSC: Definitional REF: 17-3 TOP: Resale price maintenance 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. MSC: Definitional REF: 17-3 TOP: Resale price maintenance 49. Predatory pricing 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. MSC: Definitional REF: 17-3 TOP: Predatory pricing

185 1586 Chapter 17/Oligopoly 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. MSC: Definitional REF: 17-3 TOP: Predatory pricing 51. Tying 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. REF: 17-3 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. REF: 17-3 TOP: Tying 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. REF: 16-4 TOP: Cooperation Oligopoly

186 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 2. TOP: Marginal product of labor In 2008, the total income of all U.S. residents was approximately $120 billion. ANS: F 3. REF: 18-1 REF: 18-0 TOP: Income 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 REF: 18-1 TOP: Value of the marginal product 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 REF: 18-1 LOC: The study of economics, and definitions of economics TOP: Diminishing marginal product 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 LOC: The study of economics, and definitions of economics TOP: Competitive firms Profit maximization 6. The demand for computer programmers is inseparably tied to the supply of computer software. ANS: T REF: 18-1 TOP: Labor demand 1587

187 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. ANS: T 8. TOP: Labor demand The idea that rational employers think at the margin is central to understanding how many units of labor they choose to employ. ANS: T 9. REF: 18-1 REF: 18-1 TOP: Labor demand 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 REF: 18-1 TOP: Labor demand Value of the marginal product 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 REF: 18-1 TOP: Value of the marginal product 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 REF: 18-1 TOP: Value of the marginal product 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 REF: 18-1 TOP: Labor demand Value of the marginal product 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 REF: 18-1 TOP: Labor demand Marginal product of labor

188 Chapter 18/The Markets For the Factors of Production Technological advances can cause the labor demand curve to shift. ANS: T REF: 18-1 TOP: Labor demand 15. In the United States, technological advances help explain persistently rising employment in the face of rising wages. ANS: T REF: 18-1 TOP: Labor demand 16. The term Luddite refers to tekkies or people who are the first to adopt new technological advances. ANS: F MSC: Definitional REF: 18-1 TOP: Labor demand 17. Labor-saving technological advances increase the marginal productivity of labor. ANS: F MSC: Definitional REF: 18-1 TOP: Labor demand 18. Labor-saving technological advances decrease the marginal productivity of labor. ANS: T MSC: Definitional REF: 18-1 TOP: Labor demand 19. Labor-augmenting technological advances increase the marginal productivity of labor. ANS: T MSC: Definitional REF: 18-1 TOP: Labor demand 20. Labor-augmenting technological advances decrease the marginal productivity of labor. ANS: F MSC: Definitional REF: 18-1 TOP: Labor demand 21. An increase in a product s price will shift the labor demand curve for that product to the left. ANS: F MSC: Definitional REF: 18-1 TOP: Labor demand

189 1590 Chapter 18/The Markets For the Factors of Production 22. The quantity available of one factor of production can affect the marginal product of other factors. ANS: T REF: 18-1 TOP: Marginal product of labor Factor markets 23. In a competitive market for labor, the equilibrium wage always equals the value of the marginal product. ANS: T REF: 18-1 TOP: Value of the marginal product 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 REF: 18-1 TOP: Labor demand 25. The labor-supply curve is affected by the trade-off between labor and leisure. ANS: T REF: 18-2 TOP: Labor supply 26. The opportunity cost of leisure is impossible to measure, since we can't measure leisure time in dollars. ANS: F REF: 18-2 TOP: Labor supply 27. The labor supply curve reflects how workers' decisions about the labor-leisure tradeoff respond to changes in the opportunity cost of leisure. ANS: T REF: 18-2 TOP: Labor supply 28. Labor supply curves are always upward sloping. ANS: F REF: 18-2 TOP: Labor supply

190 Chapter 18/The Markets For the Factors of Production When an individual s income goes up, that individual may choose to supply less labor, resulting in a backward-sloping labor supply curve. ANS: T REF: 18-2 TOP: Labor supply 30. The supply of labor in any one market depends on the opportunities available in other markets. ANS: T REF: 18-2 TOP: Labor supply 31. Movements of workers from country to country can cause shifts in the labor supply curves for both countries. ANS: T REF: 18-2 TOP: Labor supply 32. If the demand for labor in a particular industry increases, the equilibrium wage in that industry will also increase. ANS: T REF: 18-3 TOP: Labor-market equilibrium 33. If the demand for labor decreases and the supply of labor is unchanged, then the opportunity cost of leisure will decrease. ANS: T REF: 18-3 LOC: Understanding and applying economic models TOP: Opportunity cost Wages 34. Profit maximization by firms ensures that the equilibrium wage always equals the value of the marginal product of capital. ANS: F REF: 18-3 LOC: Understanding and applying economic models TOP: Marginal product Wages 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 REF: 18-3 TOP: Labor-market equilibrium

191 1592 Chapter 18/The Markets For the Factors of Production 36. Oil field workers' wages are directly tied to the world price of oil. ANS: T REF: 18-3 TOP: Labor-market equilibrium 37. Changes in supply and demand in the labor market will cause changes in wages. ANS: T MSC: Definitional REF: 18-3 TOP: Labor-market equilibrium 38. In general, less productive workers are paid less than more productive workers. ANS: T REF: 18-3 TOP: Labor-market equilibrium 39. Increases in productivity are not responsible for increased standards of living in the United States. ANS: F REF: 18-3 TOP: Factor markets 40. Average productivity can be measured as total output divided by total units of labor. ANS: T MSC: Definitional REF: 18-3 TOP: Factor markets 41. The rental price of capital is the price a person pays to own the capital indefinitely. ANS: F REF: 18-4 LOC: Understanding and applying economic models TOP: Capital market 42. The marginal product of land depends on the quantity of land that is available. ANS: T REF: 18-4 TOP: Land markets 43. For a snow-removal business, the capital stock would include inputs such as snow blowers and shovels. ANS: T MSC: Definitional REF: 18-4 TOP: Capital

192 Chapter 18/The Markets For the Factors of Production The demand curve for each factor of production equals the value of the marginal product of that factor. ANS: T REF: 18-4 TOP: Factor markets 45. Capital income does not include income paid to households for the use of their capital. ANS: F MSC: Definitional REF: 18-4 TOP: Capital income 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 MSC: Definitional REF: 18-4 TOP: Capital income 47. When a firm decides to retain its earnings instead of paying dividends, the stockholders necessarily suffer. ANS: F REF: 18-4 TOP: Capital 48. Capital owners are compensated according to the value of the marginal product of that capital. ANS: T REF: 18-4 TOP: Capital 49. A change in the supply of any one factor alters the earnings of all the other factors. ANS: T REF: 18-4 TOP: Factor markets 50. If the output price of a product rises, the demand for capital will increase, raising the rental price of capital. ANS: T REF: 18-4 TOP: Capital

193 1594 Chapter 18/The Markets For the Factors of Production 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 REF: 18-4 TOP: Capital 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 REF: 18-4 TOP: Land markets 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 TOP: Diminishing marginal product 2. REF: 18-1 Explain how a firm values the contribution of workers to its profitability. Would a profitmaximizing 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 REF: 18-1 TOP: Marginal product of labor

194 Chapter 18/The Markets For the Factors of Production 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 4. REF: 18-3 TOP: Marginal product of labor 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 5. REF: 18-3 TOP: Capital 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 REF: 18-3 TOP: Land markets

195 1596 Chapter 18/The Markets For the Factors of Production 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 TOP: Capital markets Land markets 7. REF: 18-4 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 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. MSC: Definitional REF: 18-0 TOP: Factor markets

196 Chapter 18/The Markets For the Factors of Production 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. MSC: Definitional 3. REF: 18-0 TOP: Factor markets 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 MSC: Definitional 5. TOP: Factors of production 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. MSC: Definitional 4. REF: 18-0 REF: 18-0 TOP: Factor markets 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 MSC: Definitional REF: 18-0 TOP: Factor markets

197 1598 Chapter 18/The Markets For the Factors of Production 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. MSC: Definitional REF: 18-1 TOP: Production function Table 18-1 Number of Workers (L) Output of Firm A Output of Firm B ,000 Output of Firm C Output of Firm D Refer to Table Which firm s production function exhibits diminishing marginal product? a. Firm A b. Firm B c. Firm C d. Firm D REF: 18-1 TOP: Diminishing marginal product 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 What is the marginal productivity of the second worker? a. 7 b. 10 c. 12 d. 22 REF: 18-1 TOP: Marginal product of labor

198 Chapter 18/The Markets For the Factors of Production Refer to Scenario What is the total productivity of three workers? a. 12 b. 22 c. 30 d Refer to Scenario 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. $ REF: 18-1 TOP: Marginal product of labor REF: 18-1 TOP: Value of the marginal product Refer to Scenario 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 REF: 18-1 TOP: Value of the marginal product

199 1600 Chapter 18/The Markets For the Factors of Production 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 Refer to Table What is the marginal product of the third unit of labor? a. 40 units b. 50 units c. 60 units d. 180 units 8. REF: 18-1 TOP: Marginal product of labor Refer to Table What is the marginal product of the fifth unit of labor? a. 30 units b. 40 units c. 50 units d. 250 units 9. Output REF: 18-1 TOP: Marginal product of labor Refer to Table 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 REF: 18-1 TOP: Value of the marginal product

200 Chapter 18/The Markets For the Factors of Production Refer to Table 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 fourth worker? a. $200 b. $1,000 c. $6,400 d. $32,000 REF: 18-1 TOP: Value of the marginal product 11. Refer to Table Suppose this firm charges a price of $5 per unit of output and pays workers a 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 REF: 18-1 TOP: Value of the marginal product Profit maximization 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. REF: 18-1 TOP: Value of the marginal product 13. Which of the following statements is correct? 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. DIF: 3 REF: 18-1 TOP: Labor demand

201 1602 Chapter 18/The Markets For the Factors of Production 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. DIF: 3 REF: 18-1 TOP: Marginal product of labor 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. DIF: 3 REF: 18-1 TOP: Marginal product of labor

202 Chapter 18/The Markets For the Factors of Production 1603 Figure On the graph, L represents the quantity of labor and Q represents the quantity of output per week. Q L 16. Refer to Figure The figure illustrates the a. demand for labor. b. supply of labor. c. production function. d. wage function. REF: 18-1 LOC: The study of economics, and definitions of economics MSC: Definitional TOP: Production function 17. Refer to Figure The marginal product of the second worker is a. 90 units of output. b. 105 units of output. c. 210 units of output. d. 330 units of output. REF: 18-1 LOC: The study of economics, and definitions of economics TOP: Marginal product of labor

203 1604 Chapter 18/The Markets For the Factors of Production 18. Refer to Figure The marginal product of the fourth worker is a. 60 units of output. b. 75 units of output. c. 285 units of output. d. 345 units of output. REF: 18-1 LOC: The study of economics, and definitions of economics TOP: Marginal product of labor 19. Refer to Figure 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 REF: 18-1 TOP: Marginal revenue product 20. Refer to Figure 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 REF: 18-1 TOP: Marginal revenue product 21. Refer to Figure 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 REF: 18-1 TOP: Marginal revenue product Profit maximization

204 Chapter 18/The Markets For the Factors of Production Refer to Figure Suppose the firm sells its output for $12 per unit, and it pays each of its workers $700 per week. How many workers will the firm hire to maximize its profit? a. 2 b. 3 c. 4 d. 5 REF: 18-1 TOP: Marginal revenue product Profit maximization 23. Refer to Figure Suppose the firm sells its output for $15 per unit, and it pays each of its 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: LOC: TOP: MSC: A DIF: 3 REF: 18-1 Labor markets Marginal cost Marginal revenue Marginal revenue product Applicative 24. Refer to Figure Suppose the firm sells its output for $10 per unit, and it pays each of its 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: LOC: TOP: MSC: C DIF: 3 REF: 18-1 Labor markets Marginal revenue Marginal cost Marginal revenue product Applicative 25. Refer to Figure Suppose the firm sells its output for $25 per unit, and it pays each of its 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. REF: 18-1 TOP: Profit maximization

205 1606 Chapter 18/The Markets For the Factors of Production 26. Refer to Figure Suppose the firm sells its output for $20 per unit, and it pays each of its workers $1,250 per week. The firm maximizes profit by hiring a. 3 workers. b. 4 workers. c. 5 workers. d. 6 workers. REF: 18-1 TOP: Profit maximization 27. Refer to Figure 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. REF: 18-1 TOP: Diminishing marginal product Figure 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. 400 VMP VMP L 28. Refer to Figure 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. REF: 18-1 TOP: Marginal revenue product Labor demand

206 Chapter 18/The Markets For the Factors of Production Refer to Figure 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. REF: 18-1 TOP: Labor demand 30. Refer to Figure 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. REF: 18-1 TOP: Marginal revenue product 31. Refer to Figure 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. DIF: 3 REF: 18-1 TOP: Marginal revenue product Profit maximization

207 1608 Chapter 18/The Markets For the Factors of Production 32. Refer to Figure 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: LOC: TOP: MSC: C DIF: 3 REF: 18-1 Labor markets Marginal cost Marginal revenue product Profit maximization 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. MSC: Definitional REF: 18-1 TOP: Factor markets 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. MSC: Definitional REF: 18-1 TOP: Factors of production 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. MSC: Definitional REF: 18-1 TOP: Factor markets

208 Chapter 18/The Markets For the Factors of Production The term "factor market" applies to the market for a. labor. b. capital. c. land. d. All of the above are correct. MSC: Definitional REF: 18-1 TOP: Factor markets 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. REF: 18-1 TOP: Factor markets 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. REF: 18-1 TOP: Factor markets 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. REF: 18-1 TOP: Factors of production 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. REF: 18-1 TOP: Factors of production

209 1610 Chapter 18/The Markets For the Factors of Production 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. REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand

210 Chapter 18/The Markets For the Factors of Production What causes the labor demand curve to shift? (i) changes in productivity (ii) changes in wages (iii) changes in output prices a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) All of the above are correct. REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand

211 1612 Chapter 18/The Markets For the Factors of Production 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. REF: 18-1 TOP: Labor demand 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. b. c. d. (i) only (iii) only (i) and (ii) (ii) and (iii) REF: 18-1 TOP: Labor demand 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. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) All of the above are correct. REF: 18-1 TOP: Labor demand

212 Chapter 18/The Markets For the Factors of Production 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 highschool 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. REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand 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 REF: 18-1 TOP: Labor demand 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 REF: 18-1 TOP: Labor demand

213 1614 Chapter 18/The Markets For the Factors of Production 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. REF: 18-1 TOP: Labor demand 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. MSC: Definitional REF: 18-1 TOP: Labor demand 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. MSC: Definitional REF: 18-1 TOP: Labor demand 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. b. c. d. (i) only (ii) only (i) and (iii) (ii) and (iv) REF: 18-1 TOP: Labor demand

214 Chapter 18/The Markets For the Factors of Production 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. b. c. d. (i) only (ii) only (i) and (iii) (ii) and (iv) REF: 18-1 TOP: Labor demand 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. MSC: Definitional REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand 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. MSC: Definitional REF: 18-1 TOP: Production function

215 1616 Chapter 18/The Markets For the Factors of Production 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. MSC: Definitional REF: 18-1 TOP: Production function 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. REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand 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. REF: 18-1 TOP: Labor demand

216 Chapter 18/The Markets For the Factors of Production 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. REF: 18-1 TOP: Labor demand 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. DIF: 3 REF: 18-1 TOP: Production function 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. REF: 18-1 TOP: Labor demand

217 1618 Chapter 18/The Markets For the Factors of Production 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 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. REF: 18-1 TOP: Labor demand 72. Refer to Scenario 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. REF: 18-1 TOP: Labor demand 73. Refer to Scenario 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. REF: 18-1 TOP: Labor demand

218 Chapter 18/The Markets For the Factors of Production Refer to Scenario 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. REF: 18-1 TOP: Labor demand 75. Refer to Scenario 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. REF: 18-1 TOP: Labor demand 76. Refer to Scenario 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. REF: 18-1 TOP: Labor demand 77. Refer to Scenario 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. REF: 18-1 TOP: Labor demand

219 1620 Chapter 18/The Markets For the Factors of Production 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 Labor a. b. c. d. ANS: LOC: TOP: MSC: Number of Calculators Per Week C DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product 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. ANS: LOC: TOP: MSC: C REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 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. REF: 18-1 TOP: Value of the marginal product

220 Chapter 18/The Markets For the Factors of Production 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. MSC: Definitional REF: 18-1 TOP: Value of the marginal product 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. MSC: Definitional REF: 18-1 TOP: Marginal product of labor 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. MSC: Definitional REF: 18-1 TOP: Marginal product of labor

221 1622 Chapter 18/The Markets For the Factors of Production Table 18-3 Quantity of Labor Number of Baseballs Per Day Refer to Table 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 DIF: 3 REF: 18-1 TOP: Marginal product of labor 85. Refer to Table 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. 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: LOC: TOP: MSC: D REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 86. Refer to Table 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. What is the marginal revenue product of the third worker? a. 120 baseballs. b. $300 c. $400 d. $600 REF: 18-1 TOP: Value of the marginal product

222 Chapter 18/The Markets For the Factors of Production Refer to Table This table describes the number of baseballs a manufacturer can produce per 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 REF: 18-1 TOP: Value of the marginal product 88. Refer to Table 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 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 REF: 18-1 TOP: Value of the marginal product 89. Refer to Table This table describes the number of baseballs a manufacturer can produce per 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 REF: 18-1 TOP: Value of the marginal product 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. DIF: 3 REF: 18-1 TOP: Labor demand

223 1624 Chapter 18/The Markets For the Factors of Production 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) Marginal Product of Quantity (golf Labor (golf balls per day) balls per day) Value of the Marginal Product of Labor Wage (per day) 91. Refer to Table 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 REF: 18-1 TOP: Marginal product of labor 92. Refer to Table What is the fourth worker's marginal product of labor? a. 120 golf balls b. 140 golf balls c. 160 golf balls d. 180 golf balls REF: 18-1 TOP: Marginal product of labor 93. Refer to Table What is the sixth worker's marginal product of labor? a. 100 golf balls b. 120 golf balls c. 140 golf balls d. 160 golf balls REF: 18-1 TOP: Marginal product of labor Marginal Profit

224 Chapter 18/The Markets For the Factors of Production Refer to Table What is the value of the marginal product of the second worker? a. $180 b. $450 c. $950 d. $1,080 DIF: 3 REF: 18-1 TOP: Value of the marginal product 95. Refer to Table What is the value of the marginal product of the fifth worker? a. $120 b. $300 c. $2,000 d. $2,300 DIF: 3 REF: 18-1 TOP: Value of the marginal product 96. Refer to Table What is the value of the marginal product of the first worker? a. $200 b. $400 c. $500 d. $700 DIF: 3 REF: 18-1 TOP: Value of the marginal product 97. Refer to Table 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 DIF: 3 REF: 18-1 TOP: Diminishing marginal product 98. Refer to Table What is the marginal profit of the fourth worker? a. $25 b. $117 c. $350 d. $1,700 ANS: LOC: TOP: MSC: A DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical

225 1626 Chapter 18/The Markets For the Factors of Production 99. Refer to Table What is the marginal profit of the sixth worker? a. $12 b. $25 c. $50 d. $75 ANS: LOC: TOP: MSC: D DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 100. Refer to Table 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: LOC: TOP: MSC: B DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 101. Refer to Table 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 ANS: LOC: TOP: MSC: A DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 102. Refer to Table 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. REF: 18-1 TOP: Labor demand

226 Chapter 18/The Markets For the Factors of Production 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. b. c. d. (i) and (ii) (i) and (iii) (ii) and (iii) All of the above are correct. REF: 18-1 TOP: Labor demand Value of the marginal product Table 18-5 Number of Workers Output Marginal Product of Labor Value of Marginal Product of Labor $1,000 $ 800 $ Wage $500 $500 $500 $500 $500 Marginal Profit $500 $ Refer to Table What is the market price of the final good? a. $5 b. $6 c. $8 d. $10 ANS: LOC: TOP: MSC: D REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 105. Refer to Table 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. REF: 18-1 TOP: Marginal product of labor

227 1628 Chapter 18/The Markets For the Factors of Production 106. Refer to Table If the firm hires two workers, the two workers together produce a. 80 units. b. 100 units. c. 180 units. d. 200 units. ANS: LOC: TOP: MSC: C REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 107. Refer to Table What is the marginal product of the fourth worker? a. 30 b. 40 c. 100 d. 400 REF: 18-1 TOP: Marginal product of labor 108. Refer to Table 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. MSC: Definitional REF: 18-1 TOP: Diminishing marginal product 109. Refer to Table 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. MSC: Definitional REF: 18-1 TOP: Diminishing marginal product

228 Chapter 18/The Markets For the Factors of Production Refer to Table What is the marginal profit of the fourth worker? a. $400 b. $100 c. $0 d. $100 ANS: LOC: TOP: MSC: D REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 111. Refer to Table What is the fourth worker's marginal revenue product? a. $100 b. $40 c. $400 d. $500 ANS: LOC: TOP: MSC: C REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 112. Refer to Table To maximize its profit, how many workers will the firm hire? a. 2 b. 3 c. 4 d. 5 ANS: LOC: TOP: MSC: B REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 113. Refer to Table 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. REF: 18-1 TOP: Value of the marginal product

229 1630 Chapter 18/The Markets For the Factors of Production 114. Which of the following statements is correct? a. The value of the marginal product curve is the labor demand curve for competitive, profitmaximizing 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. d. All of the above are correct. ANS: LOC: TOP: MSC: D REF: 18-1 Labor markets Marginal product of labor Value of the marginal product 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. ANS: LOC: TOP: MSC: C DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 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. ANS: LOC: TOP: MSC: D DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical

230 Chapter 18/The Markets For the Factors of Production 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. ANS: LOC: TOP: MSC: C DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical Table 18-6 Labor Output Marginal Product of Labor Value of Marginal Product of Labor Wage Marginal Profit $1200 $ 900 $ 750 $ $400 $400 $400 $400 --$800 $500 $350 -$ Refer to Table The price of output is a. $1. b. $2. c. $3. d. $400. REF: 18-1 TOP: Value of the marginal product 119. Refer to Table How many workers should the firm hire? a. 1 b. 2 c. 3 d. 4 ANS: LOC: TOP: MSC: C REF: 18-1 Labor markets Value of the marginal product Marginal product of labor Analytical

231 1632 Chapter 18/The Markets For the Factors of Production Table 18-7 Labor Output Marginal Product of Labor Value of Marginal Product of Labor Wage Marginal Profit CC --$600 AA $200 DD --$300 $300 $300 $300 --$300 $100 BB -$ Refer to Table What is the value for the cell labeled AA? a. $600 b. $500 c. $400 d. $300 REF: 18-1 TOP: Value of the marginal product 121. Refer to Table What is the value for the cell labeled BB? a. $300 b. $200 c. $100 d. $100 REF: 18-1 TOP: Value of the marginal product 122. Refer to Table What is the value for the cell labeled CC? a. 650 b. 600 c. 100 d. 50 DIF: 3 REF: 18-1 TOP: Marginal product of labor 123. Refer to Table What is the value for the cell labeled DD? a. $100 b. $300 c. $100 d. $50 DIF: 3 REF: 18-1 TOP: Value of the marginal product

232 Chapter 18/The Markets For the Factors of Production 1633 Table 18-8 Days of Labor Units of Output Refer to Table What is the marginal product of the third worker? a. 7 b. 8 c. 25 d. 75 REF: 18-1 TOP: Marginal product of labor 125. Refer to Table 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 ANS: LOC: TOP: MSC: D DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical 126. Refer to Table 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 ANS: LOC: TOP: MSC: A DIF: 3 REF: 18-1 Labor markets Marginal product of labor Value of the marginal product Analytical

233 1634 Chapter 18/The Markets For the Factors of Production 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. MSC: Definitional REF: 18-1 TOP: Diminishing marginal product 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. REF: 18-1 TOP: Diminishing marginal product Production function 129. Diminishing marginal product is closely related to a. diminishing total cost. b. diminishing marginal cost. c. increasing price. d. increasing marginal cost. REF: 18-1 TOP: Diminishing marginal product 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. MSC: Definitional REF: 18-1 TOP: Diminishing marginal product 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. REF: 18-1 TOP: Diminishing marginal product

234 Chapter 18/The Markets For the Factors of Production 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. REF: 18-1 TOP: Marginal product of labor 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. MSC: Definitional REF: 18-1 TOP: Diminishing marginal product 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. REF: 18-1 TOP: Diminishing marginal product Labor demand 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: LOC: TOP: MSC: A REF: 18-1 Labor markets Diminishing marginal product Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product

235 1636 Chapter 18/The Markets For the Factors of Production 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. MSC: Definitional REF: 18-1 TOP: Value of the marginal product 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. MSC: Definitional REF: 18-1 TOP: Value of the marginal product 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 REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product

236 Chapter 18/The Markets For the Factors of Production 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Labor demand

237 1638 Chapter 18/The Markets For the Factors of Production 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product

238 Chapter 18/The Markets For the Factors of Production 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. b. c. d. (i) and (ii) (i) and (iii) (ii) and (iii) All of the above are correct. REF: 18-1 TOP: Value of the marginal product

239 1640 Chapter 18/The Markets For the Factors of Production 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. MSC: Definitional REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. REF: 18-1 TOP: Value of the marginal product 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. MSC: Definitional REF: 18-1 TOP: Value of the marginal product

240 Chapter 18/The Markets For the Factors of Production 1641 Figure 18-3 The figure below shows the production function for a particular firm. Q L 159. Refer to Figure The marginal product of the third worker is a. 20 units. b. 30 units. c. 40 units. d. 70 units. REF: 18-1 TOP: Marginal product of labor 160. Refer to Figure 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 REF: 18-1 TOP: Marginal product of labor

241 1642 Chapter 18/The Markets For the Factors of Production 161. Refer to Figure Suppose the firm pays a wage equal to $160 per unit of labor and sells its 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 REF: 18-1 TOP: Marginal product of labor 162. Refer to Figure Suppose the firm pays a wage equal to $320 per unit of labor and sells its 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 REF: 18-1 TOP: Marginal product of labor 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. 2. REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Labor supply

242 Chapter 18/The Markets For the Factors of Production 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 4. TOP: Labor supply 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 5. REF: 18-2 REF: 18-2 TOP: Labor supply 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. REF: 18-2 LOC: The study of economics, and definitions of economics TOP: Opportunity cost Wages 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. REF: 18-2 LOC: Understanding and applying economic models TOP: Labor supply

243 1644 Chapter 18/The Markets For the Factors of Production 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 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 8. TOP: Labor supply Refer to Scenario 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 9. REF: 18-2 REF: 18-2 TOP: Labor supply Refer to Scenario 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. REF: 18-2 TOP: Labor supply 10. Refer to Scenario 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. REF: 18-2 TOP: Labor supply

244 Chapter 18/The Markets For the Factors of Production 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. REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Labor supply 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 REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Labor supply

245 1646 Chapter 18/The Markets For the Factors of Production 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. REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Labor supply 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 REF: 18-2 TOP: Labor supply

246 Chapter 18/The Markets For the Factors of Production 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. REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Labor supply 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. DIF: 3 REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Labor supply

247 1648 Chapter 18/The Markets For the Factors of Production 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. REF: 18-2 TOP: Labor supply 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. DIF: 3 REF: 18-2 TOP: Labor supply 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. REF: 18-2 TOP: Income effect 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. REF: 18-3 TOP: Labor-market equilibrium

248 Chapter 18/The Markets For the Factors of Production 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. 3. REF: 18-3 TOP: Labor-market equilibrium 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. TOP: Labor-market equilibrium 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. REF: 18-3 REF: 18-3 TOP: Labor-market equilibrium 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. REF: 18-3 TOP: Labor-market equilibrium

249 1650 Chapter 18/The Markets For the Factors of Production 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. REF: 18-3 TOP: Labor-market equilibrium 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. S D 2 D L Refer to Figure 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 REF: 18-3 TOP: Labor-market equilibrium

250 Chapter 18/The Markets For the Factors of Production Refer to Figure Which of the following is a possible explanation of the shift of the labordemand 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. REF: 18-3 TOP: Labor-market equilibrium Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 10. Refer to Figure Which of the following events would most likely explain a shift of the labordemand 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. REF: 18-3 TOP: Labor-market equilibrium 11. A significant slowdown in the growth of productivity persisted in the U.S. economy between a and b and c and the present. d and the present. REF: 18-3 LOC: Productivity and growth TOP: Productivity

251 1652 Chapter 18/The Markets For the Factors of Production 12. Which of the following statements is correct? 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. REF: 18-3 LOC: Productivity and growth TOP: Productivity Wages 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. REF: TOP: Labor-market equilibrium 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. REF: 18-3 TOP: Labor-market equilibrium 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. REF: TOP: Labor-market equilibrium

252 Chapter 18/The Markets For the Factors of Production 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 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. REF: TOP: Labor-market equilibrium 17. 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 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. REF: TOP: Labor-market equilibrium 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. REF: TOP: Labor-market equilibrium

253 1654 Chapter 18/The Markets For the Factors of Production 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. REF: TOP: Labor-market equilibrium 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. REF: TOP: Labor-market equilibrium 21. 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 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. REF: TOP: Labor-market equilibrium 22. 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 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. REF: TOP: Labor-market equilibrium

254 Chapter 18/The Markets For the Factors of Production 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. REF: TOP: Labor-market equilibrium 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. REF: TOP: Labor-market equilibrium 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. DIF: 3 REF: TOP: Labor-market equilibrium

255 1656 Chapter 18/The Markets For the Factors of Production 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. DIF: 3 REF: TOP: Labor-market equilibrium 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. REF: 18-3 TOP: Labor-market equilibrium 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 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. REF: 18-3 TOP: Labor-market equilibrium

256 Chapter 18/The Markets For the Factors of Production Refer to Scenario 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. REF: 18-3 TOP: Labor-market equilibrium 30. Refer to Scenario 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. REF: 18-3 TOP: Labor-market equilibrium 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 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. REF: 18-3 TOP: Labor-market equilibrium 32. Refer to Scenario 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. REF: 18-3 TOP: Labor-market equilibrium

257 1658 Chapter 18/The Markets For the Factors of Production 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. REF: 18-3 TOP: Labor-market equilibrium Figure Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 35. Refer to Figure 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. a. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) All of the above are correct. REF: 18-3 TOP: Labor-market equilibrium

258 Chapter 18/The Markets For the Factors of Production Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 37. Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 38. Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 39. Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium

259 1660 Chapter 18/The Markets For the Factors of Production Figure Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 41. Refer to Figure 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. DIF: 3 REF: 18-3 TOP: Labor-market equilibrium 42. Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium

260 Chapter 18/The Markets For the Factors of Production Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 44. Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 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. REF: 18-3 TOP: Labor-market equilibrium 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. REF: 18-3 TOP: Labor-market equilibrium

261 1662 Chapter 18/The Markets For the Factors of Production 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. DIF: 3 REF: 18-3 TOP: Labor-market equilibrium 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. REF: 18-3 TOP: Labor-market equilibrium 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. DIF: 3 REF: 18-3 TOP: Labor-market equilibrium

262 Chapter 18/The Markets For the Factors of Production 1663 Figure Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 51. Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 52. Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium

263 1664 Chapter 18/The Markets For the Factors of Production 53. Refer to Figure 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. REF: 18-3 TOP: Labor-market equilibrium 54. Refer to Figure 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. REF: 18-3 TOP: Labor-market 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. MSC: Definitional REF: 18-4 TOP: Capital

264 Chapter 18/The Markets For the Factors of Production Which of the following statements is correct? 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. 3. TOP: Capital markets 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. 4. REF: 18-4 DIF: 3 REF: 18-4 TOP: Land markets 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. DIF: 3 REF: 18-4 TOP: Capital markets

265 1666 Chapter 18/The Markets For the Factors of Production 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. 6. DIF: 3 REF: 18-4 TOP: Capital markets 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. REF: 18-4 LOC: Understanding and applying economic models TOP: Capital market 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. 8. REF: TOP: Factor markets 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. MSC: Definitional REF: 18-4 TOP: Capital

266 Chapter 18/The Markets For the Factors of Production 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. MSC: Definitional REF: 18-4 TOP: Capital 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. REF: 18-4 TOP: Capital 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. MSC: Definitional REF: 18-4 TOP: Capital 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. REF: 18-4 TOP: Capital 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. REF: 18-4 TOP: Factor markets

267 1668 Chapter 18/The Markets For the Factors of Production 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. REF: 18-4 TOP: Factor markets 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. REF: 18-4 TOP: Factor markets 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. REF: 18-4 TOP: Factor markets 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. REF: 18-4 TOP: Capital markets 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. MSC: Definitional REF: 18-4 TOP: Capital

268 Chapter 18/The Markets For the Factors of Production 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 REF: 18-4 TOP: Factor markets 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 MSC: Definitional REF: 18-4 TOP: Capital 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. REF: 18-4 TOP: Factor markets 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. DIF: 3 REF: 18-4 TOP: Capital

269 1670 Chapter 18/The Markets For the Factors of Production 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 MSC: Definitional REF: 18-4 TOP: Capital 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. b. c. d. (i) only (ii) only (iii) only (i) and (iii) MSC: Definitional REF: 18-4 TOP: Capital 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. b. c. d. (i) only (iii) only (i) and (iii) (ii) and (iii) MSC: Definitional REF: 18-4 TOP: Capital 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. DIF: 3 REF: 18-4 TOP: Factor markets

270 Chapter 18/The Markets For the Factors of Production The Black Death in fourteenth-century Europe resulted in 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. DIF: 3 REF: 18-4 TOP: Factor markets 28. The Black Death in fourteenth-century Europe resulted in 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. DIF: 3 REF: 18-4 TOP: Factor markets 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. REF: TOP: Labor supply 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. MSC: Definitional REF: 18-4 TOP: Capital income 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. MSC: Definitional REF: 18-4 TOP: Factor markets

271 1672 Chapter 18/The Markets For the Factors of Production 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. REF: 18-4 TOP: Capital income 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. REF: 18-4 TOP: Capital income 34. Who receives income from capital in the United States? a. Bank depositors b. Bondholders c. Stockholders d. All of the above are correct. REF: 18-4 TOP: Capital income 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. REF: 18-4 TOP: Capital income 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. DIF: 3 REF: TOP: Capital markets

272 Chapter 18/The Markets For the Factors of Production 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. DIF: 3 REF: TOP: Capital markets 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. DIF: 3 REF: TOP: Capital markets 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. DIF: 3 REF: TOP: Capital markets 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. DIF: 3 REF: 18-4 TOP: Capital markets

273 1674 Chapter 18/The Markets For the Factors of Production 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. REF: 18-4 TOP: Land markets 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. REF: 18-4 TOP: Land markets 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. b. c. d. (i) and (ii) (ii) and (iii) (i) and (iii) (ii) only REF: 18-4 TOP: Land markets 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. REF: 18-4 TOP: Land markets

274 Chapter 18/The Markets For the Factors of Production 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. DIF: 3 REF: 18-4 TOP: Land markets 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. REF: 18-4 TOP: Land markets 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. REF: 18-4 TOP: Land markets 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. DIF: 3 REF: 18-4 TOP: Land markets

275 1676 Chapter 18/The Markets For the Factors of Production 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. DIF: 3 REF: 18-4 TOP: Land markets 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. DIF: 3 REF: 18-4 TOP: Land markets 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. DIF: 3 REF: 18-4 TOP: Land markets 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. REF: 18-3 TOP: Labor-market equilibrium

276 Chapter 18/The Markets For the Factors of Production 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. REF: 18-3 TOP: Labor-market equilibrium 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. REF: 18-5 LOC: Understanding and applying economic models TOP: Neoclassical theory of distribution

277 Chapter 19 Earnings and Discrimination TRUE/FALSE 1. A compensating differential refers to a difference in wages that arises from nonmonetary characteristics. ANS: T MSC: Definitional 2. REF: 19-1 TOP: Compensating differentials REF: 19-1 TOP: Human capital 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 6. TOP: Compensating differentials A computer is an example of productivity-enhancing human capital. ANS: F MSC: Definitional 5. REF: 19-1 The fact that doctors are paid more than economics professors is an example of a compensating differential. ANS: T MSC: Definitional 4. TOP: Compensating differentials A compensating differential is a difference in wages due to higher levels of education or other forms of human capital. ANS: F MSC: Definitional 3. REF: 19-1 REF: 19-1 TOP: Human capital 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 REF: 19-1 TOP: Increasing value of skills 1678

278 Chapter 19/Earnings and Discrimination 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. ANS: F 8. TOP: Increasing value of skills 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 9. REF: 19-1 REF: 19-1 TOP: Increasing value of skills 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. ANS: T REF: 19-1 TOP: Increasing value of skills 10. Some economists suggest that international trade has led to an expanding wage gap between highskill and low-skill workers in the United States. ANS: T REF: 19-1 TOP: Increasing value of skills 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. ANS: F REF: 19-1 TOP: Increasing value of skills 12. The United States is losing manufacturing jobs to countries like China and India, where manufacturing jobs have increased 30 percent since ANS: F REF: 19-1 TOP: Increasing value of skills 13. Since 1995, global manufacturing employment has declined, yet global industrial output has risen. ANS: T REF: 19-1 TOP: Increasing value of skills

279 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. ANS: T REF: 19-1 TOP: Increasing value of skills 15. The demand for workers with excellent problem-solving skills is increasing, as are the wages for those workers. ANS: T REF: 19-1 TOP: Increasing value of skills 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 REF: 19-1 TOP: Beauty premium 17. One reason why better-looking workers may have higher earnings is that physical attractiveness is correlated with intelligence. ANS: F REF: 19-1 TOP: Beauty premium 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 MSC: Definitional REF: 19-1 TOP: Signaling 19. The signaling theory of education maintains that workers who complete specific levels of education enhance their productivity through education. ANS: F MSC: Definitional REF: 19-1 TOP: Signaling 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 REF: 19-1 TOP: Signaling

280 Chapter 19/Earnings and Discrimination The human-capital theory of education maintains that workers who complete specific levels of education enhance their productivity through education. ANS: T MSC: Definitional REF: 19-1 TOP: Human capital Signaling 22. Education and on-the-job training are sources of human capital. ANS: T REF: 19-1 TOP: Human capital 23. The superstar phenomenon explains why professional athletes earn more than amateur athletes. ANS: F MSC: Definitional REF: 19-1 TOP: Superstar phenomenon 24. Superstars earn high incomes due to their ability to satisfy the demands of millions of people at once. ANS: T REF: 19-2 TOP: Superstars 25. An effective minimum wage law will increase the quantity of labor demanded. ANS: F REF: 19-1 TOP: Above-equilibrium wages 26. Labor unions will raise the quantity of labor demanded. ANS: F REF: 19-1 TOP: Unions 27. Efficiency wages will raise the quantity of labor supplied to the market. ANS: T REF: 19-1 TOP: Efficiency wages 28. Efficiency wages decrease employee effort. ANS: F REF: 19-2 TOP: Above-equilibrium wages

281 1682 Chapter 19/Earnings and Discrimination 29. Efficiency wages decrease employee turnover. ANS: T REF: 19-2 TOP: Above-equilibrium wages 30. Economic theory of labor markets suggests that wages are governed by labor supply and labor demand. ANS: T REF: 19-1 TOP: Wages 31. Empirical evidence suggests that ability, effort, and chance are not likely to be significant contributors to wage differences. ANS: F REF: 19-1 TOP: Wages 32. Discrimination is a reflection of some people's prejudice against certain groups in society. ANS: T MSC: Definitional REF: 19-2 TOP: Discrimination 33. Differences in human capital among groups of workers is possibly a reflection of past discrimination. ANS: T REF: 19-2 TOP: Discrimination 34. Discrimination is an emotionally charged issue that is impossible to study objectively. ANS: F REF: 19-2 TOP: Discrimination 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. ANS: T REF: 19-2 TOP: Discrimination

282 Chapter 19/Earnings and Discrimination 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 REF: 19-2 TOP: Labor-market discrimination 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 REF: 19-2 TOP: Labor-market discrimination 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 REF: 19-2 TOP: Labor-market discrimination 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 REF: 19-2 TOP: Labor-market discrimination 40. Economists would argue that the gender wage gap is narrowing because of efficiency wages. ANS: F REF: TOP: Labor-market discrimination Efficiency wages 41. All differences in wages that are not accounted for by differences in human-capital investment are likely to be a result of discrimination. ANS: F REF: 19-2 TOP: Labor-market discrimination 42. In a labor market free from discrimination, wages for workers that are employed by the same company will still differ. ANS: T REF: TOP: Labor-market discrimination Human capital

283 1684 Chapter 19/Earnings and Discrimination 43. Evidence of discrimination is most apparent when one compares wages among broad groups. ANS: F REF: 19-2 TOP: Labor-market discrimination 44. When discrimination occurs as a result of prejudice, firms do not maximize profits. ANS: T REF: 19-2 TOP: Labor-market discrimination 45. Consumers are often a primary source of discrimination in labor markets. ANS: T REF: 19-2 TOP: Labor-market discrimination 46. Discrimination is usually not a profit-maximizing strategy. ANS: T REF: 19-2 TOP: Discrimination 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. ANS: T REF: 19-2 TOP: Labor-market discrimination 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 REF: 19-2 TOP: Discrimination 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. ANS: T REF: 19-2 TOP: Labor-market discrimination

284 Chapter 19/Earnings and Discrimination Streetcar owners in the early 20th century were against segregation for profit maximizing reasons. ANS: T REF: 19-2 TOP: Discrimination 51. Experimental evidence indicates women choose less competitive environments than men. ANS: T REF: 19-2 TOP: Gender differences 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 2. REF: 19-1 NAT: Reflective TOP: Compensating differentials 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 REF: 19-1 NAT: Reflective TOP: Human capital

285 1686 Chapter 19/Earnings and Discrimination 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 4. REF: 19-1 TOP: Wages 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 MSC: Definitional 5. REF: 19-1 NAT: Reflective TOP: Human capital Signaling 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 6. REF: 19-2 NAT: Reflective TOP: Labor-market discrimination 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 REF: 19-2 TOP: Labor-market discrimination

286 Chapter 19/Earnings and Discrimination 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: LOC: TOP: MSC: 8. 1 REF: Labor markets Labor-market discrimination Compensating differentials Applicative 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. PTS: 1 9. REF: 19-2 NAT: Reflective TOP: Labor-market discrimination 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. PTS: 1 REF: 19-2 NAT: Reflective TOP: Labor-market discrimination

287 1688 Chapter 19/Earnings and Discrimination 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 REF: 19-2 TOP: Labor-market discrimination 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 REF: 19-2 TOP: Labor-market discrimination 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. 2. REF: 19-1 TOP: Above-equilibrium wages 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. REF: 19-1 TOP: Above-equilibrium wages

288 Chapter 19/Earnings and Discrimination 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. 4. REF: 19-1 TOP: Above-equilibrium wages Which of the following statements is not correct? 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. REF: 19-1 TOP: Wages Above-equilibrium wages 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. 6. REF: 19-1 TOP: Above-equilibrium wages 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 REF: 19-1 TOP: Above-equilibrium wages

289 1690 Chapter 19/Earnings and Discrimination Figure Refer to Figure 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. 8. TOP: Above-equilibrium wages Refer to Figure 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. NAT: Reflective 9. REF: 19-1 REF: 19-1 TOP: Above-equilibrium wages Refer to Figure 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. REF: 19-1 TOP: Above-equilibrium wages

290 Chapter 19/Earnings and Discrimination 1691 Figure Refer to Figure 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. REF: 19-1 TOP: Above-equilibrium wages Unions 11. Refer to Figure 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. REF: 19-1 TOP: Above-equilibrium wages Unions

291 1692 Chapter 19/Earnings and Discrimination Figure 19-3 The manufacturing labor market. 12. Refer to Figure 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. REF: 19-1 TOP: Above-equilibrium wages Unions 13. Refer to Figure 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. REF: 19-1 TOP: Above-equilibrium wages Unions

292 Chapter 19/Earnings and Discrimination 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. DIF: 3 REF: 19-1 TOP: Efficiency wages Above-equilibrium wages 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. REF: 19-1 TOP: Above-equilibrium wages 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. MSC: Definitional REF: 19-1 TOP: Compensating differentials 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. MSC: Definitional REF: 19-1 TOP: Compensating differentials 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. MSC: Definitional REF: 19-1 TOP: Compensating differentials

293 1694 Chapter 19/Earnings and Discrimination 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. MSC: Definitional REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials

294 Chapter 19/Earnings and Discrimination 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. MSC: Definitional REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials 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. MSC: Definitional REF: 19-1 TOP: Compensating differentials

295 1696 Chapter 19/Earnings and Discrimination 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. MSC: Definitional REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials

296 Chapter 19/Earnings and Discrimination 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." REF: 19-1 TOP: Compensating differentials 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. NAT: Reflective REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials

297 1698 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Compensating differentials 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. REF: 19-1 TOP: Human capital Compensating differentials

298 Chapter 19/Earnings and Discrimination 1699 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 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. REF: 19-1 NAT: Reflective TOP: Human capital Compensating differentials 40. Refer to Scenario 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. REF: 19-1 NAT: Reflective TOP: Human capital Compensating differentials 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. REF: 19-1 TOP: Compensating differentials Human capital Signaling

299 1700 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Human capital Compensating differentials 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 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. REF: 19-1 NAT: Reflective TOP: Human capital Compensating differentials 44. Refer to Scenario 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 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. REF: 19-1 NAT: Reflective TOP: Human capital Compensating differentials

300 Chapter 19/Earnings and Discrimination Refer to Scenario 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 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. REF: 19-1 NAT: Reflective TOP: Human capital Compensating differentials 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. REF: 19-1 TOP: Human capital Compensating differentials 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. DIF: 3 REF: 19-1 TOP: Compensating differentials Human capital 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. DIF: 3 REF: 19-1 TOP: Human capital Signaling Compensating differentials

301 1702 Chapter 19/Earnings and Discrimination 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 REF: 19-1 TOP: Human capital Signaling Compensating differentials 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. REF: 19-1 NAT: Reflective TOP: Compensating differentials Unions 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: NAT: TOP: MSC: A DIF: 3 REF: Analytic Human capital Labor-market discrimination Compensating differentials Interpretive

302 Chapter 19/Earnings and Discrimination Which of the following statements is not correct? 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: NAT: TOP: MSC: D DIF: 3 REF: Reflective Compensating differentials Signaling Efficiency wages Labor-market discrimination 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: NAT: TOP: MSC: C REF: Reflective Wages Compensating differentials Unions Labor-market discrimination 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 REF: 19-1 LOC: The study of economics, and definitions of economics TOP: Compensating differentials MSC: Definitional

303 1704 Chapter 19/Earnings and Discrimination 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 welldeveloped 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. REF: 19-1 LOC: The study of economics, and definitions of economics TOP: Compensating differentials 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 DIF: 3 REF: 19-1 LOC: The study of economics, and definitions of economics TOP: Compensating differentials 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 REF: 19-1 TOP: Signaling Human capital Compensating differentials 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. REF: 19-1 TOP: Beauty premium

304 Chapter 19/Earnings and Discrimination 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." REF: 19-1 TOP: Beauty premium 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. REF: 19-1 TOP: Beauty premium 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. REF: 19-1 TOP: Beauty premium 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. REF: 19-1 TOP: Compensating differentials, Beauty premium

305 1706 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Human capital, Signaling, Compensating differentials 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. MSC: Definitional REF: 19-1 TOP: Human capital 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. MSC: Definitional REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital

306 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Human capital 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. MSC: Definitional REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital

307 1708 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. MSC: Definitional REF: 19-1 TOP: Human capital 73. Which of the following is the most important contributor to human capital? a. education b. effort c. chance d. physical strength MSC: Definitional REF: 19-1 TOP: Human capital

308 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Human capital 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. MSC: Definitional REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital

309 1710 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital

310 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital

311 1712 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital

312 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Human capital 93. Which of the following statements is not correct? 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. REF: 19-1 TOP: Human capital 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. REF: 19-1 TOP: Human capital 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. NAT: Reflective REF: 19-1 TOP: Human capital Signaling

313 1714 Chapter 19/Earnings and Discrimination 96. Which of the following statements is not correct? 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. REF: 19-1 TOP: Human capital Signaling 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 REF: 19-1 TOP: Human capital Signaling 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. REF: 19-1 TOP: Signaling Human capital 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. REF: 19-1 TOP: Signaling Human capital

314 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Signaling Human capital 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. REF: 19-1 TOP: Human capital Signaling 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. REF: 19-1 TOP: Human capital Signaling 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. REF: 19-1 TOP: Signaling Human capital 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 REF: 19-1 TOP: Signaling Human capital

315 1716 Chapter 19/Earnings and Discrimination 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 REF: 19-1 TOP: Signaling Human capital 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. REF: 19-1 TOP: Signaling Human capital 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. REF: 19-1 TOP: Signaling Human capital 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 REF: 19-1 TOP: Efficiency wages Human capital Signaling

316 Chapter 19/Earnings and Discrimination 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. DIF: 3 REF: TOP: Human capital Labor-market discrimination 110. Which of the following statements is correct? 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. DIF: 3 REF: TOP: Signaling Labor-market discrimination Human capital 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. REF: TOP: Labor-market discrimination Human capital 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. REF: TOP: Labor-market discrimination Human capital

317 1718 Chapter 19/Earnings and Discrimination 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 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. REF: TOP: Human capital Labor-market discrimination 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 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. REF: TOP: Human capital Labor-market discrimination 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. REF: 19-1 TOP: Human capital

318 Chapter 19/Earnings and Discrimination Which of the following statements is correct? 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. REF: 19-1 TOP: Human capital 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. DIF: 3 REF: 19-1 TOP: Human capital 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. DIF: 3 REF: 19-1 TOP: Human capital 119. Which of the following statements is correct? 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. REF: 19-1 TOP: Human capital Signaling

319 1720 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Signaling Human capital 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. REF: 19-1 TOP: Signaling Human capital 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. REF: 19-1 TOP: Signaling Human capital 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. DIF: 3 REF: 19-1 TOP: Efficiency wages 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. REF: 19-1 TOP: Efficiency wages

320 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Efficiency wages 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. REF: 19-1 TOP: Efficiency wages 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. REF: 19-1 TOP: Efficiency wages 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. REF: 19-1 TOP: Efficiency wages

321 1722 Chapter 19/Earnings and Discrimination 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. MSC: Definitional REF: 19-1 TOP: Efficiency wages 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. NAT: Reflective REF: 19-1 TOP: Efficiency wages 131. Which of the following statements is not correct? 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: NAT: TOP: MSC: C DIF: 3 REF: Analytic Efficiency wages Labor-market discrimination Signaling Value of the marginal product Analytical

322 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Efficiency wages 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. REF: 19-1 LOC: The study of economics, and definitions of economics TOP: Efficiency wages 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. REF: 19-1 TOP: Increasing value of skills 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. REF: 19-1 TOP: Increasing value of skills

323 1724 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Increasing value of skills 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. REF: 19-1 TOP: Increasing value of skills 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. REF: 19-1 TOP: Increasing value of skills 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. REF: 19-1 TOP: Increasing value of skills

324 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Increasing value of skills 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. NAT: Reflective REF: 19-1 TOP: Increasing value of skills 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. REF: 19-1 TOP: Increasing value of skills 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. REF: 19-1 TOP: Increasing value of skills

325 1726 Chapter 19/Earnings and Discrimination 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 REF: 19-1 TOP: Increasing value of skills 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. REF: 19-1 TOP: Increasing value of skills 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. REF: 19-1 TOP: Increasing value of skills 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. REF: 19-1 TOP: Increasing value of skills

326 Chapter 19/Earnings and Discrimination 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. REF: 19-1 LOC: The study of economics, and definitions of economics TOP: Wages Labor 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. TOP: Labor REF: 19-1 LOC: The study of economics, and definitions of economics 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. REF: 19-1 LOC: The study of economics, and definitions of economics TOP: Labor Wages 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. REF: 19-1 LOC: The study of economics, and definitions of economics TOP: Minimum wage

327 1728 Chapter 19/Earnings and Discrimination 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. REF: 19-1 LOC: The study of economics, and definitions of economics TOP: Signaling Productivity Wages 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. REF: 19-1 TOP: Signaling 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. REF: 19-1 TOP: Signaling 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. TOP: Signaling REF: 19-1 LOC: The study of economics, and definitions of economics

328 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Superstar phenomenon 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. REF: 19-1 TOP: Superstar phenomenon 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. REF: 19-1 TOP: Superstar phenomenon 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. REF: 19-1 TOP: Superstar phenomenon 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. REF: 19-1 TOP: Superstar phenomenon

329 1730 Chapter 19/Earnings and Discrimination 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. MSC: Definitional REF: 19-1 TOP: Superstar phenomenon 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. REF: 19-1 TOP: Superstar phenomenon 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. MSC: Definitional REF: 19-1 TOP: Superstar phenomenon

330 Chapter 19/Earnings and Discrimination 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. NAT: Reflective REF: 19-1 TOP: Superstar phenomenon 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. REF: 19-1 TOP: Superstar phenomenon 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. REF: 19-1 LOC: The study of economics, and definitions of economics TOP: Technology Wages 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. MSC: Definitional REF: 19-1 TOP: Unions

331 1732 Chapter 19/Earnings and Discrimination 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. MSC: Definitional REF: 19-1 TOP: Unions 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. REF: 19-1 TOP: Unions 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. REF: 19-1 TOP: Unions 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. DIF: 3 REF: 19-1 TOP: Unions 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. REF: 19-1 TOP: Unions, Minimum wage, Efficiency wages

332 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Wages 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. REF: 19-1 TOP: Wages 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. DIF: 3 REF: 19-1 TOP: Wages 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 REF: 19-1 TOP: Wages

333 1734 Chapter 19/Earnings and Discrimination 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. REF: 19-1 TOP: Wages 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. REF: 19-1 TOP: Wages 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. REF: 19-1 TOP: Wages 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. TOP: Wages REF: 19-1 LOC: The study of economics, and definitions of economics

334 Chapter 19/Earnings and Discrimination 1735 Sec02--The Economics of Discrimination MULTIPLE CHOICE 1. Which of the following statements is not correct? 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: NAT: TOP: MSC: 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: NAT: TOP: MSC: 3. D DIF: 3 REF: Reflective Compensating differentials Signaling Efficiency wages Labor-market discrimination Analytical C REF: Reflective Wages Compensating differentials Unions Labor-market discrimination Analytical 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. REF: 19-2 TOP: Discrimination

335 1736 Chapter 19/Earnings and Discrimination 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. 5. TOP: Discrimination REF: 19-2 TOP: Discrimination 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. 8. REF: 19-2 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. 7. TOP: Discrimination 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. 6. REF: 19-2 REF: 19-2 TOP: Discrimination 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. REF: 19-2 TOP: Discrimination

336 Chapter 19/Earnings and Discrimination 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. REF: 19-2 TOP: Discrimination 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. REF: 19-2 TOP: Discrimination 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. REF: 19-2 TOP: Discrimination 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Discrimination

337 1738 Chapter 19/Earnings and Discrimination 13. Which of the following statements is not correct? 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: NAT: TOP: MSC: C DIF: 3 REF: Analytic Efficiency wages Labor-market discrimination Signaling Value of the marginal product 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. NAT: Reflective REF: 19-2 TOP: Gender Differences 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.. DIF: 3 REF: 19-2 TOP: Gender Differences 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. NAT: Reflective DIF: 3 REF: 19-2 TOP: Gender Differences

338 Chapter 19/Earnings and Discrimination 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. DIF: 3 REF: TOP: Human capital Labor-market discrimination 18. Which of the following statements is correct? 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. DIF: 3 REF: TOP: Signaling Labor-market discrimination Human capital 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. REF: TOP: Labor-market discrimination Human capital 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. REF: TOP: Labor-market discrimination Human capital

339 1740 Chapter 19/Earnings and Discrimination 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 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. REF: TOP: Human capital Labor-market discrimination 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 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. REF: TOP: Human capital Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

340 Chapter 19/Earnings and Discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. NAT: Reflective REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

341 1742 Chapter 19/Earnings and Discrimination 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. MSC: Definitional REF: 19-2 TOP: Labor-market discrimination 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. MSC: Definitional REF: 19-2 TOP: Labor-market discrimination 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. MSC: Definitional REF: 19-2 TOP: Labor-market discrimination 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. MSC: Definitional REF: 19-2 TOP: Labor-market discrimination

342 Chapter 19/Earnings and Discrimination 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. REF: 19-2 TOP: Labor-market discrimination 34. Which of the following statements is correct? 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

343 1744 Chapter 19/Earnings and Discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

344 Chapter 19/Earnings and Discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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 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. NAT: Reflective DIF: 3 REF: 19-2 TOP: Labor-market discrimination

345 1746 Chapter 19/Earnings and Discrimination 45. Refer to Scenario 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. NAT: Reflective DIF: 3 REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

346 Chapter 19/Earnings and Discrimination 1747 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 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. REF: 19-2 TOP: Labor-market discrimination 49. Refer to Scenario 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. REF: 19-2 TOP: Labor-market discrimination 50. Refer to Scenario 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. NAT: Reflective REF: 19-2 TOP: Labor-market discrimination

347 1748 Chapter 19/Earnings and Discrimination 51. Refer to Scenario 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. NAT: Reflective REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

348 Chapter 19/Earnings and Discrimination 1749 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 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. NAT: Reflective REF: 19-2 TOP: Labor-market discrimination 56. Refer to Scenario 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. REF: 19-2 TOP: Labor-market discrimination 57. Refer to Scenario 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

349 1750 Chapter 19/Earnings and Discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

350 Chapter 19/Earnings and Discrimination 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 aboveequilibrium levels. d. Discrimination is usually the outcome of rational decision-making processes, and competitive markets produce rational outcomes. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

351 1752 Chapter 19/Earnings and Discrimination 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. DIF: 3 REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

352 Chapter 19/Earnings and Discrimination Suppose that consumers suddenly prefer to do business with left-handed workers instead of righthanded 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. DIF: 3 REF: 19-2 NAT: Reflective TOP: Labor-market discrimination Marginal product of labor 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market 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. REF: 19-2 TOP: Labor-market discrimination

353 1754 Chapter 19/Earnings and Discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. NAT: Reflective DIF: 3 REF: 19-2 TOP: Labor-market discrimination

354 Chapter 19/Earnings and Discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 80. Which of the following statements is not correct? 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. NAT: Reflective REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination

355 1756 Chapter 19/Earnings and Discrimination 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. REF: 19-2 TOP: Labor-market 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 consumerdriven 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 TOP: Labor-market discrimination 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination Wages

356 Chapter 19/Earnings and Discrimination 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination Wages 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination Wages 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination Wages 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination Wages

357 1758 Chapter 19/Earnings and Discrimination 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination Wages 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination Wages 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination Wages

358 Chapter 19/Earnings and Discrimination 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. REF: 19-2 LOC: The study of economics, and definitions of economics TOP: Labor-market discrimination Wages

359 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 TOP: Poverty line 2. REF: 20-1 LOC: The study of economics, and definitions of economics MSC: Definitional The United States has more income inequality than Japan, Germany, and Canada. ANS: T REF: 20-1 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 REF: 20-1 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 REF: 20-1 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 6. REF: 20-2 LOC: The role of government TOP: Utility One existing government program that works much like a negative income tax is the Earned Income Tax Credit. ANS: T REF: 20-3 LOC: The role of government TOP: Negative income tax 1760

360 Chapter 20/Income Inequality and Poverty One existing government program that works much like a negative income tax is Medicaid. ANS: F 8. TOP: Negative income tax The invisible hand of the marketplace acts to allocate resources efficiently, but it does not necessarily ensure that resources are allocated fairly. ANS: T 9. REF: 20-3 LOC: The role of government REF: 20-0 LOC: Efficiency and equity TOP: Income inequality 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 REF: 20-0 LOC: The role of government TOP: Income inequality 10. In the United States in 2005, the bottom fifth of the income distribution had incomes below $19,250. ANS: F REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 11. The top 5 percent of U.S. annual family income in 2005 was $184,500 or more. ANS: T REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 12. A U.S. family earning $80,000 would be in the top 20 percent of income distribution in ANS: F REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 13. Free trade and economic growth have reduced poverty worldwide. ANS: T REF: 20-1 LOC: Efficiency and equity TOP: Poverty 14. Although globalization has reduced income inequality, the number of people living in extreme poverty has remained unchanged. ANS: F REF: 20-1 LOC: Efficiency and equity TOP: Poverty

361 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 REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate 16. The poverty line is an absolute standard and is based on the cost of providing an adequate diet. ANS: T MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 17. The poverty line is based on the percentage of people who cannot afford an adequate diet. ANS: F REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 18. The poverty rate is a measure of people unable to meet the government s poverty line. ANS: T REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 19. The elderly represent the largest demographic group in poverty. ANS: F REF: 20-1 LOC: Efficiency and equity TOP: Poverty 20. About half of black and Hispanic children in female-headed households live in poverty. ANS: T REF: 20-1 LOC: Efficiency and equity TOP: Poverty 21. The economic life cycle describes how young people usually have higher savings rates than middleaged people. ANS: F REF: 20-1 LOC: Efficiency and equity TOP: Economic life cycle 22. Many economists believe that a family bases its spending decisions on its permanent, or average, income rather than on transitory income. ANS: T REF: 20-1 LOC: Efficiency and equity TOP: Economic life cycle

362 Chapter 20/Income Inequality and Poverty About four out of five millionaires in the United States earned their money rather than inherited it. ANS: T REF: 20-1 LOC: Efficiency and equity TOP: Economic mobility 24. Fewer than three percent of families are poor for eight or more years. ANS: T REF: 20-1 LOC: Efficiency and equity TOP: Economic mobility 25. Utilitarians believe that the proper goal of the government is to maximize the sum of the utilities of everyone in society. ANS: T REF: 20-2 LOC: The role of government TOP: Utilitarianism 26. The utilitarian justification for redistributing income is based on the assumption of diminishing marginal utility. ANS: T REF: 20-2 LOC: The role of government TOP: Utilitarianism 27. If a government could successfully achieve the maximin criterion, each member of society would have an equal income. ANS: F REF: 20-2 LOC: The role of government TOP: Liberalism 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 REF: 20-2 LOC: The role of government TOP: Libertarianism 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 REF: 20-2 LOC: The role of government TOP: Libertarianism

363 1764 Chapter 20/Income Inequality and Poverty 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 MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate, Poverty line 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 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 32. A goal of libertarians is to provide citizens with equal opportunities rather than to ensure equal outcomes. ANS: T REF: 20-2 LOC: Efficiency and equity TOP: Libertarianism 33. Temporary Assistance for Needy Families (TANF) is an example of a negative income tax program. ANS: F REF: 20-3 LOC: Efficiency and equity TOP: Welfare 34. When poor families in developing countries experience an increase in family income, their children supply fewer hours of labor. ANS: T REF: 20-3 LOC: Efficiency and equity TOP: Child labor 35. Education is the most important factor explaining reductions in child labor in Vietnam. ANS: F REF: 20-3 TOP: Child labor 36. Internet access is the most important factor explaining reductions in child labor in Vietnam. ANS: F REF: 20-3 TOP: Child labor

364 Chapter 20/Income Inequality and Poverty Since 1959 the United States income distribution has become more equal. ANS: F REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 38. In 2005 the top fifth of income earners accounted for over 50% of all income received by United States families. ANS: F REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 39. In 2005 the top 5 percent of income earners accounted for over 50% of all income received by United States families. ANS: F REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 40. From 1935 to 2005 the share of total income earned by the bottom fifth of income earners rose and then fell. ANS: T REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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 REF: 20-0 TOP: Income inequality

365 1766 Chapter 20/Income Inequality and Poverty 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 3. REF: 20-1 TOP: Income inequality Given the table shown, which country has a more equal income distribution? Explain your answer. Country Country A Country B Bottom Fifth 9.0% 4.8% Second Fifth 13.5% 10.5% Middle Fifth 17.5% 16.0% Fourth Fifth 22.9% 23.5% Top Fifth 37.1% 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 REF: 20-1 TOP: Income inequality

366 Chapter 20/Income Inequality and Poverty 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 5. REF: 20-1 TOP: Poverty rate Poverty line 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 6. REF: 20-1 TOP: Economic life cycle 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 REF: 20-2 TOP: Diminishing marginal utility Utilitarianism

367 1768 Chapter 20/Income Inequality and Poverty 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 8. REF: 20-2 TOP: Utilitarianism 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 REF: 20-2 TOP: Income redistribution

368 Chapter 20/Income Inequality and Poverty 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 $2 $3 $4 $5 $6 $7 $ a. b. c. ANS: a. b. c. 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. 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? Does the table above describe a situation characterized by diminishing marginal utility? Explain your answer. 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. Peter $4 Paul $7 Mary $5 Jane $3 Yes. Marginal utility declines as income increases for each person. PTS: 1 DIF: 3 REF: 20-3 TOP: Income redistribution

369 1770 Chapter 20/Income Inequality and Poverty 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. b. c. d. e. $30,000 $20,000 $10,000 $0 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 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. b. c. d or 25% $5,000 $7,500 $20,000 PTS: 1 DIF: 3 REF: 20-3 TOP: Negative income tax

370 Chapter 20/Income Inequality and Poverty 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 REF: 20-3 TOP: In-kind transfers 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 REF: 20-3 TOP: Welfare 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 REF: 20-3 TOP: Welfare

371 1772 Chapter 20/Income Inequality and Poverty 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. 2. A REF: 20-0 Analytic Efficiency and equity The study of economics, and definitions of economics Income inequality MSC: Definitional 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. TOP: Income inequality 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: NAT: LOC: TOP: 3. REF: 20-0 LOC: Efficiency and equity REF: 20-0 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-0 LOC: Efficiency and equity TOP: Income inequality

372 Chapter 20/Income Inequality and Poverty The marketplace allocates resources a. fairly. b. efficiently. c. to those desiring them least. d. both efficiently and equitably. 6. REF: 20-0 LOC: Efficiency and equity TOP: Income inequality 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. 8. TOP: Income inequality 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. 7. REF: 20-0 LOC: Efficiency and equity REF: 20-0 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-0 LOC: The study of economics, and definitions of economics TOP: Income Labor MSC: Definitional

373 1774 Chapter 20/Income Inequality and Poverty 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. REF: 20-0 LOC: Efficiency and equity TOP: Efficiency Equity 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. REF: 20-0 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. REF: 20-0 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. REF: 20-0 LOC: The study of economics, and definitions of economics TOP: Ten principles of economics MSC: Definitional

374 Chapter 20/Income Inequality and Poverty 1775 Sec 01--Income Inequality and Poverty 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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 10year 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. REF: 20-1 LOC: The study of economics, and definitions of economics TOP: Consumption Income 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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? REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

375 1776 Chapter 20/Income Inequality and Poverty 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. 6. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. TOP: Income inequality 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. 7. REF: 20-1 LOC: Efficiency and equity REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

376 Chapter 20/Income Inequality and Poverty 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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 d. gradually became more equal until about 1970, then became less equal from 1970 to REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 11. In 2005, what percentage of U.S. families had income levels below $103,100? a. 5 percent b. 20 percent c. 80 percent d. 95 percent REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 12. In 2003, what percentage of U.S. families had income levels above $103,100? a. 5 percent b. 20 percent c. 80 percent d. 95 percent REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

377 1778 Chapter 20/Income Inequality and Poverty 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

378 Chapter 20/Income Inequality and Poverty 1779 Table 20-1 Group Top Quartile (25%) Second Quartile Third Quartile Bottom Quartile Annual Family Income $85,000 and over $50,000 to $84,999 $28,000 to $49,999 Under $28, Refer to Table 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 19. Refer to Table 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

379 1780 Chapter 20/Income Inequality and Poverty Table 20-2 Percentage of Before-Tax Income Received by Families in Hapland Group Percentage of Percentage of Family Income Family Income in 2000 in 1950 Top Fifth Fourth Fifth Middle Fifth Second Fifth Bottom Fifth Refer to Table 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality Table 20-3 The Distribution of Income in Hapland Group Annual Family Income Top Fifth $120,000 and over Fourth Fifth $90, ,999 Middle Fifth $60,000-89,999 Second Fifth $45,000-59,999 Bottom Fifth Under $45, Refer to Table 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

380 Chapter 20/Income Inequality and Poverty Refer to Table 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 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 24. Refer to Table 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 25. The country that has the highest degree of income inequality is a. Japan. b. Brazil. c. South Africa. d. the United States. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 26. The country that has the most income equality is a. Japan. b. Brazil. c. South Africa. d. the United States. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 27. The United States has more income inequality than a. Brazil. b. Mexico. c. Canada. d. South Africa. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

381 1782 Chapter 20/Income Inequality and Poverty 28. The United States has less income inequality than a. Japan. b. Canada. c. Germany. d. South Africa. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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 b. more equal between 1935 and 1973, but that trend reversed itself between 1973 and c. more unequal between 1935 and 1973, but that trend reversed itself between 1973 and d. more unequal between 1935 and REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

382 Chapter 20/Income Inequality and Poverty 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 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

383 1784 Chapter 20/Income Inequality and Poverty 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 pretax income. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality

384 Chapter 20/Income Inequality and Poverty 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: Efficiency and equity TOP: Income inequality 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. REF: 20-1 LOC: The study of economics, and definitions of economics TOP: Income inequality Standard of living 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. MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate

385 1786 Chapter 20/Income Inequality and Poverty 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. MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate 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. MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate 47. In 2005, the poverty rate in the United States was a. 2.5 percent. b percent. c percent. d percent. REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate 48. Over the past 50 years, the U.S. poverty rate was at its lowest level in a b c d REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate 49. A commonly-used gauge of poverty is the a. income inequality rate. b. average income rate. c. poverty rate. d. social inequality rate. REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate

386 Chapter 20/Income Inequality and Poverty 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 REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate 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. MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate In-kind transfers 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate Income 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate

387 1788 Chapter 20/Income Inequality and Poverty 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 less than $5,000 between $5,000 and $10,000 between $10,000 and $15,000 between $15,000 and $20,000 over $20,000 The poverty rate in Inequalia is a percent. b percent. c percent. d percent. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate 56. The distribution of income for Inequalia is as follows: Number of Families Income less than $5,000 between $5,000 and $10,000 between $10,000 and $15,000 between $15,000 and $20,000 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate Poverty line

388 Chapter 20/Income Inequality and Poverty The poverty line in the country of Grim is $10,000. The distribution of income for Grim is as follows: Number of Families 500 1,000 1, Income less than $5,000 between $5,000 and $10,000 between $10,000 and $15,000 between $15,000 and $20,000 over $20,000 The poverty rate in Grim is a. 5 percent. b percent. c. 50 percent. d percent. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate 58. The distribution of income for Grim is as follows: Number of Families 500 1,000 1, Income less than $5,000 between $5,000 and $10,000 between $10,000 and $15,000 between $15,000 and $20,000 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate Poverty line

389 1790 Chapter 20/Income Inequality and Poverty 59. The distribution of income for Danville is as follows: Number of Families , Income less than $15,000 between $15,000 and $20,000 between $20,000 and $25,000 between $25,000 and $30,000 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate Poverty line 60. The poverty line in the country of Abbyville is $15,000. The distribution of income for Abbyville is as follows: Number of Families Income less than $15,000 between $15,000 and $20,000 between $20,000 and $25,000 between $25,000 and $30,000 over $30,000 The poverty rate in Abbyville is a. 12 percent. b. 32 percent. c. 50 percent. d. 68 percent. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate

390 Chapter 20/Income Inequality and Poverty The distribution of income for Abbyville is as follows: Number of Families Income less than $15,000 between $15,000 and $20,000 between $20,000 and $25,000 between $25,000 and $30,000 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. DIF: 3 REF: 20-1 LOC: Efficiency and equity TOP: Poverty rate Poverty line 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 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. MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 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. MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty line

391 1792 Chapter 20/Income Inequality and Poverty 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. MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 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. MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty line

392 Chapter 20/Income Inequality and Poverty 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 71. Which of the following statements is not correct? 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. MSC: Definitional REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty 74. Which of the following statements is correct? 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty

393 1794 Chapter 20/Income Inequality and Poverty 75. Which of the following groups has the highest poverty rate? a. Blacks. b. Asians. c. Children (under age 18). d. Female-headed households. TOP: Poverty REF: 20-1 LOC: The study of economics, and definitions of economics 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty 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. REF: 20-1 LOC: Efficiency and equity TOP: Poverty

394 Chapter 20/Income Inequality and Poverty 1795 Table 20-4 Poverty Thresholds in 2002, by Size of Family and Number of Related Children Under 18 Years [Dollars] Size of family unit None One person (unrelated individual) Under 65 years 65 years and over One Two Related children under 18 years Three Four Five Six Seven Eight or more 9,359 8,628 Two persons Householder under 65 years Householder 65 years and over 12,047 12,400 10,874 12,353 Three persons Four persons Five persons Six persons Seven persons Eight persons Nine persons or more 14,072 18,556 22,377 25,738 29,615 33,121 39,843 14,480 18,859 22,703 25,840 29,799 33,414 40,036 14,494 18,244 22,007 25,307 29,162 32,812 39,504 18,307 21,469 24,797 28,718 32,285 39,057 21,141 24,038 27,890 31,538 38,323 23,588 26,924 25,865 30,589 29,601 29,350 37,313 36,399 36,173 34,780 Source: U. S. Bureau of the Census, Current Population Survey. 78. Refer to Table 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 REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 79. Refer to Table 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 REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 80. Refer to Table 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 REF: 20-1 LOC: Efficiency and equity TOP: Poverty line

395 1796 Chapter 20/Income Inequality and Poverty 81. Refer to Table What is the poverty line for a 75 year old individual? a. $8,628 b. $9,359 c. $12,353 d. $12,400 REF: 20-1 LOC: Efficiency and equity TOP: Poverty line 82. Refer to Table 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 REF: 20-1 LOC: Efficiency and equity TOP: Poverty line

396 Chapter 20/Income Inequality and Poverty 1797 Figure 20-1 Number of Poor 83. Refer to Figure The absolute number of people in poverty a. is higher in 2001 than in b. is lower in 2001 than in c. has not changed between 1959 and d. has steadily decreased between 1959 and REF: 20-1 LOC: Reading and interpreting graphs TOP: Poverty 84. Refer to Figure 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. REF: 20-1 LOC: Reading and interpreting graphs TOP: Poverty

397 1798 Chapter 20/Income Inequality and Poverty 85. Refer to Figure 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. REF: 20-1 LOC: Reading and interpreting graphs TOP: Poverty rate Figure 20-2 Poverty Rates by Age 86. Refer to Figure 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. REF: 20-1 LOC: Reading and interpreting graphs TOP: Poverty

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