# Microeconomics 14Th Canadian Edition by Ragan – Test Bank

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###### Microeconomics 14Th Canadian Edition by Ragan – Test Bank

chapter 2

Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Suppose that two points on a straight line are (X = 4, Y = 5), and (X = 2, Y = 1). The slope of this line
is
1)
A) 2. B) 45
. C) –
12
. D) -2. E) 12
.
Explanation: A)
B)
C)
D)
E)
2) Suppose we observe that consumption of electricity decreases when the price of electricity rises.
We can say that the two variables are related
2)
A) negatively.
B) positively.
C) exogenously.
D) linearly.
E) non-linearly.
Explanation: A)
B)
C)
D)
E)
3) Suppose an individual wheat farmer’s income is influenced by the region’s average daily
temperature. When examining the determinants of individual farmer income, the average daily
temperature is a(n) ________ variable.
3)
A) flow
B) endogenous
C) induced
D) exogenous
E) dependent
Explanation: A)
B)
C)
D)
E)
1
FIGURE 2-4
4) Refer to Figure 2-4. The functional relation shown between fertilizer applied and wheat yield can
be described as a
4)
A) diminishing marginal response.
B) decreasing total response.
C) constant marginal response.
D) increasing marginal response.
E) increasing partial response.
Explanation: A)
B)
C)
D)
E)
5) Which is the best description of a normative statement? A normative statement 5)
A) can be derived logically from facts.
B) is one that involves a value judgment.
C) concerns what is provable.
D) has no place in the study and practice of economics.
E) is a statement that is empirically testable.
Explanation: A)
B)
C)
D)
E)
2
6) The statement “Y is a function of X” means that the 6)
A) value of Y depends on that of X.
B) values of Y and X are related to some third variable.
C) value of X depends on that of Y.
D) values of Y and X are the same.
E) values of Y and X are independent.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical data for the volume of gold and nickel output across several years.
Gold
(troy ounces)
Index Nickel
(lbs)
Index
Year 1 1 230 000 4500
Year 2 1 416 000 4551
Year 3 1 349 000 100 4623 100
Year 4 947 000 4791
Year 5 1 012 000 4802
Year 6 1 321 000 4867
Year 7 1 450 000 5002
Year 8 1 510 000 5117
TABLE 2-4
7) Refer to Table 2-4. What is the index number for gold output in Year 8? 7)
A) 111.9% B) 11.9% C) 111.9 D) 1.119 E) 11.9
Explanation: A)
B)
C)
D)
E)
3
FIGURE 2-4
8) Refer to Figure 2-4. If we want to know the marginal response of “yield per acre” due to a change
in “fertilizer applied per acre of wheat” at point B, then we should determine the
8)
A) quantity of fertilizer applied at point B.
B) slope of a straight line tangent to point B.
C) the slope of a straight line from the origin to point B.
D) yield per acre at 30 units of fertilizer.
E) slope of a straight line joining points B and C.
Explanation: A)
B)
C)
D)
E)
9) An assertion about the desirability of reducing unemployment by lowering payroll taxes is most
likely
9)
A) a normative statement.
B) a theory.
C) a testable proposition.
D) a positive statement.
E) a hypothesis.
Explanation: A)
B)
C)
D)
E)
4
10) Suppose point A represents co-ordinates (x=2, y=16) and point B represents coordinates (x=10,
y=4). What is the slope of the straight line joining points A and B?
10)
A) 0.75 B) -0.43 C) 1.5 D) -1.5 E) -0.75
Explanation: A)
B)
C)
D)
E)
11) Which of the following is a normative statement? 11)
A) Reducing unemployment is more important than reducing inflation.
B) An increase in the price of lumber is followed by a decrease in the construction of new
houses.
C) A government deficit will reduce unemployment and cause an increase in prices.
D) Queen Elizabeth II is the wealthiest woman in the world.
E) The sun rises in the west and sets in the east.
Explanation: A)
B)
C)
D)
E)
12) Data collected repeatedly over successive periods of time are called 12)
A) topographic data.
B) time-series data.
C) cross-sectional data.
D) logarithmic data.
E) time-analysis data.
Explanation: A)
B)
C)
D)
E)
13) Economic theories 13)
A) must apply to all economies to be true.
B) can be used to help explain and predict economic behaviour.
C) are not useful because of the unrealistic assumptions they contain.
D) cannot help to predict future behaviour.
E) cannot be tested because we cannot do economic “experiments.”
Explanation: A)
B)
C)
D)
E)
5
14) Suppose that over a 12-month period, Sonali’s income (Y) rises from \$27 000 to \$35 000 per year
and, as a result, her spending on travel (T) increases from \$1500 to \$2500 per year. Assume there is
a linear relation between the two variables, Y and T. What is the marginal response in T to a change
in Y?
14)
A) 4 B) 0.25 C) 8 D) 0.125 E) 0
Explanation: A)
B)
C)
D)
E)
15) Choose the statement that best describes how endogenous variables differ from exogenous
variables.
15)
A) An endogenous variable is a flow, while an exogenous variable is a stock.
B) An endogenous variable is a function of the exogenous variable, and both are stock variables.
C) An endogenous variable is explained outside the theory and influences an exogenous variable
while an exogenous variable is explained within the theory.
D) An endogenous variable is explained within the theory, while an exogenous variable
influences the endogenous variables but is determined outside the theory.
E) An exogenous variable is a function of the endogenous variable, and both are flow variables.
Explanation: A)
B)
C)
D)
E)
16) What is the best way to display the unemployment rate in each of the world’s developed economies
in 2012?
16)
A) a time series line graph
B) a cross-sectional bar chart graph
C) a scatter diagram
D) a scatter diagram with two variables
E) a cross-sectional graph with time-series data
Explanation: A)
B)
C)
D)
E)
6
17) An economic theory requires, among other things, 17)
A) a set of definitions of the variables to be considered.
B) that the set of predictions be correct.
C) a controlled laboratory setting in which the theory can be tested.
D) the use of endogenous variables only.
E) a set of value judgments to interpret the empirical evidence.
Explanation: A)
B)
C)
D)
E)
18) The scientific approach to economic inquiry involves 18)
A) testing the reality of the assumptions of the model.
B) using only endogenous variables in economic models.
C) using only independent variables.
D) testing the predictions with empirical data.
E) choosing data that will support the predictions.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical data for the volume of gold and nickel output across several years.
Gold
(troy ounces)
Index Nickel
(lbs)
Index
Year 1 1 230 000 4500
Year 2 1 416 000 4551
Year 3 1 349 000 100 4623 100
Year 4 947 000 4791
Year 5 1 012 000 4802
Year 6 1 321 000 4867
Year 7 1 450 000 5002
Year 8 1 510 000 5117
TABLE 2-4
19) Refer to Table 2-4. What is the index number for nickel output in Year 6? 19)
A) 105.3 B) 110.7 C) 108.2 D) 95.0 E) 95.0%
Explanation: A)
B)
C)
D)
E)
7
20) Refer to Table 2-4. What is the index number for gold output in Year 1? 20)
A) 91.2 B) 0.91 C) 99.7 D) 109.7 E) 1.097
Explanation: A)
B)
C)
D)
E)
21) Suppose an economist tells you that, on average, people in Canada have too much personal debt.
This is an example of a(n) ________ statement.
21)
A) positive
B) normative
C) induced
D) autonomous
E) independent
Explanation: A)
B)
C)
D)
E)
22) When an increase in one variable is associated with an increase in a second variable, the two
variables are
22)
A) proportionally related.
B) positively related.
C) equivalent.
D) inversely proportionally related.
E) negatively related.
Explanation: A)
B)
C)
D)
E)
23) Economists build models that abstract from the complexities of reality because 23)
A) the complexities of reality are unimportant.
B) it is easier to do so.
C) economists do not understand the real world.
D) they believe they gain a greater understanding of reality.
E) economists are not interested in reality.
Explanation: A)
B)
C)
D)
E)
8
FIGURE 2-4
24) Refer to Figure 2-4. This non-linear function shows that over the range shown, 24)
A) as more fertilizer is applied, the marginal change in yield is diminishing.
B) as more fertilizer is applied, the marginal response in yield is increasing
C) as the yield per acre increases, the amount of fertilizer required per acre is diminishing.
D) as more fertilizer is applied, the total yield per acre is diminishing.
E) as the yield per acre increases, the amount of fertilizer required per acre is increasing.
Explanation: A)
B)
C)
D)
E)
25) Suppose we have data for 1000 students for a period of one year. The data show that those students
who spend more hours studying have a higher grade point average (GPA). We can say that
25)
A) there is a causal relationship between hours of study time and GPA.
B) there is a positive correlation between hours of study time and GPA.
C) more hours spent studying leads to a higher GPA.
D) if hours of study time increase, then GPA will automatically increase.
E) having a higher GPA leads students to spend more time studying.
Explanation: A)
B)
C)
D)
E)
9
26) When using statistics in economics, the possibility of error 26)
A) cannot be controlled.
B) cannot be eliminated.
C) can be eliminated with more sophisticated statistical techniques.
D) is not considered to be important.
E) cannot be evaluated.
Explanation: A)
B)
C)
D)
E)
27) Which is an example of a positive statement? 27)
A) Substitutes for fossil fuels should be developed.
B) There should be one price for gasoline throughout Canada.
C) Corporations in Canada should pay more taxes.
D) Canada should reduce its imports of consumer goods.
E) The higher the price for gasoline, the less of it will be consumed.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical tuition costs at a Canadian university.
Year Tuition
2008 \$5000
2009 \$5050
2010 \$5100
2011 \$5150
2012 \$5200
TABLE 2-1
28) Refer to Table 2-1. Assume that 2008 is used as the base year, with the index number = 100. The
value of the index number in 2012 is
28)
A) 0.96 B) 100 C) 96 D) 1.04 E) 104
Explanation: A)
B)
C)
D)
E)
10
29) Suppose economists at the World Bank discover a positive correlation between family income and
female education levels in developing countries. We can say that
29)
A) an increase in female education levels causes an increase in family incomes.
B) the correlation is inconsistent with a theory that an increase in female education levels causes
an increase in family income.
C) the observed correlation is consistent with a theory that an increase in female education levels
causes an increase in family income.
D) an increase in family income causes an increase in female education levels.
E) there is a causal relationship between family income and female education.
Explanation: A)
B)
C)
D)
E)
30) Choose the answer that best explains why economists build models that abstract from the
complexities of reality.
30)
A) Because economists are not interested in reality.
B) Because economics deals only in the abstract.
C) Because the complexities of reality are unimportant.
D) Because this allows economists to conduct controlled experiments to test their theories.
E) Because they believe they gain a greater understanding of reality.
Explanation: A)
B)
C)
D)
E)
31) At the minimum or the maximum of the graph of a non-linear function (with x on the horizontal
axis and y on the vertical axis) the slope of the curve is
31)
A) -1.
B) undefined.
C) 1.
D) 0.
E) infinite.
Explanation: A)
B)
C)
D)
E)
11
32) The mathematical expression of a relationship between two or more variables is usually known as 32)
A) a theory.
B) an observation.
C) an assumption.
D) a definition.
E) a function.
Explanation: A)
B)
C)
D)
E)
FIGURE 2-3
33) Refer to Figure 2-3. The slope of curve A is 33)
A) negative from X1 to X2 and positive from X2 to X3.
B) zero.
C) positive and variable.
D) positive from X1 to X2 and negative from X2 to X3.
E) negative and variable.
Explanation: A)
B)
C)
D)
E)
12
FIGURE 2-2
34) Refer to Figure 2-2. The slope of curve A is 34)
A) positive and constant.
B) negative and constant.
C) undefined.
D) negative and changing.
E) positive and changing.
Explanation: A)
B)
C)
D)
E)
35) When an economist assumes that the owners of firms are motivated only by the desire to maximize
profits, the economist most likely believes that
35)
A) individuals entering business are quite narrow in their personal objectives.
B) the assumption is inaccurate, since surveys have been taken and the owners of firms have
C) the assumption is descriptively accurate, since surveys have been taken and the owners of
firms have admitted that their only objective is to maximize profits.
D) it doesn’t matter whether or not the assumption is descriptively accurate; what matters is
whether a theory built on the assumption predicts well.
E) all people enter business for their own selfish gain.
Explanation: A)
B)
C)
D)
E)
13
36) A positive statement is one that states 36)
A) non-negative numbers.
B) what is desirable.
C) what is, was, or will be.
D) what is and what should be.
E) what should be but is not.
Explanation: A)
B)
C)
D)
E)
37) An index number expresses the value of a variable in any given period 37)
A) as a weighted average.
B) as a proportional weighted average.
C) as an absolute compared to the base period.
D) as an average of its value in the base period.
E) as a percentage of its value in the base period.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical per-minute cell phone charges for “pay-and-talk” service over several years.
2008 0.55
2009 0.50
2010 0.40
2011 0.35
2012 0.25
TABLE 2-2
38) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. Which
of the following series is the correct set of index numbers for the per-minute cell phone charges
from 2008 to 2012?
38)
A) 55; 50; 40; 35; 25
B) 100; 91; 73; 64; 45
C) 100%; 91%; 73%; 64%; 45%
D) 0.55; 0.50; 0.40; 0.35; 0.25
E) 1.0; 0.91; 0.73; 0.64; 0.45
Explanation: A)
B)
C)
D)
E)
14
39) Which of the following pairs of words have similar meanings? 39)
A) dependent and exogenous
B) endogenous and autonomous
C) induced and exogenous
D) induced and autonomous
E) independent and exogenous
Explanation: A)
B)
C)
D)
E)
40) An economic hypothesis will be rejected when 40)
A) the possibility of error has been completely eliminated.
B) the probability that it is wrong, based on repeated empirical observations, is judged to be
unacceptably high.
C) it is rejected by a single empirical observation.
D) one or more of the assumptions on which it is based fails to conform with reality.
E) a single empirical observation is encountered in which its predictions fail.
Explanation: A)
B)
C)
D)
E)
15
FIGURE 2-3
41) Refer to Figure 2-3. At X2 on curve B, the 41)
A) maximum occurs at Y1.
B) slope is decreasing.
C) minimum occurs at Y4.
D) slope of the curve is zero.
E) slope is increasing.
Explanation: A)
B)
C)
D)
E)
16
The table below shows hypothetical per-minute cell phone charges for “pay-and-talk” service over several years.
2008 0.55
2009 0.50
2010 0.40
2011 0.35
2012 0.25
TABLE 2-2
42) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. The
value of the index number in 2010 is
42)
A) 100 B) 137.5 C) 0.72 D) 72.73 E) 1.375
Explanation: A)
B)
C)
D)
E)
43) Suppose point A represents coordinates (X = 2, Y = 12) and point B represents coordinates (X = 6, Y
= 4). The slope of the straight line joining points A and B is
43)
A) -2. B) 5. C) –
12
. D) 2. E) 12
.
Explanation: A)
B)
C)
D)
E)
44) Suppose economists at the World Bank develop a theory with a prediction that increased levels of
foreign aid lead to increases in per capita GDP in the recipient developing countries. They find
empirical evidence that is consistent with this theory. The economists are able to conclude that
44)
A) the assumptions used in the theory have been proven correct.
B) the theory has been proven correct.
C) the theory is always reliable.
D) the evidence is rejected by the theory.
E) the evidence fails to reject the theory.
Explanation: A)
B)
C)
D)
E)
17
FIGURE 2-3
45) Refer to Figure 2-3. The slope of curve B is 45)
A) always negative but variable.
B) zero at X2.
C) undefined at X2.
D) always positive but variable.
E) positive from Y1 to Y2 and negative between Y2 and Y3.
Explanation: A)
B)
C)
D)
E)
46) Suppose point A represents coordinates (X = 5, Y = 6) and point B represents coordinates (X = 2, Y
= 3). Then the slope of the straight line joining points A and B is
46)
A) 2/3. B) 5/6. C) 1. D) 3/2. E) -1.
Explanation: A)
B)
C)
D)
E)
18
47) According to the Bank of Canada’s website, Canada’s Consumer Price Index (CPI) in August 2009
was 114.7, August 2010 was 116.7, August 2011 was 120.3 and August 2012 was 121.8. Given this
set of index numbers, what is the percentage change in the average level of prices between August
2009 and August 2012?
47)
A) 114.7% B) 6.2% C) 7.1% D) 5.8% E) 121.8%
Explanation: A)
B)
C)
D)
E)
48) An economist collects data comparing per-capita expenditures on health care across provinces and
territories for the year 2012. The best way to illustrate this data is
48)
A) a scatter diagram.
B) a time-series bar chart diagram.
C) a time-series line graph.
D) a logarithmic scale diagram.
E) a cross-sectional bar-chart graph.
Explanation: A)
B)
C)
D)
E)
49) The statement that a country’s rate of GDP growth is influenced by individuals’ saving behaviour is
an example of a(n)
49)
A) theory.
B) normative statement.
C) prediction.
D) economic law.
E) variable.
Explanation: A)
B)
C)
D)
E)
19
The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.
E-books Hardcover Books
Year 1 23 000 72 000
Year 2 52 000 59 000
Year 3 106 000 31 000
TABLE 2-3
50) Refer to Table 2-3. Suppose we choose Year 1 as the base year and construct a series of index
numbers with which to analyze sales data. The index numbers for volumes of hardcover books sold
(starting with Year 1) is:
50)
A) 100; 0.819; 0.431
B) 0.431; 0.819; 100
C) 431; 819; 100
D) 43.1; 81.9; 100
E) 100; 81.9; 43.1
Explanation: A)
B)
C)
D)
E)
51) When studying economic data, and when comparing the magnitude of changes in variables with
different scales it is best to
51)
A) express each variable as an index number.
B) compare the relative data on each variable.
C) compare the absolute data on each variable.
D) use only time-series data.
E) express each variable as a logarithmic number.
Explanation: A)
B)
C)
D)
E)
52) In a co-ordinate graph, with Y on the vertical axis and X on the horizontal axis, the variable X is
positive and the variable Y is negative in the ________ quadrant.
52)
A) top, right B) top, left C) bottom, right D) bottom, left
Explanation: A)
B)
C)
D)
20
FIGURE 2-1
53) Refer to Figure 2-1. What is the slope of the line in part (i) of the figure? 53)
A) -5 B) -10 C) 1 D) 5 E) -1
Explanation: A)
B)
C)
D)
E)
54) The statement that a country’s rate of economic growth is influenced by its firms’ investment
behaviour is an example of a(n)
54)
A) normative statement.
B) theory.
C) variable.
D) prediction.
E) economic law.
Explanation: A)
B)
C)
D)
E)
21
55) An economist has data showing household income and energy consumption for 10 000 Canadian
households. The best way to illustrate these data is
55)
A) a time-series line graph.
B) a logarithmic scale diagram.
C) a time-series bar chart diagram.
D) a scatter diagram.
E) a cross-sectional bar-chart graph.
Explanation: A)
B)
C)
D)
E)
56) Which of the following statements is NOT correct? 56)
A) Positive statements can best be tested by exposing them to empirical evidence.
B) Economic predictions cannot be tested because human decisions involve free will.
C) An economic model can be useful even if its underlying assumptions are unrealistic.
D) Economists test their theories by confronting the predictions of their theories with the
evidence drawn from the real world.
E) Normative statements cannot be tested by the scientific method.
Explanation: A)
B)
C)
D)
E)
57) The statement that introducing a policy of legislated rent controls will lead to a housing shortage is
an example of a(n)
57)
A) prediction.
B) model.
C) theory.
D) normative statement.
E) assumption.
Explanation: A)
B)
C)
D)
E)
22
58) The base year for an index number is 58)
A) chosen arbitrarily by those who construct the data.
B) dependant upon the type of data.
C) declared by the federal government.
D) the year in which 2 or more index numbers are equal to 100.
E) determined by the year the variable equals exactly 100.
Explanation: A)
B)
C)
D)
E)
59) Consider the line which is the graph of the function Y = 60 – 4X. The slope of this line is 59)
A) -4.0. B) -2.5. C) 60. D) -40. E) 4.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical per-minute cell phone charges for “pay-and-talk” service over several years.
2008 0.55
2009 0.50
2010 0.40
2011 0.35
2012 0.25
TABLE 2-2
60) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. The
value of the index number in 2011 is calculated as follows:
60)
A) 0.55/0.35 = 1.57
B) (0.55/0.35) × 100 = 157.14
C) (0.35/0.55) × 100 = 63.64
D) 0.35 × 100 = 35
E) 0.35/0.55 = 0.64
Explanation: A)
B)
C)
D)
E)
23
61) Let 1 stand for “any given period” and 2 stand for “base period.” The formula of any index number
can be written as:
61)
A) value of index at 1 =
relative value at 1
relative value at 2 × 100
B) value of index at 1 =
absolute value at 1
absolute value at 2
C) value of index at 1 =
relative value at 1
relative value at 2
D) value of index at 1 =
absolute value at 1
absolute value at 2 × 100
E) value of index at 1 =
absolute value at 2
absolute value at 1 × 100
Explanation: A)
B)
C)
D)
E)
62) Most economists believe that economic analysis ________ be made completely free of judgement, in
part because it is ________ to absolutely refute a theory on the basis of factual evidence.
62)
A) can; impossible
B) will; necessary
C) cannot; impossible
D) can; possible
E) cannot; possible
Explanation: A)
B)
C)
D)
E)
24
The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.
E-books Hardcover Books
Year 1 23 000 72 000
Year 2 52 000 59 000
Year 3 106 000 31 000
TABLE 2-3
63) Refer to Table 2-3. Between Year 1 and Year 3, what is the percentage change in sales of hardcover
books?
63)
A) -0.569% B) -56.9% C) 56.9% D) -569% E) 0.569%
Explanation: A)
B)
C)
D)
E)
64) For a given year, an index number of average prices across the economy (such as the Consumer
Price Index) is the ratio of the
64)
A) weighted prices of a typical bundle of goods purchased in a given year to that in the base
year.
B) weighted prices of a typical bundle of goods purchased in the base year to that in the given
year.
C) price of several goods in the given year to that in the base year.
D) average price of several goods in the base year to that in the given year.
E) average price of all goods in the given year to that in the base year.
Explanation: A)
B)
C)
D)
E)
65) An economic model that contains a highly realistic set of assumptions is 65)
A) certainly superior to a model whose assumptions are highly unrealistic.
B) more abstract than a model whose assumptions are further removed from reality.
C) useful because there is then very little difference between “theory” and “reality.”
D) necessarily better able to predict the future.
E) not likely to be useful because of its particularized nature and its complexity.
Explanation: A)
B)
C)
D)
E)
25
66) When studying economic data, index numbers are especially valuable when comparing 66)
A) linear and logarithmic data.
B) relative movements in different variables measured in different units.
C) time-series data with cross-sectional data.
D) relative movements in real and nominal variables.
E) government data with private-sector data.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.
E-books Hardcover Books
Year 1 23 000 72 000
Year 2 52 000 59 000
Year 3 106 000 31 000
TABLE 2-3
67) Refer to Table 2-3. Between Year 1 and Year 3, what is the percentage change in sales of e-books? 67)
A) 83 000% B) 360.9% C) 83% D) 21.7% E) 460.9%
Explanation: A)
B)
C)
D)
E)
68) Which is the best description of positive statements? Positive statements 68)
A) form the basis of all normative arguments.
B) have been verified by appeal to factual evidence.
C) have no place in economics because economics deals only with value judgments.
D) are falsifiable in principle by appeal to factual evidence.
E) are seldom employed in social sciences like economics.
Explanation: A)
B)
C)
D)
E)
26
69) As a science, economics is disadvantaged in that 69)
A) some economic variables are determined within the theory.
B) economic variables do not change enough to provide reliable data for testing hypotheses.
C) it deals with human behaviour and thus is not open to empirical testing.
D) it is usually not possible to conduct controlled experiments in economics, in contrast with
certain other sciences.
E) economic hypotheses cannot be accepted with complete certainty, by contrast with the other
sciences.
Explanation: A)
B)
C)
D)
E)
70) Which of the following best describes the relationship between positive and normative statements
in economics?
70)
A) Neither positive nor normative statements are concerned with the desirability of certain
economic changes.
B) Normative statements evaluate the desirability of certain economic changes; positive
statements do not.
C) Normative statements are those with which all economists agree; positive statements may
give rise to some disagreement.
D) Economists generally agree with each other regardless of whether a question is positive or
normative.
E) Positive and normative statements are alternate ways of describing the desirability of certain
economic policies.
Explanation: A)
B)
C)
D)
E)
71) An economist has data showing Canadian GDP for the years 1945-2012. The best way to illustrate
these data is
71)
A) a cross-sectional bar-chart graph.
B) a time-series pie chart.
C) a time-series line graph.
D) a logarithmic scale diagram.
E) a scatter diagram.
Explanation: A)
B)
C)
D)
E)
27
72) The statement that a 2% increase in the money supply leads to a 2% increase in the price level is an
example of a(n)
72)
A) model.
B) normative statement.
C) variable.
D) prediction.
E) assumption.
Explanation: A)
B)
C)
D)
E)
73) Suppose that a particular theory predicts that on sunny days consumption of ice cream will rise
and that on cloudy days consumption of ice cream will fall. If an economist tests this theory and
finds that over a six-month period the theory predicts accurately, the economist would likely say
73)
A) the evidence fails to reject the theory.
B) the theory shouldn’t be taken seriously.
C) the theory has been proven correct.
D) that the theory is not useful because consumption involves irrational human behaviour.
E) the theory is always reliable.
Explanation: A)
B)
C)
D)
E)
74) Suppose a theory predicts that lowering tuition fees at Canadian universities will increase
enrollment from low-income households. If empirical evidence consistently rejects this prediction,
then we
74)
A) should test the theory again.
B) need to amend the theory.
C) change the exogenous variables in the theory.
D) should change the empirical data.
E) should increase tuition fees back to their initial level.
Explanation: A)
B)
C)
D)
E)
28
75) A scientific prediction is 75)
A) always based on the law of large numbers.
B) a conditional statement of the following form: if A occurs, then B will follow.
C) a causal statement of the following form: A will occur because B occurred.
D) a prophesy of how the future will unfold.
E) not testable.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical per-minute cell phone charges for “pay-and-talk” service over several years.
2008 0.55
2009 0.50
2010 0.40
2011 0.35
2012 0.25
TABLE 2-2
76) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. What
is the percentage change in the per-minute charge from 2011 to 2012?
76)
A) -35.0% B) -25.0% C) -10.0% D) -71.4% E) -28.6%
Explanation: A)
B)
C)
D)
E)
29
FIGURE 2-3
77) Refer to Figure 2-3. On curve A, the maximum value of Y occurs at 77)
A) X1.
B) X = 0.
C) X2.
D) values of X greater than X3.
E) X3.
Explanation: A)
B)
C)
D)
E)
78) Suppose there is a linear relationship between the ticket price (P) to a university basketball game
and the number of tickets sold (Q). If the ticket price is \$20, then 600 tickets are sold; if the ticket
price is \$8, then \$3000 tickets are sold. What is the slope of the function if Q is plotted on the
horizontal axis and P is plotted on the vertical axis?
78)
A) 0.005 B) -0.005 C) -0.05 D) 0.05 E) 0
Explanation: A)
B)
C)
D)
E)
30
79) In order to test a theory, one must 79)
A) use assumptions that most closely reflect reality.
B) develop normative statements from the law of large numbers.
C) confront the predictions of the theory with evidence.
D) present a series of normative statements and positive statements.
E) develop a better explanation than the one presented.
Explanation: A)
B)
C)
D)
E)
80) Which of the following is a normative statement? 80)
A) A reduction in export taxes on petroleum would result in higher wages.
B) The higher is the level of taxes, the higher are wage demands.
C) The higher is the level of taxes, the lower is consumption spending.
D) A free-trade agreement between two countries will result in an increase in trade.
E) Tuition fees should be waived for low-income students.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city.
E-books Hardcover Books
Year 1 23 000 72 000
Year 2 52 000 59 000
Year 3 106 000 31 000
TABLE 2-3
81) Refer to Table 2-3. Suppose we choose Year 1 as the base year and construct a series of index
numbers with which to analyze the sales data. The index numbers for volumes of e-books sold
(starting with Year 1) is:
81)
A) 100; 226.1; 460.9
B) 1; 0.442; 0.217
C) 23 000; 52 000; 106 000
D) 100; 126.1; 360.1
E) 100; 44.2; 21.7
Explanation: A)
B)
C)
D)
E)
31
82) If a theory’s prediction is tested and rejected, 82)
A) a new hypothesis is usually suggested and tested.
B) it is rejected with certainty, because it is not possible to reject a hypothesis that is actually true.
C) inquiry into the matter should cease.
D) the original data and assumptions should be discarded.
E) the statistical tolerance of risk for accepting a false hypothesis should be increased.
Explanation: A)
B)
C)
D)
E)
83) Which of the following statements belongs more properly in the field of normative economics than
positive economics?
83)
A) When a drought occurs, the price of vegetables tends to rise.
B) Technological change has reduced the cost of cell phone service.
C) The price of one Canadian dollar is \$0.85 U.S.
D) Canadian governments should provide assistance to the auto industry.
E) An increase in the minimum wage leads to more unemployment.
Explanation: A)
B)
C)
D)
E)
84) Data collected of several variables but for the same time period are called 84)
A) logarithmic data.
B) time-series data.
C) time-analysis data.
D) cross-sectional data.
E) topographic data.
Explanation: A)
B)
C)
D)
E)
32
FIGURE 2-1
85) Refer to Figure 2-1. What is the slope of the line in part (ii) of the figure? 85)
A) 12.5 B) 0.05 C) -12.5 D) 1 E) 0.08
Explanation: A)
B)
C)
D)
E)
86) A theory 86)
A) can only be tested with a controlled experiment.
B) enables one to make prophesies about the future.
C) is designed to explain and predict what we observe.
D) is used to impose order on the world.
E) assumes definitions for variables.
Explanation: A)
B)
C)
D)
E)
33
87) Choose the statement that best characterizes an economic theory. A valid theory 87)
A) appeals to the law of large numbers.
B) generates a hypothesis that can predict future events.
C) allows one to deduce a normative statement.
D) extrapolates from the past behaviour of a variable to predict its future course.
E) allows one to prove irrefutably one’s hypothesis.
Explanation: A)
B)
C)
D)
E)
88) The slope of a straight line is necessarily 88)
A) increasing as one moves up the line.
B) negative.
C) positive.
D) constant.
E) zero.
Explanation: A)
B)
C)
D)
E)
34
FIGURE 2-4
89) Refer to Figure 2-4. Suppose we draw a straight line tangent to point B of the non-linear function.
The straight line has a slope of 0.075. What information is conveyed to us by this measurement?
89)
A) At point B, if one additional unit of fertilizer is applied per acre, the marginal response is
0.075 tonnes of wheat per acre.
B) At point B, when fertilizer is applied at a rate of 30 units per acre, the yield is 0.075 tonnes per
acre.
C) Because point B is midway between point A and point C, the yield per acre is 0.075 tonnes of
wheat when fertilizer applied is between 10 and 60 units per acre.
D) At point B, the marginal response to the application of 30 units of fertilizer per acre is 0.075
tonnes of wheat.
E) At point B, the marginal response to the application of 0.075 units of fertilizer is between 4
and 5 tonnes per acre.
Explanation: A)
B)
C)
D)
E)
35
FIGURE 2-2
90) Refer to Figure 2-2. The slope of curve C is 90)
A) impossible to describe.
B) negative and changing.
C) positive and changing.
D) positive and constant.
E) negative and constant.
Explanation: A)
B)
C)
D)
E)
91) According to the Bank of Canada’s website, Canada’s Consumer Price Index (CPI) in August 2009
was 114.7, August 2010 was 116.7, August 2011 was 120.3 and August 2012 was 121.8. Given this
set of index numbers, what can we conclude about average prices in Canada between August 2009
and August 2012?
91)
A) average prices decreased each year
B) average prices increased each year
C) average prices decreased over this time period by 7.1%
D) average prices increased over this time period by 21.8%
E) average prices increased over this time period by 7.1%
Explanation: A)
B)
C)
D)
E)
36
92) Suppose there is a theory that several things influence the price of fish in Halifax, one of which is
the weather during the fishing season. When examining the determinants of the price of fish, the
weather is
92)
A) an exogenous variable, as it is determined outside the theory.
B) an act of God and, therefore, has no legitimate connection with the theory.
C) a stock, as it influences the quantity of fish caught.
D) an endogenous variable, as it is determined within the theory.
E) an endogenous variable, as it influences the price of fish.
Explanation: A)
B)
C)
D)
E)
FIGURE 2-2
93) Refer to Figure 2-2. The slope of curve B is 93)
A) positive and constant.
B) positive and changing.
C) negative and constant.
D) undefined.
E) negative and changing.
Explanation: A)
B)
C)
D)
E)
37
94) On a coordinate graph, what is the Y intercept of the function X = 60 + 3Y? 94)
A) 3.0 B) -20 C) 0.1 D) 20 E) 60
Explanation: A)
B)
C)
D)
E)
95) The assumptions of a theory 95)
A) are indirectly refuted if and when the theory itself is rejected by empirical observation.
B) are not necessary for the scientific approach.
C) are supposed to be as unrealistic as possible.
D) are assumed to be true even when empirical observation rejects the predictions of the theory.
E) must be realistic if the theory is to be of any use.
Explanation: A)
B)
C)
D)
E)
96) Suppose Ahmoud would spend \$1200 per year on travel, even if his annual income were zero. As
his income rises, he would spend 20% of each additional dollar of income on travel. Choose the
correct mathematical equation that describes the functional relation between his travel spending (T)
and his income (Y).
96)
A) T = 0.2 + 1200Y
B) Y = 1200 + 0.2T
C) T = 1200 + 0.2Y
D) Y = 1200 – 0.2T
E) T = 1200 + 0.8Y
Explanation: A)
B)
C)
D)
E)
97) The slope of a curve is 97)
A) always constant.
B) always negative.
C) positive if the curve rises to the right.
D) always positive.
E) negative if the curve rises to the right.
Explanation: A)
B)
C)
D)
E)
38
98) Suppose point A represents co-ordinates (X=10, Y=12) and point B represents co-ordinates (X=5,
Y=7). The slope of the straight line joining points A and B is
98)
A) 1. B) 3/2. C) -1. D) 5/6. E) 2/3.
Explanation: A)
B)
C)
D)
E)
99) Suppose that a particular theory predicts that on Monday, Wednesday, and Friday the stock market
will rise and that on Tuesday and Thursday the stock market will fall. If an economist tests this
theory and finds that over a six-month period the theory predicts accurately, the economist would
likely say that the theory
99)
A) has been proven correct.
B) shouldn’t be taken seriously.
C) is reliable.
D) is not rejected by the evidence.
E) is not useful because stock markets involve irrational human behaviour.
Explanation: A)
B)
C)
D)
E)
100) Consider the following equation: Y = 10 + 5X – X2. This equation is an expression of 100)
A) two independent variables in a functional relation.
B) a functional relation in a schedule format.
C) a functional relation in a verbal format.
D) a functional relation between X and Y.
E) two dependent variables in a functional relation.
Explanation: A)
B)
C)
D)
E)
39
FIGURE 2-2
101) Refer to Figure 2-2. The slope of curve D is 101)
A) negative and constant.
B) positive and constant.
C) undefined.
D) negative and changing.
E) positive and changing.
Explanation: A)
B)
C)
D)
E)
102) Of the following, which is the most important characteristic of a successful theory? 102)
A) all assumptions on which the theory is based are true
B) the theory allows us to predict behaviour reasonably accurately
C) the theory provides a basis for facts about economic behaviour
D) the theory adequately explains all economic behaviour
E) the theory could never be refuted
Explanation: A)
B)
C)
D)
E)
40
103) A scatter diagram 103)
A) is a graph of a theoretical relationship between two variables.
B) plots a series of observations, showing the relationship between two variables.
C) relates time series data only.
D) relates cross-sectional data only.
E) shows the dependence of one variable on another.
Explanation: A)
B)
C)
D)
E)
104) Choose the statement that best characterizes an economic theory. An economic theory 104)
A) must be judged on its ability to explain and predict real-world phenomena.
B) is only useful if its underlying assumptions are realistic.
C) will predict more accurately if it contains a greater number of mathematical equations.
D) will be useful only if all human behaviour is rational.
E) will be useful as long as it is logically consistent.
Explanation: A)
B)
C)
D)
E)
105) If the graph of a function is a horizontal line, the slope of this line is 105)
A) undefined.
B) -1.
C) 0.
D) infinity.
E) 1.
Explanation: A)
B)
C)
D)
E)
106) Negatively related variables change such that as the value of one variable 106)
A) increases, the value of the other decreases.
B) increases, the value of the other variable remains the same.
C) decreases, the value of the other variable remains the same.
D) decreases, the value of the other variable decreases.
E) increases, the value of the other variable increases.
Explanation: A)
B)
C)
D)
E)
41
107) When an increase in one variable is associated with a decrease in a second variable, the two
variables are
107)
A) inversely proportionally related.
B) positively related.
C) negatively related.
D) proportionally related.
E) equivalent.
Explanation: A)
B)
C)
D)
E)
108) Disagreements over positive statements 108)
A) are best handled by an appeal to the facts.
B) are basically devoid of any emotion.
C) never occur.
D) cannot arise because positive statements are facts.
E) arise from the failure to distinguish between a positive and a normative statement.
Explanation: A)
B)
C)
D)
E)
109) If we seek to explain the number of seats sold on a particular air route, say Toronto to Halifax, over
a one-year period, we would consider many variables. Which of the following variables would be
endogenous to our theory?
109)
A) the number of airline seats sold on this route
B) the price of jet fuel
C) the average salary of Canadian airline pilots
D) the number of fog days in Halifax
E) the unemployment rate in Toronto
Explanation: A)
B)
C)
D)
E)
42
110) Using the scientific method to approach an economic issue involves 110)
A) formulating normative statements about it.
B) considering stock and flow variables.
C) finding the correct data to validate the theory.
D) building a theory to explain the issue and then determining if the theory can be refuted by
evidence.
E) the use of controlled experiments to confirm the evidence presented by the data.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical per-minute cell phone charges for “pay-and-talk” service over several years.
2008 0.55
2009 0.50
2010 0.40
2011 0.35
2012 0.25
TABLE 2-2
111) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. The
value of the index number in 2012 is
111)
A) 45.45 B) 0.45 C) 25.0 D) 2.5 E) 0.25
Explanation: A)
B)
C)
D)
E)
43
FIGURE 2-3
112) Refer to Figure 2-3. At X2 on curve A, the 112)
A) minimum occurs at Y4.
B) slope is increasing.
C) slope of the curve is zero.
D) maximum occurs at Y1.
E) slope is decreasing.
Explanation: A)
B)
C)
D)
E)
113) At the minimum or the maximum of the graph of a non-linear function (with x on the horizontal
axis and y on the vertical axis) the marginal response of y to a small change in x is
113)
A) 0.
B) 1.
C) undefined.
D) -1.
E) infinite.
Explanation: A)
B)
C)
D)
E)
44
114) On a coordinate graph, what is the X intercept of the function X = 60 + 3Y? 114)
A) 0 B) -20 C) 60 D) 20 E) -60
Explanation: A)
B)
C)
D)
E)
115) Suppose an economist tells you that the unemployment rate in Canada last year was 7.8%. This is
an example of a(n) ________ statement.
115)
A) induced
B) imputed
C) normative
D) positive
E) autonomous
Explanation: A)
B)
C)
D)
E)
116) Suppose economists at the Department of Finance in Ottawa employ an economic model that
predicts the effects of an increase in the GST. After implementation of the change, researchers find
that the empirical data rejects the prediction. They are likely to
116)
A) reject the empirical data as faulty because it did not support the theory.
B) modify the theory in light of this newly acquired empirical knowledge.
C) modify the prediction in light of the new evidence.
D) ignore the empirical evidence and continue using the model.
E) modify the data to suit the definitions and assumptions.
Explanation: A)
B)
C)
D)
E)
117) Consider the functional relationship between two variables, X and Y. If Y is an increasing function
of X, then
117)
A) X remains constant as Y increases.
B) Y increases when X increases.
C) X decreases when Y increases.
D) Y decreases when X increases.
E) Y increases when X decreases.
Explanation: A)
B)
C)
D)
E)
45
118) When it is said that variable A depends on variable B, then A is 118)
A) a function of B.
B) a derivative of B.
C) proportional to B.
D) independent of B.
E) partially exclusive of B.
Explanation: A)
B)
C)
D)
E)
119) Economics is scientific because 119)
A) economists routinely conduct laboratory experiments.
B) economists use data.
C) economists test hypotheses by appealing to empirical evidence.
D) individual behaviour is predictable.
E) economists routinely conduct controlled experiments.
Explanation: A)
B)
C)
D)
E)
The table below shows hypothetical tuition costs at a Canadian university.
Year Tuition
2008 \$5000
2009 \$5050
2010 \$5100
2011 \$5150
2012 \$5200
TABLE 2-1
120) Refer to Table 2-1. Assume that 2008 is used as the base year, with the index number = 100. The
value of the index number in 2010 is calculated as follows:
120)
A) 5100/5000 = 1.02
B) (5100/5000) × 100 = 102
C) 5100/5100 = 100
D) (5000/5100) × 100 = 98
E) 5000/5100 = 0.98
Explanation: A)
B)
C)
D)
E)
46
FIGURE 2-4
121) Refer to Figure 2-4. The slope of the non-linear function changes as we move along the curve. The
slope is
121)
A) negative and decreasing, indicating a diminishing marginal response.
B) constant at all points, indicating a constant marginal response.
C) negative and increasing, indicating an increasing marginal response.
D) positive and increasing, indicating an increasing marginal response.
E) positive and decreasing, indicating a diminishing marginal response.
Explanation: A)
B)
C)
D)
E)
47
The table below shows hypothetical tuition costs at a Canadian university.
Year Tuition
2008 \$5000
2009 \$5050
2010 \$5100
2011 \$5150
2012 \$5200
TABLE 2-1
122) Refer to Table 2-1. The increase in tuition fees from 2008 to 2012 is 122)
A) 100/5000. B) 200/5200. C) 4%. D) 200. E) 0.04%.
Explanation: A)
B)
C)
D)
E)
123) When considering how a family’s level of consumption changes in response to changes in its
income,
123)
A) both of the variables are independent.
B) consumption is the dependent variable and income is the independent variable.
C) income is the dependent variable and family consumption is the independent variable.
D) there is no relationship between the variables.
E) both of the variables are dependent.
Explanation: A)
B)
C)
D)
E)
124) A hypothesis (or a prediction) is a statement about 124)
A) how assumptions affect theories.
B) the relationship between facts explained by the hypothesis.
C) how two or more variables are related to each other.
D) what will happen in the future.
E) those things which we believe to be true, but cannot prove.
Explanation: A)
B)
C)
D)
E)
48
125) Positively related variables change such that as the value of one variable 125)
A) decreases, the value of the other variable decreases.
B) decreases, the value of the other variable increases.
C) decreases, the value of the other variable remains the same.
D) increases, the value of the other variable decreases.
E) increases, the value of the other variable remains the same.
Explanation: A)
B)
C)
D)
E)
49
Testname: C2
1) A
2) A
3) D
4) A
5) B
6) A
7) C
8) B
9) A
10) D
11) A
12) B
13) B
14) D
15) D
16) B
17) A
18) D
19) A
20) A
21) B
22) B
23) D
24) A
25) B
26) B
27) E
28) E
29) C
30) E
31) D
32) E
33) D
34) B
35) D
36) C
37) E
38) B
39) E
40) B
41) D
42) D
43) A
44) E
45) B
46) C
47) B
48) E
49) A
50) E
50
Testname: C2
51) A
52) C
53) B
54) B
55) D
56) B
57) A
58) A
59) A
60) C
61) D
62) C
63) B
64) A
65) E
66) B
67) B
68) D
69) D
70) B
71) C
72) D
73) A
74) B
75) B
76) E
77) C
78) B
79) C
80) E
81) A
82) A
83) D
84) D
85) B
86) C
87) B
88) D
89) A
90) C
91) B
92) A
93) A
94) B
95) A
96) C
97) C
98) A
99) D
100) D
51
Testname: C2
101) D
102) B
103) B
104) A
105) C
106) A
107) C
108) A
109) A
110) D
111) A
112) C
113) A
114) C
115) D
116) B
117) B
118) A
119) C
120) B
121) E
122) C
123) B
124) C
125) A
52

chapter 10

Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Natural barriers to firms to entering an industry include 1)
A) large economies of scale in the industry.
B) increasing-cost production.
C) a government-awarded franchise.
D) control or ownership of the entire supply of an essential raw material.
E) a patent which allows production by only the patent holder.
Explanation: A)
B)
C)
D)
E)
1
The diagram below shows a pharmaceutical firm’s demand curve and marginal cost and marginal revenue curves for a new heart
medication for which the firm holds a 20-year patent on its production.
FIGURE 10-5
2) Refer to Figure 10-5. Assume this pharmaceutical firm is practicing perfect price discrimination
among its buyers. At its profit-maximizing level of output it will produce
2)
A) Q1 units and charge a price of p1 on the last unit sold.
B) Q0 units and charge a price of p0 on the last unit sold.
C) Q1 units and charge a price of p1 on all units.
D) Q0 units and charge a price of p0 on all units.
E) It is not possible to determine with the information provided.
Explanation: A)
B)
C)
D)
E)
3) The two characteristic problems for cartels are 3)
A) agreeing on the price to be set and coordinating marketing policies.
B) policing members’ output restrictions and preventing new entrants.
C) policing members’ prices and restricting output.
D) coordinating marketing policies and policing members’ quotas.
E) agreeing on the price to be set and preventing new entrants.
Explanation: A)
B)
C)
D)
E)
2
4) Which of the following is probably NOT an example of price discrimination? 4)
A) Train fares that are less expensive for weekend travel than weekday travel.
B) A theatre charging children under 12 less for a movie ticket than it charges an adult.
C) A doctor charging for his services according to the income of his patients.
D) Universities charging out-of-province students higher tuition fees.
E) A supermarket charging more for strawberries in December than in June.
Explanation: A)
B)
C)
D)
E)
Consider the following AR and MR curves for a single-price monopolist.
FIGURE 10-2
5) Refer to Figure 10-2. If marginal costs were positive and constant but less than A, the
profit-maximizing output for this single-price monopolist would be
5)
A) equal to Q2.
B) 0.
C) between Q2 and Q4.
D) greater than zero, but less than Q1.
E) greater than zero, but less than Q2.
Explanation: A)
B)
C)
D)
E)
3
6) If a single-price monopolist sets price where the price elasticity of demand exactly equals 1, its 6)
A) marginal revenue is always positive.
B) total revenue is rising, although marginal revenue is falling.
C) total revenue is at its maximum.
D) total profits are at a maximum.
E) total revenue is falling.
Explanation: A)
B)
C)
D)
E)
7) A single-price monopolist is currently producing an output level where P = \$20, MR = \$13, ATC =
\$15, and MC = \$14. In order to maximize profits, this monopolist should
7)
A) shut down.
B) decrease production and increase price.
C) not change the output level, because the firm is currently at the profit-maximizing output
level.
D) increase production and reduce price.
E) There is insufficient information to make a recommendation.
Explanation: A)
B)
C)
D)
E)
8) Consider a profit-maximizing single-price monopolist that faces a linear demand curve. The firm
sets price where the price elasticity of demand is
8)
A) zero.
B) greater than one.
C) infinite.
D) less than one.
E) one.
Explanation: A)
B)
C)
D)
E)
4
The diagram below shows total revenue for a single-price monopolist.
FIGURE 10-3
9) Refer to Figure 10-3. The price elasticity of demand at Q3 is 9)
A) less than 1.
B) zero.
C) equal to 1.
D) greater than 1.
E) not determinable from the diagram.
Explanation: A)
B)
C)
D)
E)
5
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
10) Refer to Figure 10-4. If the single-price monopolist is producing at the profit-maximizing level of
output, the total cost is represented by the area
10)
A) 0P1dQ1. B) 0P4aQ0. C) 0P2bQ0. D) 0P0gQ5. E) 0P3cQ3.
Explanation: A)
B)
C)
D)
E)
6
Your food-services company has been named as the sole provider of meals at a small university. The cost and demand schedules are:
Sold per Day Price per Meal
Total
Fixed Cost
Total
Variable Cost Total Revenue
0 \$3.50 \$150 \$0 \$0
100 \$3.25 \$150 \$300 \$325
200 \$3.00 \$150 \$500 \$600
300 \$2.75 \$150 \$650 \$825
400 \$2.50 \$150 \$750 \$1000
500 \$2.25 \$150 \$830 \$1125
600 \$2.00 \$150 \$905 \$1200
700 \$1.75 \$150 \$995 \$1225
TABLE 10-2
11) Refer to Table 10-2. For a single-price monopolist, the profit-maximizing price and number of
meals per day is
11)
A) 600 meals at \$2.00 per meal.
B) 700 meals at \$1.75 per meal.
C) 300 meals at \$2.75 per meal.
D) 400 meals at \$2.50 per meal.
E) 500 meals at \$2.25 per meal.
Explanation: A)
B)
C)
D)
E)
7
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
12) Refer to Figure 10-4. If this single-price monopolist is producing at the profit-maximizing level of
output, the total profit is represented by the area
12)
A) P3ceP2. B) 0P4aQ0. C) 0P0fQ0. D) 0P2bQ0. E) P4abP2.
Explanation: A)
B)
C)
D)
E)
8
Your food-services company has been named as the sole provider of meals at a small university. The cost and demand schedules are:
Sold per Day Price per Meal
Total
Fixed Cost
Total
Variable Cost Total Revenue
0 \$3.50 \$150 \$0 \$0
100 \$3.25 \$150 \$300 \$325
200 \$3.00 \$150 \$500 \$600
300 \$2.75 \$150 \$650 \$825
400 \$2.50 \$150 \$750 \$1000
500 \$2.25 \$150 \$830 \$1125
600 \$2.00 \$150 \$905 \$1200
700 \$1.75 \$150 \$995 \$1225
TABLE 10-2
13) Refer to Table 10-2. If the firm were to shut down in the short run its losses per day would be 13)
A) equal to its total cost.
B) zero.
C) equal to its total revenue.
D) equal to its average variable cost.
E) \$150.
Explanation: A)
B)
C)
D)
E)
14) For a monopolist, the profit-maximizing level of output occurs where 14)
A) MC = 0.
B) MR = MC.
C) MC = price.
D) MR = AC.
E) MC = AR.
Explanation: A)
B)
C)
D)
E)
9
15) Suppose that a single-price monopolist knows the following information:
Price Quantity TR MR Fixed Cost TC ATC MC
\$5.00 2000 \$4.00 \$2000 \$5.00 \$3.00
The monopolist could maximize profits in the short run by
15)
A) lowering price and leaving output unchanged.
B) shutting down.
C) staying at the current price and output.
D) raising price and lowering output.
E) lowering price and increasing output.
Explanation: A)
B)
C)
D)
E)
16) Relative to a firm that must charge a single price for all of its output, the ability to charge multiple
prices gives a firm with market power the ability to capture some or all of the
16)
A) consumer surplus.
B) marginal costs.
C) producer surplus.
D) fixed costs.
E) variable costs.
Explanation: A)
B)
C)
D)
E)
17) Marginal revenue is less than price for a single-price monopolist because the 17)
A) monopolist has achieved economies of scale.
B) monopolist charges a price higher than the unit production cost.
C) firm must lower its price for all units if it wants to sell more of the product.
D) firm’s output decisions do not affect the selling price.
E) monopolist must worry about how its price setting will lead to entry by other firms.
Explanation: A)
B)
C)
D)
E)
10
18) The main argument of Joseph Schumpeter’s idea of “creative destruction” is that 18)
A) monopolies create profits for themselves at the expense of the destruction of consumer
surplus.
B) the existence of monopolies leads to destruction of the environment.
C) perfectly competitive industries are characterized by more productive innovation and
productivity growth than monopolistic industries, which Schumpeter regarded as
destructive.
D) monopoly profits lead to innovation in an effort to sustain those profits.
E) short-run profits created by the existence of monopolies will lead to antitrust legislation,
which will force the fragmentation of monopolies into competitive industries.
Explanation: A)
B)
C)
D)
E)
19) One similarity between a monopolist and a perfectly competitive firm is that both 19)
A) are large relative to their markets.
B) may have similarly shaped cost curves.
C) need to know the shape of the market demand curve.
D) can make economic profits in the long run.
E) choose the price at which to sell their product.
Explanation: A)
B)
C)
D)
E)
20) One reason movie theatres charge a lower admission price to senior citizens is that 20)
A) senior citizens have a less elastic demand than other movie-goers.
B) senior citizens have a more elastic demand than other movie-goers.
C) government sets the price policies.
D) movie-theatre owners are able to practice perfect price discrimination.
E) senior citizens have a higher willingness-to-pay than other people.
Explanation: A)
B)
C)
D)
E)
11
21) Which of the following statements about a monopoly practicing perfect price discrimination is
correct?
21)
A) Total costs will be lower than that of a single-price monopolist.
B) The output will always be less than that produced by a single-price monopolist.
C) The profit-maximizing criterion is MR = P, the same as for perfect competition.
D) The demand curve is also the marginal-revenue curve.
E) It will charge higher prices in those market segments with more elastic demand.
Explanation: A)
B)
C)
D)
E)
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
22) Refer to Figure 10-4. If the monopolist is practicing perfect price discrimination and is maximizing
its profits, the consumer surplus is represented by the area
22)
A) P5P4a.
B) P5P0c.
C) P5P2e.
D) P5P3c.
E) There is no consumer surplus in this case.
Explanation: A)
B)
C)
D)
E)
12
23) A single-price monopolist is currently producing an output level where P = \$320, MR = \$260, ATC
= \$280, and MC = \$200. In order to maximize profits, this monopolist should
23)
A) decrease production and increase price.
B) increase production and reduce price
C) There is insufficient information to make a recommendation.
D) shut down.
E) not change the output level because the firm is currently at the profit-maximizing output
level.
Explanation: A)
B)
C)
D)
E)
24) If a monopolist’s marginal revenue is MR = 15 – 2Q and its marginal cost is MC = 5, then the
profit-maximizing quantity is
24)
A) 10. B) 5. C) 15. D) 0. E) 7.5.
Explanation: A)
B)
C)
D)
E)
25) Suppose the technology of production is such that the typical firm’s minimum efficient scale is 1400
units per week at an average long-run cost of \$9 per unit. If the total quantity demanded in this
market at a price of \$9 per unit is 22 million units per week, the likely result will be
25)
A) a competitive industry.
B) a natural monopoly.
C) price discrimination.
D) a cartel.
E) a concentrated oligopoly.
Explanation: A)
B)
C)
D)
E)
26) Price discrimination, if possible, allows a price-setting firm to increase its profits by 26)
A) shifting its cost curves downward.
B) charging different prices according to the different marginal cost on each unit.
C) raising the price above the competitive price.
D) charging different prices according to the willingness to pay of each consumer.
E) reducing costs through a reduction in output.
Explanation: A)
B)
C)
D)
E)
13
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
27) Refer to Figure 10-4. If the monopolist is practicing perfect price discrimination and is maximizing
its profits, the total revenue is represented by the area
27)
A) 0P4aQ0. B) 0P3cQ2. C) 0P5cQ2. D) 0P1dQ1. E) 0P2bQ0.
Explanation: A)
B)
C)
D)
E)
14
The diagram below shows total revenue for a single-price monopolist.
FIGURE 10-3
28) Refer to Figure 10-3. The profit-maximizing output for this single-price monopolist is 28)
A) Q1
B) Q2.
C) Q3.
D) Q4.
E) not determinable from the diagram.
Explanation: A)
B)
C)
D)
E)
15
Your food-services company has been named as the sole provider of meals at a small university. The cost and demand schedules are:
Sold per Day Price per Meal
Total
Fixed Cost
Total
Variable Cost Total Revenue
0 \$3.50 \$150 \$0 \$0
100 \$3.25 \$150 \$300 \$325
200 \$3.00 \$150 \$500 \$600
300 \$2.75 \$150 \$650 \$825
400 \$2.50 \$150 \$750 \$1000
500 \$2.25 \$150 \$830 \$1125
600 \$2.00 \$150 \$905 \$1200
700 \$1.75 \$150 \$995 \$1225
TABLE 10-2
29) Refer to Table 10-2. The marginal cost between 100 and 200 meals per day is 29)
A) \$2.00. B) \$0. C) \$1.00. D) \$3.00. E) \$1.50.
Explanation: A)
B)
C)
D)
E)
30) Refer to Table 10-2. Assuming the firm is a single-price monopolist, the marginal revenue at 200
meals per day is
30)
A) \$0. B) \$2.25. C) \$2.75. D) \$3.25. E) \$1.75.
Explanation: A)
B)
C)
D)
E)
31) Suppose the technology of an industry is such that the typical firm’s minimum efficient scale is
8000 units per month at an average long-run cost of \$5 per unit. If the total quantity demanded at a
price of \$5 per unit is 8500 units per month, the likely result would be
31)
A) a concentrated oligopoly.
B) a cartel.
C) price discrimination.
D) a natural monopoly.
E) perfectly competitive firms.
Explanation: A)
B)
C)
D)
E)
16
32) Which of the following statements about single-price monopolists is correct? 32)
A) The average revenue curve lies above the demand curve.
B) AR is greater than MR.
C) Price elasticity of demand will be equal to one if the firm is profit-maximizing.
D) Price equals marginal cost at the profit-maximizing level of output.
E) The profit-maximizing level of output is the same as the total revenue-maximizing level of
output.
Explanation: A)
B)
C)
D)
E)
33) One of the reasons cartels are considered unstable is that 33)
A) it is inefficient to manage individual firms collectively.
B) consumers seek out substitutes to the cartel product.
C) there are wide fluctuations in price as cartel members vary their output.
D) individual members of the cartel have an incentive to violate the cartel agreement.
E) member firms reduce their investment, thereby becoming uncompetitive over time.
Explanation: A)
B)
C)
D)
E)
34) In November 2012, there was some discussion of several south-Asian countries joining together to
restrict the supply of rice to the world market. Between them, these countries’ exports of rice
account for 40% of the total global trade. What would they be trying to accomplish?
34)
A) They are attempting to form a cartel, jointly restrict output, and increase the world price of
rice.
B) They are attempting to form a cartel, drive other producers out of the world market and then
increase their output of rice.
C) They are attempting to form a cartel, increase their joint output, and control a larger
percentage of the total global trade.
D) They are attempting to act as a bloc to restrict entry of new producers to the world market,
and thereby protect their joint profits.
E) They are attempting to price discriminate between consumers of their exported rice, thereby
increasing their share of the global trade and increasing their joint profits.
Explanation: A)
B)
C)
D)
E)
17
The diagram below shows a pharmaceutical firm’s demand curve and marginal cost and marginal revenue curves for a new heart
medication for which the firm holds a 20-year patent on its production.
FIGURE 10-5
35) Refer to Figure 10-5. Suppose this pharmaceutical firm is charging a single price for its drug and is
maximizing its profits. If it then begins to perfectly price discriminate among its buyers it will
35)
A) reduce its producer surplus by areas C+F+H.
B) no longer be equating MR and MC.
C) capture consumer surplus equal to areas D+E+C+F+H.
D) decrease its total output.
E) cause a loss of economic surplus to society as a whole.
Explanation: A)
B)
C)
D)
E)
18
Price
Quantity
Demanded
\$8 5
\$7 6
\$6 7
\$5 8
\$4 9
\$3 10
\$2 11
TABLE 10-1
36) Refer to Table 10-1. For a single-price monopolist, the marginal revenue associated with increasing
sales from 5 to 6 units is
36)
A) -4. B) -2. C) 0. D) 2. E) 4.
Explanation: A)
B)
C)
D)
E)
19
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
37) Refer to Figure 10-4. The average per unit profit earned by this profit-maximizing single-price
monopolist is
37)
A) P4 – P3. B) P3 – P2. C) P4 – P0. D) P4 – P1. E) P4 – P2.
Explanation: A)
B)
C)
D)
E)
38) The average revenue curve for a single-price monopolist 38)
A) coincides with its demand curve.
B) lies below its demand curve.
C) is a horizontal line, equal to the price of its product.
D) does not exist.
E) slopes upward to the right.
Explanation: A)
B)
C)
D)
E)
20
39) Which one of the following is a natural barrier to firms entering an industry? 39)
A) decreasing returns to scale
B) a positively sloped LRAC curve over the whole range of output
C) a negatively sloped LRAC curve over the whole range of output
D) licensing and patent restrictions
E) threats of punitive price-cutting by existing producers
Explanation: A)
B)
C)
D)
E)
Consider the following AR and MR curves for a single-price monopolist.
FIGURE 10-2
40) Refer to Figure 10-2. If marginal costs were zero, the profit-maximizing output for this
single-price monopolist would be
40)
A) 0. B) Q1. C) Q2. D) Q3. E) Q4.
Explanation: A)
B)
C)
D)
E)
21
41) If a monopolist is practicing perfect price discrimination, then the following equation is true: 41)
A) AR = ATC at the profit-maximizing level of output.
B) MC = 1/2 MR at the profit-maximizing level of output.
C) MR = P for all units.
D) MR = 1/2 P for any unit.
E) P = AVC at the profit-maximizing level of output.
Explanation: A)
B)
C)
D)
E)
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
42) Refer to Figure 10-4. If this single-price monopolist is producing at the profit-maximizing level of
output, consumer surplus is represented by the area
42)
A) P5P2b. B) P5P1e. C) P5Q30. D) P5P0g. E) P5P4a.
Explanation: A)
B)
C)
D)
E)
22
43) A monopoly is distinguished from a firm operating under any other market structure in the
following way: the monopoly
43)
A) does not produce at a profit-maximizing level of output.
B) faces a demand curve which is identical to the market demand curve.
C) can choose its output level.
D) charges a price higher than its average revenue.
E) can choose its level of cost.
Explanation: A)
B)
C)
D)
E)
44) With regard to price discrimination, we can generally say that a monopolist practicing perfect price
discrimination ________ a single-price monopolist in the same market.
44)
A) generates more consumer surplus than
B) has the same effects on consumer welfare as
C) generates a more efficient outcome for society as a whole compared to
D) produces the same output level and charges the same price as
E) produces a lower level of output compared to
Explanation: A)
B)
C)
D)
E)
45) The marginal revenue curve facing a single-price monopolist 45)
A) lies below the average revenue curve.
B) is the same as the demand curve facing the monopolist.
C) shows the change in the profit for the firm.
D) at first falls to a minimum and then rises as output is increased.
E) is the same as the average revenue curve facing the monopolist.
Explanation: A)
B)
C)
D)
E)
23
46) A monopolist faces a straight-line demand curve and is currently producing an output level of
2000 units receiving \$10 000 in total revenue. At an output of 1000 units the marginal revenue for
this firm would be
46)
A) \$10.00
B) \$5.00.
C) \$2.50.
D) 0.
E) Impossible to tell with the given information.
Explanation: A)
B)
C)
D)
E)
The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.
FIGURE 10-1
47) Refer to Figure 10-1. Suppose this single-price monopolist is initially selling 5 units at \$8 each and
then reduces the price of the product to \$6. By making this change, the firm is giving up revenue of
________ on the original number of units sold and gaining revenue of ________ on the additional
units sold. Its marginal revenue is therefore ________. (All figures are dollars.)
47)
A) 10; 12; 2 B) 5; 7; -2 C) 14; 14; 0 D) 38; 40; 2 E) 8; 6; 2
Explanation: A)
B)
C)
D)
E)
24
48) If a single-price monopolist’s price equals marginal cost, the firm 48)
A) will find it more profitable to produce a greater output.
B) is producing where MR = MC and thus is maximizing profits.
C) should definitely shut down.
D) could increase its profits by lowering output and raising price.
E) should maintain its current price because it is a price taker.
Explanation: A)
B)
C)
D)
E)
Price
Quantity
Demanded
\$8 5
\$7 6
\$6 7
\$5 8
\$4 9
\$3 10
\$2 11
TABLE 10-1
49) Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. At what
level of demand is the price elasticity of demand equal to 1?
49)
A) between 6 and 7 units
B) between 7 and 8 units
C) between 8 and 9 units
D) between 9 and 10 units
E) between 10 and 11 units
Explanation: A)
B)
C)
D)
E)
25
Your food-services company has been named as the sole provider of meals at a small university. The cost and demand schedules are:
Sold per Day Price per Meal
Total
Fixed Cost
Total
Variable Cost Total Revenue
0 \$3.50 \$150 \$0 \$0
100 \$3.25 \$150 \$300 \$325
200 \$3.00 \$150 \$500 \$600
300 \$2.75 \$150 \$650 \$825
400 \$2.50 \$150 \$750 \$1000
500 \$2.25 \$150 \$830 \$1125
600 \$2.00 \$150 \$905 \$1200
700 \$1.75 \$150 \$995 \$1225
TABLE 10-2
50) Refer to Table 10-2, and suppose that the firm is a single-price monopolist. At the
profit-maximizing level of output, the price elasticity of demand is
50)
A) less than one.
B) greater than one.
C) one.
D) infinite.
E) impossible to know with the available information.
Explanation: A)
B)
C)
D)
E)
51) Which one of the following cases is NOT an example of price discrimination? 51)
A) Young males are charged higher premiums for car insurance than older males or women.
B) Theatres charge different rates for different age groups.
C) Electric companies charge different rates to commercial and residential users for electricity.
D) Airlines charge different fares for business people than tourist travelers.
E) A local phone company charges different telephone rates to residential and business users.
Explanation: A)
B)
C)
D)
E)
26
52) At the profit-maximizing level of output for a single-price monopolist, price 52)
A) equals marginal revenue.
B) exceeds marginal cost.
C) equals marginal cost.
D) is below marginal revenue.
E) always exceeds average total cost.
Explanation: A)
B)
C)
D)
E)
53) A firm is best described as a natural monopoly if 53)
A) its MC curve is downward sloping.
B) it can supply the entire market while minimizing its average costs.
C) there are no competing firms.
D) its ATC curve is upward sloping.
E) it holds an exclusive charter from the government.
Explanation: A)
B)
C)
D)
E)
Price
Quantity
Demanded
\$8 5
\$7 6
\$6 7
\$5 8
\$4 9
\$3 10
\$2 11
TABLE 10-1
54) Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. Which of
the following statements about price elasticity of demand is true?
54)
A) demand is elastic at a price of \$5
B) demand is inelastic at a price of \$8
C) demand is unit-elastic at a price of \$4
D) demand is elastic at a price of \$8
E) demand is elastic at a price of \$3
Explanation: A)
B)
C)
D)
E)
27
55) Consider the following statement: “Price discrimination is harmful to society and should not be
tolerated under any circumstance.” Why is this statement false?
55)
A) Price discrimination leads to higher prices for all consumers and a reduction in consumer
surplus.
B) Price discrimination always leads to lower prices and higher quantities.
C) Price discrimination reduces total quantity exchanged and therefore reduces the sum of
producer and consumer surplus.
D) Price discrimination can allow for some consumers to be made better off because they are able
to buy a product or service that was otherwise unaffordable.
E) Price discrimination violates the Canadian Charter of Rights and Freedoms.
Explanation: A)
B)
C)
D)
E)
56) Suppose that a single-price monopolist knows the following information:
Price Quantity TR MR Fixed Cost TC ATC MC
\$9.00 1500 \$4.00 \$7000 \$7.00 \$5.00
The total profit being earned by this firm at the current level of output is
56)
A) \$1500. B) \$6500. C) \$13 500. D) \$10 500. E) \$3000.
Explanation: A)
B)
C)
D)
E)
57) A number of firms agreeing together to restrict output and thereby raise prices is known as 57)
A) a natural monopoly.
B) a monopoly.
C) an oligopoly.
D) a cartel.
E) a barrier to entry.
Explanation: A)
B)
C)
D)
E)
28
58) Suppose that a single-price monopolist knows the following information:
Price Quantity TR MR Fixed Cost TC ATC MC
\$10.00 1500 \$7.00 \$6000 \$5.00 \$5.00
The total profit being earned by this firm at the current level of output is ________ which ________
the maximum profit possible.
58)
A) \$105 000; is
B) \$97 500; is not
C) \$3000; is not
D) \$7500; is not
E) \$15 000; is
Explanation: A)
B)
C)
D)
E)
59) Suppose you go to a retailer’s website and print a coupon that gives you a discount on your next
purchase at their store. But your friend, who also plans to purchase there, can’t be bothered. You
are revealing to the store that
59)
A) you have a higher elasticity of demand than your friend.
B) you have a lower elasticity of demand than your friend.
C) you have a lower income than your friend.
D) elasticity of demand changes according to the size of the discount offered.
E) you understand price discrimination and your friend does not.
Explanation: A)
B)
C)
D)
E)
29
The diagram below shows total revenue for a single-price monopolist.
FIGURE 10-3
60) Refer to Figure 10-3. The firm’s marginal revenue at Q1 is 60)
A) positive and rising.
B) zero.
C) negative and falling.
D) positive but falling.
E) not determinable from the diagram.
Explanation: A)
B)
C)
D)
E)
61) A monopolist will be earning positive economic profits 61)
A) whenever marginal revenue is positive.
B) whenever marginal revenue equals marginal cost.
C) when price exceeds average total cost.
D) at all times, since it controls the market.
E) when price equals marginal cost.
Explanation: A)
B)
C)
D)
E)
30
Price
Quantity
Demanded
\$8 5
\$7 6
\$6 7
\$5 8
\$4 9
\$3 10
\$2 11
TABLE 10-1
62) Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. At what
level of output is total revenue maximized for this firm?
62)
A) between 6 and 7 units
B) between 7 and 8 units
C) between 8 and 9 units
D) between 9 and 10 units
E) between 10 and 11 units
Explanation: A)
B)
C)
D)
E)
63) Consider a monopolist that is able to distinguish between two distinct market segments, A and B,
for its product. Marginal cost is constant at \$18 for each unit produced. The firm is currently
selling its output at a single price and allocating its output across segments such that marginal
revenue in segment A is \$25 and marginal revenue in segment B is \$15. Is this firm maximizing its
profit?
63)
A) Yes, because since marginal cost is constant, the firm must set a single price.
B) No, this firm can increase its profits by price discriminating across the two market segments.
C) Yes, because it has set a price such that MC is between the MRs of the two market segments.
D) No, because it is only possible to equate MR and MC when there is a single MR curve.
Explanation: A)
B)
C)
D)
31
64) Consider a monopolist that is able to distinguish between two distinct market segments, A and B,
for its product. Marginal cost is constant at \$100 for each unit produced. The firm is currently
selling its output at a single price and allocating its output across segments such that marginal
revenue in segment A is \$85 and marginal revenue in segment B is \$105. How can this firm
maximize its profit?
64)
A) increase the output in segments A and B
B) increase the output in segment A and decrease the output in segment B
C) maintain the current output and its allocation across segments
D) decrease the output in segment A and increase the output in segment B
E) decrease the output in segments A and B
Explanation: A)
B)
C)
D)
E)
65) If a monopolist’s marginal revenue is MR = 12 – 2Q and its marginal cost is MC = 3, then the
profit-maximizing quantity is
65)
A) 12. B) 6. C) 4.5. D) 4. E) 0.
Explanation: A)
B)
C)
D)
E)
66) Which of the following products would most easily lend itself to successful price discrimination by
a monopolist?
66)
A) transport trucks
B) restaurant meals
C) electricity
D) pianos
E) cellular phones
Explanation: A)
B)
C)
D)
E)
32
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
67) Refer to Figure 10-4. This single-price monopolist would maximize total revenue by producing the
quantity
67)
A) Q1. B) Q2. C) Q3. D) Q4. E) Q5.
Explanation: A)
B)
C)
D)
E)
68) If a monopolist is practising perfect price discrimination, we know that 68)
A) the firm is producing a lower output than it would if it were a single-price monopolist.
B) the firm is selling each unit at a different price and capturing all consumer surplus.
C) marginal cost is rising as output rises.
D) the firm is facing a perfectly elastic demand curve.
E) the firm is facing a perfectly inelastic demand curve.
Explanation: A)
B)
C)
D)
E)
33
69) Consider a monopolist that is able to distinguish between two distinct market segments, A and B,
for its product. Marginal cost is constant at \$18 for each unit produced. The firm is currently
selling its output at a single price and allocating its output across segments such that marginal
revenue in segment A is \$25 and marginal revenue in segment B is \$15. How can this firm
maximize its profit?
69)
A) maintain the current output and its allocation across segments
B) increase the output in segment A and decrease the output in segment B
C) increase the output in segments A and B
D) decrease the output in segments A and B
E) decrease the output in segment A and increase the output in segment B
Explanation: A)
B)
C)
D)
E)
70) If a competing firm is able to overcome an entry barrier of a monopolized industry, the demand
curve of the single firm already in the industry will
70)
A) shift to the left.
B) become less elastic.
C) shift to the left and become more elastic.
D) remain the same in spite of the entry of the other firm.
E) shift to the right.
Explanation: A)
B)
C)
D)
E)
71) Suppose that a single-price monopolist knows the following information:
Price Quantity TR MR Fixed Cost TC ATC MC
\$5.00 2000 \$4.00 \$2000 \$5.00 \$3.00
The total profit being earned by this firm at the current level of output is
71)
A) 0. B) -\$1000. C) -\$2000. D) \$2000. E) \$1000.
Explanation: A)
B)
C)
D)
E)
34
72) A single-price monopolist is currently producing an output level where P = \$320, MR = \$200, AVC
= \$327, and MC = \$200. In order to maximize profits, this firm should
72)
A) decrease production and increase prices.
B) There is insufficient information to make a recommendation.
C) not change its output level, because the firm is currently at its profit maximizing level.
D) shut down.
E) increase production and reduce prices.
Explanation: A)
B)
C)
D)
E)
73) Consider a monopolist that is able to distinguish between two distinct market segments, A and B,
for its product. Marginal cost is constant at \$100 for each unit produced. The firm is currently
selling its output at a single price and allocating its output across segments such that marginal
revenue in segment A is \$85 and marginal revenue in segment B is \$105. Is this firm maximizing its
profit?
73)
A) No, this firm can increase its profits by price discriminating across the two market segments.
B) No, because it is only possible to equate MR and MC when there is a single MR curve.
C) Yes, because since marginal cost is constant, the firm must set a single price.
D) Yes, because it has set a price such that MC is between the MRs of the two market segments.
Explanation: A)
B)
C)
D)
35
The diagram below shows a pharmaceutical firm’s demand curve and marginal cost and marginal revenue curves for a new heart
medication for which the firm holds a 20-year patent on its production.
FIGURE 10-5
74) Refer to Figure 10-5. Assume this pharmaceutical firm is practicing perfect price discrimination
among its buyers. At its profit-maximizing level of output, consumer surplus is represented by
74)
A) areas C+D+E+F+H.
B) There is no consumer surplus.
C) areas C+F+H.
D) areas D+E.
E) It is not possible to determine with the information provided.
Explanation: A)
B)
C)
D)
E)
75) Economic profit for a monopolistic firm will equal zero when 75)
A) price equals marginal cost.
B) marginal revenue equals marginal cost.
C) average total cost equals price.
D) marginal revenue equals price.
E) average total cost is minimized.
Explanation: A)
B)
C)
D)
E)
36
The diagram below shows a pharmaceutical firm’s demand curve and marginal cost and marginal revenue curves for a new heart
medication for which the firm holds a 20-year patent on its production.
FIGURE 10-5
76) Refer to Figure 10-5. Assume this pharmaceutical firm is practicing perfect price discrimination
among its buyers. At its profit-maximizing level of output, it will generate a deadweight loss to
society represented by
76)
A) areas I+J+K.
B) areas H+I+J+K.
C) areas H+I.
D) There is no deadweight loss generated.
E) It is not possible to determine with the information provided.
Explanation: A)
B)
C)
D)
E)
77) If a monopolist is practicing perfect price discrimination, then 77)
A) the producer surplus is zero.
B) demand must be inelastic.
C) consumer surplus is zero.
D) costs are lower than for the non-price-discriminating monopolist.
E) the monopolist is not profit maximizing.
Explanation: A)
B)
C)
D)
E)
37
Price
Quantity
Demanded
\$8 5
\$7 6
\$6 7
\$5 8
\$4 9
\$3 10
\$2 11
TABLE 10-1
78) Refer to Table 10-1. For a single-price monopolist producing and selling 9 units, the marginal
revenue earned by selling the 9th unit is
78)
A) -4. B) -2. C) 0. D) 2. E) 4.
Explanation: A)
B)
C)
D)
E)
79) If an industry’s demand conditions allow at most one firm to cover its costs while producing at its
minimum efficient scale (MES), this situation is known as
79)
A) limited competition.
B) a discriminating monopoly.
C) a natural monopoly.
D) declining marginal revenue.
E) natural economic limits.
Explanation: A)
B)
C)
D)
E)
38
80) Refer to Figure 10-4. Suppose this monopolist is practicing perfect price discrimination. How does
this differ from the situation where this firm is charging a single price for its product?
80)
A) The firm is restricting output to a level below that of the single-price monopolist, and thereby
raises the price of its product and earns higher profits.
B) The firm is producing a smaller quantity, is charging a different price for each unit sold and is
earning higher profits.
C) The firm is producing the same quantity, has successfully identified different segments of the
market, and is able to capture some of the consumer surplus.
D) The firm is producing the same quantity, but charging a different price for each unit sold and
is earning higher profits.
E) The firm is producing a higher quantity, is charging a different price for each unit sold and is
earning higher profits.
Explanation: A)
B)
C)
D)
E)
81) Suppose all of the firms in a perfectly competitive industry form a cartel and agree to restrict
output, thereby raising the price of the product. Individual Firm A will gain the most from the
existence of the cartel if
81)
A) all firms revert back to their competitive outputs.
B) no firms restrict output.
C) all firms, except Firm A, cooperate and restrict output.
D) Firm A restricts output, while the other firms do not.
E) all firms, including A, cooperate and restrict output.
Explanation: A)
B)
C)
D)
E)
82) Many clothing retailers allow you to go to their website and print a coupon that you then present
for a discounted price on your next purchase in the store. In economics we refer to this as
82)
A) hurdle pricing, a form of price discrimination.
C) sales maximization, a form of market segmentation.
D) a created entry barrier, a form of price discrimination.
E) arbitrage, a form of price discrimination.
Explanation: A)
B)
C)
D)
E)
39
83) A likely cause of a natural monopoly occurring in some industry is 83)
A) sabotage.
B) charters.
D) scale economies.
E) patents.
Explanation: A)
B)
C)
D)
E)
The diagram below shows a pharmaceutical firm’s demand curve and marginal cost and marginal revenue curves for a new heart
medication for which the firm holds a 20-year patent on its production.
FIGURE 10-5
84) Refer to Figure 10-5. Assume this pharmaceutical firm charges a single price for its drug. At its
profit-maximizing level of output it will produce
84)
A) Q1 units and charge a price of p1.
B) Q1 units and charge a price greater than its average total variable cost.
C) Q0 units and charge a price of p0.
D) Q0 units and charge the perfectly competitive price.
E) Q0 units and charge a price of p2.
Explanation: A)
B)
C)
D)
E)
40
Your food-services company has been named as the sole provider of meals at a small university. The cost and demand schedules are:
Sold per Day Price per Meal
Total
Fixed Cost
Total
Variable Cost Total Revenue
0 \$3.50 \$150 \$0 \$0
100 \$3.25 \$150 \$300 \$325
200 \$3.00 \$150 \$500 \$600
300 \$2.75 \$150 \$650 \$825
400 \$2.50 \$150 \$750 \$1000
500 \$2.25 \$150 \$830 \$1125
600 \$2.00 \$150 \$905 \$1200
700 \$1.75 \$150 \$995 \$1225
TABLE 10-2
85) Refer to Table 10-2, and suppose that the firm is a single-price monopolist. The level of output at
which profits are zero is between
85)
A) 0 and 100 meals.
B) 100 and 200 meals.
C) 200 and 300 meals.
D) 300 and 400 meals.
E) 300 and 500 meals.
Explanation: A)
B)
C)
D)
E)
86) One reason airlines charge a higher price to business travellers is that 86)
A) government sets the price policies.
B) business travellers have a relatively lower demand elasticity than other travellers.
C) business travellers have a relatively higher demand elasticity than other travellers.
D) they are thereby able to minimize costs.
E) business travellers don’t profit maximize.
Explanation: A)
B)
C)
D)
E)
41
87) Which of the following statements describes a major difference between monopoly and perfect
competition?
87)
A) Perfectly competitive firms cannot maintain positive economic profits in the long run,
whereas monopolists can.
B) Monopolistic firms tend to maximize revenue while perfectly competitive firms maximize
profit.
C) Monopolists do not consider consumer demand when choosing price and output levels.
D) Perfectly competitive firms can never earn economic profits; monopolistic firms always earn
economic profits.
E) Monopolistic firms emphasize cost minimization whereas perfectly competitive firms
emphasize profit maximization.
Explanation: A)
B)
C)
D)
E)
88) The cartelization of an industry with a homogeneous product usually means that 88)
A) the demand curve facing the industry must be linear.
B) member firms have agreed to cooperate in reducing costs.
C) member firms have agreed to reduce their joint output.
D) the demand curve facing the industry must be elastic.
E) member firms have agreed to reduce investment.
Explanation: A)
B)
C)
D)
E)
89) The demand curve facing a single-price monopolist slopes downward because 89)
A) demand is perfectly inelastic.
B) its demand curve is the market demand curve, which is generally downward sloping.
C) it sells typically to only one consumer.
D) its supply curve is upward sloping.
E) its average revenue equals its marginal revenue.
Explanation: A)
B)
C)
D)
E)
42
90) A cartel can only succeed in the long run 90)
A) if all firms are experiencing decreasing returns to scale.
B) with authorization from the government.
C) if member firms cooperate and resist their individual incentives.
D) if there is free entry of new firms.
E) if the long-run market supply curve is elastic.
Explanation: A)
B)
C)
D)
E)
The diagram below shows a pharmaceutical firm’s demand curve and marginal cost and marginal revenue curves for a new heart
medication for which the firm holds a 20-year patent on its production.
FIGURE 10-5
91) Refer to Figure 10-5. Assume this pharmaceutical firm charges a single price for its drug. At its
profit-maximizing level of output, consumer surplus is represented by
91)
A) areas C+D+E+F.
B) areas D+E.
C) areas H+I.
D) There is no consumer surplus generated.
E) It is not possible to determine with the information provided.
Explanation: A)
B)
C)
D)
E)
43
Price
Quantity
Demanded
\$8 5
\$7 6
\$6 7
\$5 8
\$4 9
\$3 10
\$2 11
TABLE 10-1
92) Refer to Table 10-1. For a single-price monopolist, the marginal revenue associated with increasing
sales from 6 to 7 units is
92)
A) -4. B) -2. C) 0. D) 2. E) 4.
Explanation: A)
B)
C)
D)
E)
93) A monopolistic firm faces a downward-sloping demand curve because 93)
A) the demand for its product is always inelastic.
B) marginal revenue is negative throughout the feasible range of output.
C) there are a large number of firms in the industry, all selling the same product.
D) the monopolistic firm can exploit economies of scale.
E) the market price is affected by the amount sold by a monopolistic firm.
Explanation: A)
B)
C)
D)
E)
44
Price
Quantity
Demanded
\$8 5
\$7 6
\$6 7
\$5 8
\$4 9
\$3 10
\$2 11
TABLE 10-1
94) Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. At what
level of output is marginal revenue equal to 0?
94)
A) between 6 and 7 units
B) between 7 and 8 units
C) between 8 and 9 units
D) between 9 and 10 units
E) between 10 and 11 units
Explanation: A)
B)
C)
D)
E)
95) If a single-price monopoly is presently producing an output at which marginal revenue is less than
marginal cost, it can increase its profits by
95)
A) reducing output and raising prices.
B) expanding output and raising price.
C) reducing output and holding prices unchanged.
D) expanding output and lowering price.
E) reducing barriers to entry.
Explanation: A)
B)
C)
D)
E)
45
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
96) Refer to Figure 10-4. If this single-price monopolist is producing at the profit-maximizing level of
output, the total revenue is represented by the area
96)
A) 0P1dQ1. B) 0P2bQ0. C) 0P0gQ5. D) 0P4aQ0. E) 0P3cQ2.
Explanation: A)
B)
C)
D)
E)
46
The diagram below shows a pharmaceutical firm’s demand curve and marginal cost and marginal revenue curves for a new heart
medication for which the firm holds a 20-year patent on its production.
FIGURE 10-5
97) Refer to Figure 10-5. Assume this pharmaceutical firm charges a single price for its drug. At its
profit-maximizing level of output, it will generate a total profit represented by
97)
A) areas A+B+C+F+G.
B) the sum of areas A through K.
C) areas D+E.
D) areas B+C+F+G+H+I.
E) It is not possible to determine with the information provided.
Explanation: A)
B)
C)
D)
E)
47
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
98) Refer to Figure 10-4. In order to maximize its profits, a perfect-price-discriminating monopolist
produces the quantity
98)
A) Q0. B) Q1. C) Q2. D) Q3. E) Q4.
Explanation: A)
B)
C)
D)
E)
48
Your food-services company has been named as the sole provider of meals at a small university. The cost and demand schedules are:
Sold per Day Price per Meal
Total
Fixed Cost
Total
Variable Cost Total Revenue
0 \$3.50 \$150 \$0 \$0
100 \$3.25 \$150 \$300 \$325
200 \$3.00 \$150 \$500 \$600
300 \$2.75 \$150 \$650 \$825
400 \$2.50 \$150 \$750 \$1000
500 \$2.25 \$150 \$830 \$1125
600 \$2.00 \$150 \$905 \$1200
700 \$1.75 \$150 \$995 \$1225
TABLE 10-2
99) Refer to Table 10-2, and suppose that the firm is a single-price monopolist. If the firm provided 700
meals per day, total daily profits would be
99)
A) \$230.
B) -\$60.
C) \$150.
D) \$80.
E) impossible to calculate given the information provided.
Explanation: A)
B)
C)
D)
E)
100) Suppose the market for some product can be divided into two segments, each with a linear demand
curve. A monopolist can set a different price (but only one price) in each segment. The
profit-maximizing price discrimination across these two market segments will lead to
100)
A) higher output with average revenue higher than the best single price.
B) higher output with average revenue lower than the best single price.
C) lower output with a higher average revenue than the best single price.
D) lower output with total revenue higher than the single best price.
E) the same output but higher average revenue than the best single price.
Explanation: A)
B)
C)
D)
E)
49
The diagram below shows a pharmaceutical firm’s demand curve and marginal cost and marginal revenue curves for a new heart
medication for which the firm holds a 20-year patent on its production.
FIGURE 10-5
101) Refer to Figure 10-5. Assume this pharmaceutical firm charges a single price for its drug. At its
profit-maximizing level of output, it will generate a deadweight loss to society represented by
101)
A) areas I+J+K.
B) areas H+I.
C) There is no deadweight loss generated.
D) areas H+I+J+K.
E) It is not possible to determine with the information provided.
Explanation: A)
B)
C)
D)
E)
50
Consider the following AR and MR curves for a single-price monopolist.
FIGURE 10-2
102) Refer to Figure 10-2. For this single-price monopolist, the profit-maximizing level of output is 102)
A) Q1.
B) Q2.
C) Q3.
D) Q4.
E) not determinable from the diagram.
Explanation: A)
B)
C)
D)
E)
51
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
103) Refer to Figure 10-4. A profit-maximizing single-price monopolist would charge the price 103)
A) P0. B) P1. C) P2. D) P3. E) P4.
Explanation: A)
B)
C)
D)
E)
104) Consider a single-price monopolist that is operating in the inelastic range of its linear demand
curve. This firm
104)
A) would be operating where its AR is negative.
B) would be operating at its profit-maximizing position.
C) would have a marginal revenue curve that is negative.
D) could raise its total revenue by lowering its price.
E) would have a marginal revenue that is negative although its total revenues would be at a
maximum.
Explanation: A)
B)
C)
D)
E)
52
105) Suppose the technology of an industry is such that the typical firm’s minimum efficient scale is 18
units per day at an average long-run cost of \$1600 per unit. If the total quantity demanded at a
price of \$1750 per unit is 16 units per month, the likely result would be
105)
A) a concentrated oligopoly.
B) price discrimination.
C) a competitive industry.
D) a natural monopoly.
E) a cartel.
Explanation: A)
B)
C)
D)
E)
106) Suppose that a single-price monopolist knows the following information:
Price Quantity TR MR Fixed Cost TC ATC MC
\$10.00 1500 \$7.00 \$6000 \$5.00 \$5.00
The monopolist could maximize profits by
106)
A) lowering price and increasing output.
B) lowering price and leaving output unchanged.
C) shutting down.
D) staying at the current price and output.
E) raising price and leaving output unchanged.
Explanation: A)
B)
C)
D)
E)
107) A single-price monopolist is currently producing an output level where price equals marginal cost,
and profits are positive. In order to maximize profits, this monopolist should
107)
A) increase production and reduce price.
B) not change his output level, because he is currently earning profits.
C) reduce price and let production adjust to the new price.
D) shut down.
E) decrease production and increase price.
Explanation: A)
B)
C)
D)
E)
53
Consider the following AR and MR curves for a single-price monopolist.
FIGURE 10-2
108) Refer to Figure 10-2. The price elasticity of demand at Q1 is 108)
A) less than 1.
B) equal to 1.
C) zero.
D) greater than 1.
E) not determinable from the diagram.
Explanation: A)
B)
C)
D)
E)
109) For a single-price monopolist, marginal revenue falls faster than price (as output rises) because 109)
A) in order to sell additional units, the price must be lowered on all units.
B) the firm has no supply curve.
C) profits are maximized when marginal cost equals marginal revenue.
D) the cost of producing extra units of output increases as production is increased.
E) none of the above — marginal revenue does not fall faster than price.
Explanation: A)
B)
C)
D)
E)
54
The diagram below shows a pharmaceutical firm’s demand curve and marginal cost and marginal revenue curves for a new heart
medication for which the firm holds a 20-year patent on its production.
FIGURE 10-5
110) Refer to Figure 10-5. Assume this pharmaceutical firm has no fixed costs and is practicing perfect
price discrimination among its buyers. At its profit-maximizing level of output, it will generate a
total profit represented by
110)
A) the area below the demand curve minus the area below the MC curve, up to Q1.
B) areas C+F+H.
C) areas B+C+F+G+H+I.
D) areas G+I.
E) It is not possible to determine with the information provided.
Explanation: A)
B)
C)
D)
E)
55
Your food-services company has been named as the sole provider of meals at a small university. The cost and demand schedules are:
Sold per Day Price per Meal
Total
Fixed Cost
Total
Variable Cost Total Revenue
0 \$3.50 \$150 \$0 \$0
100 \$3.25 \$150 \$300 \$325
200 \$3.00 \$150 \$500 \$600
300 \$2.75 \$150 \$650 \$825
400 \$2.50 \$150 \$750 \$1000
500 \$2.25 \$150 \$830 \$1125
600 \$2.00 \$150 \$905 \$1200
700 \$1.75 \$150 \$995 \$1225
TABLE 10-2
111) Refer to Table 10-2, and suppose that the firm is a single-price monopolist. At the
profit-maximizing level of output, the firm’s total profit per day will be
111)
A) \$295. B) \$150. C) \$145. D) \$100. E) \$75.
Explanation: A)
B)
C)
D)
E)
56
The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.
FIGURE 10-1
112) Refer to Figure 10-1. What is the lowest level of output at which marginal revenue becomes
negative?
112)
A) 6th unit B) 8th unit C) 7th unit D) 9th unit E) 5th unit
Explanation: A)
B)
C)
D)
E)
113) It is common for a cartel to collapse when one or more firms in the cartel 113)
A) is much larger than other cartel members.
B) exceed its output quota.
C) exit the industry.
D) produce more efficiently than other member firms.
E) increase its price above the monopoly price.
Explanation: A)
B)
C)
D)
E)
57
Suppose a monopolist faces the demand curve and cost curves shown below.
FIGURE 10-4
114) Refer to Figure 10-4. A profit-maximizing single-price monopolist would produce the quantity 114)
A) Q0. B) Q1. C) Q2. D) Q3. E) Q4.
Explanation: A)
B)
C)
D)
E)
115) Refer to Figure 10-4. Suppose this firm experiences an increase in the demand for its product. In
the short run, this profit-maximizing monopolist will
115)
A) lower price and increase output.
B) increase price and output.
C) neither raise price nor change output.
D) increase price and produce the same output.
E) increase price and reduce output.
Explanation: A)
B)
C)
D)
E)
58
116) Monopolistic firms do not have supply curves because 116)
A) monopolists face a given market price.
B) their marginal costs cannot be calculated.
C) monopolists get to choose their price-quantity combination along the demand curve.
D) their output is a fixed quantity.
E) they are not constrained by the marginal costs of production.
Explanation: A)
B)
C)
D)
E)
117) Suppose that a single-price monopolist knows the following information:
Price Quantity TR MR Fixed Cost TC ATC MC
\$9.00 1500 \$4.00 \$7000 \$7.00 \$5.00
The monopolist could maximize its profits by
117)
A) raising price and lowering output.
B) lowering price and leaving output unchanged.
C) staying at the current price and output.
D) lowering price and increasing output.
E) shutting down.
Explanation: A)
B)
C)
D)
E)
59
The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.
FIGURE 10-1
118) Refer to Figure 10-1. Suppose this single-price monopolist is initially selling 9 units at \$4 each and
then reduces the price of the product to \$3. By making this change, the firm is giving up revenue of
________ on the original number of units sold and gaining revenue of ________ on the additional
units sold. Its marginal revenue is therefore ________. (All figures are dollars)
118)
A) 3; 9; 6 B) 40; 27; -13 C) 34; 28; -6 D) 9; 3; -6 E) 30; 36; 6
Explanation: A)
B)
C)
D)
E)
119) Suppose that a single-price monopolist calculates that at its present output, marginal revenue is \$2
and marginal cost is \$1. If the price of the product is \$3, the monopolist could maximize its profits
by
119)
A) doing nothing.
B) lowering price and raising output.
C) lowering price and leaving output unchanged.
D) shutting down.
E) raising price and leaving output unchanged.
Explanation: A)
B)
C)
D)
E)
60
Consider the following AR and MR curves for a single-price monopolist.
FIGURE 10-2
120) Refer to Figure 10-2. The price elasticity of demand at Q2 is 120)
A) less than 1.
B) equal to 1.
C) greater than 1.
D) zero
E) not determinable from the diagram.
Explanation: A)
B)
C)
D)
E)
61
Testname: C10
1) A
2) A
3) B
4) E
5) E
6) C
7) B
8) B
9) A
10) C
11) A
12) E
13) E
14) B
15) E
16) A
17) C
18) D
19) B
20) B
21) D
22) E
23) B
24) B
25) A
26) D
27) C
28) E
29) A
30) C
31) D
32) B
33) D
34) A
35) C
36) D
37) E
38) A
39) C
40) C
41) C
42) E
43) B
44) C
45) A
46) E
47) A
48) D
49) A
50) B
62
Testname: C10
51) A
52) B
53) B
54) D
55) D
56) E
57) D
58) D
59) A
60) D
61) C
62) A
63) B
64) D
65) C
66) C
67) C
68) B
69) B
70) C
71) A
72) D
73) A
74) B
75) C
76) D
77) C
78) A
79) C
80) E
81) C
82) A
83) D
84) C
85) C
86) B
87) A
88) C
89) B
90) C
91) B
92) C
93) E
94) A
95) A
96) D
97) E
98) C
99) D
100) E
63
Testname: C10
101) B
102) E
103) E
104) C
105) D
106) A
107) E
108) D
109) A
110) A
111) C
112) C
113) B
114) A
115) B
116) C
117) A
118) D
119) B
120) B
64

chapter 34

Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are
identical.
FIGURE 34-4
1) Refer to Figure 34-4. Assume there is free trade in bicycles. If the world price of bicycles is \$500,
domestic consumption is ________ at a price of ________.
1)
A) 40 000; \$500
B) 50 000; \$300
C) 30 000; \$300
D) 40 000; \$400
E) 30 000; \$500
Explanation: A)
B)
C)
D)
E)
1
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
2) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of \$t per
pair. Canadian consumers will lose consumer surplus equal to the area
2)
A) A.
B) A + B + C.
C) B + C + E + F + G + H.
D) D.
E) D + E + F + G + H.
Explanation: A)
B)
C)
D)
E)
2
3) Canadian governments (provincial and federal) currently provide enormous protection (through
tariffs) to which of the following domestic industries?
3)
A) lumber
B) electronic gaming
C) steel
D) dairy
E) textile
Explanation: A)
B)
C)
D)
E)
4) The main difference between a tariff and an “equivalent” voluntary export restriction (VER) is that 4)
A) a tariff keeps the price in the importing country higher than it would otherwise be; a VER
does not.
B) a tariff allows the importing country to protect wages and other factor incomes in the affected
industry, while a VER does not.
C) a tariff allows the extra market value of the good to accrue to the supplier, but a VER allows
the extra market value to be appropriated by the government of the importing country.
D) a tariff restricts free trade between two countries and a VER does not.
E) a tariff allows the government of the importing country to appropriate the extra market value
of the imported good, but with a VER the extra market value accrues to the good’s foreign
producers.
Explanation: A)
B)
C)
D)
E)
barriers for the protection of Canada’s textile industry. You are likely to study the gains to be
realized in this industry and weigh those against
5)
A) the cost in terms of lower national income of Canada’s trading partners.
B) the cost in terms of higher prices to Canadian consumers.
C) the lower factor prices that occur in competing domestic industries.
Explanation: A)
B)
C)
D)
3
6) Consider the following statement: “Canadians on average are worse off when some manufacturing
jobs migrate from Canada to low-wage countries in Central America.” This statement is ________
because ________.
6)
A) incorrect; the permanent gains to consumers from lower prices outweigh the temporary losses
to the displaced manufacturing workers
B) incorrect; low-wage countries do not produce manufactured goods
C) correct; Canadian firms cannot compete with production in low-wage countries
D) incorrect; there are no Canadians made worse off by such an event
E) correct; the loss of manufacturing jobs leads to permanent income losses in Canada
Explanation: A)
B)
C)
D)
E)
7) When a firm sells its product abroad for less than the price at which it sells it in its domestic market,
it is often accused of
7)
A) dumping.
B) strategic selling.
C) cross-subsidization.
D) countervailing.
E) predatory pricing.
Explanation: A)
B)
C)
D)
E)
4
The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton
towels is PW. Assume that all cotton towels are identical.
FIGURE 34-3
8) Refer to Figure 34-3. If Canada imposes a tariff of \$t per cotton towel, the deadweight loss to the
Canadian economy is shown by area
8)
A) A + B + C + D.
B) A + B + C.
C) B + D.
D) C.
E) C + H.
Explanation: A)
B)
C)
D)
E)
5
9) Consider the North American Free Trade Agreement (NAFTA) between Canada, the United States
and Mexico. Some industries in Canada, however, continue to have some trade protection. An
example is
9)
A) mining.
B) auto parts.
C) computer software.
D) beef.
E) dairy products.
Explanation: A)
B)
C)
D)
E)
6
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
10) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of \$t per
pair. Canada’s jean-producing firms will gain producer surplus equal to the area
10)
A) A.
B) A + B + C.
C) A + D.
D) D.
E) D + E + F + G + H.
Explanation: A)
B)
C)
D)
E)
7
11) Consider the following statement: “With unemployment at its highest level in years, Canada needs
to protect domestic jobs by promoting a “Buy Canadian” policy.” This statement is ________
because ________.
11)
B) incorrect; it fails to recognize that imports of foreign goods also help to encourage the export
of domestic goods
C) correct; it recognizes that such a policy can sustain high levels of domestic employment
D) incorrect; it confuses the real and nominal gains from trade
Explanation: A)
B)
C)
D)
E)
12) Suppose that at the current world price bananas are imported into Canada. Suppose also that
domestic supply is perfectly inelastic and domestic demand has unit elasticity. If Canada were to
place a tariff on imported bananas, the
12)
A) revenues of the foreign exporters of bananas would rise.
B) quantity imported would be unaffected.
C) price of bananas in Canada would rise, but total domestic expenditures would fall.
D) quantity imported would rise.
E) price of bananas in Canada would rise, but total domestic expenditures would be unaffected.
Explanation: A)
B)
C)
D)
E)
13) Suppose Canada imposes a 20% tariff on imported textiles. Which of the following will occur?
1) an increase in producer surplus for Canadian textile producers
2) a reduction in the quantity of textiles imported
3) a reduction in the consumption of textiles in Canada
13)
A) 2 only B) 2 and 3 C) 1 only D) 3 only E) 1, 2, and 3
Explanation: A)
B)
C)
D)
E)
8
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
14) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of \$t per
pair. The deadweight loss to the Canadian economy is represented by the area
14)
A) D + E + F + G + H.
B) A + B + C.
C) E + H.
D) E + F + G + H.
E) B + C.
Explanation: A)
B)
C)
D)
E)
9
15) Consider the following statement: “Without a doubt, free trade improves the lives of every
Canadian citizen.” This statement is ________ because ________.
15)
A) correct; there are no net costs associated with the movement to free trade
B) correct; it is consistent with the idea of comparative advantage
C) incorrect; we do not know much about the benefits of free trade
E) incorrect; it fails to recognize that the movement to free trade involves both winners and
losers
Explanation: A)
B)
C)
D)
E)
16) Any policy designed to benefit domestic industries at the expense of foreign export industries is
called
16)
A) monopolization.
B) cartelization.
C) protection.
D) commercialization.
E) predatory practice.
Explanation: A)
B)
C)
D)
E)
17) Consider trade between country A and country B. If country A has wages that are substantially less
than those in country B,
17)
A) country A will have an absolute advantage over country B.
B) country B will benefit by placing tariffs on imports from country A.
C) country A will not have to subsidize its export industries.
D) the pattern of comparative advantage will depend also on the relative productivities of labour
in the two countries.
E) country B will import from A but will not be able to export to country A.
Explanation: A)
B)
C)
D)
E)
10
18) It is not possible for one country to sell all products more cheaply than other countries for any
length of time because the
18)
A) depreciation of the importing countries’ currencies ensures that trade will flow in both
directions.
B) exporting country will find its cost of production decreasing relative to the importing country.
C) depreciation of the exporting country’s currency will lead to trade in both directions.
D) importing countries will react by constructing severe trade barriers.
E) the principle of absolute advantage would then be violated.
Explanation: A)
B)
C)
D)
E)
11
The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are
identical.
FIGURE 34-4
19) Refer to Figure 34-4. Assume there is free trade in bicycles. At a world price of \$300, Canada’s
________ will be ________ bicycles per year.
19)
A) exports; 50 000
B) exports; 30 000
C) exports; 20 000
D) imports; 30 000
E) imports; 20 000
Explanation: A)
B)
C)
D)
E)
12
20) If all countries try to expand their exports and restrict their imports through the use of export
subsidies and import tariffs, the net effect will probably be
20)
A) a fall in the volume of trade and an increase in the standard of living in each country.
B) no change in the volume of trade but an increase in the overall unemployment rates.
C) no change in the volume of trade but less unemployment.
D) a fall in the volume of trade and a decline in the average living standards in each country.
E) an increase in the volume of trade but little change in unemployment levels.
Explanation: A)
B)
C)
D)
E)
13
The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are
identical.
FIGURE 34-4
21) Refer to Figure 34-4. Suppose the world price of bicycles is \$200 and Canada has in place a 50%
tariff on this good. The deadweight loss to the Canadian economy resulting from this tariff is
________ per year.
21)
A) \$1.0 million
B) \$2.0 million
C) \$0.5 million
D) \$0
E) \$1.5 million
Explanation: A)
B)
C)
D)
E)
14
The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all
cheddar cheese is identical.
United Kingdom 9.00 ________
United States 8.00 ________
TABLE 34-1
22) Refer to Table 34-1. Suppose Canada and the United Kingdom negotiate a free-trade agreement in
cheese. But Canada has a 40% tariff on cheese imported from other countries. From which country
22)
A) from Canada and United States
B) all from the United States
C) from United Kingdom and United States
E) all from United Kingdom
Explanation: A)
B)
C)
D)
E)
23) The effect of the imposition of a new tariff is to ________ domestic production of the commodity
and ________ the domestic consumption of the commodity.
23)
A) increase; increase
B) decrease; decrease
C) decrease; increase
D) increase; decrease
E) leave unaffected; decrease
Explanation: A)
B)
C)
D)
E)
15
The diagram below shows the demand and supply curves for refrigerators in Canada.
FIGURE 34-1
24) Refer to Figure 34-1, and assume the world price is P0. The Canadian government now imposes an
import quota of the amount Q2Q4. The result would be that the price in Canada would:
24)
A) rise to P2 and consumption would decrease to Q5.
B) stay at P0 and consumption would rise to Q3.
C) rise to P1 and consumption would decrease to Q4.
D) stay at P0 and consumption would stay at Q5.
E) rise to P2 and consumption would decrease to Q4.
Explanation: A)
B)
C)
D)
E)
16
The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton
towels is PW. Assume that all cotton towels are identical.
FIGURE 34-3
25) Refer to Figure 34-3. If Canada imposes a tariff of \$t per cotton towel, the Canadian government’s
tariff revenues will be equal to the area
25)
A) A + B + C + D.
B) C.
C) C + H.
D) A + B + C.
E) B + C + D.
Explanation: A)
B)
C)
D)
E)
17
26) Which of the following actions (all of which affect international trade) would be taken by a private
firm as opposed to a national government?
26)
A) quota
B) countervailing duty
C) tariff
D) dumping
E) import duty
Explanation: A)
B)
C)
D)
E)
27) Many of the world’s industrialized countries initially developed their industries with heavy tariff
protection. In Canada’s case, this was the basis for
27)
A) the Charlottetown Accord.
B) the NAFTA.
C) reciprocity.
D) the National Policy of 1876.
E) the National Energy Program of the 1980s.
Explanation: A)
B)
C)
D)
E)
28) Trade-remedy policies commonly used to achieve a “level playing field” are 28)
A) system-wide subsidies to domestic consumers.
B) voluntary export restraints (VER).
C) countervailing duties.
D) quotas.
E) export taxes.
Explanation: A)
B)
C)
D)
E)
18
29) The North American Free Trade Agreement (NAFTA) is guided by the principle of 29)
A) most-favoured-nation status.
B) countervailing duties.
C) national treatment.
D) protectionism.
Explanation: A)
B)
C)
D)
E)
30) Continued tariff protection for industries that have already attained all potential economies of scale
and possibilities for learning by doing is likely to
30)
A) increase employment in the protected industries.
B) reduce average real income for the country’s residents.
C) decrease prices to consumers of the products produced in the protected industries.
D) redistribute income away from the factors used in the protected industries.
E) both A and B are correct.
Explanation: A)
B)
C)
D)
E)
19
The diagram below shows the demand and supply curves for refrigerators in Canada.
FIGURE 34-1
31) Refer to Figure 34-1. The free-market equilibrium price of refrigerators in Canada is P0, implying
that P0 is the
31)
A) tariff-protected price.
B) cartel-induced price.
C) quota-induced price.
D) world price.
Explanation: A)
B)
C)
D)
E)
20
The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton
towels is PW. Assume that all cotton towels are identical.
FIGURE 34-3
32) Refer to Figure 34-3. If Canada has free trade in cotton towels, foreign producers’ revenues from
their Canadian sales will be equal to the amount
32)
A) E + F.
B) E + F + G + H + I.
C) G + H + I.
D) A + B + E + F + G.
E) E + F + G + H + I + J.
Explanation: A)
B)
C)
D)
E)
21
The diagram below shows the demand and supply curves for refrigerators in Canada.
FIGURE 34-1
33) Refer to Figure 34-1. At the price P0, the quantity of refrigerators imported into the Canadian
market is
33)
A) Q2Q4. B) Q3Q5. C) Q2Q5. D) Q1Q5. E) Q2Q3.
Explanation: A)
B)
C)
D)
E)
22
34) Many people argue that the imposition of tariffs in industry X will increase factor incomes in that
industry and therefore be good for the country as a whole. The counter-argument is that
34)
A) the increase in factor incomes would increase unemployment.
B) the increase in factor incomes in industry X would reduce profits to business owners by an
equal amount.
C) the increase in industry X factor incomes would be more than offset by reductions in real
incomes to all other domestic residents.
D) factor incomes would first rise and then decrease in industry X.
E) factor incomes overall would increase, but wages in industry X would fall, which would hurt
workers in that industry.
Explanation: A)
B)
C)
D)
E)
23
The diagram below shows the demand and supply curves for refrigerators in Canada.
FIGURE 34-1
35) Refer to Figure 34-1. If we compare the effect of an import tariff with the effect of an import quota,
both of which cause the Canadian price to increase by the same amount, the major difference
between the two policies is:
35)
A) the tariff directly affects the price consumers pay whereas the quota has neither direct nor
indirect price effects.
B) the tariff does not directly affect the price consumers pay whereas the quota does.
C) the tariff raises revenue for the government whereas the quota benefits foreign producers.
D) the quota does not directly reduce the quantity whereas the tariff does.
E) the tariff raises revenue for the protected producers whereas the quota benefits the
government.
Explanation: A)
B)
C)
D)
E)
24
36) According to the principle of “national treatment” in the North American Free Trade Agreement
(NAFTA), member countries
36)
A) must submit any new laws being considered to a cross-border judicial panel before the laws
are enacted.
B) have complete autonomy over their own laws and the way in which they are applied to any
firm, domestic or foreign, operating on their soil.
C) can establish specific subsidies to favour their own national firms over international firms, as
long as it applies only to domestic operations.
D) can establish new laws as they wish, as long as these laws apply equally to domestic and
foreign-owned firms.
E) cannot establish new laws which harm the domestic environment.
Explanation: A)
B)
C)
D)
E)
37) An agreement among a group of countries that allows for tariff-free trade among the members but
leaves each member free to levy its own tariffs on imports from other countries is called a
37)
A) customs union.
B) confederation.
C) reciprocity association.
D) common market.
Explanation: A)
B)
C)
D)
E)
38) Suppose Canada imposed more stringent quality standards on pharmaceutical products being
imported from Mexico than were imposed on firms producing the same products in Canada. This
action would be
38)
A) a violation of NAFTA’s principle of national treatment.
B) a violation of Canadian Competition Bureau rules.
C) an example of a countervailing duty.
D) an example of an unfair subsidy to domestic firms.
E) a breach of WTO trade guidelines.
Explanation: A)
B)
C)
D)
E)
25
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
39) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of \$t per
pair. Canadian jean producers’ revenues will increase by the area equal to
39)
A) A + B + F + J.
B) F + G.
C) D + E + I.
D) F + G + H.
E) E + F + G + H.
Explanation: A)
B)
C)
D)
E)
40) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of \$t per
pair. Canada’s production will then be at the quantity
40)
A) Q1 B) Q2 C) Q3 D) Q4 E) Q5
Explanation: A)
B)
C)
D)
E)
26
41) Assume Canada is trading with a country that has lower costs of production for some good and can
therefore sell that good at a lower price. If Canada imposes a tariff large enough to equalize the
foreign country’s price with ours, then
41)
A) this tariff will eliminate exploitation of Canadian markets.
B) the gains from international specialization would be reduced.
D) a “level playing field” will be created.
E) all Canadians would realize an increase in their standard of living.
Explanation: A)
B)
C)
D)
E)
42) If a tariff is imposed by a country that is large enough to have market power in global markets, the
domestic consumer will face an autarkic price ________ than the world price for the product, and
this world price will be ________ by the tariff.
42)
A) higher; increased
B) lower; unaffected
C) higher; reduced
D) lower; reduced
E) lower; increased
Explanation: A)
B)
C)
D)
E)
43) The effect of imposing a tariff on a specific imported good is to ________ the domestic price of the
good and ________ the domestic production of the good.
43)
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase
E) decrease; to leave unaffected
Explanation: A)
B)
C)
D)
E)
27
imports from India were replaced with imports from China. This would be an example of
44)
E) dumping.
Explanation: A)
B)
C)
D)
E)
45) Consider the following statement: “Canada is unambiguously better off if it is exporting more, in
dollar value, to the rest of the world than it is importing.” This statement is ________ because
________.
45)
A) correct; exports are good and imports are bad
C) incorrect; it fails to recognize that the gains from trade come from the volume rather than the
D) incorrect; it does not recognize the operation of the foreign-exchange market
E) correct; it is based on the mercantilist doctrine
Explanation: A)
B)
C)
D)
E)
28
The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton
towels is PW. Assume that all cotton towels are identical.
FIGURE 34-3
46) Refer to Figure 34-3. If the Canadian government imposes a quota on imported cotton towels of the
amount (Q3 – Q2), then foreign producers’ revenues from their sales in Canada will be equal to the
area
46)
A) C + H.
B) G + H + I.
C) B + C + D + G + H + I.
D) H.
E) B + C + D.
Explanation: A)
B)
C)
D)
E)
29
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
47) Refer to Figure 34-2. If Canada were to engage in no international trade in denim jeans, then the
quantity consumed and produced in Canada would be
47)
A) Q1 B) Q2 C) Q3 D) Q4 E) Q5
Explanation: A)
B)
C)
D)
E)
48) Continued tariff protection for industries that have already attained all the possible economies of
scale will likely
48)
A) maintain high prices to consumers of the products produced in the protected industries.
B) result in lower domestic prices for the products they produce.
C) reduce employment in the protected industries.
D) redistribute income away from the factors used in the protected industries.
E) reduce the stream of tariff revenue to the government.
Explanation: A)
B)
C)
D)
E)
30
The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton
towels is PW. Assume that all cotton towels are identical.
FIGURE 34-3
49) Refer to Figure 34-3. If the Canadian government imposes a quota on imported cotton towels of the
amount (Q3 – Q2), then the deadweight loss to the Canadian economy is shown by the area
49)
A) B +D. B) C + H. C) H. D) G + H + I. E) B + C + D.
Explanation: A)
B)
C)
D)
E)
31
The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are
identical.
FIGURE 34-4
50) Refer to Figure 34-4. Assume there is free trade in bicycles. If the world price of bicycles is \$500,
Canada’s ________ will be ________ bicycles per year.
50)
A) imports; 20 000
B) exports; 20 000
C) imports; 30 000
D) exports; 50 000
E) exports; 30 000
Explanation: A)
B)
C)
D)
E)
32
51) An agreement among a group of countries to eliminate trade barriers among themselves, to present
a common trading front to the rest of the world in terms of common barriers to trade, and to permit
free movement of factors of production among member countries is called a
51)
A) common market.
B) reciprocity association.
C) customs union.
D) confederation.
Explanation: A)
B)
C)
D)
E)
52) Suppose Canada eliminates a 15% tariff on foreign-made leather goods. There will be a ________
in the Canadian price of leather goods, ________ profits for domestic leather-goods producers, and
________ in the deadweight loss associated with the tariff.
52)
A) rise; increased; an increase
B) fall; decreased; an increase
C) fall; decreased; a decrease
D) rise; increased; a decrease
E) fall; increased; a decrease
Explanation: A)
B)
C)
D)
E)
53) A country can impose a tariff to improve its own terms of trade if it 53)
A) constitutes a large fraction of the world demand for some commodity that it imports.
B) has a significant trade surplus.
C) has a high level of industrial diversification.
D) produces and exports a large fraction of the world’s supply of some commodity.
E) imports mostly primary products.
Explanation: A)
B)
C)
D)
E)
33
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
54) Refer to Figure 34-2. In the presence of free international trade, Canada’s production will be at the
quantity:
54)
A) Q1 B) Q2 C) Q3 D) Q4 E) Q5
Explanation: A)
B)
C)
D)
E)
55) Countervailing duties are a method of trade restriction designed to offset 55)
A) a trading partner’s countervailing duties.
B) dumping.
C) subsidies by foreign governments.
D) quotas.
E) foreign tariffs.
Explanation: A)
B)
C)
D)
E)
34
56) Suppose that a Canadian brewery sells beer in both Canadian and American markets and that all
prices are in Canadian dollars. The Canadian domestic price is \$17.00 per case while in the
American market it sells the same case for \$13.00. The average total cost of production is \$11.50.
This brewery could be accused of
56)
A) dumping.
B) exploiting the Canadian beer drinkers.
D) exchange-rate manipulation.
E) trying to reduce the American domestic price of beer.
Explanation: A)
B)
C)
D)
E)
57) Canada is a net importer of durable consumer goods (washing machines, refrigerators, etc.). If
Canada, a small country in global markets, imposes a 15% tariff on these goods, it will cause
57)
A) a decrease in the price consumers pay for these goods in Canada.
B) a reduction in the consumption of these goods in Canada.
C) a reduction in tariff revenue collected by the Canadian government.
D) an increase in the quantity imported of these goods.
E) an upward shift in the demand curve for these goods.
Explanation: A)
B)
C)
D)
E)
58) When a country chooses to protect domestic industries from foreign competition, it will incur a cost
in the form of
58)
A) higher unemployment.
B) the loss of jobs in the protected industries.
C) the loss of those protected industries.
D) the loss of revenue from tariffs.
E) lower material living standards.
Explanation: A)
B)
C)
D)
E)
35
59) Canada is a net importer of durable consumer goods (washing machines, refrigerators, etc.). If
Canada initially has no tariffs and it then imposes a 10% tariff on these goods, we would expect to
observe
59)
A) a reduction in the production of the commodity in Canada.
B) an upward shift in the commodity’s demand curve.
C) a downward shift in the commodity’s demand curve.
D) an upward shift in the commodity’s supply curve.
E) an increase in the tariff revenue collected by the Canadian government.
Explanation: A)
B)
C)
D)
E)
60) Economists would tend to accept which of the following arguments in favour of tariffs? 60)
A) Tariffs will stimulate the domestic economy.
B) Tariffs are needed to avoid exporting jobs.
C) Temporary tariff protection in some situations may help to generate an eventual comparative
D) Tariffs are needed to limit imports and reduce the capital flow from the country.
E) Tariffs help to reduce inflation by reducing the price of domestic products.
Explanation: A)
B)
C)
D)
E)
61) Does free trade improve the living standards of all residents of a country? 61)
A) Yes, because inefficient import-competing industries are replaced with efficient export
industries.
B) Yes, definitely, because the gains from trade outweigh the losses in the import-competing
industries.
C) Probably not – in principle, the net gains from trade could be divided such that every
individual is better off, but in practice, some individuals are likely to be worse off.
D) No, because the losses in the import-competing industries outweigh the gains from trade in
the new export industries.
E) No, because the benefits from free trade are only theoretical.
Explanation: A)
B)
C)
D)
E)
36
62) The effect of a tariff on a specific imported good on (domestic) consumer and producer surplus can
be summarized as follows:
62)
A) consumer surplus and producer surplus are both decreased.
B) consumer surplus is increased and producer surplus is decreased.
C) consumer surplus is decreased and producer surplus is increased.
D) there is no effect on either consumer or producer surplus.
E) consumer surplus and producer surplus are both increased.
Explanation: A)
B)
C)
D)
E)
63) For most products, Canada is a small economy with no market power in the global market. If
Canada imposed a tariff on imported goods from a low-wage foreign country, this would
63)
B) reduce the price of the imported good in Canada.
C) increase national income in the low-wage country.
D) equalize the costs of production between the two countries.
E) increase the income of the foreign producer.
Explanation: A)
B)
C)
D)
E)
37
The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all
cheddar cheese is identical.
United Kingdom 9.00 ________
United States 8.00 ________
TABLE 34-1
64) Refer to Table 34-1. If Canada has a 40% tariff in place on the import of cheddar cheese, the price
per kilogram of cheese from Canada, United Kingdom and United States respectively, is
64)
A) \$14, \$12.60 and \$11.20.
B) \$10, \$12.60 and \$11.20.
C) \$10, \$10 and \$10.
D) \$14, \$9.00 and \$8.00.
E) \$10, \$9.00 and \$8.00.
Explanation: A)
B)
C)
D)
E)
65) A common argument for the use of tariffs when the objective is to maximize a country’s national
income would be to
65)
A) increase the prices of domestic exports.
B) improve the country’s terms of trade.
C) prevent learning-by-doing by potential trade partners.
D) enjoy the advantages of diversification.
E) subject infant industries to the discipline of the market.
Explanation: A)
B)
C)
D)
E)
38
66) An example of the “infant industry” argument for trade protection is that 66)
A) in the presence of unexploited scale economies, tariff protection may permit a country to
develop future comparative advantage in certain products.
B) tariffs should be implemented in order to improve the terms of trade and thereby maximize
C) “strategic” trade policy is helpful when other countries are also being strategic.
D) tariffs should not be imposed on countries that have democratic governments.
E) imports of certain products should be limited in the interests of national defence.
Explanation: A)
B)
C)
D)
E)
67) If wages in Mexico are lower than those in Canada, 67)
C) Canadian living standards can be raised by imposing tariffs on imports from Mexico.
E) Canadian consumers can benefit by purchasing some low-cost goods from Mexico.
Explanation: A)
B)
C)
D)
E)
68) An agreement among a group of countries to eliminate trade barriers among themselves, to present
a common trading front to the rest of the world in terms of common tariffs, but which does not
permit free movement of factors of production among member countries, is called a
68)
A) common market.
B) reciprocity association.
C) confederation.
D) customs union.
Explanation: A)
B)
C)
D)
E)
39
The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all
cheddar cheese is identical.
United Kingdom 9.00 ________
United States 8.00 ________
TABLE 34-1
69) Refer to Table 34-1. Assuming that a 40% tariff is in place and that Canadians buy only the
69)
A) from United Kingdom and United States
C) all from the United States
D) all from United Kingdom
E) from Canada and United States
Explanation: A)
B)
C)
D)
E)
70) Suppose the Canadian government began subsidizing wheat farmers by paying them \$25 per
bushel of wheat produced. According to existing international trade agreements, other countries
would be allowed to react to this subsidy by imposing a
70)
A) countervailing duty.
B) VER.
D) non-tariff barrier.
E) quota.
Explanation: A)
B)
C)
D)
E)
40
The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton
towels is PW. Assume that all cotton towels are identical.
FIGURE 34-3
71) Refer to Figure 34-3. If the Canadian government imposes a quota on imported cotton towels of the
amount (Q3 – Q2 ), then domestic towel producers’ revenues will be equal to the area
71)
A) A + B + C + D.
B) A + B + C + E + F + G + H.
C) E + F + G + H.
D) E + F + G.
E) A + B + E + F + G.
Explanation: A)
B)
C)
D)
E)
72) What is a tariff? 72)
A) a tax imposed on exported goods
B) a tax imposed on domestically produced manufactured goods
C) a quota imposed on imported goods
D) an encouragement to worldwide specialization and division of labour
E) a tax imposed on imported goods
Explanation: A)
B)
C)
D)
E)
41
73) Suppose Canada has a 20% tariff on the import of carpets, and Canada currently imports this
product from India at a with-tariff price of \$22. The with-tariff price of identical carpets from the
United States is \$24. Now suppose a free-trade agreement with the U.S. eliminates the tariff and so
the no-tariff price from the U.S. is \$20. Canada now purchases carpets from the U.S. This is an
example of
73)
A) specialization.
C) dumping.
E) a countervailing duty.
Explanation: A)
B)
C)
D)
E)
42
The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are
identical.
FIGURE 34-4
74) Refer to Figure 34-4. Suppose the world price of bicycles is \$200 and Canada has in place a 50%
import tariff on this good. The Canadian government will collect tariff revenue in the amount of
________ per year.
74)
A) \$1.0 million
B) \$1.5 million
C) \$2.5 million
D) \$2.0 million
E) \$0.5 million
Explanation: A)
B)
C)
D)
E)
43
75) A 10% tariff on all wines imported into Canada will 75)
A) protect the cheaper wines at the expense of the expensive wines.
B) protect the expensive wines more than the cheaper wines.
C) create the incentive to produce better quality wines.
D) equally protect the production of all Canadian wines.
E) provide no protection at all to the Canadian wine industry.
Explanation: A)
B)
C)
D)
E)
44
The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are
identical.
FIGURE 34-4
76) Refer to Figure 34-4. Assume there is free trade in bicycles. If the world price of bicycles is \$200,
domestic consumption is ________ and domestic production is ________.
76)
A) 50 000; 30 000
B) 30 000; 50 000
C) 60 000; 20 000
D) 20 000; 60 000
E) 40 000; 40 000
Explanation: A)
B)
C)
D)
E)
45
77) For most products, Canada is a small economy with no market power in the global market. If
Canada imposed a tariff on imported goods from a low-wage foreign country, this would
77)
A) increase wages in the low-wage foreign country.
B) increase the Canadian price of the imported good.
D) reduce the price of the imported good in Canada.
E) equalize the costs of production between the two countries.
Explanation: A)
B)
C)
D)
E)
78) The main objective of protectionist trade policies is to 78)
A) create a level playing field.
B) shield local producers from foreign competition.
C) raise average real wages in the economy.
D) raise government revenues through tariffs.
E) maximize world production.
Explanation: A)
B)
C)
D)
E)
79) A business which contends that it needs temporary protection so that it can expand significantly
and thereby reduce its costs so as to enable it to compete with foreign producers is using an
argument known as the
79)
A) infant-industry case for tariffs.
B) social advantages case for tariffs.
C) monopolistic competition case for tariffs.
D) strategic case for tariffs.
E) price fluctuations case for tariffs.
Explanation: A)
B)
C)
D)
E)
46
80) In international trade, “dumping” is defined as charging 80)
A) export prices below average cost for any period of time.
B) a lower price in foreign markets than in the domestic market.
C) a domestic retail price above the marginal cost faced by a firm importing the product at the
wholesale level.
D) export prices below marginal cost for any period of time.
E) export prices below average cost for a short period of time.
Explanation: A)
B)
C)
D)
E)
81) The concept of “trade creation” refers to 81)
D) increased exports and reduced imports as a result of a high-tariff policy.
E) the opening up of new trading routes.
Explanation: A)
B)
C)
D)
E)
47
The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are
identical.
FIGURE 34-4
82) Refer to Figure 34-4. Suppose there is free trade in bicycles and the world price is \$200. If Canada
then imposes a 50% import tariff on bicycles, domestic consumption will
82)
A) decrease by 10 000.
B) increase by 30 000.
C) decrease by 20 000.
D) increase by 20 000.
E) increase by 10 000.
Explanation: A)
B)
C)
D)
E)
48
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
83) Refer to Figure 34-2. In the presence of free international trade, Canada’s consumption of denim
jeans will be the quantity
83)
A) Q1 B) Q2 C) Q3 D) Q4 E) Q5
Explanation: A)
B)
C)
D)
E)
49
The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are
identical.
FIGURE 34-4
84) Refer to Figure 34-4. Suppose the world price of bicycles is \$500 and Canada has in place a 50%
tariff on this good. The deadweight loss to the Canadian economy resulting from this tariff is
________ per year.
84)
A) \$0.5 million
B) \$1.0 million
C) \$1.5 million
D) \$2.0 million
E) \$0
Explanation: A)
B)
C)
D)
E)
50
85) Suppose Canada has a 12% tariff on foreign-made cotton clothing. If the tariff is raised to 20%,
there will be a ________ in the Canadian price of cotton clothing, ________ profits for domestic
producers, and ________ in deadweight loss.
85)
A) fall; reduced; a decrease
B) rise; increased; an increase
C) fall; increased; a decrease
D) rise; reduced; an increase
E) rise; increased; a decrease
Explanation: A)
B)
C)
D)
E)
86) Suppose five countries in Central America agree that products are to be freely traded across their
borders, they will share a common set of import duties, and that the flow of people will continue to
be restricted. This is an example of a
86)
A) customs union.
C) common market.
E) political union.
Explanation: A)
B)
C)
D)
E)
51
The diagram below shows the demand and supply curves for refrigerators in Canada.
FIGURE 34-1
87) Refer to Figure 34-1. At the price P0, the quantity of refrigerators supplied to the Canadian market
87)
A) Q1. B) Q2. C) Q3. D) Q4. E) Q5.
Explanation: A)
B)
C)
D)
E)
88) Mercosur is 88)
A) the location of the last GATT round of negotiations.
B) the first president of the World Trade Organization (WTO).
C) a customs union between Argentina, Brazil, Paraguay, and Uruguay.
D) the location of the WTO headquarters.
E) a new trade agreement between the countries of Mexico, Canada, and Cuba.
Explanation: A)
B)
C)
D)
E)
52
89) If Canada reduces the tariff imposed on a commodity from 10% to 5%, we would expect to observe 89)
A) a downward shift in the commodity’s demand curve.
B) an increase in quantity produced of the commodity in Canada.
C) a reduction in the quantity consumed of the commodity in Canada.
D) a reduction in the quantity produced of the commodity in Canada.
E) an upward shift in the commodity’s demand curve.
Explanation: A)
B)
C)
D)
E)
90) The concept of “trade diversion” refers to 90)
A) trade that is shifted between members of a customs union.
B) the replacement of a low-cost foreign supplier with a high-cost one based on membership in
C) the main benefit of creating a free-trade area.
D) an increase in economic efficiency that comes with a newly established trading relationship.
E) something that is predicted by theory, but has never been observed in practice.
Explanation: A)
B)
C)
D)
E)
91) Canada is a net importer of durable consumer goods (washing machines, refrigerators, etc.). If
Canada, a small country in global markets, imposes a 10% tariff on these goods, we would expect to
observe
91)
A) a reduction in the production of these goods in Canada.
B) an increase in the quantity imported of these goods.
C) an upward shift in the demand curve for these goods.
D) a decrease in the price paid by Canadian consumers.
E) an increase in the price paid by Canadian consumers.
Explanation: A)
B)
C)
D)
E)
53
92) The final round of GATT talks, called the Uruguay Round, established GATT’s successor, known as
the
92)
A) Second General Agreement on Trade and Tariffs (GATT 2).
C) European Union (EU).
D) North American Free Trade Agreement (NAFTA).
Explanation: A)
B)
C)
D)
E)
93) If a tariff is imposed in a country that is too small to have global market power, the domestic
consumer will face a ________ price, and the price paid to foreign producers will ________.
93)
A) higher; fall
B) lower; not change
C) lower; rise
D) higher; rise
E) higher; not change
Explanation: A)
B)
C)
D)
E)
54
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
94) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of \$t per
pair. The Canadian government’s tariff revenues will be equal to
94)
A) F + G.
B) F + G + H.
C) E + F.
D) B + C.
E) E + F + G + H.
Explanation: A)
B)
C)
D)
E)
55
95) If a country is exporting more goods and services than it is importing, we should consider this to be
“beneficial” only in the sense that it
95)
A) represents an accumulation of assets for the domestic economy that can be used in the future
to finance consumption.
B) means that an economy is earning more than it is spending.
C) increases the standard of living through a larger national income.
D) is a necessary condition to enable a country to take full advantage of scale economies.
E) allows a country to add to its foreign-exchange reserves above the level needed to cope with
fluctuations in private payments.
Explanation: A)
B)
C)
D)
E)
96) A \$1 per-litre tariff on all wine imported into Canada will 96)
A) provide no protection at all to the Canadian wine industry.
B) protect the production of expensive wines more than cheaper wines.
C) protect the production of cheaper wines more than expensive wines.
D) create an incentive to produce better quality wines.
E) equally protect the production of all Canadian wines.
Explanation: A)
B)
C)
D)
E)
97) Which of the following methods of import protection leads to the largest deadweight loss for the
importing country?
97)
A) quota
B) countervailing duty
C) tariff
D) import duty
E) dumping
Explanation: A)
B)
C)
D)
E)
56
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
98) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of \$t per
pair. Canada’s consumption will then be at the quantity:
98)
A) Q1 B) Q2 C) Q3 D) Q4 E) Q5
Explanation: A)
B)
C)
D)
E)
99) Suppose Canada implements new border procedures that require goods arriving from Country X
to be held for 60 days in a bonded warehouse. This new policy is ________ and is likely to
________.
99)
A) a non-tariff barrier; reduce imports from Country X
B) an example of an anti-dumping measure; reduce exports from Country X
C) a non-tariff barrier; drive down the price of imports from Country X
D) a voluntary export restriction; reduce imports from Country X
E) an example of trade diversion; increase imports from Country X
Explanation: A)
B)
C)
D)
E)
57
softwood lumber industry in Canada. Who loses and who gains from the situation in which
Canadian governments impose taxes on Canadian exports of softwood lumber to the United States?
100)
A) Canadian users of lumber lose and Canadian producers of lumber gain.
B) Canadian users of lumber lose and U.S. producers of lumber lose.
C) U.S. users of lumber gain and U.S. producers of lumber gain.
D) U.S. users of lumber lose and U.S. producers of lumber gain.
E) U.S. producers of lumber lose and U.S. users of lumber gain.
Explanation: A)
B)
C)
D)
E)
101) A country that implements a voluntary export restriction (VER) 101)
A) sets a countervailing duty.
B) sets a tariff to raise the price of an imported commodity.
C) agrees to limit the amount of a commodity it sells to another country.
D) employs the “escape clause.”
E) sets a maximum on the quantity of some commodity that it may import each year.
Explanation: A)
B)
C)
D)
E)
58
The diagram below shows the demand and supply curves for refrigerators in Canada.
FIGURE 34-1
102) Refer to Figure 34-1. Suppose that P0 is the world price and Canada imports refrigerators. Suppose
the Canadian government then responds to political pressure from domestic refrigerator
manufacturers and imposes a tariff high enough that all imports are eliminated. As a result of this
tariff, the price and quantity of refrigerators in Canada will be, respectively,
102)
A) P0 and Q1.
B) P0 and Q5.
C) P1 and Q2.
D) P1 and Q3.
E) P2 and Q3.
Explanation: A)
B)
C)
D)
E)
59
103) Refer to Figure 34-1. Suppose that P0 is the world price. If Canada imposes a tariff causing the
price of refrigerators in Canada to rise from P0 to P1, the Canadian government will collect tariff
revenues equal to
103)
A) the new price, P1, multiplied by the total quantity of refrigerators purchased in Canada, Q4.
B) (P1 – P0) multiplied by the tariff-induced quantity of refrigerators imported into Canada,
Q2Q4.
C) (P1 – P0) multiplied by the tariff-induced quantity of refrigerators imported into Canada,
Q1Q5.
D) the new price, P1, multiplied by the total quantity of refrigerators purchased in Canada, Q2.
E) the original price P0, multiplied by the original quantity of refrigerators imported into
Explanation: A)
B)
C)
D)
E)
agricultural industries, such as dairy and poultry. If the United States is successful in having
Canada’s “tariff equivalents” removed, who will lose and who will gain?
104)
C) American consumers lose and American poultry and dairy producers gain.
E) American poultry and dairy producers lose and American consumers gain.
Explanation: A)
B)
C)
D)
E)
105) Continued tariff protection for industries that have already attained all potential economies of scale
and opportunities for learning by doing is likely to
105)
A) redistribute income in favour of the factors used in the protected industries.
B) decrease prices to consumers of the products produced in the protected industries.
C) reduce employment in the protected industries.
D) reduce the stream of tariff revenue to the government.
E) result in increased demand for imports.
Explanation: A)
B)
C)
D)
E)
60
The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton
towels is PW. Assume that all cotton towels are identical.
FIGURE 34-3
106) Refer to Figure 34-3. If Canada imposes a tariff of \$t per cotton towel, Canadian towel producers’
revenues will be equal to the amount
106)
A) A + B + E + F + G.
B) A + B + C + D.
C) E + F + G.
D) A + B + C + E + F + G + H.
E) E + F + G + H.
Explanation: A)
B)
C)
D)
E)
107) In the past few decades, an example of the infant-industry argument at work has been the 107)
B) Japanese agriculture industry.
C) U.S. automobile industry.
D) European commercial aircraft industry.
Explanation: A)
B)
C)
D)
E)
61
108) Suppose that lumber, a homogeneous product, is exported from Canada at the current world price.
If Canada imposes a 25% tariff on imported lumber, we would expect to observe
108)
A) a decrease in domestic consumption and an increase in domestic production.
B) an increase in revenues for foreign lumber producers.
C) a decrease in tariff revenues for the Canadian government.
D) no change in the domestic consumption or production of lumber.
E) an increase in tariff revenues for the Canadian government.
Explanation: A)
B)
C)
D)
E)
109) If a country is small in world markets and imports some product at the world price, the country
effectively faces a horizontal foreign supply curve for that product. If the country then restricts the
volume of imports by imposing an import quota, the effect on the domestic market for that product
is to
109)
A) make the foreign supply curve a horizontal line at the current price.
B) make the foreign supply curve a vertical line determined by the permitted quantity of
imports.
C) shift the entire supply curve to the left.
D) make the domestic demand curve a horizontal line at the permitted quantity of imports.
E) make the domestic demand curve a vertical line at the permitted quantity of imports.
Explanation: A)
B)
C)
D)
E)
110) Suppose Canada reduces a tariff on imported solar panels from 20% to 5%. We would expect to
observe
110)
A) an increase in the number of solar panels imported into Canada.
B) an upward shift in the demand curve for solar panels.
D) a downward shift in the demand curve for solar panels.
E) an increase in tariff revenue by the Government of Canada.
Explanation: A)
B)
C)
D)
E)
62
111) Suppose a national government chooses to impose barriers to trade in an effort to promote a more
diversified economy. This objective would be particularly important to, for example, an economy
largely dependent on one or two agricultural products because
111)
A) it will allow firms in the economy to exploit economies of scale in newly developed
industries.
B) any volatility in the world prices of those commodities leads to great volatility in national
income.
C) that country’s terms of trade will continue to deteriorate over time if it continues to specialize.
D) it will increase net exports for the economy.
E) it will certainly maximize national income and raise average living standards.
Explanation: A)
B)
C)
D)
E)
112) Which of the following policy objectives can sometimes lead a government of a small economy to
112)
A) to prevent domestic currency from going abroad
B) to raise average living standards
C) to diversify production in the domestic economy
D) to maximize national income
E) to protect against low-wage labour from abroad
Explanation: A)
B)
C)
D)
E)
63
The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all
cheddar cheese is identical.
United Kingdom 9.00 ________
United States 8.00 ________
TABLE 34-1
113) Refer to Table 34-1. Assume there is free trade in cheddar cheese and Canada imports the lowest
price cheese from the United States. If a 40% tariff is then imposed on U.S. imports, Canada would
be likely to purchase its cheese from ________. This situation would be one of ________.
113)
Explanation: A)
B)
C)
D)
E)
114) According to the infant-industry argument for protection, a new small industry 114)
A) must be protected permanently to provide for a diversified economy.
B) must be protected even if it will never have a comparative advantage.
C) must be protected in order to provide a domestic supply of the product.
D) will need protection once it has exploited available economies of scale.
E) may need protection temporarily until it can exploit its economies of scale.
Explanation: A)
B)
C)
D)
E)
64
The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume
that all jeans are identical.
FIGURE 34-2
115) Refer to Figure 34-2. Suppose Canada has free trade in jeans. If Canada initially has no tariff on
jeans but then imposes a tariff of \$t per pair, Canada’s imports will
115)
A) decrease from(Q5 – Q3) to (Q3 – Q1).
B) decrease from (Q5 – Q3) to (Q4 – Q2).
C) decrease from (Q5 – Q1) to (Q4 – Q2).
D) increase from (Q4 – Q2) to (Q5 – Q3).
E) increase from (Q4 – Q2) to (Q5 – Q1).
Explanation: A)
B)
C)
D)
E)
65
116) Suppose the Canadian government imposes trade restrictions (tariffs or quotas) on the import of
steel. Which of the following groups are likely to be in favour of this policy?
116)
B) foreign steel consumers
D) foreign steel producers
Explanation: A)
B)
C)
D)
E)
117) A common, but invalid argument for using tariffs to maximize national income and raise domestic
living standards is to
117)
B) exploit economies of scale.
C) encourage learning by doing.
D) alter the terms of trade.
Explanation: A)
B)
C)
D)
E)
66
The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton
towels is PW. Assume that all cotton towels are identical.
FIGURE 34-3
118) Refer to Figure 34-3. If Canada imposes a tariff of \$t per cotton towel, foreign producers’ revenues
from their Canadian sales will be equal to the area
118)
A) G +H + I.
B) B + C + D.
C) B + C + D + G + H + I.
D) H.
E) C + H.
Explanation: A)
B)
C)
D)
E)
67
119) The imposition of a tariff on an imported good causes consumer surplus to ________ and producer
surplus to ________.
119)
A) decrease; increase
B) increase; decrease
C) remain the same; decrease
D) decrease; decrease
E) increase; increase
Explanation: A)
B)
C)
D)
E)
68
The diagram below shows the demand and supply curves for refrigerators in Canada.
FIGURE 34-1
120) Refer to Figure 34-1. Suppose that P0 is the world price. If Canada imposes a tariff causing the
price of refrigerators in Canada to rise from P0 to P1, the consequence would be that
120)
A) domestic production will increase from Q1 to Q3 and domestic consumption will fall from Q5
to Q3.
B) domestic production will increase from Q1 to Q2 and domestic consumption will fall from Q5
to Q4.
C) both domestic production and domestic consumption would decrease by equal amounts.
D) both domestic production and domestic consumption would increase by equal amounts.
E) domestic production will exceed domestic consumption.
Explanation: A)
B)
C)
D)
E)
69
121) Suppose the Canadian government imposed more stringent environmental regulations on
U.S.-owned pulp and paper mills than on Canadian-owned mills. This practice would be a
violation of
121)
A) the NAFTA principle of national treatment.
B) U.S. Environmental Protection Agency rules.
C) GATT rules.
D) WTO rules.
E) Canada’s Charter of Rights and Freedoms.
Explanation: A)
B)
C)
D)
E)
122) Suppose Canada reduces a tariff on imported solar panels from 20% to 5%. We would expect to
observe
122)
A) an increase in quantity consumed of solar panels in Canada.
B) a reduction in the quantity imported of solar panels.
C) a downward shift in the demand curve for solar panels.
D) a reduction in the quantity consumed of solar panels in Canada.
E) an upward shift in the demand curve for solar panels.
Explanation: A)
B)
C)
D)
E)
123) Over the long run, protecting a domestic industry using a high tariff is likely to ________ new
products and production methods, thus making it ________ to compete in the global marketplace.
123)
A) discourage it from developing; less able
B) discourage it from developing; more focused on investing in its ability
C) encourage it to develop; more able
D) discourage it from developing; more able
E) encourage it to develop; less able
Explanation: A)
B)
C)
D)
E)
70
124) Suppose Canada has a 20% tariff on the import of carpets, and Canada currently imports this
product from India at a with-tariff price of \$22. The with-tariff price of identical carpets from the
United States is \$24. Now suppose a free-trade agreement with the U.S. eliminates the tariff and so
the no-tariff price from the U.S. is \$20. Canada now purchases carpets from the U.S. Is Canada
124)
A) Yes, because Canadian consumers are paying less for carpets and consumer surplus has
increased.
C) Canada is not better or worse off. The gain in consumer surplus in Canada is identical to the
loss in tariff revenue to the Canadian government.
D) No, because it would still be cheaper for individual consumers to buy carpets from India.
E) No, because before the agreement Canada was buying from India at a lower (pre-tariff) price
and collecting tariff revenue.
Explanation: A)
B)
C)
D)
E)
125) What is potentially an important argument against regional trade agreements? 125)
A) The benefits of trade creation may be outweighed by the costs of trade diversion.
B) Regional trade agreements lead to more volatile swings in national income.
C) They are more difficult to negotiate than multilateral agreements at the WTO.
D) The gains from trade can only be realized with global trade agreements.
E) Regional trade agreements are not legally enforceable.
Explanation: A)
B)
C)
D)
E)
71
Testname: C34
1) E
2) E
3) D
4) E
5) B
6) A
7) A
8) C
9) E
10) D
11) B
12) E
13) E
14) C
15) E
16) C
17) D
18) A
19) E
20) D
21) A
22) E
23) D
24) C
25) B
26) D
27) D
28) C
29) C
30) E
31) D
32) C
33) D
34) C
35) C
36) D
37) E
38) A
39) C
40) B
41) B
42) C
43) C
44) B
45) C
46) A
47) C
48) A
49) E
50) B
72
Testname: C34
51) A
52) C
53) A
54) A
55) C
56) A
57) B
58) E
59) E
60) C
61) C
62) C
63) A
64) B
65) B
66) A
67) E
68) D
69) B
70) A
71) E
72) E
73) D
74) D
75) D
76) C
77) B
78) B
79) A
80) B
81) C
82) A
83) E
84) E
85) B
86) A
87) A
88) C
89) D
90) B
91) E
92) B
93) E
94) A
95) A
96) C
97) A
98) D
99) A
100) D
73
Testname: C34
101) C
102) E
103) B
104) A
105) A
106) A
107) D
108) D
109) B
110) A
111) B
112) C
113) E
114) E
115) C
116) A
117) E
118) D
119) A
120) B
121) A
122) A
123) A
124) E
125) A
74

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