Chapter 1 Ten Principles of Economics

1. The term ______ refers to the size of the economic pie, and the term ______ refers to how the pie is
divided.

2. Explain how government policies that redistribute income from the rich to the poor might reduce
efficiency.

Scenario 1-1
You have the afternoon free. You have a choice between going to the movies with a friend or studying
economics for three hours. If you go to the movies, you will spend $8.00 on a ticket and $4.50 on
popcorn. If you choose to study economics for three hours, you will raise your exam grade by 10 points.

3. Refer to Scenario 1-1. What is your opportunity cost of going to the movies?

4. Refer to Scenario 1-1. What is your opportunity cost of studying economics?

Scenario 1-2
Suppose that you have a choice between going to the movies with a friend for two hours or working at
your job. If you go to the movies, you will spend $7 on a ticket and $5 on popcorn. If you choose to
work, you will earn $10 an hour.

5. Refer to Scenario 1-2. What is your opportunity cost of going to the movies?

6. Refer to Scenario 1-2. What is your opportunity cost of working?

7. Debbie quits her job, which pays $30,000 a year, to finish her college degree. Her annual college
expenses are $10,000 for tuition, $2,000 for books, and $700 for food. What is her opportunity cost of
attending college for the year?

8. Zack quits his job at a consulting firm, which pays $40,000 a year, to enroll in a two-year graduate
program. His annual school expenses are $30,000 for tuition, $2,000 for books, and $600 for food. What
is his opportunity cost of attending the two-year graduate program?

9. What is another word for “marginal”?

Incremental; additional

10. The term ______ refers to a small incremental adjustment to an existing plan of action.

1
 Scenario 1-3
It costs a company $35,000 to produce 700 graphing calculators. The company’s cost will be $35,070 if it
produces an additional graphing calculator. The company is currently producing 700 graphing calculators.

11. Refer to Scenario 1-3. What is the company’s average cost?

12. Refer to Scenario 1-3. What is the company’s marginal cost?

13. Refer to Scenario 1-3. A customer is willing to pay $60 for the 701th calculator. Should the company
produce and sell it? Explain.

14. Refer to Scenario 1-3. What is the minimum price the company will charge for the 701th calculator?

15. Explain how trade with other countries is beneficial.

16. What are the two basic types of economies?

17. What is the main difference between a centrally planned economy and a market economy?

18. Invisible hand is a term used by the economist ______ to describe how the decisions of households and
firms lead to desirable market outcomes.

19. Economists use the term ______ to refer to a situation in which the market on its own fails to produce an
efficient allocation of resources.

20. What are the two possible causes of market failure?

21. Explain the concept of externality and give an example.

22. What are the two reasons for the government to intervene in a market?

23. Economists use the term ______ to refer to an increase in the overall level of prices in the economy.

24. In the short run, an increase in the money supply is likely to lead to ______ inflation and ______
unemployment.

25. Economists use the term ______ to refer to fluctuations in economic activity, such as employment and
production.

2
Chapter 2 Thinking Like an Economist

PROBLEM

Figure 2-1

1 2

1. Refer to Figure 2-1. What is the name of the model depicted in the figure?

2. Refer to Figure 2-1. What do the ovals represent in the figure?

3. Refer to Figure 2-1. What do the rectangles represent in the figure?

4. Refer to Figure 2-1. What do the outer arrows represent in the figure?

5. Refer to Figure 2-1. What do the inner arrows represent in the figure?

6. Refer to Figure 2-1. What does the arrow going from oval A to rectangle 2 represent in the figure?

7. Refer to Figure 2-1. What does the arrow going from oval B to rectangle 2 represent in the figure?

8. Refer to Figure 2-1. What are two elements not included in this figure that could be included in a more
complex model?

9. The three main factors of production, or categories of inputs, used by firms to produce goods and services
are

3
Chapter 4 The Market Forces of Supply and Demand

1. Since individual buyers and individual sellers in a competitive market have no influence on the market
price, what do we call the buyers and sellers in a competitive market?

2. Does a change in the price in a market result in a shift of the demand curve or in a movement along the
demand curve?

3. If income rises in the market for an inferior good, will the demand curve for the inferior good shift to the
right or to the left?

4. If income rises in the market for a normal good, will the demand curve for the normal good shift to the
right or to the left?

5. Suppose goods A and B are substitutes. If the price of good A increases, will the demand for good B
increase or decrease?

6. Suppose goods A and B are complements. If the price of good A increases, will the demand for good B
increase or decrease?

7. Suppose consumers expect the price of a good to be higher in the future than it is today. Would the
current demand for the good increase or decrease?

8. Suppose the number of buyers in a market decreases. As a result, would the demand curve in this market
shift to the right or to the left?

9. If corn is an input into the production of ethanol, will a decrease in the price of corn increase the supply
of ethanol or decrease the supply of ethanol?

10. Suppose researchers discover a new, lower cost method of producing calculators. As a result, will the
supply of calculators increase or decrease?

4
 Scenario 4-1

The following table shows the supply and demand schedules in a market.

Quantity Quantity
Demanded Supplied
Price ($) (units) (units)
0 50 0
2 40 15
4 30 30
6 20 45
8 10 60
10 0 75

11. Refer to Scenario 4-1. What is the equilibrium price in this market?

12. Refer to Scenario 4-1. What is the equilibrium quantity in this market?

13. Refer to Scenario 4-1. At a price of $2, will there be a surplus or shortage of units in this market?

14. Refer to Scenario 4-1. At a price of $8, how large of a surplus will there be in this market?

15. Refer to Scenario 4-1. If the supply curve shifts to the right, will the price in this market rise or fall?

Scenario 4-2

Suppose the demand schedule in a market can be represented by the equation , where
is the quantity demanded and is the price. Also, suppose the supply schedule can be represented by the
equation , where is the quantity supplied.

16. Refer to Scenario 4-2. What is the equilibrium price in this market?

17. Refer to Scenario 4-2. What is the equilibrium quantity in this market?

18. Refer to Scenario 4-2. Suppose the price is currently equal to 10 in this market. Is there a shortage or
suplus in this market, and how large is the shortage/surplus?

19. Refer to Scenario 4-2. Suppose the price is currently equal to 18 in this market. Is there a shortage or
suplus in this market, and how large is the shortage/surplus?

20. Refer to Scenario 4-2. Suppose the supply curve shifts to . What is the new equilibrium
price and quantity in this market?

21. Suppose the supply and demand of corn both increase. As a result, what will happen to the equilibrium
price and equilibrium quantity in the market?

5
22. If the supply of tennis balls, a complement to tennis racquets, decreases, what will happen to the
equilibrium price of tennis balls and to the equilibrium price of tennis racquets?

23. If the supply of pencils, a substitute for pens, increases, what will happen to the equilibrium price of
pencils and to the equilibrium price of pens?

24. If the price of steel, an input into the production of automobiles, rises, and at the same time the price of
gasoline rises, what will happen to the equilibrium price and quantity of automobiles?

25. If the demand for a good increases at the same time as the supply of the same good decreases, what will
happen to the equilibrium price and quantity of the good?

6
Chapter 4 The Market Forces of Supply and Demand

1. Suppose that good X has few close substitutes and that good Y has many close substitutes. Which good
would you expect to have more price inelastic demand?
2. Suppose that good X has few close substitutes and that good Y has many close substitutes. Which good
would you expect to have more price elastic demand?

3. Suppose that good X is a luxury and that good Y is a necessity. Which good would you expect to have
more price inelastic demand?

4. Suppose that good X is a luxury and that good Y is a necessity. Which good would you expect to have
more price elastic demand?

5. Suppose the price of natural gas, a typical fuel for heating homes, rises in January in Alaska. Would you
expect the price elasticity of demand for natural gas to more inelastic immediately after the price increase
or at some point in the future?

Table 5-3

Price Quantity Demanded

$0 50
$2 40
$4 30
$6 20
$8 10

6. Refer to Table 5-3. Using the midpoint method, what is the price elasticity of demand between $2 and
$4?

7. Refer to Table 5-3. Using the midpoint method, what is the price elasticity of demand between $6 and
$8?

8. Suppose the price elasticity of demand for good A is 1.25. If the price of good A increases by 20%, what
will be the resulting percentage change in quantity demanded for good A?

9. What is the price elasticity of demand at any point on a perfectly inelastic demand curve?
elasticity of demand MSC: Analytical

10. What is the price elasticity of demand at any point on a perfectly elastic demand curve?

11. Suppose demand is given by the equation:

Using the midpoint method, what is the price elasticity of demand between $1 and $2?

7
12. Suppose demand is given by the equation:

Using the midpoint method, what is the price elasticity of demand between $7 and $8?

13. Suppose demand is given by the equation:

At what price will total revenue be maximized?

14. Suppose demand is given by the equation:

Using the midpoint method, what is the price elasticity of demand between $1 and $2?

15. Suppose demand is given by the equation:

Using the midpoint method, what is the price elasticity of demand between $2 and $4?

16. Suppose demand is given by the equation:

At what point along this demand curve will total revenue be maximized?

17. Adam and Barb go to the store to purchase some lottery tickets. Without looking at the price, Adam says
“I’ll take 10 lottery tickets,” and Barb says “I’ll take $10 worth of lottery tickets.” What is each person’s
price elasticity of demand for lottery tickets?

8
 Figure 5-3
Price

55
50 Supply
45
40
35
30
25
20
15
10
5

5 10 15 20 25 30 35 40 Quantity

22. Refer to Figure 5-3. Using the midpoint method, what is the price elasticity of supply between $15 and
$25?

23. Refer to Figure 5-3. Using the midpoint method, what is the price elasticity of supply between $25 and
$35?

24. Suppose a freeze in Florida significantly reduces the supply of oranges this year. As a result, would you
expect the total revenue from the sale of orange juice to rise or fall? Explain.

25. Suppose you manage a baseball stadium. To pay the salary for a star player, you would like to increase
the total revenue from ticket sales. Should you increase or decrease the price of a ticket to increase
revenue? Explain.

9
Chapter 6 Supply, Demand, and Government Policies

1. Define a price ceiling.

2. When a price ceiling is binding, is the price ceiling set above or below the market equilibrium price?

3. Does a binding price ceiling result in a shortage or a surplus in the market?

4. Define a price floor.

5. When a price floor is binding, is the price floor set above or below the market equilibrium price?

6. Will a binding price floor result in a shortage or a surplus in the market?

Figure 6-4
Price
30

27

24
S

21

18

15

12

3
D

3 6 9 12 15 18 21 24 Quantity

7. Refer to Figure 6-4. If the government set a price ceiling at $9, would there be a shortage or surplus, and
how large would be the shortage/surplus?

8. Refer to Figure 6-4. If the government set a price ceiling at $15, would there be a shortage or surplus,
and how large would be the shortage/surplus?

9. Refer to Figure 6-4. If the government set a price ceiling at $8, would there be a shortage or surplus, and
how large would be the shortage/surplus?

10. Refer to Figure 6-4. If the government set a price floor at $15, would there be a shortage or surplus, and
how large would be the shortage/surplus?

11. Refer to Figure 6-4. If the government set a price floor at $9, would there be a shortage or surplus, and
how large would be the shortage/surplus?

12. Refer to Figure 6-4. If the government set a price floor at $17, would there be a shortage or surplus, and
how large would be the shortage/surplus?
Scenario 6-1
10
 Suppose that demand in the market for good X is given by the equation

and that supply in the market for good X is given by the equation

13. Refer to Scenario 6-1. What are the equilibrium price and quantity in the market for good X?

14. Refer to Scenario 6-1. If the government set a price ceiling at $8, would there be a shortage or surplus,
and how large would be the shortage/surplus?

15. Refer to Scenario 6-1. If the government set a price ceiling at $12, would there be a shortage or surplus,
and how large would be the shortage/surplus?

16. Refer to Scenario 6-1. If the government set a price floor at $13, would there be a shortage or surplus,
and how large would be the shortage/surplus?

17. Refer to Scenario 6-1. If the government set a price floor at $7, would there be a shortage or surplus,
and how large would be the shortage/surplus?

18. The following table shows the demand and supply schedules in a particular market.

Quantity Quantity
Price Demanded Supplied
$1 8 3
$3 6 6
$5 4 9
$7 2 12
$9 0 15

If the government sets a price floor $2 above the equilibrium price, how many units will be sold in this
market?

11
 Figure 6-5
Price
20

18
S
16

14

12

10

4
D
2

2 4 6 8 10 12 14 16 Quantity

19. Refer to Figure 6-5. Suppose a $3 per-unit tax is imposed on the sellers of this good. What price will
buyers pay for the good after the tax is imposed?

20. Refer to Figure 6-5. Suppose a $3 per-unit tax is imposed on the sellers of this good. How much is the
burden of this tax on the buyers in this market?

21. Refer to Figure 6-5. Suppose a $3 per-unit tax is imposed on the sellers of this good. What is the
effective price that sellers will receive for the good after the tax is imposed?

22. Refer to Figure 6-5. Suppose a $3 per-unit tax is imposed on the sellers of this good. How much is the
burden of this tax on the sellers in this market?

23. Refer to Figure 6-5. Suppose a $4 per-unit tax is imposed on the sellers of this good. How many units
of this good will be sold after the tax is imposed?

24. If the demand curve is more price elastic than the supply curve in a particular market, will the buyers or
the sellers bear a larger burden of a per-unit tax imposed on the market?

25. If the supply curve is more price elastic than the demand curve in a particular market, will the buyers or
the sellers bear a larger burden of a per-unit tax imposed on the market?

12
Chapter 7 Consumers, Producers, and the Efficiency of Markets

1. What do economists call the highest amount a consumer will pay to purchase a good?

2. If John’s willingness to pay for a good is $20 and the price of the good is $15, how much is John’s
consumer surplus from purchasing the good?

Table 7-3
The following table shows the willingness to pay for a good for the only four consumers in a market.

Consumer Willingness to Pay

A $25
B $40
C $15
D $30

3. Refer to Table 7-3. If the price of the good is $20, how many units will be demanded?

4. Refer to Table 7-3. If the price of the good is $20, how much is the total consumer surplus?

Scenario 7-1
Suppose market demand is given by the equation

5. Refer to Scenario 7-1. If the market equilibrium price is $10, how much is total consumer surplus in this
market?

6. Refer to Scenario 7-1. If the market equilibrium price rises from $10 to $15, what is the change in total
consumer surplus in the market?

7. Refer to Scenario 7-1. If the market equilibrium price falls from $10 to $5, what is the change in total
consumer surplus in the market?

8. Refer to Scenario 7-1. If the market equilibrium price falls from $10 to $5, how much additional
consumer surplus do consumers initially in the market at the $10 price receive?

9. Refer to Scenario 7-1. If the market equilibrium price falls from $10 to $5, how much consumer surplus
do consumers entering the market after the price drop receive?

13
 Figure 7-4
P
240

220

200

180

160

140

120

100

80

60

40

20
Demand

5 10 15 20 25 30 35 40 45 50 55 60 Q

10. Refer to Figure 7-4. If the market equilibrium price is $120, how much is total consumer surplus?

11. Refer to Figure 7-4. If the market equilibrium price falls from $120 to $80, how much is the change in
total consumer surplus in the market?

12. Refer to Figure 7-4. If the market equilibrium price falls from $120 to $80, how much is the increase in
consumer surplus to the consumers who were initially in the market at the $120 price?

13. Refer to Figure 7-4. If the market equilibrium price falls from $120 to $80, how much consumer surplus
do consumers entering the market after the price drop receive?

14. Suppose John’s cost for performing some carpentry work is $120. If John is paid $200 for the carpentry
work, what is his producer surplus?

Table 7-4
The following table shows the cost of producing a good for the only four producers in a market.

Producer Cost
W $40
X $30
Y $20
Z $10

15. Refer to Table 7-4. If the market price is $28, which producers will supply units in the market?

16. Refer to Table 7-4. If the market equilibrium price is $28, what is total producer surplus in the market?

14
17. Refer to Table 7-4. If these four producers bid in an auction to supply one unit to a consumer, at what
price will the good be sold?

Figure 7-5
P
50

45 Supply
40

35

30

25

20

15

10

1 2 3 4 5 Q

18. Refer to Figure 7-5. If the market equilibrium price is $25, how much is total producer surplus in this
market?

19. Refer to Figure 7-5. If the market equilibrium price is $35, how much is total producer surplus in this
market?

20. Refer to Figure 7-5. If the market equilibrium price rises from $25 to $35, how much is the increase in
producer surplus to the producers supplying units at the initial $25 price?

21. Refer to Figure 7-5. If the market equilibrium price rises from $25 to $35, how much is the producer
surplus for the producers entering the market after the price increase?

15
 Figure 7-6
P
60

55

50
Supply
45

40

35

30

25

20

15

10

5
Demand

5 10 15 20 25 30 35 40 45 50 55 Q

22. Refer to Figure 7-6. How much are consumer surplus, producer surplus, and total surplus at the market
equilibrium price?

23. Refer to Figure 7-6. At what price will total surplus be maximized in this market?

24. Refer to Figure 7-6. If the government imposed a price floor at $35 in this market, how much is
consumer surplus?

25. Refer to Figure 7-6. If the government imposed a price ceiling at $20 in this market, how much are
consumer surplus, producer surplus, and total surplus?

16
Chapter 8 Application: The Costs of Taxation

Figure 8-3
P
12

11

10
Supply
9

1
Demand

20 40 60 80 100 120 140 160 180 200 220 240 Q

1. Refer to Figure 8-3. What are the equilibrium price and equilibrium quantity in this market?

2. Refer to Figure 8-3. How much is consumer surplus at the market equililbrium?

3. Refer to Figure 8-3. How much is producer surplus at the market equililbrium?

4. Refer to Figure 8-3. How much is total surplus at the market equililbrium?

5. Refer to Figure 8-3. Suppose the government places a $4 tax per unit on this good. What price will
consumers pay for the good after the tax is imposed?

6. Refer to Figure 8-3. Suppose the government places a $4 tax per unit on this good. What price will
sellers receive for the good after the tax is imposed?

7. Refer to Figure 8-3. Suppose the government places a $4 tax per unit on this good. How many units of
this good will be bought and sold after the tax is imposed?

8. Refer to Figure 8-3. Suppose the government places a $4 tax per unit on this good. How much is
consumer surplus after the tax is imposed?

9. Refer to Figure 8-3. Suppose the government places a $4 tax per unit on this good. How much is
producer surplus after the tax is imposed?

10. Refer to Figure 8-3. Suppose the government places a $4 tax per unit on this good. How much tax
revenue is collected after the tax is imposed?

17
11. Refer to Figure 8-3. Suppose the government increases the size of the tax on this good from $4 per unit
to $6 per unit. Will the tax revenue collected from the tax increase, decrease, or stay the same?

12. Refer to Figure 8-3. Suppose the government places a $4 tax per unit on this good. How much is total
surplus after the tax is imposed?

13. Refer to Figure 8-3. Suppose the government places a $4 tax per unit on this good. How much is the
deadweight loss from this tax?

Scenario 8-1

Suppose the market demand and market supply curves are given by the equations:

14. Refer to Scenario 8-1. What are the equilibrium price and equilibrium quantity in this market?

15. Refer to Scenario 8-1. Suppose that a tax of T is placed on buyers so that the demand curve becomes:

What price will sellers receive and what price will buyers pay after the tax is imposed?

16. Refer to Scenario 8-1. Suppose that a tax of T is placed on buyers so that the demand curve becomes:

What quantity will be bought and sold after the tax is imposed?

17. Refer to Scenario 8-1. Suppose that a tax of T is placed on buyers so that the demand curve becomes:

How much tax revenue will be collected after this tax is imposed?

18. Refer to Scenario 8-1. Suppose that a tax of T is placed on buyers so that the demand curve becomes:

What will be the deadweight loss from this tax?

19. Refer to Scenario 8-1. Suppose that a tax of T is placed on buyers so that the demand curve becomes:

18
 If T = 40, what price will buyers pay and what price will sellers receive?

20. Refer to Scenario 8-1. Suppose that a tax of T is placed on buyers so that the demand curve becomes:

If T = 40, how much is the burden of the tax on the buyers and on the sellers?

21. Refer to Scenario 8-1. Suppose that a tax of T is placed on buyers so that the demand curve becomes:

If T = 40, how many units will be bought and sold after the tax is imposed?

22. Refer to Scenario 8-1. Suppose that a tax of T is placed on buyers so that the demand curve becomes:

If T = 40, how much tax revenue will be collected from this tax?

23. Refer to Scenario 8-1. Suppose that a tax of T is placed on buyers so that the demand curve becomes:

If T = 40, how much will be the deadweight loss from this tax?

24. Suppose the demand curve and the supply curve in a market are both linear, and suppose the price
elasticity of supply is 0.5. Will the deadweight loss from a $3 tax per unit be larger if the price elasticity
of demand is 0.3 or if the price elasticity of demand is 0.7?

25. Suppose the demand curve and the supply curve in a market are both linear. If a $2 tax per unit results in
a deadweight loss of $200, how large would be the deadweight loss from a $3 tax per unit?

19
Chapter 13 The Costs of Production

1. Define profit.

2. Consider a small family wheat farm. List some examples of explicit costs of farming.

3. Consider a small family wheat farm. List some examples of implicit costs of farming.

4. Can economic profit ever exceed accounting profit?

Scenario 13-1
Suppose that a small family farm sold its output for $100,000 in a given year. The family spent $25,000
on fuel, $40,000 on seed, fertilizer, and pesticides, and $25,000 on equipment, including maintenance.
The family members could have earned $20,000 working at other occupations.

5. Refer to Scenario 13-1. What is the accounting profit for the family farm?

6. Refer to Scenario 13-1. What is the economic profit for the family farm?

Table 13-2
Labor Output Marginal Variable Fixed
Product Cost Cost
0 0 -- $0 $10
1 200 200 $20 $10
2 350 $40 $10
3 450 $60 $10
4 50 $80 $10
5 25 $100 $10
6 530 $120 $10

7. Refer to Table 13-2. What is the marginal product of the third worker?

8. Refer to Table 13-2. What is the total output of four workers?

9. Refer to Table 13-2. What is the total output of five workers?

10. Refer to Table 13-2. What is the marginal product of the sixth worker?

11. Refer to Table 13-2. What is the shape of the firm’s total-cost curve?

12. Refer to Table 13-2. What is the average total cost of producing 525 units of output?

13. Refer to Table 13-2. What is the average variable cost of producing 500 units of output?

14. Refer to Table 13-2. What is the average fixed cost of producing 450 units of output?

20
15. Refer to Table 13-2. What is the shape of the average-fixed-cost curve?

16. Refer to Table 13-2. What is the shape of the average-variable-cost curve?

17. Refer to Table 13-2. What is the shape of the average-total-cost curve?

18. Refer to Table 13-2. What is the shape of the marginal-cost curve?

19. Describe the relationship between average total cost and marginal cost.

20. Describe the relationship between average variable cost and marginal cost.

21. Describe the general shape of the average-fixed-cost curve.

22. Describe the relationship between average variable cost and average total cost. How are the general
shapes of the AVC and ATC curves related?

23. Describe the difference between the short run and the long run.

21