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Test​ ​Bank​ ​Answer​ ​Key

Table​ ​of​ ​Contents

Supply,​ ​Demand,​ ​and​ ​Equilibrium

Elasticity​ ​and​ ​Its​ ​Applications
Taxes​ ​and​ ​Subsidies
The​ ​Price​ ​System
Price​ ​Ceilings​ ​and​ ​Price​ ​Floors
Trade
Externalities
Costs​ ​and​ ​Profit​ ​Maximization​ ​Under​ ​Competition
Competition​ ​and​ ​the​ ​Invisible​ ​Hand
Monopoly
Price​ ​Discrimination
Labor​ ​Markets
Public​ ​Goods​ ​and​ ​the​ ​Tragedy​ ​of​ ​the​ ​Commons
Asymmetric​ ​Information

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Supply,​ ​Demand,​ ​and​ ​Equilibrium

Video​ ​name:​ ​The​ ​Demand​ ​Curve

1.​ ​When​ ​the​ ​price​ ​of​ ​a​ ​good​ ​increases​ ​the​ ​quantity​ ​demanded​ ​____.

​ ​a.​ ​decreases

​ ​b.​ ​increases

​ ​c.​ ​stays​ ​the​ ​same

2.​ ​When​ ​will​ ​people​ ​search​ ​harder​ ​for​ ​substitutes​ ​for​ ​oil?

​ ​a.​ ​when​ ​the​ ​price​ ​of​ ​oil​ ​is​ ​low

​ ​b.​ ​when​ ​the​ ​price​ ​of​ ​oil​ ​is​ ​high

​ ​c.​ ​people​ ​are​ ​not​ ​incentivized​ ​to​ ​search​ ​for​ ​substitutes​ ​for​ ​oil

Video​ ​name:​ ​The​ ​Supply​ ​Curve

1.​ ​Along​ ​a​ ​supply​ ​curve,​ ​if​ ​the​ ​price​ ​of​ ​oil​ ​falls,​ ​what​ ​will​ ​happen​ ​to​ ​the​ ​quantity​ ​of​ ​oil​ ​supplied?

​ ​a.​ ​it​ ​will​ ​decrease

​ ​b.​ ​it​ ​will​ ​increase

​ ​c.​ ​it​ ​will​ ​not​ ​change

2.​ ​If​ ​the​ ​price​ ​of​ ​cars​ ​falls,​ ​are​ ​carmakers​ ​likely​ ​to​ ​make​ ​___________.

​ ​a.​ ​more​ ​cars

​ ​b.​ ​fewer​ ​cars

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​ ​c.​ ​the​ ​same​ ​amount​ ​of​ ​cars

Video​ ​name:​ ​The​ ​Equilibrium​ ​Price

1.​ ​If​ ​the​ ​price​ ​in​ ​a​ ​market​ ​is​ ​above​ ​the​ ​equilibrium​ ​price,​ ​this​ ​creates​ ​___________.

​ ​a.​ ​a​ ​shortage

​ ​b.​ ​a​ ​surplus

​ ​c.​ ​neither​ ​a​ ​shortage​ ​nor​ ​a​ ​surplus

2.​ ​When​ ​the​ ​price​ ​is​ ​above​ ​the​ ​equilibrium​ ​price,​ ​greed​ ​(in​ ​other​ ​words,​ ​self-interest)​ ​tends​ ​to​ ​_________.

​ ​a.​ ​push​ ​the​ ​price​ ​down

​ ​b.​ ​push​ ​the​ ​price​ ​up

​ ​c.​ ​have​ ​no​ ​effect​ ​on​ ​price

3.​ ​Jon​ ​is​ ​on​ ​eBay,​ ​bidding​ ​for​ ​a​ ​first​ ​edition​ ​of​ ​the​ ​influential​ ​Frank​ ​Miller​ ​graphic​ ​novel​ ​Batman:​ ​The
Dark​ ​Knight​ ​Returns.​ ​In​ ​this​ ​market,​ ​who​ ​is​ ​Jon​ ​competing​ ​with?

​ ​a.​ ​The​ ​seller​ ​of​ ​the​ ​graphic​ ​novel

​ ​b.​ ​The​ ​other​ ​bidders

​ ​c.​ ​eBay’s​ ​stakeholders

4.​ ​Now,​ ​Jon​ ​is​ ​in​ ​Japan,​ ​trying​ ​to​ ​get​ ​a​ ​job​ ​as​ ​a​ ​full-time​ ​translator;​ ​he​ ​wants​ ​to​ ​translate​ ​English​ ​TV
shows​ ​into​ ​Japanese​ ​and​ ​vice​ ​versa.​ ​He​ ​notices​ ​that​ ​the​ ​wage​ ​for​ ​translators​ ​is​ ​very​ ​low.​ ​Who​ ​is​ ​the
“competition”​ ​that​ ​is​ ​pushing​ ​the​ ​wage​ ​down?

​ ​a.​ ​Businesses​ ​who​ ​hire​ ​translators

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​ ​b.​ ​Other​ ​translators

​ ​c.​ ​Prospective​ ​clients

Video​ ​name:​ ​A​ ​Deeper​ ​Look​ ​at​ ​the​ ​Demand​ ​Curve

1.​ ​Your​ ​roommate​ ​just​ ​bought​ ​an​ ​iPod​ ​for​ ​$200.​ ​She​ ​would​ ​have​ ​been​ ​willing​ ​to​ ​pay​ ​$500​ ​for​ ​a​ ​machine
that​ ​could​ ​store​ ​and​ ​replay​ ​that​ ​much​ ​music.​ ​How​ ​much​ ​consumer​ ​surplus​ ​does​ ​your​ ​roommate​ ​enjoy
from​ ​the​ ​iPod?

​ ​a.​ ​$200

​ ​b.​ ​$300

​ ​c.​ ​$500

The​ ​economist​ ​Bryan​ ​Caplan​ ​recently​ ​found​ ​a​ ​pair​ ​of​ ​$10​ ​arch​ ​supports​ ​that​ ​saved​ ​him​ ​from​ ​the​ ​pain​ ​of
major​ ​foot​ ​surgery.​ ​As​ ​he​ ​stated​ ​on​ ​his​ ​blog​ ​(econlog.econlib.org),​ ​he​ ​would​ ​have​ ​been​ ​willing​ ​to​ ​pay
$100,000​ ​to​ ​fix​ ​his​ ​foot​ ​problem,​ ​but​ ​instead​ ​he​ ​only​ ​paid​ ​a​ ​few​ ​dollars.

2.​ ​How​ ​much​ ​consumer​ ​surplus​ ​did​ ​Bryan​ ​enjoy​ ​from​ ​this​ ​purchase?

​ ​a.​ ​$10

​ ​b.​ ​$10,000

​ ​c.​ ​$99,990

3.​ ​If​ ​the​ ​sales​ ​tax​ ​was​ ​5​ ​percent​ ​on​ ​this​ ​product,​ ​how​ ​much​ ​revenue​ ​did​ ​the​ ​government​ ​raise​ ​when​ ​Bryan
bought​ ​his​ ​arch​ ​supports?

​ ​a.​ ​50​ ​cents

​ ​b.​ ​$5

​ ​c.​ ​$50

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4.​ ​If​ ​the​ ​government​ ​could​ ​have​ ​taxed​ ​Bryan​ ​based​ ​on​ ​his​ ​willingness​ ​to​ ​pay​ ​rather​ ​than​ ​on​ ​how​ ​much​ ​he
actually​ ​paid,​ ​how​ ​much​ ​sales​ ​tax​ ​would​ ​Bryan​ ​have​ ​had​ ​to​ ​pay?

​ ​a.​ ​$50

​ ​b.​ ​$500

​ ​c.​ ​$5,000

5.​ ​What​ ​should​ ​happen​ ​to​ ​the​ ​“demand​ ​for​ ​speed”​ ​(measured​ ​by​ ​the​ ​average​ ​speed​ ​on​ ​highways)​ ​once
airbags​ ​are​ ​included​ ​on​ ​cars?

​ ​a.​ ​The​ ​demand​ ​for​ ​speed​ ​increases

​ ​b.​ ​The​ ​demand​ ​for​ ​speed​ ​decreases

​ ​c.​ ​The​ ​demand​ ​for​ ​speed​ ​stays​ ​the​ ​same

Video​ ​name:​ ​The​ ​Demand​ ​Curve​ ​Shifts

4.​ ​When​ ​the​ ​price​ ​of​ ​Apple​ ​computers​ ​goes​ ​down,​ ​what​ ​probably​ ​happens​ ​to​ ​the​ ​demand​ ​for
Windows-based​ ​computers?

​ ​a.​ ​The​ ​demand​ ​for​ ​Windows-based​ ​computers​ ​increases

​ ​b.​ ​The​ ​demand​ ​for​ ​Window-based​ ​computers​ ​decrease

​ ​c.​ ​A​ ​change​ ​in​ ​the​ ​price​ ​of​ ​Apple​ ​computers​ ​has​ ​no​ ​effect​ ​on​ ​the​ ​demand​ ​for​ ​Windows-based​ ​computers

5.​ ​When​ ​the​ ​price​ ​of​ ​olive​ ​oil​ ​goes​ ​up,​ ​what​ ​probably​ ​happens​ ​to​ ​the​ ​demand​ ​for​ ​corn​ ​oil?

​ ​a.​ ​The​ ​demand​ ​for​ ​corn​ ​oil​ ​increases

​ ​b.​ ​The​ ​demand​ ​for​ ​corn​ ​oil​ ​decreases

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​ ​c.​ ​A​ ​change​ ​in​ ​the​ ​price​ ​of​ ​olive​ ​oil​ ​has​ ​no​ ​effect​ ​on​ ​the​ ​demand​ ​for​ ​corn​ ​oil

6.​ ​When​ ​the​ ​price​ ​of​ ​petroleum​ ​goes​ ​up,​ ​what​ ​probably​ ​happens​ ​to​ ​the​ ​demand​ ​for​ ​natural​ ​gas?

​ ​a.​ ​The​ ​demand​ ​for​ ​natural​ ​gas​ ​increases

​ ​b.​ ​The​ ​demand​ ​for​ ​natural​ ​gas​ ​decreases

​ ​c.​ ​A​ ​change​ ​in​ ​the​ ​price​ ​of​ ​petroleum​ ​has​ ​no​ ​effect​ ​on​ ​the​ ​demand​ ​for​ ​natural​ ​gas

7.​ ​If​ ​everyone​ ​thinks​ ​that​ ​the​ ​price​ ​of​ ​tomatoes​ ​will​ ​go​ ​up​ ​next​ ​week,​ ​what​ ​is​ ​likely​ ​to​ ​happen​ ​to​ ​demand
for​ ​tomatoes​ ​today?

​ ​a.​ ​The​ ​demand​ ​for​ ​tomatoes​ ​increases

​ ​b.​ ​The​ ​demand​ ​for​ ​tomatoes​ ​decreases

​ ​c.​ ​Expectations​ ​about​ ​the​ ​price​ ​of​ ​tomatoes​ ​has​ ​no​ ​effect​ ​on​ ​the​ ​demand​ ​for​ ​tomatoes​ ​today

Video​ ​name:​ ​A​ ​Deeper​ ​Look​ ​at​ ​the​ ​Supply​ ​Curve

1.​ ​Michael​ ​is​ ​an​ ​economist.​ ​He​ ​loves​ ​being​ ​an​ ​economist​ ​so​ ​much​ ​that​ ​he​ ​would​ ​do​ ​it​ ​for​ ​a​ ​living​ ​even​ ​if
he​ ​only​ ​earned​ ​$30,000​ ​per​ ​year.​ ​Instead,​ ​he​ ​earns​ ​$80,000​ ​per​ ​year.​ ​(Note:​ ​This​ ​is​ ​the​ ​average​ ​salary​ ​of
new​ ​economists​ ​with​ ​a​ ​Ph.D.​ ​degree.)​ ​How​ ​much​ ​producer​ ​surplus​ ​does​ ​Michael​ ​enjoy?

​ ​a.​ ​$30,000

​ ​b.​ ​$50,000

​ ​c.​ ​$80,000

2.​ ​The​ ​industrial​ ​areas​ ​in​ ​northeast​ ​Washington,​ ​DC,​ ​were​ ​relatively​ ​dangerous​ ​in​ ​the​ ​1980s.​ ​Over​ ​the
last​ ​two​ ​decades,​ ​the​ ​area​ ​has​ ​become​ ​a​ ​safer​ ​place​ ​to​ ​work​ ​(although​ ​there​ ​are​ ​still​ ​seven​ ​times​ ​more

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violent​ ​crimes​ ​per​ ​person​ ​in​ ​these​ ​areas​ ​compared​ ​with​ ​another​ ​DC​ ​neighborhood,​ ​Georgetown).​ ​When
an​ ​area​ ​becomes​ ​a​ ​safer​ ​place​ ​to​ ​work,​ ​what​ ​probably​ ​happens​ ​to​ ​the​ ​“supply​ ​of​ ​labor”​ ​in​ ​that​ ​area?

​ ​a.​ ​the​ ​supply​ ​of​ ​labor​ ​increases

​ ​b.​ ​the​ ​supply​ ​of​ ​labor​ ​decreases

​ ​c.​ ​the​ ​supply​ ​of​ ​labor​ ​does​ ​not​ ​change

Video​ ​name:​ ​The​ ​Supply​ ​Curve​ ​Shifts

1.​ ​When​ ​is​ ​a​ ​pharmaceutical​ ​business​ ​more​ ​likely​ ​to​ ​hire​ ​highly​ ​educated,​ ​cutting-edge​ ​workers​ ​and​ ​use
new,​ ​experimental​ ​research​ ​methods?

​ ​a.​ ​When​ ​the​ ​business​ ​expects​ ​the​ ​price​ ​of​ ​its​ ​new​ ​drug​ ​to​ ​be​ ​low

​ ​b.​ ​When​ ​the​ ​business​ ​expects​ ​the​ ​price​ ​of​ ​its​ ​new​ ​drug​ ​to​ ​be​ ​high

​ ​c.​ ​The​ ​pharmaceutical​ ​business​ ​is​ ​unlikely​ ​to​ ​hire​ ​highly​ ​educated​ ​workers​ ​under​ ​any​ ​price.

2.​ ​Imagine​ ​that​ ​a​ ​technological​ ​innovation​ ​reduces​ ​the​ ​costs​ ​of​ ​producing​ ​high-quality​ ​steel.​ ​What
happens​ ​to​ ​the​ ​supply​ ​of​ ​steel?

​ ​a.​ ​The​ ​supply​ ​of​ ​steel​ ​increases

​ ​b.​ ​The​ ​supply​ ​of​ ​steel​ ​decreases

​ ​c.​ ​Reduced​ ​production​ ​costs​ ​for​ ​steel​ ​have​ ​no​ ​effect​ ​on​ ​the​ ​supply​ ​of​ ​steel

3.​ ​When​ ​oil​ ​companies​ ​expect​ ​the​ ​price​ ​of​ ​oil​ ​to​ ​be​ ​higher​ ​next​ ​year,​ ​what​ ​happens​ ​to​ ​the​ ​supply​ ​of​ ​oil
today?

​ ​a.​ ​The​ ​supply​ ​of​ ​oil​ ​increases

​ ​b.​ ​The​ ​supply​ ​of​ ​oil​ ​decreases

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​ ​c.​ ​Expectations​ ​about​ ​the​ ​price​ ​of​ ​oil​ ​have​ ​no​ ​effect​ ​on​ ​the​ ​supply​ ​of​ ​oil​ ​today

4.​ ​Do​ ​taxes​ ​usually​ ​increase​ ​the​ ​supply​ ​of​ ​a​ ​good​ ​or​ ​reduce​ ​the​ ​supply?

​ ​a.​ ​Taxes​ ​increase​ ​the​ ​supply​ ​of​ ​the​ ​good

​ ​b.​ ​Taxes​ ​reduce​ ​the​ ​supply​ ​of​ ​the​ ​good

​ ​c.​ ​Trick​ ​question!​ ​Taxes​ ​have​ ​no​ ​effect​ ​on​ ​the​ ​supply​ ​of​ ​a​ ​good.

Video​ ​name:​ ​Exploring​ ​Equilibrium

Jules​ ​wants​ ​to​ ​purchase​ ​a​ ​Royale​ ​with​ ​cheese​ ​from​ ​Vincent.​ ​Vincent​ ​is​ ​willing​ ​to​ ​offer​ ​this​ ​tasty​ ​burger
for​ ​$3.​ ​The​ ​most​ ​Jules​ ​is​ ​willing​ ​to​ ​pay​ ​for​ ​the​ ​tasty​ ​burger​ ​is​ ​$8​ ​(after​ ​all,​ ​his​ ​girlfriend​ ​is​ ​a​ ​vegetarian,​ ​so
he​ ​doesn’t​ ​get​ ​many​ ​opportunities​ ​for​ ​tasty​ ​burgers).

1.​ ​How​ ​large​ ​are​ ​the​ ​potential​ ​gains​ ​from​ ​trade​ ​if​ ​Jules​ ​and​ ​Vincent​ ​agree​ ​to​ ​make​ ​this​ ​trade?​ ​In​ ​other
words,​ ​what​ ​is​ ​the​ ​sum​ ​of​ ​producer​ ​and​ ​consumer​ ​surplus​ ​if​ ​the​ ​trade​ ​happens?

​ ​a.​ ​$3

​ ​b.​ ​$4

​ ​c.​ ​$5

2.​ ​If​ ​the​ ​trade​ ​takes​ ​place​ ​at​ ​$4,​ ​how​ ​much​ ​producer​ ​surplus​ ​goes​ ​to​ ​Vincent?​ ​How​ ​much​ ​consumer
surplus​ ​goes​ ​to​ ​Jules?

​ ​a.​ ​$1​ ​goes​ ​to​ ​Vincent,​ ​$4​ ​goes​ ​to​ ​Jules

​ ​b.​ ​$4​ ​goes​ ​to​ ​Vincent,​ ​$1​ ​goes​ ​to​ ​Jules

​ ​c.​ ​$2​ ​goes​ ​to​ ​Vincent,​ ​$3​ ​goes​ ​to​ ​Jules

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3.​ ​If​ ​the​ ​trade​ ​takes​ ​place​ ​at​ ​$7,​ ​how​ ​much​ ​producer​ ​surplus​ ​goes​ ​to​ ​Vincent?​ ​How​ ​much​ ​consumer
surplus​ ​goes​ ​to​ ​Jules?

​ ​a.​ ​$1​ ​goes​ ​to​ ​Vincent,​ ​$4​ ​goes​ ​to​ ​Jules

​ ​b.​ ​$4​ ​goes​ ​to​ ​Vincent,​ ​$1​ ​goes​ ​to​ ​Jules

​ ​c.​ ​$2​ ​goes​ ​to​ ​Vincent,​ ​$3​ ​goes​ ​to​ ​Jules

Video​ ​name:​ ​Does​ ​the​ ​Equilibrium​ ​Model​ ​Work?

1.​ ​What​ ​happened​ ​in​ ​Vernon​ ​Smith’s​ ​lab?

​ ​a.​ ​The​ ​price​ ​and​ ​quantity​ ​were​ ​close​ ​to​ ​equilibrium​ ​but​ ​gains​ ​from​ ​trade​ ​were​ ​far​ ​from​ ​the​ ​maximum.

​ ​b.​ ​The​ ​price​ ​and​ ​quantity​ ​were​ ​far​ ​from​ ​equilibrium​ ​and​ ​gains​ ​from​ ​trade​ ​were​ ​far​ ​from​ ​the​ ​maximum.

​ ​c.​ ​The​ ​price​ ​and​ ​quantity​ ​were​ ​far​ ​from​ ​equilibrium​ ​but​ ​gains​ ​from​ ​trade​ ​were​ ​close​ ​to​ ​the​ ​maximum.

​ ​d.​ ​The​ ​price​ ​and​ ​quantity​ ​were​ ​close​ ​to​ ​equilibrium​ ​and​ ​gains​ ​from​ ​trade​ ​were​ ​close​ ​to​ ​the​ ​maximum.

2.​ ​When​ ​demand​ ​increases,​ ​what​ ​happens​ ​to​ ​price​ ​and​ ​quantity​ ​in​ ​equilibrium?

​ ​a.​ ​Price​ ​increases​ ​and​ ​quantity​ ​decreases

​ ​b.​ ​Price​ ​decreases​ ​and​ ​quantity​ ​increases

​ ​c.​ ​Price​ ​and​ ​quantity​ ​both​ ​increase

​ ​d.​ ​Price​ ​and​ ​quantity​ ​both​ ​decrease

3.​ ​When​ ​supply​ ​increases,​ ​what​ ​happens​ ​to​ ​price​ ​and​ ​quantity​ ​in​ ​equilibrium?

​ ​a.​ ​Price​ ​increases​ ​and​ ​quantity​ ​decreases

​ ​b.​ ​Price​ ​decreases​ ​and​ ​quantity​ ​increases

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​ ​c.​ ​Price​ ​and​ ​quantity​ ​both​ ​increase

​ ​d.​ ​Price​ ​and​ ​quantity​ ​both​ ​decrease

4.​ ​When​ ​supply​ ​decreases,​ ​what​ ​happens​ ​to​ ​price​ ​and​ ​quantity​ ​in​ ​equilibrium?

​ ​a.​ ​Price​ ​increases​ ​and​ ​quantity​ ​decreases

​ ​b.​ ​Price​ ​decreases​ ​and​ ​quantity​ ​increases

​ ​c.​ ​Price​ ​and​ ​quantity​ ​both​ ​increase

​ ​d.​ ​Price​ ​and​ ​quantity​ ​both​ ​decrease

5.​ ​When​ ​demand​ ​decreases,​ ​what​ ​happens​ ​to​ ​price​ ​and​ ​quantity​ ​in​ ​equilibrium?

​ ​a.​ ​Price​ ​increases​ ​and​ ​quantity​ ​decreases

​ ​b.​ ​Price​ ​decreases​ ​and​ ​quantity​ ​increases

​ ​c.​ ​Price​ ​and​ ​quantity​ ​both​ ​increase

​ ​d.​ ​Price​ ​and​ ​quantity​ ​both​ ​decrease

6.​ ​What’s​ ​the​ ​best​ ​way​ ​to​ ​think​ ​about​ ​the​ ​rise​ ​in​ ​oil​ ​prices​ ​in​ ​the​ ​1970s,​ ​when​ ​wars​ ​and​ ​oil​ ​embargoes
wracked​ ​the​ ​Middle​ ​East?

​ ​a.​ ​A​ ​rise​ ​in​ ​demand

​ ​b.​ ​A​ ​fall​ ​in​ ​demand

​ ​c.​ ​A​ ​rise​ ​in​ ​supply

​ ​d.​ ​A​ ​fall​ ​in​ ​supply

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7.​ ​What’s​ ​the​ ​best​ ​way​ ​to​ ​think​ ​about​ ​the​ ​rise​ ​in​ ​oil​ ​prices​ ​in​ ​the​ ​last​ ​10​ ​years,​ ​as​ ​China​ ​and​ ​India​ ​have
become​ ​richer:​ ​Was​ ​it​ ​a​ ​rise​ ​in​ ​demand,​ ​a​ ​fall​ ​in​ ​demand,​ ​a​ ​rise​ ​in​ ​supply,​ ​or​ ​a​ ​fall​ ​in​ ​supply?​ ​*

​ ​a.​ ​A​ ​rise​ ​in​ ​demand

​ ​b.​ ​A​ ​fall​ ​in​ ​demand

​ ​c.​ ​A​ ​rise​ ​in​ ​supply

​ ​d.​ ​A​ ​fall​ ​in​ ​supply

Video​ ​name:​ ​Supply​ ​and​ ​Demand​ ​Terminology

1.​ ​When​ ​supply​ ​falls,​ ​what​ ​happens​ ​to​ ​quantity​ ​demanded​ ​in​ ​equilibrium?

​ ​a.​ ​Quantity​ ​demanded​ ​increases

​ ​b.​ ​Quantity​ ​demanded​ ​decreases

​ ​c.​ ​A​ ​change​ ​in​ ​supply​ ​has​ ​no​ ​effect​ ​on​ ​quantity​ ​demanded

2.​ ​If​ ​oil​ ​executives​ ​read​ ​in​ ​the​ ​newspaper​ ​that​ ​massive​ ​new​ ​oil​ ​supplies​ ​have​ ​been​ ​discovered​ ​under​ ​the
Pacific​ ​Ocean​ ​but​ ​will​ ​likely​ ​only​ ​be​ ​useful​ ​in​ ​10​ ​years,​ ​what​ ​is​ ​likely​ ​to​ ​happen​ ​to​ ​the​ ​supply​ ​of​ ​oil​ ​today?

​ ​a.​ ​The​ ​supply​ ​of​ ​oil​ ​will​ ​rise​ ​today

​ ​b.​ ​The​ ​supply​ ​of​ ​oil​ ​will​ ​fall​ ​today

​ ​c.​ ​There​ ​will​ ​be​ ​no​ ​change​ ​in​ ​the​ ​supply​ ​of​ ​oil

3.​ ​If​ ​oil​ ​executives​ ​read​ ​in​ ​the​ ​newspaper​ ​that​ ​new​ ​solar-power​ ​technologies​ ​have​ ​been​ ​discovered​ ​but
will​ ​likely​ ​only​ ​become​ ​useful​ ​in​ ​10​ ​years,​ ​what​ ​is​ ​the​ ​likely​ ​equilibrium​ ​impact​ ​on​ ​the​ ​price​ ​and​ ​quantity
of​ ​oil​ ​today?

​ ​a.​ ​the​ ​price​ ​of​ ​oil​ ​will​ ​increase,​ ​the​ ​quantity​ ​of​ ​oil​ ​will​ ​decrease

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​ ​b.​ ​the​ ​price​ ​of​ ​oil​ ​will​ ​decrease,​ ​the​ ​quantity​ ​of​ ​oil​ ​will​ ​increase

​ ​c.​ ​the​ ​price​ ​and​ ​quantity​ ​of​ ​oil​ ​will​ ​decrease

​ ​d.​ ​the​ ​price​ ​and​ ​quantity​ ​of​ ​oil​ ​will​ ​increase

4.​ ​If​ ​we​ ​learn​ ​today​ ​about​ ​promising​ ​future​ ​energy​ ​sources,​ ​today’s​ ​price​ ​of​ ​energy​ ​will​ ​_______​ ​and
today’s​ ​quantity​ ​of​ ​energy​ ​will​ ​__________.

​ ​a.​ ​rise,​ ​fall

​ ​b.​ ​fall,​ ​rise

​ ​c.​ ​rise,​ ​rise

​ ​c.rise,​ ​rise

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Elasticity​ ​and​ ​Its​ ​Applications

Video​ ​name:​ ​Elasticity​ ​of​ ​Demand

1.​ ​Which​ ​of​ ​the​ ​following​ ​two​ ​goods​ ​is​ ​more​ ​likely​ ​to​ ​be​ ​inelastically​ ​demanded?

​ ​a.​ ​Demand​ ​for​ ​tangerines

​ ​b.​ ​Demand​ ​for​ ​fruit

Explanation:​ ​Fruit​ ​is​ ​more​ ​inelastically​ ​demanded​ ​because​ ​the​ ​overall​ ​category​ ​of​ ​fruit​ ​has​ ​fewer
good​ ​substitutes​ ​than​ ​any​ ​one​ ​item​ ​in​ ​that​ ​category.

2.​ ​Which​ ​of​ ​the​ ​following​ ​two​ ​goods​ ​is​ ​more​ ​likely​ ​to​ ​be​ ​inelastically​ ​demanded?

​ ​a.​ ​Demand​ ​for​ ​beef​ ​next​ ​month

Explanation:​ ​Demand​ ​will​ ​be​ ​more​ ​inelastic​ ​over​ ​the​ ​next​ ​month​ ​because​ ​people​ ​are​ ​usually​ ​more
stubborn​ ​(inelastic,​ ​inflexible)​ ​in​ ​the​ ​short​ ​run

​ ​b.​ ​Demand​ ​for​ ​beef​ ​over​ ​the​ ​next​ ​decade

3.​ ​Which​ ​of​ ​the​ ​following​ ​two​ ​goods​ ​is​ ​more​ ​likely​ ​to​ ​be​ ​inelastically​ ​demanded?

​ ​a.​ ​Demand​ ​for​ ​Exxon​ ​gasoline​ ​at​ ​the​ ​corner​ ​of​ ​7th​ ​and​ ​Grand

Explanation:​ ​ ​Brand-named​ ​goods​ ​are​ ​more​ ​elastic​ ​than​ ​categories​ ​especially​ ​when​ ​there​ ​are​ ​very
good​ ​substitutes​ ​for​ ​Exxon​ ​gasoline​ ​available​ ​at​ ​close​ ​distances.

​ ​b.​ ​Demand​ ​for​ ​gasoline​ ​in​ ​the​ ​entire​ ​city

4.​ ​Which​ ​of​ ​the​ ​following​ ​two​ ​goods​ ​is​ ​more​ ​likely​ ​to​ ​be​ ​inelastically​ ​demanded?

​ ​a.​ ​Demand​ ​for​ ​insulin

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 Explanation:​ ​Insulin​ ​is​ ​more​ ​of​ ​a​ ​necessity;​ ​thus,​ ​demand​ ​for​ ​insulin​ ​from​ ​buyers​ ​is​ ​more​ ​inelastic
than​ ​demand​ ​for​ ​vitamins​ ​for​ ​buyers​ ​of​ ​vitamins.

​ ​b.​ ​Demand​ ​for​ ​vitamins

5.​ ​After​ ​a​ ​public​ ​information​ ​campaign​ ​highlighting​ ​that​ ​bacteria​ ​and​ ​other​ ​organisms​ ​cause​ ​and​ ​spread
disease,​ ​will​ ​the​ ​demand​ ​curve​ ​for​ ​soap​ ​be​ ​more​ ​elastic​ ​or​ ​more​ ​inelastic?

​ ​a.​ ​More​ ​elastic

​ ​b.​ ​More​ ​inelastic

Explanation:​ ​Because​ ​soap​ ​is​ ​viewed​ ​more​ ​as​ ​a​ ​necessity​ ​in​ ​the​ ​prevention​ ​of​ ​germs​ ​than​ ​a
luxury,​ ​the​ ​demand​ ​curve​ ​will​ ​be​ ​more​ ​elastic.

6.​ ​After​ ​the​ ​invention​ ​of​ ​nuclear​ ​power​ ​plants,​ ​will​ ​the​ ​demand​ ​curve​ ​for​ ​coal​ ​power​ ​plants​ ​be​ ​more
elastic​ ​or​ ​more​ ​inelastic?

​ ​a.​ ​More​ ​elastic

Explanation:​ ​Because​ ​nuclear​ ​power​ ​plants​ ​are​ ​a​ ​substitute​ ​for​ ​coal​ ​power​ ​plants,​ ​the​ ​demand
curve​ ​for​ ​coal​ ​power​ ​plants​ ​will​ ​be​ ​more​ ​elastic.

​ ​b.​ ​More​ ​inelastic

7.​ ​After​ ​more​ ​employers​ ​allow​ ​employees​ ​to​ ​telecommute,​ ​will​ ​the​ ​demand​ ​curve​ ​for​ ​cars​ ​be​ ​more​ ​elastic
or​ ​more​ ​inelastic?

​ ​a.​ ​More​ ​elastic

Explanation:​ ​the​ ​demand​ ​for​ ​cars​ ​will​ ​be​ ​more​ ​elastic,​ ​because​ ​either​ ​(1)​ ​consumers​ ​see​ ​cars​ ​as
less​ ​of​ ​a​ ​necessity​ ​and​ ​more​ ​as​ ​a​ ​luxury​ ​or​ ​(2)​ ​consumers​ ​see​ ​telecommuting​ ​as​ ​a​ ​new​ ​substitute​ ​for​ ​a​ ​car

​ ​b.​ ​More​ ​inelastic

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8.​ ​After​ ​an​ ​economic​ ​boom,​ ​will​ ​the​ ​demand​ ​curve​ ​for​ ​TVs​ ​be​ ​more​ ​elastic​ ​or​ ​more​ ​inelastic?

​ ​a.​ ​More​ ​elastic

​ ​b.​ ​More​ ​inelastic

Explanation:​ ​Demand​ ​for​ ​TVs​ ​will​ ​be​ ​more​ ​inelastic,​ ​because​ ​as​ ​incomes​ ​rise​ ​televisions​ ​take​ ​up
a​ ​smaller​ ​portion​ ​of​ ​an​ ​average​ ​person’s​ ​budget.​ ​Thus​ ​TVs​ ​will​ ​be​ ​perceived​ ​as​ ​less​ ​of​ ​a​ ​luxury.

9.​ ​During​ ​the​ ​Middle​ ​Ages,​ ​the​ ​African​ ​city​ ​of​ ​Taghaza​ ​quarried​ ​salt​ ​in​ ​200-pound​ ​blocks​ ​to​ ​be​ ​sent​ ​to​ ​the
salt​ ​market​ ​in​ ​Timbuktu,​ ​in​ ​present-day​ ​Mali.​ ​Travelers​ ​report​ ​that​ ​Taghazans​ ​used​ ​salt​ ​instead​ ​of​ ​wood
to​ ​construct​ ​buildings.​ ​Compared​ ​with​ ​other​ ​towns​ ​without​ ​big​ ​salt​ ​mines,​ ​was​ ​the​ ​demand​ ​for​ ​wood​ ​more
elastic​ ​or​ ​more​ ​inelastic​ ​in​ ​Taghaza?

​ ​a.​ ​More​ ​elastic

Explanation:​ ​ ​Because​ ​substitutes​ ​for​ ​wood​ ​were​ ​easier​ ​to​ ​find​ ​in​ ​Taghaza​ ​than​ ​in​ ​other​ ​places,
the​ ​demand​ ​for​ ​wood​ ​was​ ​more​ ​elastic.

​ ​b.​ ​More​ ​inelastic

Video​ ​name:​ ​Calculating​ ​the​ ​Elasticity​ ​of​ ​Demand

1.​ ​If​ ​the​ ​elasticity​ ​of​ ​demand​ ​for​ ​college​ ​textbooks​ ​is​ ​-0.1,​ ​and​ ​the​ ​price​ ​of​ ​textbooks​ ​increases​ ​by​ ​20%,
how​ ​much​ ​will​ ​the​ ​quantity​ ​demanded​ ​change,​ ​and​ ​in​ ​what​ ​direction?

​ ​a.​ ​The​ ​quantity​ ​demanded​ ​increases​ ​by​ ​2%

​ ​b.​ ​The​ ​quantity​ ​demanded​ ​decreases​ ​by​ ​20%

​ ​c.​ ​The​ ​quantity​ ​demanded​ ​decreases​ ​by​ ​2%

Explanation:​ ​Recall​ ​that​ ​elasticity​ ​is​ ​(%​ ​change​ ​in​ ​quantity)/(%​ ​change​ ​in​ ​price).​ ​So​ ​20.1​ ​is​ ​(%
change​ ​in​ ​quantity)/(20%).​ ​That​ ​means​ ​that​ ​%​ ​change​ ​in​ ​quantity​ ​is​ ​20%​ ​x​ ​(20.1)​ ​=​ ​22%.​ ​The​ ​quantity
demanded​ ​falls​ ​by​ ​2%.

​ ​d.​ ​The​ ​quantity​ ​demanded​ ​remains​ ​the​ ​same

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2.​ ​If​ ​the​ ​elasticity​ ​of​ ​demand​ ​for​ ​spring​ ​break​ ​packages​ ​to​ ​Cancun​ ​is​ ​-5,​ ​and​ ​if​ ​you​ ​notice​ ​that​ ​this​ ​year​ ​in
Cancun​ ​the​ ​quantity​ ​of​ ​packages​ ​demanded​ ​increased​ ​by​ ​10%,​ ​then​ ​what​ ​happened​ ​to​ ​the​ ​price​ ​of
Cancun​ ​vacation​ ​packages?

​ ​a.​ ​The​ ​price​ ​fell​ ​by​ ​10​ ​percent

​ ​b.​ ​The​ ​price​ ​fell​ ​by​ ​2​ ​percent

Explanation:​ ​-5=(10%)/(%​ ​change​ ​in​ ​price),​ ​so​ ​%​ ​change​ ​in​ ​price​ ​is​ ​-2%.​ ​The​ ​price​ ​falls​ ​by​ ​2
percent.

​ ​c.​ ​The​ ​price​ ​increased​ ​by​ ​2​ ​percent

​ ​d.​ ​The​ ​price​ ​remained​ ​the​ ​same

3.​ ​In​ ​your​ ​college​ ​town,​ ​real​ ​estate​ ​developers​ ​are​ ​building​ ​thousands​ ​of​ ​new​ ​student-friendly​ ​apartments
close​ ​to​ ​campus.​ ​If​ ​you​ ​want​ ​to​ ​pay​ ​the​ ​lowest​ ​rent​ ​possible,​ ​should​ ​you​ ​hope​ ​that​ ​demand​ ​for​ ​apartments
is​ ​elastic​ ​or​ ​inelastic?

​ ​a.​ ​Elastic

​ ​b.​ ​Inelastic

Explanation:​ ​You​ ​want​ ​demand​ ​to​ ​be​ ​inelastic.​ ​If​ ​it​ ​is,​ ​then​ ​a​ ​rise​ ​in​ ​supply​ ​causes​ ​a​ ​big​ ​fall​ ​in​ ​the
rental​ ​price.

4.​ ​In​ ​your​ ​college​ ​town,​ ​the​ ​local​ ​government​ ​decrees​ ​that​ ​thousands​ ​of​ ​apartments​ ​close​ ​to​ ​campus​ ​are
uninhabitable​ ​and​ ​must​ ​be​ ​torn​ ​down​ ​next​ ​semester.​ ​If​ ​you​ ​want​ ​to​ ​pay​ ​the​ ​lowest​ ​rent​ ​possible,​ ​should
you​ ​hope​ ​that​ ​demand​ ​for​ ​apartments​ ​is​ ​elastic​ ​or​ ​inelastic?

​ ​a.​ ​Elastic

Explanation:​ ​You​ ​want​ ​demand​ ​to​ ​be​ ​elastic.​ ​If​ ​it​ ​is,​ ​then​ ​a​ ​fall​ ​in​ ​supply​ ​causes​ ​only​ ​a​ ​small
increase​ ​in​ ​the​ ​rental​ ​price.

​ ​b.​ ​Inelastic

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5.​ ​The​ ​long-run​ ​elasticity​ ​of​ ​oil​ ​demand​ ​has​ ​been​ ​estimated​ ​at​ ​-0.5.​ ​If​ ​the​ ​price​ ​of​ ​oil​ ​rises​ ​by​ ​10%,​ ​how
much​ ​will​ ​the​ ​quantity​ ​of​ ​oil​ ​demanded​ ​fall?

​ ​a.​ ​5%

Explanation:​ ​Elasticity=​ ​(%​ ​change​ ​in​ ​quantity)/(%​ ​change​ ​in​ ​price).​ ​So​ ​-0.5=​ ​%​ ​change​ ​in
quantity/​ ​10%.​ ​percent​ ​change​ ​in​ ​quantity​ ​is​ ​-5​ ​percent.

​ ​b.​ ​0.5%

​ ​c.​ ​2%

​ ​d.​ ​20%

6.​ ​The​ ​long-run​ ​elasticity​ ​of​ ​oil​ ​demand​ ​has​ ​been​ ​estimated​ ​at​ ​-0.5.​ ​Does​ ​a​ ​10%​ ​rise​ ​in​ ​oil​ ​prices​ ​increase
or​ ​decrease​ ​total​ ​revenues​ ​to​ ​the​ ​oil​ ​producers?

​ ​a.​ ​Increase

Explanation:​ ​It​ ​will​ ​increase​ ​total​ ​revenues​ ​because​ ​the​ ​change​ ​is​ ​occurring​ ​along​ ​an​ ​inelastic
point​ ​on​ ​the​ ​demand​ ​curve.

​ ​b.​ ​Decrease

7.​ ​In​ ​the​ ​United​ ​States,​ ​the​ ​long-run​ ​elasticity​ ​of​ ​oil​ ​demand​ ​has​ ​been​ ​estimated​ ​at​ ​-0.5.​ ​Some
policymakers​ ​and​ ​environmental​ ​scientists​ ​would​ ​like​ ​to​ ​see​ ​the​ ​United​ ​States​ ​cut​ ​back​ ​on​ ​its​ ​use​ ​of​ ​oil​ ​in
the​ ​long​ ​run.​ ​We​ ​can​ ​use​ ​this​ ​elasticity​ ​estimate​ ​to​ ​get​ ​a​ ​rough​ ​measure​ ​of​ ​how​ ​high​ ​the​ ​price​ ​of​ ​oil​ ​would
have​ ​to​ ​permanently​ ​rise​ ​in​ ​order​ ​to​ ​get​ ​people​ ​to​ ​make​ ​big​ ​cuts​ ​in​ ​oil​ ​consumption.​ ​How​ ​much​ ​would​ ​the
price​ ​of​ ​oil​ ​have​ ​to​ ​permanently​ ​rise​ ​in​ ​order​ ​to​ ​cut​ ​oil​ ​consumption​ ​by​ ​50%?

​ ​a.​ ​5%

​ ​b.​ ​25%

​ ​c.​ ​50%

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​ ​d.​ ​100%

Explanation:​ ​ ​Input​ ​the​ ​numbers​ ​in​ ​the​ ​elasticity​ ​equation.​ ​0.5=-50%/(%​ ​change​ ​in​ ​price).
Therefore,​ ​the​ ​price​ ​of​ ​oil​ ​would​ ​have​ ​to​ ​permanently​ ​rise​ ​100%.

8.​ ​France​ ​has​ ​the​ ​largest​ ​long-run​ ​elasticity​ ​of​ ​oil​ ​demand​ ​(–0.6)​ ​of​ ​any​ ​of​ ​the​ ​large,​ ​rich​ ​countries,
according​ ​to​ ​Cooper’s​ ​estimates.​ ​Does​ ​this​ ​mean​ ​that​ ​France​ ​is​ ​better​ ​at​ ​responding​ ​to​ ​long-run​ ​price
changes​ ​than​ ​other​ ​rich​ ​countries,​ ​or​ ​does​ ​it​ ​mean​ ​France​ ​is​ ​worse​ ​at​ ​responding?

​ ​a.​ ​Better​ ​at​ ​responding

Explanation:​ ​It​ ​means​ ​France​ ​is​ ​more​ ​responsive​ ​as​ ​more​ ​elastic​ ​means​ ​more​ ​flexible.​ ​One​ ​reason
may​ ​be​ ​that​ ​France​ ​is​ ​also​ ​one​ ​of​ ​the​ ​countries​ ​that​ ​most​ ​uses​ ​nuclear​ ​power,​ ​making​ ​it​ ​a​ ​more​ ​viable
substitute​ ​for​ ​oil.

​ ​b.​ ​Worse​ ​at​ ​responding

9.​ ​The​ ​elasticity​ ​of​ ​demand​ ​is​ ​0.2.​ ​Is​ ​the​ ​demand​ ​curve​ ​relatively​ ​steep​ ​or​ ​flat?​ ​Will​ ​a​ ​fall​ ​in​ ​price​ ​raise
total​ ​revenue​ ​or​ ​lower​ ​it?​ ​Note:​ ​we​ ​present​ ​the​ ​elasticity​ ​in​ ​terms​ ​of​ ​its​ ​absolute​ ​value.

​ ​a.​ ​Relatively​ ​steep;​ ​raise​ ​total​ ​revenue

​ ​b.​ ​Relatively​ ​flat;​ ​raise​ ​total​ ​revenue

​ ​c.​ ​Relatively​ ​steep;​ ​lower​ ​total​ ​revenue

Explanation:​ ​It​ ​is​ ​inelastic,​ ​so​ ​the​ ​curve​ ​is​ ​relatively​ ​steep​ ​and​ ​a​ ​fall​ ​in​ ​price​ ​will​ ​lower​ ​total
revenue.

​ ​d.​ ​Relatively​ ​flat;​ ​lower​ ​total​ ​revenue

10.​ ​The​ ​elasticity​ ​of​ ​demand​ ​is​ ​2.0.​ ​Is​ ​the​ ​demand​ ​curve​ ​relatively​ ​steep​ ​or​ ​flat?​ ​Will​ ​a​ ​fall​ ​in​ ​price​ ​raise
total​ ​revenue​ ​or​ ​lower​ ​it?​ ​Note:​ ​we​ ​present​ ​the​ ​elasticity​ ​in​ ​terms​ ​of​ ​its​ ​absolute​ ​value.

​ ​a.​ ​Relatively​ ​steep;​ ​raise​ ​total​ ​revenue

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​ ​b.​ ​Relatively​ ​flat;​ ​raise​ ​total​ ​revenue

Explanation:​ ​It​ ​is​ ​elastic,​ ​so​ ​the​ ​curve​ ​is​ ​relatively​ ​flat​ ​and​ ​a​ ​fall​ ​in​ ​price​ ​will​ ​raise​ ​total​ ​revenue.

​ ​c.​ ​Relatively​ ​steep;​ ​lower​ ​total​ ​revenue

​ ​d.​ ​Relatively​ ​flat;​ ​lower​ ​total​ ​revenue

11.​ ​The​ ​elasticity​ ​of​ ​demand​ ​is​ ​1.1.​ ​Is​ ​the​ ​demand​ ​curve​ ​relatively​ ​steep​ ​or​ ​flat?​ ​Will​ ​a​ ​fall​ ​in​ ​price​ ​raise
total​ ​revenue​ ​or​ ​lower​ ​it?​ ​Note:​ ​we​ ​present​ ​the​ ​elasticity​ ​in​ ​terms​ ​of​ ​its​ ​absolute​ ​value.

​ ​a.​ ​Relatively​ ​steep;​ ​raise​ ​total​ ​revenue

​ ​b.​ ​Relatively​ ​flat;​ ​raise​ ​total​ ​revenue

Explanation:​ ​It​ ​is​ ​elastic,​ ​so​ ​the​ ​curve​ ​is​ ​relatively​ ​flat​ ​and​ ​a​ ​fall​ ​in​ ​price​ ​will​ ​raise​ ​total​ ​revenue.

​ ​c.​ ​Relatively​ ​steep;​ ​lower​ ​total​ ​revenue

​ ​d.​ ​Relatively​ ​flat;​ ​lower​ ​total​ ​revenue

12.​ ​The​ ​elasticity​ ​of​ ​demand​ ​is​ ​0.9.​ ​Is​ ​the​ ​demand​ ​curve​ ​relatively​ ​steep​ ​or​ ​flat?​ ​Will​ ​a​ ​fall​ ​in​ ​price​ ​raise
total​ ​revenue​ ​or​ ​lower​ ​it?​ ​Note:​ ​we​ ​present​ ​the​ ​elasticity​ ​in​ ​terms​ ​of​ ​its​ ​absolute​ ​value.

​ ​a.​ ​Relatively​ ​steep;​ ​raise​ ​total​ ​revenue

​ ​b.​ ​Relatively​ ​flat;​ ​raise​ ​total​ ​revenue

​ ​c.​ ​Relatively​ ​steep;​ ​lower​ ​total​ ​revenue

Explanation:​ ​It​ ​is​ ​inelastic,​ ​so​ ​the​ ​curve​ ​is​ ​relatively​ ​steep​ ​and​ ​a​ ​fall​ ​in​ ​price​ ​will​ ​lower​ ​total
revenue.

​ ​d.​ ​Relatively​ ​flat;​ ​lower​ ​total​ ​revenue

13.​ ​Henry​ ​Ford​ ​famously​ ​mass-produced​ ​cars​ ​at​ ​the​ ​beginning​ ​of​ ​the​ ​twentieth​ ​century,​ ​starting​ ​Ford
Motor​ ​Company.​ ​He​ ​made​ ​millions​ ​because​ ​mass​ ​production​ ​made​ ​cars​ ​cheap​ ​to​ ​make,​ ​and​ ​he​ ​passed
19
some​ ​of​ ​the​ ​savings​ ​to​ ​the​ ​consumer​ ​in​ ​the​ ​form​ ​of​ ​a​ ​low​ ​price.​ ​Cars​ ​became​ ​a​ ​common​ ​sight​ ​in​ ​the
United​ ​States​ ​thereafter.​ ​Keeping​ ​total​ ​revenue​ ​and​ ​its​ ​relationship​ ​with​ ​price​ ​in​ ​mind,​ ​do​ ​you​ ​expect​ ​the
demand​ ​for​ ​cars​ ​to​ ​be​ ​elastic​ ​or​ ​inelastic​ ​given​ ​the​ ​story​ ​of​ ​Henry​ ​Ford?​ ​*

​ ​a.​ ​Elastic

Explanation:​ ​Total​ ​revenue​ ​went​ ​up​ ​for​ ​the​ ​Ford​ ​Motor​ ​Company​ ​as​ ​the​ ​price​ ​of​ ​cars​ ​decreased.
Thus,​ ​the​ ​demand​ ​for​ ​cars​ ​was​ ​elastic.

​ ​b.​ ​Inelastic

Video​ ​name:​Elasticity​ ​of​ ​Supply

1.​ ​Which​ ​of​ ​the​ ​two​ ​goods​ ​is​ ​more​ ​likely​ ​to​ ​be​ ​elastically​ ​supplied?

​ ​a.​ ​Supply​ ​of​ ​apples​ ​over​ ​the​ ​next​ ​growing​ ​season

​ ​b.​ ​Supply​ ​of​ ​apples​ ​over​ ​the​ ​next​ ​decade

Explanation:​ ​Supply​ ​of​ ​apples​ ​over​ ​the​ ​next​ ​decade​ ​is​ ​more​ ​elastic.​ ​If​ ​the​ ​price​ ​permanently​ ​rises,
you​ ​can​ ​plant​ ​some​ ​trees​ ​or​ ​buy​ ​them​ ​from​ ​someone​ ​else​ ​or​ ​invest​ ​more​ ​in​ ​effective​ ​horticulture.​ ​The​ ​time
horizon​ ​for​ ​the​ ​next​ ​growing​ ​season​ ​is​ ​too​ ​short​ ​to​ ​make​ ​such​ ​adjustments.

2.​ ​Which​ ​of​ ​the​ ​two​ ​goods​ ​is​ ​more​ ​likely​ ​to​ ​be​ ​elastically​ ​supplied?

​ ​a.​ ​Supply​ ​of​ ​construction​ ​workers​ ​in​ ​Binghamton,​ ​NY

Explanation:​ ​Supply​ ​in​ ​Binghamton​ ​is​ ​more​ ​elastic​ ​because​ ​it​ ​draws​ ​on​ ​a​ ​smaller​ ​labor​ ​pool
compared​ ​to​ ​the​ ​whole​ ​of​ ​New​ ​York​ ​State.​ ​If​ ​the​ ​wage​ ​rises​ ​or​ ​falls​ ​there,​ ​workers​ ​can​ ​move​ ​to
Binghamton​ ​or​ ​leave​ ​Binghamton,​ ​respectively​ ​much​ ​easier​ ​than​ ​they​ ​could​ ​move​ ​to​ ​or​ ​leave​ ​from​ ​New
York​ ​State.

​ ​b.​ ​Supply​ ​of​ ​construction​ ​workers​ ​in​ ​New​ ​York​ ​State

3.​ ​Which​ ​of​ ​the​ ​two​ ​goods​ ​is​ ​more​ ​likely​ ​to​ ​be​ ​elastically​ ​supplied?

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​ ​a.​ ​Supply​ ​of​ ​breakfast​ ​cereal

Explanation:​ ​Supply​ ​of​ ​breakfast​ ​cereal​ ​is​ ​more​ ​elastic.​ ​If​ ​its​ ​price​ ​rises,​ ​firms​ ​can​ ​switch
machines​ ​from​ ​making​ ​macaroni​ ​to​ ​making​ ​cereal​ ​more​ ​easily​ ​than​ ​transforming​ ​non–food-producing
machines​ ​to​ ​food-producing​ ​machines.

​ ​b.​ ​Supply​ ​of​ ​food

4.​ ​Which​ ​of​ ​the​ ​two​ ​goods​ ​is​ ​more​ ​likely​ ​to​ ​be​ ​elastically​ ​supplied?

​ ​a.​ ​Supply​ ​of​ ​gold

​ ​b.​ ​Supply​ ​of​ ​computers

Explanation:​ ​Supply​ ​of​ ​computers​ ​is​ ​more​ ​elastic.​ ​It’s​ ​easier​ ​to​ ​adjust​ ​production​ ​of​ ​a
manufactured​ ​good​ ​if​ ​its​ ​price​ ​rises​ ​or​ ​falls​ ​than​ ​to​ ​adjust​ ​production​ ​of​ ​a​ ​rare​ ​material.​ ​New​ ​gold​ ​is​ ​hard
to​ ​find,​ ​but​ ​new​ ​computers​ ​are​ ​relatively​ ​easy​ ​to​ ​make.

5.​ ​If​ ​a​ ​new​ ​process​ ​for​ ​manufacturing​ ​diamonds​ ​is​ ​created,​ ​will​ ​the​ ​supply​ ​curve​ ​for​ ​diamonds​ ​become
more​ ​elastic​ ​or​ ​more​ ​inelastic?

​ ​a.​ ​More​ ​elastic

Explanation:​ ​the​ ​supply​ ​curve​ ​for​ ​diamonds​ ​will​ ​be​ ​more​ ​elastic​ ​because​ ​mining​ ​more​ ​diamonds
requires​ ​increasing​ ​costs​ ​per​ ​unit,​ ​but​ ​the​ ​number​ ​of​ ​diamond​ ​factories​ ​can​ ​be​ ​doubled​ ​while​ ​keeping​ ​all
other​ ​things​ ​equal.

​ ​b.​ ​More​ ​inelastic

6.​ ​If​ ​pesticides​ ​and​ ​fertilizers​ ​are​ ​banned,​ ​will​ ​the​ ​supply​ ​curve​ ​for​ ​food​ ​become​ ​more​ ​elastic​ ​or​ ​more
inelastic?

​ ​a.​ ​More​ ​elastic

​ ​b.​ ​More​ ​inelastic

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 Explanation:​ ​The​ ​supply​ ​for​ ​food​ ​will​ ​be​ ​more​ ​inelastic,​ ​because​ ​with​ ​a​ ​shorter​ ​technological
“menu,”​ ​there​ ​are​ ​fewer​ ​ways​ ​to​ ​respond​ ​to​ ​a​ ​price​ ​change.

7.​ ​If​ ​a​ ​larger​ ​share​ ​of​ ​oil​ ​output​ ​is​ ​required​ ​to​ ​make​ ​plastic,​ ​will​ ​the​ ​supply​ ​curve​ ​for​ ​plastic​ ​become​ ​more
elastic​ ​or​ ​more​ ​inelastic?

​ ​a.​ ​More​ ​elastic

​ ​b.​ ​More​ ​inelastic

Explanation:​ ​the​ ​supply​ ​curve​ ​for​ ​plastic​ ​will​ ​be​ ​more​ ​inelastic,​ ​because​ ​increasing​ ​plastic
production​ ​today​ ​will​ ​be​ ​accomplished​ ​by​ ​small​ ​decreases​ ​in​ ​other​ ​uses​ ​of​ ​oil,​ ​but​ ​if​ ​plastic​ ​production
accounted​ ​for​ ​a​ ​larger​ ​share​ ​of​ ​oil​ ​production​ ​more​ ​plastic​ ​production​ ​would​ ​require​ ​getting​ ​more​ ​from
the​ ​ground​ ​and​ ​that’s​ ​more​ ​costly.

8.​ ​In​ ​1993,​ ​then​ ​President​ ​Clinton​ ​passed​ ​a​ ​law​ ​raising​ ​income​ ​taxes.​ ​This​ ​tax​ ​hike​ ​was​ ​fully​ ​expected:​ ​He
campaigned​ ​on​ ​it​ ​in​ ​1992.​ ​What​ ​do​ ​you​ ​expect​ ​happened​ ​to​ ​executive​ ​income​ ​in​ ​the​ ​first​ ​year​ ​of​ ​the​ ​tax
increases?​ ​What​ ​about​ ​in​ ​subsequent​ ​years?​ ​Hint:​ ​Top​ ​executives​ ​have​ ​a​ ​lot​ ​of​ ​power​ ​over​ ​when​ ​they​ ​get
paid​ ​for​ ​their​ ​work:​ ​They​ ​can​ ​ask​ ​for​ ​bonuses​ ​a​ ​bit​ ​earlier,​ ​or​ ​they​ ​can​ ​cash​ ​out​ ​their​ ​stock​ ​options​ ​a​ ​bit
earlier.​ ​Literally,​ ​this​ ​isn’t​ ​their​ ​“labor​ ​supply,”​ ​it’s​ ​more​ ​like​ ​their​ ​“income​ ​supply.”

​ ​a.​ ​In​ ​the​ ​first​ ​year​ ​income​ ​will​ ​decrease;​ ​in​ ​the​ ​long​ ​run​ ​it​ ​will​ ​decrease

​ ​b.​ ​In​ ​the​ ​first​ ​year​ ​income​ ​will​ ​decrease;​ ​in​ ​the​ ​long​ ​run​ ​it​ ​will​ ​remain​ ​nearly​ ​the​ ​same

Explanation:​ ​Income​ ​went​ ​down​ ​a​ ​lot​ ​in​ ​the​ ​first​ ​year​ ​of​ ​the​ ​tax​ ​increase​ ​because​ ​executives​ ​had
pulled​ ​their​ ​income​ ​into​ ​the​ ​previous​ ​year​ ​when​ ​taxes​ ​were​ ​low.​ ​In​ ​the​ ​long​ ​run,​ ​however,​ ​executives
have​ ​fewer​ ​options​ ​to​ ​move​ ​their​ ​income​ ​through​ ​time.​ ​Thus,​ ​as​ ​time​ ​continued,​ ​executive​ ​income
returned​ ​to​ ​close​ ​to​ ​its​ ​previous​ ​level.​ ​Sometimes​ ​the​ ​short-run​ ​elasticity​ ​will​ ​be​ ​higher​ ​than​ ​the​ ​long-run
elasticity.

​ ​c.​ ​In​ ​the​ ​first​ ​year​ ​income​ ​will​ ​increase;​ ​in​ ​the​ ​long​ ​run​ ​it​ ​will​ ​decrease

​ ​d.​ ​In​ ​the​ ​first​ ​year​ ​income​ ​will​ ​increase;​ ​in​ ​the​ ​long​ ​run​ ​it​ ​will​ ​remain​ ​nearly​ ​the​ ​same

9.​ ​Economist​ ​Austen​ ​Goolsbee​ ​estimated​ ​that​ ​the​ ​short-run​ ​elasticity​ ​of​ ​“income​ ​supply”​ ​for​ ​these
executives​ ​was​ ​1.4,​ ​while​ ​the​ ​long-run​ ​elasticity​ ​of​ ​“income​ ​supply”​ ​was​ ​0.1.​ ​(Note:​ ​Goolsbee​ ​used​ ​a
22
variety​ ​of​ ​statistical​ ​methods​ ​to​ ​look​ ​for​ ​these​ ​elasticities,​ ​and​ ​all​ ​came​ ​to​ ​roughly​ ​the​ ​same​ ​result.)​ ​If
taxes​ ​pushed​ ​down​ ​their​ ​take-home​ ​income​ ​by​ ​10%,​ ​how​ ​much​ ​would​ ​this​ ​cut​ ​the​ ​amount​ ​of​ ​income
supplied​ ​in​ ​the​ ​short​ ​run?​ ​In​ ​the​ ​long​ ​run?

​ ​a.​ ​Short​ ​run​ ​income​ ​would​ ​decrease​ ​10%;​ ​long​ ​run​ ​income​ ​would​ ​decrease​ ​1%

​ ​b.​ ​Short​ ​run​ ​income​ ​would​ ​decrease​ ​14%;​ ​long​ ​run​ ​income​ ​would​ ​decrease​ ​1%

Explanation:​ ​Using​ ​the​ ​equation​ ​for​ ​elasticity:​ ​1.4=%​ ​of​ ​income​ ​supplied/10%.​ ​Thus,​ ​in​ ​the​ ​short
run,​ ​the​ ​percent​ ​of​ ​income​ ​supplied​ ​will​ ​be​ ​cut​ ​by​ ​14%.​ ​Using​ ​the​ ​equation​ ​for​ ​elasticity​ ​again:​ ​0.1=%​ ​of
income​ ​supplied/10%.​ ​Percent​ ​of​ ​income​ ​supplied​ ​in​ ​the​ ​long​ ​run​ ​will​ ​be​ ​1%.

​ ​c.​ ​Short​ ​run​ ​income​ ​would​ ​decrease​ ​10%;​ ​long​ ​run​ ​income​ ​would​ ​decrease​ ​2%

​ ​d.​ ​Short​ ​run​ ​income​ ​would​ ​decrease​ ​14%;​ ​long​ ​run​ ​income​ ​would​ ​decrease​ ​2%

Video​ ​name:​ ​Elasticity​ ​and​ ​Slave​ ​Redemption

1.​ ​For​ ​which​ ​of​ ​the​ ​following​ ​products​ ​would​ ​you​ ​expect​ ​the​ ​largest​ ​increase​ ​in​ ​price​ ​for​ ​the​ ​same
increase​ ​in​ ​demand?

​ ​a.​ ​Flashlights

​ ​b.​ ​Pens

​ ​c.​ ​A​ ​first​ ​edition​ ​of​ ​Adam​ ​Smith's​ ​The​ ​Wealth​ ​of​ ​Nations

Explanation:​ ​The​ ​supply​ ​of​ ​first​ ​edition​ ​books​ ​like​ ​Wealth​ ​of​ ​Nations​ ​is​ ​very​ ​inelastic.

​ ​d.​ ​Jeans

2.​ ​A​ ​good​ ​is​ ​more​ ​elastic​ ​when

​ ​a.​ ​it​ ​is​ ​easy​ ​to​ ​produce​ ​more​ ​at​ ​the​ ​same​ ​cost

​ ​b.​ ​it​ ​is​ ​made​ ​from​ ​rubber

​ ​c.​ ​it​ ​is​ ​difficult​ ​to​ ​produce​ ​more​ ​at​ ​the​ ​same​ ​cost

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​ ​d.​ ​the​ ​marginal​ ​cost​ ​is​ ​equal​ ​to​ ​the​ ​price

3.​ ​In​ ​the​ ​world​ ​of​ ​fashion,​ ​the​ ​power​ ​to​ ​imitate​ ​a​ ​trendy​ ​look​ ​is​ ​the​ ​power​ ​to​ ​make​ ​money.​ ​Stores​ ​like
H&M​ ​and​ ​Forever​ ​21​ ​focus​ ​on​ ​imitating​ ​fashions​ ​wherever​ ​possible:​ ​As​ ​soon​ ​as​ ​they​ ​see​ ​that​ ​a​ ​new​ ​look
is​ ​coming​ ​along,​ ​something​ ​people​ ​are​ ​willing​ ​to​ ​pay​ ​a​ ​high​ ​price​ ​for,​ ​they​ ​start​ ​cranking​ ​out​ ​that​ ​look.
Do​ ​these​ ​imitation-centered​ ​stores​ ​make​ ​the​ ​supply​ ​of​ ​clothing​ ​more​ ​elastic​ ​or​ ​more​ ​inelastic?

​ ​a.​ ​More​ ​elastic

Explanation:​ ​A​ ​rise​ ​in​ ​price​ ​causes​ ​a​ ​much​ ​larger​ ​change​ ​in​ ​quantity​ ​supplied.

​ ​b.​ ​Less​ ​elastic

4.​ ​A​ ​lot​ ​of​ ​American​ ​action​ ​movies​ ​are​ ​quests​ ​to​ ​eliminate​ ​a​ ​villain.​ ​If​ ​in​ ​real​ ​life​ ​villains​ ​are​ ​elastically
supplied​ ​(like​ ​guns​ ​for​ ​buyback​ ​programs),​ ​should​ ​we​ ​care​ ​whether​ ​the​ ​hero​ ​captures​ ​a​ ​particular
villain?

​ ​a.​ ​Yes

​ ​b.​ ​No

Explanation:​ ​No,​ ​we​ ​shouldn’t​ ​care.​ ​Once​ ​one​ ​villain​ ​is​ ​eliminated,​ ​another​ ​will​ ​quickly​ ​take​ ​his
or​ ​her​ ​place​ ​if​ ​the​ ​supply​ ​of​ ​villains​ ​is​ ​elastic.

Video​ ​name:​ ​Applications​ ​Using​ ​Elasticity

1.​ ​Suppose​ ​that​ ​drug​ ​addicts​ ​pay​ ​for​ ​their​ ​addiction​ ​by​ ​stealing:​ ​So​ ​the​ ​higher​ ​the​ ​total​ ​revenue​ ​of​ ​the
illegal​ ​drug​ ​industry,​ ​the​ ​higher​ ​the​ ​amount​ ​of​ ​theft.​ ​If​ ​a​ ​government​ ​crackdown​ ​on​ ​drug​ ​suppliers​ ​leads
to​ ​a​ ​higher​ ​price​ ​of​ ​drugs,​ ​what​ ​will​ ​happen​ ​to​ ​the​ ​amount​ ​of​ ​stealing​ ​if​ ​the​ ​demand​ ​for​ ​drugs​ ​is​ ​elastic?

​ ​a.​ ​The​ ​overall​ ​amount​ ​of​ ​stealing​ ​will​ ​decrease

Explanation:​ ​If​ ​the​ ​demand​ ​for​ ​drugs​ ​is​ ​elastic,​ ​a​ ​higher​ ​price​ ​of​ ​drugs​ ​will​ ​mean​ ​less​ ​consumer
expenditure​ ​on​ ​drugs.​ ​While​ ​some​ ​people​ ​will​ ​steal​ ​more​ ​to​ ​pay​ ​for​ ​the​ ​higher​ ​price,​ ​more​ ​than​ ​enough
people​ ​to​ ​outweigh​ ​that​ ​will​ ​steal​ ​less​ ​as​ ​they​ ​move​ ​away​ ​from​ ​drugs​ ​in​ ​favor​ ​of​ ​other​ ​recreation.​ ​The
overall​ ​amount​ ​of​ ​stealing​ ​will​ ​decrease.

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​ ​b.​ ​The​ ​overall​ ​amount​ ​of​ ​stealing​ ​will​ ​increase

​ ​c.​ ​The​ ​overall​ ​amount​ ​of​ ​stealing​ ​will​ ​remain​ ​the​ ​same

2.​ ​Suppose​ ​that​ ​drug​ ​addicts​ ​pay​ ​for​ ​their​ ​addiction​ ​by​ ​stealing:​ ​So​ ​the​ ​higher​ ​the​ ​total​ ​revenue​ ​of​ ​the
illegal​ ​drug​ ​industry,​ ​the​ ​higher​ ​the​ ​amount​ ​of​ ​theft.​ ​If​ ​a​ ​government​ ​crackdown​ ​on​ ​drug​ ​suppliers​ ​leads
to​ ​a​ ​higher​ ​price​ ​of​ ​drugs,​ ​what​ ​will​ ​happen​ ​to​ ​the​ ​amount​ ​of​ ​stealing​ ​if​ ​the​ ​demand​ ​for​ ​drugs​ ​is​ ​inelastic?

​ ​a.​ ​The​ ​overall​ ​amount​ ​of​ ​stealing​ ​will​ ​decrease

​ ​b.​ ​The​ ​overall​ ​amount​ ​of​ ​stealing​ ​will​ ​increase

Explanation:​ ​If​ ​the​ ​demand​ ​for​ ​drugs​ ​is​ ​inelastic,​ ​a​ ​higher​ ​price​ ​of​ ​drugs​ ​will​ ​mean​ ​greater
consumer​ ​expenditure​ ​on​ ​drugs.​ ​Since​ ​the​ ​consumers​ ​get​ ​money​ ​for​ ​their​ ​addiction​ ​by​ ​stealing,​ ​the
amount​ ​of​ ​stealing​ ​will​ ​increase.

​ ​c.​ ​The​ ​overall​ ​amount​ ​of​ ​stealing​ ​will​ ​remain​ ​the​ ​same

3.​ ​Immigration​ ​is​ ​a​ ​fact​ ​of​ ​life​ ​in​ ​the​ ​United​ ​States.​ ​This​ ​will​ ​lead​ ​to​ ​a​ ​big​ ​boost​ ​in​ ​the​ ​labor​ ​supply.​ ​What
field​ ​would​ ​you​ ​rather​ ​be​ ​in?

​ ​a.​ ​A​ ​field​ ​where​ ​the​ ​demand​ ​for​ ​your​ ​kind​ ​of​ ​labor​ ​is​ ​elastic.

Explanation:​ ​I​ ​want​ ​to​ ​be​ ​in​ ​a​ ​field​ ​where​ ​the​ ​demand​ ​for​ ​my​ ​labor​ ​is​ ​elastic​ ​because​ ​a​ ​big
increase​ ​in​ ​supply​ ​won’t​ ​push​ ​down​ ​my​ ​wage​ ​much.

​ ​b.​ ​A​ ​field​ ​where​ ​the​ ​demand​ ​for​ ​your​ ​kind​ ​of​ ​labor​ ​is​ ​inelastic.

4.​ ​We​ ​saw​ ​that​ ​a​ ​gun​ ​buyback​ ​program​ ​was​ ​unlikely​ ​to​ ​work​ ​in​ ​Washington,​ ​D.C.​ ​If​ ​the​ ​entire​ ​United
States​ ​ran​ ​a​ ​gun​ ​buyback​ ​program,​ ​would​ ​that​ ​be​ ​better​ ​at​ ​eliminating​ ​guns​ ​or​ ​worse?​ ​Hint:​ ​Is​ ​the​ ​supply
of​ ​guns​ ​at​ ​a​ ​national​ ​level​ ​more​ ​elastic​ ​or​ ​more​ ​inelastic?​ ​*

​ ​a.​ ​Better

Explanation:​ ​A​ ​national​ ​gun​ ​buyback​ ​would​ ​probably​ ​be​ ​more​ ​effective,​ ​since​ ​the​ ​supply​ ​of​ ​guns
is​ ​more​ ​inelastic​ ​at​ ​the​ ​national​ ​level.​ ​It’s​ ​harder​ ​to​ ​import​ ​guns​ ​from​ ​elsewhere​ ​to​ ​sell​ ​in​ ​the​ ​United
States​ ​than​ ​to​ ​import​ ​guns​ ​from​ ​Maryland​ ​to​ ​sell​ ​in​ ​Washington,​ ​D.C.​ ​There​ ​still​ ​is​ ​the​ ​important​ ​problem
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of​ ​people​ ​just​ ​selling​ ​useless​ ​guns,​ ​long-forgotten​ ​guns,​ ​and​ ​so​ ​forth,​ ​but​ ​it​ ​weakens​ ​the​ ​problem​ ​of
imports.​ ​If​ ​the​ ​gun​ ​buyback​ ​problem​ ​were​ ​accompanied​ ​by​ ​a​ ​law​ ​making​ ​it​ ​illegal​ ​to​ ​own​ ​(or​ ​produce
more)​ ​guns,​ ​the​ ​program​ ​would​ ​likely​ ​be​ ​even​ ​more​ ​effective​ ​at​ ​getting​ ​guns​ ​off​ ​the​ ​street.​ ​Australia
enacted​ ​just​ ​such​ ​a​ ​program​ ​in​ ​1997.​ ​Economists​ ​Andrew​ ​Leigh​ ​and​ ​Christine​ ​Neill​ ​found​ ​that​ ​the
program​ ​was​ ​successful​ ​at​ ​reducing​ ​the​ ​number​ ​of​ ​guns​ ​in​ ​Australia​ ​and​ ​that​ ​it​ ​reduced​ ​firearm​ ​deaths,
especially​ ​firearm​ ​suicides.

​ ​b.​ ​Worse

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Taxes​ ​and​ ​Subsidies

Video​ ​name:​ ​Commodity​ ​Taxes

1.​ ​Fill​ ​in​ ​the​ ​blanks:​ ​As​ ​long​ ​as​ ​supply​ ​and​ ​demand​ ​curves​ ​have​ ​their​ ​normal​ ​shape​ ​(the​ ​demand​ ​curves
have​ ​a​ ​negative​ ​slope​ ​while​ ​supply​ ​curves​ ​have​ ​a​ ​positive​ ​slope),​ ​if​ ​there​ ​is​ ​a​ ​tax,​ ​the​ ​equilibrium​ ​quantity
must​ ​_______​ ​and​ ​the​ ​price​ ​that​ ​buyers​ ​pay​ ​must​ ​_______.

​ ​a.​ ​Fall;​ ​rise

Explanation:​ ​Quantity​ ​falls,​ ​the​ ​price​ ​received​ ​by​ ​suppliers​ ​falls,​ ​and​ ​the​ ​price​ ​paid​ ​by​ ​the​ ​buyer
rises.

​ ​b.​ ​Fall;​ ​fall

​ ​c.​ ​Rise;​ ​fall

​ ​d.​ ​Fall;​ ​rise

2.​ ​Fill​ ​in​ ​the​ ​blanks:​ ​As​ ​long​ ​as​ ​supply​ ​and​ ​demand​ ​curves​ ​have​ ​their​ ​normal​ ​shape​ ​(the​ ​demand​ ​curve
has​ ​a​ ​negative​ ​slope​ ​while​ ​supply​ ​curves​ ​have​ ​appositive​ ​slope),​ ​if​ ​there​ ​is​ ​a​ ​tax,​ ​the​ ​equilibrium​ ​quantity
must​ ​_______​ ​and​ ​the​ ​price​ ​that​ ​sellers​ ​receive​ ​must​ ​_______.

​ ​a.​ ​Fall;​ ​rise

​ ​b.​ ​Fall;​ ​fall

Explanation:​ ​Quantity​ ​falls,​ ​the​ ​price​ ​received​ ​by​ ​suppliers​ ​falls,​ ​and​ ​the​ ​price​ ​paid​ ​by​ ​the​ ​buyer
rises.​ ​(Note:​ ​The​ ​correct​ ​answer(s)​ ​to​ ​this​ ​question​ ​was​ ​(were)​ ​actually​ ​controversial​ ​until​ ​Nobel​ ​Laureate
Paul​ ​Samuelson​ ​created​ ​a​ ​simple​ ​mathematical​ ​proof​ ​in​ ​his​ ​legendary​ ​graduate​ ​textbook,​ ​Foundations​ ​of
Economic​ ​Analysis.)

​ ​c.​ ​Rise;​ ​fall

​ ​d.​ ​Fall;​ ​rise

Video​ ​name:​ ​Who​ ​Pays​ ​the​ ​Tax?

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1.​ ​Junk​ ​food​ ​has​ ​been​ ​criticized​ ​for​ ​being​ ​unhealthy​ ​and​ ​too​ ​cheap,​ ​enticing​ ​the​ ​poor​ ​to​ ​adopt​ ​unhealthy
lifestyles.​ ​Suppose​ ​that​ ​the​ ​state​ ​of​ ​Oklakansas​ ​imposes​ ​a​ ​tax​ ​on​ ​junk​ ​food.​ ​For​ ​the​ ​tax​ ​to​ ​actually​ ​deter
people​ ​from​ ​eating​ ​junk​ ​food,​ ​should​ ​junk​ ​food​ ​demand​ ​be​ ​elastic​ ​or​ ​inelastic?

​ ​a.​ ​Elastic

Explanation:​ ​The​ ​tax​ ​will​ ​achieve​ ​its​ ​goals​ ​only​ ​if​ ​junk​ ​food​ ​is​ ​sensitive​ ​to​ ​price,​ ​which​ ​means
demand​ ​for​ ​junk​ ​food​ ​has​ ​to​ ​be​ ​elastic.

​ ​b.​ ​Inelastic

2.​ ​If​ ​the​ ​Oklakansas​ ​government​ ​wants​ ​to​ ​strongly​ ​discourage​ ​people​ ​from​ ​eating​ ​junk​ ​food,​ ​when​ ​will​ ​it
need​ ​to​ ​set​ ​a​ ​higher​ ​tax​ ​rate:​ ​When​ ​junk​ ​food​ ​demand​ ​is​ ​elastic​ ​or​ ​when​ ​it​ ​is​ ​inelastic?

​ ​a.​ ​Elastic

​ ​b.​ ​Inelastic

Explanation:​ ​Because​ ​only​ ​an​ ​extremely​ ​high​ ​price​ ​will​ ​discourage​ ​stubborn​ ​consumers,​ ​the
government​ ​will​ ​need​ ​to​ ​set​ ​a​ ​higher​ ​tax​ ​rate​ ​when​ ​consumers​ ​have​ ​inelastic​ ​junk​ ​food​ ​demand.​ ​Higher
taxes​ ​are​ ​needed​ ​to​ ​deter​ ​consumers​ ​who​ ​are​ ​more​ ​insensitive​ ​to​ ​price.

3.​ ​Let’s​ ​take​ ​a​ ​look​ ​at​ ​the​ ​supply​ ​side​ ​of​ ​junk​ ​food.​ ​If​ ​junk​ ​food​ ​supply​ ​is​ ​highly​ ​elastic—perhaps​ ​because
it’s​ ​not​ ​that​ ​hard​ ​to​ ​start​ ​selling​ ​salads​ ​with​ ​lowfat​ ​dressing​ ​instead​ ​of​ ​mayonnaise-​ ​and​ ​cheese-laden
burgers—will​ ​a​ ​junk​ ​food​ ​tax​ ​have​ ​a​ ​bigger​ ​effect​ ​if​ ​supply​ ​were​ ​inelastic​ ​or​ ​elastic?

​ ​a.​ ​Elastic

Explanation:​ ​Elastic​ ​supply​ ​is​ ​better​ ​from​ ​the​ ​government’s​ ​point​ ​of​ ​view,​ ​just​ ​as​ ​elastic​ ​demand
is​ ​better.​ ​As​ ​long​ ​as​ ​the​ ​goal​ ​is​ ​getting​ ​the​ ​quantity​ ​to​ ​move​ ​a​ ​lot,​ ​you​ ​want​ ​elasticity.

​ ​b.​ ​Inelastic

4.​ ​If​ ​a​ ​government​ ​is​ ​hoping​ ​that​ ​a​ ​small​ ​tax​ ​can​ ​actually​ ​discourage​ ​a​ ​lot​ ​of​ ​junk​ ​food​ ​purchases,​ ​it
should​ ​hope​ ​for:

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​ ​a.​ ​Elastic​ ​supply​ ​and​ ​inelastic​ ​demand

​ ​b.​ ​Elastic​ ​supply​ ​and​ ​elastic​ ​demand

Explanation:​ ​As​ ​long​ ​as​ ​the​ ​goal​ ​is​ ​getting​ ​the​ ​quantity​ ​to​ ​move​ ​a​ ​lot,​ ​you​ ​want​ ​elasticity.

​ ​c.​ ​Inelastic​ ​supply​ ​and​ ​elastic​ ​demand

​ ​d.​ ​Inelastic​ ​supply​ ​and​ ​inelastic​ ​demand

5.​ ​What​ ​does​ ​it​ ​mean​ ​that​ ​elasticity​ ​equals​ ​escape?​ ​(This​ ​is​ ​worth​ ​remembering:​ ​Elasticity​ ​is​ ​one​ ​of​ ​the
toughest​ ​ideas​ ​for​ ​most​ ​economics​ ​students.)

​ ​a.​ ​People​ ​with​ ​elastic​ ​demands​ ​don’t​ ​like​ ​to​ ​pay​ ​taxes

​ ​b.​ ​It​ ​is​ ​easy​ ​for​ ​market​ ​participants​ ​to​ ​escape​ ​to​ ​another​ ​market​ ​if​ ​they​ ​have​ ​elastic​ ​demand​ ​or​ ​supply

Explanation:​ ​Elasticity​ ​=​ ​escape​ ​because​ ​someone​ ​with​ ​high​ ​elasticity​ ​is​ ​someone​ ​who​ ​can​ ​easily
escape​ ​to​ ​another​ ​market,​ ​either​ ​as​ ​a​ ​supplier​ ​or​ ​as​ ​a​ ​demander.

​ ​c.​ ​Resources​ ​used​ ​to​ ​produce​ ​goods​ ​with​ ​elastic​ ​supply​ ​cannot​ ​be​ ​used​ ​for​ ​much​ ​else

6.​ ​One​ ​way​ ​governments​ ​have​ ​tried​ ​to​ ​collect​ ​taxes​ ​from​ ​the​ ​wealthy​ ​is​ ​through​ ​the​ ​use​ ​of​ ​luxury​ ​taxes,
which​ ​are​ ​exactly​ ​what​ ​they​ ​sound​ ​like:​ ​taxes​ ​on​ ​goods​ ​that​ ​are​ ​considered​ ​luxuries,​ ​like​ ​jewelry​ ​or
expensive​ ​cars​ ​and​ ​real​ ​estate.​ ​What​ ​is​ ​true​ ​about​ ​the​ ​demand​ ​for​ ​luxuries?

​ ​a.​ ​It​ ​is​ ​elastic

Explanation:​ ​Because​ ​luxuries​ ​are​ ​by​ ​definition​ ​not​ ​necessities,​ ​the​ ​demand​ ​for​ ​them​ ​is​ ​elastic.

​ ​b.​ ​It​ ​is​ ​inelastic

​ ​c.​ ​It​ ​is​ ​unit​ ​elastic

7.​ ​Consider​ ​jewelry.​ ​Is​ ​a​ ​luxury​ ​tax​ ​more​ ​likely​ ​to​ ​hurt​ ​the​ ​buyers​ ​of​ ​jewelry,​ ​or​ ​the​ ​sellers​ ​of​ ​jewelry?

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​ ​a.​ ​The​ ​buyers

​ ​b.​ ​The​ ​sellers

Explanation:​ ​ ​Because​ ​the​ ​demand​ ​for​ ​luxuries​ ​in​ ​elastic,​ ​the​ ​buyers​ ​of​ ​luxuries​ ​will​ ​escape​ ​the
luxury​ ​tax​ ​and​ ​it​ ​will​ ​be​ ​borne​ ​primarily​ ​by​ ​the​ ​sellers​ ​of​ ​luxuries.

8.​ ​Let’s​ ​apply​ ​the​ ​economics​ ​of​ ​taxation​ ​to​ ​romantic​ ​relationships.​ ​Sometimes​ ​relationships​ ​have​ ​taxes.
Suppose​ ​that​ ​you​ ​and​ ​your​ ​boyfriend​ ​or​ ​girlfriend​ ​live​ ​one​ ​hour​ ​apart.​ ​Using​ ​the​ ​tools​ ​developed​ ​in​ ​the
chapter,​ ​how​ ​can​ ​you​ ​predict​ ​which​ ​one​ ​of​ ​you​ ​will​ ​do​ ​most​ ​of​ ​the​ ​driving?​ ​That​ ​is,​ ​which​ ​one​ ​of​ ​you​ ​will
bear​ ​the​ ​majority​ ​of​ ​the​ ​relationship​ ​tax?

​ ​a.​ ​The​ ​person​ ​with​ ​more​ ​inelastic​ ​demand​ ​for​ ​the​ ​relationship​ ​will​ ​bear​ ​the​ ​tax​ ​–​ ​he​ ​or​ ​she​ ​will​ ​do​ ​most​ ​of
the​ ​driving.

Explanation:​ ​If​ ​your​ ​demand​ ​for​ ​the​ ​relationship​ ​is​ ​more​ ​inelastic,​ ​you​ ​view​ ​the​ ​relationship​ ​as
more​ ​of​ ​a​ ​necessity,​ ​therefore​ ​you​ ​will​ ​do​ ​more​ ​driving​ ​and​ ​bear​ ​more​ ​of​ ​the​ ​tax.

​ ​b.​ ​The​ ​person​ ​with​ ​more​ ​elastic​ ​demand​ ​for​ ​the​ ​relationship​ ​will​ ​bear​ ​the​ ​tax​ ​–​ ​he​ ​or​ ​she​ ​will​ ​do​ ​most​ ​of
the​ ​driving.

9.​ ​In​ ​the​ ​opening​ ​scene​ ​of​ ​the​ ​classic​ ​Eddie​ ​Murphy​ ​comedy​ ​Beverly​ ​Hills​ ​Cop,​ ​Axel​ ​Foley,​ ​a​ ​Detroit
police​ ​officer,​ ​is​ ​stopping​ ​a​ ​cigarette​ ​smuggling​ ​ring.​ ​Of​ ​course,​ ​smugglers​ ​don’t​ ​pay​ ​the​ ​tax​ ​when​ ​the
cigarettes​ ​cross​ ​state​ ​lines.​ ​Which​ ​way​ ​do​ ​you​ ​suspect​ ​the​ ​smugglers​ ​were​ ​moving​ ​the​ ​cigarettes,​ ​based
on​ ​economic​ ​theory?

​ ​a.​ ​From​ ​the​ ​high-tax​ ​North​ ​to​ ​the​ ​low-cost​ ​South.

​ ​b.​ ​From​ ​the​ ​low-cost​ ​South​ ​to​ ​the​ ​high-tax​ ​North.

Explanation:​ ​The​ ​smugglers​ ​were​ ​quite​ ​likely​ ​moving​ ​cigarettes​ ​from​ ​the​ ​low-tax​ ​South​ ​to​ ​the
high-tax​ ​North.​ ​There​ ​was​ ​money​ ​to​ ​be​ ​made​ ​in​ ​avoiding​ ​taxes.

10.​ ​In​ ​our​ ​discussion​ ​of​ ​taxation,​ ​we’ve​ ​acted​ ​as​ ​if​ ​it​ ​were​ ​effortless​ ​to​ ​pass​ ​and​ ​enforce​ ​tax​ ​laws.​ ​But,​ ​of
course,​ ​law​ ​enforcement​ ​officials​ ​including​ ​the​ ​Internal​ ​Revenue​ ​Service​ ​put​ ​a​ ​lot​ ​of​ ​effort​ ​into​ ​enforcing

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tax​ ​laws.​ ​Let’s​ ​think​ ​for​ ​a​ ​moment​ ​about​ ​what​ ​kind​ ​of​ ​taxes​ ​are​ ​easiest​ ​to​ ​collect,​ ​just​ ​based​ ​on​ ​the​ ​basic
ideas​ ​we’ve​ ​covered.​ ​Who​ ​will​ ​make​ ​the​ ​most​ ​effort​ ​to​ ​escape​ ​a​ ​tax?

​ ​a.​ ​The​ ​party​ ​who​ ​is​ ​elastic

​ ​b.​ ​The​ ​party​ ​who​ ​is​ ​inelastic

Explanation:​ ​The​ ​party​ ​who​ ​is​ ​inelastic​ ​will​ ​make​ ​the​ ​most​ ​effort,​ ​because​ ​he​ ​or​ ​she​ ​bears​ ​most​ ​of
the​ ​tax​ ​burden.​ ​So​ ​if​ ​the​ ​supplier​ ​is​ ​inelastic,​ ​she​ ​will​ ​go​ ​to​ ​great​ ​efforts​ ​to​ ​find​ ​a​ ​way​ ​around​ ​the​ ​tax.
People​ ​want​ ​to​ ​“escape”​ ​the​ ​tax​ ​but​ ​if​ ​they​ ​can’t​ ​escape​ ​by​ ​choosing​ ​a​ ​substitute,​ ​they’re​ ​more​ ​likely​ ​to
try​ ​to​ ​“escape”​ ​through​ ​tax​ ​avoidance.

​ ​c.​ ​Neither​ ​party

Video​ ​name:​ ​Tax​ ​Revenue​ ​and​ ​Deadweight​ ​Loss

1.​ ​Decades​ ​ago,​ ​Washington,​ ​DC,​ ​a​ ​fairly​ ​small​ ​city,​ ​wanted​ ​to​ ​raise​ ​more​ ​revenue​ ​by​ ​increasing​ ​the​ ​gas
tax.​ ​Washington,​ ​DC,​ ​shares​ ​borders​ ​with​ ​Maryland​ ​and​ ​Virginia,​ ​and​ ​it’s​ ​very​ ​easy​ ​to​ ​cross​ ​the​ ​borders
between​ ​these​ ​states.​ ​How​ ​elastic​ ​is​ ​the​ ​demand​ ​for​ ​gasoline​ ​sold​ ​at​ ​stations​ ​within​ ​Washington,​ ​DC?​ ​In
other​ ​words,​ ​if​ ​the​ ​price​ ​of​ ​gas​ ​in​ ​DC​ ​rises,​ ​but​ ​the​ ​price​ ​in​ ​Maryland​ ​and​ ​Virginia​ ​stays​ ​the​ ​same,​ ​will
gasoline​ ​sales​ ​at​ ​DC​ ​stations​ ​fall​ ​a​ ​little,​ ​or​ ​will​ ​they​ ​fall​ ​a​ ​lot?"

​ ​a.​ ​Elastic​ ​–​ ​gasoline​ ​sales​ ​would​ ​fall​ ​a​ ​lot

Explanation:​ ​Gas​ ​sales​ ​are​ ​very​ ​elastic​ ​because​ ​it​ ​is​ ​easy​ ​to​ ​drive​ ​across​ ​the​ ​border​ ​to​ ​buy​ ​gas
where​ ​it’s​ ​cheapest.

​ ​b.​ ​Inelastic​ ​–​ ​gasoline​ ​sales​ ​would​ ​fall​ ​a​ ​little

2.​ ​Given​ ​your​ ​answer​ ​on​ ​the​ ​previous​ ​question,​ ​how​ ​much​ ​revenue​ ​did​ ​it​ ​raise​ ​when​ ​it​ ​increased​ ​its
gasoline​ ​tax?

​ ​a.​ ​A​ ​little​ ​revenue

Explanation:​ ​Gasoline​ ​sales​ ​in​ ​Washington,​ ​DC,​ ​plummeted​ ​and​ ​the​ ​tax​ ​raised​ ​very​ ​little​ ​revenue
because​ ​people​ ​could​ ​easily​ ​go​ ​to​ ​neighboring​ ​states​ ​to​ ​get​ ​gas.

​ ​b.​ ​A​ ​lot​ ​of​ ​revenue

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3.​ ​If​ ​DC,​ ​Maryland,​ ​and​ ​Virginia​ ​all​ ​agreed​ ​to​ ​raise​ ​their​ ​gas​ ​tax​ ​simultaneously,​ ​how​ ​much​ ​revenue
could​ ​the​ ​gas​ ​tax​ ​raise?​ ​Note:​ ​These​ ​states​ ​have​ ​heavily​ ​populated​ ​borders​ ​with​ ​each​ ​other,​ ​but​ ​they​ ​don’t
have​ ​any​ ​heavily​ ​populated​ ​borders​ ​with​ ​other​ ​states.

​ ​a.​ ​A​ ​little​ ​revenue

​ ​b.​ ​A​ ​lot​ ​of​ ​revenue

Explanation:​ ​If​ ​they​ ​all​ ​raised​ ​the​ ​gas​ ​tax​ ​simultaneously,​ ​they​ ​could​ ​raise​ ​a​ ​lot​ ​of​ ​revenue.​ ​The
demand​ ​within​ ​these​ ​three​ ​states​ ​is​ ​more​ ​inelastic,​ ​since​ ​drivers​ ​don’t​ ​have​ ​many​ ​good​ ​alternatives​ ​to
filling​ ​up​ ​within​ ​the​ ​tri-state​ ​area.

4.​ ​Suppose​ ​that​ ​Maria​ ​is​ ​willing​ ​to​ ​pay​ ​$40​ ​for​ ​a​ ​haircut,​ ​and​ ​her​ ​stylist​ ​Juan​ ​is​ ​willing​ ​to​ ​accept​ ​as​ ​little
as​ ​$25​ ​for​ ​a​ ​haircut.​ ​What​ ​possible​ ​price​ ​for​ ​the​ ​haircut​ ​would​ ​be​ ​beneficial​ ​to​ ​both​ ​Maria​ ​and​ ​Juan?

​ ​a.​ ​$20

​ ​b.​ ​$30

Explanation:​ ​Any​ ​price​ ​greater​ ​than​ ​$25​ ​will​ ​make​ ​Juan​ ​better​ ​off;​ ​any​ ​price​ ​lower​ ​than​ ​$40​ ​will
make​ ​Maria​ ​better​ ​off.

​ ​c.​ ​$45

5.​ ​Given​ ​that​ ​Maria​ ​and​ ​Juan​ ​find​ ​a​ ​price​ ​suitable​ ​to​ ​both​ ​of​ ​them,​ ​how​ ​much​ ​total​ ​surplus​ ​(i.e.,​ ​the​ ​sum
of​ ​consumer​ ​and​ ​producer​ ​surplus)​ ​would​ ​be​ ​generated?

​ ​a.​ ​$15

Explanation:​ ​this​ ​is​ ​the​ ​sum​ ​of​ ​1.the​ ​difference​ ​between​ ​the​ ​amount​ ​Maria​ ​is​ ​willing​ ​to​ ​pay​ ​and
the​ ​amount​ ​she​ ​actually​ ​pays​ ​and​ ​2.​ ​the​ ​difference​ ​between​ ​what​ ​Juan​ ​is​ ​willing​ ​to​ ​receive​ ​and​ ​what​ ​he
actually​ ​receives.

​ ​b.​ ​$30

​ ​c.​ ​$10

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6.​ ​If​ ​the​ ​state​ ​where​ ​Maria​ ​and​ ​Juan​ ​live​ ​instituted​ ​a​ ​tax​ ​on​ ​services​ ​that​ ​included​ ​a​ ​$5​ ​per​ ​haircut​ ​tax​ ​on
stylists​ ​and​ ​barbers,​ ​what​ ​is​ ​one​ ​price​ ​that​ ​will​ ​make​ ​both​ ​Maria​ ​and​ ​Juan​ ​better​ ​off?

​ ​a.​ ​$28

​ ​b.​ ​$30

Explanation:​ ​If​ ​Juan​ ​has​ ​to​ ​pay​ ​a​ ​$5​ ​tax​ ​for​ ​every​ ​haircut​ ​he​ ​gives,​ ​then​ ​his​ ​willingness​ ​to​ ​accept
price​ ​will​ ​rise​ ​to​ ​$30.​ ​At​ ​a​ ​price​ ​of​ ​$30,​ ​he​ ​will​ ​give​ ​$5​ ​to​ ​the​ ​government​ ​and​ ​have​ ​$25​ ​leftover​ ​for
himself,​ ​which​ ​was​ ​originally​ ​the​ ​minimum​ ​he​ ​was​ ​willing​ ​to​ ​accept.​ ​Now​ ​Juan​ ​and​ ​Maria​ ​must​ ​find​ ​a
price​ ​greater​ ​than​ ​$30​ ​but​ ​less​ ​than​ ​$40.

​ ​c.​ ​$42

​ ​d.​ ​There​ ​are​ ​no​ ​prices​ ​that​ ​are​ ​suitable​ ​to​ ​both​ ​Maria​ ​and​ ​Juan

7.​ ​Suppose​ ​that​ ​Maria​ ​is​ ​willing​ ​to​ ​pay​ ​$40​ ​for​ ​a​ ​haircut,​ ​and​ ​her​ ​stylist​ ​Juan​ ​is​ ​willing​ ​to​ ​accept​ ​as​ ​little
as​ ​$25​ ​for​ ​a​ ​haircut.​ ​If​ ​the​ ​state​ ​where​ ​Maria​ ​and​ ​Juan​ ​live​ ​instituted​ ​a​ ​tax​ ​on​ ​services​ ​that​ ​included​ ​a​ ​$5
per​ ​haircut​ ​tax​ ​on​ ​stylists​ ​and​ ​barbers,​ ​what​ ​will​ ​happen​ ​to​ ​the​ ​$15​ ​of​ ​economic​ ​benefit?

​ ​a.​ ​It​ ​will​ ​decrease

​ ​b.​ ​It​ ​will​ ​increase

​ ​c.​ ​It​ ​will​ ​stay​ ​the​ ​same

Explanation:​ ​While​ ​the​ ​benefit​ ​to​ ​Maria​ ​and​ ​Juan​ ​will​ ​sum​ ​only​ ​to​ ​$10,​ ​the​ ​government​ ​also
receives​ ​$5​ ​in​ ​tax​ ​revenue,​ ​so​ ​the​ ​total​ ​economic​ ​benefit​ ​generated​ ​by​ ​the​ ​haircut​ ​is​ ​still​ ​$15.​ ​Therefore,
the​ ​tax​ ​will​ ​only​ ​shift​ ​money​ ​to​ ​the​ ​government​ ​and​ ​away​ ​from​ ​the​ ​producers​ ​and​ ​consumers.

8.​ ​Suppose​ ​that​ ​Maria​ ​is​ ​willing​ ​to​ ​pay​ ​$40​ ​for​ ​a​ ​haircut,​ ​and​ ​her​ ​stylist​ ​Juan​ ​is​ ​willing​ ​to​ ​accept​ ​as​ ​little
as​ ​$25​ ​for​ ​a​ ​haircut.​ ​If​ ​a​ ​previous​ ​$5​ ​tax​ ​increases​ ​to​ ​$20,​ ​will​ ​the​ ​haircut​ ​transaction​ ​still​ ​happen?

​ ​a.​ ​Yes

​ ​b.​ ​No

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 Explanation:​ ​Now,​ ​there​ ​are​ ​no​ ​prices​ ​high​ ​enough​ ​to​ ​satisfy​ ​Juan​ ​(higher​ ​than​ ​$45)​ ​but​ ​low
enough​ ​to​ ​satisfy​ ​Maria​ ​(lower​ ​than​ ​$40).​ ​Therefore,​ ​the​ ​haircut​ ​will​ ​not​ ​take​ ​place.​ ​It​ ​will,​ ​therefore,​ ​not
generate​ ​any​ ​tax​ ​revenue,​ ​and​ ​the​ ​total​ ​economic​ ​benefit​ ​will​ ​be​ ​reduced​ ​to​ ​$0.

9.​ ​The​ ​competitive​ ​market​ ​equilibrium​ ​maximizes​ ​gains​ ​from​ ​trade.​ ​Taxes​ ​and​ ​subsidies,​ ​by​ ​altering​ ​the
market​ ​outcome,​ ​reduce​ ​the​ ​gains​ ​from​ ​trade.​ ​Does​ ​this​ ​happen​ ​primarily​ ​because​ ​of​ ​the​ ​impact​ ​of​ ​taxes
and​ ​subsidies​ ​on​ ​prices,​ ​or​ ​the​ ​impact​ ​of​ ​taxes​ ​and​ ​subsidies​ ​on​ ​quantities?

​ ​a.​ ​The​ ​impact​ ​on​ ​prices

​ ​b.​ ​The​ ​impact​ ​on​ ​quantities

Explanation:​ ​The​ ​gains​ ​from​ ​trade​ ​are​ ​reduced​ ​primarily​ ​through​ ​the​ ​impact​ ​of​ ​taxes​ ​and
subsidies​ ​on​ ​the​ ​market​ ​quantity.​ ​In​ ​the​ ​case​ ​of​ ​taxes,​ ​too​ ​few​ ​transactions​ ​take​ ​place,​ ​which​ ​means​ ​that
there​ ​are​ ​some​ ​unexploited​ ​opportunities​ ​to​ ​exchange​ ​goods​ ​with​ ​value​ ​higher​ ​than​ ​their​ ​costs.​ ​In​ ​the​ ​case
of​ ​subsidies,​ ​too​ ​many​ ​transactions​ ​take​ ​place,​ ​so​ ​that​ ​some​ ​goods​ ​are​ ​exchanged​ ​that​ ​have​ ​costs​ ​higher
than​ ​their​ ​value.​ ​So​ ​quantity​ ​is​ ​the​ ​key,​ ​and​ ​economic​ ​welfare​ ​can​ ​be​ ​reduced​ ​if​ ​too​ ​many​ ​or​ ​too​ ​few
transactions​ ​take​ ​place.

Video​ ​name:​ ​Subsidies

1.​ ​Fill​ ​in​ ​the​ ​blanks:​ ​When​ ​the​ ​government​ ​subsidizes​ ​an​ ​activity,​ ​resources​ ​such​ ​as​ ​labor,​ ​machines,​ ​and
bank​ ​lending​ ​will​ ​tend​ ​to​ ​gravitate​ ​__________​ ​the​ ​activity​ ​that​ ​is​ ​subsidized​ ​and​ ​will​ ​tend​ ​to​ ​gravitate
___________​ ​activity​ ​that​ ​is​ ​not​ ​subsidized.

​ ​a.​ ​toward;​ ​away​ ​from

Explanation:​ ​On​ ​the​ ​supply​ ​side,​ ​resources​ ​move​ ​toward​ ​the​ ​activity​ ​that​ ​is​ ​subsidized​ ​and​ ​away
from​ ​the​ ​activity​ ​that​ ​is​ ​not​ ​subsidized

​ ​b.​ ​toward;​ ​toward

​ ​c.​ ​away​ ​from;​ ​toward

​ ​d.​ ​away​ ​from;​ ​away​ ​from

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2.​ ​Fill​ ​in​ ​the​ ​blanks:​ ​When​ ​the​ ​government​ ​taxes​ ​an​ ​activity,​ ​resources​ ​such​ ​as​ ​labor,​ ​machines,​ ​and​ ​bank
lending​ ​will​ ​tend​ ​to​ ​gravitate​ ​_________the​ ​activity​ ​that​ ​is​ ​taxed​ ​and​ ​will​ ​tend​ ​to​ ​gravitate​ ​________
activity​ ​that​ ​is​ ​not​ ​taxed.

​ ​a.​ ​toward;​ ​away​ ​from

​ ​b.​ ​toward;​ ​toward

​ ​c.​ ​away​ ​from;​ ​toward

Explanation:​ ​On​ ​the​ ​supply​ ​side,​ ​resources​ ​move​ ​away​ ​from​ ​the​ ​activity​ ​that​ ​is​ ​taxed​ ​and​ ​toward
the​ ​untaxed​ ​activity.

​ ​d.​ ​away​ ​from;​ ​away​ ​from

3.​ ​Some​ ​people​ ​with​ ​diabetes​ ​absolutely​ ​need​ ​to​ ​take​ ​insulin​ ​on​ ​a​ ​regular​ ​basis​ ​to​ ​survive.
Pharmaceutical​ ​companies​ ​that​ ​make​ ​insulin​ ​could​ ​find​ ​a​ ​lot​ ​of​ ​other​ ​ways​ ​to​ ​make​ ​some​ ​money.​ ​If​ ​the
U.S.​ ​government​ ​imposes​ ​a​ ​tax​ ​on​ ​insulin​ ​producers​ ​of​ ​$10​ ​per​ ​cubic​ ​centimeter​ ​of​ ​insulin,​ ​payable​ ​every
month​ ​to​ ​the​ ​U.S.​ ​Treasury,​ ​who​ ​will​ ​bear​ ​most​ ​of​ ​the​ ​burden​ ​of​ ​the​ ​tax?

​ ​a.​ ​Insulin​ ​producers

​ ​b.​ ​People​ ​with​ ​diabetes

​ ​c.​ ​Not​ ​enough​ ​information​ ​is​ ​given

4.​ ​Suppose​ ​instead​ ​that​ ​because​ ​of​ ​government​ ​corruption,​ ​the​ ​insulin​ ​manufacturers​ ​convince​ ​the​ ​U.S.
government​ ​to​ ​pay​ ​the​ ​insulin​ ​makers​ ​$10​ ​per​ ​cubic​ ​centimeter​ ​of​ ​insulin,​ ​payable​ ​every​ ​month​ ​from​ ​the
U.S.​ ​Treasury.​ ​Who​ ​will​ ​get​ ​most​ ​of​ ​the​ ​benefit​ ​of​ ​this​ ​subsidy?

​ ​a.​ ​Insulin​ ​producers

​ ​b.​ ​People​ ​with​ ​diabetes

​ ​c.​ ​Not​ ​enough​ ​information​ ​is​ ​given

35
Video​ ​name:​ ​Wage​ ​Subsidies

1.​ ​What​ ​effect​ ​do​ ​wage​ ​subsidies​ ​have​ ​on​ ​employment?

​ ​a.​ ​Wage​ ​subsidies​ ​increase​ ​employment

Explanation:​ ​Producers​ ​will​ ​hire​ ​more​ ​workers​ ​because,​ ​by​ ​definition,​ ​wage​ ​subsidies​ ​decrease
the​ ​cost​ ​of​ ​hiring.

​ ​b.​ ​Wage​ ​subsidies​ ​decrease​ ​employment

​ ​c.​ ​Wage​ ​subsidies​ ​have​ ​no​ ​effect​ ​on​ ​employment

2.​ ​What​ ​effect​ ​do​ ​wage​ ​subsidies​ ​have​ ​on​ ​the​ ​demand​ ​for​ ​welfare​ ​payments?

​ ​a.​ ​Wage​ ​subsidies​ ​increase​ ​the​ ​demand​ ​for​ ​welfare​ ​payments

​ ​b.​ ​Wage​ ​subsidies​ ​decrease​ ​the​ ​demand​ ​for​ ​welfare​ ​payments

Explanation:​ ​Because​ ​more​ ​people​ ​are​ ​likely​ ​to​ ​be​ ​employed,​ ​wage​ ​subsidies​ ​reduce​ ​the​ ​demand
for​ ​welfare​ ​payments.

​ ​c.​ ​Wage​ ​subsidies​ ​have​ ​no​ ​effect​ ​on​ ​the​ ​demand​ ​for​ ​welfare​ ​payments

3.​ ​Which​ ​one​ ​of​ ​the​ ​following​ ​options​ ​is​ ​a​ ​real​ ​life​ ​example​ ​of​ ​a​ ​wage​ ​subsidy?

​ ​a.​ ​Food​ ​stamps​ ​(SNAP)

​ ​b.​ ​Housing​ ​assistance

​ ​c.​ ​The​ ​Earned​ ​Income​ ​Tax​ ​Credit

Explanation:​ ​The​ ​earned​ ​income​ ​tax​ ​credit​ ​awards​ ​employees​ ​based​ ​on​ ​their​ ​income,​ ​and​ ​in
effect,​ ​subsidizes​ ​their​ ​wages.

​ ​d.​ ​The​ ​minimum​ ​wage

36
4.​ ​Fill​ ​in​ ​the​ ​blanks:​ ​Wage​ ​subsidies​ ​____​ ​the​ ​demand​ ​for​ ​labor​ ​and​ ​the​ ​number​ ​of​ ​low​ ​skilled​ ​jobs.​ ​The
minimum​ ​wage​ ​laws​ ​____​ ​the​ ​demand​ ​for​ ​labor​ ​and​ ​the​ ​number​ ​of​ ​low​ ​skilled​ ​jobs.

​ ​a.​ ​increase;​ ​increase

​ ​b.​ ​increase;​ ​decrease

Explanation:​ ​Minimum​ ​wage​ ​laws​ ​increase​ ​the​ ​cost​ ​of​ ​hiring​ ​workers,​ ​and​ ​thus​ ​have​ ​the​ ​opposite
effect​ ​as​ ​wage​ ​subsidies.

​ ​c.​ ​decrease;​ ​increase

​ ​d.​ ​decrease;​ ​decrease

37
The​ ​Price​ ​System

Video​ ​name:​ ​I,​ ​Rose

No​ ​questions

Video​ ​name:​ ​ ​A​ ​Price​ ​Is​ ​a​ ​Signal​ ​Wrapped​ ​up​ ​in​ ​an​ ​Incentive

1.​ ​Circa​ ​1200​ ​BCE,​ ​a​ ​decreasing​ ​supply​ ​of​ ​tin​ ​due​ ​to​ ​wars​ ​and​ ​the​ ​breakdown​ ​of​ ​trade​ ​led​ ​to​ ​a​ ​drastic
increase​ ​in​ ​the​ ​price​ ​of​ ​bronze​ ​in​ ​the​ ​Middle​ ​East​ ​and​ ​Greece​ ​(tin​ ​being​ ​necessary​ ​for​ ​its​ ​production).​ ​It
is​ ​around​ ​this​ ​time​ ​that​ ​blacksmiths​ ​developed​ ​iron-​ ​and​ ​steel-making​ ​techniques​ ​(as​ ​substitutes​ ​for
bronze).​ ​What​ ​does​ ​the​ ​increasing​ ​price​ ​of​ ​bronze​ ​signal?

​ ​a.​ ​It​ ​tells​ ​people​ ​that​ ​bronze​ ​is​ ​getting​ ​harder​ ​to​ ​find​ ​and​ ​its​ ​higher​ ​price​ ​will​ ​signal​ ​consumers​ ​to
conserve​ ​it​ ​more​ ​or​ ​seek​ ​substitutes.

​ ​b.​ ​It​ ​tells​ ​people​ ​that​ ​there​ ​is​ ​a​ ​price​ ​bubble​ ​forming​ ​around​ ​bronze​ ​and​ ​that​ ​people​ ​are​ ​overvaluing​ ​the
price​ ​of​ ​bronze.

​ ​c.​ ​It​ ​tells​ ​people​ ​that​ ​the​ ​wars​ ​in​ ​the​ ​Middle​ ​East​ ​and​ ​Greece​ ​are​ ​coming​ ​close​ ​to​ ​being​ ​resolved​ ​because
of​ ​bronze​ ​scarcity.

​ ​d.​ ​It​ ​tells​ ​people​ ​to​ ​buy​ ​more​ ​bronze​ ​because​ ​it​ ​is​ ​going​ ​to​ ​be​ ​more​ ​valuable​ ​in​ ​the​ ​future.

2.​ ​How​ ​is​ ​the​ ​increasing​ ​price​ ​of​ ​bronze​ ​an​ ​incentive?

​ ​a.​ ​Consumers​ ​will​ ​save​ ​more​ ​money​ ​by​ ​conserving​ ​bronze.

​ ​b.​ ​Consumers​ ​who​ ​switch​ ​to​ ​substitutes​ ​can​ ​save​ ​money.

​ ​c.​ ​Entrepreneurs​ ​can​ ​profit​ ​by​ ​developing​ ​new​ ​alternatives​ ​to​ ​bronze.

​ ​d.​ ​Entrepreneurs​ ​can​ ​profit​ ​by​ ​developing​ ​ways​ ​to​ ​recycle​ ​bronze.

​ ​e.​ ​All​ ​of​ ​the​ ​above.

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3.​ ​Why​ ​do​ ​you​ ​think​ ​iron​ ​and​ ​steel​ ​became​ ​more​ ​common​ ​around​ ​the​ ​same​ ​time​ ​as​ ​the​ ​increase​ ​in​ ​price​ ​of
bronze?

​ ​a.​ ​An​ ​increase​ ​in​ ​the​ ​demand​ ​for​ ​bronze​ ​signals​ ​that​ ​people​ ​are​ ​wealthy​ ​enough​ ​to​ ​afford​ ​iron​ ​and​ ​steel.

​ ​b.​ ​An​ ​increase​ ​in​ ​the​ ​price​ ​of​ ​bronze​ ​encourages​ ​innovation​ ​to​ ​produce​ ​substitutes.

​ ​c.​ ​An​ ​increase​ ​in​ ​the​ ​price​ ​of​ ​a​ ​resources​ ​signals​ ​that​ ​it​ ​is​ ​too​ ​competitive​ ​to​ ​make​ ​a​ ​profit,​ ​so
entrepreneurs​ ​seek​ ​other​ ​alternatives.

​ ​d.​ ​The​ ​introduction​ ​of​ ​iron​ ​and​ ​steel​ ​differentiates​ ​bronze​ ​for​ ​specific​ ​uses​ ​and​ ​therefore​ ​causes​ ​its​ ​price
to​ ​increase.

4.​ ​After​ ​the​ ​development​ ​of​ ​iron,​ ​did​ ​the​ ​supply​ ​or​ ​demand​ ​for​ ​bronze​ ​shift?​ ​Which​ ​way​ ​did​ ​it​ ​shift?​ ​Why?

​ ​a.​ ​The​ ​demand​ ​for​ ​bronze​ ​shifted​ ​to​ ​the​ ​left​ ​(down)​ ​because​ ​there​ ​was​ ​now​ ​a​ ​good​ ​substitute​ ​for​ ​bronze.

​ ​b.​ ​The​ ​demand​ ​for​ ​bronze​ ​shifted​ ​to​ ​the​ ​right​ ​(up)​ ​because​ ​there​ ​was​ ​now​ ​a​ ​good​ ​substitute​ ​for​ ​bronze.

​ ​c.​ ​The​ ​supply​ ​for​ ​bronze​ ​shifted​ ​to​ ​the​ ​right​ ​(down)​ ​because​ ​there​ ​was​ ​now​ ​a​ ​good​ ​substitute​ ​for​ ​bronze.

​ ​d.​ ​The​ ​supply​ ​for​ ​bronze​ ​shifted​ ​to​ ​the​ ​left​ ​(up)​ ​because​ ​the​ ​quantity​ ​demanded​ ​of​ ​bronze​ ​decreased.

5.​ ​One​ ​question​ ​that​ ​economics​ ​students​ ​often​ ​ask​ ​is​ ​“In​ ​a​ ​market​ ​with​ ​a​ ​lot​ ​of​ ​buyers​ ​and​ ​sellers,​ ​who
sets​ ​the​ ​price​ ​of​ ​the​ ​good?”​ ​There​ ​are​ ​two​ ​possible​ ​correct​ ​answers​ ​to​ ​this​ ​question:​ ​“Everyone”​ ​and
“No​ ​one.”​ ​What​ ​is​ ​meant​ ​by​ ​“Everyone?”

​ ​a.​ ​In​ ​a​ ​market​ ​operating​ ​in​ ​a​ ​western​ ​democracy,​ ​everyone​ ​gets​ ​to​ ​vote​ ​on​ ​price​ ​controls​ ​and​ ​restrictions
to​ ​ensure​ ​the​ ​market​ ​operates​ ​fairly.

​ ​b.​ ​In​ ​a​ ​market​ ​with​ ​many​ ​participants,​ ​each​ ​person’s​ ​actions​ ​push​ ​the​ ​supply​ ​or​ ​the​ ​demand​ ​just​ ​a​ ​little
bit,​ ​so​ ​everyone​ ​has​ ​some​ ​small​ ​influence.

​ ​c.​ ​In​ ​a​ ​market​ ​with​ ​many​ ​suppliers​ ​and​ ​demanders,​ ​each​ ​person’s​ ​actions​ ​have​ ​a​ ​negligible​ ​effect​ ​on
supply​ ​or​ ​the​ ​demand,​ ​so​ ​everyone​ ​has​ ​to​ ​work​ ​together​ ​to​ ​influence​ ​the​ ​market.

​ ​d.​ ​Everyone​ ​has​ ​to​ ​consume​ ​something.

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6.​ ​What​ ​is​ ​meant​ ​by​ ​“No​ ​one?”

​ ​a.​ ​No​ ​one​ ​person’s​ ​behavior​ ​can​ ​affect​ ​prices.

​ ​b.​ ​No​ ​one​ ​wants​ ​the​ ​equilibrium​ ​price.​ ​Everyone​ ​wants​ ​the​ ​lowest​ ​price​ ​possible.

​ ​c.​ ​There​ ​is​ ​too​ ​much​ ​information​ ​for​ ​suppliers​ ​to​ ​know​ ​how​ ​to​ ​set​ ​prices.

​ ​d.​ ​Nobody​ ​actually​ ​plans​ ​for​ ​a​ ​given​ ​price​ ​to​ ​be​ ​the​ ​equilibrium​ ​price.

Video​ ​name:​ ​Markets​ ​Link​ ​the​ ​World

1.​ ​Suppose​ ​you​ ​learned​ ​that​ ​growing​ ​political​ ​instability​ ​in​ ​Chile​ ​(the​ ​largest​ ​producer​ ​of​ ​copper)​ ​will
greatly​ ​reduce​ ​the​ ​productivity​ ​of​ ​its​ ​mines​ ​in​ ​two​ ​years.​ ​Ignoring​ ​all​ ​other​ ​factors,​ ​which​ ​curve​ ​(demand
or​ ​supply)​ ​will​ ​shift​ ​which​ ​way​ ​in​ ​the​ ​market​ ​for​ ​copper​ ​two​ ​years​ ​from​ ​now?

​ ​a.​ ​Demand​ ​curve​ ​will​ ​increase,​ ​that​ ​is,​ ​a​ ​shift​ ​to​ ​the​ ​right​ ​(up).

​ ​b.​ ​Demand​ ​curve​ ​will​ ​decrease,​ ​that​ ​is,​ ​a​ ​shift​ ​to​ ​the​ ​left​ ​(down).

​ ​c.​ ​Supply​ ​curve​ ​will​ ​increase,​ ​that​ ​is,​ ​a​ ​shift​ ​to​ ​the​ ​right​ ​(down).

​ ​d.​ ​Supply​ ​curve​ ​will​ ​decrease,​ ​that​ ​is,​ ​a​ ​shift​ ​to​ ​the​ ​left​ ​(up).

2.​ ​Will​ ​the​ ​price​ ​rise​ ​or​ ​fall​ ​as​ ​a​ ​result​ ​of​ ​this​ ​curve​ ​shift?

​ ​a.​ ​The​ ​price​ ​will​ ​rise.

​ ​b.​ ​The​ ​price​ ​will​ ​fall.

3.​ ​The​ ​video​ ​explores​ ​how​ ​prices​ ​tie​ ​all​ ​goods​ ​together.​ ​To​ ​illustrate​ ​this​ ​idea,​ ​suppose​ ​new​ ​farming
techniques​ ​drastically​ ​increased​ ​the​ ​productivity​ ​of​ ​growing​ ​wheat.​ ​Given​ ​this​ ​change,​ ​how​ ​would​ ​the
price​ ​of​ ​wheat​ ​change?

40
​ ​a.​ ​Increase,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​right.

​ ​b.​ ​Increase,​ ​because​ ​supply​ ​would​ ​shift​ ​to​ ​the​ ​left.

​ ​c.​ ​Fall,​ ​because​ ​supply​ ​would​ ​shift​ ​to​ ​the​ ​right.

​ ​d.​ ​Fall,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​left.

4.​ ​How​ ​would​ ​the​ ​price​ ​of​ ​cookbooks​ ​specializing​ ​in​ ​recipes​ ​using​ ​wheat​ ​flour​ ​change?

​ ​a.​ ​Increase,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​right.

​ ​b.​ ​Increase,​ ​because​ ​supply​ ​would​ ​shift​ ​to​ ​the​ ​left.

​ ​c.​ ​Fall,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​right.

​ ​d.​ ​Fall,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​left.

5.​ ​Given​ ​your​ ​answer​ ​to​ ​the​ ​previous​ ​question,​ ​what​ ​would​ ​happen​ ​to​ ​the​ ​price​ ​of​ ​paper?

​ ​a.​ ​Increase,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​right.

​ ​b.​ ​Increase,​ ​because​ ​supply​ ​would​ ​shift​ ​to​ ​the​ ​left.

​ ​c.​ ​Fall,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​right.

​ ​d.​ ​Fall,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​left.

6.​ ​Given​ ​your​ ​prediction​ ​about​ ​the​ ​change​ ​in​ ​the​ ​price​ ​of​ ​paper,​ ​how​ ​would​ ​the​ ​price​ ​of​ ​pencils​ ​change?
(Hint:​ ​are​ ​paper​ ​and​ ​pencils​ ​complements​ ​or​ ​substitutes?)

​ ​a.​ ​Rise,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​right.

​ ​b.​ ​Rise,​ ​because​ ​supply​ ​would​ ​shift​ ​to​ ​the​ ​left.

41
​ ​c.​ ​Fall,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​right.

​ ​d.​ ​Fall,​ ​because​ ​demand​ ​would​ ​shift​ ​to​ ​the​ ​left.

Video​ ​name:​ ​The​ ​Great​ ​Economic​ ​Problem

1.​ ​Let’s​ ​see​ ​if​ ​the​ ​forces​ ​of​ ​the​ ​market​ ​can​ ​be​ ​as​ ​efficient​ ​as​ ​a​ ​benevolent​ ​dictator.​ ​Since​ ​laptop​ ​computers
are​ ​increasingly​ ​easy​ ​to​ ​build​ ​and​ ​since​ ​they​ ​allow​ ​people​ ​to​ ​use​ ​their​ ​computers​ ​wherever​ ​they​ ​like,​ ​an
all-wise​ ​benevolent​ ​dictator​ ​would​ ​probably​ ​decree​ ​that​ ​most​ ​people​ ​buy​ ​laptops​ ​rather​ ​than​ ​desktop
computers.​ ​This​ ​is​ ​especially​ ​true​ ​now​ ​that​ ​laptops​ ​are​ ​about​ ​as​ ​powerful​ ​as​ ​most​ ​desktops.​ ​Since​ ​it’s
become​ ​much​ ​easier​ ​to​ ​build​ ​better​ ​laptop​ ​computers​ ​in​ ​recent​ ​years,​ ​laptop​ ​supply​ ​has​ ​increased.​ ​What
does​ ​this​ ​do​ ​to​ ​the​ ​price​ ​of​ ​laptops?

​ ​a.​ ​The​ ​price​ ​of​ ​laptops​ ​increases.

​ ​b.​ ​The​ ​price​ ​of​ ​laptops​ ​decreases.

Explanation:​ ​The​ ​increase​ ​in​ ​supply​ ​pushes​ ​down​ ​the​ ​price​ ​of​ ​laptops.

​ ​c.​ ​An​ ​increase​ ​in​ ​laptop​ ​supply​ ​will​ ​not​ ​change​ ​its​ ​price.

2.​ ​Laptop​ ​and​ ​desktop​ ​computers​ ​are​ ​substitutes.​ ​Now​ ​that​ ​the​ ​price​ ​of​ ​laptops​ ​has​ ​changed,​ ​what​ ​does
this​ ​do​ ​to​ ​the​ ​demand​ ​for​ ​desktop​ ​computers?

​ ​a.​ ​The​ ​demand​ ​for​ ​desktops​ ​increases

​ ​b.​ ​The​ ​demand​ ​for​ ​desktops​ ​decreases.

​ ​c.​ ​A​ ​change​ ​in​ ​the​ ​price​ ​of​ ​laptops​ ​will​ ​not​ ​affect​ ​the​ ​price​ ​of​ ​desktops.

3.​ ​How​ ​does​ ​the​ ​change​ ​in​ ​desktop​ ​demand​ ​affect​ ​the​ ​quantity​ ​supplied​ ​of​ ​desktop​ ​computers?

​ ​a.​ ​The​ ​supply​ ​of​ ​desktops​ ​increases.

​ ​b.​ ​The​ ​supply​ ​of​ ​desktops​ ​decreases.

42
​ ​c.​ ​The​ ​supply​ ​of​ ​desktops​ ​is​ ​unaffected.

4.​ ​Once​ ​it​ ​became​ ​easier​ ​to​ ​build​ ​good​ ​laptops,​ ​did​ ​“invisible​ ​hand”​ ​forces​ ​push​ ​more​ ​of​ ​society’s
resources​ ​into​ ​making​ ​laptop​ ​and​ ​push​ ​resources​ ​away​ ​from​ ​making​ ​desktops?

​ ​a.​ ​Yes.

Explanation:​ ​Yes,​ ​there​ ​are​ ​now​ ​fewer​ ​people​ ​and​ ​machines​ ​making​ ​the​ ​old,​ ​worse​ ​kind​ ​of
computers.

​ ​b.​ ​No.

5.​ ​The​ ​process​ ​of​ ​market​ ​creation​ ​is​ ​most​ ​similar​ ​to​ ​the​ ​creation​ ​of​ ​a​ ​country’s

​ ​a.​ ​Constitution

​ ​b.​ ​Language

Explanation:​ ​Like​ ​markets,​ ​no​ ​one​ ​wrote​ ​out​ ​all​ ​the​ ​rules​ ​for​ ​any​ ​given​ ​language​ ​beforehand.
They​ ​emerged​ ​over​ ​time​ ​through​ ​trial​ ​and​ ​error.​ ​The​ ​one​ ​exception​ ​to​ ​this​ ​rule​ ​is​ ​Esperanto,​ ​which​ ​no​ ​one
speaks.

​ ​c.​ ​Defense​ ​strategy

Video​ ​name:​ ​Information​ ​and​ ​Incentives

1.​ ​If​ ​a​ ​nation’s​ ​government​ ​made​ ​it​ ​impossible​ ​for​ ​inefficient​ ​firms​ ​to​ ​fail​ ​by​ ​giving​ ​them​ ​loans,​ ​cash
grants,​ ​and​ ​other​ ​bailouts​ ​to​ ​stay​ ​in​ ​business,​ ​is​ ​that​ ​nation​ ​likely​ ​to​ ​be​ ​poorer​ ​or​ ​richer​ ​as​ ​a​ ​result​ ​of​ ​this
strategy?​ ​(Hint:​ ​Steven​ ​Davis​ ​and​ ​John​ ​Haltiwanger.​ ​1999.​ ​“Gross​ ​Job​ ​Flows.”​ ​In​ ​Handbook​ ​of​ ​Labor
Economics​ ​(Amsterdam:​ ​North–Holland)​ ​found​ ​than​ ​in​ ​the​ ​United​ ​States,​ ​60%​ ​of​ ​the​ ​increase​ ​in​ ​U.S.
manufacturing​ ​efficiency​ ​was​ ​caused​ ​by​ ​people​ ​moving​ ​from​ ​weak​ ​firms​ ​to​ ​strong​ ​firms.)

​ ​a.​ ​Richer.

​ ​b.​ ​Poorer.

43
 Explanation:​ ​If​ ​the​ ​most​ ​inefficient​ ​firms​ ​are​ ​kept​ ​from​ ​failing,​ ​then​ ​many​ ​people​ ​are​ ​spending
their​ ​days​ ​producing​ ​less​ ​than​ ​they​ ​would​ ​at​ ​a​ ​more​ ​efficient​ ​firm.​ ​Less​ ​production​ ​implies​ ​that,​ ​on
average,​ ​people​ ​will​ ​have​ ​less​ ​to​ ​consume.

2.​ ​Suppose​ ​a​ ​new​ ​invention​ ​comes​ ​along​ ​that​ ​makes​ ​it​ ​easier​ ​and​ ​much​ ​less​ ​expensive​ ​to​ ​recycle​ ​clothing:
perhaps​ ​a​ ​new​ ​device​ ​about​ ​the​ ​size​ ​of​ ​a​ ​washing​ ​machine​ ​can​ ​bleach,​ ​re-weave,​ ​and​ ​re-dye​ ​cotton​ ​fabric
to​ ​closely​ ​imitate​ ​any​ ​cotton​ ​item​ ​you​ ​see​ ​in​ ​a​ ​fashion​ ​magazine.​ ​Head​ ​into​ ​the​ ​laundry​ ​room,​ ​drop​ ​in​ ​a
batch​ ​of​ ​old​ ​clothes,​ ​scan​ ​in​ ​a​ ​couple​ ​of​ ​pages​ ​from​ ​Vogue,​ ​and​ ​come​ ​back​ ​in​ ​an​ ​hour.​ ​If​ ​you​ ​think​ ​of​ ​the
“market​ ​for​ ​clothing”​ ​as​ ​the​ ​“market​ ​for​ ​new​ ​clothing,”​ ​does​ ​this​ ​shift​ ​the​ ​demand​ ​or​ ​the​ ​supply​ ​of
clothing,​ ​and​ ​in​ ​which​ ​direction?

​ ​a.​ ​The​ ​supply​ ​of​ ​clothing​ ​shifts​ ​right:​ ​a​ ​rise​ ​in​ ​supply.

​ ​b.​ ​The​ ​supply​ ​of​ ​clothing​ ​shifts​ ​left:​ ​a​ ​fall​ ​in​ ​supply.

​ ​c.​ ​The​ ​demand​ ​for​ ​clothing​ ​shifts​ ​right:​ ​a​ ​rise​ ​in​ ​demand.

​ ​d.​ ​The​ ​demand​ ​for​ ​clothing​ ​shifts​ ​left:​ ​a​ ​fall​ ​in​ ​demand.

3.​ ​If​ ​you​ ​instead​ ​think​ ​of​ ​the​ ​“market​ ​for​ ​clothing”​ ​as​ ​the​ ​“market​ ​for​ ​clothing,​ ​whether​ ​it’s​ ​new​ ​or​ ​used,”
does​ ​this​ ​shift​ ​the​ ​demand​ ​or​ ​supply​ ​of​ ​clothing,​ ​and​ ​in​ ​which​ ​direction?

​ ​a.​ ​The​ ​supply​ ​of​ ​clothing​ ​shifts​ ​right:​ ​a​ ​rise​ ​in​ ​supply.

​ ​b.​ ​The​ ​supply​ ​of​ ​clothing​ ​shifts​ ​left:​ ​a​ ​fall​ ​in​ ​supply.

​ ​c.​ ​The​ ​demand​ ​for​ ​clothing​ ​shifts​ ​right:​ ​a​ ​rise​ ​in​ ​demand.

​ ​d.​ ​The​ ​demand​ ​for​ ​clothing​ ​shifts​ ​left:​ ​a​ ​fall​ ​in​ ​demand.

4.​ ​What​ ​happens​ ​to​ ​the​ ​price​ ​of​ ​new,​ ​unrecycled​ ​clothing?

​ ​a.​ ​The​ ​price​ ​of​ ​new​ ​clothing​ ​increases.

​ ​b.​ ​The​ ​price​ ​of​ ​new​ ​clothing​ ​decreases.

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​ ​c.​ ​The​ ​change​ ​in​ ​price​ ​direction​ ​depends​ ​on​ ​the​ ​size​ ​of​ ​the​ ​supply​ ​curve’s​ ​shift.

​ ​d.​ ​The​ ​price​ ​of​ ​new​ ​clothing​ ​will​ ​not​ ​change.

5.​ ​After​ ​this​ ​invention,​ ​will​ ​society’s​ ​scarce​ ​productive​ ​resources​ ​(machines,​ ​workers,​ ​retail​ ​space)​ ​flow
toward​ ​the​ ​“new​ ​clothing”​ ​sector​ ​or​ ​away​ ​from​ ​it?​ ​(Note:​ ​You​ ​may​ ​think​ ​this​ ​theoretical​ ​question​ ​is
fanciful​ ​but​ ​three-dimensional​ ​printers,​ ​which​ ​can​ ​create​ ​plastic​ ​or​ ​plaster​ ​prototypes​ ​of​ ​small​ ​items​ ​such
as​ ​toys,​ ​cups,​ ​etc.,​ ​have​ ​fallen​ ​dramatically​ ​in​ ​price.​ ​Every​ ​day,​ ​you’re​ ​getting​ ​just​ ​a​ ​bit​ ​closer​ ​to​ ​having
your​ ​own​ ​personal​ ​Star​ ​Trek​ ​replicator.)

​ ​a.​ ​Resources​ ​will​ ​flow​ ​toward​ ​the​ ​new​ ​clothing​ ​sector.

​ ​b.​ ​Resources​ ​will​ ​flow​ ​away​ ​from​ ​the​ ​new​ ​clothing​ ​sector.

​ ​c.​ ​Resource​ ​flows​ ​will​ ​remain​ ​unchanged.

Video​ ​name:​ ​Speculation

1.​ ​Sometimes​ ​speculators​ ​get​ ​it​ ​wrong.​ ​In​ ​the​ ​months​ ​before​ ​the​ ​Persian​ ​Gulf​ ​War,​ ​speculators​ ​drove​ ​up
the​ ​price​ ​of​ ​oil:​ ​The​ ​average​ ​price​ ​in​ ​October​ ​1990​ ​was​ ​$36​ ​per​ ​barrel,​ ​more​ ​than​ ​double​ ​its​ ​price​ ​in
1988.​ ​Oil​ ​speculators,​ ​like​ ​many​ ​people​ ​around​ ​the​ ​world,​ ​expected​ ​the​ ​Gulf​ ​War​ ​to​ ​last​ ​for​ ​months,
disrupting​ ​the​ ​oil​ ​supply​ ​throughout​ ​the​ ​Gulf​ ​region.​ ​Thus,​ ​speculators​ ​either​ ​bought​ ​oil​ ​on​ ​the​ ​open
market​ ​(almost​ ​always​ ​at​ ​the​ ​high​ ​speculative​ ​price)​ ​or​ ​they​ ​already​ ​owned​ ​oil​ ​and​ ​kept​ ​it​ ​in​ ​storage.
Either​ ​way,​ ​their​ ​plan​ ​was​ ​the​ ​same:​ ​to​ ​sell​ ​it​ ​in​ ​the​ ​future,​ ​when​ ​prices​ ​might​ ​even​ ​be​ ​higher.​ ​As​ ​it​ ​turned
out,​ ​the​ ​war​ ​was​ ​swift:​ ​After​ ​one​ ​month​ ​of​ ​massive​ ​aerial​ ​bombardment​ ​of​ ​Iraqi​ ​troops​ ​and​ ​a​ ​100-hour
ground​ ​war,​ ​then​ ​President​ ​George​ ​H.​ ​W.​ ​Bush​ ​declared​ ​a​ ​cessation​ ​of​ ​hostilities.​ ​Despite​ ​the​ ​fact​ ​that
Saddam​ ​Hussein​ ​set​ ​fire​ ​to​ ​many​ ​of​ ​Kuwait’s​ ​oil​ ​fields,​ ​the​ ​price​ ​of​ ​oil​ ​plummeted​ ​to​ ​about​ ​$20​ ​per
barrel,​ ​a​ ​price​ ​at​ ​which​ ​it​ ​remained​ ​for​ ​years.​ ​How​ ​much​ ​money​ ​did​ ​speculators​ ​lose​ ​or​ ​make​ ​on​ ​each
barrel?

​ ​a.​ ​Speculators​ ​made​ ​a​ ​profit​ ​of​ ​$16​ ​per​ ​barrel.

​ ​b.​ ​Speculators​ ​lost​ ​$16​ ​per​ ​barrel.

​ ​c.​ ​Most​ ​oil​ ​speculators​ ​broke​ ​even.

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2.​ ​When​ ​speculators​ ​sold​ ​their​ ​stored​ ​oil​ ​in​ ​the​ ​months​ ​after​ ​the​ ​war,​ ​did​ ​this​ ​massive​ ​resale​ ​tend​ ​to
increase​ ​the​ ​price​ ​of​ ​oil​ ​or​ ​decrease​ ​it?

​ ​a.​ ​The​ ​resale​ ​increased​ ​the​ ​price​ ​of​ ​oil.

​ ​b.​ ​The​ ​resale​ ​decreased​ ​the​ ​price​ ​of​ ​oil.

3.​ ​In​ ​1980,​ ​University​ ​of​ ​Maryland,​ ​Julian​ ​Simon​ ​bet​ ​Stanford​ ​entomologist​ ​Paul​ ​Ehrlich​ ​that​ ​the​ ​price​ ​of
any​ ​five​ ​metals​ ​of​ ​Ehrlich’s​ ​choosing​ ​would​ ​fall​ ​over​ ​10​ ​years.​ ​Ehrlich​ ​believed​ ​that​ ​resources​ ​would
become​ ​scarcer​ ​over​ ​time​ ​as​ ​the​ ​population​ ​grew,​ ​while​ ​Simon​ ​believed​ ​that​ ​people​ ​would​ ​find​ ​good
substitutes,​ ​just​ ​as​ ​earlier​ ​people​ ​developed​ ​iron​ ​as​ ​a​ ​substitute​ ​for​ ​scarce​ ​bronze.​ ​The​ ​price​ ​of​ ​all​ ​five
metals​ ​that​ ​Ehrlich​ ​chose​ ​(nickel,​ ​tin,​ ​tungsten,​ ​chromium,​ ​and​ ​copper)​ ​fell​ ​over​ ​the​ ​next​ ​10​ ​years​ ​and
Simon​ ​won​ ​the​ ​bet.​ ​Ehrlich,​ ​an​ ​honorable​ ​man,​ ​sent​ ​a​ ​check​ ​in​ ​the​ ​appropriate​ ​amount​ ​to​ ​Simon.​ ​What
does​ ​the​ ​falling​ ​price​ ​tell​ ​us​ ​about​ ​the​ ​relative​ ​scarcity​ ​of​ ​these​ ​metals?

​ ​a.​ ​The​ ​falling​ ​price​ ​indicates​ ​that​ ​the​ ​metals​ ​are​ ​scarcer​ ​than​ ​what​ ​they​ ​were​ ​before.

​ ​b.​ ​The​ ​falling​ ​price​ ​indicates​ ​that​ ​the​ ​metals​ ​are​ ​less​ ​scarce​ ​than​ ​what​ ​they​ ​were​ ​before.

​ ​c.​ ​The​ ​falling​ ​price​ ​tells​ ​us​ ​nothing​ ​about​ ​scarcity.

4.​ ​Which​ ​of​ ​the​ ​following​ ​could​ ​not​ ​have​ ​caused​ ​the​ ​shift?

​ ​a.​ ​Scientists​ ​developed​ ​substitutes​ ​for​ ​the​ ​minerals.

​ ​b.​ ​The​ ​demand​ ​for​ ​the​ ​minerals​ ​increased.

​ ​c.​ ​The​ ​supply​ ​of​ ​the​ ​minerals​ ​increased.

5.​ ​Choose​ ​the​ ​pair​ ​that​ ​best​ ​expresses​ ​a​ ​relationship​ ​similar​ ​to​ ​that​ ​in​ ​the​ ​original​ ​pair.​ ​Arbitrager:
Region​ ​::

​ ​a.​ ​Speculator:​ ​Market

​ ​b.​ ​Speculator:​ ​Time

46
 Explanation:​ ​Like​ ​arbitragers​ ​who​ ​move​ ​goods​ ​across​ ​regions,​ ​speculators​ ​also​ ​buy​ ​low​ ​and​ ​sell
high,​ ​except​ ​they​ ​buy​ ​and​ ​sell​ ​across​ ​time​ ​instead​ ​of​ ​national​ ​boundaries​ ​or​ ​regions.

​ ​c.​ ​Speculator:​ ​Forecast

​ ​d.​ ​Speculator:​ ​Bet

Video​ ​name:​ ​Prediction​ ​Markets

1.​ ​You​ ​manage​ ​a​ ​department​ ​store​ ​in​ ​Florida,​ ​and​ ​one​ ​winter​ ​you​ ​read​ ​in​ ​the​ ​newspaper​ ​that​ ​orange​ ​juice
futures​ ​have​ ​fallen​ ​dramatically​ ​in​ ​price.​ ​Should​ ​your​ ​store​ ​stock​ ​up​ ​on​ ​more​ ​sweaters​ ​than​ ​usual,​ ​or
should​ ​your​ ​store​ ​stock​ ​up​ ​on​ ​more​ ​Bermuda​ ​shorts?

​ ​a.​ ​Sweaters

​ ​b.​ ​Bermuda​ ​shorts

Explanation:​ ​Bermuda​ ​shorts,​ ​baby:​ ​The​ ​fall​ ​in​ ​orange​ ​juice​ ​futures​ ​is​ ​a​ ​sign​ ​of​ ​a​ ​good​ ​crop,
which​ ​probably​ ​means​ ​that​ ​speculators​ ​are​ ​expecting​ ​good,​ ​warm​ ​weather.

2.​ ​Andy​ ​enters​ ​in​ ​a​ ​futures​ ​contract​ ​allowing​ ​him​ ​to​ ​sell​ ​5,000​ ​troy​ ​ounces​ ​of​ ​gold​ ​at​ ​$1,000​ ​per​ ​ounce​ ​in
36​ ​months.​ ​After​ ​that​ ​time​ ​passes,​ ​the​ ​market​ ​price​ ​of​ ​gold​ ​is​ ​$950​ ​per​ ​troy​ ​ounce.​ ​How​ ​much​ ​did​ ​Andy
make​ ​or​ ​lose?

​ ​a.​ ​Andy​ ​made​ ​$50.

​ ​b.​ ​Andy​ ​lost​ ​$50.

​ ​c.​ ​Andy​ ​made​ ​$250,000.

Explanation:​ ​Andy​ ​made​ ​$250,000---​ ​he​ ​can​ ​now​ ​buy​ ​gold​ ​at​ ​$950​ ​per​ ​troy​ ​ounce​ ​and​ ​his
contract​ ​guarantees​ ​he​ ​can​ ​sell​ ​it​ ​$1,000.​ ​Thus,​ ​he​ ​can​ ​make​ ​$50​ ​per​ ​troy​ ​ounce​ ​and​ ​is​ ​allowed​ ​to​ ​repeat
the​ ​process​ ​5,000​ ​times.

​ ​d.​ ​Andy​ ​lost​ ​$250,000.

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3.​ ​Two​ ​major-party​ ​presidential​ ​candidates​ ​are​ ​running​ ​against​ ​each​ ​other​ ​in​ ​the​ ​2016​ ​election.​ ​The
Democratic​ ​Party​ ​candidate​ ​promises​ ​more​ ​money​ ​for​ ​corn-based​ ​ethanol​ ​research​ ​and​ ​the​ ​Republican
Party​ ​candidate​ ​promises​ ​more​ ​money​ ​for​ ​defense​ ​contractors.​ ​In​ ​the​ ​weeks​ ​before​ ​the​ ​election,​ ​defense
stocks​ ​take​ ​a​ ​nosedive.​ ​Who​ ​is​ ​probably​ ​going​ ​to​ ​win​ ​the​ ​election:​ ​the​ ​pro-ethanol​ ​candidate​ ​or​ ​the
pro-defense​ ​spending​ ​candidate?

​ ​a.​ ​Pro-ethanol​ ​research,​ ​or​ ​the​ ​Democratic​ ​Party,​ ​candidate

Explanation:​ ​The​ ​pro-defense​ ​candidate​ ​is​ ​probably​ ​going​ ​to​ ​lose​ ​or​ ​at​ ​least​ ​the​ ​fall​ ​in​ ​defense
stocks​ ​indicates​ ​that​ ​his​ ​chances​ ​of​ ​winning​ ​have​ ​fallen.

​ ​b.​ ​Pro-defense​ ​spending,​ ​or​ ​the​ ​Republican​ ​Party,​ ​candidate

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Price​ ​Ceilings​ ​and​ ​Price​ ​Floors

Video​ ​name:​ ​Price​ ​Ceilings

1.​ ​How​ ​does​ ​a​ ​free​ ​market​ ​eliminate​ ​a​ ​shortage?

​ ​a.​ ​By​ ​letting​ ​the​ ​price​ ​fall.

​ ​b.​ ​By​ ​letting​ ​the​ ​price​ ​rise.

Explanation:​ ​ ​At​ ​a​ ​higher​ ​price,​ ​demanders​ ​demand​ ​less​ ​and​ ​suppliers​ ​want​ ​to​ ​supply​ ​more,
thereby​ ​ending​ ​the​ ​shortage.

​ ​c.​ ​By​ ​creating​ ​quotas.

​ ​d.​ ​By​ ​creating​ ​a​ ​price​ ​ceiling.

2.​ ​Business​ ​leaders​ ​often​ ​say​ ​that​ ​there​ ​is​ ​a​ ​“shortage”​ ​of​ ​skilled​ ​workers,​ ​and​ ​so​ ​they​ ​argue​ ​that
immigrants​ ​need​ ​to​ ​be​ ​brought​ ​in​ ​to​ ​do​ ​these​ ​jobs.​ ​For​ ​example,​ ​an​ ​AP​ ​article​ ​entitled​ ​“New​ ​York
farmers​ ​fear​ ​a​ ​shortage​ ​of​ ​skilled​ ​workers,”​ ​pointing​ ​out​ ​that​ ​a​ ​special​ ​U.S.​ ​visa​ ​program,​ ​the​ ​H-2A
program,​ ​“allows​ ​employers​ ​to​ ​hire​ ​foreign​ ​workers​ ​temporarily​ ​if​ ​they​ ​show​ ​that​ ​they​ ​were​ ​not​ ​able​ ​to
find​ ​U.S.​ ​workers​ ​for​ ​the​ ​jobs.”​ ​(Source:​ ​Thompson,​ ​Carolyn.​ ​May​ ​13,​ ​2008.​ ​N.Y.​ ​farmers​ ​fear​ ​a​ ​shortage
of​ ​skilled​ ​workers​ ​Associated​ ​Press.)​ ​How​ ​do​ ​unregulated​ ​markets​ ​cure​ ​a​ ​“labor​ ​shortage”​ ​when​ ​there
are​ ​no​ ​immigrants​ ​to​ ​boost​ ​the​ ​labor​ ​supply?

​ ​a.​ ​Let​ ​the​ ​price​ ​of​ ​labor​ ​increase.

​ ​b.​ ​Let​ ​the​ ​price​ ​of​ ​labor​ ​decrease.

​ ​c.​ ​Contract​ ​production.

​ ​d.​ ​Expand​ ​production.

3.​ ​In​ ​the​ ​town​ ​of​ ​Freedonia,​ ​the​ ​government​ ​declares​ ​that​ ​all​ ​street​ ​parking​ ​must​ ​be​ ​free:​ ​There​ ​can​ ​be​ ​no
parking​ ​meters.​ ​In​ ​an​ ​almost​ ​identical​ ​town​ ​of​ ​Meterville,​ ​parking​ ​costs​ ​$5​ ​per​ ​hour​ ​(or​ ​$1.25​ ​per​ ​15
minutes).​ ​Where​ ​will​ ​it​ ​be​ ​easier​ ​to​ ​find​ ​parking:​ ​in​ ​Freedonia​ ​or​ ​Meterville?

49
​ ​a.​ ​Freedonia

​ ​b.​ ​Meterville

Explanation:​ ​ ​In​ ​Freedonia,​ ​there​ ​will​ ​be​ ​a​ ​shortage​ ​of​ ​parking​ ​spots​ ​and​ ​higher​ ​search​ ​costs​ ​to
find​ ​a​ ​parking​ ​spot.​ ​In​ ​Meterville,​ ​there​ ​will​ ​be​ ​parking​ ​for​ ​those​ ​willing​ ​to​ ​pay​ ​the​ ​price

​ ​c.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

4.​ ​One​ ​town​ ​will​ ​tend​ ​to​ ​attract​ ​shoppers​ ​who​ ​hate​ ​driving​ ​around​ ​looking​ ​for​ ​parking.​ ​Which​ ​one?

​ ​a.​ ​Freedonia

​ ​b.​ ​Meterville

Explanation:​ ​Meterville,​ ​again.​ ​Their​ ​stronger​ ​preference​ ​for​ ​easy-to-find​ ​parking​ ​suggests​ ​a
higher​ ​willingness​ ​to​ ​pay​ ​for​ ​it.​ ​Thus,​ ​the​ ​meters​ ​are​ ​a​ ​worthwhile​ ​price​ ​to​ ​pay​ ​to​ ​ensure​ ​a​ ​parking​ ​space.

5.​ ​Which​ ​town​ ​will​ ​likely​ ​attract​ ​shoppers​ ​with​ ​higher​ ​incomes?

​ ​a.​ ​Freedonia

​ ​b.​ ​Meterville

Explanation:​ ​People​ ​who​ ​have​ ​money​ ​to​ ​spend​ ​on​ ​meters​ ​typically​ ​have​ ​a​ ​higher​ ​opportunity​ ​cost
for​ ​their​ ​free​ ​time.​ ​That​ ​typically​ ​means​ ​they​ ​earn​ ​higher​ ​wages.

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Video​ ​name:​ ​Price​ ​Ceilings:​ ​Shortages​ ​and​ ​Quality​ ​Reduction

Suppose​ ​that​ ​the​ ​quantity​ ​demanded​ ​and​ ​quantity​ ​supplied​ ​in​ ​the​ ​market​ ​for​ ​milk​ ​is​ ​as​ ​follows:

Price​ ​per​ ​Gallon

Quantity Quantity​ ​Supplied
Demanded

$5 1000 5000

$4 2000 4500

$3 3500 3500

$2 4100 2000

$1 6000 1000

1.​ ​What​ ​is​ ​the​ ​equilibrium​ ​price​ ​and​ ​quantity​ ​of​ ​milk?

​ ​a.​ ​price:​ ​$4;​ ​quantity:​ ​4500

​ ​b.​ ​price:​ ​$3;​ ​quantity:​ ​3500

​ ​c.​ ​price:​ ​$2,​ ​quantity:​ ​2000

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​information​ ​given.

2.​ ​If​ ​the​ ​government​ ​places​ ​a​ ​price​ ​ceiling​ ​of​ ​$2​ ​on​ ​milk,​ ​how​ ​large​ ​with​ ​the​ ​shortage​ ​be?

​ ​a.​ ​2300​ ​gallons

​ ​b.​ ​2100​ ​gallons

Explanation:​ ​If​ ​the​ ​government​ ​places​ ​a​ ​price​ ​ceiling​ ​of​ ​$2​ ​on​ ​milk,​ ​there​ ​will​ ​be​ ​a​ ​shortage​ ​of
2,100​ ​gallons.​ ​At​ ​a​ ​price​ ​of​ ​$2,​ ​suppliers​ ​will​ ​be​ ​willing​ ​to​ ​sell​ ​2,000​ ​gallons.

51
​ ​c.​ ​3500​ ​gallons

​ ​d.​ ​2000​ ​gallons

3.​ ​If​ ​a​ ​government​ ​decides​ ​to​ ​make​ ​health​ ​insurance​ ​affordable​ ​by​ ​requiring​ ​all​ ​health​ ​insurance
companies​ ​to​ ​cut​ ​their​ ​prices​ ​by​ ​30%,​ ​what​ ​will​ ​probably​ ​happen​ ​to​ ​the​ ​number​ ​of​ ​people​ ​covered​ ​by
health​ ​insurance?

​ ​a.​ ​More​ ​people​ ​will​ ​be​ ​covered​ ​because​ ​it’s​ ​cheaper​ ​and​ ​more​ ​people​ ​can​ ​now​ ​afford​ ​it.

​ ​b.​ ​Fewer​ ​people​ ​will​ ​be​ ​covered​ ​because​ ​health​ ​insurance​ ​companies​ ​will​ ​supply​ ​less.

Explanation:​ ​This​ ​is​ ​just​ ​another​ ​price​ ​ceiling:​ ​It​ ​will​ ​create​ ​a​ ​shortage​ ​in​ ​health​ ​insurance,​ ​and
fewer​ ​people​ ​will​ ​be​ ​covered.

​ ​c.​ ​The​ ​number​ ​of​ ​insured​ ​will​ ​not​ ​change.

​ ​d.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

4.​ ​If​ ​the​ ​government​ ​forced​ ​all​ ​bread​ ​manufacturers​ ​to​ ​sell​ ​their​ ​products​ ​at​ ​a​ ​“fair​ ​price”​ ​that​ ​was​ ​half
the​ ​current,​ ​free-market​ ​price,​ ​what​ ​would​ ​happen​ ​to​ ​the​ ​quantity​ ​supplied​ ​of​ ​bread?

​ ​a.​ ​quantity​ ​supplied​ ​decreases.

​ ​b.​ ​quantity​ ​supplied​ ​increases.

​ ​c.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

5.​ ​With​ ​these​ ​price​ ​controls​ ​on​ ​bread,​ ​would​ ​you​ ​expect​ ​bread​ ​quality​ ​to​ ​rise​ ​or​ ​fall?

​ ​a.​ ​Quality​ ​rises

​ ​b.​ ​Quality​ ​falls

Explanation:​ ​Bread​ ​quality​ ​is​ ​likely​ ​to​ ​fall,​ ​just​ ​as​ ​the​ ​quality​ ​of​ ​any​ ​price-controlled​ ​good​ ​is
likely​ ​to​ ​fall.​ ​Think​ ​about​ ​the​ ​matzo​ ​balls!​ ​But​ ​one​ ​point​ ​to​ ​note​ ​is​ ​that​ ​if​ ​the​ ​quality​ ​of​ ​the​ ​bread​ ​falls,​ ​so

52
will​ ​the​ ​length​ ​of​ ​the​ ​line​ ​to​ ​get​ ​the​ ​bread,​ ​and​ ​we​ ​do​ ​not​ ​want​ ​to​ ​double​ ​count​ ​the​ ​losses​ ​from​ ​price
controls!

​ ​c.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

Video​ ​name:​ ​Price​ ​Ceilings:​ ​Lines​ ​and​ ​Search​ ​Costs

1.​ ​When​ ​a​ ​price​ ​ceiling​ ​is​ ​in​ ​place​ ​keeping​ ​the​ ​price​ ​below​ ​the​ ​market​ ​price,​ ​what’s​ ​larger:​ ​quantity
demanded​ ​or​ ​quantity​ ​supplied?

​ ​a.​ ​Quantity​ ​demanded.

Explanation:​ ​Those​ ​extra​ ​demanders​ ​wait​ ​in​ ​long​ ​lines​ ​and​ ​waste​ ​effort​ ​searching​ ​for​ ​scarce
goods.

​ ​b.​ ​Quantity​ ​supplied.

​ ​c.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

​ ​d.​ ​Neither.

Suppose​ ​that​ ​the​ ​market​ ​for​ ​coats​ ​can​ ​be​ ​described​ ​as​ ​follows:

Price
Quantity​ ​Demanded​ ​(millions) Quantity​ ​Supplied​ ​(millions)

$120 16 21

$100 18 18

$80 20 16

$60 22 14

2.​ ​What​ ​is​ ​the​ ​equilibrium​ ​price​ ​of​ ​coats?

53
​ ​a.​ ​$120

​ ​b.​ ​$100

​ ​c.​ ​$80

​ ​d.​ ​$60

3.​ ​Suppose​ ​the​ ​government​ ​sets​ ​a​ ​price​ ​ceiling​ ​of​ ​$80.​ ​How​ ​large​ ​will​ ​the​ ​shortage​ ​be?

​ ​a.​ ​5​ ​million​ ​coats

​ ​b.​ ​4​ ​million​ ​coats

​ ​c.​ ​3​ ​million​ ​coats

​ ​d.​ ​There​ ​is​ ​no​ ​shortage

4.​ ​Suppose​ ​again​ ​that​ ​the​ ​government​ ​sets​ ​a​ ​price​ ​ceiling​ ​of​ ​$80​ ​and​ ​that​ ​people​ ​line​ ​up​ ​to​ ​get​ ​this​ ​good.
For​ ​how​ ​long​ ​will​ ​people​ ​wait​ ​in​ ​line​ ​to​ ​obtain​ ​a​ ​coat​ ​if​ ​they​ ​value​ ​their​ ​time​ ​at​ ​$10​ ​an​ ​hour?

​ ​a.​ ​2​ ​hours

​ ​b.​ ​3​ ​hours

​ ​c.​ ​4​ ​hours

Explanation:​ ​If​ ​the​ ​government​ ​sets​ ​a​ ​price​ ​ceiling​ ​of​ ​$80,​ ​suppliers​ ​will​ ​produce​ ​16​ ​million
coats.​ ​At​ ​this​ ​quantity​ ​supplied,​ ​buyers​ ​value​ ​coats​ ​at​ ​$120​ ​each.​ ​If​ ​buyers​ ​are​ ​able​ ​to​ ​buy​ ​for​ ​$80​ ​what
they​ ​value​ ​at​ ​$120,​ ​there​ ​will​ ​be​ ​competition​ ​to​ ​obtain​ ​coats.​ ​Although​ ​buyers​ ​cannot​ ​bid​ ​up​ ​the​ ​money
price​ ​of​ ​coats,​ ​they​ ​can​ ​compete​ ​by​ ​waiting​ ​in​ ​line.​ ​Buyers​ ​will​ ​be​ ​willing​ ​to​ ​wait​ ​in​ ​line​ ​until​ ​the​ ​money
cost​ ​plus​ ​the​ ​time​ ​cost​ ​of​ ​the​ ​coat​ ​is​ ​equal​ ​to​ ​$120.​ ​Thus,​ ​if​ ​buyers​ ​value​ ​their​ ​time​ ​at​ ​$10​ ​an​ ​hour,​ ​they
will​ ​wait​ ​in​ ​line​ ​for​ ​up​ ​to​ ​four​ ​hours​ ​to​ ​obtain​ ​a​ ​coat.

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

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5.​ ​Between​ ​2000​ ​and​ ​2008,​ ​the​ ​price​ ​of​ ​oil​ ​increased​ ​from​ ​$30​ ​per​ ​barrel​ ​to​ ​$140​ ​per​ ​barrel,​ ​and​ ​the
price​ ​of​ ​gasoline​ ​in​ ​the​ ​United​ ​States​ ​rose​ ​from​ ​about​ ​$1.50​ ​per​ ​gallon​ ​to​ ​over​ ​$4.00​ ​per​ ​gallon.​ ​Unlike​ ​in
the​ ​1970s​ ​when​ ​oil​ ​prices​ ​spiked,​ ​there​ ​were​ ​no​ ​long​ ​lines​ ​outside​ ​gas​ ​stations.​ ​Why?

​ ​a.​ ​Government​ ​intervened​ ​to​ ​prevent​ ​lines.

​ ​b.​ ​Government​ ​intervened​ ​to​ ​enact​ ​gasoline​ ​rations.

​ ​c.​ ​There​ ​was​ ​no​ ​price​ ​control​ ​on​ ​gasoline​ ​at​ ​the​ ​time.

Explanation:​ ​There​ ​were​ ​no​ ​gas​ ​lines​ ​because​ ​this​ ​time​ ​because​ ​there​ ​were​ ​no​ ​price​ ​controls​ ​on
oil​ ​or​ ​gasoline.

6.​ ​Price​ ​controls​ ​distribute​ ​resources​ ​in​ ​many​ ​unintended​ ​ways.​ ​In​ ​the​ ​following​ ​cases​ ​below,​ ​who​ ​will
probably​ ​spend​ ​more​ ​time​ ​waiting​ ​in​ ​line​ ​to​ ​get​ ​scarce,​ ​price-controlled​ ​goods?​ ​Choose​ ​one​ ​from​ ​each
pair:

​ ​a.​ ​Working​ ​people

​ ​b.​ ​Retired​ ​people

7.​ ​Choose​ ​one​ ​from​ ​each​ ​pair:

​ ​a.​ ​Fast-food​ ​employees​ ​who​ ​earn​ ​$8​ ​per​ ​hour

​ ​b.​ ​Lawyers​ ​who​ ​charge​ ​$800​ ​per​ ​hour

8.​ ​Choose​ ​one​ ​from​ ​each​ ​pair:

​ ​a.​ ​People​ ​with​ ​desk​ ​jobs

​ ​b.​ ​People​ ​who​ ​can​ ​disappear​ ​for​ ​a​ ​couple​ ​of​ ​hours​ ​during​ ​the​ ​day

Explanation:​ ​Retired​ ​people,​ ​fast-food​ ​employees,​ ​and​ ​people​ ​who​ ​can​ ​disappear​ ​are​ ​all​ ​more
willing​ ​to​ ​stand​ ​in​ ​line.​ ​The​ ​opportunity​ ​cost​ ​of​ ​free​ ​time​ ​is​ ​higher​ ​for​ ​the​ ​other​ ​groups.​ ​Thus,​ ​some

55
lawyers​ ​might​ ​pay​ ​some​ ​fast-food​ ​employees​ ​to​ ​wait​ ​in​ ​line​ ​on​ ​their​ ​behalf,​ ​as​ ​happens​ ​with​ ​ticket
scalping​ ​today.

9.​ ​Which​ ​job​ ​exists​ ​in​ ​part​ ​because​ ​time-sensitive​ ​wealthy​ ​individuals​ ​want​ ​to​ ​pay​ ​someone​ ​else​ ​to​ ​wait​ ​in
line​ ​for​ ​them?

​ ​a.​ ​Fast​ ​food​ ​employees

​ ​b.​ ​Ticket​ ​scalpers

​ ​c.​ ​Construction​ ​workers

​ ​d.​ ​Truck​ ​drivers

Video​ ​name:​ ​Price​ ​Ceilings:​ ​Deadweight​ ​Loss

1.​ ​During​ ​a​ ​crisis​ ​such​ ​as​ ​Hurricane​ ​Katrina,​ ​governments​ ​often​ ​make​ ​it​ ​illegal​ ​to​ ​raise​ ​the​ ​price​ ​of
emergency​ ​items​ ​like​ ​flashlights​ ​and​ ​bottled​ ​water.​ ​In​ ​practice,​ ​this​ ​means​ ​that​ ​these​ ​items​ ​get​ ​sold​ ​on​ ​a
first-come,​ ​first-served​ ​basis.​ ​If​ ​a​ ​person​ ​has​ ​a​ ​flashlight​ ​that​ ​she​ ​values​ ​at​ ​$5,​ ​but​ ​its​ ​price​ ​on​ ​the​ ​black
market​ ​is​ ​$40,​ ​what​ ​gains​ ​from​ ​trade​ ​are​ ​lost​ ​if​ ​the​ ​government​ ​shuts​ ​down​ ​the​ ​black​ ​market?

​ ​a.​ ​$45

​ ​b.​ ​$40

​ ​c.​ ​$35

Explanation:​ ​The​ ​total​ ​gains​ ​from​ ​trade​ ​if​ ​trade​ ​is​ ​allowed​ ​are​ ​$35,​ ​these​ ​gains​ ​from​ ​trade​ ​would
be​ ​split​ ​between​ ​the​ ​buyer​ ​and​ ​the​ ​seller​ ​depending​ ​on​ ​the​ ​exact​ ​price​ ​they​ ​agreed​ ​upon.

​ ​d.​ ​$30

​ ​e.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

2.​ ​When​ ​will​ ​entrepreneurs​ ​be​ ​more​ ​likely​ ​to​ ​fill​ ​up​ ​their​ ​pickup​ ​trucks​ ​with​ ​flashlights​ ​and​ ​drive​ ​into​ ​a
disaster​ ​area:​ ​when​ ​they​ ​can​ ​sell​ ​their​ ​flashlights​ ​for​ ​$5​ ​each​ ​or​ ​when​ ​they​ ​can​ ​sell​ ​them​ ​for​ ​$40​ ​each?

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​ ​a.​ ​$5

​ ​b.​ ​$40

Explanation:​ ​When​ ​the​ ​price​ ​is​ ​$40,​ ​entrepreneurs​ ​are​ ​more​ ​likely​ ​to​ ​drive​ ​in​ ​with​ ​pickup​ ​trucks
full​ ​of​ ​flashlights.​ ​It​ ​is​ ​worth​ ​mentioning​ ​that​ ​driving​ ​into​ ​a​ ​disaster​ ​area​ ​is​ ​not​ ​without​ ​risks​ ​and
inconvenience.​ ​These​ ​entrepreneurs​ ​often​ ​have​ ​employment​ ​options​ ​in​ ​their​ ​current​ ​location.​ ​The
additional​ ​money​ ​compensates​ ​entrepreneurs​ ​to​ ​assume​ ​this​ ​additional​ ​risk​ ​and​ ​inconvenience.

​ ​c.​ ​Equal​ ​numbers​ ​of​ ​entrepreneurs​ ​will​ ​be​ ​present​ ​at​ ​both​ ​prices.

3.​ ​In​ ​the​ ​late​ ​1990s,​ ​the​ ​city​ ​of​ ​Santa​ ​Monica,​ ​California,​ ​made​ ​it​ ​illegal​ ​for​ ​banks​ ​to​ ​charge​ ​people​ ​ATM
fees.​ ​As​ ​you​ ​probably​ ​know,​ ​it’s​ ​almost​ ​always​ ​free​ ​to​ ​use​ ​your​ ​own​ ​bank’s​ ​ATMs,​ ​but​ ​there’s​ ​usually​ ​a
fee​ ​charged​ ​when​ ​you​ ​use​ ​another​ ​bank’s​ ​ATM.​ ​(Source:​ ​The​ ​War​ ​on​ ​ATM​ ​Fees,​ ​Time,​ ​November​ ​29,
1999).​ ​As​ ​soon​ ​as​ ​Santa​ ​Monica​ ​passed​ ​this​ ​law,​ ​Bank​ ​of​ ​America​ ​stopped​ ​allowing​ ​customers​ ​from​ ​other
banks​ ​to​ ​use​ ​their​ ​ATMs:​ ​In​ ​bank​ ​jargon,​ ​B​ ​of​ ​A​ ​banned​ ​“out-of-network”​ ​ATM​ ​usage.​ ​In​ ​fact,​ ​this​ ​ban
only​ ​lasted​ ​for​ ​a​ ​few​ ​days,​ ​after​ ​which​ ​a​ ​judge​ ​allowed​ ​banks​ ​to​ ​continue​ ​to​ ​charge​ ​fees​ ​while​ ​awaiting​ ​a
full​ ​court​ ​hearing​ ​on​ ​the​ ​issue.​ ​Eventually,​ ​the​ ​court​ ​declared​ ​the​ ​fee​ ​ban​ ​illegal​ ​under​ ​federal​ ​law.​ ​But
let’s​ ​imagine​ ​the​ ​effect​ ​of​ ​a​ ​full​ ​ban​ ​on​ ​out-of-network​ ​fees.​ ​Calculate​ ​the​ ​exact​ ​amount​ ​of​ ​producer​ ​and
consumer​ ​surplus​ ​in​ ​the​ ​out-of-network​ ​ATM​ ​market​ ​in​ ​Santa​ ​Monica​ ​after​ ​the​ ​ban.​ ​How​ ​large​ ​is
consumer​ ​surplus?

​ ​a.​ ​10

​ ​b.​ ​0

Explanation:​ ​When​ ​a​ ​market​ ​is​ ​shut​ ​down​ ​completely,​ ​as​ ​occurs​ ​here,​ ​there​ ​is​ ​no​ ​producer​ ​surplus
and​ ​no​ ​consumer​ ​surplus.​ ​Surplus​ ​only​ ​comes​ ​from​ ​exchange,​ ​so​ ​where​ ​there’s​ ​no​ ​exchange,​ ​there’s​ ​just
no​ ​surplus!​ ​Both​ ​are​ ​zero

​ ​c.​ ​15

​ ​d.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

4.​ ​Suppose​ ​the​ ​government​ ​forced​ ​all​ ​bread​ ​manufacturers​ ​to​ ​sell​ ​their​ ​products​ ​at​ ​a​ ​“fair​ ​price”​ ​that
was​ ​half​ ​the​ ​current,​ ​free-market​ ​price.​ ​To​ ​keep​ ​it​ ​simple,​ ​assume​ ​that​ ​people​ ​must​ ​wait​ ​in​ ​line​ ​to​ ​get

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bread​ ​at​ ​the​ ​controlled​ ​price.​ ​Would​ ​consumer​ ​surplus​ ​rise,​ ​fall,​ ​or​ ​can’t​ ​you​ ​tell​ ​with​ ​the​ ​information
given?

​ ​a.​ ​consumer​ ​surplus​ ​increases.

​ ​b.​ ​consumer​ ​surplus​ ​decreases.

Explanation:​ ​Consumer​ ​surplus​ ​must​ ​fall.​ ​The​ ​cost​ ​of​ ​waiting​ ​in​ ​line​ ​for​ ​the​ ​bread​ ​is​ ​the​ ​key:​ ​That
“time-wasting”​ ​rectangle​ ​eats​ ​up​ ​any​ ​extra​ ​value​ ​that​ ​might​ ​have​ ​gone​ ​to​ ​consumers.

​ ​c.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

Video​ ​name:​ ​Price​ ​Ceilings:​ ​Misallocation​ ​of​ ​Resources

1.​ ​The​ ​Canadian​ ​government​ ​has​ ​wage​ ​controls​ ​for​ ​medical​ ​doctors.​ ​To​ ​keep​ ​things​ ​simple,​ ​let’s​ ​assume
that​ ​they​ ​set​ ​one​ ​wage​ ​for​ ​all​ ​doctors:​ ​$100,000​ ​per​ ​year.​ ​It​ ​takes​ ​about​ ​6​ ​years​ ​to​ ​become​ ​a​ ​general
practitioner​ ​or​ ​a​ ​pediatrician,​ ​but​ ​it​ ​takes​ ​about​ ​8​ ​or​ ​9​ ​years​ ​to​ ​become​ ​a​ ​specialist​ ​like​ ​a​ ​gynecologist,
surgeon,​ ​or​ ​ophthalmologist.​ ​What​ ​kind​ ​of​ ​doctor​ ​would​ ​you​ ​want​ ​to​ ​become​ ​under​ ​this​ ​system?​ ​(Note:
The​ ​actual​ ​Canadian​ ​system​ ​does​ ​allow​ ​a​ ​specialist​ ​to​ ​earn​ ​a​ ​bit​ ​more​ ​than​ ​general​ ​practitioners,​ ​but​ ​the
difference​ ​isn’t​ ​big​ ​enough​ ​to​ ​matter.)

​ ​a.​ ​Pediatrician

Explanation:​ ​If​ ​both​ ​all​ ​jobs​ ​pay​ ​about​ ​the​ ​same,​ ​most​ ​people​ ​would​ ​rather​ ​be​ ​a​ ​general
practitioner/pediatrician—​ ​the​ ​job​ ​is​ ​easier,​ ​the​ ​hours​ ​are​ ​better,​ ​and​ ​you​ ​get​ ​out​ ​of​ ​school​ ​sooner.​ ​That’s
actually​ ​what’s​ ​happening​ ​in​ ​Canada:​ ​They​ ​have​ ​lots​ ​of​ ​generalists​ ​and​ ​few​ ​specialists.

​ ​b.​ ​Surgeon

2.​ ​Antibiotics​ ​are​ ​often​ ​given​ ​to​ ​people​ ​with​ ​colds​ ​(even​ ​though​ ​they​ ​are​ ​not​ ​useful​ ​for​ ​that​ ​purpose),​ ​but
they​ ​are​ ​also​ ​used​ ​to​ ​treat​ ​life-threatening​ ​infections.​ ​If​ ​there​ ​was​ ​a​ ​price​ ​control​ ​on​ ​antibiotics,​ ​what​ ​do
you​ ​think​ ​would​ ​happen​ ​to​ ​the​ ​allocation​ ​of​ ​antibiotics​ ​across​ ​these​ ​two​ ​uses?

​ ​a.​ ​It​ ​would​ ​go​ ​to​ ​those​ ​who​ ​need​ ​it​ ​most.

​ ​b.​ ​It​ ​would​ ​go​ ​to​ ​those​ ​who​ ​need​ ​it​ ​least.

​ ​c.​ ​It​ ​would​ ​go​ ​to​ ​a​ ​mix​ ​of​ ​the​ ​two.

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 Explanation:​ ​Although​ ​antibiotics​ ​are​ ​often​ ​overused,​ ​if​ ​someone​ ​does​ ​have​ ​a​ ​life-threatening
infection,​ ​they​ ​can​ ​usually​ ​get​ ​all​ ​the​ ​antibiotics​ ​they​ ​need​ ​by​ ​outbidding​ ​other​ ​potential​ ​users​ ​of
antibiotics​ ​who​ ​have​ ​less-valued​ ​uses.​ ​A​ ​price​ ​control​ ​on​ ​antibiotics​ ​would​ ​create​ ​a​ ​shortage.​ ​If​ ​antibiotics
were​ ​allocated​ ​efficiently,​ ​the​ ​quantity​ ​supplied​ ​would​ ​go​ ​only​ ​to​ ​those​ ​with​ ​life-threatening​ ​infections,
the​ ​highest​ ​valued​ ​users.​ ​But​ ​it​ ​is​ ​also​ ​possible,​ ​and​ ​perhaps​ ​likely,​ ​that​ ​under​ ​price​ ​controls​ ​the
antibiotics​ ​would​ ​not​ ​be​ ​allocated​ ​efficiently.​ ​Without​ ​prices,​ ​there​ ​would​ ​no​ ​longer​ ​be​ ​a​ ​signal​ ​nor​ ​an
incentive​ ​to​ ​deliver​ ​antibiotics​ ​to​ ​the​ ​users​ ​with​ ​the​ ​highest​ ​demands.​ ​Just​ ​as​ ​oil​ ​can​ ​be​ ​misallocated
between​ ​warm​ ​California​ ​and​ ​cold​ ​New​ ​Jersey,​ ​a​ ​price​ ​control​ ​on​ ​antibiotics​ ​would​ ​probably​ ​lead​ ​to​ ​a
tragic​ ​misallocation​ ​of​ ​antibiotics​ ​between​ ​high-​ ​and​ ​low-valued​ ​users.

Video​ ​name:​ ​Price​ ​Ceilings:​ ​Rent​ ​Controls

1.​ ​A​ ​review​ ​of​ ​the​ ​jargon:​ ​Is​ ​rent​ ​control​ ​a​ ​“price​ ​ceiling”​ ​or​ ​a​ ​“price​ ​floor?”

​ ​a.​ ​price​ ​ceiling

​ ​b.​ ​price​ ​floor

2.​ ​In​ ​a​ ​rent-controlled​ ​apartment,​ ​a​ ​landlord​ ​will​ ​likely​ ​do​ ​which​ ​of​ ​the​ ​following​ ​more​ ​often:

​ ​a.​ ​Rent​ ​more​ ​apartments

​ ​b.​ ​Provide​ ​more​ ​unfurnished​ ​apartments

​ ​c.​ ​Discriminate​ ​more​ ​against​ ​applicants

Explanation:​ ​If​ ​a​ ​scarce​ ​good​ ​can’t​ ​be​ ​rationed​ ​through​ ​prices,​ ​it​ ​will​ ​be​ ​rationed​ ​in​ ​some​ ​other
way.​ ​Landlords​ ​who​ ​must​ ​rent​ ​at​ ​below-market​ ​prices​ ​will​ ​attempt​ ​to​ ​ration​ ​out​ ​their​ ​scarce​ ​goods​ ​so​ ​that
they​ ​can​ ​get​ ​the​ ​most​ ​value​ ​possible.​ ​Landlords​ ​under​ ​rent​ ​control​ ​will​ ​tend​ ​to​ ​favor​ ​powerful​ ​politicians,
celebrities,​ ​or​ ​family​ ​members.

​ ​d.​ ​Allow​ ​more​ ​renters​ ​per​ ​room

3.​ ​Harry​ ​is​ ​lucky​ ​enough​ ​to​ ​get​ ​a​ ​rent-controlled​ ​apartment​ ​for​ ​$300​ ​per​ ​month.​ ​The​ ​market​ ​rent​ ​on​ ​such
an​ ​apartment​ ​is​ ​$3,000​ ​per​ ​month.​ ​Harry​ ​himself​ ​values​ ​the​ ​apartment​ ​at​ ​$2,000​ ​per​ ​month,​ ​and​ ​he’d​ ​be

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quite​ ​happy​ ​with​ ​a​ ​regular,​ ​$2,000​ ​per​ ​month​ ​New​ ​York​ ​apartment.​ ​If​ ​he​ ​stays​ ​in​ ​the​ ​apartment,​ ​how
much​ ​consumer​ ​surplus​ ​does​ ​he​ ​enjoy?

​ ​a.​ ​$1,700​ ​per​ ​month

​ ​b.​ ​$2,100​ ​per​ ​month

​ ​c.​ ​$2,400​ ​per​ ​month

​ ​d.​ ​Indeterminate​ ​given​ ​the​ ​information.

4.​ ​If​ ​he​ ​illegally​ ​subleases​ ​his​ ​apartment​ ​to​ ​Sally​ ​on​ ​the​ ​black​ ​market​ ​for​ ​$2,500​ ​per​ ​month​ ​and​ ​instead
rents​ ​a​ ​$2,000​ ​apartment,​ ​is​ ​he​ ​better​ ​off​ ​or​ ​worse​ ​off​ ​than​ ​if​ ​he​ ​obeyed​ ​the​ ​law?

​ ​a.​ ​Better​ ​off

Explanation:​ ​He​ ​is​ ​better​ ​off​ ​if​ ​he​ ​subleases​ ​the​ ​apartment:​ ​He​ ​can​ ​move​ ​into​ ​a​ ​regular​ ​$2,000​ ​per
month​ ​apartment​ ​plus​ ​have​ ​$500​ ​in​ ​spending​ ​money​ ​left​ ​over.​ ​This​ ​kind​ ​of​ ​resale​ ​is​ ​very​ ​common​ ​in
rent-controlled​ ​markets.​ ​It​ ​was​ ​made​ ​famous​ ​in​ ​the​ ​Tom​ ​Wolfe​ ​novel​ ​Bonfire​ ​of​ ​the​ ​Vanities​.

​ ​b.​ ​Worse​ ​off

​ ​c.​ ​Indeterminate​ ​given​ ​the​ ​information.

Video​ ​name:​ ​Price​ ​Floors:​ ​The​ ​Minimum​ ​Wage

1.​ ​A​ ​review​ ​of​ ​the​ ​jargon:​ ​Is​ ​the​ ​minimum​ ​wage​ ​a​ ​“price​ ​ceiling”​ ​or​ ​a​ ​“price​ ​floor?”

​ ​a.​ ​price​ ​ceiling

​ ​b.​ ​price​ ​floor

2.​ ​Who​ ​is​ ​impacted​ ​most​ ​by​ ​a​ ​change​ ​in​ ​the​ ​minimum​ ​wage?

​ ​a.​ ​unionized​ ​workers

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​ ​b.​ ​senior​ ​citizens

​ ​c.​ ​stay-at-home​ ​parents

​ ​d.​ ​teenagers

Explanation:​ ​When​ ​the​ ​minimum​ ​wage​ ​rises,​ ​businesses​ ​look​ ​harder​ ​for​ ​alternatives​ ​to​ ​hiring
low-skilled​ ​teenagers.​ ​They​ ​might​ ​hire​ ​a​ ​smaller​ ​number​ ​of​ ​skilled​ ​older​ ​workers,​ ​they​ ​might​ ​have
machines​ ​do​ ​more​ ​of​ ​the​ ​work,​ ​or​ ​they​ ​might​ ​shorten​ ​teenage​ ​hours.​ ​If​ ​they​ ​can,​ ​businesses​ ​will​ ​also​ ​try
to​ ​reduce​ ​other​ ​forms​ ​of​ ​on-the-job​ ​compensation​ ​such​ ​as​ ​benefits​ ​or​ ​lunch​ ​breaks.​ ​None​ ​of​ ​these​ ​are
good​ ​for​ ​teenagers​ ​looking​ ​for​ ​work

3.​ ​Imagine​ ​that​ ​you​ ​can​ ​hire​ ​four​ ​low-skilled​ ​workers​ ​to​ ​move​ ​dirt​ ​with​ ​shovels​ ​at​ ​$5​ ​an​ ​hour,​ ​or​ ​you​ ​can
hire​ ​one​ ​skilled​ ​worker​ ​at​ ​$24​ ​an​ ​hour​ ​to​ ​move​ ​the​ ​same​ ​amount​ ​of​ ​dirt​ ​with​ ​a​ ​skid​ ​loader.​ ​Who​ ​will​ ​you
hire​ ​if​ ​the​ ​minimum​ ​wage​ ​increases​ ​from​ ​$5​ ​per​ ​hour​ ​to​ ​$6.50​ ​per​ ​hour?

​ ​a.​ ​4​ ​low-skilled​ ​workers

​ ​b.​ ​1​ ​high-skilled​ ​worker

Explanation:​ ​At​ ​a​ ​wage​ ​of​ ​$5,​ ​it​ ​is​ ​cheaper​ ​to​ ​hire​ ​4​ ​low-skilled​ ​workers​ ​than​ ​to​ ​hire​ ​one​ ​skilled
worker.​ ​However,​ ​if​ ​the​ ​wage​ ​is​ ​$6.50,​ ​then​ ​4​ ​low-skilled​ ​workers​ ​would​ ​cost​ ​$26,​ ​making​ ​the​ ​skilled
worker​ ​cheaper.​ ​This​ ​increase​ ​in​ ​the​ ​wage​ ​of​ ​low-skilled​ ​workers​ ​will​ ​reduce​ ​the​ ​demand​ ​for​ ​this​ ​type​ ​of
work.​ ​If​ ​the​ ​minimum​ ​wage​ ​rises,​ ​that​ ​will​ ​increase​ ​the​ ​demand​ ​for​ ​high-skilled​ ​worker’s​ ​labor,​ ​because
the​ ​competition​ ​(unskilled​ ​labor)​ ​is​ ​getting​ ​priced​ ​out​ ​of​ ​the​ ​market.​ ​Unions​ ​usually​ ​support​ ​a​ ​rise​ ​in​ ​the
minimum​ ​wage​ ​not​ ​because​ ​it​ ​usually​ ​raises​ ​their​ ​wages​ ​but​ ​because​ ​it​ ​makes​ ​their​ ​high-wage​ ​union​ ​labor
more​ ​attractive​ ​than​ ​lower-wage​ ​labor

4.​ ​Suppose​ ​you’re​ ​doing​ ​some​ ​history​ ​research​ ​on​ ​shoe​ ​production​ ​in​ ​ancient​ ​Rome,​ ​during​ ​the​ ​reign​ ​of
the​ ​famous​ ​Emperor​ ​Diocletian.​ ​Your​ ​records​ ​tell​ ​you​ ​how​ ​many​ ​shoes​ ​were​ ​produced​ ​each​ ​year​ ​in​ ​the
Roman​ ​Empire,​ ​but​ ​it​ ​doesn’t​ ​tell​ ​you​ ​the​ ​price​ ​of​ ​shoes.​ ​You​ ​find​ ​a​ ​document​ ​that​ ​says​ ​that​ ​in​ ​the​ ​year
301,​ ​Emperor​ ​Diocletian​ ​issued​ ​an​ ​“edict​ ​on​ ​prices,”​ ​but​ ​you​ ​don’t​ ​know​ ​whether​ ​he​ ​imposed​ ​price
ceilings​ ​or​ ​price​ ​floors—your​ ​Latin​ ​is​ ​a​ ​little​ ​rusty.​ ​However,​ ​you​ ​can​ ​clearly​ ​tell​ ​from​ ​the​ ​documents​ ​that
the​ ​number​ ​of​ ​shoes​ ​actually​ ​sold​ ​in​ ​markets​ ​fell​ ​dramatically,​ ​and​ ​that​ ​both​ ​potential​ ​shoe​ ​sellers​ ​and
potential​ ​shoe​ ​buyers​ ​were​ ​unhappy​ ​with​ ​the​ ​edict.​ ​With​ ​the​ ​information​ ​given,​ ​can​ ​you​ ​tell​ ​whether
Diocletian​ ​imposed​ ​a​ ​ceiling​ ​or​ ​a​ ​floor?​ ​If​ ​so,​ ​which​ ​is​ ​it?​ ​(Yes,​ ​there​ ​really​ ​was​ ​an​ ​edict​ ​of​ ​Diocletian,
and​ ​Wikipedia​ ​has​ ​excellent​ ​coverage​ ​of​ ​ancient​ ​Roman​ ​history.)

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​ ​a.​ ​Price​ ​ceiling

​ ​b.​ ​Price​ ​floor

​ ​c.​ ​Neither-​ ​it​ ​was​ ​a​ ​government​ ​shoe​ ​ration.

​ ​d.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

Explanation:​ ​You​ ​can’t​ ​tell​ ​with​ ​the​ ​information​ ​given.​ ​Both​ ​price​ ​ceilings​ ​and​ ​price​ ​floors​ ​reduce
the​ ​quantity​ ​of​ ​goods​ ​traded​ ​in​ ​markets.​ ​(Yes,​ ​a​ ​price​ ​floor​ ​creates​ ​a​ ​surplus​ ​but​ ​in​ ​real​ ​life​ ​those​ ​goods
don’t​ ​really​ ​get​ ​made​ ​after​ ​businesses​ ​realize​ ​they​ ​can’t​ ​sell​ ​all​ ​the​ ​extra​ ​shoes.)​ ​But,​ ​in​ ​fact,​ ​Diocletian’s
edict​ ​was​ ​a​ ​price​ ​ceiling:​ ​He​ ​made​ ​it​ ​illegal​ ​to​ ​charge​ ​more​ ​than​ ​a​ ​certain​ ​price​ ​for​ ​various​ ​goods,
specifically​ ​including​ ​shoes.​ ​It​ ​really​ ​did​ ​hurt​ ​the​ ​quantity​ ​of​ ​trade​ ​in​ ​the​ ​Roman​ ​Empire,​ ​at​ ​a​ ​time​ ​when
the​ ​empire​ ​was​ ​already​ ​facing​ ​major​ ​political​ ​troubles.

Video​ ​name:​ ​Price​ ​Floors:​ ​Airline​ ​Fares

1.​ ​In​ ​the​ ​1970s,​ ​AirCal​ ​and​ ​Pacific​ ​Southwest​ ​Airlines​ ​flew​ ​only​ ​within​ ​California.​ ​As​ ​we​ ​mentioned,​ ​the
federal​ ​price​ ​floors​ ​didn’t​ ​apply​ ​to​ ​flights​ ​within​ ​just​ ​one​ ​state.​ ​A​ ​major​ ​route​ ​for​ ​these​ ​airlines​ ​was​ ​flying
from​ ​San​ ​Francisco​ ​to​ ​Los​ ​Angeles,​ ​a​ ​distance​ ​of​ ​350​ ​miles.​ ​This​ ​is​ ​about​ ​the​ ​same​ ​distance​ ​as​ ​from
Chicago,​ ​Illinois,​ ​to​ ​Cleveland,​ ​Ohio.​ ​Which​ ​flight​ ​had​ ​a​ ​nicer​ ​meal?

​ ​a.​ ​San​ ​Francisco-to-Los​ ​Angeles​ ​flight

​ ​b.​ ​Chicago-to-Cleveland​ ​flight

Explanation:​ ​AirCal​ ​flights,​ ​i.e.​ ​San​ ​Francisco-to-Los​ ​Angeles​ ​flights,​ ​were​ ​cheaper​ ​but​ ​had
worse​ ​meals​ ​than​ ​flights​ ​from​ ​Chicago​ ​to​ ​Cleveland.​ ​This​ ​is​ ​because​ ​in​ ​the​ ​unregulated​ ​California​ ​market,
businesses​ ​didn’t​ ​have​ ​to​ ​provide​ ​inefficiently​ ​high​ ​quality​ ​to​ ​make​ ​up​ ​for​ ​the​ ​extra-high​ ​price.​ ​Instead,
Californians​ ​could​ ​get​ ​lots​ ​of​ ​cheap​ ​flights​ ​with​ ​peanuts​ ​and​ ​soda.

2.​ ​Airline​ ​regulation​ ​of​ ​the​ ​1970s​ ​produced​ ​a​ ​similar​ ​result​ ​to​ ​which​ ​of​ ​the​ ​following​ ​government
interventions?

​ ​a.​ ​Rent​ ​control​ ​laws

​ ​b.​ ​Minimum​ ​wage​ ​laws

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 Explanation:​ ​In​ ​the​ ​1970s​ ​price​ ​floors​ ​on​ ​airline​ ​tickets​ ​caused​ ​wasteful​ ​increases​ ​in​ ​the​ ​quality​ ​of
airline​ ​trips.​ ​When​ ​workers​ ​cannot​ ​compete​ ​to​ ​obtain​ ​a​ ​job​ ​by​ ​offering​ ​to​ ​work​ ​at​ ​a​ ​lower​ ​wage​ ​they​ ​will
compete​ ​in​ ​other​ ​ways,​ ​such​ ​as​ ​by​ ​searching​ ​longer​ ​or​ ​by​ ​investing​ ​more​ ​in​ ​skills.​ ​Similarly,​ ​firms​ ​who
must​ ​pay​ ​a​ ​minimum​ ​wage​ ​will​ ​try​ ​harder​ ​to​ ​sort​ ​workers​ ​so​ ​they​ ​can​ ​hire​ ​only​ ​the​ ​most​ ​skilled​ ​workers.
Although​ ​it​ ​is​ ​good​ ​to​ ​have​ ​skills​ ​it​ ​is​ ​possible​ ​to​ ​invest​ ​too​ ​much​ ​in​ ​skills​ ​(just​ ​as​ ​it​ ​is​ ​possible​ ​to​ ​have​ ​a
wastefully​ ​high​ ​quality​ ​of​ ​airline​ ​meal).​ ​If​ ​a​ ​minimum​ ​wage​ ​job​ ​at​ ​McDonald’s​ ​paid​ ​$25​ ​an​ ​hour,​ ​for
example,​ ​McDonald’s​ ​might​ ​hire​ ​only​ ​workers​ ​who​ ​spoke​ ​two​ ​or​ ​more​ ​languages.​ ​That’s​ ​nice,​ ​but​ ​it’s​ ​not
the​ ​most​ ​productive​ ​use​ ​of​ ​a​ ​talented​ ​workforce.

​ ​c.​ ​Communism

​ ​d.​ ​The​ ​Affordable​ ​Care​ ​Act

3.​ ​President​ ​Jimmy​ ​Carter​ ​didn’t​ ​just​ ​deregulate​ ​airline​ ​prices.​ ​He​ ​also​ ​deregulated​ ​much​ ​of​ ​the​ ​trucking
industry,​ ​as​ ​well.​ ​Trucks​ ​carry​ ​almost​ ​all​ ​of​ ​the​ ​consumer​ ​goods​ ​that​ ​you​ ​purchase,​ ​so​ ​almost​ ​every​ ​time
you​ ​purchase​ ​something,​ ​you’re​ ​paying​ ​money​ ​to​ ​a​ ​trucking​ ​company.​ ​Based​ ​on​ ​what​ ​happened​ ​in​ ​the
airline​ ​industry​ ​after​ ​prices​ ​were​ ​deregulated,​ ​what​ ​do​ ​you​ ​think​ ​happened​ ​in​ ​the​ ​trucking​ ​industry​ ​after
deregulation?​ ​You​ ​can​ ​find​ ​some​ ​answers​ ​here:
http://www.econlib.org/Library/Enc/TruckingDeregulation.html​.​ ​For​ ​another​ ​look​ ​that​ ​is​ ​critical​ ​of
trucking​ ​deregulation,​ ​but​ ​comes​ ​to​ ​basically​ ​the​ ​same​ ​answers,​ ​see​ ​Michael​ ​Belzer,​ ​2000.​ ​Sweatshops​ ​on
Wheels:​ ​Winners​ ​and​ ​Losers​ ​in​ ​Trucking​ ​Deregulation,​ ​Thousand​ ​Oaks,CA:​ ​SAGE.

​ ​a.​ ​Trucking​ ​salaries​ ​increased

​ ​b.​ ​Trucking​ ​salaries​ ​decreased

​ ​c.​ ​Trucking​ ​companies​ ​increased

​ ​d.​ ​Trucking​ ​companies​ ​decreased

​ ​e.​ ​B​ ​and​ ​C

4.​ ​Who​ ​do​ ​you​ ​think​ ​asked​ ​Congress​ ​and​ ​the​ ​president​ ​to​ ​keep​ ​price​ ​floors​ ​for​ ​trucking?

​ ​a.​ ​consumer​ ​groups

​ ​b.​ ​retail​ ​shops​ ​like​ ​Wal-Mart

​ ​c.​ ​Republicans

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​ ​d.​ ​trucking​ ​companies

Explanation:​ ​The​ ​trucking​ ​companies​ ​probably​ ​wanted​ ​the​ ​price​ ​floors:​ ​They​ ​liked​ ​getting​ ​high
prices​ ​for​ ​their​ ​trucking​ ​services

​ ​e.​ ​A​ ​and​ ​D

Video​ ​name:​ ​Why​ ​Do​ ​Governments​ ​Enact​ ​Price​ ​Controls?

1.​ ​If​ ​a​ ​government​ ​decided​ ​to​ ​impose​ ​price​ ​controls​ ​on​ ​gasoline,​ ​what​ ​could​ ​it​ ​do​ ​to​ ​avoid​ ​the​ ​time​ ​wasted
waiting​ ​in​ ​lines?​ ​Though​ ​there​ ​are​ ​several​ ​solutions​ ​to​ ​this​ ​problem,​ ​only​ ​one​ ​of​ ​the​ ​options​ ​below​ ​is
correct.

​ ​a.​ ​Restrict​ ​gasoline​ ​consumption​ ​to​ ​high-value​ ​uses.

​ ​b.​ ​Ban​ ​lines​ ​for​ ​gasoline.

​ ​c.​ ​Create​ ​gasoline​ ​rations.

Explanation:​ ​One​ ​method​ ​is​ ​to​ ​make​ ​it​ ​pointless​ ​to​ ​wait​ ​in​ ​line​ ​by​ ​restricting​ ​the​ ​quantity​ ​of
gasoline​ ​that​ ​any​ ​individual​ ​can​ ​consume.​ ​During​ ​World​ ​War​ ​II,​ ​for​ ​example,​ ​the​ ​United​ ​States​ ​Office​ ​of
Price​ ​Administration​ ​(OPA)​ ​limited​ ​every​ ​person​ ​in​ ​the​ ​United​ ​States​ ​to​ ​a​ ​certain​ ​amount​ ​of​ ​coffee,​ ​sugar,
shoes,​ ​and​ ​gasoline​ ​(as​ ​well​ ​as​ ​many​ ​other​ ​goods).​ ​To​ ​purchase​ ​gasoline​ ​a​ ​driver​ ​had​ ​to​ ​certify​ ​that​ ​they
needed​ ​gasoline​ ​and​ ​that​ ​they​ ​owned​ ​no​ ​more​ ​than​ ​five​ ​tires.​ ​(All​ ​tires​ ​in​ ​excess​ ​of​ ​five​ ​per​ ​driver​ ​were
confiscated​ ​by​ ​the​ ​government,​ ​because​ ​of​ ​rubber​ ​shortages).​ ​Most​ ​cars​ ​were​ ​limited​ ​to​ ​3–4​ ​gallons​ ​of
gasoline​ ​a​ ​week.​ ​To​ ​buy​ ​gasoline​ ​the​ ​driver​ ​had​ ​to​ ​present​ ​their​ ​ration​ ​book​ ​and​ ​a​ ​stamp​ ​for​ ​every​ ​gallon
of​ ​gasoline​ ​that​ ​they​ ​wanted​ ​to​ ​purchase.​ ​The​ ​ration​ ​books​ ​limited​ ​time​ ​wasted​ ​in​ ​lines​ ​although​ ​the
rationing​ ​system​ ​did​ ​require​ ​greater​ ​administrative​ ​expenses.

​ ​d.​ ​Ban​ ​black​ ​markets​ ​for​ ​gasoline.

Video​ ​name:​Price​ ​Controls​ ​and​ ​Communism

1.​ ​On​ ​average,​ ​should​ ​we​ ​expect​ ​better​ ​customer​ ​service​ ​from​ ​a​ ​capitalist​ ​or​ ​a​ ​Communist​ ​employee?

​ ​a.​ ​Capitalist
(Long)​ ​explanation:​ ​On​ ​January​ ​31,​ ​1990,​ ​the​ ​first​ ​McDonald’s​ ​opened​ ​in​ ​Moscow,​ ​capital​ ​of​ ​the
then​ ​Soviet​ ​Union.​ ​Economists​ ​often​ ​described​ ​the​ ​Soviet​ ​Union​ ​as​ ​a​ ​“permanent​ ​shortage​ ​economy,”

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where​ ​the​ ​government​ ​kept​ ​prices​ ​permanently​ ​low​ ​in​ ​order​ ​to​ ​appear​ ​“fair.”​ ​ ​“An​ ​American​ ​journalist​ ​on
the​ ​scene​ ​reported​ ​the​ ​customers​ ​seemed​ ​most​ ​amazed​ ​at​ ​the​ ​‘simple​ ​sight​ ​of​ ​polite​ ​shop​ ​workers​ ​.​ ​.​ ​.​ ​in
this​ ​nation​ ​of​ ​commercial​ ​boorishness.’​ ​”​ ​(Source:
http://www.history.com/this-day-in-history.do?action=Article&id=2563​).​ ​No​ ​matter​ ​how​ ​badly​ ​they
behaved,​ ​all​ ​the​ ​goods​ ​would​ ​end​ ​up​ ​sold.​ ​The​ ​McDonald’s​ ​workers​ ​were​ ​trained​ ​to​ ​be​ ​polite​ ​because
McDonald’s​ ​always​ ​faces​ ​competition​ ​from​ ​other​ ​restaurants.​ ​If​ ​their​ ​workers​ ​are​ ​boorish,​ ​customers​ ​will
go​ ​somewhere​ ​else.​ ​Human​ ​“nature”​ ​looks​ ​pretty​ ​flexible,​ ​when​ ​money​ ​is​ ​on​ ​the​ ​line.
​ ​b.​ ​Communist

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Trade

Video​ ​name:​ ​The​ ​Big​ ​Ideas​ ​of​ ​Trade

1.​ ​How​ ​is​ ​international​ ​trade​ ​similar​ ​to​ ​domestic​ ​trade?

​ ​a.​ ​International​ ​trade​ ​makes​ ​people​ ​better​ ​off​ ​when​ ​preferences​ ​differ.

​ ​b.​ ​International​ ​trade​ ​increases​ ​productivity​ ​through​ ​specialization​ ​and​ ​the​ ​division​ ​of​ ​knowledge.

​ ​c.​ ​Trade​ ​increases​ ​productivity​ ​through​ ​comparative​ ​advantage.

​ ​d.​ ​A​ ​and​ ​B

​ ​e.​ ​All​ ​of​ ​the​ ​above

2.​ ​Many​ ​people​ ​will​ ​tell​ ​you​ ​that,​ ​whenever​ ​possible,​ ​you​ ​should​ ​always​ ​buy​ ​U.S.-made​ ​goods.​ ​If​ ​this
argument​ ​were​ ​taken​ ​to​ ​its​ ​natural​ ​conclusion,​ ​where​ ​should​ ​you​ ​buy​ ​all​ ​of​ ​your​ ​goods​ ​from?

​ ​a.​ ​Your​ ​state

​ ​b.​ ​Your​ ​county

​ ​c.​ ​Your​ ​neighborhood

​ ​d.​ ​Yourself

Explanation:​ ​It​ ​is​ ​quite​ ​common​ ​to​ ​hear​ ​the​ ​argument​ ​to​ ​buy​ ​domestically-produced​ ​goods​ ​or​ ​ ​to
buy​ ​goods​ ​produced​ ​in​ ​your​ ​own​ ​state​ ​whenever​ ​possible​ ​(Just​ ​do​ ​a​ ​simple​ ​Google​ ​search​ ​for​ ​“Buy​ ​[any
state]”​ ​and​ ​you’ll​ ​find​ ​a​ ​Web​ ​site​ ​encouraging​ ​this​ ​kind​ ​of​ ​thinking.).​ ​The​ ​idea​ ​is​ ​that​ ​if​ ​you​ ​spend​ ​money
in​ ​your​ ​state,​ ​you​ ​help​ ​the​ ​economy​ ​of​ ​your​ ​state,​ ​rather​ ​than​ ​the​ ​economy​ ​of​ ​some​ ​other​ ​state.​ ​Taken​ ​to
its​ ​extreme,​ ​this​ ​thinking​ ​will​ ​lead​ ​us​ ​to​ ​consume​ ​only​ ​goods​ ​that​ ​we​ ​ourselves​ ​can​ ​produce,​ ​so​ ​we
ourselves​ ​reap​ ​all​ ​of​ ​the​ ​benefits​ ​of​ ​our​ ​own​ ​“purchases.”​ ​Just​ ​like​ ​each​ ​of​ ​us​ ​cannot​ ​produce​ ​all​ ​that​ ​we
need​ ​on​ ​our​ ​own,​ ​and​ ​we​ ​benefit​ ​from​ ​specialization​ ​and​ ​trade​ ​with​ ​others,​ ​trade​ ​between​ ​cities​ ​or​ ​states
or​ ​countries​ ​leads​ ​to​ ​increasing​ ​opportunities​ ​for​ ​specialization​ ​and​ ​the​ ​benefits​ ​that​ ​derive​ ​from​ ​this
specialization.​ ​When​ ​we​ ​limit​ ​the​ ​people​ ​with​ ​whom​ ​we​ ​are​ ​willing​ ​to​ ​trade,​ ​we​ ​may​ ​ignore​ ​some
potentially​ ​beneficial​ ​trades

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Video​ ​name:​ ​Comparative​ ​Advantage

1.​ ​True​ ​or​ ​False:​ ​Every​ ​country​ ​has​ ​at​ ​least​ ​one​ ​comparative​ ​advantage​ ​in​ ​something.

​ ​a.​ ​True

​ ​b.​ ​False

2.​ ​The​ ​cost​ ​of​ ​the​ ​next​ ​most​ ​valuable​ ​opportunity​ ​is​ ​known​ ​as​ ​a

​ ​a.​ ​Sunk​ ​cost

​ ​b.​ ​Opportunity​ ​cost

​ ​c.​ ​Comparative​ ​advantage

​ ​d.​ ​Absolute​ ​advantage

Video​ ​name:​ ​Another​ ​Look​ ​at​ ​Comparative​ ​Advantage

1.​ ​What​ ​is​ ​a​ ​source​ ​of​ ​comparative​ ​advantage?

​ ​a.​ ​climate

​ ​b.​ ​institutions

​ ​c.​ ​answer​ ​choices​ ​a​ ​&​ ​b

​ ​d.​ ​None​ ​of​ ​the​ ​above.

2.​ ​In​ ​30​ ​minutes,​ ​Kana​ ​can​ ​either​ ​make​ ​miso​ ​soup​ ​or​ ​she​ ​can​ ​clean​ ​the​ ​kitchen.​ ​In​ ​15​ ​minutes,​ ​Mitchell
can​ ​make​ ​miso​ ​soup;​ ​it​ ​takes​ ​Mitchell​ ​an​ ​hour​ ​to​ ​clean​ ​the​ ​kitchen.

​ ​a.​ ​Kana​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​making​ ​miso​ ​soup.

​ ​b.​ ​Mitchell​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​making​ ​miso​ ​soup.

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​ ​c.​ ​Kana​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​cleaning​ ​the​ ​kitchen.

​ ​d.​ ​Mitchell​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​cleaning​ ​the​ ​kitchen.

​ ​e.​ ​A​ ​&​ ​D

​ ​f.​ ​B​ ​&​ ​C

Explanation:​ ​Mitchell’s​ ​absolute​ ​and​ ​comparative​ ​advantages​ ​are​ ​at​ ​miso;​ ​Kana’s​ ​absolute​ ​and
comparative​ ​advantages​ ​are​ ​at​ ​cleaning.

3.​ ​In​ ​one​ ​hour,​ ​Ethan​ ​can​ ​bake​ ​20​ ​cookies​ ​or​ ​lay​ ​the​ ​drywall​ ​for​ ​two​ ​rooms.​ ​In​ ​one​ ​hour,​ ​Sienna​ ​can​ ​bake
100​ ​cookies​ ​or​ ​lay​ ​the​ ​drywall​ ​for​ ​three​ ​rooms.

​ ​a.​ ​Ethan​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​baking​ ​cookies.

​ ​b.​ ​Sienna​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​baking​ ​cookies.

Explanation:​ ​Sienna​ ​has​ ​an​ ​absolute​ ​advantage​ ​at​ ​both,​ ​but​ ​her​ ​comparative​ ​advantage​ ​is​ ​at
baking​ ​cookies.​ ​Ethan’s​ ​comparative​ ​advantage​ ​is​ ​at​ ​laying​ ​drywall

​ ​c.​ ​Ethan​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​laying​ ​drywall.

​ ​d.​ ​Sienna​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​laying​ ​drywall.

​ ​e.​ ​A​ ​&​ ​D

​ ​f.​ ​B​ ​&​ ​C

​ ​g.​ ​None​ ​of​ ​the​ ​above.

4.​ ​Data​ ​can​ ​write​ ​12​ ​excellent​ ​poems​ ​per​ ​day​ ​or​ ​solve​ ​100​ ​difficult​ ​physics​ ​problems​ ​per​ ​day.​ ​Riker​ ​can
write​ ​one​ ​excellent​ ​poem​ ​per​ ​day​ ​or​ ​solve​ ​0.5​ ​difficult​ ​physics​ ​problems​ ​per​ ​day.

​ ​a.​ ​Data​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​writing​ ​poems.

​ ​b.​ ​Riker​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​writing​ ​poems.

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​ ​c.​ ​Data​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​solving​ ​physics​ ​problems.

Explanation:​ ​Data​ ​has​ ​an​ ​absolute​ ​advantage​ ​at​ ​both,​ ​but​ ​Riker​ ​has​ ​a​ ​comparative​ ​advantage​ ​at
writing​ ​poetry.

​ ​d.​ ​Riker​ ​has​ ​the​ ​absolute​ ​and​ ​comparative​ ​advantage​ ​at​ ​solving​ ​physics​ ​problems.

​ ​e.​ ​A​ ​&​ ​D

​ ​f.​ ​B​ ​&​ ​C

​ ​g.​ ​None​ ​of​ ​the​ ​above.

Video​ ​name:​ ​Comparative​ ​Advantage​ ​Homework

Use​ ​the​ ​information​ ​below​ ​to​ ​answer​ ​questions​ ​1-7.​ ​According​ ​to​ ​the​ ​Wall​ ​Street​ ​Journal​ ​(August​ ​30,
2007,​ ​“In​ ​the​ ​Balance”),​ ​it​ ​takes​ ​about​ ​30​ ​hours​ ​to​ ​assemble​ ​a​ ​vehicle​ ​in​ ​the​ ​United​ ​States.​ ​Let’s​ ​use​ ​that
fact​ ​plus​ ​a​ ​few​ ​invented​ ​numbers​ ​to​ ​sum​ ​up​ ​the​ ​global​ ​division​ ​of​ ​labor​ ​in​ ​auto​ ​manufacturing.​ ​In
international​ ​economics,​ ​“North”​ ​is​ ​shorthand​ ​for​ ​the​ ​high-tech​ ​developed​ ​countries​ ​of​ ​East​ ​Asia,​ ​North
America,​ ​and​ ​Western​ ​Europe,​ ​while​ ​“South”​ ​is​ ​shorthand​ ​for​ ​the​ ​rest​ ​of​ ​the​ ​world.​ ​Let’s​ ​use​ ​that
shorthand​ ​here.

Region
Number​ ​of​ ​Hours​ ​to​ ​Make Number​ ​of​ ​Hours​ ​to​ ​Make
One​ ​High-Quality​ ​Care One​ ​Low-Quality​ ​Car

North 30 20

South 60 30

1.​ ​Which​ ​region​ ​has​ ​an​ ​absolute​ ​advantage​ ​at​ ​producing​ ​high-quality​ ​cars?

​ ​a.​ ​North

​ ​b.​ ​South

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2.​ ​Which​ ​country​ ​has​ ​an​ ​absolute​ ​advantage​ ​at​ ​producing​ ​low-quality​ ​cars?

​ ​a.​ ​North

​ ​b.​ ​South

3.​ ​Which​ ​country​ ​has​ ​a​ ​comparative​ ​advantage​ ​for​ ​producing​ ​low-quality​ ​cars?

​ ​a.​ ​North

​ ​b.​ ​South

4.​ ​Which​ ​country​ ​has​ ​a​ ​comparative​ ​advantage​ ​for​ ​producing​ ​high-quality​ ​cars?

​ ​a.​ ​North

​ ​b.​ ​South

5.​ ​There​ ​are​ ​1​ ​million​ ​hours​ ​of​ ​labor​ ​available​ ​for​ ​making​ ​cars​ ​in​ ​the​ ​North,​ ​and​ ​another​ ​1​ ​million​ ​hours
of​ ​labor​ ​available​ ​for​ ​making​ ​cars​ ​in​ ​the​ ​South.​ ​In​ ​a​ ​no-trade​ ​world,​ ​let’s​ ​assume​ ​that​ ​two-thirds​ ​of​ ​the
auto​ ​industry​ ​labor​ ​in​ ​each​ ​region​ ​is​ ​used​ ​to​ ​make​ ​high-quality​ ​cars​ ​and​ ​one-third​ ​is​ ​used​ ​to​ ​make
low-quality​ ​cars.​ ​What​ ​will​ ​be​ ​the​ ​global​ ​output​ ​of​ ​low-quality​ ​cars?

​ ​a.​ ​17,253

​ ​b.​ ​22,222

​ ​c.​ ​11,111

​ ​d.​ ​27,778

​ ​e.​ ​None​ ​of​ ​the​ ​above.

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6.​ ​Now,​ ​allow​ ​specialization.​ ​If​ ​each​ ​region​ ​completely​ ​specializes​ ​in​ ​the​ ​type​ ​of​ ​car​ ​in​ ​which​ ​it​ ​holds​ ​the
comparative​ ​advantage,​ ​what​ ​will​ ​be​ ​the​ ​global​ ​output​ ​of​ ​low-quality​ ​cars?​ ​*

​ ​a.​ ​11,111

​ ​b.​ ​22,222

​ ​c.​ ​33,333

​ ​d.​ ​44,444

​ ​e.​ ​None​ ​of​ ​the​ ​above.

Video​ ​name:​ ​Tariffs​ ​and​ ​Protectionism

1.​ ​The​ ​Japanese​ ​people​ ​currently​ ​pay​ ​about​ ​four​ ​times​ ​the​ ​world​ ​price​ ​for​ ​rice​ ​because​ ​of​ ​trade​ ​barriers.
Who​ ​is​ ​more​ ​likely​ ​to​ ​make​ ​a​ ​greater​ ​effort​ ​lobbying​ ​for​ ​or​ ​against​ ​a​ ​reduction​ ​in​ ​trade​ ​barriers?

​ ​a.​ ​Japanese​ ​consumers.

​ ​b.​ ​Japanese​ ​rice​ ​farmers.

Explanation:​ ​Japanese​ ​consumers​ ​would​ ​be​ ​better​ ​off​ ​and​ ​Japanese​ ​rice​ ​farmers​ ​would​ ​be​ ​worse
off.​ ​The​ ​theory​ ​of​ ​trade​ ​tells​ ​us​ ​that​ ​Japanese​ ​consumers​ ​would​ ​be​ ​better​ ​off​ ​by​ ​more​ ​than​ ​Japanese
producers​ ​would​ ​be​ ​worse​ ​off​ ​so​ ​the​ ​net​ ​gains​ ​would​ ​be​ ​positive.​ ​The​ ​theory​ ​of​ ​politics,​ ​however,​ ​tells​ ​us
that​ ​Japanese​ ​rice​ ​farmers​ ​would​ ​probably​ ​spend​ ​more​ ​effort​ ​and​ ​money​ ​opposing​ ​the​ ​reduction​ ​in​ ​trade
barriers​ ​than​ ​consumers​ ​would​ ​spend​ ​favoring​ ​the​ ​reduction​ ​in​ ​barriers.​ ​The​ ​gains​ ​to​ ​consumers​ ​would​ ​be
small​ ​per​ ​consumer​ ​but​ ​the​ ​losses​ ​to​ ​producers​ ​would​ ​be​ ​concentrated​ ​so​ ​the​ ​producers​ ​have​ ​a​ ​greater
incentive​ ​and​ ​ability​ ​to​ ​oppose​ ​reductions​ ​in​ ​trade​ ​barriers.

2.​ ​The​ ​supply​ ​curve​ ​for​ ​rice​ ​in​ ​Japan​ ​slopes​ ​upward,​ ​just​ ​like​ ​any​ ​normal​ ​supply​ ​curve.​ ​If​ ​Japan
eliminated​ ​its​ ​trade​ ​barriers​ ​to​ ​rice,​ ​what​ ​would​ ​happen​ ​to​ ​the​ ​number​ ​of​ ​workers​ ​employed​ ​in​ ​the
rice-producing​ ​industry​ ​in​ ​Japan:​ ​Would​ ​it​ ​rise​ ​or​ ​fall?

​ ​a.​ ​Rise

​ ​b.​ ​Fall

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 Explanation:​ ​The​ ​number​ ​of​ ​rice​ ​farmers​ ​would​ ​fall.​ ​They​ ​would​ ​search​ ​for​ ​new​ ​work​ ​over​ ​the
next​ ​year​ ​or​ ​so,​ ​but​ ​given​ ​the​ ​nature​ ​of​ ​job​ ​creation​ ​and​ ​destruction​ ​the​ ​vast​ ​majority​ ​would​ ​find​ ​new
employment​ ​fairly​ ​rapidly.

3.​ ​Spend​ ​some​ ​time​ ​driving​ ​in​ ​Detroit,​ ​MI—the​ ​Motor​ ​City—and​ ​you’re​ ​sure​ ​to​ ​see​ ​bumper​ ​stickers​ ​with
messages​ ​like​ ​“Buy​ ​American”​ ​or​ ​“Out​ ​of​ ​a​ ​job​ ​yet?​ ​Keep​ ​buying​ ​foreign!”​ ​or​ ​“Hungry?​ ​Eat​ ​your
foreign​ ​car!”​ ​Explain​ ​these​ ​bumper​ ​stickers​ ​in​ ​light​ ​of​ ​what​ ​you’ve​ ​learned:​ ​Who​ ​is​ ​hurt​ ​most​ ​by
imported​ ​automobiles?

​ ​a.​ ​American​ ​(domestic)​ ​consumers

​ ​b.​ ​American​ ​(domestic)​ ​car​ ​manufacturers

Explanation:​ ​These​ ​bumper​ ​stickers​ ​are​ ​voicing​ ​support​ ​for​ ​protectionism.​ ​Domestic​ ​auto
companies​ ​are​ ​potentially​ ​hurt​ ​by​ ​imported​ ​automobiles.​ ​Many​ ​workers​ ​identify​ ​with​ ​the​ ​plight​ ​of​ ​their
company​ ​because​ ​they​ ​recognize​ ​that​ ​if​ ​the​ ​domestic​ ​auto​ ​industry​ ​shrinks​ ​in​ ​response​ ​to​ ​imported​ ​autos,
they​ ​may​ ​lose​ ​their​ ​jobs.​ ​The​ ​workers​ ​at​ ​the​ ​foreign​ ​auto​ ​companies​ ​benefit​ ​when​ ​Americans​ ​import
automobiles​ ​because​ ​their​ ​industry​ ​grows​ ​larger.​ ​Domestic​ ​buyers​ ​benefit​ ​from​ ​the​ ​downward​ ​pressure
that​ ​imports​ ​may​ ​place​ ​on​ ​auto​ ​prices.​ ​These​ ​lower​ ​auto​ ​prices​ ​benefit​ ​others​ ​in​ ​the​ ​economy,​ ​not​ ​just
auto​ ​buyers,​ ​because​ ​the​ ​money​ ​that​ ​those​ ​households​ ​save​ ​on​ ​buying​ ​lower-priced​ ​automobiles,​ ​they
spend​ ​on​ ​other​ ​goods​ ​and​ ​services​ ​in​ ​the​ ​economy.​ ​So​ ​while​ ​the​ ​domestic​ ​auto​ ​industry​ ​may​ ​shrink​ ​as​ ​a
result​ ​of​ ​imported​ ​autos,​ ​it​ ​is​ ​quite​ ​possible​ ​that​ ​other​ ​domestic​ ​industries​ ​could​ ​grow,​ ​because​ ​of
increases​ ​in​ ​sales.

​ ​c.​ ​Foreign​ ​consumers

​ ​d.​ ​Foreign​ ​car​ ​manufacturers

4.​ ​Trade​ ​restrictions​ ​on​ ​sugar​ ​cause​ ​U.S.​ ​consumers​ ​to​ ​pay​ ​more​ ​than​ ​twice​ ​the​ ​going​ ​world​ ​price​ ​for
sugar.​ ​However,​ ​you​ ​are​ ​very​ ​unlikely​ ​to​ ​ever​ ​encounter​ ​bumper​ ​stickers​ ​that​ ​say​ ​things​ ​like​ ​“Out​ ​of
money​ ​yet?​ ​Keep​ ​taxing​ ​foreign​ ​sugar!”​ ​or​ ​“Hungry?​ ​It’s​ ​probably​ ​because​ ​domestic​ ​sugar​ ​is​ ​so
expensive!”​ ​Why?

​ ​a.​ ​Sugar​ ​is​ ​unhealthy​ ​and​ ​therefore​ ​it’s​ ​unpopular​ ​to​ ​lower​ ​its​ ​cost.

​ ​b.​ ​The​ ​sugar​ ​tariff​ ​benefits​ ​more​ ​Americans​ ​than​ ​it​ ​hurts.

​ ​c.​ ​The​ ​price​ ​increase​ ​of​ ​sugar​ ​per​ ​person​ ​is​ ​small.

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 Explanation:​ ​Though​ ​domestic​ ​buyers​ ​of​ ​sugar​ ​are​ ​hurt​ ​by​ ​sugar​ ​tariffs,​ ​one​ ​is​ ​unlikely​ ​to​ ​find
vocal​ ​opposition​ ​to​ ​these​ ​tariffs​ ​because​ ​the​ ​costs​ ​of​ ​the​ ​tariffs​ ​are​ ​relatively​ ​small​ ​and​ ​spread​ ​out​ ​among
many,​ ​many​ ​people.

​ ​d.​ ​None​ ​of​ ​the​ ​above.

5.​ ​Sugar​ ​farmers​ ​in​ ​Florida​ ​who​ ​use​ ​unusually​ ​large​ ​amounts​ ​of​ ​fertilizer​ ​to​ ​produce​ ​their​ ​crops​ ​do​ ​so
because​ ​their​ ​land​ ​isn’t​ ​all​ ​that​ ​great​ ​for​ ​sugar​ ​production.​ ​If​ ​we​ ​translate​ ​this​ ​into​ ​the​ ​language​ ​of​ ​the
supply​ ​curve,​ ​where​ ​would​ ​these​ ​sugar​ ​farmers​ ​be​ ​on​ ​the​ ​supply​ ​curve?

​ ​a.​ ​Lower-left

​ ​b.​ ​Upper-right

Explanation:​ ​ ​The​ ​Florida​ ​producers​ ​will​ ​be​ ​in​ ​the​ ​upper-right​ ​part​ ​of​ ​the​ ​supply​ ​curve.​ ​These​ ​are
the​ ​producers​ ​with​ ​the​ ​highest​ ​opportunity​ ​cost​ ​of​ ​producing​ ​sugar:​ ​It​ ​costs​ ​them​ ​a​ ​lot​ ​to​ ​get​ ​into​ ​this
business,​ ​and​ ​they​ ​only​ ​enter​ ​the​ ​business​ ​when​ ​the​ ​price​ ​of​ ​sugar​ ​is​ ​high.

​ ​c.​ ​At​ ​equilibrium​ ​price

​ ​d.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

6.​ ​There​ ​are​ ​three​ ​conditions​ ​that​ ​explain​ ​why​ ​a​ ​free​ ​market​ ​is​ ​efficient:​ ​1.​ ​The​ ​supply​ ​of​ ​goods​ ​is​ ​sold​ ​by
the​ ​sellers​ ​with​ ​the​ ​lowest​ ​cost.​ ​2.​ ​There​ ​are​ ​no​ ​unexploited​ ​gains​ ​or​ ​wasteful​ ​trades.​ ​3.​ ​The​ ​supply​ ​of
goods​ ​is​ ​purchased​ ​by​ ​the​ ​buyers​ ​that​ ​place​ ​the​ ​highest​ ​value​ ​on​ ​the​ ​goods.​ ​Which​ ​condition​ ​or​ ​conditions
cease​ ​to​ ​hold​ ​in​ ​the​ ​case​ ​of​ ​a​ ​tariff​ ​on​ ​imported​ ​goods?

​ ​a.​ ​1​ ​only

​ ​b.​ ​2​ ​only

​ ​c.​ ​3​ ​only

​ ​d.​ ​A​ ​and​ ​B​ ​only.

Explanation:​ ​The​ ​tariff​ ​causes​ ​non–lowest-cost​ ​producers​ ​(domestic​ ​producers)​ ​to​ ​enter​ ​the
market​ ​and​ ​begin​ ​producing,​ ​even​ ​though​ ​foreign​ ​producers​ ​have​ ​lower​ ​costs.​ ​Likewise,​ ​the​ ​tariff​ ​reduces
the​ ​number​ ​of​ ​trades​ ​made​ ​by​ ​raising​ ​the​ ​price​ ​that​ ​buyers​ ​face​ ​and​ ​driving​ ​some​ ​of​ ​the​ ​buyers​ ​out​ ​of​ ​the

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market.​ ​Though​ ​those​ ​with​ ​the​ ​highest​ ​value​ ​uses​ ​continue​ ​to​ ​buy​ ​the​ ​goods,​ ​fewer​ ​of​ ​these​ ​buyers
continue​ ​to​ ​buy.

7.​ ​If​ ​the​ ​United​ ​States​ ​were​ ​to​ ​eliminate​ ​a​ ​tariff​ ​on,​ ​say,​ ​Mexican​ ​shirts​ ​thereby​ ​lowering​ ​its​ ​cost,​ ​which
product​ ​might​ ​be​ ​purchased​ ​more​ ​by​ ​Americans?

​ ​a.​ ​computer

​ ​b.​ ​toothpaste

​ ​c.​ ​pants

​ ​d.​ ​All​ ​of​ ​the​ ​above.

Video​ ​name:​ ​Arguments​ ​Against​ ​International​ ​Trade

1.​ ​Some​ ​people​ ​argue​ ​for​ ​protectionism​ ​by​ ​pointing​ ​out​ ​that​ ​other​ ​countries​ ​with​ ​whom​ ​we​ ​trade​ ​engage
in​ ​“unfair​ ​trade​ ​practices,”​ ​and​ ​that​ ​we​ ​should​ ​retaliate​ ​with​ ​our​ ​own​ ​protectionist​ ​measures.​ ​One​ ​such
policy​ ​is​ ​the​ ​policy​ ​of​ ​some​ ​countries​ ​to​ ​subsidize​ ​exporting​ ​industries.​ ​India,​ ​for​ ​example,​ ​subsidizes​ ​its
steel​ ​industry.​ ​Who​ ​is​ ​hurt​ ​by​ ​this​ ​subsidy?

​ ​a.​ ​U.S.​ ​steel​ ​producers

Explanation:​ ​Obviously,​ ​U.S.​ ​steel​ ​producers​ ​are​ ​hurt​ ​by​ ​this​ ​policy​ ​and​ ​would​ ​like​ ​to​ ​restrict
imported​ ​steel​ ​from​ ​India.​ ​However,​ ​Indian​ ​steel​ ​subsidies​ ​can​ ​reduce​ ​steel​ ​prices​ ​that​ ​American​ ​buyers
face,​ ​while​ ​reducing​ ​the​ ​producer​ ​surplus​ ​for​ ​American​ ​steel​ ​companies.​ ​However,​ ​the​ ​benefit​ ​to​ ​buyers
exceeds​ ​the​ ​detriment​ ​to​ ​sellers.​ ​Essentially,​ ​an​ ​Indian​ ​steel​ ​subsidy​ ​constitutes​ ​a​ ​payment​ ​from​ ​the​ ​Indian
government​ ​to​ ​American​ ​steel​ ​customers.​ ​Taxing​ ​Indian​ ​steel​ ​would​ ​just​ ​eliminate​ ​this​ ​payment​ ​to
domestic​ ​buyers,​ ​and​ ​the​ ​net​ ​benefit​ ​of​ ​the​ ​cheaper​ ​steel.
​ ​b.​ ​U.S.​ ​steel​ ​consumers
​ ​c.​ ​Indian​ ​steel​ ​producers
​ ​d.​ ​A​ ​&​ ​C

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Externalities

Video​ ​name:​ ​An​ ​Introduction​ ​to​ ​Externalities

1.​ ​The​ ​price​ ​you​ ​pay​ ​for​ ​an​ ​iTunes​ ​download

​ ​a.​ ​private​ ​costs

​ ​b.​ ​external​ ​costs

​ ​c.​ ​private​ ​benefits

​ ​d.​ ​external​ ​benefits

2.​ ​The​ ​benefit​ ​your​ ​neighbor​ ​receives​ ​from​ ​hearing​ ​you​ ​play​ ​your​ ​pleasant​ ​music

​ ​a.​ ​private​ ​costs

​ ​b.​ ​external​ ​costs

​ ​c.​ ​private​ ​benefits

​ ​d.​ ​external​ ​benefits

3.​ ​The​ ​annoyance​ ​of​ ​your​ ​neighbor​ ​because​ ​she​ ​doesn’t​ ​like​ ​your​ ​achingly​ ​conventional​ ​music

​ ​a.​ ​private​ ​costs

​ ​b.​ ​external​ ​costs

​ ​c.​ ​private​ ​benefits

​ ​d.​ ​external​ ​benefits

4.​ ​The​ ​pleasure​ ​you​ ​receive​ ​from​ ​listening​ ​to​ ​your​ ​iTunes​ ​download

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​ ​a.​ ​private​ ​costs

​ ​b.​ ​external​ ​costs

​ ​c.​ ​private​ ​benefits

​ ​d.​ ​external​ ​benefits

5.​ ​The​ ​price​ ​you​ ​pay​ ​for​ ​a​ ​security​ ​system​ ​for​ ​your​ ​home

​ ​a.​ ​private​ ​costs

​ ​b.​ ​external​ ​costs

​ ​c.​ ​private​ ​benefits

​ ​d.​ ​external​ ​benefits

6.​ ​The​ ​safety​ ​you​ ​enjoy​ ​as​ ​a​ ​result​ ​of​ ​having​ ​the​ ​security​ ​system

​ ​a.​ ​private​ ​costs

​ ​b.​ ​external​ ​costs

​ ​c.​ ​private​ ​benefits

​ ​d.​ ​external​ ​benefits

7.​ ​The​ ​crime​ ​that​ ​is​ ​more​ ​likely​ ​to​ ​occur​ ​to​ ​your​ ​neighbor​ ​once​ ​a​ ​criminal​ ​sees​ ​a​ ​“Protected​ ​by​ ​alarm”
sticker​ ​on​ ​your​ ​window.

​ ​a.​ ​private​ ​costs

​ ​b.​ ​external​ ​costs

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​ ​c.​ ​private​ ​benefits

​ ​d.​ ​external​ ​benefits

8.​ ​The​ ​extra​ ​safety​ ​your​ ​neighbor​ ​might​ ​experience​ ​because​ ​criminals​ ​tend​ ​to​ ​stay​ ​away​ ​from
neighborhoods​ ​that​ ​have​ ​a​ ​lot​ ​of​ ​burglar​ ​alarms

​ ​a.​ ​private​ ​costs

​ ​b.​ ​external​ ​costs

​ ​c.​ ​private​ ​benefits

​ ​d.​ ​external​ ​benefits

9.​ ​Cultural​ ​influences​ ​often​ ​create​ ​externalities,​ ​for​ ​good​ ​and​ ​ill.​ ​A​ ​happy​ ​movie​ ​might​ ​make​ ​people​ ​smile
more,​ ​which​ ​improves​ ​the​ ​lives​ ​of​ ​people​ ​who​ ​don’t​ ​see​ ​the​ ​movie.​ ​A​ ​new​ ​fashion​ ​trend​ ​for​ ​tight-fitting
clothing​ ​might​ ​hurt​ ​the​ ​body​ ​image​ ​of​ ​people​ ​who​ ​think​ ​they​ ​won’t​ ​look​ ​good​ ​in​ ​the​ ​new​ ​trendy​ ​clothing.
Let’s​ ​consider​ ​the​ ​market​ ​for​ ​one​ ​cultural​ ​good​ ​that​ ​unrealistically​ ​raises​ ​expectations​ ​about​ ​the​ ​opposite
sex:​ ​the​ ​romance​ ​novel.​ ​In​ ​romance​ ​novels,​ ​men​ ​are​ ​dangerous​ ​yet​ ​safe,​ ​wealthy​ ​yet​ ​never​ ​at​ ​work,​ ​they
ride​ ​high-speed​ ​motorcycles​ ​yet​ ​never​ ​get​ ​in​ ​terrible​ ​accidents,​ ​they​ ​look​ ​fantastic​ ​even​ ​though​ ​they​ ​never
waste​ ​endless​ ​hours​ ​at​ ​the​ ​gym,​ ​and​ ​so​ ​on.​ ​(Of​ ​course,​ ​advertising​ ​that​ ​focuses​ ​on​ ​sexy​ ​female​ ​models
may​ ​also​ ​unrealistically​ ​raise​ ​expectations​ ​about​ ​the​ ​opposite​ ​sex​ ​so​ ​feel​ ​free​ ​to​ ​change​ ​our​ ​example​ ​as
you​ ​see​ ​best.)​ ​Romance​ ​novels​ ​impose​ ​an​ ​external​ ​cost​ ​on​ ​men,​ ​who​ ​have​ ​to​ ​try​ ​to​ ​live​ ​up​ ​to​ ​these
unrealistic​ ​expectations.​ ​Suppose​ ​the​ ​government​ ​taxed​ ​the​ ​romance​ ​novel​ ​to​ ​reduce​ ​the​ ​externality.​ ​How
should​ ​the​ ​government​ ​spend​ ​the​ ​money?

​ ​a.​ ​Efficiently.

Explanation:​ ​When​ ​a​ ​tax​ ​is​ ​reducing​ ​the​ ​harm​ ​from​ ​an​ ​externality,​ ​it​ ​doesn’t​ ​matter​ ​how
government​ ​spends​ ​the​ ​money,​ ​as​ ​long​ ​as​ ​it’s​ ​spending​ ​it​ ​efficiently.​ ​It​ ​doesn’t​ ​need​ ​to​ ​spend​ ​the​ ​tax
dollars​ ​on​ ​projects​ ​directly​ ​related​ ​to​ ​the​ ​problem​ ​at​ ​hand.​ ​It​ ​can​ ​use​ ​the​ ​money​ ​to​ ​pay​ ​for​ ​food​ ​stamps​ ​or
college​ ​aid.​ ​As​ ​long​ ​as​ ​some​ ​separate​ ​argument​ ​can​ ​show​ ​that​ ​it’s​ ​efficient​ ​to​ ​spend​ ​the​ ​money​ ​that​ ​way,
the​ ​theory​ ​of​ ​externalities​ ​has​ ​nothing​ ​to​ ​say​ ​on​ ​the​ ​matter.

​ ​b.​ ​Subsidizing​ ​programs​ ​encouraging​ ​male​ ​self-esteem.

​ ​c.​ ​Subsidizing​ ​books​ ​including​ ​male​ ​protagonists​ ​who​ ​are​ ​overweight​ ​and​ ​seriously​ ​flawed.

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​ ​d.​ ​B​ ​&​ ​C.

​ ​e.​ ​None​ ​of​ ​the​ ​above.

10.​ ​When​ ​we​ ​tax​ ​goods​ ​with​ ​external​ ​costs,​ ​this​ ​always​ ​creates

​ ​a.​ ​a​ ​price​ ​ceiling.

​ ​b.​ ​deadweight​ ​loss.

​ ​c.​ ​a​ ​price​ ​floor.

​ ​d.​ ​None​ ​of​ ​the​ ​above.

Explanation:​ ​When​ ​governments​ ​tax​ ​external​ ​costs,​ ​they​ ​are​ ​preventing​ ​transactions​ ​that​ ​ought​ ​to
be​ ​prevented.​ ​By​ ​contrast,​ ​when​ ​no​ ​externalities​ ​are​ ​present,​ ​every​ ​transaction​ ​that​ ​is​ ​deterred​ ​by​ ​a​ ​tax​ ​is​ ​a
transaction​ ​that​ ​creates​ ​consumer​ ​or​ ​producer​ ​surplus.​ ​So​ ​losing​ ​those​ ​transactions​ ​means​ ​losing​ ​valuable
consumer​ ​or​ ​producer​ ​surplus.​ ​Note,​ ​however,​ ​that​ ​if​ ​a​ ​tax​ ​on​ ​an​ ​external​ ​cost​ ​reduces​ ​the​ ​quantity​ ​traded
below​ ​the​ ​efficient​ ​quantity​ ​because​ ​the​ ​tax​ ​is​ ​greater​ ​than​ ​the​ ​externality,​ ​then​ ​it​ ​will​ ​create​ ​a​ ​deadweight
loss.

11.​ ​Which​ ​of​ ​the​ ​following​ ​job​ ​is​ ​attempting​ ​to​ ​correct​ ​for​ ​an​ ​externality?

​ ​a.​ ​tarot​ ​card​ ​reader

​ ​b.​ ​ombudsmen

​ ​c.​ ​stock​ ​trader

​ ​d.​ ​homeowner​ ​association

Video​ ​name:​ ​External​ ​Benefits

1.​ ​Which​ ​action​ ​would​ ​likely​ ​reduce​ ​the​ ​undersupply​ ​of​ ​people​ ​who​ ​get​ ​flu​ ​shots?

​ ​a.​ ​Pay​ ​people​ ​to​ ​get​ ​a​ ​flu​ ​shot

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​ ​b.​ ​Offer​ ​the​ ​flu​ ​shot​ ​in​ ​more​ ​locations

​ ​c.​ ​Publicly​ ​recognize​ ​people​ ​for​ ​getting​ ​a​ ​flu​ ​shot

​ ​d.​ ​A​ ​&​ ​C

​ ​e.​ ​All​ ​of​ ​the​ ​above.

Explanation:​ ​People​ ​sometimes​ ​do​ ​things​ ​to​ ​get​ ​approval​ ​from​ ​their​ ​friends,​ ​so​ ​people​ ​might​ ​be
more​ ​likely​ ​to​ ​get​ ​flu​ ​shots​ ​if​ ​they​ ​knew​ ​they’d​ ​get​ ​a​ ​thank​ ​you​ ​from​ ​someone​ ​they​ ​cared​ ​about.​ ​And​ ​it’s
reasonable​ ​to​ ​thank​ ​people​ ​who​ ​get​ ​flu​ ​shots:​ ​They’re​ ​reducing​ ​the​ ​chance​ ​you’ll​ ​get​ ​sick​ ​this​ ​winter!
Alex​ ​has​ ​suggested​ ​(on​ ​Marginal​ ​Revolution)​ ​three​ ​possible​ ​buttons​ ​to​ ​give​ ​people​ ​who​ ​get​ ​a​ ​flu​ ​shot:

​ ​•​ ​Kiss​ ​me,​ ​I’m​ ​vaccinated.

•​ ​Take​ ​one​ ​for​ ​the​ ​herd!

•​ ​Get​ ​a​ ​flu​ ​shot.​ ​The​ ​life​ ​you​ ​save​ ​may​ ​not​ ​be​ ​your​ ​own.

For​ ​the​ ​following​ ​six​ ​questions,​ ​determine​ ​whether​ ​there​ ​is​ ​an​ ​external​ ​benefit​ ​or​ ​cost​ ​and​ ​estimate​ ​its
size.​ ​Finally,​ ​decide​ ​between​ ​a​ ​tax​ ​or​ ​a​ ​subsidy​ ​as​ ​a​ ​simple​ ​way​ ​to​ ​compensate​ ​for​ ​the​ ​externality.

1.​ ​Scenario​ ​1:​ ​In​ ​the​ ​market​ ​for​ ​automobiles,​ ​the​ ​private​ ​benefit​ ​of​ ​one​ ​more​ ​small​ ​SUV​ ​is​ ​$20,000​ ​and
the​ ​social​ ​cost​ ​of​ ​one​ ​more​ ​small​ ​SUV​ ​is​ ​$30,000.​ ​Is​ ​this​ ​an​ ​external​ ​cost​ ​or​ ​an​ ​external​ ​benefit?

​ ​a.​ ​External​ ​cost

​ ​b.​ ​External​ ​benefit

​ ​c.​ ​Neither

2.​ ​What​ ​is​ ​the​ ​size​ ​of​ ​the​ ​externality?

​ ​a.​ ​-30,000

​ ​b.-10,000

​ ​c.​ ​30,000

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​ ​d.​ ​10,000

3.​ ​Would​ ​a​ ​tax​ ​or​ ​a​ ​subsidy​ ​be​ ​more​ ​appropriate​ ​for​ ​this​ ​externality?

​ ​a.​ ​Tax

​ ​b.​ ​Subsidy

​ ​c.​ ​Neither

4.​ ​Is​ ​this​ ​an​ ​external​ ​cost​ ​or​ ​an​ ​external​ ​benefit?

​ ​a.​ ​External​ ​cost

​ ​b.​ ​External​ ​benefit

​ ​c.​ ​Neither

5.​ ​What​ ​is​ ​the​ ​size​ ​of​ ​the​ ​externality?

​ ​a.​ ​-100,000,000

​ ​b.-99,000,000

​ ​c.​ ​100,000,000

​ ​d.​ ​99,000,000

6.​ ​Would​ ​a​ ​tax​ ​or​ ​a​ ​subsidy​ ​be​ ​more​ ​appropriate​ ​for​ ​this​ ​externality?

​ ​a.​ ​tax

​ ​b.​ ​subsidy

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​ ​c.​ ​neither

7.​ ​Economists​ ​have​ ​found​ ​that​ ​increasing​ ​the​ ​proportion​ ​of​ ​girls​ ​in​ ​primary​ ​and​ ​secondary​ ​school​ ​leads
to​ ​significant​ ​improvement​ ​in​ ​students’​ ​cognitive​ ​outcomes​ ​(Victor​ ​Lavy​ ​and​ ​Analia​ ​Schlosser.​ ​2007.
“Mechanisms​ ​and​ ​Impacts​ ​of​ ​Gender​ ​Peer​ ​Effects​ ​at​ ​School,”​ ​NBER​ ​Working​ ​Paper​ ​13292).​ ​One​ ​key
channel​ ​seems​ ​to​ ​be​ ​that​ ​on​ ​average​ ​boys​ ​create​ ​more​ ​trouble​ ​in​ ​class,​ ​which​ ​makes​ ​it​ ​harder​ ​for
everyone​ ​to​ ​learn.​ ​In​ ​newspaper​ ​English,​ ​we’d​ ​say​ ​that​ ​“boys​ ​are​ ​a​ ​tax​ ​on​ ​every​ ​child’s​ ​education.”​ ​Do
girls​ ​in​ ​a​ ​classroom​ ​provide​ ​external​ ​costs​ ​or​ ​benefits?

​ ​a.​ ​External​ ​costs

​ ​b.​ ​External​ ​benefits

​ ​c.​ ​Neither

Explanation:​ ​Girls​ ​provide​ ​neither​ ​external​ ​costs​ ​nor​ ​external​ ​benefits.​ ​Boys​ ​provide​ ​an​ ​external
cost.

8.​ ​Fruit​ ​farmers​ ​pay​ ​beekeepers​ ​for​ ​their​ ​honeybees’​ ​pollination​ ​services.​ ​Honeybees​ ​provide​ ​an​ ​external
benefit​ ​to​ ​fruit​ ​farmers.​ ​However,​ ​fruits​ ​provide​ ​an​ ​external​ ​benefit​ ​to​ ​the​ ​beekeepers​ ​because​ ​their
honeybees​ ​need​ ​fruits.​ ​Which​ ​external​ ​benefit​ ​is​ ​larger:​ ​honeybees’​ ​external​ ​benefit​ ​to​ ​fruit​ ​farmers​ ​and
fruits’​ ​external​ ​benefit​ ​to​ ​beekeepers?

​ ​a.​ ​Honeybees’​ ​external​ ​benefit​ ​to​ ​fruit​ ​farmers​ ​is​ ​larger

Explanation:​ ​Start​ ​from​ ​a​ ​situation​ ​where​ ​beekeepers​ ​do​ ​not​ ​pay​ ​farmers​ ​and​ ​farmers​ ​do​ ​not​ ​pay
beekeepers.​ ​Each​ ​group​ ​creates​ ​an​ ​external​ ​benefit​ ​for​ ​the​ ​other​ ​but​ ​which​ ​group​ ​is​ ​willing​ ​to​ ​pay​ ​more
for​ ​additional​ ​services?​ ​It​ ​could​ ​go​ ​either​ ​way​ ​but​ ​in​ ​practice​ ​it​ ​appears​ ​that​ ​the​ ​farmers​ ​are​ ​willing​ ​to​ ​pay
more​ ​for​ ​additional​ ​pollination​ ​than​ ​beekeepers​ ​are​ ​willing​ ​to​ ​pay​ ​for​ ​additional​ ​fruit​ ​farms.​ ​But​ ​if​ ​bees
produced​ ​gold​ ​or​ ​diamonds​ ​instead​ ​of​ ​honey,​ ​beekeepers​ ​would​ ​probably​ ​end​ ​up​ ​paying​ ​the​ ​fruit​ ​farmers

​ ​b.​ ​Fruits’​ ​external​ ​benefit​ ​to​ ​beekeepers​ ​is​ ​larger

​ ​c.​ ​The​ ​external​ ​benefits​ ​are​ ​the​ ​same​ ​size.

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

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Video​ ​name:​ ​Command​ ​and​ ​Control​ ​Solutions

1.​ ​Given​ ​what​ ​you’ve​ ​learned​ ​about​ ​externalities,​ ​should​ ​human-caused​ ​global​ ​warming​ ​be​ ​completely
stopped?

​ ​a.​ ​Yes

​ ​b.​ ​No

Explanation:​ ​It’s​ ​probably​ ​not​ ​efficient​ ​to​ ​stop​ ​human-made​ ​global​ ​warming​ ​completely.​ ​The
social​ ​benefits​ ​that​ ​manifest​ ​as​ ​a​ ​result​ ​of​ ​creating​ ​a​ ​lot​ ​of​ ​carbon​ ​dioxide​ ​and​ ​other​ ​greenhouse​ ​gases
probably​ ​outweighs​ ​the​ ​social​ ​costs​ ​of​ ​such​ ​action.​ ​The​ ​socially​ ​optimal​ ​amount​ ​of​ ​human-made​ ​carbon
dioxide​ ​is​ ​likely​ ​less​ ​than​ ​today’s​ ​amount,​ ​but​ ​it’s​ ​likely​ ​far​ ​more​ ​than​ ​zero.​ ​In​ ​supply​ ​and​ ​demand​ ​terms,
the​ ​social​ ​cost​ ​curve​ ​is​ ​to​ ​the​ ​left​ ​of​ ​the​ ​supply​ ​curve,​ ​but​ ​not​ ​radically​ ​so​ ​far​ ​to​ ​the​ ​left​ ​that​ ​the​ ​socially
optimal​ ​quantity​ ​is​ ​zero.

A​ ​government​ ​is​ ​deciding​ ​between​ ​command​ ​and​ ​control​ ​solutions​ ​versus​ ​tax​ ​and​ ​subsidy​ ​solutions​ ​to
solve​ ​an​ ​externality​ ​problem.

2.​ ​Suppose​ ​that​ ​whales​ ​are​ ​threatened​ ​with​ ​extinction​ ​because​ ​a​ ​large​ ​number​ ​of​ ​people​ ​like​ ​to​ ​eat​ ​whale
meat.​ ​Governments​ ​are​ ​torn​ ​between​ ​banning​ ​all​ ​whaling​ ​except​ ​for​ ​certain​ ​religious​ ​ceremonies,​ ​and
heavily​ ​taxing​ ​all​ ​whale​ ​meat.​ ​Assume​ ​there​ ​are​ ​only​ ​a​ ​few​ ​countries​ ​in​ ​the​ ​world​ ​who​ ​consume​ ​whale
meat,​ ​and​ ​that​ ​they​ ​have​ ​fairly​ ​efficient​ ​governments.

​ ​a.​ ​Ban​ ​the​ ​eating​ ​of​ ​whale​ ​meat.

Explanation:​ ​Command​ ​and​ ​control​ ​might​ ​work​ ​best​ ​here.​ ​If​ ​the​ ​tax​ ​is​ ​set​ ​too​ ​low,​ ​then​ ​whales
may​ ​become​ ​extinct​ ​and​ ​there​ ​is​ ​no​ ​turning​ ​back​ ​from​ ​that​ ​result.​ ​Banning​ ​the​ ​eating​ ​of​ ​whale​ ​meat​ ​could
inefficiently​ ​reduce​ ​whale​ ​meat​ ​consumption​ ​creating​ ​a​ ​deadweight​ ​loss,​ ​but​ ​that​ ​loss​ ​will​ ​probably​ ​be
small​ ​and​ ​we​ ​can​ ​change​ ​the​ ​law​ ​as​ ​whales​ ​recover.​ ​Notice​ ​that​ ​if​ ​extinction​ ​was​ ​not​ ​likely,​ ​then​ ​a​ ​tax
would​ ​probably​ ​be​ ​better,​ ​so​ ​as​ ​whale​ ​populations​ ​recover​ ​it​ ​would​ ​make​ ​sense​ ​to​ ​switch​ ​from​ ​a​ ​ban​ ​to​ ​a
tax.

​ ​b.​ ​Tax​ ​the​ ​eating​ ​of​ ​whale​ ​meat.

​ ​c.​ ​Subsidize​ ​the​ ​eating​ ​of​ ​whale​ ​meat.

​ ​d.​ ​None​ ​of​ ​the​ ​above.

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3.​ ​LoJack​ ​is​ ​an​ ​example​ ​of​ ​a​ ​vehicle​ ​tracking​ ​system​ ​designed​ ​to​ ​help​ ​police​ ​recover​ ​stolen​ ​vehicles.​ ​Steve
Levitt​ ​found​ ​evidence​ ​that​ ​Lojack​ ​and​ ​other​ ​vehicle​ ​tracking​ ​devices​ ​create​ ​a​ ​positive​ ​externality​ ​of
decreasing​ ​all​ ​car​ ​thefts​ ​because​ ​car​ ​thieves​ ​do​ ​not​ ​know​ ​which​ ​cars​ ​have​ ​Lojack​ ​installed,​ ​making​ ​them
more​ ​hesitant​ ​to​ ​break​ ​into​ ​any​ ​car.

​ ​a.​ ​Mandate​ ​vehicle​ ​tracking​ ​devices​ ​be​ ​installed​ ​in​ ​all​ ​cars.

​ ​b.​ ​Subsidize​ ​purchase​ ​of​ ​vehicle​ ​tracking​ ​devices.

​ ​c.​ ​Tax​ ​purchase​ ​of​ ​vehicle​ ​tracking​ ​devices.

Video​ ​name:​ ​The​ ​Coase​ ​Theorem

1.​ ​Consider​ ​a​ ​factory,​ ​located​ ​in​ ​the​ ​middle​ ​of​ ​nowhere,​ ​producing​ ​a​ ​nasty​ ​smell.​ ​As​ ​long​ ​as​ ​no​ ​one​ ​is
around​ ​to​ ​experience​ ​the​ ​unpleasant​ ​odor,​ ​what​ ​type​ ​of​ ​externality​ ​is​ ​produced?

​ ​a.​ ​Negative​ ​externality

​ ​b.​ ​Positive​ ​externality

​ ​c.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

​ ​d.​ ​None​ ​of​ ​the​ ​above.

2.​ ​Suppose​ ​that​ ​a​ ​family​ ​moves​ ​in​ ​next​ ​door​ ​to​ ​this​ ​smelly​ ​factory.​ ​Who​ ​is​ ​causing​ ​the​ ​externalities
problem?

​ ​a.​ ​The​ ​factory.

​ ​b.​ ​The​ ​family.

​ ​c.​ ​A​ ​&​ ​B

​ ​d.None​ ​of​ ​the​ ​above.

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3.​ ​Suppose​ ​that​ ​the​ ​family​ ​clearly​ ​possesses​ ​the​ ​right​ ​to​ ​a​ ​pleasant-smelling​ ​environment.​ ​What​ ​could
happen?

​ ​a.​ ​The​ ​factory​ ​stops​ ​producing​ ​the​ ​bad​ ​smell.

​ ​b.​ ​The​ ​factory​ ​pays​ ​the​ ​family​ ​for​ ​the​ ​right​ ​to​ ​continue​ ​the​ ​bad​ ​smell.

​ ​c.​ ​The​ ​factory​ ​pays​ ​the​ ​family​ ​to​ ​move.

​ ​e.​ ​All​ ​of​ ​the​ ​above.

Explanation​:​ ​The​ ​family​ ​could​ ​demand​ ​that​ ​the​ ​factory​ ​shut​ ​down​ ​or​ ​use​ ​a​ ​less-smelly
technology,​ ​but​ ​there​ ​are​ ​other​ ​possibilities.​ ​The​ ​factory​ ​could​ ​pay​ ​the​ ​family​ ​to​ ​move​ ​away​ ​and​ ​continue
to​ ​produce​ ​the​ ​bad​ ​smell.​ ​The​ ​factory​ ​could​ ​just​ ​pay​ ​the​ ​family​ ​a​ ​fixed​ ​monthly​ ​fee​ ​for​ ​the​ ​right​ ​to​ ​keep
producing​ ​the​ ​smell.​ ​The​ ​factory​ ​could​ ​buy​ ​the​ ​family​ ​lovely-smelling​ ​flowers​ ​for​ ​their​ ​home.​ ​That’s​ ​the
nature​ ​of​ ​the​ ​Coase​ ​theorem:​ ​There​ ​are​ ​usually​ ​many​ ​possible​ ​win-win​ ​outcomes,​ ​and​ ​if​ ​the​ ​parties​ ​can
calmly​ ​negotiate,​ ​there’s​ ​a​ ​good​ ​chance​ ​they’ll​ ​find​ ​an​ ​option​ ​that‘s​ ​better​ ​than​ ​just​ ​shutting​ ​down​ ​the
factory.

For​ ​the​ ​following​ ​four​ ​questions,​ ​in​ ​which​ ​cases​ ​will​ ​the​ ​Coase​ ​theorem’s​ ​assumptions​ ​likely​ ​to​ ​be​ ​true?
(In​ ​other​ ​words,​ ​when​ ​will​ ​the​ ​parties​ ​be​ ​likely​ ​to​ ​strike​ ​an​ ​efficient​ ​bargain?)

4.​ ​My​ ​neighbor​ ​wants​ ​me​ ​to​ ​cut​ ​down​ ​an​ ​ugly​ ​shrub​ ​in​ ​my​ ​front​ ​yard.​ ​The​ ​ugly​ ​shrub,​ ​of​ ​course,​ ​imposes
an​ ​external​ ​cost​ ​on​ ​him​ ​and​ ​on​ ​his​ ​property​ ​value.

​ ​a.​ ​Yay,​ ​Coase.

Explanation:​ ​Transactions​ ​costs​ ​are​ ​likely​ ​low,​ ​since​ ​you​ ​are​ ​only​ ​dealing​ ​with​ ​one​ ​party.

​ ​b.​ ​Not​ ​this​ ​time,​ ​Coase.

5.​ ​My​ ​neighbors​ ​all​ ​would​ ​love​ ​for​ ​me​ ​to​ ​get​ ​that​ ​broken-down​ ​Willies​ ​Jeep​ ​off​ ​my​ ​front​ ​lawn.​ ​It’s​ ​been
years​ ​now,​ ​after​ ​all.​ ​And​ ​would​ ​it​ ​be​ ​too​ ​much​ ​for​ ​me​ ​to​ ​paint​ ​the​ ​house​ ​and​ ​fill​ ​up​ ​that​ ​6-foot​ ​deep​ ​ditch
in​ ​the​ ​front​ ​yard?​ ​The​ ​whole​ ​neighborhood​ ​is​ ​just​ ​annoyed.

​ ​a.​ ​Yes​ ​to​ ​the​ ​Coase.

​ ​b.​ ​Coase​ ​is​ ​a​ ​no​ ​go.

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 Explanation:​ ​In​ ​all​ ​cases,​ ​it’s​ ​a​ ​question​ ​of​ ​whether​ ​you​ ​need​ ​to​ ​negotiate​ ​with​ ​one​ ​party​ ​or​ ​many
parties.​ ​In​ ​this​ ​case,​ ​it’s​ ​probably​ ​too​ ​hard​ ​to​ ​negotiate​ ​with​ ​dozens​ ​of​ ​neighbors.​ ​The​ ​few​ ​neighbors​ ​who
care​ ​most​ ​probably​ ​can’t​ ​come​ ​up​ ​with​ ​enough​ ​money​ ​to​ ​convince​ ​me​ ​to​ ​clean​ ​up​ ​my​ ​yard—though​ ​every
once​ ​in​ ​a​ ​while​ ​it​ ​might​ ​work​ ​out.

6.​ ​A​ ​coal-fired​ ​electricity​ ​plant​ ​dumps​ ​its​ ​leftover​ ​hot​ ​water​ ​into​ ​the​ ​nearby​ ​lake,​ ​killing​ ​the​ ​naturally
occurring​ ​fish.​ ​Thousands​ ​of​ ​homes​ ​line​ ​the​ ​banks​ ​of​ ​the​ ​lake.

​ ​a.​ ​Three​ ​cheers​ ​for​ ​Coase.

​ ​b.​ ​Not​ ​going​ ​to​ ​happen,​ ​Coase.

Explanation:​ ​In​ ​all​ ​cases,​ ​it’s​ ​a​ ​question​ ​of​ ​whether​ ​you​ ​need​ ​to​ ​negotiate​ ​with​ ​one​ ​party​ ​or​ ​many
parties.​ ​In​ ​this​ ​case​ ​it’s​ ​probably​ ​too​ ​hard​ ​to​ ​negotiate​ ​with​ ​thousands​ ​of​ ​lake-dwellers.

7.​ ​A​ ​coal-fired​ ​electricity​ ​plant​ ​dumps​ ​its​ ​leftover​ ​hot​ ​water​ ​into​ ​the​ ​nearby​ ​river,​ ​killing​ ​the​ ​naturally
occurring​ ​fish​ ​downstream.​ ​There​ ​is​ ​one​ ​large​ ​fishery​ ​one-mile​ ​downstream​ ​affected​ ​by​ ​this.​ ​After​ ​that,
the​ ​water​ ​cools​ ​enough​ ​so​ ​it’s​ ​not​ ​a​ ​problem.

​ ​a.​ ​Coasting​ ​to​ ​Coase.

​ ​b.​ ​Not​ ​so,​ ​Coase.

Explanation​ ​for​ ​questions​ ​4-7:​​ ​In​ ​all​ ​cases,​ ​it’s​ ​a​ ​simple​ ​question​ ​of​ ​whether​ ​you​ ​need​ ​to​ ​negotiate​ ​with
one​ ​party​ ​or​ ​with​ ​many​ ​parties.​ ​This​ ​is​ ​an​ ​easy​ ​way​ ​to​ ​illustrate​ ​low​ ​versus​ ​high​ ​transaction​ ​costs.​ ​For
questions​ ​4​ ​and​ ​7,​ ​only​ ​one​ ​party​ ​is​ ​annoyed,​ ​so​ ​the​ ​injuring​ ​party​ ​can​ ​probably​ ​work​ ​something​ ​out​ ​with
the​ ​injured​ ​party.​ ​The​ ​neighbor​ ​can​ ​chip​ ​in​ ​half​ ​the​ ​cost​ ​of​ ​getting​ ​the​ ​shrub​ ​removed,​ ​and​ ​the​ ​fishery​ ​can
pay​ ​for​ ​the​ ​coal-fired​ ​plant​ ​to​ ​cool​ ​off​ ​the​ ​water​ ​first.​ ​Or,​ ​if​ ​the​ ​fishery​ ​has​ ​the​ ​right​ ​to​ ​cool​ ​water,​ ​then​ ​the
power​ ​plant​ ​can​ ​pay​ ​for​ ​the​ ​right​ ​to​ ​heat​ ​the​ ​river—it​ ​might​ ​even​ ​pay​ ​the​ ​fishery​ ​to​ ​shut​ ​down​ ​completely.
For​ ​questions​ ​5​ ​and​ ​6,​ ​it’s​ ​too​ ​hard​ ​to​ ​negotiate​ ​with​ ​thousands​ ​of​ ​lake-dwellers​ ​or​ ​dozens​ ​of​ ​neighbors.
The​ ​few​ ​neighbors​ ​who​ ​care​ ​most​ ​probably​ ​can’t​ ​come​ ​up​ ​with​ ​enough​ ​money​ ​to​ ​convince​ ​me​ ​to​ ​clean​ ​up
my​ ​yard—though​ ​every​ ​once​ ​in​ ​awhile​ ​it​ ​might​ ​work​ ​out

Video​ ​name:​ ​Trading​ ​Pollution

1.​ ​An​ ​increase​ ​in​ ​the​ ​number​ ​of​ ​pollution​ ​allowances​ ​does​ ​which​ ​of​ ​the​ ​following:

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​ ​a.​ ​Increases​ ​the​ ​cost​ ​of​ ​polluting

​ ​b.​ ​Decreases​ ​the​ ​cost​ ​of​ ​polluting

Explanation​:​ ​Pollution​ ​allowances​ ​work​ ​just​ ​like​ ​a​ ​supply​ ​curve:​ ​If​ ​the​ ​government​ ​creates​ ​more
of​ ​them,​ ​supply​ ​shifts​ ​out,​ ​so​ ​demanders​ ​bid​ ​down​ ​the​ ​price​ ​of​ ​an​ ​allowance,​ ​which​ ​reduces​ ​the​ ​marginal
cost​ ​of​ ​polluting.​ ​Conversely,​ ​a​ ​smaller​ ​supply​ ​increases​ ​the​ ​price​ ​of​ ​an​ ​allowance,​ ​which​ ​increases​ ​the
price​ ​of​ ​polluting.​ ​We​ ​can’t​ ​say​ ​what​ ​the​ ​increase​ ​does​ ​to​ ​deadweight​ ​loss​ ​without​ ​more​ ​information.

2.​ ​In​ ​theory,​ ​one​ ​reason​ ​why​ ​tradable​ ​pollution​ ​allowances​ ​are​ ​preferable​ ​to​ ​pollution​ ​regulation​ ​is
because​ ​they:

​ ​a.​ ​Make​ ​it​ ​more​ ​difficult​ ​for​ ​firms​ ​to​ ​pollute.

​ ​b.​ ​Encourage​ ​lowest-cost​ ​pollution​ ​reduction.

​ ​c.​ ​Decrease​ ​government​ ​oversight​ ​costs.

​ ​d.​ ​All​ ​of​ ​the​ ​above.

3.​ ​If​ ​the​ ​permits​ ​were​ ​not​ ​tradeable,​ ​how​ ​would​ ​this​ ​affect​ ​the​ ​efficiency​ ​of​ ​the​ ​program?

​ ​a.​ ​Program​ ​efficiency​ ​would​ ​remain​ ​unchanged.

​ ​b.​ ​Program​ ​would​ ​resemble​ ​other​ ​command-and-control​ ​programs.

​ ​c.​ ​Program​ ​would​ ​no​ ​longer​ ​be​ ​as​ ​efficient.

​ ​d.​ ​B​ ​&​ ​C

​ ​e.​ ​Indeterminate​ ​with​ ​the​ ​given​ ​information.

Video​ ​name:​ ​A​ ​Deeper​ ​Look​ ​at​ ​Tradeable​ ​Allowances

1.​ ​A​ ​government​ ​is​ ​torn​ ​between​ ​selling​ ​annual​ ​pollution​ ​allowances​ ​and​ ​setting​ ​an​ ​annual​ ​pollution​ ​tax.
Unlike​ ​in​ ​the​ ​messy​ ​real​ ​world,​ ​this​ ​government​ ​is​ ​quite​ ​certain​ ​that​ ​it​ ​can​ ​achieve​ ​the​ ​same​ ​price​ ​and

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quantity​ ​either​ ​way.​ ​It​ ​wants​ ​to​ ​choose​ ​the​ ​method​ ​that​ ​will​ ​pull​ ​in​ ​more​ ​government​ ​tax​ ​revenue.​ ​Which
method​ ​is​ ​better​ ​from​ ​a​ ​revenue-raising​ ​perspective?

​ ​a.​ ​Pollution​ ​allowances.

​ ​b.​ ​Pollution​ ​tax.

​ ​c.​ ​Revenues​ ​will​ ​be​ ​the​ ​same.

Explanation:​ ​Revenues​ ​will​ ​be​ ​the​ ​same.​ ​If​ ​the​ ​auction​ ​is​ ​competitive,​ ​the​ ​price​ ​of​ ​each​ ​permit
will​ ​equal​ ​the​ ​difference​ ​between​ ​the​ ​marginal​ ​cost​ ​of​ ​producing​ ​one​ ​more​ ​unit​ ​of​ ​the​ ​polluting​ ​product​ ​at
the​ ​efficient​ ​quantity​ ​(read​ ​off​ ​the​ ​supply​ ​curve)​ ​and​ ​the​ ​selling​ ​price​ ​of​ ​one​ ​more​ ​unit​ ​of​ ​the​ ​product​ ​at
the​ ​efficient​ ​quantity​ ​(read​ ​off​ ​the​ ​social​ ​cost​ ​curve).​ ​If​ ​the​ ​permit​ ​price​ ​were​ ​any​ ​higher,​ ​too​ ​little​ ​of​ ​the
product​ ​would​ ​be​ ​produced;​ ​if​ ​the​ ​permit​ ​price​ ​were​ ​any​ ​lower,​ ​too​ ​much.​ ​The​ ​permit​ ​price​ ​at​ ​the​ ​efficient
quantity​ ​will​ ​be​ ​just​ ​equal​ ​to​ ​the​ ​tax​ ​when​ ​the​ ​tax​ ​is​ ​set​ ​at​ ​the​ ​efficient​ ​level.​ ​As​ ​a​ ​result,​ ​tax​ ​revenues​ ​and
permit​ ​revenues​ ​are​ ​identical.

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

2.​ ​Maxicon​ ​is​ ​opening​ ​a​ ​new​ ​coal-fired​ ​power​ ​plant,​ ​but​ ​the​ ​government​ ​wants​ ​to​ ​keep​ ​pollution​ ​down
using​ ​tradable​ ​pollution​ ​permits.​ ​If​ ​a​ ​corrupt​ ​government​ ​just​ ​grants​ ​Maxicon​ ​all​ ​of​ ​the​ ​pollution​ ​permits
in​ ​the​ ​entire​ ​nation​ ​(even​ ​though​ ​there​ ​are​ ​many​ ​energy​ ​companies),​ ​what​ ​do​ ​we​ ​predict​ ​will​ ​happen​ ​to
pollution​ ​production?

​ ​a.​ ​Maxicon​ ​will​ ​pollute​ ​much​ ​more​ ​than​ ​it​ ​would​ ​have​ ​if​ ​it​ ​were​ ​not​ ​given​ ​all​ ​of​ ​the​ ​permits.

​ ​b.​ ​Pollution​ ​permits​ ​will​ ​not​ ​be​ ​traded​ ​because​ ​Maxicon​ ​has​ ​no​ ​incentive​ ​to​ ​trade​ ​with​ ​other​ ​firms.

​ ​c.​ ​The​ ​firms​ ​polluting​ ​will​ ​likely​ ​be​ ​those​ ​with​ ​the​ ​highest​ ​costs​ ​of​ ​reducing​ ​pollution.

Explanation​:​ ​If​ ​the​ ​permits​ ​are​ ​tradable,​ ​other​ ​companies​ ​might​ ​bid​ ​up​ ​the​ ​price​ ​of​ ​the​ ​permits​ ​so​ ​high
that​ ​Maxicon​ ​would​ ​rather​ ​cut​ ​back​ ​on​ ​polluting​ ​itself​ ​and​ ​sell​ ​the​ ​permits​ ​rather​ ​than​ ​hold​ ​on​ ​to​ ​the
permits.​ ​The​ ​high​ ​permit​ ​price​ ​would​ ​convince​ ​Maxicon​ ​to​ ​sell​ ​some​ ​of​ ​its​ ​right​ ​to​ ​pollute.​ ​In​ ​other
words,​ ​a​ ​benefit​ ​of​ ​tradable​ ​permits​ ​is​ ​that​ ​they​ ​will​ ​tend​ ​to​ ​flow​ ​to​ ​the​ ​high​ ​demanders​ ​(those​ ​with​ ​the
highest​ ​costs​ ​of​ ​reducing​ ​pollution).

​ ​d.​ ​A​ ​&​ ​B

​ ​e.​ ​None​ ​of​ ​the​ ​above.

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Costs​ ​and​ ​Profit​ ​Maximization​ ​Under​ ​Competition

Video​ ​name:​ ​Introduction​ ​to​ ​the​ ​Competitive​ ​Firm

1.​ ​A​ ​competitive​ ​firm​ ​maximizes​ ​profit​ ​by​ ​choosing

​ ​a.​ ​Price.

​ ​b.​ ​Quantity.

​ ​c.​ ​Both​ ​price​ ​and​ ​quantity.

​ ​d.​ ​Either​ ​price​ ​or​ ​quantity,​ ​but​ ​not​ ​both.

​ ​e.​ ​None​ ​of​ ​the​ ​above.

2.​ ​A​ ​competitive​ ​market​ ​has​ ​which​ ​of​ ​the​ ​following​ ​characteristics?

​ ​a.​ ​Lots​ ​of​ ​small-scale​ ​sellers

​ ​b.​ ​Lots​ ​of​ ​small-scale​ ​buyers

​ ​c.​ ​A​ ​product​ ​that​ ​is​ ​similar​ ​across​ ​sellers

​ ​d.​ ​A​ ​&​ ​C​ ​only

​ ​e.​ ​All​ ​of​ ​the​ ​above.

3.​ ​In​ ​a​ ​competitive​ ​market,​ ​sellers​ ​sell​ ​their​ ​product

​ ​a.​ ​At​ ​the​ ​world​ ​price.

​ ​b.​ ​Just​ ​below​ ​the​ ​world​ ​price.

​ ​c.​ ​Just​ ​above​ ​the​ ​world​ ​price.

​ ​d.​ ​At​ ​a​ ​price​ ​dependent​ ​on​ ​the​ ​quantity​ ​chosen.

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 Explanation:​ ​You​ ​would​ ​fail.​ ​Your​ ​stock​ ​is​ ​no​ ​different​ ​from​ ​any​ ​of​ ​the​ ​other​ ​3.8​ ​billion​ ​shares
out​ ​there,​ ​so​ ​no​ ​one​ ​would​ ​pay​ ​a​ ​higher​ ​price​ ​for​ ​yours.​ ​If​ ​you​ ​could​ ​sell​ ​at​ ​$18.85​ ​per​ ​share,​ ​the​ ​price
would​ ​be​ ​$18.85,​ ​not​ ​$18.79.

4.​ ​On​ ​January​ ​27,​ ​2011,​ ​the​ ​price​ ​of​ ​Ford​ ​Motor​ ​Company​ ​stock​ ​hit​ ​an​ ​almost​ ​10-year​ ​high​ ​at​ ​$18.79​ ​per
share.​ ​(Two​ ​years​ ​prior,​ ​in​ ​January​ ​2009,​ ​Ford​ ​stock​ ​was​ ​trading​ ​for​ ​about​ ​a​ ​tenth​ ​of​ ​that​ ​price.)
Suppose​ ​that​ ​on​ ​January​ ​27,​ ​2011,​ ​you​ ​owned​ ​10,000​ ​shares​ ​of​ ​Ford​ ​stock​ ​(a​ ​small​ ​fraction​ ​of​ ​the​ ​almost
3.8​ ​billion​ ​shares).​ ​Suppose​ ​you​ ​offered​ ​to​ ​sell​ ​your​ ​stock​ ​for​ ​$18.85​ ​per​ ​share,​ ​just​ ​slightly​ ​above​ ​the
market​ ​price.​ ​How​ ​many​ ​shares​ ​would​ ​you​ ​sell?

​ ​a.​ ​10,000

Explanation:​ ​Lots​ ​of​ ​people​ ​in​ ​the​ ​market​ ​would​ ​be​ ​eager​ ​to​ ​buy​ ​all​ ​of​ ​your​ ​shares​ ​because​ ​at​ ​that
price​ ​the​ ​buyer​ ​could​ ​buy​ ​all​ ​your​ ​shares​ ​and​ ​turn​ ​around​ ​and​ ​resell​ ​them​ ​at​ ​$18.79​ ​for​ ​a​ ​4-cent-per-share
profit​ ​or​ ​$400​ ​in​ ​total​ ​(minus​ ​transaction​ ​costs​ ​around​ ​$20).

​ ​b.​ ​7,300

​ ​c.​ ​1

​ ​d.​ ​0

5.​ ​Suppose​ ​instead​ ​that​ ​on​ ​January​ ​27,​ ​2011,​ ​you​ ​wanted​ ​to​ ​sell​ ​your​ ​10,000​ ​shares​ ​of​ ​Ford​ ​stock​ ​but​ ​you
reduced​ ​your​ ​asking​ ​price​ ​to​ ​$18.75​ ​per​ ​share?​ ​How​ ​many​ ​shares​ ​would​ ​you​ ​sell?

​ ​a.​ ​10,000

​ ​b.​ ​7,300

Explanation:​ ​You​ ​should​ ​sell​ ​at​ ​the​ ​market​ ​price​ ​of​ ​$18.79.​ ​The​ ​demand​ ​curve​ ​that​ ​an​ ​individual
seller​ ​of​ ​the​ ​stock​ ​faces​ ​is​ ​horizontal—that​ ​is,​ ​perfectly​ ​elastic.​ ​In​ ​other​ ​words,​ ​since​ ​there​ ​are​ ​plenty​ ​of
perfect​ ​substitutes​ ​for​ ​any​ ​seller’s​ ​shares,​ ​an​ ​individual​ ​trader​ ​(who​ ​is​ ​a​ ​small​ ​share​ ​of​ ​the​ ​market)​ ​can​ ​sell
as​ ​many​ ​shares​ ​as​ ​he​ ​or​ ​she​ ​wants​ ​at​ ​the​ ​market​ ​price.

​ ​c.​ ​1

​ ​d.​ ​0

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6.​ ​Given​ ​your​ ​answer​ ​to​ ​the​ ​previous​ ​question,​ ​should​ ​you​ ​sell​ ​your​ ​shares​ ​at​ ​$18.75?

​ ​a.​ ​Yes

​ ​b.​ ​No

7.​ ​Which​ ​characteristic​ ​below​ ​best​ ​describes​ ​the​ ​demand​ ​curve​ ​that​ ​you​ ​as​ ​an​ ​individual​ ​seller​ ​of​ ​Ford
stock​ ​face?

​ ​a.​ ​A​ ​perfectly​ ​elastic​ ​demand​ ​curve

Explanation:​ ​The​ ​demand​ ​curve​ ​that​ ​an​ ​individual​ ​seller​ ​of​ ​the​ ​stock​ ​faces​ ​is​ ​horizontal—that​ ​is,
perfectly​ ​elastic.​ ​In​ ​other​ ​words,​ ​since​ ​there​ ​are​ ​plenty​ ​of​ ​perfect​ ​substitutes​ ​for​ ​any​ ​seller’s​ ​shares,​ ​an
individual​ ​trader​ ​(who​ ​is​ ​a​ ​small​ ​share​ ​of​ ​the​ ​market)​ ​can​ ​sell​ ​as​ ​many​ ​shares​ ​as​ ​he​ ​or​ ​she​ ​wants​ ​at​ ​the
market​ ​price.

​ ​b.​ ​A​ ​perfectly​ ​inelastic​ ​demand​ ​curve

​ ​c.​ ​None​ ​of​ ​the​ ​above.

Video​ ​name:​ ​Maximizing​ ​Profit​ ​under​ ​Competition

1.​ ​The​ ​economic​ ​definition​ ​of​ ​profit​ ​differs​ ​from​ ​the​ ​accounting​ ​definition​ ​of​ ​profit​ ​in​ ​that​ ​the​ ​economic
definition​ ​includes

​ ​a.​ ​Fixed​ ​costs.

​ ​b.​ ​Variable​ ​costs.

​ ​c.​ ​Opportunity​ ​costs.

​ ​d.​ ​Sunk​ ​costs.

​ ​e.​ ​None​ ​of​ ​the​ ​above.

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2.​ ​Whenever​ ​money​ ​is​ ​used​ ​to​ ​purchase​ ​capital,​ ​interest​ ​costs​ ​are​ ​incurred.​ ​Sometimes​ ​those​ ​costs​ ​are
explicit—like​ ​when​ ​Alex​ ​borrowed​ ​the​ ​money​ ​from​ ​the​ ​bank—and​ ​sometimes​ ​those​ ​costs​ ​are​ ​implicit—
like​ ​when​ ​Tyler​ ​had​ ​to​ ​forgo​ ​the​ ​interest​ ​he​ ​could​ ​have​ ​earned​ ​had​ ​he​ ​left​ ​his​ ​funds​ ​in​ ​a​ ​savings​ ​account.
If​ ​an​ ​economist​ ​and​ ​accountant​ ​calculated​ ​Alex​ ​and​ ​Tyler’s​ ​costs,​ ​for​ ​whom​ ​would​ ​they​ ​have​ ​identical
numbers​ ​and​ ​for​ ​whom​ ​would​ ​the​ ​numbers​ ​differ?

​ ​a.​ ​Economist​ ​and​ ​accountant​ ​would​ ​agree​ ​on​ ​Alex’s​ ​costs​ ​and​ ​disagree​ ​on​ ​Tyler’s.

​ ​b.​ ​Economist​ ​and​ ​accountant​ ​would​ ​agree​ ​on​ ​Tyler’s​ ​costs​ ​and​ ​disagree​ ​on​ ​Alex’s.

3.​ ​In​ ​the​ ​aforementioned​ ​disagreement​ ​on​ ​cost​ ​of​ ​one​ ​of​ ​the​ ​activities,​ ​which​ ​profession​ ​would​ ​calculate​ ​a
larger​ ​cost?

​ ​a.​ ​Economist.

​ ​b.​ ​Accountant.

4.​ ​Which​ ​type​ ​of​ ​cost​ ​is​ ​dependent​ ​on​ ​the​ ​amount​ ​of​ ​quantity​ ​produced​ ​by​ ​a​ ​firm?

​ ​a.​ ​fixed​ ​costs

​ ​b.​ ​variable​ ​costs

​ ​c.​ ​sunk​ ​costs

​ ​d.​ ​none​ ​of​ ​the​ ​above

5.​ ​A​ ​competitive​ ​firm​ ​maximizes​ ​profit​ ​by​ ​choosing​ ​a​ ​level​ ​of​ ​output​ ​where​ ​the​ ​world​ ​price​ ​is​ ​equal​ ​to​ ​the
firm’s

​ ​a.​ ​Marginal​ ​revolution.

​ ​b.​ ​Marginal​ ​revenue.

​ ​c.​ ​Marginal​ ​cost.

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​ ​d.​ ​Average​ ​cost.

​ ​e.​ ​Fixed​ ​costs.

​ ​f.​ ​Variable​ ​costs.

6.​ ​True​ ​or​ ​False:​ ​When​ ​a​ ​competitive​ ​firm​ ​maximizes​ ​profit,​ ​profits​ ​are​ ​always​ ​greater​ ​than​ ​0.

​ ​a.​ ​True

​ ​b.​ ​False

Paulette,​ ​Camille,​ ​and​ ​Hortense​ ​each​ ​own​ ​wineries​ ​in​ ​France.​ ​They​ ​produce​ ​inexpensive,​ ​mass-market
wines.​ ​Over​ ​the​ ​last​ ​few​ ​years,​ ​such​ ​wines​ ​sold​ ​for​ ​7​ ​euros​ ​per​ ​bottle;​ ​but​ ​with​ ​a​ ​global​ ​recession,​ ​the
price​ ​has​ ​fallen​ ​to​ ​5​ ​euros​ ​per​ ​bottle.​ ​Given​ ​the​ ​information​ ​below,​ ​let’s​ ​find​ ​out​ ​which​ ​of​ ​these​ ​three
winemakers​ ​(if​ ​any)​ ​should​ ​shut​ ​down​ ​temporarily​ ​until​ ​times​ ​get​ ​better.​ ​Remember:​ ​Whether​ ​or​ ​not​ ​they
shut​ ​down,​ ​they​ ​still​ ​have​ ​to​ ​keep​ ​paying​ ​fixed​ ​costs​ ​for​ ​at​ ​least​ ​some​ ​time​ ​(that’s​ ​what​ ​makes​ ​them
“fixed”).​ ​To​ ​keep​ ​things​ ​simple,​ ​let’s​ ​assume​ ​that​ ​each​ ​winemaker​ ​has​ ​calculated​ ​the​ ​optimal​ ​quantity​ ​to
produce​ ​if​ ​they​ ​decide​ ​to​ ​stay​ ​in​ ​business;​ ​your​ ​job​ ​is​ ​simply​ ​to​ ​figure​ ​out​ ​if​ ​she​ ​should​ ​produce​ ​that
amount​ ​or​ ​just​ ​shut​ ​down.

Winemaker
Fixed​ ​Costs Variable​ ​Costs Recession​ ​Revenues

Paulette $50,000 $80,000 $120,000

Camille $100,000 $40,000 $70,000

Hortense $200,000 $250,000 $200,000

7.​ ​Which​ ​of​ ​these​ ​women,​ ​if​ ​any,​ ​earned​ ​a​ ​profit?

​ ​a.​ ​Paulette

​ ​b.​ ​Camille

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​ ​c.​ ​Hortense

​ ​d.​ ​A​ ​&​ ​B​ ​only.

​ ​e.​ ​None​ ​of​ ​the​ ​women​ ​earned​ ​a​ ​profit.

Explanation:​ ​None​ ​of​ ​the​ ​women​ ​earned​ ​a​ ​positive​ ​profit;​ ​they​ ​have​ ​all​ ​suffered​ ​losses.

8.​ ​Who​ ​should​ ​stay​ ​in​ ​business​ ​in​ ​the​ ​short​ ​run?

​ ​a.​ ​Paulette

​ ​b.​ ​Camille

​ ​c.​ ​Hortense

​ ​d.​ ​A​ ​&​ ​B​ ​only

Explanation:​ ​Even​ ​if​ ​profit​ ​is​ ​negative,​ ​if​ ​revenues​ ​are​ ​greater​ ​than​ ​variable​ ​costs,​ ​then​ ​it’s​ ​best​ ​to
stay​ ​open​ ​in​ ​the​ ​short​ ​run.​ ​Paulette​ ​and​ ​Camille​ ​should​ ​stay​ ​in​ ​business​ ​in​ ​the​ ​short​ ​run.​ ​Hortense​ ​should
shut​ ​down.​ ​Since​ ​the​ ​fixed​ ​costs​ ​have​ ​to​ ​be​ ​paid​ ​whether​ ​or​ ​not​ ​the​ ​winemaker​ ​produces,​ ​the​ ​fixed​ ​costs
show​ ​us​ ​the​ ​magnitude​ ​of​ ​the​ ​losses​ ​from​ ​shutting​ ​down.​ ​If​ ​Paulette​ ​shuts​ ​down,​ ​she​ ​will​ ​lose​ ​her​ ​$50,000
fixed​ ​costs,​ ​but​ ​she​ ​only​ ​loses​ ​$10,000​ ​by​ ​producing,​ ​so​ ​producing​ ​is​ ​a​ ​better​ ​option.​ ​The​ ​same​ ​is​ ​true​ ​for
Camille.​ ​However,​ ​if​ ​Hortense​ ​shuts​ ​down​ ​she​ ​will​ ​lose​ ​only​ ​her​ ​$200,000​ ​fixed​ ​costs,​ ​which​ ​is​ ​less​ ​than
the​ ​$250,000​ ​she​ ​loses​ ​by​ ​producing.

​ ​e.​ ​None​ ​of​ ​the​ ​wineries.

9.​ ​For​ ​which​ ​of​ ​these​ ​wineries,​ ​if​ ​any,​ ​is​ ​P​ ​>​ ​AC?​ ​(Hint:​ ​You​ ​don’t​ ​need​ ​to​ ​calculate​ ​any​ ​new​ ​numbers​ ​to
answer​ ​this.)

​ ​a.​ ​Paulette

​ ​b.​ ​Camille

​ ​c.​ ​Hortense

​ ​d.​ ​A​ ​&​ ​B​ ​only

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​ ​e.​ ​None​ ​of​ ​the​ ​wineries

Explanation:​ ​This​ ​is​ ​true​ ​for​ ​none​ ​of​ ​the​ ​wineries.​ ​If​ ​we​ ​multiply​ ​both​ ​sides​ ​of​ ​“P​ ​>AC”​ ​by
quantity​ ​(Q),​ ​it​ ​becomes​ ​P​ ​*Q​ ​>AC​ ​*Q.​ ​The​ ​left-hand​ ​side​ ​is​ ​just​ ​the​ ​formula​ ​for​ ​total​ ​revenue,​ ​price
times​ ​quantity.​ ​The​ ​right-hand​ ​side​ ​is​ ​equal​ ​to​ ​total​ ​cost,​ ​because​ ​the​ ​formula​ ​for​ ​average​ ​cost​ ​is​ ​TC/Q.
Therefore,​ ​P​ ​>​ ​AC​ ​is​ ​just​ ​another​ ​way​ ​of​ ​saying​ ​that​ ​total​ ​revenue​ ​is​ ​greater​ ​than​ ​total​ ​cost,​ ​which​ ​means
that​ ​profit​ ​is​ ​positive.​ ​According​ ​to​ ​the​ ​analysis​ ​in​ ​earlier​ ​questions,​ ​all​ ​three​ ​wineries​ ​are​ ​suffering​ ​losses,
so​ ​for​ ​none​ ​of​ ​them​ ​is​ ​total​ ​revenue​ ​greater​ ​than​ ​total​ ​cost.

10.​ ​Fill​ ​in​ ​the​ ​blank:​ ​Even​ ​if​ ​profit​ ​is​ ​negative,​ ​if​ ​revenues​ ​are​ ​______​ ​variable​ ​costs,​ ​then​ ​it’s​ ​best​ ​to​ ​stay
open​ ​in​ ​the​ ​short​ ​run.

​ ​a.​ ​>

Explanation:​ ​“Even​ ​if​ ​profit​ ​is​ ​negative,​ ​if​ ​revenues​ ​are​ ​greater​ ​than​ ​variable​ ​costs,​ ​then​ ​it’s​ ​best​ ​to​ ​stay
open​ ​in​ ​the​ ​short​ ​run.”​ ​We​ ​see​ ​that​ ​for​ ​Paulette​ ​and​ ​Camille,​ ​their​ ​revenues​ ​(even​ ​in​ ​the​ ​recession)​ ​are
more​ ​than​ ​enough​ ​to​ ​cover​ ​their​ ​variable​ ​costs.​ ​When​ ​these​ ​two​ ​winemakers​ ​produce,​ ​they​ ​earn​ ​more​ ​than
enough​ ​money​ ​to​ ​pay​ ​for​ ​the​ ​variable​ ​production​ ​costs.​ ​They​ ​can​ ​use​ ​the​ ​excess​ ​of​ ​revenues​ ​over​ ​variable
costs​ ​to​ ​help​ ​pay​ ​for​ ​part​ ​of​ ​their​ ​fixed​ ​costs.​ ​For​ ​Hortense,​ ​this​ ​is​ ​not​ ​the​ ​case.

​ ​b.​ ​<

11.​ ​You’ve​ ​been​ ​hired​ ​as​ ​a​ ​management​ ​consultant​ ​to​ ​WaffleCo,​ ​a​ ​maker​ ​of​ ​generic-brand​ ​frozen​ ​waffles.
They’re​ ​each​ ​trying​ ​to​ ​figure​ ​out​ ​if​ ​they​ ​should​ ​produce​ ​a​ ​little​ ​more​ ​output​ ​or​ ​a​ ​little​ ​bit​ ​less​ ​in​ ​order​ ​to
maximize​ ​their​ ​profits.​ ​The​ ​firms​ ​all​ ​have​ ​typical​ ​marginal​ ​cost​ ​curves:​ ​They​ ​rise​ ​as​ ​the​ ​firm​ ​produces
more.​ ​Your​ ​staff​ ​did​ ​all​ ​the​ ​hard​ ​work​ ​for​ ​you​ ​of​ ​figuring​ ​out​ ​the​ ​price​ ​of​ ​the​ ​firm’s​ ​output​ ​is​ ​$4​ ​per​ ​box
and​ ​the​ ​marginal​ ​cost​ ​of​ ​producing​ ​one​ ​more​ ​unit​ ​of​ ​output​ ​is​ ​$2​ ​per​ ​box​ ​at​ ​its​ ​current​ ​level​ ​of​ ​output.
However,​ ​they​ ​forgot​ ​to​ ​collect​ ​data​ ​on​ ​how​ ​much​ ​the​ ​firm​ ​is​ ​actually​ ​producing​ ​at​ ​the​ ​moment.
Fortunately,​ ​that​ ​doesn’t​ ​matter.​ ​In​ ​your​ ​final​ ​report,​ ​you​ ​need​ ​to​ ​decide​ ​if​ ​the​ ​firm​ ​should​ ​produce​ ​more,
less,​ ​or​ ​stay​ ​at​ ​the​ ​current​ ​output​ ​level.​ ​What​ ​do​ ​you​ ​recommend?

​ ​a.​ ​Produce​ ​more.

Explanation:​ ​when​ ​P>MC,​ ​produce​ ​more.

​ ​b.​ ​Produce​ ​less.

​ ​c.​ ​Stay​ ​at​ ​the​ ​current​ ​level​ ​of​ ​output.

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Video​ ​name:​ ​Maximizing​ ​Profit​ ​and​ ​the​ ​Average​ ​Cost​ ​Curve

1.​ ​For​ ​a​ ​competitive​ ​firm​ ​supplying​ ​wheat,​ ​if​ ​the​ ​world​ ​price​ ​(P)​ ​equals​ ​the​ ​firm’s​ ​min​ ​average​ ​cost​ ​(min
AC),​ ​then​ ​profits​ ​will​ ​be

​ ​a.​ ​greater​ ​than​ ​0

​ ​b.​ ​less​ ​than​ ​0

​ ​c.​ ​0

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

Given​ ​the​ ​cost​ ​function​ ​for​ ​Simon,​ ​a​ ​housepainter​ ​in​ ​a​ ​competitive​ ​local​ ​market,​ ​below,​ ​answer​ ​the
questions​ ​that​ ​follow.​ ​(You​ ​may​ ​want​ ​to​ ​calculate​ ​average​ ​cost.)

Number​ ​of​ ​rooms Total​ ​Cost

painted​ ​per​ ​week

$100
0

$120
1

$125
2

$145
3

$200
4

$300
5

$460
6

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2.​ ​What​ ​is​ ​the​ ​minimum​ ​price​ ​per​ ​room​ ​at​ ​which​ ​Simon​ ​would​ ​be​ ​earning​ ​positive​ ​economic​ ​profit?

​ ​a.​ ​$62.50

​ ​b.​ ​$48.33

Explanation:​ ​To​ ​earn​ ​an​ ​economic​ ​profit,​ ​total​ ​revenue​ ​has​ ​to​ ​be​ ​greater​ ​than​ ​total​ ​cost.​ ​Stated
differently,​ ​price​ ​has​ ​to​ ​be​ ​greater​ ​than​ ​average​ ​cost.​ ​The​ ​minimum​ ​average​ ​cost​ ​is​ ​$48.33,​ ​so​ ​as​ ​long​ ​as
price​ ​is​ ​greater​ ​than​ ​this,​ ​Simon​ ​can​ ​earn​ ​a​ ​profit​ ​by​ ​choosing​ ​the​ ​right​ ​(profit-maximizing)​ ​quantity.​ ​If
the​ ​price​ ​is​ ​lower​ ​than​ ​this,​ ​Simon​ ​will​ ​want​ ​to​ ​exit​ ​the​ ​house-painting​ ​industry​ ​in​ ​the​ ​long​ ​run.

​ ​c.​ ​$60

​ ​d.​ ​$76.67

​ ​e.​ ​$35.29

Video​ ​name:​ ​Entry,​ ​Exit,​ ​and​ ​Supply​ ​Curves:​ ​Increasing​ ​Costs

1.​ ​What​ ​is​ ​the​ ​least​ ​common​ ​cost​ ​structure​ ​for​ ​an​ ​industry?

​ ​a.​ ​Costs​ ​decrease​ ​as​ ​industry​ ​output​ ​increases.

​ ​b.​ ​Costs​ ​increase​ ​as​ ​industry​ ​output​ ​increases.

​ ​c.​ ​Costs​ ​stay​ ​the​ ​same​ ​as​ ​industry​ ​output​ ​increases.

2.​ ​In​ ​the​ ​ancient​ ​Western​ ​world,​ ​incense​ ​was​ ​one​ ​of​ ​the​ ​first​ ​commodities​ ​transported​ ​long​ ​distances.​ ​It
grew​ ​only​ ​in​ ​the​ ​south​ ​of​ ​the​ ​Arabian​ ​Peninsula​ ​(modern-day​ ​Yemen,​ ​known​ ​then​ ​as​ ​Arabia​ ​Felix)​ ​and
was​ ​transported​ ​by​ ​camel​ ​to​ ​Alexandria​ ​and​ ​the​ ​Mediterranean​ ​civilizations,​ ​notably​ ​the​ ​Roman
Republic.​ ​As​ ​the​ ​republic​ ​expanded​ ​into​ ​a​ ​richer​ ​and​ ​larger​ ​empire,​ ​the​ ​demand​ ​for​ ​incense​ ​grew​ ​and
planters​ ​in​ ​Arabia​ ​added​ ​a​ ​second​ ​and​ ​then​ ​a​ ​third​ ​annual​ ​crop​ ​(though​ ​this​ ​incense​ ​was​ ​not​ ​as​ ​high​ ​of​ ​a
quality).​ ​Cultivation​ ​also​ ​crossed​ ​to​ ​the​ ​Horn​ ​of​ ​Africa​ ​(modern-day​ ​Oman)​ ​even​ ​though​ ​such​ ​fields​ ​were
farther​ ​away​ ​from​ ​Rome.​ ​The​ ​fact​ ​that​ ​additional​ ​annual​ ​crops​ ​were​ ​of​ ​lower​ ​quality​ ​indicates​ ​that​ ​this
industry​ ​has

​ ​a.​ ​Increasing​ ​costs.

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 Explanation:​ ​Growers​ ​started​ ​with​ ​the​ ​best​ ​growing​ ​season​ ​and,​ ​in​ ​moving​ ​to​ ​less​ ​desired
seasons,​ ​received​ ​a​ ​lesser​ ​crop.​ ​The​ ​quantity​ ​of​ ​quality​ ​crop​ ​per​ ​unit​ ​of​ ​currency​ ​spent​ ​is​ ​increasing.

​ ​b.​ ​Decreasing​ ​costs.

​ ​c.​ ​Constant​ ​costs.

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

3.​ ​It’s​ ​more​ ​costly​ ​to​ ​grow​ ​incense​ ​in​ ​Eastern​ ​Africa​ ​than​ ​in​ ​Arabia​ ​Felix.​ ​Which​ ​region​ ​would​ ​you​ ​expect
to​ ​see​ ​more​ ​incense​ ​grown​ ​in?

​ ​a.​ ​Eastern​ ​Africa

​ ​b.​ ​Arabia​ ​Felix

Video​ ​name:​ ​Entry,​ ​Exit,​ ​and​ ​Supply​ ​Curves:​ ​Constant​ ​Costs

1.​ ​In​ ​the​ ​long​ ​run,​ ​constant​ ​supply​ ​curves​ ​are

​ ​a.​ ​sloping​ ​upwards.

​ ​b.​ ​horizontal.

​ ​c.​ ​sloping​ ​downwards.

2.​ ​In​ ​the​ ​competitive​ ​children’s​ ​pajama​ ​industry,​ ​a​ ​new​ ​government​ ​safety​ ​regulation​ ​raises​ ​the​ ​average
cost​ ​of​ ​children’s​ ​pajamas​ ​by​ ​$2​ ​per​ ​pair.​ ​If​ ​this​ ​is​ ​a​ ​constant​ ​cost​ ​industry,​ ​then​ ​in​ ​the​ ​long​ ​run,​ ​what
exactly​ ​happens​ ​to​ ​the​ ​price​ ​of​ ​children’s​ ​pajamas?

​ ​a.​ ​The​ ​price​ ​of​ ​pajamas​ ​increases​ ​by​ ​more​ ​than​ ​$2

​ ​b.​ ​The​ ​price​ ​of​ ​pajamas​ ​increases​ ​by​ ​less​ ​than​ ​$2

​ ​c.​ ​The​ ​price​ ​of​ ​pajamas​ ​increases​ ​by​ ​exactly​ ​$2

97
 Explanation:​ ​The​ ​price​ ​rises​ ​by​ ​exactly​ ​$2:​ ​It’s​ ​an​ ​upward​ ​shift​ ​in​ ​long-run​ ​average​ ​cost​ ​of
exactly​ ​that​ ​amount.

3.​ ​If​ ​this​ ​is​ ​an​ ​increasing​ ​cost​ ​industry​ ​instead,​ ​will​ ​the​ ​long-run​ ​price​ ​of​ ​pajamas​ ​rise​ ​by​ ​more​ ​than​ ​$2​ ​or
less?​ ​(Hint:​ ​The​ ​long-run​ ​supply​ ​curve​ ​will​ ​be​ ​shaped​ ​just​ ​like​ ​an​ ​ordinary​ ​supply​ ​curve.​ ​If​ ​you​ ​treat​ ​this
like​ ​a​ ​$2​ ​tax​ ​per​ ​pair,​ ​you’ll​ ​get​ ​the​ ​right​ ​answer.)

​ ​a.​ ​The​ ​price​ ​of​ ​pajamas​ ​increases​ ​by​ ​more​ ​than​ ​$2.

​ ​b.​ ​The​ ​price​ ​of​ ​pajamas​ ​increases​ ​by​ ​less​ ​than​ ​$2.

Explanation:​ ​The​ ​long-run​ ​price​ ​will​ ​rise​ ​by​ ​less​ ​than​ ​$2:​ ​The​ ​higher​ ​price​ ​will​ ​reduce​ ​quantity
demanded,​ ​and​ ​at​ ​a​ ​lower​ ​quantity​ ​demanded,​ ​higher-cost​ ​firms​ ​will​ ​drop​ ​out​ ​of​ ​the​ ​industry.​ ​This​ ​saves
customers​ ​some​ ​money,​ ​so​ ​the​ ​price​ ​rises​ ​by​ ​less​ ​than​ ​$2.

​ ​c.​ ​The​ ​price​ ​of​ ​pajamas​ ​increases​ ​by​ ​exactly​ ​$2.

Video​ ​name:​ ​Entry,​ ​Exit,​ ​and​ ​Supply​ ​Curves:​ ​Decreasing​ ​Costs

1.​ ​As​ ​Ngoy​ ​started​ ​hiring​ ​more​ ​Cambodian​ ​refugees​ ​to​ ​work​ ​in​ ​his​ ​donut​ ​shop,​ ​this​ ​made​ ​it​ ​more​ ​likely
that

​ ​a.​ ​Competition​ ​from​ ​other​ ​doughnut​ ​shop​ ​owners​ ​would​ ​increase.

​ ​b.​ ​Ngoy’s​ ​fixed​ ​costs​ ​decreased.

​ ​c.​ ​Other​ ​Cambodians​ ​would​ ​open​ ​donut​ ​shops.

Explanation​:​ ​As​ ​his​ ​Cambodian​ ​employees​ ​learned​ ​the​ ​trade,​ ​some​ ​would​ ​eventually​ ​open​ ​their
own​ ​shops.

2.​ ​At​ ​this​ ​point​ ​in​ ​the​ ​story,​ ​what​ ​sort​ ​of​ ​cost​ ​industry​ ​(constant,​ ​increasing,​ ​or​ ​decreasing)​ ​would​ ​you
consider​ ​doughnut​ ​shops​ ​owned​ ​by​ ​Cambodians​ ​to​ ​be?

​ ​a.​ ​Constant

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​ ​b.​ ​Increasing

​ ​c.​ ​Decreasing

Explanation​:​ ​Since​ ​there​ ​were​ ​more​ ​Cambodians​ ​hiring​ ​Cambodians,​ ​more​ ​Cambodians​ ​were
learning​ ​to​ ​make​ ​doughnuts​ ​and​ ​learning​ ​how​ ​to​ ​open​ ​their​ ​own​ ​shop,​ ​and​ ​with​ ​more​ ​Cambodians​ ​in​ ​the
industry,​ ​this​ ​lowered​ ​the​ ​costs​ ​of​ ​being​ ​a​ ​Cambodian​ ​doughnut​ ​shop​ ​owner.

3.​ ​Fast​ ​forward​ ​40​ ​years:​ ​What​ ​kind​ ​of​ ​cost​ ​structure​ ​are​ ​Californian​ ​doughnut​ ​shops​ ​probably​ ​in​ ​now?

​ ​a.​ ​Constant

Explanation​:​ ​Ngoy’s​ ​first​ ​doughnut​ ​shop​ ​lowered​ ​the​ ​costs​ ​to​ ​other​ ​Cambodians​ ​of​ ​becoming
doughnut​ ​shop​ ​owners​ ​but​ ​as​ ​the​ ​industry​ ​grew​ ​the​ ​advantages​ ​to​ ​other​ ​Cambodians​ ​of​ ​another
Cambodian​ ​opening​ ​a​ ​doughnut​ ​shop​ ​declined​ ​and​ ​eventually​ ​disappeared.​ ​Also,​ ​there​ ​are​ ​only​ ​so​ ​many
Cambodian​ ​refugees​ ​to​ ​open​ ​shops​ ​and​ ​only​ ​so​ ​much​ ​demand​ ​for​ ​doughnuts.​ ​Thus,​ ​Cambodians​ ​are​ ​likely
to​ ​dominate​ ​the​ ​California​ ​doughnut​ ​industry​ ​for​ ​a​ ​long​ ​time​ ​just​ ​like​ ​Dalton,​ ​Georgia,​ ​continues​ ​to
dominate​ ​the​ ​carpet​ ​industry,​ ​but​ ​the​ ​costs​ ​of​ ​being​ ​a​ ​Cambodian​ ​doughnut​ ​maker​ ​no​ ​longer​ ​fall​ ​when
another​ ​Cambodian​ ​enters​ ​the​ ​industry.​ ​The​ ​cost​ ​structure​ ​is​ ​now​ ​constant.

​ ​b.​ ​Increasing

​ ​c.​ ​Decreasing

4.​ ​We​ ​mentioned​ ​that​ ​carpet​ ​manufacturing​ ​looks​ ​like​ ​a​ ​decreasing​ ​cost​ ​industry.​ ​In​ ​American​ ​homes,
carpets​ ​are​ ​much​ ​less​ ​popular​ ​than​ ​they​ ​were​ ​in​ ​the​ ​1960s​ ​and​ ​1970s,​ ​when​ ​“wall-to-wall​ ​carpeting”​ ​was
fashionable​ ​in​ ​homes.​ ​Suppose​ ​that​ ​carpeting​ ​became​ ​even​ ​less​ ​popular​ ​than​ ​it​ ​is​ ​today:​ ​What​ ​would​ ​this
fall​ ​in​ ​demand​ ​probably​ ​do​ ​to​ ​the​ ​price​ ​of​ ​carpet​ ​in​ ​the​ ​long​ ​run?

​ ​a.​ ​Increase​ ​carpet​ ​prices

Explanation​:​ ​When​ ​demand​ ​falls​ ​in​ ​a​ ​decreasing​ ​cost​ ​industry,​ ​the​ ​price​ ​rises.​ ​It’s​ ​expensive​ ​to
have​ ​just​ ​a​ ​few​ ​carpet​ ​manufacturers:​ ​Society​ ​loses​ ​all​ ​of​ ​the​ ​scale​ ​efficiencies​ ​discussed​ ​in​ ​the​ ​chapter.
This​ ​pushes​ ​up​ ​average​ ​cost​ ​when​ ​the​ ​scale​ ​is​ ​small.

​ ​b.​ ​Decrease​ ​carpet​ ​prices

​ ​c.​ ​No​ ​change​ ​to​ ​carpet​ ​prices

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Competition​ ​and​ ​the​ ​Invisible​ ​Hand

Video​ ​name:​ ​Minimization​ ​of​ ​Total​ ​Industry​ ​Costs​ ​of​ ​Production

1.​ ​Entrepreneurs​ ​shift​ ​capital​ ​and​ ​labor​ ​across​ ​industries​ ​in​ ​pursuit​ ​of​ ​profit.​ ​Let’s​ ​look​ ​at​ ​this​ ​a​ ​little
more​ ​closely.​ ​Suppose​ ​there​ ​are​ ​two​ ​industries:​ ​a​ ​high-profit​ ​industry,​ ​Industry​ ​H,​ ​and​ ​a​ ​low-profit
industry,​ ​Industry​ ​L.​ ​Answer​ ​the​ ​questions​ ​below​ ​about​ ​these​ ​two​ ​industries.​ ​If​ ​the​ ​two​ ​industries​ ​have
similar​ ​costs,​ ​then​ ​what​ ​must​ ​be​ ​true​ ​about​ ​prices​ ​in​ ​the​ ​two​ ​industries?

​ ​a.​ ​Prices​ ​in​ ​Industry​ ​H​ ​are​ ​higher​ ​than​ ​in​ ​Industry​ ​L.

Explanation​:​ ​For​ ​profits​ ​to​ ​be​ ​higher​ ​in​ ​Industry​ ​H,​ ​the​ ​price​ ​in​ ​Industry​ ​H​ ​would​ ​have​ ​to​ ​be
higher​ ​than​ ​in​ ​Industry​ ​L.

​ ​b.​ ​Prices​ ​in​ ​Industry​ ​H​ ​are​ ​lower​ ​than​ ​in​ ​Industry​ ​L.

​ ​c.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

2.​ ​Suppose​ ​instead​ ​that​ ​the​ ​prices​ ​in​ ​the​ ​two​ ​industries​ ​were​ ​identical.​ ​In​ ​this​ ​case,​ ​what​ ​must​ ​be​ ​true
about​ ​the​ ​costs​ ​in​ ​the​ ​two​ ​industries?

​ ​a.​ ​Costs​ ​in​ ​Industry​ ​H​ ​are​ ​higher​ ​than​ ​in​ ​Industry​ ​L.

​ ​b.​ ​Costs​ ​in​ ​Industry​ ​H​ ​are​ ​lower​ ​than​ ​in​ ​Industry​ ​L.

​ ​c.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

3.​ ​Assuming​ ​that​ ​prices​ ​in​ ​the​ ​two​ ​industries​ ​were​ ​identical,​ ​if​ ​labor​ ​and​ ​capital​ ​are​ ​moved​ ​from​ ​Industry
L​ ​to​ ​Industry​ ​H,​ ​are​ ​more​ ​units​ ​of​ ​output​ ​lost​ ​in​ ​Industry​ ​L​ ​or​ ​gained​ ​in​ ​Industry​ ​H?

​ ​a.​ ​More​ ​units​ ​of​ ​output​ ​are​ ​lost​ ​in​ ​Industry​ ​L​ ​than​ ​are​ ​gained​ ​in​ ​Industry​ ​H.

​ ​b.​ ​More​ ​units​ ​of​ ​output​ ​are​ ​gained​ ​in​ ​Industry​ ​H​ ​than​ ​are​ ​lost​ ​in​ ​Industry​ ​L.

Explanation​:​ ​If​ ​prices​ ​are​ ​identical,​ ​than​ ​costs​ ​in​ ​Industry​ ​H​ ​are​ ​lower​ ​than​ ​in​ ​Industry​ ​L.​ ​If​ ​labor
and​ ​capital​ ​move​ ​from​ ​Industry​ ​L​ ​to​ ​Industry​ ​H,​ ​then​ ​fewer​ ​units​ ​of​ ​output​ ​are​ ​given​ ​up​ ​in​ ​industry​ ​L​ ​than
are​ ​gained​ ​in​ ​industry​ ​H

100
​ ​c.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

4.​ ​Suppose​ ​that​ ​two​ ​industries,​ ​the​ ​pizza​ ​industry​ ​and​ ​the​ ​calzone​ ​industry,​ ​are​ ​equally​ ​risky,​ ​but​ ​rates​ ​of
return​ ​on​ ​capital​ ​investments​ ​are​ ​5%​ ​in​ ​the​ ​pizza​ ​industry​ ​and​ ​8%​ ​in​ ​the​ ​calzone​ ​industry.​ ​Which​ ​way​ ​will
capital​ ​flow—from​ ​the​ ​pizza​ ​industry​ ​to​ ​the​ ​calzone​ ​industry,​ ​or​ ​from​ ​the​ ​calzone​ ​industry​ ​to​ ​the​ ​pizza
industry?

​ ​a.​ ​From​ ​pizza​ ​industry​ ​to​ ​calzone​ ​industry.

​ ​b.​ ​From​ ​calzone​ ​industry​ ​to​ ​pizza​ ​industry.

​ ​c.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

We’ve​ ​claimed​ ​that​ ​the​ ​efficient​ ​way​ ​to​ ​spread​ ​out​ ​work​ ​across​ ​firms​ ​in​ ​the​ ​same​ ​industry​ ​is​ ​to​ ​set​ ​the
marginal​ ​cost​ ​of​ ​production​ ​to​ ​be​ ​the​ ​same​ ​across​ ​firms.​ ​Let’s​ ​see​ ​if​ ​this​ ​works​ ​in​ ​an​ ​example.​ ​Consider​ ​a
competitive​ ​market​ ​for​ ​rolled​ ​steel​ ​(measured​ ​by​ ​the​ ​ton)​ ​with​ ​just​ ​two​ ​firms:​ ​SmallCo​ ​and​ ​BigCo.​ ​If​ ​we
wanted​ ​to​ ​be​ ​more​ ​realistic,​ ​we​ ​could​ ​say​ ​there​ ​were​ ​100​ ​firms​ ​like​ ​SmallCo​ ​and​ ​100​ ​firms​ ​like​ ​BigCo,
but​ ​that​ ​would​ ​just​ ​make​ ​the​ ​math​ ​harder​ ​without​ ​generating​ ​any​ ​insight.​ ​(We’ll​ ​also​ ​ignore​ ​fixed​ ​costs​ ​of
starting​ ​up​ ​the​ ​firms​ ​just​ ​to​ ​make​ ​things​ ​a​ ​little​ ​simpler.​ ​)​ ​The​ ​two​ ​firms​ ​have​ ​marginal​ ​cost​ ​schedules​ ​like
this:

Quantity Marginal​ ​Cost​ ​SmallCo Marginal​ ​Cost​ ​BigCo

1 $10 $10

2 $20 $10

3 $30 $10

4 $40 $10

5 $50 $20

6 $60 $30

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 7 $70 $40

8 $80 $50

5.​ ​What​ ​is​ ​the​ ​total​ ​cost​ ​of​ ​SmallCo​ ​producing​ ​6​ ​units​ ​of​ ​output?

​ ​a.​ ​$60

​ ​b.​ ​$130

​ ​c.​ ​$150

​ ​d.​ ​$210

​ ​e.​ ​$280

6.​ ​What​ ​is​ ​the​ ​total​ ​cost​ ​of​ ​BigCo​ ​producing​ ​6​ ​units​ ​of​ ​output?

​ ​a.​ ​$30

​ ​b.​ ​$60

​ ​c.​ ​$90

​ ​d.​ ​$120

​ ​e.​ ​$130

7.​ ​What​ ​would​ ​the​ ​price​ ​have​ ​to​ ​be​ ​in​ ​this​ ​competitive​ ​market​ ​for​ ​these​ ​two​ ​firms​ ​to​ ​produce​ ​a​ ​total​ ​of​ ​11
tons​ ​of​ ​steel?

​ ​a.​ ​$30

​ ​b.​ ​$40

102
 Explanation​:​ ​The​ ​cheapest​ ​way​ ​to​ ​make​ ​11​ ​tons​ ​of​ ​steel​ ​is​ ​to​ ​make​ ​4​ ​at​ ​SmallCo​ ​and​ ​7​ ​at​ ​BigCo.

​ ​c.​ ​$50

​ ​d.​ ​$60

​ ​e.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

8.​ ​What​ ​would​ ​the​ ​total​ ​cost​ ​be​ ​if​ ​BigCo​ ​were​ ​the​ ​only​ ​firm​ ​in​ ​the​ ​market,​ ​and​ ​it​ ​had​ ​to​ ​produce​ ​7​ ​tons​ ​of
rolled​ ​steel?

​ ​a.​ ​$40

​ ​b.​ ​$70

​ ​c.​ ​$130

Explanation​:​ ​If​ ​BigCo​ ​had​ ​to​ ​do​ ​it​ ​alone,​ ​its​ ​marginal​ ​cost​ ​would​ ​be​ ​$40​ ​and​ ​its​ ​total​ ​cost​ ​would
be​ ​$130.

​ ​d.​ ​$140

​ ​e.​ ​$170

9.​ ​What​ ​would​ ​total​ ​cost​ ​be​ ​if​ ​SmallCo​ ​and​ ​BigCo​ ​let​ ​the​ ​invisible​ ​hand​ ​divvy​ ​up​ ​the​ ​work​ ​between​ ​them
to​ ​produce​ ​7​ ​tons​ ​of​ ​rolled​ ​steel?

​ ​a.​ ​$20

​ ​b.​ ​$30

​ ​c.​ ​$70

​ ​d.​ ​$90

Explanation​:​ ​If​ ​the​ ​invisible​ ​hand​ ​divides​ ​up​ ​the​ ​work,​ ​marginal​ ​cost​ ​is​ ​$20​ ​and​ ​total​ ​cost​ ​is​ ​$90.

​ ​e.​ ​$130

103
10.​ ​Would​ ​it​ ​make​ ​sense​ ​to​ ​shut​ ​down​ ​the​ ​more​ ​inefficient​ ​of​ ​the​ ​two​ ​firms?

​ ​a.​ ​Yes

​ ​b.​ ​No

Explanation​:​ ​A​ ​government​ ​agency​ ​might​ ​be​ ​tempted​ ​to​ ​shut​ ​down​ ​SmallCo​ ​entirely.​ ​But​ ​this
wouldn’t​ ​be​ ​a​ ​good​ ​idea:​ ​SmallCo​ ​can​ ​always​ ​produce​ ​at​ ​least​ ​a​ ​few​ ​tons​ ​of​ ​steel​ ​more​ ​cheaply​ ​than
BigCo​ ​could.​ ​Dividing​ ​the​ ​work​ ​among​ ​the​ ​two​ ​firms​ ​is​ ​the​ ​low-cost​ ​solution.

Video​ ​name:​ ​The​ ​Balance​ ​of​ ​Industries​ ​and​ ​Creative​ ​Destruction

1.​ ​Let’s​ ​review​ ​the​ ​basic​ ​mechanism​ ​of​ ​the​ ​elimination​ ​principle​ ​with​ ​the​ ​following​ ​questions.​ ​When
demand​ ​rises​ ​in​ ​Industry​ ​X,​ ​what​ ​happens​ ​to​ ​profits?​ ​Do​ ​they​ ​rise,​ ​fall,​ ​or​ ​remain​ ​unchanged?

​ ​a.​ ​Rise

​ ​b.​ ​Fall

​ ​c.​ ​Remain​ ​unchanged

2.​ ​When​ ​that​ ​happens,​ ​do​ ​firms,​ ​workers,​ ​and​ ​capital​ ​tend​ ​to​ ​enter​ ​Industry​ ​X,​ ​or​ ​do​ ​they​ ​tend​ ​to​ ​leave?

​ ​a.​ ​Enter

Explanation​:​ ​When​ ​profits​ ​are​ ​positive,​ ​firms​ ​enter​ ​the​ ​industry.

​ ​b.​ ​Exit

​ ​c.​ ​No​ ​changes

3.​ ​Does​ ​this​ ​tend​ ​to​ ​increase​ ​short-run​ ​supply​ ​in​ ​Industry​ ​X​ ​or​ ​reduce​ ​it?

​ ​a.​ ​Increase

​ ​b.​ ​Reduce

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4.​ ​In​ ​the​ ​long​ ​run,​ ​after​ ​this​ ​rise​ ​in​ ​demand,​ ​what​ ​will​ ​profits​ ​typically​ ​be​ ​in​ ​Industry​ ​X?

​ ​a.​ ​Greater​ ​than​ ​0

​ ​b.​ ​0

Explanation​:​ ​In​ ​the​ ​long​ ​run,​ ​profits​ ​are​ ​zero​ ​at​ ​the​ ​typical​ ​firm.

​ ​c.​ ​Less​ ​than​ ​0

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

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Monopoly

Video​ ​name:​ ​Maximizing​ ​Profit​ ​under​ ​Monopoly

1.​ ​In​ ​the​ ​textbook,​ ​The​ ​Applied​ ​Theory​ ​of​ ​Price,​ ​D.​ ​N.​ ​McCloskey​ ​refers​ ​to​ ​the​ ​equation​ ​MR=​ ​MC​ ​as​ ​the
rule​ ​of​ ​rational​ ​life.​ ​Who​ ​follows​ ​this​ ​rule:​ ​monopolies,​ ​competitive​ ​firms,​ ​both​ ​or​ ​neither?

​ ​a.​ ​Monopolies

​ ​b.​ ​Competitive​ ​firms

​ ​c.​ ​Both

Explanation​:​ ​Both​ ​follow​ ​this​ ​rule.​ ​For​ ​competitive​ ​firms,​ ​MR=MC.​ ​Of​ ​course,​ ​for​ ​competitive
firms,​ ​price​ ​also​ ​equals​ ​marginal​ ​revenue,​ ​so​ ​this​ ​fact​ ​is​ ​somewhat​ ​hidden:​ ​We​ ​usually​ ​emphasize​ ​P​ ​=​ ​MC
under​ ​competition.​ ​With​ ​monopoly​ ​firms,​ ​this​ ​fact​ ​is​ ​much​ ​more​ ​blatant:​ ​MR​ ​=​ ​MC​ ​is​ ​the​ ​way​ ​we
describe​ ​the​ ​monopolies’​ ​profit​ ​maximization​ ​problem.

​ ​d.​ ​Neither

2.​ ​Rapido,​ ​the​ ​shoe​ ​company,​ ​is​ ​so​ ​popular​ ​that​ ​it​ ​has​ ​monopoly​ ​power.​ ​It’s​ ​selling​ ​20​ ​million​ ​shoes​ ​per
year,​ ​and​ ​it’s​ ​highly​ ​profitable.​ ​The​ ​marginal​ ​cost​ ​of​ ​making​ ​extra​ ​shoes​ ​is​ ​quite​ ​low,​ ​and​ ​it​ ​doesn’t
change​ ​much​ ​if​ ​they​ ​produce​ ​more​ ​shoes.​ ​Rapido’s​ ​marketing​ ​experts​ ​tell​ ​the​ ​CEO​ ​of​ ​Rapido​ ​that​ ​if​ ​it
decreased​ ​prices​ ​by​ ​20%,​ ​it​ ​would​ ​sell​ ​so​ ​many​ ​more​ ​shoes​ ​that​ ​profits​ ​would​ ​rise.​ ​If​ ​the​ ​expert​ ​is​ ​correct,
at​ ​its​ ​current​ ​output,​ ​is​ ​MC=MR,​ ​is​ ​MC​ ​>MR,​ ​or​ ​is​ ​MC

​ ​a.​ ​MC=MR

​ ​b.​ ​MC>MR

​ ​c.​ ​MC<MR

Explanation:​​ ​If​ ​the​ ​expert​ ​is​ ​correct​ ​and​ ​a​ ​price​ ​decrease​ ​increases​ ​profits,​ ​MR​ ​must​ ​be​ ​greater​ ​than​ ​MC
(MR>​ ​MC)​ ​at​ ​the​ ​current​ ​level​ ​of​ ​output.

3.​ ​If​ ​the​ ​expert​ ​is​ ​correct​ ​and​ ​Rapido’s​ ​CEO​ ​follows​ ​the​ ​experts’​ ​advice,​ ​will​ ​Rapido’s​ ​total​ ​revenue​ ​rise,
fall,​ ​or​ ​be​ ​unchanged?

106
​ ​a.​ ​Total​ ​revenue​ ​will​ ​rise.

Explanation​:​ ​Cutting​ ​the​ ​price​ ​means​ ​cutting​ ​marginal​ ​revenue​ ​as​ ​well.​ ​This​ ​will​ ​increase​ ​total
revenue:​ ​Any​ ​time​ ​marginal​ ​revenue​ ​is​ ​positive,​ ​it​ ​means​ ​that​ ​a​ ​price​ ​cut​ ​will​ ​increase​ ​total​ ​revenue.

​ ​b.​ ​Total​ ​revenue​ ​will​ ​fall.

​ ​c.​ ​Total​ ​revenue​ ​will​ ​remain​ ​unchanged.

4.​ ​Apollo,​ ​another​ ​highly​ ​profitable​ ​shoe​ ​company,​ ​also​ ​has​ ​market​ ​power.​ ​It’s​ ​selling​ ​15​ ​million​ ​shoes
per​ ​year,​ ​and​ ​it​ ​faces​ ​marginal​ ​costs​ ​quite​ ​similar​ ​to​ ​Rapido.​ ​Apollo’s​ ​marketing​ ​experts​ ​conclude​ ​that​ ​if
they​ ​increased​ ​prices​ ​by​ ​20%,​ ​profits​ ​would​ ​rise.​ ​For​ ​Apollo,​ ​is​ ​MC=MR,​ ​is​ ​MC>MR,​ ​or​ ​is​ ​MC

​ ​a.​ ​MC=MR

​ ​b.​ ​MC>MR

Explanation​:​ ​ ​If​ ​a​ ​price​ ​increase​ ​raises​ ​profits,​ ​MC>MR​ ​at​ ​the​ ​current​ ​level​ ​of​ ​output.​ ​The​ ​price​ ​is
inefficiently​ ​low,​ ​and​ ​the​ ​firm​ ​is​ ​selling​ ​too​ ​many​ ​pairs​ ​of​ ​shoes​ ​to​ ​profit​ ​maximize.

​ ​c.​ ​MC

5.​ ​When​ ​selling​ ​e-books,​ ​music​ ​on​ ​iTunes,​ ​and​ ​downloadable​ ​software,​ ​the​ ​marginal​ ​cost​ ​of​ ​producing
and​ ​selling​ ​one​ ​more​ ​unit​ ​of​ ​output​ ​is​ ​essentially​ ​zero:​ ​MC​ ​=​ ​0.​ ​Let’s​ ​think​ ​about​ ​a​ ​monopoly​ ​in​ ​this​ ​kind
of​ ​market.​ ​If​ ​the​ ​monopolist​ ​is​ ​doing​ ​its​ ​best​ ​to​ ​maximize​ ​profits,​ ​what​ ​will​ ​marginal​ ​revenue​ ​equal​ ​at​ ​a
firm​ ​like​ ​this?

​ ​a.​ ​Greater​ ​than​ ​0

​ ​b.​ ​Less​ ​than​ ​0

​ ​c.​ ​0

Explanation​:​ ​For​ ​monopolies,​ ​as​ ​elsewhere​ ​in​ ​life,​ ​you’re​ ​doing​ ​your​ ​best​ ​if​ ​MR​ ​=​ ​MC.​ ​So,​ ​if​ ​MC
=​ ​0,​ ​then​ ​MR​ ​should​ ​equal​ ​zero,​ ​as​ ​well.

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

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6.​ ​All​ ​firms​ ​are​ ​trying​ ​to​ ​maximize​ ​their​ ​profits​ ​(profit​ ​=​ ​TR​ ​-​ ​TC).​ ​The​ ​rule​ ​from​ ​the​ ​previous​ ​question
tells​ ​us​ ​that​ ​in​ ​the​ ​special​ ​case​ ​where​ ​marginal​ ​cost​ ​is​ ​zero,​ ​“profit​ ​maximization”​ ​is​ ​equivalent​ ​to​ ​which
of​ ​the​ ​following​ ​statements?

​ ​a.​ ​“Maximize​ ​total​ ​revenue”

Explanation:​ ​“Maximize​ ​total​ ​revenue”​ ​is​ ​the​ ​right​ ​answer:​ ​You​ ​want​ ​the​ ​highest​ ​dollar​ ​sales
possible.​ ​You​ ​don’t​ ​want​ ​to​ ​minimize​ ​total​ ​cost​ ​(if​ ​MC​ ​=​ ​0,​ ​any​ ​level​ ​of​ ​output​ ​does​ ​that);​ ​you​ ​don’t​ ​want
to​ ​minimize​ ​average​ ​cost​ ​(if​ ​MC​ ​=​ ​0,​ ​that​ ​would​ ​mean​ ​infinite​ ​output,​ ​which​ ​probably​ ​isn’t​ ​revenue
maximizing);​ ​you​ ​don’t​ ​want​ ​to​ ​maximize​ ​average​ ​revenue​ ​(average​ ​revenue​ ​is​ ​another​ ​word​ ​for​ ​“price”
in​ ​any​ ​one-price​ ​market,​ ​and​ ​you​ ​don’t​ ​want​ ​to​ ​charge​ ​the​ ​highest​ ​price).

​ ​b.​ ​“Minimize​ ​total​ ​cost”

​ ​c.​ ​“Minimize​ ​average​ ​cost”

​ ​d.​ ​“Maximize​ ​average​ ​revenue”

7.​ ​Which​ ​of​ ​the​ ​following​ ​is​ ​true​ ​when​ ​a​ ​monopoly​ ​is​ ​producing​ ​the​ ​profit-maximizing​ ​quantity​ ​of​ ​output?
More​ ​than​ ​one​ ​may​ ​be​ ​true.

​ ​a.​ ​Marginal​ ​revenue​ ​=​ ​Average​ ​cost

​ ​b.​ ​Total​ ​cost​ ​=​ ​Total​ ​revenue

​ ​c.​ ​Monopoly​ ​Price​ ​=​ ​Marginal​ ​cost

​ ​d.​ ​Marginal​ ​revenue​ ​=​ ​Marginal​ ​cost

Explanation:​ ​The​ ​rule​ ​of​ ​rational​ ​life

​ ​e.​ ​A​ ​&​ ​C

​ ​f.​ ​C​ ​&​ ​D

8.​ ​For​ ​the​ ​following​ ​statements,​ ​decide​ ​whether​ ​it​ ​is​ ​true​ ​or​ ​false.​ ​When​ ​a​ ​monopoly​ ​is​ ​maximizing​ ​its
profits,​ ​price​ ​is​ ​greater​ ​than​ ​marginal​ ​cost.

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​ ​a.​ ​True

Explanation​:​ ​For​ ​a​ ​monopoly,​ ​P​ ​>​ ​MR,​ ​and​ ​if​ ​it’s​ ​behaving​ ​optimally,​ ​MR​ ​=MC,​ ​so​ ​P​ ​>MC.

​ ​b.​ ​False

9.​ ​For​ ​a​ ​monopoly​ ​producing​ ​a​ ​certain​ ​amount​ ​of​ ​output,​ ​price​ ​is​ ​less​ ​than​ ​marginal​ ​revenue.​ ​*

​ ​a.​ ​True

​ ​b.​ ​False

Explanation​:​ ​False:​ ​P>MR​ ​on​ ​a​ ​monopoly​ ​demand​ ​curve.​ ​Extra​ ​output​ ​“spoils​ ​the​ ​market,”
pushing​ ​MR​ ​below​ ​price.

Video​ ​name:​ ​The​ ​Monopoly​ ​Markup

1.​ ​What’s​ ​the​ ​rule:​ ​Monopolists​ ​charge​ ​a​ ​higher​ ​markup​ ​when​ ​demand​ ​is​ ​highly​ ​elastic​ ​or​ ​when​ ​it’s
highly​ ​inelastic?

​ ​a.​ ​Highly​ ​elastic

​ ​b.​ ​Highly​ ​inelastic

Explanation​:​ ​Inelastic​ ​demand​ ​causes​ ​higher​ ​markups.

2.​ ​What’s​ ​the​ ​rule:​ ​Monopolists​ ​charge​ ​a​ ​higher​ ​markup​ ​when​ ​customers​ ​have​ ​many​ ​good​ ​substitutes​ ​or
when​ ​they​ ​have​ ​few​ ​good​ ​substitutes?

​ ​a.​ ​Customers​ ​have​ ​many​ ​good​ ​substitutes.

​ ​b.​ ​Customers​ ​have​ ​few​ ​good​ ​substitutes.

Explanation​:​ ​Inelastic​ ​demand​ ​is​ ​the​ ​same​ ​as​ ​“fewer​ ​substitutes,”​ ​so​ ​fewer​ ​substitutes​ ​mean
higher​ ​markups.

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3.​ ​For​ ​the​ ​following​ ​pairs​ ​of​ ​goods,​ ​which​ ​producer​ ​is​ ​more​ ​likely​ ​to​ ​charge​ ​a​ ​bigger​ ​markup?

​ ​a.​ ​Someone​ ​selling​ ​new​ ​trendy​ ​shoes

​ ​b.​ ​Someone​ ​selling​ ​ordinary​ ​tennis​ ​shoes

4.​ ​For​ ​the​ ​following​ ​pairs​ ​of​ ​goods,​ ​which​ ​producer​ ​is​ ​more​ ​likely​ ​to​ ​charge​ ​a​ ​bigger​ ​markup?

​ ​a.​ ​A​ ​movie​ ​theater​ ​selling​ ​popcorn

​ ​b.​ ​New​ ​York​ ​City​ ​street​ ​vendor​ ​selling​ ​popcorn

5.​ ​For​ ​the​ ​following​ ​pairs​ ​of​ ​goods,​ ​which​ ​producer​ ​is​ ​more​ ​likely​ ​to​ ​charge​ ​a​ ​bigger​ ​markup?

​ ​a.​ ​A​ ​pharmaceutical​ ​company​ ​selling​ ​a​ ​new​ ​powerful​ ​antibiotic

Explanation​:​ ​People​ ​care​ ​about​ ​dandruff​ ​but​ ​a​ ​hat​ ​is​ ​a​ ​substitute​ ​for​ ​a​ ​good​ ​shampoo;​ ​also,​ ​“you
can’t​ ​take​ ​it​ ​with​ ​you”​ ​is​ ​a​ ​force​ ​pushing​ ​people​ ​to​ ​have​ ​an​ ​inelastic​ ​demand​ ​for​ ​life-saving​ ​antibiotics.

​ ​b.​ ​A​ ​firm​ ​selling​ ​a​ ​new​ ​powerful​ ​cure​ ​for​ ​dandruff

Video​ ​name:​ ​The​ ​Costs​ ​and​ ​Benefits​ ​of​ ​Monopoly

1.​ ​A​ ​patent​ ​is​ ​a​ ​government-created​ ​monopoly.

​ ​a.​ ​True

Explanation​:​ ​True:​ ​The​ ​government​ ​creates​ ​a​ ​monopoly​ ​by​ ​preventing​ ​other​ ​firms​ ​from​ ​offering
competing​ ​patented​ ​goods.​ ​By​ ​law,​ ​only​ ​the​ ​patent​ ​holder​ ​may​ ​sell​ ​those​ ​goods.

​ ​b.​ ​False

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2.​ ​Just​ ​based​ ​on​ ​self-interest,​ ​who​ ​is​ ​more​ ​likely​ ​to​ ​support​ ​strong​ ​patents​ ​on​ ​pharmaceuticals:​ ​Young
people​ ​or​ ​old​ ​people?

​ ​a.​ ​Young​ ​people

Explanation​:​ ​Young​ ​people:​ ​They​ ​have​ ​a​ ​longer​ ​time​ ​horizon,​ ​so​ ​they​ ​want​ ​more​ ​drugs​ ​to​ ​be
invented.​ ​Older​ ​people​ ​are​ ​less​ ​likely​ ​to​ ​be​ ​around​ ​when​ ​new​ ​drugs​ ​are​ ​invented,​ ​so​ ​they’re​ ​more​ ​willing
to​ ​support​ ​weaker​ ​patents​ ​that​ ​make​ ​existing​ ​drugs​ ​cheaper.​ ​They​ ​aren’t​ ​as​ ​worried​ ​about​ ​what​ ​will
happen​ ​to​ ​drug​ ​innovation​ ​10​ ​or​ ​20​ ​years​ ​down​ ​the​ ​road.

​ ​b.​ ​Old​ ​people

3.​ ​Who​ ​is​ ​more​ ​likely​ ​to​ ​support​ ​strong​ ​patent​ ​and​ ​copyright​ ​protection​ ​on​ ​video​ ​games:​ ​People​ ​who
really​ ​like​ ​old-fashioned​ ​videogames​ ​or​ ​people​ ​who​ ​want​ ​to​ ​play​ ​the​ ​best,​ ​most​ ​advanced​ ​videogames?

​ ​a.​ ​Old-fashioned​ ​video-gamers

​ ​b.​ ​Cutting​ ​edge​ ​video-gamers

Explanation​:​ ​People​ ​who​ ​want​ ​to​ ​play​ ​the​ ​best​ ​video​ ​games​ ​will​ ​support​ ​strong​ ​patents​ ​and
copyrights.​ ​Strong​ ​intellectual​ ​property​ ​laws​ ​will​ ​encourage​ ​more​ ​companies​ ​to​ ​invest​ ​millions​ ​in
inventing​ ​new​ ​games.​ ​People​ ​happy​ ​with​ ​old​ ​games​ ​are​ ​happy​ ​to​ ​cripple​ ​patent​ ​and​ ​copyright​ ​law,​ ​since
they​ ​just​ ​want​ ​to​ ​play​ ​old​ ​games​ ​at​ ​lower​ ​prices.

4.​ ​It’s​ ​very​ ​difficult​ ​to​ ​build​ ​and​ ​operate​ ​a​ ​new​ ​power​ ​plant​ ​largely​ ​because​ ​new​ ​plants​ ​have​ ​to​ ​comply
with​ ​a​ ​long​ ​list​ ​of​ ​environmental​ ​and​ ​safety​ ​regulations.​ ​Compared​ ​with​ ​a​ ​world​ ​with​ ​fewer​ ​such
regulations,​ ​how​ ​do​ ​these​ ​rules​ ​change​ ​the​ ​average​ ​total​ ​cost​ ​of​ ​building​ ​and​ ​operating​ ​a​ ​power​ ​plant?

​ ​a.​ ​Increase​ ​average​ ​cost

Explanation:​ ​It​ ​increases​ ​the​ ​average​ ​total​ ​cost​ ​because​ ​complying​ ​with​ ​the​ ​laws​ ​requires
additional​ ​expenses.

​ ​b.​ ​Decrease​ ​average​ ​cost

​ ​c.​ ​Does​ ​not​ ​affect​ ​average​ ​cost

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5.​ ​Do​ ​these​ ​regulations​ ​make​ ​it​ ​more​ ​or​ ​less​ ​likely​ ​that​ ​you​ ​will​ ​build​ ​a​ ​new​ ​power​ ​plant?

​ ​a.​ ​More​ ​likely​ ​to​ ​build​ ​a​ ​new​ ​power​ ​plant

​ ​b.​ ​Less​ ​likely​ ​to​ ​build​ ​a​ ​new​ ​power​ ​plant

Explanation​:​ ​Less​ ​likely​ ​because​ ​the​ ​additional​ ​costs​ ​reduce​ ​profits​ ​and​ ​thus​ ​incentives.

6.​ ​Do​ ​these​ ​regulations​ ​increase​ ​or​ ​decrease​ ​the​ ​market​ ​power​ ​of​ ​power​ ​plants​ ​that​ ​already​ ​exist?

​ ​a.​ ​Increases​ ​market​ ​power​ ​of​ ​existing​ ​power​ ​plants

Explanation​:​ ​Increase​ ​because​ ​these​ ​expenses​ ​were​ ​a​ ​barrier​ ​to​ ​entry​ ​preventing​ ​the​ ​reduction​ ​of
high​ ​profits,​ ​and​ ​big​ ​barriers​ ​to​ ​entry​ ​create​ ​market​ ​power.

​ ​b.​ ​Decreases​ ​market​ ​power​ ​of​ ​existing​ ​power​ ​plants

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Price​ ​Discrimination

Video​ ​name:​ ​Introduction​ ​to​ ​Price​ ​Discrimination

1.​ ​True​ ​or​ ​False?​ ​A​ ​business​ ​that​ ​price​ ​discriminates​ ​will​ ​generally​ ​charge​ ​some​ ​customers​ ​more​ ​than
marginal​ ​cost,​ ​and​ ​it​ ​will​ ​generally​ ​charge​ ​other​ ​customers​ ​less​ ​than​ ​marginal​ ​cost.

​ ​True

​ ​False

Explanation​:​ ​False:​ ​Price​ ​discrimination​ ​has​ ​little​ ​to​ ​do​ ​with​ ​charging​ ​less​ ​than​ ​marginal​ ​cost.​ ​The
goal​ ​is​ ​to​ ​charge​ ​some​ ​customers​ ​a​ ​little​ ​more​ ​than​ ​MC​ ​and​ ​others​ ​a​ ​lot​ ​more​ ​than​ ​MC.

2.​ ​Two​ ​customers,​ ​Fred​ ​and​ ​Lamont,​ ​walk​ ​into​ ​a​ ​Grady’s​ ​Used​ ​Pickups.​ ​Who​ ​probably​ ​has​ ​a​ ​more
inelastic​ ​demand​ ​for​ ​one​ ​of​ ​Grady’s​ ​pickups:​ ​people​ ​like​ ​Lamont,​ ​who​ ​are​ ​good​ ​at​ ​shopping​ ​around,​ ​or
people​ ​like​ ​Fred,​ ​who​ ​know​ ​what​ ​they​ ​like​ ​and​ ​just​ ​buy​ ​it?

​ ​a.​ ​People​ ​like​ ​Lamont

​ ​b.​ ​People​ ​like​ ​Fred

Explanation​:​ ​People​ ​like​ ​Fred,​ ​who​ ​make​ ​quick,​ ​impulsive​ ​decisions,​ ​have​ ​inelastic​ ​demand:
They​ ​don’t​ ​shop​ ​around​ ​much​ ​and​ ​aren’t​ ​very​ ​sensitive​ ​to​ ​price.​ ​Customers​ ​like​ ​Fred​ ​are​ ​every​ ​business
owner’s​ ​dream.

3.​ ​Who​ ​probably​ ​gets​ ​charged​ ​more​ ​for​ ​a​ ​Hertz​ ​rental​ ​car:​ ​Someone​ ​who​ ​reserves​ ​a​ ​car​ ​online​ ​weeks
before​ ​a​ ​trip,​ ​or​ ​someone​ ​who​ ​walks​ ​up​ ​to​ ​a​ ​Hertz​ ​counter​ ​after​ ​he​ ​walks​ ​off​ ​a​ ​4-5​ ​hour​ ​airplane​ ​flight?

​ ​a.​ ​Someone​ ​who​ ​reserves​ ​the​ ​car​ ​online​ ​weeks​ ​before​ ​a​ ​trip

​ ​b.​ ​Someone​ ​who​ ​walks​ ​up​ ​to​ ​a​ ​Hertz​ ​counter​ ​after​ ​a​ ​4-5​ ​hour​ ​plane​ ​flight

Explanation:​ ​This​ ​second​ ​person​ ​probably​ ​gets​ ​charged​ ​more.​ ​The​ ​person​ ​who​ ​shops​ ​in​ ​advance
probably​ ​has​ ​a​ ​more​ ​elastic​ ​demand:​ ​If​ ​Hertz​ ​charges​ ​too​ ​much,​ ​it’s​ ​easy​ ​to​ ​go​ ​to​ ​another​ ​car​ ​rental
website​ ​and​ ​quickly​ ​check​ ​other​ ​prices.​ ​But​ ​after​ ​a​ ​long​ ​flight,​ ​few​ ​people​ ​are​ ​willing​ ​to​ ​wait​ ​in​ ​the​ ​Hertz
line,​ ​find​ ​out​ ​the​ ​price​ ​is​ ​high,​ ​and​ ​then​ ​jump​ ​in​ ​the​ ​National​ ​or​ ​Enterprise​ ​line.

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4.​ ​Where​ ​will​ ​you​ ​see​ ​more​ ​price​ ​discrimination:​ ​In​ ​monopoly-type​ ​markets​ ​with​ ​just​ ​a​ ​few​ ​firms​ ​or​ ​in
competitive​ ​markets​ ​with​ ​many​ ​firms?

​ ​a.​ ​Monopoly-type​ ​markets

Explanation:​ ​In​ ​monopoly-type​ ​markets:​ ​In​ ​these​ ​markets,​ ​individual​ ​firms​ ​face
downward-sloping​ ​demand​ ​curves,​ ​and​ ​they​ ​want​ ​to​ ​pick​ ​off​ ​the​ ​customers​ ​at​ ​different​ ​price​ ​levels,​ ​if
possible.​ ​But​ ​in​ ​a​ ​competitive​ ​market​ ​like​ ​for​ ​socks​ ​or​ ​fast​ ​food,​ ​if​ ​one​ ​firm​ ​tried​ ​to​ ​price​ ​discriminate,
another​ ​firm​ ​would​ ​just​ ​jump​ ​in​ ​and​ ​offer​ ​a​ ​lower,​ ​but​ ​still​ ​profitable​ ​price.​ ​The​ ​power​ ​of​ ​free​ ​entry—key
to​ ​a​ ​competitive​ ​market—makes​ ​it​ ​much​ ​harder​ ​to​ ​lump​ ​customers​ ​into​ ​different​ ​price-discrimination
categories.

​ ​b.​ ​Competitive​ ​markets

5.​ ​When​ ​both​ ​kinds​ ​of​ ​people,​ ​the​ ​Convenience​ ​Shoppers​ ​and​ ​the​ ​Bargain​ ​Shoppers,​ ​are​ ​shopping​ ​at​ ​the
same​ ​Wal-Mart,​ ​who​ ​is​ ​more​ ​likely​ ​to​ ​stick​ ​to​ ​their​ ​prearranged​ ​shopping​ ​list​ ​rather​ ​than​ ​splurging​ ​on
something​ ​on​ ​a​ ​whim?

​ ​a.​ ​Convenience​ ​Shoppers

​ ​b.​ ​Bargain​ ​Shoppers

Explanation​:​ ​The​ ​Bargain​ ​Shoppers​ ​will​ ​stick​ ​to​ ​their​ ​prearranged,​ ​low-price​ ​shopping​ ​list.​ ​The
Convenience​ ​Shoppers​ ​will​ ​splurge.

6.​ ​Which​ ​group​ ​does​ ​Wal-Mart​ ​have​ ​monopoly​ ​power​ ​over?

​ ​a.​ ​Convenience​ ​Shoppers

Explanation​:​ ​Wal-Mart​ ​has​ ​monopoly​ ​power​ ​over​ ​Convenience​ ​Shoppers:​ ​They​ ​will​ ​buy
whatever​ ​looks​ ​good.​ ​Wal-Mart​ ​will​ ​have​ ​little​ ​power​ ​over​ ​the​ ​Bargain​ ​Shoppers:​ ​When​ ​these​ ​shoppers
walk​ ​into​ ​Wal-Mart,​ ​they​ ​only​ ​“see”​ ​the​ ​good​ ​with​ ​the​ ​competitive​ ​price.​ ​If​ ​you​ ​shop​ ​around​ ​carefully,
Wal-Mart​ ​is​ ​a​ ​“competitive​ ​firm”​ ​to​ ​you.​ ​However,​ ​if​ ​you​ ​buy​ ​whatever​ ​looks​ ​best,​ ​as​ ​the​ ​Convenience
Shopper​ ​does,​ ​Wal-Mart​ ​often​ ​charges​ ​you​ ​higher,​ ​“monopoly”​ ​prices.

​ ​b.​ ​Bargain​ ​Shoppers

​ ​c.​ ​Both

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​ ​d.​ ​Neither

7.​ ​Does​ ​this​ ​mean​ ​that​ ​Darth​ ​Vader​ ​really​ ​did​ ​kill​ ​Anakin​ ​Skywalker?

​ ​a.​ ​Yes

​ ​b.​ ​No

​ ​c.​ ​It​ ​depends​ ​on​ ​your​ ​point​ ​of​ ​view.

Video​ ​name:​ ​The​ ​Social​ ​Welfare​ ​of​ ​Price​ ​Discrimination

1.​ ​When​ ​arbitrage​ ​is​ ​easy​ ​in​ ​a​ ​market​ ​of​ ​would-be​ ​price​ ​discriminators,​ ​who​ ​is​ ​more​ ​likely​ ​to​ ​get​ ​priced
out​ ​of​ ​the​ ​market:​ ​those​ ​with​ ​elastic​ ​demand​ ​or​ ​those​ ​with​ ​inelastic​ ​demand?

​ ​a.​ ​Elastic​ ​demanders

Explanation​:​ ​When​ ​arbitrage​ ​is​ ​easy,​ ​it’s​ ​the​ ​person​ ​with​ ​the​ ​elastic​ ​demand​ ​who​ ​is​ ​likely​ ​to​ ​get
priced​ ​out.​ ​Arbitrage​ ​turns​ ​this​ ​back​ ​into​ ​a​ ​normal​ ​monopoly​ ​market,​ ​and​ ​at​ ​the​ ​higher​ ​monopoly​ ​price,
the​ ​price​ ​might​ ​rise​ ​above​ ​the​ ​elastic​ ​person’s​ ​cutoff​ ​level.

​ ​b.​ ​Inelastic​ ​demanders

2.​ ​If​ ​Congress​ ​passed​ ​a​ ​privacy​ ​law​ ​making​ ​it​ ​illegal​ ​for​ ​colleges​ ​to​ ​ask​ ​for​ ​parents’​ ​tax​ ​returns,​ ​would
that​ ​tend​ ​to​ ​help​ ​students​ ​from​ ​high-income​ ​families​ ​or​ ​students​ ​from​ ​low-income​ ​families?

​ ​a.​ ​Students​ ​from​ ​high-income​ ​families

Explanation​:​ ​That​ ​would​ ​help​ ​students​ ​from​ ​high-income​ ​families.​ ​The​ ​price​ ​would​ ​settle​ ​down
somewhere​ ​in​ ​between​ ​the​ ​“sticker​ ​price”​ ​and​ ​the​ ​“scholarship​ ​price,”​ ​so​ ​the​ ​rich​ ​families​ ​would​ ​get​ ​a
price​ ​cut.

​ ​b.​ ​Students​ ​from​ ​low-income​ ​families

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3.​ ​When​ ​will​ ​a​ ​monopoly​ ​create​ ​more​ ​output:​ ​When​ ​the​ ​government​ ​bans​ ​price​ ​discrimination​ ​or​ ​when
the​ ​monopoly​ ​is​ ​allowed​ ​to​ ​and​ ​can​ ​perfectly​ ​price​ ​discriminate?

​ ​a.​ ​When​ ​the​ ​government​ ​bans​ ​price​ ​discrimination

​ ​b.​ ​When​ ​the​ ​monopoly​ ​can​ ​perfectly​ ​price​ ​discriminate

Explanation:​ ​It​ ​will​ ​create​ ​more​ ​output​ ​when​ ​it​ ​can​ ​perfectly​ ​price​ ​discriminate.​ ​(The​ ​answer​ ​is
more​ ​ambiguous​ ​when​ ​the​ ​company​ ​can​ ​only​ ​carve​ ​out​ ​two​ ​categories,​ ​as​ ​in​ ​the​ ​pharmaceutical​ ​example.)

Video​ ​name:​ ​Tying

1.​ ​Some​ ​razors,​ ​like​ ​Gillette’s​ ​Fusion​ ​and​ ​Venus​ ​razors,​ ​have​ ​disposable​ ​heads.​ ​The​ ​razor​ ​comes​ ​with​ ​an
initial​ ​pack​ ​with​ ​a​ ​razor​ ​handle​ ​plus​ ​three​ ​or​ ​four​ ​heads;​ ​after​ ​that,​ ​you​ ​need​ ​to​ ​buy​ ​refills​ ​separately.
Where​ ​do​ ​you​ ​think​ ​Gillette​ ​gets​ ​more​ ​revenue:​ ​By​ ​selling​ ​the​ ​initial​ ​pack​ ​or​ ​by​ ​selling​ ​the​ ​refills?

​ ​a.​ ​The​ ​initial​ ​pack

​ ​b.​ ​The​ ​refills

Explanation​:​ ​By​ ​selling​ ​the​ ​refills.​ ​A​ ​typical​ ​person​ ​will​ ​spend​ ​much​ ​more​ ​money​ ​on​ ​refills​ ​than
on​ ​the​ ​original​ ​razor​ ​handle.

2.​ ​The​ ​next​ ​time​ ​you​ ​buy​ ​a​ ​new​ ​razor,​ ​are​ ​you​ ​going​ ​to​ ​spend​ ​more​ ​time​ ​looking​ ​at​ ​the​ ​price​ ​of​ ​the​ ​razor
or​ ​at​ ​the​ ​price​ ​of​ ​the​ ​refills?

​ ​a.​ ​The​ ​price​ ​of​ ​the​ ​razor

​ ​b.​ ​The​ ​price​ ​of​ ​refills

Explanation​:​ ​You​ ​should​ ​certainly​ ​spend​ ​more​ ​time​ ​looking​ ​at​ ​the​ ​price​ ​of​ ​the​ ​refills,​ ​just​ ​as​ ​you
should​ ​spend​ ​more​ ​time​ ​looking​ ​at​ ​the​ ​cost​ ​of​ ​printer​ ​cartridges.​ ​You​ ​may​ ​even​ ​want​ ​to​ ​ask​ ​your​ ​car
dealer​ ​how​ ​much​ ​they​ ​charge​ ​to​ ​replace​ ​a​ ​transmission​ ​before​ ​you​ ​buy​ ​a​ ​new​ ​car​ ​there:​ ​That’s​ ​another
form​ ​of​ ​tying.

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Video​ ​name:​ ​Bundling

1.​ ​Where​ ​are​ ​you​ ​more​ ​likely​ ​to​ ​see​ ​businesses​ ​“bundling”​ ​a​ ​lot​ ​of​ ​goods​ ​into​ ​one​ ​package:​ ​In​ ​industries
with​ ​high​ ​fixed​ ​costs​ ​and​ ​low​ ​marginal​ ​costs​ ​(like​ ​computer​ ​games​ ​or​ ​moviemaking),​ ​or​ ​in​ ​industries​ ​with
low​ ​fixed​ ​costs​ ​and​ ​high​ ​marginal​ ​costs​ ​(like​ ​doctor​ ​visits,​ ​where​ ​the​ ​doctor’s​ ​time​ ​is​ ​expensive)?

​ ​a.​ ​High-fixed-cost​ ​and​ ​low-marginal-cost​ ​industries

Explanation​:​ ​You​ ​tend​ ​to​ ​see​ ​bundling​ ​in​ ​low-marginal-cost​ ​industries,​ ​when​ ​the​ ​business​ ​has​ ​a
big​ ​incentive​ ​to​ ​add​ ​a​ ​little​ ​bit​ ​more​ ​value​ ​to​ ​the​ ​product,​ ​since​ ​for​ ​little​ ​extra​ ​cost​ ​the​ ​business​ ​can​ ​charge
a​ ​much​ ​higher​ ​price.

​ ​b.​ ​Low-fixed-cost​ ​and​ ​high-marginal-cost​ ​industries

2.​ ​Isn’t​ ​it​ ​surprising​ ​that​ ​movies,​ ​with​ ​tickets​ ​that​ ​cost​ ​around​ ​$10,​ ​often​ ​use​ ​vastly​ ​more​ ​economic
resources​ ​than​ ​stage​ ​plays​ ​where​ ​tickets​ ​can​ ​easily​ ​cost​ ​$100?​ ​Compare,​ ​for​ ​example,​ ​a​ ​live​ ​stage
performance​ ​of​ ​Shakespeare’s​ ​Hamlet​ ​with​ ​a​ ​movie​ ​of​ ​Hamlet.​ ​In​ ​which​ ​field​ ​is​ ​the​ ​marginal​ ​cost​ ​of​ ​one
more​ ​showing​ ​lower:​ ​on​ ​stage​ ​or​ ​on​ ​screen?

​ ​a.​ ​on​ ​stage

​ ​b.​ ​on​ ​screen

Explanation​:​ ​On​ ​screen:​ ​Once​ ​you’ve​ ​made​ ​the​ ​film,​ ​making​ ​extra​ ​copies​ ​is​ ​easy,​ ​and​ ​showing
the​ ​movie​ ​one​ ​extra​ ​time​ ​per​ ​week​ ​is​ ​even​ ​easier.​ ​If​ ​you​ ​want​ ​to​ ​show​ ​a​ ​play​ ​one​ ​more​ ​time,​ ​though,​ ​you
have​ ​to​ ​pay​ ​all​ ​of​ ​the​ ​performers​ ​and​ ​all​ ​of​ ​the​ ​stage​ ​hands​ ​for​ ​a​ ​few​ ​more​ ​hours​ ​of​ ​labor—and​ ​that​ ​adds
up.

3.​ ​“Bundling”​ ​in​ ​a​ ​movie​ ​or​ ​stage​ ​performance​ ​might​ ​show​ ​up​ ​in​ ​the​ ​form​ ​of​ ​adding​ ​special​ ​effects,
expensive​ ​actors,​ ​or​ ​fancy​ ​costumes:​ ​Some​ ​customers​ ​might​ ​not​ ​be​ ​too​ ​interested​ ​in​ ​an​ ​Elizabethan
revenge​ ​drama,​ ​but​ ​they​ ​show​ ​up​ ​to​ ​see​ ​Liam​ ​Neeson​ ​waving​ ​an​ ​authentic​ ​medieval​ ​dagger.​ ​Is​ ​it​ ​better​ ​to
think​ ​of​ ​these​ ​extra​ ​expenses​ ​as​ ​“fixed​ ​costs”​ ​or​ ​“marginal​ ​costs?”

​ ​a.​ ​fixed​ ​costs

Explanation:​ ​These​ ​are​ ​more​ ​like​ ​fixed​ ​costs:​ ​You​ ​pay​ ​them​ ​regardless​ ​of​ ​how​ ​many​ ​people​ ​see
the​ ​play​ ​or​ ​movie.

117
​ ​b.​ ​marginal​ ​costs

4.​ ​In​ ​which​ ​setting​ ​will​ ​it​ ​be​ ​easier​ ​for​ ​a​ ​business​ ​to​ ​cover​ ​its​ ​total​ ​costs:​ ​In​ ​a​ ​“bundled”​ ​stage​ ​production
or​ ​in​ ​a​ ​“bundled”​ ​movie​ ​production?

​ ​a.​ ​Bundled​ ​stage​ ​production

​ ​b.​ ​Bundled​ ​movie​ ​production

Explanation​:​ ​In​ ​a​ ​bundled​ ​movie​ ​production:​ ​A​ ​moviemaker​ ​can​ ​spread​ ​the​ ​fixed​ ​cost​ ​over
millions​ ​of​ ​movie​ ​viewers.

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Labor​ ​Markets

Video​ ​name:​ ​The​ ​Marginal​ ​Product​ ​of​ ​Labor

1.​ ​Determine​ ​whether​ ​the​ ​following​ ​statements​ ​are​ ​true​ ​or​ ​false.​ ​The​ ​marginal​ ​product​ ​of​ ​labor​ ​is

​ ​a.​ ​the​ ​amount​ ​of​ ​extra​ ​profit​ ​that​ ​a​ ​firm​ ​will​ ​earn​ ​if​ ​it​ ​hires​ ​one​ ​more​ ​worker

​ ​b.​ ​the​ ​amount​ ​of​ ​extra​ ​revenue​ ​that​ ​a​ ​firm​ ​will​ ​earn​ ​if​ ​it​ ​hires​ ​one​ ​more​ ​worker

Explanation​:​ ​The​ ​marginal​ ​product​ ​of​ ​labor​ ​is​ ​the​ ​amount​ ​of​ ​extra​ ​revenue​ ​from​ ​hiring​ ​one​ ​more
worker.​ ​To​ ​find​ ​the​ ​extra​ ​profit​ ​from​ ​hiring​ ​one​ ​more​ ​worker,​ ​you​ ​have​ ​to​ ​subtract​ ​the​ ​worker’s​ ​wage.
Thus,​ ​a​ ​firm​ ​will​ ​hire​ ​so​ ​long​ ​as​ ​MPL​ ​>​ ​wage,​ ​which​ ​means,​ ​if​ ​we​ ​think​ ​about​ ​hiring​ ​in​ ​very​ ​small
increments,​ ​that​ ​a​ ​firm​ ​will​ ​hire​ ​until​ ​MPL​ ​=​ ​wage.

2.​ ​By​ ​definition,​ ​a​ ​labor​ ​supply​ ​curve​ ​cannot​ ​have​ ​a​ ​negative​ ​slope.

​ ​True

​ ​False

Explanation​:​ ​False:​ ​Backward-bending​ ​supply​ ​curves​ ​for​ ​individuals​ ​are​ ​common​ ​at​ ​high​ ​wages.

3.​ ​State​ ​whether​ ​you​ ​think​ ​Joe’s​ ​labor​ ​supply​ ​will​ ​tend​ ​to​ ​increase​ ​or​ ​decrease​ ​as​ ​a​ ​result​ ​of​ ​the​ ​following
change:​ ​While​ ​in​ ​Las​ ​Vegas​ ​for​ ​the​ ​weekend,​ ​Joe​ ​wins​ ​a​ ​$1​ ​million​ ​jackpot.

​ ​a.​ ​Joe​ ​will​ ​work​ ​more.

​ ​b.​ ​Joe​ ​will​ ​work​ ​less.

Explanation​:​ ​Leisure​ ​has​ ​become​ ​much​ ​more​ ​attractive​ ​for​ ​Joe​ ​and​ ​the​ ​opportunity​ ​cost​ ​of​ ​work
is​ ​now​ ​higher.​ ​Before​ ​Joe​ ​won​ ​one​ ​million​ ​dollars,​ ​the​ ​alternative​ ​to​ ​working​ ​might​ ​have​ ​been​ ​staying​ ​at
home​ ​and​ ​watching​ ​television.​ ​Now​ ​the​ ​alternative​ ​is​ ​flying​ ​to​ ​Hawaii​ ​and​ ​spending​ ​time​ ​on​ ​the​ ​beach.
With​ ​one​ ​million​ ​in​ ​the​ ​bank,​ ​he​ ​could​ ​go​ ​for​ ​years​ ​without​ ​working,​ ​and​ ​if​ ​he​ ​lives​ ​modestly​ ​and​ ​invests
conservatively,​ ​he​ ​might​ ​even​ ​be​ ​able​ ​to​ ​live​ ​off​ ​the​ ​interest.​ ​This​ ​is​ ​a​ ​wealth​ ​effect.

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One​ ​way​ ​to​ ​think​ ​about​ ​wages​ ​for​ ​different​ ​jobs​ ​is​ ​to​ ​see​ ​it​ ​as​ ​another​ ​application​ ​of​ ​the​ ​law​ ​of​ ​one​ ​price.
The​ ​basic​ ​idea​ ​is​ ​that​ ​the​ ​supply​ ​of​ ​workers​ ​will​ ​keep​ ​adjusting​ ​until​ ​jobs​ ​that​ ​need​ ​the​ ​same​ ​kinds​ ​of
workers​ ​earn​ ​the​ ​same​ ​wage.​ ​If​ ​similar​ ​workers​ ​earned​ ​different​ ​wages,​ ​then​ ​the​ ​workers​ ​in​ ​the​ ​low-paid
jobs​ ​would​ ​reduce​ ​their​ ​labor​ ​supply,​ ​and​ ​the​ ​workers​ ​in​ ​the​ ​high-paid​ ​jobs​ ​would​ ​face​ ​more​ ​competition
from​ ​those​ ​low-paid​ ​workers.​ ​Let’s​ ​look​ ​at​ ​100​ ​computer​ ​programmers​ ​who​ ​are​ ​trying​ ​to​ ​decide​ ​whether
to​ ​work​ ​for​ ​one​ ​of​ ​two​ ​companies:​ ​Robotron​ ​or​ ​Korrexia.​ ​To​ ​keep​ ​things​ ​simple,​ ​assume​ ​that​ ​both
companies​ ​are​ ​equally​ ​fun​ ​to​ ​work​ ​for,​ ​so​ ​you​ ​don’t​ ​need​ ​to​ ​worry​ ​about​ ​compensating​ ​differentials​ ​here
(featured​ ​in​ ​the​ ​video​ ​devoted​ ​to​ ​compensating​ ​differentials).​ ​The​ ​marginal​ ​product​ ​of​ ​labor​ ​(per
additional​ ​hour​ ​of​ ​work)​ ​is​ ​in​ ​the​ ​data​ ​as​ ​follows:

Number​ ​of​ ​programmers

per​ ​firm Robotron’s​ ​MPL Korrexia’s​ ​MPL

10 200 110

20 150 80

30 120 60

40 110 50

50 80 40

60 60 20

70 50 10

80 40 0

90 20 0

100 10 0

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4.​ ​ ​At​ ​a​ ​wage​ ​of​ ​$80​ ​per​ ​hour,​ ​the​ ​total​ ​demand​ ​for​ ​workers​ ​would​ ​be

​ ​a.​ ​50​ ​workers

​ ​b.​ ​60​ ​workers

​ ​c.​ ​70​ ​workers

​ ​d.​ ​100​ ​workers

5.​ ​The​ ​programmers​ ​in​ ​this​ ​town​ ​are​ ​going​ ​to​ ​work​ ​at​ ​one​ ​of​ ​these​ ​two​ ​places​ ​for​ ​sure:​ ​Their​ ​labor​ ​supply
is​ ​vertical,​ ​or​ ​in​ ​other​ ​words​ ​perfectly​ ​inelastic,​ ​with​ ​supply​ ​=​ ​100.​ ​So,​ ​what​ ​will​ ​the​ ​equilibrium​ ​wage
be?​ ​Hint:​ ​the​ ​numbers​ ​may​ ​not​ ​work​ ​out​ ​exactly—so​ ​use​ ​your​ ​judgment​ ​to​ ​come​ ​up​ ​with​ ​a​ ​good​ ​answer.

​ ​a.​ ​$50​ ​dollars​ ​per​ ​hour

​ ​b.​ ​$55​ ​dollars​ ​per​ ​hour

Explanation​:​ ​Total​ ​quantity​ ​demanded​ ​is​ ​90​ ​workers​ ​at​ ​$60/hour​ ​and​ ​110​ ​workers​ ​at​ ​$50​ ​per
hour,​ ​so​ ​it’s​ ​reasonable​ ​to​ ​think​ ​that​ ​there​ ​will​ ​be​ ​a​ ​demand​ ​for​ ​100​ ​workers​ ​at​ ​$55​ ​per​ ​hour,​ ​give​ ​or​ ​take
a​ ​couple​ ​of​ ​dollars.

​ ​c.​ ​$60​ ​dollars​ ​per​ ​hour

​ ​d.$65​ ​dollars​ ​per​ ​hour

6.​ ​About​ ​how​ ​many​ ​programmers​ ​will​ ​work​ ​at​ ​Robotron​ ​at​ ​this​ ​price?​ ​Again,​ ​use​ ​your​ ​judgment​ ​to​ ​come
up​ ​with​ ​a​ ​good​ ​answer.

​ ​a.​ ​55​ ​workers

​ ​b.​ ​60​ ​workers

​ ​c.​ ​65​ ​workers

Explanation​:​ ​65​ ​from​ ​Robotron​ ​and​ ​about​ ​35​ ​from​ ​Korrexia,​ ​which​ ​adds​ ​up​ ​to​ ​100.

​ ​d.​ ​70​ ​workers

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7.​ ​Suppose​ ​50​ ​more​ ​programmers​ ​come​ ​to​ ​town.​ ​What​ ​will​ ​the​ ​wage​ ​be​ ​now?

​ ​a.​ ​$15​ ​per​ ​hour

​ ​b.​ ​$20​ ​per​ ​hour

Explanation​:​ ​The​ ​wage​ ​will​ ​fall​ ​to​ ​$20​ ​per​ ​hour​ ​now,​ ​and​ ​there​ ​will​ ​be​ ​90​ ​workers​ ​at​ ​Robotron
and​ ​60​ ​at​ ​Korrexia.

​ ​c.​ ​$25​ ​per​ ​hour

​ ​d.​ ​$30​ ​per​ ​hour

Video​ ​name:​ ​Human​ ​Capital​ ​and​ ​Signaling

1.​ ​The​ ​director​ ​of​ ​human​ ​resources​ ​at​ ​ToyCo​ ​is​ ​hiring​ ​new​ ​engineers.​ ​She’s​ ​got​ ​a​ ​stack​ ​of​ ​250
applications,​ ​and​ ​she’s​ ​going​ ​to​ ​do​ ​a​ ​little​ ​research.​ ​She​ ​sits​ ​down​ ​and​ ​does​ ​a​ ​little​ ​cyber-snooping​ ​on​ ​all
250,​ ​and​ ​she​ ​finds​ ​the​ ​following​ ​(Word​ ​to​ ​the​ ​wise-​ ​prospective​ ​employers​ ​do​ ​cyber-snoop!):​ ​i.​ ​Of​ ​the​ ​150
who​ ​have​ ​Facebook​ ​pages,​ ​50​ ​are​ ​holding​ ​a​ ​bottle​ ​of​ ​beer​ ​in​ ​their​ ​profile​ ​photo,​ ​and​ ​100​ ​aren’t.​ ​ii.​ ​Of​ ​the
100​ ​who​ ​have​ ​their​ ​own​ ​websites,​ ​20​ ​have​ ​more​ ​than​ ​two​ ​typos.​ ​iii.​ ​Of​ ​the​ ​150​ ​who​ ​have​ ​Facebook​ ​pages,
25​ ​have​ ​at​ ​least​ ​two​ ​friends​ ​who​ ​have​ ​apparently​ ​spent​ ​time​ ​in​ ​prison,​ ​according​ ​to​ ​a​ ​quick​ ​check​ ​of
public​ ​records.​ ​Finding​ ​(ii)​ ​is​ ​likely​ ​to​ ​signal​ ​which​ ​of​ ​the​ ​following​ ​to​ ​the​ ​human​ ​resources​ ​director:

​ ​a.​ ​the​ ​applicant​ ​is​ ​wild.

​ ​b.​ ​the​ ​applicant​ ​sleeps​ ​in.

​ ​c.​ ​the​ ​applicant​ ​is​ ​careless.

​ ​d.​ ​the​ ​applicant​ ​is​ ​not​ ​trustworthy.

2.​ ​In​ ​each​ ​case,​ ​is​ ​the​ ​bad​ ​signal​ ​100%​ ​correct?​ ​For​ ​example,​ ​is​ ​every​ ​applicant​ ​with​ ​three​ ​or​ ​four​ ​typos
on​ ​their​ ​personal​ ​website​ ​worse​ ​than​ ​every​ ​applicant​ ​with​ ​an​ ​error-free​ ​page?

​ ​a.​ ​Yes

​ ​b.​ ​No

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 Explanation​:​ ​The​ ​signal​ ​is​ ​never​ ​100​ ​percent​ ​correct.​ ​Sometimes​ ​the​ ​beer​ ​is​ ​just​ ​an​ ​innocent
drink,​ ​a​ ​few​ ​typos​ ​don’t​ ​mean​ ​much​ ​if​ ​there’s​ ​a​ ​lot​ ​of​ ​content​ ​(like​ ​a​ ​textbook!),​ ​and​ ​some​ ​people​ ​with
friends​ ​in​ ​prison​ ​are​ ​more​ ​honest​ ​than​ ​average.

3.​ ​The​ ​benefit​ ​of​ ​having​ ​a​ ​college​ ​education​ ​has​ ​increased​ ​since​ ​the​ ​1960s.

​ ​a.​ ​True

​ ​b.​ ​False

4.​ ​The​ ​wage​ ​gap​ ​between​ ​high​ ​school​ ​graduates​ ​and​ ​high​ ​school​ ​dropouts​ ​has​ ​fallen​ ​since​ ​the

​ ​a.​ ​True

​ ​b.​ ​False

Video​ ​name:​ ​The​ ​Tradeoff​ ​Between​ ​Fun​ ​and​ ​Wages

1.​ ​Let’s​ ​apply​ ​the​ ​idea​ ​of​ ​compensating​ ​differentials​ ​to​ ​janitorial​ ​jobs.​ ​Suppose​ ​there​ ​are​ ​two​ ​quite​ ​similar
restaurants​ ​in​ ​the​ ​same​ ​town,​ ​Orange​ ​Bee’s​ ​and​ ​the​ ​City​ ​Inn.​ ​Both​ ​have​ ​the​ ​same​ ​demand​ ​for​ ​janitorial
labor.​ ​But​ ​all​ ​the​ ​janitors​ ​in​ ​town​ ​know​ ​that​ ​it’s​ ​much​ ​more​ ​fun​ ​to​ ​work​ ​at​ ​City​ ​Inn.​ ​Which​ ​restaurant​ ​will
pay​ ​a​ ​higher​ ​wage​ ​for​ ​janitors?

​ ​a.​ ​Orange​ ​Bee’s

Explanation:​ ​Orange​ ​Bee’s​ ​will​ ​pay​ ​a​ ​higher​ ​wage.​ ​The​ ​supply​ ​of​ ​workers​ ​there​ ​is​ ​lower,​ ​so​ ​with
the​ ​same​ ​demand​ ​curve,​ ​they​ ​have​ ​to​ ​pay​ ​more.

​ ​b.​ ​City​ ​Inn

​ ​c.​ ​Both​ ​restaurants​ ​pay​ ​the​ ​same​ ​wage.

123
2.​ ​Which​ ​restaurant​ ​will​ ​hire​ ​more​ ​janitors?

​ ​a.​ ​Orange​ ​Bee’s

​ ​b.​ ​City​ ​Inn

Explanation​:​ ​City​ ​Inn​ ​will​ ​hire​ ​more​ ​janitors​ ​than​ ​Orange​ ​Bee’s​ ​because​ ​they​ ​can​ ​hire​ ​janitors​ ​at
a​ ​lower​ ​wage.​ ​As​ ​a​ ​result​ ​the​ ​restaurant​ ​that​ ​is​ ​more​ ​fun​ ​to​ ​work​ ​at​ ​will​ ​probably​ ​be​ ​cleaner,​ ​as​ ​well.

​ ​c.​ ​Both​ ​restaurants​ ​will​ ​hire​ ​the​ ​same​ ​number​ ​of​ ​janitors

Video​ ​name:​ ​Compensating​ ​Differentials

1.​ ​According​ ​to​ ​the​ ​theory​ ​of​ ​compensating​ ​differentials,​ ​which​ ​low-skilled​ ​jobs​ ​in​ ​the​ ​United​ ​States​ ​will
tend​ ​to​ ​pay​ ​the​ ​most:​ ​The​ ​safe​ ​jobs​ ​or​ ​the​ ​dangerous​ ​jobs?

​ ​a.​ ​Safe​ ​jobs

​ ​b.​ ​Dangerous​ ​jobs

2.​ ​The​ ​fun​ ​jobs​ ​or​ ​the​ ​boring​ ​jobs?

​ ​a.​ ​Fun​ ​jobs

​ ​b.​ ​Boring​ ​jobs

3.​ ​The​ ​dead-end​ ​jobs​ ​or​ ​the​ ​first-rung-on-the-ladder​ ​jobs?

​ ​a.​ ​Dead-end​ ​jobs

​ ​b.​ ​First-run-on-the-ladder​ ​jobs

4.​ ​True​ ​or​ ​False:​ ​Compensating​ ​differentials​ ​is​ ​a​ ​government​ ​program​ ​that​ ​pays​ ​injured​ ​workers.

124
​ ​True

​ ​False

Explanation​:​ ​False:​ ​You’re​ ​thinking​ ​about​ ​“worker’s​ ​compensation.”

Video​ ​name:​ ​Do​ ​Unions​ ​Raise​ ​Wages?

1.​ ​The​ ​main​ ​reason​ ​that​ ​an​ ​immigrant​ ​earns​ ​more​ ​when​ ​he​ ​moves​ ​from​ ​Algeria​ ​to​ ​France​ ​is​ ​because​ ​the
French​ ​have​ ​strong​ ​labor​ ​unions.

​ ​a.​ ​True

​ ​b.​ ​False

Explanation​:​ ​False:​ ​It’s​ ​because​ ​overall,​ ​French​ ​workers​ ​have​ ​access​ ​to​ ​more​ ​capital​ ​and
technology.​ ​French​ ​workers​ ​are​ ​more​ ​productive​ ​on​ ​average.

2.​ ​Unions​ ​raise​ ​the​ ​wages​ ​and​ ​the​ ​number​ ​of​ ​individuals​ ​employed​ ​in​ ​a​ ​particular​ ​sector​ ​of​ ​the​ ​economy.

​ ​a.​ ​True

​ ​b.​ ​False

Explanation​:​ ​While​ ​it’s​ ​true​ ​that​ ​unions​ ​can​ ​theoretically​ ​raise​ ​the​ ​wages​ ​of​ ​some​ ​workers​ ​in​ ​a
particular​ ​sector​ ​of​ ​the​ ​economy,​ ​they​ ​do​ ​so​ ​by​ ​restricting​ ​the​ ​number​ ​of​ ​workers​ ​in​ ​that​ ​sector.

3.​ ​Today,​ ​unions​ ​only​ ​exist​ ​in​ ​the​ ​manufacturing​ ​sectors​ ​of​ ​the​ ​economy.

​ ​a.​ ​True

​ ​b.​ ​False

Explanation​:​ ​There​ ​are​ ​LOTS​ ​of​ ​professional​ ​unions,​ ​such​ ​as​ ​the​ ​American​ ​Medical​ ​Association,
that​ ​don’t​ ​fit​ ​the​ ​traditional​ ​perception​ ​of​ ​a​ ​union.

125
As​ ​we​ ​saw,​ ​unions​ ​can​ ​raise​ ​wages​ ​in​ ​a​ ​sector​ ​of​ ​the​ ​economy​ ​by​ ​restricting​ ​the​ ​number​ ​of​ ​workers​ ​in​ ​that
sector.​ ​Let’s​ ​see​ ​what​ ​tends​ ​to​ ​happen​ ​to​ ​the​ ​workers​ ​who​ ​don’t​ ​get​ ​jobs​ ​in​ ​those​ ​favored​ ​unionized
sectors.​ ​Consider​ ​a​ ​fictitious​ ​computer​ ​programming​ ​industry​ ​(table​ ​below​ ​is​ ​the​ ​same​ ​as​ ​a​ ​previous
question​ ​for​ ​another​ ​video)​ ​with​ ​100​ ​workers.

Number​ ​of​ ​programmers

per​ ​firm Robotron’s​ ​MPL Korrexia’s​ ​MPL

10 200 110

20 150 80

30 120 60

40 110 50

50 80 40

60 60 20

70 50 10

80 40 0

90 20 0

100 10 0

4.​ ​ ​In​ ​2084,​ ​after​ ​decades​ ​of​ ​complaining​ ​about​ ​low​ ​wages,​ ​the​ ​programmers​ ​at​ ​Robotron​ ​have​ ​a
secret-ballot​ ​vote​ ​and​ ​form​ ​a​ ​union.​ ​Their​ ​new​ ​union​ ​bargains​ ​for​ ​a​ ​wage​ ​of​ ​$80​ ​per​ ​hour,​ ​and​ ​the​ ​newly
unionized​ ​programmers​ ​are​ ​very​ ​excited.​ ​How​ ​many​ ​workers​ ​will​ ​Robotron​ ​hire​ ​at​ ​the​ ​new,​ ​higher​ ​wage?

​ ​a.​ ​40

126
​ ​b.​ ​45

​ ​c.​ ​50

​ ​d.​ ​60

​ ​e.​ ​80

5.​ ​How​ ​many​ ​Robotron​ ​workers​ ​just​ ​got​ ​laid​ ​off?​ ​First​ ​calculate​ ​how​ ​many​ ​workers​ ​would​ ​have​ ​worked
at​ ​Robotron​ ​without​ ​a​ ​union-imposed​ ​minimum​ ​wage​ ​and​ ​compare​ ​it​ ​to​ ​your​ ​answer​ ​above.​ ​Hint:​ ​the
numbers​ ​may​ ​not​ ​work​ ​out​ ​exactly​ ​for​ ​how​ ​many​ ​workers​ ​are​ ​employed​ ​without​ ​a​ ​union-imposed
minimum​ ​wage​ ​—so​ ​use​ ​your​ ​judgment​ ​to​ ​come​ ​up​ ​with​ ​a​ ​good​ ​answer.

​ ​a.​ ​10

​ ​b.​ ​15

​ ​c.​ ​20

​ ​d.​ ​25

​ ​e.​ ​None

6.​ ​A​ ​natural​ ​choice​ ​for​ ​the​ ​other​ ​programmers​ ​is​ ​to​ ​look​ ​for​ ​work​ ​at​ ​Korrexia:​ ​As​ ​before,​ ​the​ ​remaining
workers​ ​have​ ​perfectly​ ​inelastic​ ​labor​ ​supply,​ ​so​ ​all​ ​100​ ​workers​ ​are​ ​going​ ​to​ ​work​ ​at​ ​one​ ​of​ ​the​ ​two
firms.​ ​What’s​ ​the​ ​wage​ ​for​ ​the​ ​nonunion​ ​Korrexia​ ​workers?

​ ​a.​ ​$40

Explanation​:​ ​At​ ​a​ ​wage​ ​of​ ​$40​ ​per​ ​hour,​ ​50​ ​workers​ ​are​ ​going​ ​to​ ​work​ ​at​ ​Korrexia.

​ ​b.​ ​$50

​ ​c.​ ​$60

​ ​d.​ ​$70

​ ​e.​ ​$80

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7.​ ​You​ ​might​ ​think​ ​that​ ​one​ ​solution​ ​is​ ​to​ ​unionize​ ​both​ ​firms​ ​and​ ​lift​ ​wages​ ​for​ ​all​ ​the​ ​programmers.​ ​If​ ​the
unions​ ​negotiate​ ​a​ ​high-wage​ ​contract​ ​and​ ​unionized​ ​wages​ ​rise​ ​to​ ​$110​ ​at​ ​both​ ​firms,​ ​how​ ​many​ ​of​ ​the
100​ ​workers​ ​will​ ​have​ ​jobs?

​ ​a.​ ​0

​ ​b.​ ​10

​ ​c.​ ​20

​ ​d.​ ​30

​ ​e.​ ​50

Explanation​:​ ​Now​ ​50​ ​workers​ ​will​ ​have​ ​jobs:​ ​The​ ​other​ ​50​ ​will​ ​be​ ​unemployed​ ​or​ ​will​ ​work​ ​in
some​ ​other​ ​sector.​ ​At​ ​this​ ​high​ ​wage,​ ​these​ ​extra​ ​50​ ​workers​ ​just​ ​aren’t​ ​profitable​ ​at​ ​these​ ​two​ ​firms.​ ​(By
the​ ​way,​ ​UCLA​ ​economists​ ​Harold​ ​Cole​ ​and​ ​Lee​ ​Ohanian​ ​argue​ ​that​ ​much​ ​of​ ​the​ ​high​ ​unemployment
during​ ​the​ ​Great​ ​Depression​ ​was​ ​caused​ ​by​ ​these​ ​kinds​ ​of​ ​high-wage,​ ​strong-union​ ​policies.​ ​Their
academic​ ​work​ ​can​ ​be​ ​found​ ​at​ ​Harold​ ​L.​ ​Cole​ ​and​ ​Lee​ ​E.​ ​Ohanian.​ ​2004.​ ​New​ ​Deal​ ​Policies​ ​and​ ​the
Persistence​ ​of​ ​the​ ​Great​ ​Depression:​ ​A​ ​General​ ​Equilibrium​ ​Analysis.​ ​Journal​ ​of​ ​Political​ ​Economy​ ​112
(4):​ ​779–816.​ ​An​ ​accessible​ ​popular​ ​article​ ​by​ ​Cole​ ​and​ ​Ohanian​ ​is​ ​How​ ​Government​ ​Prolonged​ ​the
Depression.​ ​Wall​ ​Street​ ​Journal,​ ​Feb.​ ​2,​ ​2009.

128
Public​ ​Goods​ ​and​ ​the​ ​Tragedy​ ​of​ ​the​ ​Commons

Video​ ​name:​ ​Public​ ​Goods​ ​and​ ​Asteroid​ ​Defense

1.​ ​What​ ​is​ ​the​ ​logic​ ​behind​ ​free​ ​riding?

​ ​a.​ ​My​ ​decision​ ​to​ ​buy​ ​or​ ​not​ ​buy​ ​doesn’t​ ​affect​ ​whether​ ​I​ ​receive​ ​the​ ​service

​ ​b.​ ​It’s​ ​better​ ​to​ ​get​ ​something​ ​for​ ​free​ ​than​ ​have​ ​to​ ​pay​ ​for​ ​it

​ ​c.​ ​Receiving​ ​the​ ​service​ ​is​ ​solely​ ​based​ ​on​ ​the​ ​decisions​ ​of​ ​others

​ ​d.​ ​All​ ​of​ ​the​ ​above

2.​ ​Which​ ​of​ ​the​ ​following​ ​might​ ​have​ ​a​ ​free​ ​rider​ ​problem?

​ ​a.​ ​Mail​ ​delivery

​ ​b.​ ​A​ ​large​ ​fireworks​ ​display

​ ​c.​ ​Space​ ​tourism

​ ​d.​ ​All​ ​of​ ​the​ ​above

3.​ ​We​ ​learned​ ​that​ ​asteroid​ ​defense​ ​is​ ​a​ ​public​ ​good.​ ​Which​ ​of​ ​the​ ​following​ ​group(s)​ ​of​ ​people,​ ​if​ ​any,
would​ ​potentially​ ​value​ ​investment​ ​in​ ​asteroid​ ​defense​ ​more​ ​than​ ​the​ ​rest​ ​of​ ​humankind?

​ ​a.​ ​Men

​ ​b.​ ​Women

​ ​c.​ ​Old​ ​people

​ ​d.​ ​Young​ ​people

​ ​e.​ ​A​ ​&​ ​D​ ​only

129
​ ​f.​ ​There​ ​is​ ​no​ ​group​ ​that​ ​would​ ​value​ ​asteroid​ ​defense​ ​more​ ​than​ ​others.

4.​ ​If​ ​the​ ​world​ ​collectively​ ​decided​ ​to​ ​tax​ ​the​ ​population​ ​to​ ​invest​ ​in​ ​asteroid​ ​defense,​ ​who​ ​would​ ​be​ ​the
free​ ​riders?

​ ​a.​ ​Older​ ​people​ ​who​ ​would​ ​die​ ​before​ ​it​ ​was​ ​built

​ ​b.​ ​Someone​ ​who​ ​lives​ ​in​ ​an​ ​underground​ ​bunker​ ​that​ ​is​ ​safe​ ​from​ ​any​ ​asteroid​ ​hit

​ ​c.​ ​Poor​ ​people​ ​who​ ​would​ ​prefer​ ​to​ ​not​ ​pay​ ​the​ ​tax​ ​and​ ​be​ ​at​ ​risk

​ ​d.​ ​Future​ ​generations

Explanation:​ ​Unless​ ​we​ ​billed​ ​them​ ​in​ ​the​ ​form​ ​of​ ​a​ ​budget​ ​deficit,​ ​future​ ​generations​ ​would
likely​ ​be​ ​free​ ​riding​ ​on​ ​our​ ​investment​ ​in​ ​asteroid​ ​defense.

​ ​e.​ ​All​ ​of​ ​the​ ​above

Video​ ​name:​ ​A​ ​Deeper​ ​Look​ ​at​ ​Public​ ​Goods

For​ ​each​ ​of​ ​the​ ​following​ ​items,​ ​decide​ ​first​ ​if​ ​the​ ​good​ ​is​ ​rival​ ​or​ ​nonrival​ ​and​ ​then​ ​whether​ ​it​ ​is
excludable​ ​or​ ​non-excludable.

1.​ ​Apples

​ ​a.​ ​Rival,​ ​excludable

​ ​b.​ ​Rival,​ ​non-excludable

​ ​c.​ ​Nonrival,​ ​excludable

​ ​d.​ ​Nonrival,​ ​non-excludable

2.​ ​The​ ​Chinese​ ​Language

​ ​a.​ ​Rival,​ ​excludable

130
​ ​b.​ ​Rival,​ ​non-excludable

​ ​c.​ ​Nonrival,​ ​excludable

​ ​d.​ ​Nonrival,​ ​non-excludable

3.​ ​Cable​ ​television

​ ​a.​ ​Rival,​ ​excludable

​ ​b.​ ​Rival,​ ​non-excludable

​ ​c.​ ​Nonrival,​ ​excludable

​ ​d.​ ​Nonrival,​ ​non-excludable

4.​ ​Farm-raised​ ​salmon

​ ​a.​ ​Rival,​ ​excludable

​ ​b.​ ​Rival,​ ​non-excludable

​ ​c.​ ​Nonrival,​ ​excludable

​ ​d.​ ​Nonrival,​ ​non-excludable

5.​ ​Yosemite​ ​National​ ​Park

​ ​a.​ ​Rival,​ ​excludable

​ ​b.​ ​Rival,​ ​non-excludable

​ ​c.​ ​Nonrival,​ ​excludable

​ ​d.​ ​Nonrival,​ ​non-excludable

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6.​ ​The​ ​idea​ ​of​ ​calculus

​ ​a.​ ​Rival,​ ​excludable

​ ​b.​ ​Rival,​ ​non-excludable

​ ​c.​ ​Nonrival,​ ​excludable

​ ​d.​ ​Nonrival,​ ​non-excludable

Which​ ​of​ ​the​ ​following​ ​are​ ​free​ ​riders,​ ​which​ ​are​ ​forced​ ​riders,​ ​and​ ​which​ ​are​ ​just​ ​people​ ​paying​ ​for
public​ ​goods?

7.​ ​In​ ​Britain,​ ​Alistair​ ​pays​ ​a​ ​tax​ ​to​ ​support​ ​the​ ​British​ ​Broadcasting​ ​Company.​ ​He​ ​doesn’t​ ​own​ ​a​ ​radio​ ​or
TV.

​ ​a.​ ​Free​ ​rider

​ ​b.​ ​Forced​ ​rider

Explanation​:​ ​Alistair​ ​gets​ ​no​ ​benefit​ ​from​ ​the​ ​tax​ ​he​ ​must​ ​pay.

​ ​c.​ ​Paying​ ​taxes​ ​for​ ​public​ ​goods

8.​ ​Monica​ ​pays​ ​her​ ​local​ ​property​ ​taxes​ ​and​ ​state​ ​incomes​ ​taxes.​ ​Police​ ​patrol​ ​her​ ​neighborhood
regularly.

​ ​a.​ ​Free​ ​rider

​ ​b.​ ​Forced​ ​rider

​ ​c.​ ​Paying​ ​taxes​ ​for​ ​public​ ​goods

Explanation​:​ ​Most​ ​people​ ​like​ ​having​ ​the​ ​police​ ​patrol​ ​their​ ​neighborhood,​ ​so​ ​we​ ​can​ ​just​ ​assume
Monica​ ​is​ ​typical.

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9.​ ​In​ ​the​ ​United​ ​States,​ ​Sara​ ​pays​ ​taxes​ ​to​ ​fund​ ​children’s​ ​immunizations.​ ​She​ ​lives​ ​out​ ​in​ ​the​ ​forest,​ ​has
no​ ​family,​ ​and​ ​rarely​ ​sees​ ​other​ ​people.

​ ​a.​ ​Free​ ​rider

​ ​b.​ ​Forced​ ​rider

Explanation​:​ ​the​ ​main​ ​reason​ ​for​ ​immunization​ ​is​ ​to​ ​avoid​ ​getting​ ​diseases​ ​from​ ​others,​ ​but​ ​Sara
probably​ ​doesn’t​ ​see​ ​enough​ ​people​ ​to​ ​make​ ​it​ ​worthwhile.

​ ​c.​ ​Paying​ ​taxes​ ​for​ ​public​ ​goods

10.​ ​In​ ​Japan,​ ​Dave,​ ​a​ ​tourist​ ​from​ ​the​ ​United​ ​States,​ ​enjoys​ ​the​ ​public​ ​parks.

​ ​a.​ ​Free​ ​rider

​ ​b.​ ​Forced​ ​rider

​ ​c.​ ​Paying​ ​taxes​ ​for​ ​public​ ​goods

11.​ ​True​ ​or​ ​false:​ ​a​ ​public​ ​good​ ​is​ ​defined​ ​as​ ​one​ ​produced​ ​by​ ​the​ ​public​ ​sector.

​ ​a.​ ​True

​ ​b.​ ​False

Video​ ​name:​ ​Club​ ​Goods

1.​ ​Some​ ​media​ ​companies​ ​(especially​ ​in​ ​music​ ​and​ ​movie​ ​industries)​ ​run​ ​ads​ ​claiming​ ​that​ ​downloading
or​ ​copying​ ​media​ ​is​ ​the​ ​same​ ​thing​ ​as​ ​stealing​ ​a​ ​CD​ ​or​ ​DVD​ ​from​ ​a​ ​store.​ ​Let’s​ ​see​ ​if​ ​this​ ​is​ ​the​ ​case.​ ​Is​ ​a
DVD​ ​a​ ​rival​ ​good?

​ ​a.​ ​Yes

Explanation​:​ ​The​ ​DVD​ ​is​ ​a​ ​rival​ ​good​ ​because​ ​one​ ​person​ ​owning​ ​a​ ​DVD​ ​means​ ​another​ ​person
cannot​ ​own​ ​that​ ​DVD.

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​ ​b.​ ​No

2.​ ​Suppose​ ​someone​ ​stole​ ​a​ ​DVD​ ​from​ ​a​ ​retail​ ​outlet.​ ​Regardless​ ​of​ ​how​ ​that​ ​person​ ​values​ ​the​ ​DVD,
does​ ​the​ ​movie​ ​company​ ​lose​ ​any​ ​revenue​ ​as​ ​a​ ​result​ ​of​ ​the​ ​theft?

​ ​a.​ ​Yes

Explanation​:​ ​They​ ​lose​ ​revenue​ ​because​ ​someone​ ​could​ ​have​ ​bought​ ​that​ ​DVD.

​ ​b.​ ​No

3.​ ​Suppose​ ​someone​ ​illegally​ ​downloaded​ ​a​ ​movie​ ​instead​ ​of​ ​purchasing​ ​it.​ ​Also​ ​suppose​ ​that​ ​person
placed​ ​a​ ​high​ ​value​ ​on​ ​the​ ​movie​ ​(they​ ​valued​ ​it​ ​more​ ​than​ ​the​ ​price​ ​required​ ​to​ ​purchase​ ​it​ ​legally).
Does​ ​the​ ​movie​ ​company​ ​lose​ ​any​ ​revenue​ ​as​ ​a​ ​result​ ​of​ ​the​ ​theft?

​ ​a.​ ​Yes

Explanation​:​ ​They​ ​lose​ ​revenue​ ​because​ ​if​ ​that​ ​person​ ​did​ ​not​ ​download​ ​the​ ​movie,​ ​he​ ​would
have​ ​bought​ ​the​ ​DVD.

​ ​b.​ ​No

4.​ ​Suppose​ ​someone​ ​illegally​ ​downloaded​ ​a​ ​movie​ ​instead​ ​of​ ​purchasing​ ​it.​ ​Also​ ​suppose​ ​that​ ​person
placed​ ​a​ ​low​ ​value​ ​on​ ​the​ ​movie​ ​(they​ ​valued​ ​it​ ​less​ ​than​ ​the​ ​price​ ​required​ ​to​ ​purchase​ ​it​ ​legally).​ ​Does
the​ ​movie​ ​company​ ​lose​ ​any​ ​revenue​ ​as​ ​a​ ​result​ ​of​ ​the​ ​theft?​ ​Why​ ​or​ ​why​ ​not?

​ ​a.​ ​Yes

​ ​ ​b.​ ​No

Explanation:​​ ​They​ ​did​ ​not​ ​lose​ ​revenue​ ​because​ ​if​ ​that​ ​person​ ​did​ ​not​ ​download​ ​the​ ​movie,​ ​he
wouldn’t​ ​have​ ​bought​ ​the​ ​DVD,​ ​anyway.

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5.​ ​Which​ ​of​ ​the​ ​following​ ​statements​ ​are​ ​true?

​ ​a.​ ​As​ ​the​ ​technology​ ​of​ ​home​ ​movie​ ​entertainment​ ​has​ ​changed​ ​from​ ​tapes​ ​and​ ​discs​ ​to​ ​digital​ ​files,
home​ ​viewing​ ​of​ ​movies​ ​has​ ​changed​ ​from​ ​rival​ ​to​ ​nonrival.

​ ​b.​ ​Assuming​ ​the​ ​law​ ​is​ ​obeyed,​ ​as​ ​the​ ​technology​ ​of​ ​home​ ​movie​ ​entertainment​ ​has​ ​changed​ ​from​ ​tapes
and​ ​discs​ ​to​ ​digital​ ​files,​ ​home​ ​viewing​ ​of​ ​movies​ ​has​ ​changed​ ​from​ ​excludable​ ​to​ ​nonexcludable.

​ ​c.​ ​A​ ​and​ ​B

​ ​d.​ ​None​ ​of​ ​the​ ​above

Video​ ​name:​ ​The​ ​Tragedy​ ​of​ ​the​ ​Commons

1.​ ​At​ ​some​ ​restaurants​ ​and​ ​grocery​ ​stores,​ ​you​ ​can​ ​buy​ ​bison​ ​burgers​ ​made​ ​from​ ​farm-raised​ ​bison.​ ​Is
this​ ​good​ ​news​ ​or​ ​bad​ ​news​ ​if​ ​we​ ​want​ ​more​ ​bison​ ​around?

​ ​a.​ ​Good​ ​news

Explanation:​ ​This​ ​is​ ​good​ ​news.​ ​If​ ​they​ ​are​ ​raised​ ​on​ ​farms,​ ​then​ ​bison​ ​become​ ​like​ ​chicken:​ ​The
owners​ ​will​ ​raise​ ​enough​ ​of​ ​them​ ​that​ ​they​ ​won’t​ ​go​ ​extinct.

​ ​b.​ ​Bad​ ​news

2.​ ​The​ ​nation​ ​of​ ​Alphaville​ ​has​ ​been​ ​hunting​ ​their​ ​deer​ ​population​ ​to​ ​extinction.​ ​The​ ​government​ ​decrees
strict​ ​limits​ ​on​ ​the​ ​number​ ​of​ ​hunters,​ ​and​ ​on​ ​the​ ​number​ ​of​ ​rounds​ ​of​ ​ammunition​ ​that​ ​each​ ​hunter​ ​can
take​ ​into​ ​the​ ​hunt.​ ​How​ ​do​ ​you​ ​think​ ​hunters​ ​will​ ​respond?

​ ​a.​ ​Decrease​ ​the​ ​quality​ ​of​ ​their​ ​ammunition

​ ​b.​ ​Increase​ ​the​ ​quality​ ​of​ ​their​ ​weapons

Explanation​:​ ​They’ll​ ​use​ ​powerful​ ​laser​ ​scopes​ ​and​ ​laser​ ​sights,​ ​more​ ​powerful​ ​bullets​ ​that​ ​go
farther​ ​and​ ​hit​ ​harder,​ ​and​ ​they’ll​ ​use​ ​more​ ​accurate,​ ​more​ ​expensive​ ​rifles.

​ ​c.​ ​Increase​ ​the​ ​number​ ​of​ ​times​ ​they​ ​hunt

​ ​d.​ ​B​ ​&​ ​C​ ​only

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​ ​e.​ ​All​ ​of​ ​the​ ​above

3.​ ​In​ ​this​ ​video,​ ​we​ ​learn​ ​that​ ​chickens​ ​and​ ​the​ ​“chicken​ ​of​ ​the​ ​sea”​ ​(tuna)​ ​are​ ​fundamentally​ ​different​ ​in
terms​ ​of​ ​population​ ​though​ ​they​ ​are​ ​both​ ​food.​ ​As​ ​population​ ​and​ ​prosperity​ ​has​ ​increased,​ ​the​ ​demand
for​ ​chicken​ ​has​ ​increased.​ ​What​ ​happens​ ​to​ ​the​ ​price​ ​of​ ​chickens​ ​as​ ​a​ ​result?

​ ​a.​ ​It​ ​increases

Explanation​:​ ​The​ ​price​ ​of​ ​chicken​ ​goes​ ​up​ ​as​ ​more​ ​people​ ​bid​ ​for​ ​the​ ​same​ ​number​ ​of​ ​chickens
(all​ ​other​ ​things​ ​being​ ​equal).

​ ​b.​ ​It​ ​decreases

​ ​c.​ ​There​ ​is​ ​no​ ​change

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

4.​ ​Because​ ​of​ ​the​ ​rules​ ​humans​ ​have​ ​concerning​ ​chickens,​ ​what​ ​happens​ ​to​ ​the​ ​number​ ​of​ ​people​ ​raising
chickens​ ​as​ ​a​ ​result​ ​of​ ​the​ ​price​ ​change?

​ ​a.​ ​It​ ​increases

Explanation​:​ ​The​ ​increased​ ​price​ ​encourages​ ​more​ ​people​ ​to​ ​raise​ ​chickens

​ ​b.​ ​It​ ​decreases

​ ​c.​ ​There​ ​is​ ​no​ ​change

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

5.​ ​What​ ​happens​ ​to​ ​the​ ​number​ ​of​ ​chickens?

​ ​a.​ ​It​ ​increases

​ ​b.​ ​It​ ​decreases

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​ ​c.​ ​There​ ​is​ ​no​ ​change

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

6.​ ​What​ ​happens​ ​to​ ​the​ ​price​ ​of​ ​tuna​ ​as​ ​population​ ​and​ ​prosperity​ ​increase?

​ ​a.​ ​It​ ​increases

Explanation​:​ ​The​ ​price​ ​increases​ ​because​ ​more​ ​people​ ​bid​ ​for​ ​the​ ​same​ ​number​ ​of​ ​tuna.

​ ​b.​ ​It​ ​decreases

​ ​c.​ ​There​ ​is​ ​no​ ​change

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

7.​ ​Because​ ​of​ ​the​ ​rules​ ​humans​ ​have​ ​concerning​ ​tuna,​ ​what​ ​happens​ ​to​ ​the​ ​number​ ​of​ ​people​ ​harvesting
tuna​ ​as​ ​a​ ​result​ ​of​ ​the​ ​price​ ​change?

​ ​a.​ ​It​ ​increases

Explanation​:​ ​More​ ​people​ ​harvest​ ​tuna​ ​to​ ​take​ ​advantage​ ​of​ ​the​ ​higher​ ​price.

​ ​b.​ ​It​ ​decreases

​ ​c.​ ​There​ ​is​ ​no​ ​change

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

8.​ ​What​ ​happens​ ​to​ ​the​ ​number​ ​of​ ​tuna?

​ ​a.​ ​It​ ​increases

​ ​b.​ ​It​ ​decreases

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 Explanation​:​ ​but​ ​because​ ​they​ ​are​ ​not​ ​encouraging​ ​more​ ​tuna​ ​to​ ​be​ ​born​ ​and​ ​raised,​ ​the​ ​total
amount​ ​of​ ​tuna​ ​falls.

​ ​c.​ ​There​ ​is​ ​no​ ​change

​ ​d.​ ​Indeterminate​ ​from​ ​the​ ​given​ ​information.

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Asymmetric​ ​Information

Video​ ​name:​ ​Asymmetric​ ​Information​ ​and​ ​Used​ ​Cars

1.​ ​For​ ​the​ ​following​ ​two​ ​situations,​ ​identify​ ​whether​ ​the​ ​scenario​ ​was​ ​caused​ ​by​ ​asymmetric​ ​information:
Unrest​ ​in​ ​the​ ​Middle​ ​East​ ​causes​ ​oil​ ​speculators​ ​to​ ​buy​ ​up​ ​oil​ ​futures,​ ​driving​ ​gasoline​ ​prices​ ​higher.

​ ​a.​ ​Asymmetric​ ​information​ ​induced

​ ​b.​ ​Not​ ​caused​ ​by​ ​asymmetric​ ​information

2.​ ​Joanne​ ​applies​ ​for​ ​a​ ​job​ ​as​ ​a​ ​part-time​ ​manager​ ​at​ ​a​ ​fast-food​ ​restaurant.​ ​Her​ ​MBA​ ​makes​ ​her
overqualified​ ​for​ ​the​ ​job,​ ​yet​ ​the​ ​position​ ​goes​ ​to​ ​someone​ ​else​ ​who​ ​doesn’t​ ​have​ ​a​ ​college​ ​degree.

​ ​a.​ ​Asymmetric​ ​information​ ​induced

​ ​b.​ ​Not​ ​caused​ ​by​ ​asymmetric​ ​information

3.​ ​Many​ ​states​ ​have​ ​laws​ ​like​ ​Virginia’s​ ​that​ ​give​ ​customers​ ​the​ ​right​ ​to​ ​keep​ ​or​ ​inspect​ ​parts​ ​that​ ​are
removed​ ​by​ ​an​ ​auto​ ​mechanic.​ ​Does​ ​that​ ​help​ ​solve​ ​an​ ​asymmetric​ ​information​ ​problem?

​ ​a.​ ​Yes

​ ​b.​ ​No

4.​ ​Alex’s​ ​band​ ​is​ ​about​ ​to​ ​take​ ​off,​ ​so​ ​he​ ​goes​ ​out​ ​and​ ​buys​ ​a​ ​brand​ ​new​ ​Marshall​ ​Tube​ ​Head​ ​and​ ​Cabinet
amplifier​ ​for​ ​the​ ​list​ ​price​ ​of​ ​$4,500.​ ​As​ ​fate​ ​would​ ​have​ ​it,​ ​his​ ​band​ ​immediately​ ​breaks​ ​up​ ​after​ ​he​ ​uses
it​ ​only​ ​once.​ ​(The​ ​drummer​ ​started​ ​dating​ ​the​ ​bass​ ​player’s​ ​ex-girlfriend.)​ ​He​ ​hangs​ ​on​ ​to​ ​it​ ​for​ ​a​ ​year​ ​or
so​ ​in​ ​case​ ​the​ ​drummer​ ​and​ ​bass​ ​player​ ​can​ ​work​ ​out​ ​their​ ​differences,​ ​but​ ​it​ ​never​ ​happens.​ ​He​ ​finally

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decides​ ​to​ ​sell​ ​it​ ​on​ ​Craigslist.​ ​Since​ ​he​ ​know​ ​it’s​ ​been​ ​used​ ​only​ ​once,​ ​and​ ​it’s​ ​been​ ​properly​ ​stored​ ​for​ ​a
year,​ ​he​ ​reasons​ ​that​ ​it’s​ ​still​ ​worth​ ​close​ ​to​ ​what​ ​he​ ​paid​ ​for​ ​it,​ ​so​ ​he​ ​lists​ ​it​ ​for​ ​$3,800-​ ​a​ ​10%​ ​discount
off​ ​the​ ​original​ ​price.​ ​Is​ ​it​ ​likely​ ​that​ ​Alex​ ​will​ ​sell​ ​the​ ​equipment​ ​at​ ​this​ ​price?

​ ​a.​ ​Yes

​ ​b.​ ​No

Video​ ​name:​ ​Asymmetric​ ​Information​ ​in​ ​Health​ ​Insurance

1.​ ​Which​ ​of​ ​the​ ​following​ ​concepts​ ​or​ ​policies​ ​below​ ​theoretically​ ​reduce​ ​the​ ​effects​ ​of​ ​adverse​ ​selection
in​ ​the​ ​health​ ​insurance​ ​market?

​ ​a.​ ​Asymmetric​ ​information

​ ​b.​ ​Propitious​ ​selection

​ ​c.​ ​Affordable​ ​Care​ ​Act’s​ ​individual​ ​mandate

​ ​d.​ ​A​ ​&​ ​C​ ​only

​ ​e.​ ​B​ ​&​ ​C​ ​only

2.​ ​Complete​ ​the​ ​analogy​ ​-​ ​Carfax:​ ​the​ ​used​ ​car​ ​market​ ​as​ ​_____:​ ​the​ ​medical​ ​insurance​ ​market

​ ​a.​ ​Affordable​ ​Care​ ​Act’s​ ​individual​ ​mandate

​ ​b.​ ​Employer-based​ ​group​ ​health​ ​insurance

​ ​c.​ ​Medical​ ​checkup

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​ ​d.​ ​A​ ​&​ ​B​ ​only

​ ​e.​ ​A,​ ​B,​ ​&​ ​C

3.​ ​True​ ​or​ ​False:​ ​The​ ​health​ ​insurance​ ​market​ ​mainly​ ​suffers​ ​from​ ​asymmetric​ ​information​ ​because​ ​the
doctor​ ​has​ ​more​ ​information​ ​about​ ​the​ ​patient’s​ ​health​ ​than​ ​the​ ​patient​ ​does.

​ ​a.​ ​True

​ ​b.​ ​False

4.​ ​Given​ ​the​ ​details​ ​about​ ​the​ ​two​ ​individuals​ ​below​ ​and​ ​the​ ​information​ ​from​ ​the​ ​video,​ ​who​ ​do​ ​you​ ​think
is​ ​more​ ​likely​ ​to​ ​have​ ​health​ ​insurance?​ ​Steve,​ ​a​ ​single​ ​31​ ​year​ ​old​ ​male,​ ​is​ ​a​ ​construction​ ​manager​ ​who
rides​ ​motorcycles​ ​and​ ​enjoys​ ​speeding.​ ​Kristen,​ ​a​ ​married​ ​mother​ ​of​ ​two​ ​kids,​ ​is​ ​an​ ​accountant​ ​who​ ​is
always​ ​wearing​ ​her​ ​seatbelt​ ​and​ ​is​ ​overly​ ​cautious​ ​while​ ​driving.

​ ​a.​ ​Steve

​ ​b.​ ​Kristen

​ ​c.​ ​Neither

5.​ ​Given​ ​your​ ​answer​ ​above,​ ​is​ ​this​ ​a​ ​case​ ​of​ ​adverse​ ​selection​ ​in​ ​the​ ​health​ ​insurance​ ​market?

​ ​a.​ ​Yes

​ ​b.​ ​No

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 Explanation​:​ ​This​ ​is​ ​a​ ​case​ ​of​ ​propitious​ ​selection.

Video​ ​name:​ ​Moral​ ​Hazard

1.​ ​Identify​ ​which​ ​of​ ​the​ ​following​ ​situations​ ​are​ ​caused​ ​by​ ​moral​ ​hazard:​ ​Fred​ ​lives​ ​in​ ​an​ ​apartment
above​ ​a​ ​restaurant,​ ​and​ ​his​ ​apartment​ ​always​ ​smells​ ​like​ ​burgers​ ​and​ ​fries.​ ​He​ ​has​ ​tried​ ​unsuccessfully​ ​to
get​ ​the​ ​restaurant​ ​owner​ ​to​ ​remedy​ ​the​ ​problem.

​ ​a.​ ​Caused​ ​by​ ​moral​ ​hazard

​ ​b.​ ​Not​ ​caused​ ​by​ ​moral​ ​hazard

2.​ ​Maria​ ​is​ ​halfway​ ​to​ ​work​ ​before​ ​she​ ​realizes​ ​that​ ​she​ ​forgot​ ​to​ ​lock​ ​the​ ​back​ ​door.​ ​Because​ ​she​ ​has
renter’s​ ​insurance,​ ​she​ ​decides​ ​it​ ​is​ ​not​ ​worth​ ​being​ ​late​ ​just​ ​to​ ​go​ ​home​ ​to​ ​lock​ ​the​ ​door.

​ ​a.​ ​Caused​ ​by​ ​moral​ ​hazard

​ ​b.​ ​Not​ ​caused​ ​by​ ​moral​ ​hazard

3.​ ​Your​ ​friend,​ ​Paris,​ ​has​ ​super-rich​ ​parents​ ​who​ ​gave​ ​her​ ​an​ ​Audi​ ​for​ ​her​ ​16th​ ​birthday​ ​party​ ​and​ ​have
lavished​ ​her​ ​with​ ​luxury​ ​items​ ​throughout​ ​her​ ​entire​ ​life.​ ​She​ ​tells​ ​you​ ​that​ ​she​ ​has​ ​never​ ​felt​ ​the​ ​need​ ​to
get​ ​good​ ​grades​ ​in​ ​school​ ​or​ ​succeed​ ​at​ ​a​ ​job​ ​because​ ​her​ ​parents​ ​provide​ ​her​ ​with​ ​everything.

​ ​a.​ ​Caused​ ​by​ ​moral​ ​hazard

​ ​b.​ ​Not​ ​caused​ ​by​ ​moral​ ​hazard

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4.​ ​In​ ​the​ ​car​ ​repair​ ​market,​ ​moral​ ​hazard​ ​is​ ​a​ ​problem​ ​because

​ ​a.​ ​The​ ​car​ ​owner​ ​might​ ​pay​ ​money​ ​for​ ​a​ ​repair​ ​or​ ​service​ ​that​ ​was​ ​not​ ​needed.

​ ​b.​ ​The​ ​car​ ​owner​ ​might​ ​opt​ ​not​ ​to​ ​get​ ​a​ ​repair​ ​that​ ​was​ ​actually​ ​needed​ ​for​ ​fear​ ​of​ ​being​ ​ripped​ ​off.

​ ​c.​ ​The​ ​car​ ​owner​ ​has​ ​more​ ​information​ ​about​ ​the​ ​car’s​ ​status​ ​than​ ​the​ ​car​ ​mechanic.

​ ​d.​ ​A​ ​&​ ​B​ ​only.

​ ​e.​ ​B​ ​&​ ​C​ ​only.

​ ​f.​ ​A,​ ​B,​ ​&​ ​C.

Video​ ​name:​ ​Solutions​ ​to​ ​Moral​ ​Hazard

1.​ ​Identify​ ​whether​ ​the​ ​following​ ​scenario​ ​is​ ​meant​ ​to​ ​reduce​ ​moral​ ​hazard​ ​effects:​ ​Your​ ​car​ ​insurance
has​ ​a​ ​high​ ​deductible​ ​(the​ ​amount​ ​that​ ​you​ ​have​ ​to​ ​pay​ ​out-of-pocket​ ​before​ ​insurance​ ​kicks​ ​in).

​ ​a.​ ​Reduces​ ​moral​ ​hazard​ ​effects.

​ ​b.​ ​Does​ ​not​ ​reduce​ ​moral​ ​hazard​ ​effects.

2.​ ​True​ ​or​ ​false:​ ​The​ ​under-provision​ ​of​ ​trustworthy​ ​third​ ​parties,​ ​such​ ​as​ ​Consumer​ ​Reports,​ ​reviewing
products​ ​and​ ​services​ ​is​ ​an​ ​example​ ​of​ ​moral​ ​hazard.

​ ​a.​ ​True

​ ​b.​ ​False

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 Explanation:​​ ​Goods​ ​or​ ​services​ ​are​ ​often​ ​underprovided​ ​when​ ​they​ ​are​ ​non-excludable​ ​and
subject​ ​to​ ​free-riding,​ ​but​ ​this​ ​has​ ​nothing​ ​to​ ​do​ ​with​ ​moral​ ​hazard.

3.​ ​You’d​ ​like​ ​to​ ​buy​ ​a​ ​new​ ​computer​ ​and​ ​so​ ​you​ ​are​ ​researching​ ​the​ ​best​ ​one​ ​to​ ​buy.​ ​Amazon​ ​reviewers
rate​ ​a​ ​particular​ ​computer​ ​highly​ ​but​ ​Consumer​ ​Reports​ ​does​ ​not.​ ​Which​ ​product​ ​review​ ​site​ ​are​ ​you
more​ ​prone​ ​to​ ​trust?

​ ​a.​ ​Amazon

​ ​b.​ ​Consumer​ ​Reports

Explanation​:​ ​Consumer​ ​Reports​ ​reviews​ ​are​ ​unbiased​ ​whereas​ ​Amazon​ ​reviews​ ​have​ ​the
potential​ ​to​ ​be​ ​manipulated​ ​by​ ​the​ ​seller.

Video​ ​name:​ ​Signaling

1.​ ​True​ ​or​ ​False:​ ​If​ ​you​ ​were​ ​to​ ​drop​ ​out​ ​of​ ​college​ ​after​ ​attending​ ​for​ ​3​ ​years​ ​and​ ​completing​ ​75%​ ​of​ ​all
coursework,​ ​you​ ​could​ ​expect​ ​to​ ​earn​ ​about​ ​75%​ ​of​ ​the​ ​college​ ​premium​ ​in​ ​the​ ​labor​ ​market.

​ ​a.​ ​True

​ ​b.​ ​False

2.​ ​In​ ​the​ ​marriage​ ​market​ ​(yes,​ ​it’s​ ​a​ ​market),​ ​which​ ​of​ ​the​ ​following​ ​is​ ​a​ ​signal​ ​by​ ​one​ ​or​ ​both​ ​people
indicating​ ​that​ ​they​ ​are​ ​committed​ ​to​ ​a​ ​long-term​ ​relationship?

​ ​a.​ ​Phil​ ​changes​ ​his​ ​last​ ​name​ ​to​ ​his​ ​wife’s​ ​when​ ​they​ ​get​ ​married.

144
​ ​b.​ ​Ellen​ ​and​ ​Pat​ ​have​ ​dated​ ​for​ ​3​ ​years;​ ​they​ ​celebrate​ ​holidays​ ​apart​ ​with​ ​their​ ​respective​ ​families.

​ ​c.​ ​Brad​ ​and​ ​Constance​ ​sign​ ​a​ ​pre-nuptial​ ​agreement​ ​before​ ​getting​ ​married.

​ ​d.​ ​B​ ​&​ ​C​ ​only

​ ​e.​ ​A​ ​&​ ​C​ ​only

​ ​f.​ ​A,​ ​B​ ​&​ ​C.

3.​ ​You​ ​really​ ​want​ ​a​ ​particular​ ​job​ ​as​ ​a​ ​computer​ ​programmer.​ ​You​ ​think​ ​you​ ​are​ ​the​ ​perfect​ ​fit​ ​for​ ​the
position​ ​and​ ​offer​ ​to​ ​work​ ​for​ ​much​ ​less​ ​than​ ​the​ ​job’s​ ​current​ ​salary​ ​posting.​ ​What​ ​possible​ ​signal​ ​did
you​ ​just​ ​send​ ​to​ ​your​ ​prospective​ ​employer?

​ ​a.​ ​You​ ​are​ ​enthusiastic​ ​about​ ​this​ ​job.

​ ​b.​ ​You​ ​have​ ​a​ ​lot​ ​of​ ​good​ ​opportunities.

​ ​c.​ ​You​ ​are​ ​desperate.

​ ​d.​ ​A​ ​&​ ​B​ ​only.

​ ​e.​ ​A​ ​&​ ​C​ ​only.

​ ​f.​ ​A,​ ​B,​ ​&​ ​C.

​ ​g.​ ​None​ ​of​ ​the​ ​above.

4.​ ​Human-made​ ​diamonds,​ ​which​ ​are​ ​just​ ​as​ ​beautiful​ ​and​ ​essentially​ ​indistinguishable​ ​from​ ​mined
diamonds,​ ​are​ ​becoming​ ​much​ ​cheaper​ ​to​ ​produce.​ ​True​ ​or​ ​False:​ ​This​ ​new​ ​technology​ ​making​ ​diamond

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engagement​ ​rings​ ​much​ ​cheaper​ ​will​ ​be​ ​helpful​ ​because​ ​it​ ​will​ ​reduce​ ​the​ ​cost​ ​of​ ​this​ ​very​ ​costly
commitment​ ​signal.

​ ​a.​ ​True

​ ​b.​ ​False

5.​ ​Peacocks​ ​who​ ​possess​ ​large,​ ​colorful​ ​tails​ ​signal

​ ​a.​ ​They​ ​are​ ​healthy.

​ ​b.​ ​They​ ​have​ ​good​ ​genes.

​ ​c.​ ​They​ ​would​ ​make​ ​a​ ​good​ ​mating​ ​partner.

​ ​d.​ ​B​ ​&​ ​C​ ​only

​ ​e.​ ​A,​ ​B,​ ​and​ ​C

6.​ ​If​ ​a​ ​criminal​ ​gets​ ​a​ ​large​ ​tattoo​ ​across​ ​his​ ​face,​ ​he​ ​is​ ​signaling

​ ​a.​ ​He​ ​is​ ​a​ ​trend-setter.

​ ​b.​ ​He​ ​is​ ​probably​ ​not​ ​planning​ ​to​ ​get​ ​a​ ​traditional​ ​job.

​ ​c.​ ​He​ ​was​ ​in​ ​jail​ ​for​ ​a​ ​long​ ​time.

​ ​d.​ ​B​ ​&​ ​C​ ​only

​ ​e.​ ​A,​ ​B,​ ​&​ ​C

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