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True and False: Basic Economic Decision

True/False

1. The basic economic decision rule is to undertake an action only when the marginal benefit of an action exceeds its marginal cost.

2. If caviar prices doubled, while sales of caviar rose 20 percent, this example would definitely refute the law of demand.

3. In 1998, Hurricane Mitch not only destroyed homes in Central America, but also damaged around 40 percent of the bean crop. The damage of this crop is best represented by a shift to the right in the supply curve.

4. If the price of a good goes up by 5 percent and the quantity demanded falls by 15 percent, the price elasticity of demand is 1/3.

5. Jane is maximizing utility when consuming two goods, coke and pizza. If the marginal utility from the last piece of pizza Jane consumed is 100 and the marginal utility of the last coke consumed is 75 and pizza cost $1.00 apiece, a coke must cost 75 cents.

6. The law of diminishing marginal productivity states that as more and more of a variable input is added to an existing fixed input, the additional output one gets from that additional input is going to rise.

7. An economically efficient method of production is a method that produces a given level of output at the lowest possible cost.

8. The supply of labor is generally considered to be upward sloping because the opportunity cost of work will increase as wages increase.

9. All real-world Lorenz curves are above the 45-degree line because income is always distributed unequally in the real world.

10. Income inequality decreased in the United States from 1929 to 1970 and increased thereafter.

11. Private property rights are not essential to market economies.

12. The economic well being of the U.S. is mostly attributed to the use of markets and the institutions supporting the development of such markets.

13. One of the conditions for a perfect competitive market to exist is that there must be a large number of firms producing identical products.

14. A monopoly can exist when competitors other than the one currently producing cannot enter the market.

15. Firms facing a great deal of competitive pressure tend to be the least efficient.

16. The Clayton Antitrust Act declared that tie-in contracts, in which buyers agreed to deal exclusively with one seller and not to buy from competitors, were legal.

17. An excise tax on alcohol causes the supply of alcohol to decrease and the price of alcohol to increase.

18. Even though the seller pays a tax, buyers and sellers usually share the full amount of the tax.

19. When government uses the judgment by structure criterion, a firm is considered a monopoly if it controls a significant segment of the market.

20. The Sherman Antitrust Act explicitly defined the conditions under which a firm would be judged guilty of monopolistic behavior.

21. Economists generally prefer incentive-based programs to explicit regulation because incentive-based programs are more efficient.

22. According to the principle of rational choice, a consumer should spend money on those goods that give the most marginal utility.

Solution Preview

True/False

1. The basic economic decision rule is to undertake an action only when the marginal benefit of an action exceeds its marginal cost. False.
Only when marginal benefit equals marginal cost.

2. If caviar prices doubled, while sales of caviar rose 20 percent, this example would definitely refute the law of demand. False.
There could have been a change in demand.

3. In 1998, Hurricane Mitch not only destroyed homes in Central America, but also damaged around 40 percent of the bean crop. The damage of this crop is best represented by a shift to the right in the supply curve. False
The shift is to the left. The supply has been reduced.

4. If the price of a good goes up by 5 percent and the quantity demanded falls by 15 percent, the price elasticity of demand is 1/3. False.
The price elasticity of demand is -3.

5. Jane is maximizing utility when consuming two goods, coke and pizza. If the marginal utility from ...

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