Answers to Quizzes and Final Exam

Answers to Quizzes

Chapter 1

1. False.	Economic resources include land (actual land or other natural resources, such as energy or timber), labor (people’s work), capital (tools and other things that are produced and used to produce goods and services), and entrepreneurship/technology (the know-how to combine these resources to produce goods and services). Money is not actually an economic resource; it is merely used to facilitate the exchange of these resources.
2. True.	Opportunity cost, or the cost of the next best alternative or what is given up to get something, may be different from the monetary price. For instance, if you had to wait in line for five hours to buy a Ferb, the true cost of a Ferb would be $100 plus the value of the time spent waiting.
3. False.	Rational agents think marginally. If a producer is thinking rationally, he will focus on the marginal cost of a good, rather than its average cost.
4. False.	Both of these are examples of microeconomics. Microeconomics focuses on the allocation of scarce resources by individual agents (individual people, households, and firms). Macroeconomics focuses on entire economies.
5. False.	Recall that a rational decision maker thinks about the marginal benefit in relation to the marginal cost of the next unit. If the price of the next purplett is $9 (the marginal cost to the consumer) and he or she will receive $10 in marginal benefit from purchasing it, the consumer will purchase it.
6. B.	Ceteris paribus is Latin for “with other things the same.” Economists make the ceteris paribus assumption because many things may be changing at the same time, but when we model something, we are trying to isolate what the effect of a particular thing is, so we assume that nothing else is changing at the same time.
7. D.	Recall that a rational decision maker will take an action if the marginal benefit exceeds the marginal cost. The total cost of producing 36 units is $45 and the total cost of producing 35 units is $40, so the marginal cost of producing the thirty-sixth unit is . Therefore, a rational decision maker will sell the thirty-sixth T-shirt only if she can get at least $5 for it.
8. B.	Capital is something that is made (built or produced) and that is used to produce other things, such as a factory that is built and used to produce other things. Money that is raised to start a business is what is used to purchase capital, labor, and land/natural resources. Electricity and other forms of energy are natural resources.
9. A.	A rational consumer can make mistakes if the information that she has is inaccurate. However, consumers don’t intentionally make themselves worse off.
10. C.	Society is faced with scarcity because we have unlimited economic wants, yet we have only a limited quantity of resources that we can use to satisfy those wants.

Chapter 2

1. False.	The law of diminishing marginal utility says that as you consume more and more of a good, you get less and less utility from each additional unit. While you may be better off with each additional unit of consumption (total utility increases), you are not as much better off from that last unit of consumption as you were from the previous unit (marginal utility decreases).
2. False.	Utility is the way in which economists measure the usefulness or happiness that consumers get from consumption. However, it is measured in terms of a fictional unit, “utils,” not dollars (or any other currency).
3. True.	The consumer is getting marginal utils per dollar from Gams, but is getting marginal utils per dollar from Ferbs. According to the utility maximization rule, the consumer should consume at the point all marginal utilities per dollar are equal. If the consumer increases his consumption of Ferbs, the marginal utility from consuming Ferbs will decrease.
4. True.	If the marginal utility of the next unit is negative, that unit actually reduces total utility. This unit should definitely not be consumed!
5. C.	The marginal utility of the fourth chicken liver is the difference between the total utility from four chicken livers and the total utility from three chicken livers. Thus the marginal utility of the fourth chicken liver is utils.
6. A.	To maximize utility across two goods, the marginal utility per dollar must be the same for both soda and chicken livers. We are told that marginal utility per dollar for sodas is six. The table informs us that the marginal utility of the third chicken liver is 6 utils. The only way that Sissy can be maximizing utility is if the price of fried chicken livers is $1.
7. A.	The marginal utility per dollar for doughnuts is 3 (9 utils/$3), and the marginal utility per dollar for coffee is 2.5 (5 utils/$2). Since Jamaal is already spending all of his income, he can increase his total utility by spending more of his income on the good that provides the greater “bang for the buck.”
8. D.	Calculating, 10 units of good X would use of the budget, and 12 units of good Y would use the remaining of the budget.
9. B.	Calculating, 6 units of good X would use of the budget, and 25 units of good Y would use . This would overspend the budget by $10.
10. C.	If Grace’s total utility rises by 5 utils for each cupcake she eats and never diminishes, the marginal utility is constant (drawn horizontal) at 5 utils.

Chapter 3

1. True.	The theory of utility-maximizing behavior presumes that marginal utility diminishes with more consumption. As the price of a good falls, this allows the consumer to increase utility by consuming more of the good along the downward-sloping marginal utility curve. This gives us the basis for the downward-sloping demand curve.
2. False.	A lower price of oranges will increase quantity demanded along the demand curve, but will not shift the demand curve. The demand for oranges will shift only if one of the determinants changes.
3. False.	If a good is normal, an increase in income causes an increase in demand. Thus, the income elasticity for a normal good will be a positive number.
4. True.	Complementary goods are those that consumers enjoy together. When the price of one increases, it makes it difficult for consumers to afford both of them, thus decreasing the demand for the complementary good.
5. C.	For normal goods, income and demand move in the same direction. When one increases, the other increases.
6. A.	A careful inspection of the table allows you to determine what Melanie will do when the price falls from $3 to $1.
7. C.	Using the midpoint formula: And any value greater than 1 is elastic.
8. C.	These are complementary goods, so a lower price for one good causes an increase in the demand for the other.
9. A.	Normal goods will have an income elasticity that is positive. If the response to a change in income is inelastic, it will be less than 1.
10. B.	If Mr. Pietro lowers the price by 1 percent, he will see a 3 percent increase in pizzas sold. This upward impact on total revenue will more than offset the downward impact of the lower price, and total revenue will rise.

Chapter 4

1. False.	Even if marginal product is falling, so long as the marginal product is still positive, the contribution of the next unit of labor adds to the total product.
2. True.	Only in the short run are there fixed inputs because the short run is a period of time that is too brief to change a certain input. This fixed input is usually assumed to be capital.
3. True.	Because there is a fixed input in the short run, adding more and more units of a variable input (like labor) causes the marginal product to fall.
4. False.	By the very nature of fixed costs in the short run, they neither rise nor fall as more output is produced.
5. True.	Marginal cost and marginal product of labor are inversely related.
6. D.	If the marginal product is rising, it must be positive, and therefore total product must also be rising. In fact, total product would be rising at an increasing rate.
7. A.	The marginal product for the second unit of labor is 8 units of output, but the marginal product for the third unit of labor is 7 units of output.
8. C.	Average product is calculated by dividing total output by the units of labor employed.
9. B.	Marginal cost and marginal product are inversely related. Choice D is not always true because the marginal product can be falling while average product is still rising. This occurs in the range where marginal product still exceeds average product.
10. D.	The rent will have to be paid no matter how much business Haley has during the month. All the other choices describe costs that would rise if she were producing more units of output, and would fall if she were producing fewer units of output.

Chapter 5

1. True.	Diminishing marginal product leads to a marginal cost curve with a positive slope. This upward-sloping marginal cost curve is behind the upward-sloping supply curve.
2. False.	The law of supply predicts that the price of corn chips and the quantity of chips supplied will move in the same direction. If one falls, the other falls.
3. True.	This is precisely what an increase (or rightward shift) in supply means.
4. False.	When the price of a product rises, the producer may not be able to increase the quantity supplied by a large amount in the short run. However, in the long run, producers have much more flexibility to adjust to the higher price, and thus the response will be more elastic in the long run.
5.	Use the midpoint formula: Note that when you use the midpoint formula, you are actually finding the price elasticity of supply at the price midway between the two points on your curve.
6.	When a production input becomes less expensive, the supply of autos shifts to the right, as shown in Figure A5-1.
FIGURE A5-1
7. C.	When the price of TVs increases, the supply curve will not shift; there will only be an increase in the quantity of TVs supplied along the supply curve.
8. B.	Since apples are a critical input to apple pies, more expensive apples make it more costly and difficult to supply the pies. Thus the supply curve shifts to the left.
9. A.	The shape of the supply curve comes from the shape of the marginal cost curve. If the marginal cost curve is constant at $80 for each textbook, then the supply curve is also horizontal at $80.
10. C.	If the cookie producers cannot acquire a critical input like the chocolate chips, the supply response to a higher price will be very inelastic.

Chapter 6

1. True.	When the demand curve shifts, it changes both the price and the quantity in the same direction. So a decrease in demand will cause both price and quantity to decrease. This effect can be seen in a graph like Figure 6-5 earlier in the chapter.
2. False.	A price ceiling must be set below the equilibrium price if it is to be effective. If the ceiling is set above the market price, market forces will continue to operate, and there will be no surplus or shortage.
3. True.	Total surplus is maximized when the competitive market is in equilibrium. Thus, any sort of price control will necessarily decrease the total surplus.
4. D.	Leather is a key input in the production of basketballs, so the supply curve will shift to the left. Such a shift will cause the price to rise and the quantity to fall.
5. A.	A rightward shift of the supply curve is the only choice that will produce both a lower price of coffee and a higher quantity in the market.
6. B.	The area of consumer surplus is the triangle below the demand curve and above the price. This area is equal to
7. C.	A price floor creates a surplus in the amount of the difference between the units supplied (20) and the units demanded (12). The deadweight loss is the area of a triangle below the demand curve and above the supply curve and between the new quantity of 12 and the equilibrium quantity of 16 units. This area is equal to
8. D.	If both the price and the quantity are falling, the only shift that will produce this outcome is a decrease in demand.
9. A.	A perfectly inelastic demand curve is vertical. When the supply curve shifts upward by $T, the new equilibrium price will be exactly $T higher.
10. D.	All of these policies will reduce the quantity of chocolate produced in the market away from the equilibrium quantity. When this occurs, deadweight loss is the result.

TIP When in doubt, graph it out. If you find yourself in the middle of an exam or trying to complete a homework assignment, do a quick sketch of a supply and demand graph so that you can visualize the shifting curves and the impact on price and quantity.

Chapter 7

1. True.	Economic profit subtracts opportunity costs from accounting profit, so economic profit is smaller than accounting profit. Therefore, if economic profit is zero, accounting profit must be positive.
2. False.	The firm shuts down if the price falls below average variable cost, not when it falls below average total cost.
3. False.	Perfectly competitive firms are price takers and must accept the market price and use it to maximize profit.
4. True.	In the short run, it is always true that , but only in the long run is it also true that we can include ATC in this equalwwity.
5. B.	This is a key assumption of perfect competition; it ensures that economic profit will be driven to zero in the long run.
6. C.	The absence of entry barriers ensures that short-run profits will be driven to zero by the entry of new firms in the long run.
7. A.	Josie is experiencing the shutdown condition. Every bushel that she produces brings only $50 of revenue but costs an additional $60 to produce.
8. D.	At the price P1, at Q4 units of output. Because P1 lies above the ATC curve, there will be positive profits in the short run.
9. B.	The long-run price is where profits are zero, and this occurs at the minimum of the ATC curve.
10. D.	The shutdown point is the minimum of the AVC curve, so prices below P4 would prompt the shutdown decision.

Chapter 8

1. True.	Because the marginal revenue lies below the price, the profit-maximizing output is less than it would be under perfect competition. The price set by the monopolist is therefore going to be higher than the price under perfect competition.
2. False.	A very important characteristic of monopoly is the presence of barriers to entry. Because new firms cannot enter the market, the short-run profits last into the long run.
3. False.	In perfect competition, the price is equal to the marginal revenue. In monopoly, price exceeds marginal revenue. In neither case does marginal revenue exceed price.
4. False.	If price equals average total cost, profit will be eliminated, but deadweight loss will remain.
5. D.	Because there is only one seller in the market, demand for that firm’s product is the entire market demand for the good or service.
6. A.	Joe and Susan are not buying the same product at different prices. Susan is paying a higher price because she has chosen a different (larger) apartment.
7. A.	Whenever price exceeds marginal cost, deadweight loss is the result.
8.	The graph should look something like Figure A8-1.
FIGURE A8-1
9.	Unless the government regulated the monopolist to produce output greater than Qm, there would be no impact on the deadweight loss. The government would simply transfer the area of profit to the consumers, increasing consumer surplus.
10.	The completed table should appear as Table A8-1. at an output of 2 units. The price needed to sell 2 units is $6. Profit is calculated as 2 units .
TABLE A8-1

Chapter 9

1. True.	As the name suggests, monopolistic competition shares the characteristics and outcomes of both perfect competition and monopoly.
2. False.	It is true that , but price is set higher, at the demand curve. In the long run, it is true that .
3. False.	There are barriers in oligopoly, and those facilitate long-run economic profits.
4. False.	The Nash equilibrium means that each firm earns the highest payoff possible, given the rival’s choice.
5. C.	This is a key assumption, and implication, of monopolistic competition.
6. A.	The long-run adjustment to short-run losses would first involve the exit of some firms. Demand for the remaining firms would begin to increase, increasing the price along with it. When all firms are breaking even, exit will stop.
7. C.	Some oligopolies, like the computer and beer industries, have differentiated products. Others, like the oil and gas industries, have identical products.
8. B.	Coke does not have a dominant strategy, as its best choice depends upon what Pepsi is doing. Pepsi will always choose PL because no matter what choice is made by Coke, choosing PL always produces the highest payoff.
9. C.	Pepsi has a dominant strategy to always choose PL. Because Coke knows that Pepsi will choose PL, Coke will choose PH to earn the highest payoff.
10. D.	This is really the essence of mutual interdependence.

Chapter 10

1. False.	A downward-sloping labor supply function can happen if the substitution effect of a wage increase is smaller than the income effect of the wage increase. If this is the case, a consumer has a much stronger desire to consume more hours of leisure, and this reduces the number of hours of work supplied.
2. True.	When we compute , we assume that the price is constant and is given by the competitive product market. Thus it is a diminishing marginal product of labor curve that provides the downward-sloping VMPL curve.
3. True.	The VMPL curve serves as the firm’s labor demand curve. At any wage, if the VMPL curve shifts to the right, profits will rise if more units of labor are employed.
4. True.	When the demand for labor shifts to the right, wage and employment both rise. When the supply of labor shifts to the left, wage rises and employment falls. So both shifts cause the wage to rise.
5. False.	The least-cost combination occurs when the marginal products per dollar are equal. This statement would be true only if both factor prices were equal to $1.
6. A.	The falling wage causes a substitution effect that predicts less labor and more leisure. The falling wage also creates an income effect that predicts less leisure and more labor. So if Eric is to decrease his labor supply at a lower wage, it must be true that the income effect is smaller than the substitution effect.
7. C.	The so the sixth worker has .
8. C.	The firm hires where . Since the wage is $30, we look for the , and this happens at the third worker.
9. B.	The demand for fast food workers falls if the equipment and workers are substitutes. The falling demand will reduce both wage and employment of these workers.
10. D.	Stanley has already found the combination of labor and capital where the marginal products per dollar are equal.

Chapter 11

1. False.	Microeconomics is the study of households, firms, and individuals. Macroeconomics is the study of entire economies as a whole.
2. False.	Consumption makes up the largest percentage of U.S. GDP.
3. True.	The most dramatic changes in GDP occur in investment spending.
4. False.	Gross national product is an indication of what is produced by resources owned by a particular country, whereas GDP is what is produced within a country’s borders.
5. False.	Gross domestic product counts only final goods produced and sold within a country. It doesn’t count used goods or goods sold outside of traditional markets. It also doesn’t include things like produce from home gardens that is grown and consumed by households without ever being sold.
6.	The grogs are counted in 2009 GDP as additions to inventory. Therefore, this action would add $200 in inventory to 2009 GDP. The grogs were sold in 2010, so inventory would be reduced by the same $200, and $300 would instead appear in consumption, for a total change of +$100 in 2010 GDP. Note that this means that GDP includes the value added from the service of selling the grogs.
7.	Durable goods: C New homes: I Used homes: not counted in GDP Inventories: I Nondurable goods: C Government purchases: G Imports: M Exports: X
9.	Used houses aren’t counted. The goal of GDP is to capture new production of goods and services. These used homes were already produced in another year. Counting them in this year’s GDP would overstate the production this year and double-count them.
10.	Maxistan is a net exporter, because it exports more goods than it imports. This means that its net exports add to GDP, rather than reduce GDP.

Chapter 12

1. C.	To be counted as unemployed, you must be not working even a single hour, and you must be actively looking for work.
2. A.	The efficiency wage theory states that firms pay an efficiency wage, a wage that is higher than the market-clearing wage, in order to generate greater work effort in their employees.
3. D.	The labor force includes only civilian working-age people who are not institutionalized.
4. D.	When people stop looking for work, they are no longer counted as being in the labor force. However, they are also no longer counted as being unemployed, so the official unemployment rate decreases.
5. B.	Frictional unemployment occurs when job placement is costly. If we eliminated frictional unemployment, we would no longer be placing people in jobs that were not necessarily appropriate for them. This would be more efficient for the nation’s economy.
6.
TABLE A12-1
7.	Totals: Civilian, noninstitutionalized population = 20 Civilian labor force = 8 Unemployed = 2 Employed = 6
8.	Labor force participation rate = LF/civilian working-age population
9.	Unemployment rate = 2/8 = 25%
10.	Note that if we counted Jack, who is a person that economists call a discouraged worker, then our labor force would be 9 and there would be 3 unemployed, so our unemployment rate would be percent. This illustrates the discouraged worker effect. So if Jack suddenly got more optimistic about his job prospects and started to look for work, we would see a spike in the unemployment rate. If economists were looking only at the unemployment rate, they might draw the opposite conclusion—that all of a sudden jobs prospects were worse! However, if we also noticed that when Jack reenters the workforce, the LFPR also changes (now you would calculate percent), we get a better, more complete picture of the labor market.

Chapter 13

1. False.	Deflation is the opposite of inflation, but it is associated with falling wages, weak spending, and ultimately severe recessions and depressions.
2. False.	The CPI measures the prices that are paid by a typical household for the goods and services that are typically bought. For instance, a typical urban household is not likely to purchase a farm tractor, so increases in the price of tractors would not be reflected in the CPI.
3. False.	This works only if you are comparing the rate of inflation between a year and the base year. For any other two years, you subtract the new CPI from the old CPI and divide that number by the old CPI.
4. True.	If the base year changes, the CPI for any given year will also change. However, the rate of inflation will not change.
5. True.	If the rate of inflation was underestimated, the real interest rate will be lower than expected. This means that the lender will get a lower return then it anticipated and that the real value of the borrower’s loan has decreased.
6.	See Table A13-1.
7.	See Table A13-1.
8.	See Table A13-1.
TABLE A13-1
9.	5 percent. The natural rate of unemployment (NAIRU) is found at the vertical long-run Phillips curve. This is the rate of unemployment that occurs once all expectations have had time to adjust to the actual inflation in the economy.
10.	4 percent inflation and 4 percent unemployment. When the nation experiences unexpected inflation, the SRPC shifts upward by the amount of unexpected inflation.

Chapter 14

1. False.	Although most economies have seen an upward trend in output, which occurs when the LRAS curve shifts to the right, it is entirely possible for an economy to experience a decrease in LRAS. For instance, an economy may not invest a sufficient amount to maintain its stock of capital, or a natural disaster or war may destroy a country’s resources.
2. True.	Inflation occurs when AD shifts to the right. Increased consumer confidence shifts AD to the right.
3. False.	Long-run equilibrium is associated with an employment rate equal to the NAIRU, or natural rate of unemployment.
4. False.	It is possible for an economy to produce above the full potential output. However, when it does so, it is straining its resources. For instance, if the unemployment rate is very low and firms have difficulty finding workers, they may have to increase wages to their workers in the form of overtime.
5. False.	Though there is no specific “rule” for defining a recession, a recession is broadly defined as two or more quarters (that is, six months or more) of declining output.
6. D.	The bottom point in the business cycle is the trough. The expansion is when output is increasing, the peak is when expansion hits its maximum, and contraction is when output is falling.
7. C.	Investment is a component of aggregate demand. Whenever a component of AD increases, AD increases as well. Choices A and D would cause SRAS to decrease, and choice B would cause AD to decrease.
8. A.	Each of the others is a potential reason that the AD curve is downward-sloping.
9. B.	Improvement in education would increase the quality of the labor force, which would affect the LRAS. Each of the others would have an impact on short-run variables only.
10. D.	Each of the others would cause a recessionary gap, as they would all decrease SRAS.

Chapter 15

1. True.	If something failed at performing one of the functions, it would end up failing at performing the other functions. For instance, if something could not hold a store of value for long enough, people would be unwilling to accept it as a medium of exchange because they would have to rush to spend it themselves before it lost its value.
2. False.	Fiat money has no intrinsic value, yet most money used is fiat money (such as paper dollars).
3. True.	As long as we believe that something can be used to perform all three functions of money, it is money. In essence, money is a social contract.
4. True.	This is because the things that are included in M2 cannot be used directly to purchase goods and services. They can, however, be converted to money with relative ease, so they are nearly money.
5. False.	If the reserve requirement is 5 percent, the money multiplier is 1/0.05 = 20. This means that an injection of $1,000 will lead to an increase in the money supply of $20,000 at most. The key here is whether or not banks keep excess reserves and people deposit money in the bank.
6. False.	The Federal Reserve sets interest-rate targets, but it achieves those targets by setting the money supply.
7. False.	The Federal Reserve was created in response to economic and banking crises in the late 1800s and early 1900s.
8. False.	According to liquidity preference theory, people have a preference about the amount of liquidity (that is, cash) that they have on hand that will change depending on the interest rate. This means that the interest rate will adjust to changes in either the supply of or the demand for money.
9. False.	If all of a sudden debit cards were made illegal, people would need to keep more cash on hand rather than less, which means that the demand for money would increase.
10. False.	If the Federal Reserve increased the money supply, the money supply curve would shift out, which would lead to a new lower interest rate.

Chapter 16

1. C.	Consumption makes up the largest proportion of GDP, but during recessions and expansions, investment changes by a much larger percentage, which eventually affects consumption.
2. B.	The crowding-out effect occurs when the government’s borrowing drives up interest rates.
3. A.	The classical theory assumes that prices will adjust and output will return to full employment.
4. D.	All of these concepts are associated with Keynesian theory.
5. B.	The multiplier , which is the same as 1/MPS. The multiplier here is 2.5. However, the actual increase in GDP will depend on the crowding-out effect.
FIGURE A16-1 Refer to Figure A16-1 for the answers to questions 6 through 8.
6. B.	An increase in the price of inputs, such as labor, would cause the SRAS to shift, as illustrated by a movement from A to B.
7. C.	A movement from point C to point B represents a decrease in output as a result of a decrease in aggregate demand. To increase aggregate demand, one could engage in expansionary monetary policy, which would mean buying bonds to increase the money supply.
8. B.	A movement from point A to point B represents stagflation. Expansionary fiscal policy will increase the aggregate demand curve, which will result in a return to full employment but will embed inflation in the economy.
9.	I. See Figure A16-2.
FIGURE A16-2
	II. I would pursue expansionary monetary policy. I would achieve this by buying bonds to increase the money supply, which would lower interest rates and increase aggregate demand.
	III. Figure A16-3 shows the effect of my action on the appropriate market.
FIGURE A16-3
	IV. Figure A16-4 shows the effect of my action on the AD-AS model.
FIGURE A16-4
	V. The liquidity trap. If interest rates are already at zero or close to it, monetary policy cannot stimulate investment and aggregate demand. See Figure A16.5.
FIGURE A16-5
10.	I. Figure A16.6 shows the current situation in Ema.
FIGURE A16-6
	II. An increase in the cost of production inputs, such as land, labor, and capital.
	.
	IV. Fiscal policy.
	V. The impact of expansionary fiscal policy is seen in Figure A16-7 as an increase in aggregate demand from AD0 to AD1. Unemployment will decrease.
FIGURE A16-7

Chapter 17

1. True.	This is precisely the benefit of trade based on comparative advantage.
2. False.	Mutually beneficial trade is based upon comparative advantage, not absolute advantage. Even large nations can benefit from trade because the large nation will be able to focus on producing the goods that it can make at the lowest opportunity cost.
3. False.	Both tariffs and quotas increase the price of the product. A tariff does it by taxing the imported products. The quota does it by reducing the quantity supplied by the foreign suppliers.
4. False.	A currency can appreciate if either the demand for it increases or the supply of it decreases.
5. True.	A trade surplus exists if exports exceed imports, and a trade deficit exists if the imports exceed the imports.
6. A.	Spain can produce more of both goods, so it has an absolute advantage.
7. C.	For Spain, the opportunity cost of each good is 1 unit of the other. For Portugal, the opportunity cost of one unit of cheese is 1/2 unit of wine. This means that Portugal has a comparative advantage in cheese, so it will trade cheese to Spain in exchange for wine.
8. D.	Because interest rates are rising in the United States, Japanese investors will increase their demand for U.S. dollars so that they can purchase financial assets. This increase in the demand for dollars is matched with an increased supply of yen. The price of the dollar rises against the yen.
9. B.	Americans will need to supply more dollars to increase their demand for the quid. This will lead the quid to appreciate and the dollar to depreciate.
10. B.	Consumers lose some surplus when the price rises after trade restrictions are imposed.

Chapter 18

1. False.	Cheeseburgers are a private good, and free riding is a problem only for public goods. Free riders enjoy the benefits of something without paying for it. Because public goods are nonexcludable, they suffer from this problem.
2. True.	Among the many positive externalities created by education, when more children receive an education, this improves the quality and productivity of the future workforce. These more productive workers will earn more money and pay higher taxes, start successful businesses, and employ more people. All of these benefits spill over to the rest of society and are justly subsidized by the government.
3. False.	Both create market failures, but in different ways. A negative externality causes the market to produce too much of a bad thing. A positive externality causes the market to produce too little of a good thing.
4. False.	Command-and-control policies can reduce pollution, but at a much higher cost than other policies, such as emissions taxes. If we are going to achieve a cleaner environment, economists prefer to do so at the lowest possible cost.
5. True.	At the market equilibrium, the . But with a positive externality, there are spillover benefits to society, so the .
6. D.	The fruits of the research (a cure for a disease, maybe) benefit everybody, even those who do not ever contract that disease. And if the cure is used for one person, it can also be used for another person. Scientific knowledge is nonrival and nonexcludable.
7. A.	At the market equilibrium, the . With a negative externality, there are spillover costs to society, so the .
8. B.	When a market produces a negative externality like pollution, the market quantity of the good (electricity in this case) exceeds the socially efficient quantity, so the last thing we should do is make it easier to consume or produce that good. A subsidy would worsen the situation.
9. C.	When Figure 18-11 shows a MSC curve that lies above the MPC curve, it’s a clear indication that a negative externality exists in the market for a private good.
10. D.	The unregulated market will come to equilibrium where the curve intersects the demand curve.

Chapter 19

1. True.	Healthcare is second behind government.
2. False.	The dollar in income will be taxed, and therefore the actual worth of an additional dollar in income will depend on the marginal tax rate. A dollar in health insurance benefits, however, will be worth a dollar because these benefits are not taxed.
3. False.	The largest number of Americans get health insurance through their employer, meaning that most people with health insurance obtain it outside of an insurance market.
4. False.	The U.S. healthcare system is a mix of private and public financing mechanisms.
5. False.	Healthcare violates many of the conditions of a competitive market, including the fact that there are barriers to entry, imperfect information, and uncertainty.
6. True.	Moral hazard results from insulation against the full financial impact of a loss. If people paid entirely out of pocket, there would be no opportunity for moral hazard.
7. False.	This should be the other way around. Insurance mandates solve the problem of adverse selection, but could make moral hazard a bigger problem.
8. False.	Risk premiums reflect the amount that individuals are willing to pay to avoid the potential of a loss. Actuarially fair premiums accurately reflect the probability of a loss. Thus the total premium that a person is willing to pay for insurance is Total willingness to pay = risk premium + actuarially fair premium.
9. False.	Healthcare is rationed based on price if one is not insured and by policies of insurance companies such as coverage limits, provider limits, and cost sharing if one is insured.
10. True.	Coinsurance and other forms of cost sharing return some price sensitivity to the consumption decision.

Chapter 20

1. False.	A book report summarizes existing knowledge, whereas economics research creates new knowledge.
2. False.	The sources listed are secondary sources; they can be used to get ideas, but they should not be used in a literature review.
3. False.	Collecting data is just a step. Analyzing data based on a research question would be research.
4. False.	Many research questions can be answered using existing data that have already been collected.
5. True.	The different stages in the research process can take considerable amounts of time.
6. False.	A research question should be a single, answerable question.
7. False.	A published finding may be modified or challenged.
8. False.	The goal of economic research is to build the body of economic knowledge.
9. False.	It is the other way around.
10. True.	Economic research tests a hypothesis and attempts to control for changes in factors outside the factor of interest.

Answers to Final Exam

1. B.	A nation’s land resource is more than just the area of the nation’s territory; it also includes natural resources such as timber harvested from the land, minerals mined from below the land, and fish and shellfish that are caught from the offshore waters. Food is not one of the four economic resources (land, labor, capital, and entrepreneurship/technology).
2. A.	If Kelly studies for two hours, the opportunity cost is the most valuable thing that she gave up in order to study. She couldn’t both work as a babysitter and work in the campus library, so the most valuable thing she gave up is 2 hours of babysitting at $10 per hour.
3. C.	A consumer must decide whether the additional (or marginal) benefit received from that activity is greater than the additional (or marginal) cost incurred from the activity. When the marginal benefit is weighed against the marginal cost, the consumer is engaged in marginal analysis.
4. D.	Macroeconomic topics are centered on the national or international economy. The Ford factory in Louisville and the Motorola product are both microeconomic topics because they discuss one producer of cars and one producer of cell phones. The market for gasoline is a microeconomic topic because it discusses the price of a single product. The nation’s unemployment rate is a macroeconomic topic.
5. C.	Each soda has a price, or marginal cost, of $1.50. Since Sherman will receive $3 of marginal benefit from the third soda, he should buy it. He will not buy the fourth soda because the marginal benefit of $1 falls below the marginal cost. Adding a new column to the table and adding the marginal cost of each soda is a useful way to solve this problem.
6. A.	The equation for the budget constraint states that income (I) is equal to the total spending on good plus the total spending on good . The equation given for Josh’s budget constraint, , tells us that the price of a can of soup is $4. Thus, with $100 to spend, he could buy at most 25 cans of soup.
7. D.	For a combination to lie on the budget constraint, it must add up to $100. At $4 per can, 10 cans of soup amount to $40 of Josh’s income. At $20 per video game, 3 games add up to the remaining $60 of income.
8. B.	Total utility from consuming 3 slices of pizza is the sum of the marginal utility from the first slice (18 utils), the second slice (15 more utils), and the third slice (12 more utils). Adding a column of total utility and doing a running total for each row is a useful way to solve this problem.
9. C.	If there is no price paid for a slice of pizza, the consumer will stop eating pizza at the point where the marginal utility is equal to zero. Because marginal utility declines, the eighth slice of pizza will provide negative marginal utility, which would lower the consumer’s total utility. Even though the seventh slice provides zero additional utility, the important point is that it will not reduce his utility.
10. C.	A consumer maximizes utility when the marginal utility per dollar is equal for all goods. In this case, the ratio (marginal utilitycoffee)/pricecoffee must equal (marginal utilitybagels)/pricebagels. The marginal utility per dollar is equal to 5 for both goods, so Brody has already found his utility-maximizing combination of coffee and bagels.
11. C.	Cars and trucks are complementary goods with gasoline. When the price of these vehicles goes up, fewer cars and trucks are purchased. And when fewer vehicles are purchased, the demand for gasoline to power them also falls. Choice A is incorrect because a higher price of gasoline does not cause the entire demand for gasoline to fall, it causes only a decrease in quantity demanded. This would be seen in a graph as an upward movement along a fixed demand curve.
12. A.	The law of demand states that, all else equal, when the price of a good rises, fewer units of that good will be demanded. When Stan reduces his driving in the face of rising gasoline prices, he is exhibiting the law of demand.
13. B.	The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. We can use the following formula, with the information that we know, to solve for the component that is unknown: Multiplying 1.5 by 5 percent gives us the answer of 7.5 percent.
14. D.	The cross-price elasticity of demand for peas is equal to the percentage change in quantity of peas demanded divided by the percentage change in the price of carrots. If carrots increase in price and the quantity of peas demanded increases, they must be substitutes. Dividing 4 percent by 2 percent gives us the cross-price elasticity of 2.
15. A.	Total revenue is equal to price times quantity demanded. When the price falls, we know that quantity demanded will rise. For total revenue to rise after a price decrease, it must be the case that quantity demanded increased by a greater degree. This tells us that the demand for laptops is price-elastic.
16. D.	A fixed input is a short-run input that does not change when output changes. For example, when more pizzas are made, more tomato sauce, more labor, and more electricity are needed. However, the size of the kitchen and dining room cannot be changed to sell more pizzas in the short run.
17. B.	Total costs are the sum of fixed costs and variable costs: The variable cost of producing 0 units, TVC(0), will always equal zero, so the total fixed cost is the only cost that is paid when zero units of output are produced. Thus the total fixed cost of $100 is the same cost at zero units as it is at 36 units of output.
18. B.	Marginal cost is the change in total cost divided by the change in output. So when output rises from 8 units to 18 units, marginal cost is . But when output rises from 36 to 38 units, marginal cost is . This demonstrates that marginal cost is rising; it is an upward-sloping curve.
19. A.	This equation is correct because TVC + TFC = TC. Choice B would have been correct if total product of labor had been divided by labor. Choice C would have been correct if the change in the total product of labor had been divided by the change in labor. Choice D would have been correct if the change in total cost had been divided by the change in output.
20. D.	If the marginal product of labor is falling but is still greater than zero, it simply means that the total product of labor is rising at a slower rate. The total product of labor will be falling only if the marginal product of labor is negative.
21. C.	Raw carrots are a key input in the production of carrot cake. When the carrots become less expensive, it becomes less costly to produce each carrot cake and the supply of carrot cake increases. Remember that the higher price of carrot cake (choice B) does not shift the supply curve, it causes only an upward movement along the supply curve (an increase in the quantity of cake supplied).
22. A.	The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. We can use the following formula, with the information that we know, to solve for the component that is unknown: Dividing −6 percent by 2 gives us the answer of −3 percent.
23. A.	While supply curves are typically less elastic (steeper) in the short run than in the long run, the law of supply still describes them as upward-sloping in both cases.
24. B.	If the price has remained at $2 and more coffee is being produced, the supply curve must have shifted outward.
25. D.	As farmers see the alternative crop become less lucrative (the price of cabbage has fallen), more land will be devoted to lettuce production and the supply of lettuce will increase, as shown in Figure 1.
26. B.	Market equilibrium is found at the intersection of the supply and demand curves. The equilibrium price is on the vertical axis, and the equilibrium quantity is on the horizontal axis.
27. A.	Producer surplus is the area above the supply curve and below the price. This is the area of a triangle that is $6 high ($6 equilibrium price minus where the supply curve intersects the vertical axis, or $0) and 16 units wide. The area of . It is important to remember that producer surplus (as well as consumer surplus) is the net value ($) of the output to the producers (or the consumers).
28. D.	In order for both price and quantity to increase, demand must increase by itself (recall that if both supply and demand change, then we will be able to determine only the change in either equilibrium price or equilibrium quantity). For the price to be $8 and the quantity to be 20 units, demand must shift to the right. If this good is a normal good, more income would cause demand to increase.
29. D.	Price controls and excise taxes will all cause deadweight loss in a market by moving the market quantity away from the competitive equilibrium quantity.
30. C.	By itself, an increase in demand will increase price and increase quantity. By itself, a decrease in supply will increase price and decrease quantity. When these two shifts are combined, the price will certainly rise, but the change in quantity is uncertain because we don’t know whether the demand shift is stronger than the supply shift, or vice versa.
31. D.	If price is below average total cost, losses are occurring in the short run. Losses prompt the exit of firms, and this exit causes the supply curve in the market to shift leftward. As the market price begins to rise, the firms that remain increase their output along their upward-sloping marginal cost curve.
32. A.	Profit is found by multiplying the profit-maximizing output by the difference between price and average total cost. The formula for profit is . Since , . Since and , . Therefore . Another way you can state this is profit .
33. B.	The long-run outcome in perfect competition is that the price is equal to average total cost. This creates a situation in which economic profit is zero and thus there is no incentive for new firms to enter or existing firms to exit.
34. C.	The competitive outcome is efficient, which means that no other outcome can increase one person’s welfare without also hurting someone else’s. When this outcome is achieved, deadweight loss does not exist.
35. A.	The profit-maximizing choice of quantity will be where the price is equal to the marginal cost, so at a price of $7.50, we need to find where marginal cost is $7.50. Total cost (or total variable cost) increases by $7.50 from 2 units of output to 3. so the third unit would be produced provided the firm is above the shutdown point. The total variable cost at three units is $13.50 and the total revenue at three units is , so the firm will not shut down. However, profits are negative: .
36. C.	The demand curve for the monopolist is downward-sloping, so in order to sell more units of output, the price must be lowered on all units. When the price is lowered, revenue is lost on the units that previously sold at a higher price, so the marginal revenue from the additional units sold is less than the price. The marginal revenue curve therefore lies below the demand curve.
37. B.	The monopolist produces where , and it’s also the case that because the demand curve lies above the marginal revenue curve.
38. D.	Perfect price discrimination occurs when each consumer pays a price equal to her willingness to pay. Thus no consumer surplus is earned; all surplus goes to the firm.
39. C.	Profit maximization occurs at the output where marginal revenue intersects marginal cost. The price, however, is found by going up to the demand curve. In Figure 4, the intersection of the marginal cost curve and the marginal revenue curve occurs at Q1, and the . However, the demand curve indicates that the consumer is willing to pay P1 for Q1 units, so the price charged is P1.
40. D.	If profit is equal to zero, the price must equal average total cost, and this occurs when demand intersects the ATC curve.
41. D.	Because there are short-run profits, new grocery stores will enter the market, thus decreasing the demand for Frannie’s product. As her demand curve shifts inward, price falls as she reduces her output. Once profits are equal to zero, no additional firms will enter or exit.
42. A.	One of the characteristics shared by monopolistic competition and perfect competition is a lack of barriers to entry. This is why firms in both market structures will break even in the long run.
43. A.	A dominant strategy is one that should always be played, no matter what the rival firm is doing. If Kroger expands, Safeway will expand and earn $5 million rather than $3 million from not expanding. If Kroger does not expand, Safeway will expand and earn $10 million rather than $4 million if it did not expand. If Safeway expands, Kroger will expand because it will earn $6 million rather than $3 million by not expanding. If Safeway does not expand, Kroger will still expand to earn $3 million rather than $1 million. So both firms will always expand, no matter what the rival does.
44. B.	Kroger has a dominant strategy to expand, but Safeway does not have a dominant strategy. However, given that Kroger will always expand, Safeway will choose to not expand. This decision allows Safeway to earn $3 million rather than $2 million.
45. C.	When two firms combine to sell more than 70 percent of the product in the market, this is very much an oligopoly. In fact, because these two firms are so dominant, one might even call it a duopoly.
46. C.	The value of the marginal product of labor is the price of the output multiplied by the marginal product of that worker. The marginal product of the fourth worker is 8 units. To calculate for the fourth worker, .
47. A.	The firm will hire where the wage is equal to the value of the marginal product. At 3 units, the marginal product of labor is 10 units, and the value of the marginal product of the third unit of labor is $30 . Therefore, profit is maximized when 3 workers are hired.
48. D.	To produce her output at the lowest possible cost, Rebecca must hire where the marginal product per dollar is equal for both labor and capital (MPL/wage = MPK/rental rate of capital). The marginal product of labor per dollar is 48 units divided by $12, or $4 per unit. The marginal product of capital per dollar is 125 units divided by $25, or $5 per unit. Since hiring another unit of capital will provide more “bang for the buck,” she should hire more capital and less labor.
49. B.	A housing boom will increase the demand for the resources, like carpenters, that are needed to build houses. If the demand for carpenters increases, both the wage and employment will increase as well.
50. C.	One of the foundations of our study of the factors of production (like labor) is that demand for a resource is a function of (derived from) the demand for the products being produced by that resource. For example, when the demand for healthcare increases, the demand for nurses increases. When the demand for autos decreases, the demand for autoworkers decreases.
51. A.	Gross domestic product (GDP) is the most widely used measure of the value of a nation’s output. Gross domestic product includes all production within the geographic borders of a nation.
52. B.	The circular flow diagram shows how factor markets and output markets facilitate the exchange of production inputs and goods and services between households and firms. Households buy goods and services in output markets and sell labor in factor markets.
53. D.	Recall that using the expenditures approach, . When an American buys an imported product made in Japan, that spending is subtracted from U.S. GDP under imports (M) because those dollars actually “leak” out of the American economy and flow into the Japanese economy. This would be counted in the exports of Japan (X), which increases Japanese GDP.
54. C.	A nation’s GDP is the sum of domestic consumption spending (C), investment spending (I), government spending (G), and exports to other nations (X), minus the spending on goods imported from other nations (M).
55. C.	Consumption spending is the largest component of GDP. However, it is worth noting that, while it makes up a smaller proportion of GDP, investment spending is the most volatile.
56. D.	The unemployment rate is the ratio of those classified as unemployed (U) divided by the labor force (LF). The labor force is the sum of the employed (E) and the unemployed (U). So we calculate .
57. B.	If a person who is without a job is actively seeking work, she is classified as “unemployed.” If that person has not been actively seeking work, she is classified as “out of the labor force.”
58. D.	This theory may explain why some workers receive wages that exceed the market wage and possibly why unemployment exists. It is costly for firms to hire and train new workers, so paying a worker a higher wage may keep that worker at the firm for a longer period of time. If the higher wage induces higher productivity, and also reduces training and hiring costs, the employer may actually increase profits with this strategy.
59. B.	We need to focus only on those 1,000 citizens that are above the age of 16. Since 200 of them are out of the labor force and 600 are employed, there must be 200 unemployed (1,000 − 600 employed − 200 out of labor force = 200 unemployed). So we calculate or 25 percent.
60. D.	There are 1,000 citizens above the age of 16 who could be participating in the labor force. The labor force is 800 (600 employed and 200 unemployed), so the or 80 percent.
61. B.	While any price index can be used to measure an increase in price, the most widely used is the Consumer Price Index (CPI) because it includes many goods and services that are typically purchased by households.
62. B.	In the base year, no matter what year is actually used as the base year, a price index is equal to 100. So if the CPI is 113 in 2011, it has increased 13 percent since the base year. To find the percentage change, we calculate percent.
63. D.	When a salary rises by 3 percent from 2010 to 2011, we say that nominal salary increased by this amount. Nominal salary is the salary measured in current dollars, unadjusted for inflation. If the CPI has increased by 2 percent in that time period (from 100 to 102), the increase in nominal salary is reduced by the amount of inflation, and so purchasing power has increased by only about 1 percent. Therefore, Cartman’s real salary, in terms of what he can really buy with that salary, increased only 1 percent.
64. D.	Rapid, unexpected inflation hurts people receiving fixed income payments. This also means that any recipient of fixed money payments would be hurt by this unexpected inflation. But if you are a borrower, you are repaying money that was borrowed when inflation was low and repaying it when inflation is high. Remember that the nominal interest rate is equal to the sum of the real interest rate plus expected inflation. If actual inflation exceeds expected inflation, borrowers repaying their loans will gain some purchasing power.
65. D.	In the model of the Phillips curve, the long-run equilibrium is when the economy is at full employment. This occurs when the long-run Phillips curve is vertical and intersecting the short-run Phillips curve.
66. A.	An increase in consumer wealth causes consumption spending (C) to increase. If any of the components of AD increase (C, I, G, or ) this will shift AD to the right. An increase in interest rates would make investment (I) more expensive and decrease investment.
67. C.	All three of these effects describe why the AD curve is downward-sloping. A drop in the price level will lead to a decrease in interest rates, which would increase aggregate demand. When the price level decreases, households feel wealthier and the amount of consumption they do will increase. When the price level in the United States increases, U.S. exports are relatively cheaper for other countries, and the amount of exports will increase.
68. A.	Higher consumer optimism increases consumption spending and shifts the AD curve to the right. The short-run impact of this shift is that the price level and real output (GDP) both increase along the SRAS curve.
69. B.	Because the SRAS and AD curves intersect to the left of the LRAS, the economy is operating with a recessionary gap. This means that real GDP is currently below full-employment GDP, and thus the unemployment rate exceeds the natural rate of unemployment. The economy would be at full employment if SRAS and AD intersected on the LRAS curve.
70. B.	If the economy is allowed to self-correct, the recession would cause factor prices to fall because factors of production (like labor) are underutilized. When this occurs, the SRAS curve shifts to the right, real output increases (unemployment decreases), and the price level decreases along the AD curve.
71. D.	Fiat money is money that is declared to be legal currency by the government. It has no intrinsic value (like gold), so it cannot be used as a commodity.
72. C.	When cash is moved from one’s home to a checking account, nothing happens to the quantity of money in either M1 or M2. Remember that cash is already included in M1 and M1 is included in M2.
73. A.	The money multiplier is the inverse of the reserve requirement. So if the reserve requirement is 0.05, the money multiplier MM = 1/0.05 = 20.
74. A.	The money multiplier , so if $1,000 is deposited into a bank, this should multiply total demand deposits by a factor of 20 to $20,000.
75. D.	The theory of liquidity preference models the money market with a downward-sloping money demand curve and a vertical money supply curve. Equilibrium interest rates are found at the intersection. If the demand for money increases, the new interest rate will rise along the money supply curve.
76. A.	This is one of the foundations of classical theory. The economy will self-correct in the long run at full-employment GDP because all prices are flexible in the long run.
77. C.	If the economy is in a recession, fiscal policy should be aimed at increasing aggregate demand. This can happen with more government spending, lower taxes, or both. An increase in the money supply is appropriate during a recession, but this is monetary, not fiscal, policy.
78. D.	With the , the government spending multiplier is equal to . This means that if government spending increases by $5 billion, it will multiply by a factor of 10 to ultimately increase spending by $50 billion.
79. C.	Open market operations involve the buying and selling of Treasury bonds by the Federal Reserve. In a period of high inflation, the economy needs to cool off. Selling bonds decreases the money supply and increases interest rates. As interest rates rise, investment spending and consumption spending tend to fall, decreasing aggregate demand and the price level. Choice D is not correct because open market operations do not change the interest rate directly.
80. A.	In the long run, we believe that a recession will self-correct. With weak aggregate demand, output is currently below full employment and factors of production are underutilized. As factor prices adjust downward, the SRAS curve shifts to the right. Output returns to full employment at a lower price level.
81. B.	Suppose the nation was producing 5,000 candies, but wanted to switch to producing 1,000 cars. The gain of 1,000 cars comes at a cost of 5,000 candies, or 5 candies lost for every 1 car gained. You can also solve for this by setting 5,000 candies = 1,000 cars and solving for cars.
82. D.	It costs England 1 unit of bread to make 1 unit of butter. It costs Ireland unit of bread to make 1 unit of butter. This means that Ireland can make butter at lower cost, giving Ireland a comparative advantage in butter. It costs England 1 unit of butter to make 1 unit of bread. It costs Ireland 2 units of butter to make 1 unit of bread. Thus England has a comparative advantage in bread.
83. C.	Ireland has a comparative advantage in butter, and England has a comparative advantage in bread. England will export bread to Ireland, and Ireland will export butter to England. Of course this means that Ireland imports bread from England and England imports butter from Ireland.
84. C.	Stronger popularity of American-made goods in other nations will translate into a stronger demand for U.S. dollars. All else equal, as the demand for the dollar increases (shifts to the right), the price of a dollar rises. Since the price of a dollar is measured in how many units of a foreign currency it takes to buy a dollar, the dollar is said to be appreciating (rising in value) in this situation.
85. A.	The sale of an American-made T-shirt to Canada means that money from Canada is flowing into the United States. The current account tabulates short-term transactions like the import and export of goods and services.
86. B.	Public goods are those that are nonrival and nonexcludable. A police department provides services to the entire community, not just to those adults who pay their taxes. And one person’s use of police services does not deny another person the use of police services. All of the other options are private goods because they are both rival and excludable.
87. B.	The graph shows that the marginal social cost is greater than the marginal private cost. This tells us that there are additional costs to society that are not captured by the firms’ production costs. At the market equilibrium quantity, , but the MSC is greater, which is referred to as a negative externality.
88. C.	With a negative externality, too much of the good is being produced by the market, so a per-unit tax equal to the vertical distance between MSC and MPC should remedy the market failure. A subsidy would only worsen the problem by causing the market to produce even more of this good.
89. C.	A positive externality exists when production or consumption of a good causes a third party (you in this case) to receive a spillover benefit. When the beekeeper’s bees pollinate your cherry trees, they provide just such a benefit to you.
90. D.	The next ton of pollution emitted causes both additional cost (MSC) to society and additional benefit (MSB) because goods are produced along with the pollution. It is efficient if we can limit pollution to the level where .
91. B.	Now that Mr. Pham has a very good health insurance policy, he feels that he can engage in a risky endeavor like climbing Mount Everest. If he should get sick or injured, all of the financial risk falls on his health insurance company. This is an example of moral hazard.
92. A.	Insurance companies require the patient to pay a deductible on any medical treatments they seek. By putting some of the financial risk on the patient (Betty), this helps to reduce the moral hazard issue.
93. C.	Since 10 people (1 percent of 1,000) are expected to get sick, the insurance company expects to incur losses of million. Dividing this by 1,000 policyholders amounts to $2,000 per person. So when each person pays the loading fee of $100, the premium charged is the loading fee plus the actuarially fair premium = $2,100.
94. C.	Because healthy people figure that they won’t need to use health insurance, many may opt to go without. This leaves only the sick people in the pool for health insurance.
95. B.	A copayment is a fee that the patient must pay at the doctor’s office for medical treatment. When the patient is required to assume some of the financial risk, the patient will be less likely to visit the doctor for small or frivolous treatments.
96. D.	The literature review process allows the student to learn more about the research history of his topic so that he can discover where his research might contribute to the set of knowledge.
97. A.	If we have a hypothesis about how the world works, we must gather data and rigorously test whether the hypothesis is sound or not. This allows economic research to follow the scientific method rather than just publish conclusions based on weak or anecdotal evidence.
98. D.	This is a testable hypothesis because Terrence could gather data on how many cold fountain drinks he sold on each day and the high temperature in his town that day. If he found a significantly strong positive relationship between the two variables, he might confirm his hypothesis.
99. D.	When Raquel is using the relevant data to statistically measure the relationship between her two variables, she is engaging in empirical analysis.
100. A.	Most research today involves empirical analysis of how economic variables are related to each other.