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“Between 1997 and 2001, many apple farmers switched from
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1) “Between 1997 and 2001, many apple farmers switched from traditional to organic growing methods, increasing production of organically grown apples from 1.2 million boxes per year to more than 3 million boxes.” If the market for organic apples is perfectly competitive, which of the following statements is inconsistent with the statement above? 
a. Organic apple farmers earned short-run economic profits between 1997 and 2001. 
b. The price of organic apples is likely to rise over time as more and more farmers switch to organic methods of farming. 
c. The additional supply of organic apples resulted in a lower price for organic apples.
d. It is relatively easy to enter the organic apples market. 
7) If, for a given output level, a perfectly competitive firm’s price is less than its average variable cost, the firm 
a. should increase output.
b. should shut down. 
c. should increase price. 
d. is earning a profit.
12) A market economy benefits from market power 
a. under no circumstances.
b. if the majority of the population are entrepreneurs.
c. if firms with market power do research and development with the profits earned.
d. if market power gets so bad the government creates public enterprises. 
13) Economic efficiency requires that a natural monopoly’s price be 
a. equal to the lowest price the firm can charge and still make a normal profit.
b. equal to average variable cost (AVC) where the AVC curve intersects the demand curve. 
c. equal to average total cost (ATC) where the ATC curve intersects the demand curve. 
d. equal to marginal cost (MC) where the MC curve intersects the demand curve. 
14) If a firm faces a downward-sloping demand curve 
a. it will always make a profit.
b. it can control both price and quantity sold. 
c. it must reduce its price to sell more output.
d. the demand for its product must be inelastic. 
15) A monopolistically competitive firm will 
a. have some control over its price because its product is differentiated. 
b. always produce at the minimum efficient scale of production.
c. charge the same price as its competitors do.
d. produce an output level that is productively and allocatively efficient. 
19) Suppose in 2006 you purchased a house built in 2000. Which of the following would be included in gross domestic product for 2006? 
a. The value of the house in 2006 minus depreciation 
b. The value of the house in 2000
c. The value of the services of the real estate agent 
d. The value of the house in 2006 
Scenario 11-1
CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for $300 and uses its labor and intermediate goods to make the canoe. It sells the finished canoe to a retail canoe store for $800. The retail canoe store then sells the canoe to a consumer for $1,200. 
20) Refer to Scenario 11-1. The value of each canoe in gross domestic product equals 
a. $400.
b. $800.
c. $1,200. 
d. $500. 
21) Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry and have eight children. Bob stops working for Mary in order to care for the children. What will be the effect on GDP? 
a. GDP will not change. 
b. GDP will decrease. 
c. GDP will increase. 
d. GDP may increase or may decrease depending on inflation.
25) Suppose that at the beginning of a loan contract the real interest rate is 4% and expected inflation is 6%. If actual inflation turns out to be 7% over the loan contract period, then 
a. lenders gain 3%. 
b. borrowers lose 3%. 
c. borrowers gain 1%. 
d. lenders gain 1%.

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